Page 3
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 increases in loan losses and provisions for those losses; (ii) continuation of the historically low, short-term interest rate environment; (iii) the inability of Pinnacle Financial to 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 impact of governmental restrictions on and discretionary regulatory authority over entities participating in the Capital Purchase Program (the “CPP”) of the U.S. Department of the Treasury (the “U.S. Treasury”); (xv) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvi) inability to comply with regulatory capital requirements or to secure any required regulatory approvals for capital actions, including redemption of the remaining preferred shares sold to the U.S. Treasury that are outstanding; 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” 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 release, whether as a result of new information, future events or otherwise.
Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “the firm,” “Pinnacle Financial Partners,” “Pinnacle” or “Pinnacle Financial” as used herein refer to Pinnacle Financial Partners, Inc., and its subsidiaries, including Pinnacle National Bank, which we sometimes refer to as “Pinnacle National,” “our bank subsidiary” or “our bank” and its other subsidiaries. References herein to the fiscal years 2007, 2008, 2009, 2010 and 2011 mean our fiscal years ended December 31, 2007, 2008, 2009, 2010 and 2011, respectively.
ITEM 1.
OVERVIEW
Pinnacle Financial Partners is the second-largest bank holding company headquartered in Tennessee, with $4.9 billion in assets as of December 31, 2011. Incorporated on February 28, 2000, the holding company is the parent company of Pinnacle National and owns 100% of the capital stock of Pinnacle National. The firm started operations on October 27, 2000, with one office in Nashville, Tennessee, and has since grown to 32 offices, including 29 in eight Middle Tennessee counties. The firm also has three offices in Knoxville, Tennessee, the state’s third-largest banking market.
The firm operates as a community bank primarily in the urban markets of Nashville and Knoxville, Tennessee. As an urban community bank, Pinnacle Financial provides the personalized service most often associated with small community banks, while seeking to offer the sophisticated products and services, such as investments and treasury management, more typically offered by large regional and national banks. This approach has enabled Pinnacle Financial to attract clients from the regional and national banks in the Nashville and Knoxville MSAs. As a result, Pinnacle has grown to the fourth largest market share in the Nashville MSA and to the seventh largest market share in the Knoxville MSA.
Page 4
Competitive Conditions
The Nashville MSA banking market is very competitive, with 63 financial institutions with over $37.9 billion in deposits in the market as of June 30, 2011, up from approximately $37.2 billion at June 30, 2010 according to FDIC data. As of June 30, 2011, approximately 63.8% of this deposit base was controlled by seven large, multi-state banks headquartered outside of Nashville, consisting of the following: Bank of America (headquartered in Charlotte, North Carolina), Regions Financial (headquartered in Birmingham, Alabama), SunTrust (headquartered in Atlanta, Georgia), First Horizon (headquartered in Memphis, Tennessee), Wells Fargo (headquartered in San Francisco, CA), Fifth Third (headquartered in Cinncinnati, OH), and US Bank National Association (headquartered in Minneapolis, MN). According to FDIC deposit information, the collective market share of deposits in the Nashville MSA of Regions Financial (including the acquired Union Planters National Bank and AmSouth Bank), Bank of America, US Bank National Association (including the acquired First Union) and SunTrust (including the acquired National Bank of Commerce) declined from approximately 68.9% to 63.8% between June 30, 2001 and June 30, 2011. Pinnacle, on the other hand, after only eleven years of operations, now holds the No. 4 market share position in the Nashville MSA at June 30, 2011 with 9.0% of the market, immediately behind the top three out-of-state banks.
The Knoxville MSA banking market is also very competitive, with 44 financial institutions with over $13.7 billion in deposits in the market as of June 30, 2011. According to FDIC data, bank and thrift deposits in the Knoxville MSA grew from approximately $12.6 billion at June 30, 2010 to more than $13.7 billion at June 30, 2011. As of June 30, 2011, approximately 61.6% of this deposit base was controlled by four large, multi-state banks headquartered outside of Knoxville, consisting of the following: First Horizon, SunTrust, Regions Financial, and BB&T (headquartered in Winston-Salem, North Carolina). According to FDIC deposit information, the collective market share of deposits in the Knoxville MSA of First Horizon, Regions Financial, BB&T (including the acquired BankFirst) and SunTrust declined from 65.7% to 61.6% between June 30, 2001 and June 30, 2011. At June 30, 2007, shortly after Pinnacle Financial first opened a location in Knoxville, the collective market share of deposits in the Knoxville MSA for the same four competitors was 63.4%. A significant portion of the decline in market share for the top four competitors has occurred since Pinnacle Financial established a presence in the Knoxville MSA.
Consequently, while large, multi-state institutions are well established in both of our market areas, the general trends indicate that a majority of the community banks in our market areas have been able to increase their aggregate deposit market share in recent years at the expense of the larger, multi-state banks.
We believe that the most important criteria to our bank’s targeted clients when selecting a bank is their desire to receive exceptional and personal customer service while being able to enjoy convenient access to a broad array of sophisticated financial products. Additionally, when presented with a choice, we believe that many of our bank’s targeted clients would prefer to deal with a locally-owned institution headquartered in Tennessee, like Pinnacle National, as opposed to a large, multi-state bank, where many important decisions regarding a client’s financial affairs are made elsewhere.
Employees
As of February 15, 2012, we employed 742.5 full-time equivalent associates. We believe these associates are Pinnacle’s most important asset. We consider our relationship with our associates to be excellent. This is supported by the fact that for the ninth consecutive year, Pinnacle was named by the Nashville Business Journal as the “Best Place to Work in Nashville” among Middle Tennessee’s large companies with more than 100 employees. The selection is based on an anonymously conducted survey of associates.
PRODUCTS AND SERVICES
Lending Services
We offer a full range of lending products, including commercial, real estate and consumer loans to individuals and small-to medium-sized businesses and professional entities. We compete for these loans with competitors who are also well established in the Nashville and Knoxville MSAs.
Pinnacle National’s loan approval policies provide for various levels of officer lending authority. When the total amount of loans to a single borrower exceeds an individual officer’s lending authority, officers with higher lending authority determine whether to approve any new loan requests or renewals of existing loans. Loans to insiders require approval of the board, and, beginning in February 2010, extensions of credit to certain adversely classified loans require approval of a loan committee of the board.
Page 5
Pinnacle National’s lending activities are subject to a variety of lending limits imposed by federal law. Differing limits apply based on the type of loan or the nature of the borrower, including the borrower’s relationship to Pinnacle National. In general, however, at December 31, 2011, we were able to loan any one borrower a maximum amount equal to approximately $79.3 million plus an additional $132.1 million, or a total of approximately $211.4 million, for loans that meet certain additional federal collateral guidelines. These legal limits will increase or decrease as our bank subsidiary’s capital increases or decreases as a result of its earnings or losses, the injection of additional capital, payments of dividends, or for other reasons. In addition to these regulatory limits, Pinnacle National currently imposes upon itself an internal lending limit of $15 million for relationships seeking current credit approval, which is significantly less than the prescribed legal lending limit. Prior to October 2009, our internal lending limit was $22 million. At that time, we maintained relationships which had aggregate exposure of greater than $15 million. These relationships have been grand-fathered under the previous guidelines and are not subject to our $15 million limitation. We currently have 21 relationships greater than our current in-house limit of $15 million with no relationship in excess of $25 million. Our loan policy requires that the executive committee of the board of directors determine whether to approve any increases in exposure for any relationships that exceed this internal limit.