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EX-31.2 - EXHIBIT 31.2 - PINNACLE FINANCIAL PARTNERS INCex31_2.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, 2015
or
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 
No 
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 
No
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
Accelerated Filer
 
Non-accelerated Filer 
(do not check if you are a smaller reporting company)
Smaller reporting company 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes 
No
As of  May 6, 2015 there were 35,876,498 shares of common stock, $1.00 par value per share, issued and outstanding.


Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2015

TABLE OF CONTENTS
Page No.
   
PART I – Financial Information:
 
Item 1. Consolidated Financial Statements (Unaudited)
 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 33
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 52
Item 4. Controls and Procedures
 52
   
PART II – Other Information:
 
Item 1. Legal Proceedings
 53
Item 1A. Risk Factors
 53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 66
Item 3. Defaults Upon Senior Securities
 66
Item 4.  Mine Safety Disclosures
 66
Item 5. Other Information
 66
Item 6. Exhibits
 67
Signatures
 68



FORWARD-LOOKING STATEMENTS

Certain of the statements in this quarterly report on Form 10-Q 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 increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) the inability of Pinnacle Financial or companies in which Pinnacle Financial has significant investments to grow their loan portfolios at recent growth rates; (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-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, particularly in commercial and residential real estate markets; (viii) rapid fluctuations or unanticipated changes in interest rates on loans or deposits; (ix) the results of regulatory examinations; (x) the ability to retain large, uninsured deposits; (xi) the development of any new market other than Nashville or Knoxville; (xii) a merger or acquisition, like the proposed mergers with CapitalMark Bank & Trust (CapitalMark) and Magna Bank (Magna); (xiii) risks of expansion into new geographic or product markets, like the proposed expansion into the Chattanooga, TN-GA MSA associated with the proposed merger with CapitalMark (the CapitalMark Merger) and the Memphis, TN-MS-AR MSA associated with the proposed merger with Magna (the Magna Merger and together with the CapitalMark Merger, the Mergers); (xiv) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xv) reduced ability to attract additional financial advisors (or failure of such advisors to cause their clients to switch to Pinnacle Financial) or otherwise to attract customers from other financial institutions; (xvi) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvii) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xviii) risks associated with litigation, including the applicability of insurance coverage; (xix) the risk that the cost savings and any revenue synergies from the proposed mergers may not be realized or take longer than anticipated to be realized; (xx) disruption from the mergers with customers, suppliers or employee relationships; (xxi) the occurrence of any event, change or other circumstances that could give rise to the termination of either of the merger agreements related to the Mergers; (xxii) the risk of successful integration of Pinnacle Financial's business with the business of CapitalMark and Magna; (xxiii) the failure of CapitalMark's or Magna's shareholders to approve the mergers; (xxiv) the amount of the costs, fees, expenses and charges related to the Mergers; (xxv) the ability to obtain required governmental approvals of the proposed terms of the Mergers; (xxvi) reputational risk and the reaction of the parties' customers to the proposed mergers; (xxvii) the failure of the closing conditions for either of the Mergers to be satisfied; (xxviii) the risk that the integration of CapitalMark's or Magna's operations with Pinnacle Financial's will be materially delayed or will be more costly or difficult than expected; (xxix) the possibility that the Mergers may be more expensive to complete than anticipated, including as a result of unexpected factors or events; (xxx) the dilution caused by Pinnacle's issuance of additional shares of its common stock in the Mergers; (xxxi) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xxxii) the vulnerability of our network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xxxiii) the possibility of increased compliance costs as a result of increased regulatory oversight, including oversight of companies in which Pinnacle has significant investments, and the development of additional banking products for our corporate and consumer clients; and (xxxiv) 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. A more detailed description of these and other risks is contained in "Part II. Item 1A. Risk Factors" below. 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 report, whether as a result of new information, future events or otherwise.
2

Item 1. Part I.  Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
   
March 31, 2015
   
December 31, 2014
 
ASSETS
       
Cash and noninterest-bearing due from banks
 
$
61,498,151
   
$
48,741,692
 
Interest-bearing due from banks
   
227,823,492
     
134,176,054
 
Federal funds sold and other
   
4,455,077
     
4,989,764
 
Cash and cash equivalents
   
293,776,720
     
187,907,510
 
                 
Securities available-for-sale, at fair value
   
769,018,224
     
732,054,785
 
Securities held-to-maturity (fair value of $39,407,835 and $38,788,870 at
               
March 31, 2015 and December 31, 2014, respectively)
   
39,275,846
     
38,675,527
 
Mortgage loans held-for-sale
   
18,909,910
     
14,038,914
 
Loans held-for-sale
   
7,934,778
     
-
 
                 
Loans
   
4,645,272,317
     
4,590,026,505
 
Less allowance for loan losses
   
(66,241,583
)
   
(67,358,639
)
Loans, net
   
4,579,030,734
     
4,522,667,866
 
                 
Premises and equipment, net
   
71,281,505
     
71,576,016
 
Equity-method investment
   
78,626,832
     
-
 
Accrued interest receivable
   
18,262,956
     
16,988,407
 
Goodwill
   
243,442,869
     
243,529,010
 
Core deposits and other intangible assets
   
2,665,659
     
2,893,072
 
Other real estate owned
   
8,441,288
     
11,186,414
 
Other assets
   
183,679,047
     
176,730,276
 
Total assets
 
$
6,314,346,368
   
$
6,018,247,797
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits:
               
Noninterest-bearing
 
$
1,424,971,154
   
$
1,321,053,083
 
Interest-bearing
   
1,065,900,049
     
1,005,450,690
 
Savings and money market accounts
   
1,878,270,087
     
2,024,957,383
 
Time
   
420,168,133
     
431,143,756
 
Total deposits
   
4,789,309,423
     
4,782,604,912
 
Securities sold under agreements to repurchase
   
68,053,123
     
93,994,730
 
Federal Home Loan Bank advances
   
455,443,811
     
195,476,384
 
Subordinated debt and other borrowings
   
135,533,292
     
96,158,292
 
Accrued interest payable
   
632,021
     
631,682
 
Other liabilities
   
41,224,052
     
46,688,416
 
Total liabilities
   
5,490,195,722
     
5,215,554,416
 
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;
               
35,864,667 and 35,732,483 shares issued and outstanding
               
at March 31, 2015 and December 31, 2014, respectively
   
35,864,667
     
35,732,483
 
Additional paid-in capital
   
563,831,066
     
561,431,449
 
Retained earnings
   
218,909,667
     
201,371,081
 
Accumulated other comprehensive income, net of taxes
   
5,545,246
     
4,158,368
 
Total stockholders' equity
   
824,150,646
     
802,693,381
 
Total liabilities and stockholders' equity
 
$
6,314,346,368
   
$
6,018,247,797
 

See accompanying notes to consolidated financial statements (unaudited).

3

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

   
Three Months Ended
March 31,
 
   
2015
   
2014
 
Interest income:
       
Loans, including fees
 
$
49,466,706
   
$
43,695,658
 
Securities:
               
Taxable
   
3,444,599
     
3,720,279
 
Tax-exempt
   
1,483,307
     
1,597,797
 
Federal funds sold and other
   
283,978
     
277,058
 
Total interest income
   
54,678,590
     
49,290,792
 
                 
Interest expense:
               
Deposits
   
2,430,742
     
2,595,240
 
Securities sold under agreements to repurchase
   
30,917
     
30,515
 
Federal Home Loan Bank advances and other borrowings
   
948,552
     
757,222
 
Total interest expense
   
3,410,211
     
3,382,977
 
Net interest income
   
51,268,379
     
45,907,815
 
Provision for loan losses
   
315,091
     
487,638
 
Net interest income after provision for loan losses
   
50,953,288
     
45,420,177
 
                 
Noninterest income:
               
Service charges on deposit accounts
   
2,912,549
     
2,790,968
 
Investment services
   
2,259,440
     
2,127,834
 
Insurance sales commissions
   
1,512,618
     
1,384,921
 
Gain on mortgage loans sold, net
   
1,941,254
     
1,234,872
 
    Gain on sale of investment securities, net 6,003 -
Trust fees
   
1,311,985
     
1,145,751
 
Income from equity-method investment
   
3,201,302
     
-
 
Other noninterest income
   
5,348,151
     
4,048,017
 
Total noninterest income
   
18,493,302
     
12,732,363
 
                 
Noninterest expense:
               
Salaries and employee benefits
   
23,530,860
     
21,749,960
 
Equipment and occupancy
   
6,046,223
     
5,709,030
 
Other real estate expense
   
395,288
     
651,152
 
Marketing and other business development
   
959,750
     
908,901
 
Postage and supplies
   
649,251
     
560,614
 
Amortization of intangibles
   
227,414
     
237,675
 
Other noninterest expense
   
5,022,236
     
3,828,528
 
Total noninterest expense
   
36,831,022
     
33,645,860
 
Income before income taxes
   
32,615,568
     
24,506,680
 
Income tax expense
   
10,772,857
     
8,139,557
 
Net income
 
$
21,842,711
   
$
16,367,123
 
Per share information:
               
Basic net income per common share
 
$
0.62
   
$
0.47
 
Diluted net income per common share
 
$
0.62
   
$
0.47
 
Weighted average shares outstanding:
               
Basic
   
35,041,203
     
34,602,337
 
Diluted
   
35,380,529
     
34,966,600
 

See accompanying notes to consolidated financial statements (unaudited).

4

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

   
Three Months Ended
March 31,
 
   
2015
   
2014
 
Net income
 
$
21,842,711
   
$
16,367,123
 
Other comprehensive income (loss), net of tax:
               
Change in fair value of available-for-sale securities, net of tax
   
1,936,058
 
   
4,945,912
 
Change in fair value of cash flow hedges, net of tax
   
(552,828
)    
(1,294,306
)
    Net gain on sale of investment securities reclassified from other comprehensive income into net income, net of tax
   
3,648
 
   
-
 
Total other comprehensive income (loss), net of tax     1,386,878       3,651,606  
Total comprehensive income
 
$
23,229,589
   
$
20,018,729
 

See accompanying notes to consolidated financial statements (unaudited).
5

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

   
Common Stock
   
Additional Paid-in
Capital
   
Retained Earnings
   
Accumulated Other Comp.
Income (Loss), net
   
Total Stockholders' Equity
 
   
Shares
   
Amount
                 
                         
Balances, December 31, 2013
   
35,221,941
   
$
35,221,941
   
$
550,212,135
   
$
142,298,199
   
$
(4,024,614
)
 
$
723,707,661
 
Exercise of employee common stock
                                               
options and related tax benefits
   
136,482
     
136,482
     
1,981,567
     
-
     
-
     
2,118,049
 
Common dividends paid
   
-
     
-
     
-
     
(2,824,493
)
   
-
     
(2,824,493
)
Issuance of restricted common shares,
                                               
net of forfeitures
   
260,937
     
260,937
     
(260,937
)
   
-
     
-
     
-
 
Restricted shares withheld for taxes
   
(52,092
)
   
(52,092
)
   
(1,672,312
)
   
-
     
-
     
(1,724,404
)
Compensation expense for restricted shares
   
-
     
-
     
1,201,111
     
-
     
-
     
1,201,111
 
Net income
   
-
     
-
     
-
     
16,367,123
     
-
     
16,367,123
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
3,651,606
     
3,651,606
 
Balances, March 31, 2014
   
35,567,268
   
$
35,567,268
   
$
551,461,564
   
$
155,840,829
   
$
(373,008
)
 
$
742,496,653
 
                                                 
Balances, December 31, 2014
   
35,732,483
   
$
35,732,483
   
$
561,431,449
   
$
201,371,081
   
$
4,158,368
   
$
802,693,381
 
Exercise of employee common stock
                                               
options and related tax benefits
   
65,270
     
65,270
     
2,924,061
     
-
     
-
     
2,989,331
 
Common dividends paid
   
-
     
-
     
-
     
(4,304,125
)
           
(4,304,125
)
Issuance of restricted common shares,
                                               
net of forfeitures
   
121,877
     
121,877
     
(121,877
)
   
-
     
-
     
-
 
Restricted shares withheld for taxes
   
(54,963
)
   
(54,963
)
   
(2,056,229
)
   
-
     
-
     
(2,111,192
)
Compensation expense for restricted shares
   
-
     
-
     
1,653,662
     
-
     
-
     
1,653,662
 
Net income
   
-
     
-
     
-
     
21,842,711
     
-
     
21,842,711
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
1,386,878
     
1,386,878
 
Balances, March 31, 2015
   
35,864,667
   
$
35,864,667
   
$
563,831,066
   
$
218,909,667
   
$
5,545,246
   
$
824,150,646
 

See accompanying notes to consolidated financial statements (unaudited).

6

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Three Months Ended
March 31,
 
   
2015
   
2014
 
Operating activities:
       
Net income
 
$
21,842,711
   
$
16,367,123
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net amortization/accretion of premium/discount on securities
   
1,152,427
     
957,133
 
Depreciation and amortization
   
2,165,601
     
2,258,990
 
Provision for loan losses
   
315,091
     
487,638
 
Gain on mortgage loans sold, net
   
(1,941,254
)
   
(952,222
)
Loss on sale of investment securities
   
(6,003
)
   
-
 
Stock-based compensation expense
   
1,653,662
     
1,201,111
 
Deferred tax expense (benefit)
   
1,046,983
     
(16,406
)
(Gains) losses on dispositions of other real estate
   
(389,731
)
   
143,208
 
        (Gains) losses on equity-method investment (3,201,302 ) -
Excess tax benefit from stock compensation
   
(1,348,751
)
   
(1,099,570
)
Mortgage loans held for sale:
               
Loans originated
   
(98,711,742
)
   
(61,458,365
)
Loans sold
   
95,782,000
     
61,290,000
 
Increase in other assets
   
(7,631,523
)
   
699,486
 
Decrease in other liabilities
   
(5,480,950
)
   
(6,576,105
)
Net cash provided by operating activities
   
5,247,219
     
13,302,021
 
                 
Investing activities:
               
Activities in securities available-for-sale:
               
Purchases
   
(64,826,118
)
   
(57,753,116
)
Sales
   
216,300
     
-
 
Maturities, prepayments and calls
   
29,890,467
     
23,192,675
 
Activities in securities held-to-maturity:
               
Purchases
   
(1,035,995
)
   
-
 
Maturities, prepayments and calls
   
235,000
     
860,000
 
Increase in loans, net
   
(65,558,107
)
   
(40,306,647
)
Purchases of software, premises and equipment
   
(1,222,077
)
   
(604,626
)
Increase in equity-method investment
   
(75,000,000
)
   
-
 
    Increase in other investments (122,500 ) (304,204 )
Net cash used in investing activities
   
(177,423,030
)
   
(74,915,918
)
                 
Financing activities:
               
Net increase in deposits
   
6,704,511
     
(32,895,938
)
Net decrease in securities sold under agreements to repurchase
   
(25,941,606
)
   
(2,372,676
)
Advances from Federal Home Loan Bank:
               
Issuances
   
455,370,280
     
175,000,000
 
Payments/maturities
   
(195,385,928
)
   
(115,016,116
)
Decrease in other borrowings
   
39,375,000
     
(625,000
)
Exercise of common stock options and stock appreciation rights,
               
net of repurchase of restricted shares
   
878,138
     
1,247,220
 
Excess tax benefit from stock compensation
   
1,348,751
     
1,099,570
 
Common stock dividends paid
   
(4,304,125
)
   
(2,824,493
)
Net cash provided by financing activities
   
278,045,021
     
23,612,567
 
Net decrease in cash and cash equivalents
   
105,869,210
     
(38,001,330
)
Cash and cash equivalents, beginning of period
   
187,907,510
     
208,938,737
 
Cash and cash equivalents, end of period
 
$
293,776,720
   
$
170,937,407
 

See accompanying notes to consolidated financial statements (unaudited).
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 2014 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, 2014. 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, 2014.

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the three months ended March 31, 2015 and 2014 was as follows:

   
For the three months ended March 31,
 
   
2015
   
2014
 
Cash Transactions:
       
Interest paid
 
$
3,426,798
   
$
3,447,425
 
Income taxes paid, net
   
8,217,500
     
6,100,000
 
Noncash Transactions:
               
Loans charged-off to the allowance for loan losses
   
2,649,708
     
1,503,511
 
Loans foreclosed upon and transferred to other real estate owned
   
-
     
1,645,100
 
Loans foreclosed upon and transferred to other repossessed assets
   
1,738,757
     
347,800
 
 
Income Per Common Share — Basic net income per common 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 is attributable to common stock options, common stock appreciation rights, restricted share awards, and restricted share unit awards. The dilutive effect of outstanding options, common stock appreciation rights, restricted share awards, and restricted share unit awards is reflected in diluted EPS by application of the treasury stock method.
8


The following is a summary of the basic and diluted net income per share calculations for the three months ended March 31, 2015 and 2014:
   
Three months ended
March 31,
 
   
2015
   
2014
 
Basic net income per share calculation:
       
Numerator - Net income
 
$
21,842,711
   
$
16,367,123
 
                 
Denominator - Average common shares outstanding
   
35,041,203
     
34,602,337
 
Basic net income per share
 
$
0.62
   
$
0.47
 
                 
Diluted net income per share calculation:
               
Numerator – Net income
 
$
21,842,711
   
$
16,367,123
 
                 
Denominator - Average common shares outstanding
   
35,041,203
     
34,602,337
 
Dilutive shares contingently issuable
   
339,326
     
364,263
 
Average diluted common shares outstanding
   
35,380,529
     
34,966,600
 
Diluted net income per share
 
$
0.62
   
$
0.47
 
 
Subsequent Events — ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Pinnacle Financial evaluated all events or transactions that occurred after March 31, 2015 through the date of the issued financial statements.
 
CapitalMark Bank & Trust - On April 7, 2015, Pinnacle Bank and Pinnacle Financial entered into a definitive agreement with CapitalMark Bank &Trust (CapitalMark) to acquire CapitalMark via merger. The proposed merger of CapitalMark with and into Pinnacle Bank has been approved by each company's Board of Directors and is expected to close in the third quarter or early in the fourth quarter of 2015, pending regulatory and CapitalMark shareholder approval.
 
Under the terms of the merger agreement, CapitalMark shareholders will have the option to either convert their outstanding shares of common stock into 0.50 shares of Pinnacle's common stock plus cash in lieu of any fractional shares, a cash payment per CapitalMark share equal to the product of 0.50 multiplied by the average trading price for Pinnacle Financial's common stock on the Nasdaq Global Select Market for a 10-day period prior to the closing of the transaction or into a combination of 0.50 shares of Pinnacle Financial's common stock and the cash consideration at a ratio of 90 percent stock and 10 percent cash, provided that 90 percent of the outstanding shares of CapitalMark common stock will be converted into shares of Pinnacle Financial's common stock. Additionally, CapitalMark's outstanding stock options will be converted into approximately 860,000 Pinnacle Financial options and will be fully vested upon consummation of the merger pursuant to CapitalMark's stock option plan. At closing, CapitalMark shareholders will beneficially own approximately 9.7 percent of Pinnacle's outstanding shares of common stock.
 
The transaction is currently valued at $187.0 million based on Pinnacle Financial's closing price on April 7, 2015, and is comprised of stock consideration of approximately 3.3 million shares of Pinnacle Financial common stock and $16.4 million in cash. Additionally, Pinnacle Financial and Pinnacle Bank plan to redeem at closing the $18.2 million in preferred stock issued by CapitalMark in connection with its participation in the U.S. Treasury's Small Business Lending Fund program.
 
Magna Bank - On April 28, 2015, Pinnacle Financial and Pinnacle Bank entered into a definitive agreement with Magna Bank (Magna) to acquire Magna via merger. The proposed merger of Magna with and into Pinnacle Bank has been approved by each company's Board of Directors and is expected to close in the third quarter or early in the fourth quarter of 2015, pending regulatory and Magna shareholder approval.

Under the terms of the merger agreement, Magna shareholders will have the right to elect to convert their outstanding shares of common stock into 0.3369 shares of Pinnacle Financial's common stock plus cash in lieu of any fractional shares, a cash payment equal to $14.32 per Magna share, or into a combination of 0.3369 shares of Pinnacle's common stock and $14.32 in cash at a ratio of 75 percent stock and 25 percent cash, provided that 75 percent of the outstanding shares of Magna's common stock will be converted into shares of Pinnacle Financial's common stock. Magna's 328,350 stock options will be fully vested upon consummation of the merger pursuant to Magna's stock option plan. At closing, Magna's outstanding unexercised stock options will be settled in cash for the difference between the option's exercise price and $14.32. At the closing, Magna shareholders will beneficially own approximately 3.3 percent of Pinnacle Financial's outstanding common stock, assuming all of Magna's options are cashed out and the CapitalMark Merger has been consummated.

9


The transaction is currently valued at $83.4 million based on Pinnacle Financial's closing price on April 28, 2015, based on the issuance of approximately 1.325 million shares of Pinnacle Financial's common stock and $20.7 million in cash, in each case assuming none of Magna's options are exercised prior to closing. Additionally, Pinnacle Financial and Pinnacle Bank plan to redeem at closing the $18.35 million in Series C preferred stock issued by Magna in connection with its participation in the U.S. Treasury's Small Business Lending Fund program.
 
Note 2. Acquisition and Intangibles

Acquisition - Bankers Healthcare Group, LLC. On February 1, 2015, Pinnacle Bank acquired a 30% interest in Bankers Healthcare Group, LLC (BHG) for $75 million. Pinnacle Bank accounts for this investment pursuant to the equity-method of accounting and, as such, has recorded its investment in BHG net of identified intangible assets. Earnings on this investment are recorded net of intangible amortization expense as a component of noninterest income. For the first quarter of 2015, Pinnacle Bank recorded earnings of $3.2 million, net of approximately $400,000 in intangible amortization expense in income from equity-method investment. 

In connection with this acquisition, Pinnacle Bank borrowed $40 million from an unaffiliated bank pursuant to a loan agreement which requires Pinnacle Financial and Pinnacle Bank to maintain certain financial covenants including minimum capital ratios, liquidity requirements and other non-financial covenants. The loan has a 5-year maturity and bears interest at approximately 2.95% per annum currently.
 
Note 3.  Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2015 and December 31, 2014 are summarized as follows (in thousands):

 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
March 31, 2015:
             
Securities available-for-sale:
             
U.S. Treasury securities
$
-
   
$
-
   
$
-
   
$
-
 
U.S. government agency securities
 
120,106
     
30
     
1,577
     
118,559
 
Mortgage-backed agency securities
 
458,901
     
11,147
     
1,686
     
468,362
 
State and municipal securities
 
126,041
     
8,046
     
152
     
133,935
 
Asset-backed securities
 
12,340
     
15
     
16
     
12,339
 
Corporate notes and other
 
34,857
     
1,022
     
56
     
35,823
 
 
$
752,245
   
$
20,260
   
$
3,487
   
$
769,018
 
Securities held-to-maturity:
                             
State and municipal securities
$
39,276
   
$
219
   
$
87
   
$
39,408
 
 
$
39,276
   
$
219
   
$
87
   
$
39,408
 
   
December 31, 2014:
                             
Securities available-for-sale:
                             
U.S. Treasury securities
$
-
   
$
-
   
$
-
   
$
-
 
U.S. government agency securities
 
117,098
     
12
     
3,654
     
113,456
 
Mortgage-backed agency securities
 
447,757
     
10,322
     
2,240
     
455,839
 
State and municipal securities
 
130,545
     
8,213
     
180
     
138,578
 
Asset-backed securities
 
13,089
     
14
     
85
     
13,018
 
Corporate notes and other
 
10,196
     
969
     
2
     
11,163
 
 
$
718,685
   
$
19,530
     
6,161
   
$
732,054
 
Securities held-to-maturity:
                             
State and municipal securities
$
38,676
   
$
205
   
$
92
   
$
38,789
 
 
$
38,676
   
$
205
   
$
92
   
$
38,789
 
10

At March 31, 2015, approximately $647.2 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.
 
The amortized cost and fair value of debt securities as of March 31, 2015 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):

   
Available-for-sale
   
Held-to-maturity
 
March 31, 2015:
 
Amortized
Cost
   
Fair
Value
   
Amortized Cost
   
Fair
Value
 
Due in one year or less
 
$
7,508
   
$
7,545
   
$
1,694
   
$
1,697
 
Due in one year to five years
   
31,685
     
33,245
     
11,650
     
11,691
 
Due in five years to ten years
   
151,166
     
156,389
     
15,879
     
15,935
 
Due after ten years
   
90,645
     
91,138
     
10,053
     
10,085
 
Mortgage-backed securities
   
458,901
     
468,362
     
-
     
-
 
Asset-backed securities
   
12,340
     
12,339
     
-
     
-
 
   
$
752,245
   
$
769,018
   
$
39,276
   
$
39,408
 
 
At March 31, 2015 and December 31, 2014, the following investments had unrealized losses. The table 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, 2015:
                       
                         
U.S. Treasury securities
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
U.S. government agency securities
   
39,419
     
570
     
66,858
     
1,007
     
106,277
     
1,577
 
Mortgage-backed securities
   
69,138
     
639
     
97,969
     
1,047
     
167,107
     
1,686
 
State and municipal securities
   
12,251
     
63
     
6,293
     
176
     
18,544
     
239
 
Asset-backed securities
   
-
     
-
     
8,988
     
16
     
8,988
     
16
 
Corporate notes
   
16,599
     
55
     
152
     
1
     
16,751
     
56
 
Total temporarily-impaired securities
 
$
137,407
   
$
1,327
   
$
180,260
   
$
2,247
   
$
317,667
   
$
3,574
 
                                                 
At December 31, 2014:
                                               
                                                 
U.S. Treasury securities
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
U.S. government agency securities
   
3,593
     
10
     
103,658
     
3,644
     
107,251
     
3,654
 
Mortgage-backed securities
   
91,410
     
405
     
102,892
     
1,835
     
194,302
     
2,240
 
State and municipal securities
   
3,561
     
15
     
16,502
     
257
     
20,063
     
272
 
Asset-backed securities
   
-
     
-
     
9,289
     
85
     
9,289
     
85
 
Corporate notes
   
950
     
1
     
154
     
1
     
1,104
     
2
 
Total temporarily-impaired securities
 
$
99,514
   
$
431
   
$
232,495
   
$
5,822
   
$
332,009
   
$
6,253
 
 
The applicable dates for determining when securities are in an unrealized loss position are March 31, 2015 and December 31, 2014. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the twelve-month periods ended March 31, 2015 and December 31, 2014, 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, 2015, Pinnacle Financial had approximately $3.6 million in unrealized losses on $317.7 million of securities. The unrealized losses associated with these investment securities are driven by changes in interest rates and the unrealized loss is recorded as a component of equity. 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. If a shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.
11


Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at March 31, 2015, 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, 2015.

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 or 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.

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. Additionally, there is a risk that other-than-temporary impairment charges may occur in the future if management's intention to hold these securities to maturity and or recovery changes. 

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).

Pinnacle Financial uses five loan categories: commercial real estate mortgage, consumer real estate mortgage, construction and land development, commercial and industrial, consumer and other.
 
·
Commercial real-estate mortgage loans. Commercial real-estate mortgage loans are categorized as such based on investor exposures where repayment is largely dependent upon the operation, refinance, or sale of the underlying real estate. Commercial real-estate mortgage also includes owner occupied commercial real estate which shares a similar risk profile to our commercial and industrial products.
·
Consumer real-estate mortgage loans. Consumer real-estate mortgage consists primarily of loans secured by 1-4 residential properties including home equity lines of credit.
·
Construction and land development loans. Construction and land development loans include loans where the repayment is dependent on the successful operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development.
·
Commercial and industrial loans. Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes.
·
Consumer and other loans. Consumer and other loans include all loans issued to individuals not included in the consumer real-estate mortgage classification. Examples of consumer and other loans are automobile loans, credit cards and loans to finance education, among others.
 
Commercial loans receive risk ratings assigned by a financial advisor and approved by a senior credit officer 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, 2015, approximately 73% 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.
12

Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, our credit procedures require that every risk rated loan of $500,000 or more be subject to a formal credit risk review process by the assigned financial advisor. Each loan's risk rating is also subject to review by our independent loan review department, which reviews a substantial portion of our risk rated portfolio annually.  Included in the coverage are independent loan reviews of loans in targeted higher-risk portfolio segments such as certain commercial and industrial loans, land loans and/or loan types in certain geographies.

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, 2015 and December 31, 2014 (in thousands):

   
Commercial real estate - mortgage
   
Consumer real estate - mortgage
   
Construction and land development
   
Commercial and industrial
   
Consumer
and other
   
Total
 
March 31, 2015
                       
Accruing loans
                       
        Pass
 
$
1,521,269
   
$
702,047
   
$
308,778
   
$
1,711,829
   
$
224,165
   
$
4,468,088
 
        Special Mention
   
12,659
     
2,213
     
6,386
     
38,997
     
-
     
60,255
 
        Substandard (1)
   
20,929
     
11,279
     
5,230
     
53,850
     
-
     
91,288
 
        Total
   
1,554,857
     
715,539
     
320,394
     
1,804,676
     
224,165
     
4,619,631
 
Impaired loans
                                               
        Nonaccrual loans
                                               
                Substandard-nonaccrual
   
5,826
     
4,483
     
3,636
     
1,963
     
1,007
     
16,915
 
                Doubtful-nonaccrual
   
-
     
-
     
-
     
-
     
-
     
-
 
        Total nonaccrual loans
   
5,826
     
4,483
     
3,636
     
1,963
     
1,007
     
16,915
 
        Troubled debt restructurings(2)
                                               
                Pass
   
-
     
419
     
432
     
563
     
30
     
1,444
 
                Special Mention
   
-
     
447
     
-
     
-
     
200
     
647
 
                Substandard
   
-
     
3,019
     
-
     
3,616
     
-
     
6,635
 
         Total troubled debt restructurings
   
-
     
3,885
     
432
     
4,179
     
230
     
8,726
 
Total impaired loans
   
5,826
     
8,368
     
4,068
     
6,142
     
1,237
     
25,641
 
Total loans
 
$
1,560,683
   
$
723,907
   
$
324,462
   
$
1,810,818
   
$
225,402
   
$
4,645,272
 
(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 nonaccrual loans and troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $91.3 million at March 31, 2015, compared to $83.0 million at December 31, 2014.
(2)
Troubled debt restructurings are presented as impaired loans; however, they continue to accrue interest at modified contractual rates.
13

   
Commercial real estate - mortgage
   
Consumer real estate - mortgage
   
Construction and land development
   
Commercial and industrial
   
Consumer
and other
   
Total
 
December 31, 2014
                       
Accruing loans
                       
        Pass
 
$
1,510,718
   
$
697,607
   
$
295,645
   
$
1,704,910
   
$
216,155
   
$
4,425,035
 
        Special Mention
   
7,353
     
2,536
     
15,215
     
31,733
     
-
     
56,837
 
        Substandard (1)
   
21,707
     
12,631
     
5,997
     
42,704
     
-
     
83,039
 
        Total
   
1,539,778
     
712,774
     
316,857
     
1,779,347
     
216,155
     
4,564,911
 
Impaired loans
                                               
        Nonaccrual loans
                                               
                Substandard-nonaccrual
   
4,313
     
4,458
     
5,173
     
1,609
     
1,152
     
16,705
 
                Doubtful-nonaccrual
   
-
     
-
     
-
     
-
     
-
     
-
 
        Total nonaccrual loans
   
4,313
     
4,458
     
5,173
     
1,609
     
1,152
     
16,705
 
        Troubled debt restructurings(2)
                                               
                Pass
   
-
     
62
     
436
     
575
     
75
     
1,148
 
                Special Mention
   
-
     
811
     
-
     
-
     
201
     
1,012
 
                Substandard
   
-
     
3,053
     
-
     
3,198
     
-
     
6,251
 
         Total troubled debt restructurings
   
-
     
3,926
     
436
     
3,773
     
276
     
8,411
 
Total impaired loans
   
4,313
     
8,384
     
5,609
     
5,382
     
1,428
     
25,116
 
Total loans
 
$
1,544,091
   
$
721,158
   
$
322,466
   
$
1,784,729
   
$
217,583
   
$
4,590,027
 
(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 nonaccrual loans and troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $91.3 million at March 31, 2015, compared to $83.0 million at December 31, 2014.
(2)
Troubled debt restructurings are presented as impaired loans; however, they continue to accrue interest at contractual rates.

At March 31, 2015 and December 31, 2014, all loans classified as nonaccrual were deemed to be impaired. The principal balances of these nonaccrual loans amounted to $16.9 million and $16.7 million at March 31, 2015 and December 31, 2014, respectively, and are included in the tables above.  For both the three months ended March 31, 2015 and the twelve months ended December 31, 2014, the average balance of nonaccrual loans was $17.5 million.  At the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings.  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 approximately $84,000 in interest income from cash payments received on nonaccrual loans during the three months ended March 31, 2015 and $256,000 interest income from cash payments received on nonaccrual loans during the year ended December 31, 2014. Had these remaining nonaccrual loans been on accruing status, interest income would have been higher by $333,000 for the three months ended March 31, 2015 and by $283,000 for the three months ended March 31, 2014. A nonaccrual loan may be returned to accruing status once the loan has been brought current as to the principal and interest and collection is reasonably assured or the loan has been "well-secured" through other techniques.