UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 000-31225

Registrant's telephone number, including area code:   (615) 744-3700

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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 the definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ] (Do not check if a smaller reporting company) Smaller Reporting Company [ ]

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]   No [X]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of the last business day of the registrant's most recently completed second fiscal quarter:  $846,311,085 as of June 30, 2013.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 35,336,340 shares of common stock as of February 21, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders, scheduled to be held April 15, 2014, are incorporated by reference into Part III of this Form 10-K.

---

TABLE OF CONTENTS

 

---

FORWARD-LOOKING STATEMENTS

Certain of the statements in this Annual Report on Form 10-K 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 Partners, Inc. (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; (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 concentration of Pinnacle Financial's customers in two market areas; (xii) the development of any new market other than Nashville or Knoxville; (xiii) a merger or acquisition; (xiv) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xv) the ability to attract additional or retain existing financial advisors or 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) approval of the declaration of any future dividend by Pinnacle Financial's board of directors; and, (xx) 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 "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.

 

---

ITEM 1.  BUSINESS

OVERVIEW

Pinnacle Financial is the second-largest bank holding company headquartered in Tennessee, with $5.56 billion in assets as of December 31, 2013.  Incorporated on February 28, 2000, the holding company is the parent company of Pinnacle Bank and owns 100% of the capital stock of Pinnacle Bank.  The firm started operations on October 27, 2000, in Nashville, Tennessee, and has since grown to 33 offices, including 29 in eight Middle Tennessee counties.  The firm also has four offices in Knoxville, Tennessee, the state's third-largest banking market.  Prior to September 4, 2012, when it converted from a national bank to a state bank, Pinnacle Bank was known as Pinnacle National Bank.

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 sixth largest market share in the Knoxville MSA, based on 2013 FDIC Summary of Deposits data including the impact of any mergers and acquisitions.

 

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 Bank'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, certain extensions of credit, including loans above certain amounts and certain adversely classified loans, require approval of a committee of the board.

Pinnacle Bank's lending activities are subject to a variety of lending limits imposed by federal and state law. Differing limits apply based on the type of loan or the nature of the borrower, including the borrower's relationship to Pinnacle Bank. In general, however, at December 31, 2013, we were able to loan any one borrower a maximum amount equal to approximately $80.9 million with board approval plus an additional $53.9 million, or a total of approximately $134.8 million, with board or executive committee approval. These legal limits will increase or decrease as Pinnacle Bank'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. Pinnacle Bank's internal loan limit of $30 million is less than the internal legal lending limit, and Pinnacle Bank currently has only one relationship in excess of the internal loan limit. This relationship is approximately $40.0 million and was approved by the Executive Committee of the Board of Directors.

The principal economic risk associated with each category of loans that Pinnacle Bank expects to make is the creditworthiness of the borrower. General economic factors affecting a commercial or consumer borrower's ability to repay include interest, inflation and unemployment rates, as well as other factors affecting a borrower's assets, clients, suppliers and employees.  Many of Pinnacle Bank's commercial loans are made to small- to medium-sized businesses that are sometimes less able to withstand competitive, economic and financial pressures than larger borrowers.  During periods of economic weakness these businesses may be more adversely affected than other enterprises and may cause increased levels of nonaccrual or other problem loans, loan charge-offs and higher provision for loan losses.

Pinnacle Bank's commercial clients borrow for a variety of purposes. The terms of these loans (which include equipment loans and working capital loans) will vary by purpose and by type of any underlying collateral. Commercial loans may be unsecured or secured by accounts receivable or by other business assets. Pinnacle Bank also makes a variety of commercial real estate loans, including both investment properties and business loans secured by real estate.

Pinnacle Bank also makes a variety of loans to individuals for personal, family, investment and household purposes, including secured and unsecured installment and term loans, residential first mortgage loans, home equity loans and home equity lines of credit.

---

Deposit Services

Pinnacle Bank seeks to establish a broad base of core deposits, including savings, checking, interest-bearing checking, money market and certificate of deposit accounts. To attract deposits, Pinnacle Bank has employed a marketing plan in its overall service areas primarily based on relationship banking and features a broad product line and competitive rates and services. The primary sources of deposits are individuals and businesses located in the Nashville and Knoxville MSAs. Pinnacle Bank traditionally has obtained these deposits primarily through personal solicitation by its officers and directors, although its use of media advertising has increased since 2010 because of its advertising and banking sponsorship with the Tennessee Titans NFL football team.

Pinnacle Bank also offers its targeted commercial clients a comprehensive array of treasury management services as well as remote deposit services, which allow electronic deposits to be made from the client's place of business.

 

•	Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•	Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•	Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
•	Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
•	Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
•	Bank Secrecy Act, governing how banks and other firms report certain currency transactions and maintain appropriate safeguards against "money laundering" activities;
•	Soldiers' and Sailors' Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in active military service; and
•	Rules and regulations of the various federal agencies charged with the responsibility of implementing the federal laws.

Investing in our common stock involves various risks which are particular to our company, our industry and our market area. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be materially and negatively impacted.  These matters could cause the trading price of our common stock to decline in future periods.

Negative developments in the U.S. and local economy and in local real estate markets have adversely impacted our results and may continue to adversely impact our results in the future.

Economic conditions in the markets in which we operate deteriorated significantly from early 2008 through 2010. These challenges resulted primarily from provisions for loan losses and other real estate expense related to declining collateral values in our real estate loan portfolio and increased costs associated with our portfolio of other real estate owned. Although economic conditions appear to have stabilized in our markets in the more recent periods and we have refocused our efforts on growing our earning assets, we believe that we will continue to experience a slower growth economic environment in 2014. Accordingly, we expect that our results of operations could continue to be negatively impacted by economic conditions, including reduced loan demand, in 2014. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets, generally, or us in particular, will improve materially, or at all, in the near future, or thereafter, in which case we could continue to experience reduced earnings or again experience significant losses and write-downs of assets, and could face capital and liquidity constraints or other business challenges.

Fluctuations in interest rates could reduce our profitability.

The absolute level of interest rates as well as changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rate fluctuations are caused by many factors which, for the most part, are not under our control. For example, national monetary policy plays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with our customers also impact the rates we collect on loans and the rates we pay on deposits.

As interest rates change, we expect that we will periodically experience "gaps" in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities (usually deposits and borrowings) will be more sensitive to changes in market interest rates than our interest-earning assets (usually loans and investment securities), or vice versa. In either event, if market interest rates should move contrary to our position, this "gap" may work against us, and our earnings may be negatively affected. Changes in the level of interest rates also may negatively affect our ability to originate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses. Because of the number of loans that we have made with interest rate floors above current rates, in a rising rate environment our liabilities may reprice faster than our loans, which would negatively impact our results of operations.

Our ability to declare and pay dividends is limited.

While we have announced that our board of directors had approved the initiation of a quarterly cash dividend on our common stock there can be no assurance of whether or when we may pay dividends on our common stock in the future. Future dividends, if any, will be declared and paid at the discretion of our board of directors and will depend on a number of factors. Our principal source of funds used to pay cash dividends on our common stock will be dividends that we receive from Pinnacle Bank. Although Pinnacle Bank's asset quality, earnings performance, liquidity and capital requirements will be taken into account before we declare or pay any future dividends on our common stock, our board of directors will also consider our liquidity and capital requirements and our board of directors could determine to declare and pay dividends without relying on dividend payments from Pinnacle Bank.

Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends we may declare and pay. For example, under guidance issued by the Federal Reserve Board, as a bank holding company, we are required to consult with the Federal Reserve before declaring dividends and are to consider eliminating, deferring or reducing dividends if (i) our net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) our prospective rate of earnings retention is not consistent with our capital needs and overall current and prospective financial condition, or (iii) we will not meet, or are in danger of not meeting, our minimum regulatory capital adequacy ratios.

In addition, the terms of the indentures pursuant to which our subordinated debentures have been issued prohibit us from paying dividends on our common stock at times when we are deferring the payment of interest on our subordinated debentures.  Moreover, the terms of our Loan Agreement prohibit us from paying dividends on our common stock when there is an event of default or unmatured event of default under the Loan Agreement or when the payment of the dividend would result in an event of default or unmatured event of default under the Loan Agreement.

---

We have a concentration of credit exposure to borrowers in certain industries, and we also target small to medium-sized businesses.

At December 31, 2013, we had meaningful credit exposures to borrowers in certain businesses, including commercial and residential building lessors, new home builders, and land subdividers. These industries experienced adversity during 2008 through 2010 as a result of sluggish economic conditions, and, as a result, an increased level of borrowers in these industries were unable to perform under their loan agreements with us, or suffered loan downgrades which negatively impacted our results of operations. If the economic environment in our markets weakens in 2014 or beyond, these industry concentrations could result in increased deterioration in credit quality, past dues, loan charge offs and collateral value declines, which could cause our earnings to be negatively impacted. Furthermore, any of our large credit exposures that deteriorate unexpectedly could cause us to have to make significant additional loan loss provisions, negatively impacting our earnings.

A substantial focus of our marketing and business strategy is to serve small to medium-sized businesses in the Nashville and Knoxville MSAs. As a result, a relatively high percentage of our loan portfolio consists of commercial loans primarily to small to medium-sized businesses. At December 31, 2013, our commercial and industrial loans accounted for almost 39.0% of our total loans, up from 31.5% at December 31, 2010. Additionally, approximately, 16.4% of our loans at December 31, 2013 are owner-occupied commercial real estate loans, which are loans to businesses secured by the businesses' real estate. We expect to seek to expand the amount and percentage of such loans in our portfolio in 2014. During periods of slow economic growth like those we are currently experiencing, small to medium-sized businesses may be impacted more severely and more quickly than larger businesses. Consequently, the ability of such businesses to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition.

We are geographically concentrated in the Nashville, Tennessee and Knoxville, Tennessee MSAs, and changes in local economic conditions impact our profitability.

We currently operate primarily in the Nashville, Tennessee and Knoxville, Tennessee MSAs, and most of our borrowers, depositors and other customers live or have operations in these areas. Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in these markets, along with the continued attraction of business ventures to the areas, and our profitability is impacted by the changes in general economic conditions in these markets.  We cannot assure you that economic conditions, including loan demand, in our markets will improve during 2014 or thereafter, and in that case, we may not be able to grow our loan portfolio in line with our expectations, the ability of our customers to repay their loans to us may be negatively impacted and our financial condition and results of operations could be negatively impacted.

Compared to regional or national financial institutions, we are less able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or return of more favorable economic conditions in our primary market areas if they do occur.

If our allowance for loan losses is not sufficient to cover losses inherent in our portfolio, our earnings will decrease.

If loan customers with significant loan balances fail to repay their loans, our earnings and capital levels will suffer. We make various assumptions and judgments about the probable losses in our loan portfolio, including the credit worthiness of our borrowers and the value of any collateral securing the loans. We maintain an allowance for loan losses to cover our estimate of the probable losses in our loan portfolio. In determining the size of this allowance, we utilize estimates  based on analysis of volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, loss experience of various loan categories, national and local economic conditions, industry and peer bank loan quality indications, and other pertinent factors and information. If our assumptions are inaccurate, our current allowance may not be sufficient to cover potential loan losses, and additional provisions may be necessary which would decrease our earnings.

In addition, federal and state regulators periodically review our loan portfolio and may require us to increase our allowance for loan losses or recognize loan charge-offs. Their conclusions about the quality of a particular borrower or our entire loan portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge offs as required by these regulatory agencies could have a negative effect on our operating results. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans, identification of additional problem loans, accounting rule changes and other factors, both within and outside of our management's control. These additions may require increased provision expense which would negatively impact our results of operations.

---

 

 

We continue to have elevated levels of other real estate owned, primarily as a result of foreclosures, and we anticipate that foreclosed real estate expense will continue to be a material component of noninterest expense.

As we acted to resolve non-performing real estate loans over the last few years, our level of other real estate owned was elevated in comparison to our first six years of operation. Although, our levels of other real estate owned are diminishing, they remain higher than historical levels. As a result, we expect that we will continue to have elevated levels of foreclosed real estate expense. Foreclosed real estate expense consists of three types of charges: maintenance costs, valuation adjustments to appraisal values and gains or losses on disposition. Should levels of other real estate owned increase or should local real estate values decline, these charges will continue to negatively impact our results of operations.

Our loan portfolio includes a meaningful amount of real estate construction and development loans, which have a greater credit risk than residential mortgage loans.

Although we have made meaningful progress over the last three years in reducing our concentration of real estate construction and development loans, the percentage of these loans in Pinnacle Bank's portfolio was approximately 7.6% of total loans at December 31, 2013. These loans make up approximately 5.9% of our non-performing loans at December 31, 2013. This type of lending is generally considered to have relatively high credit risks because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and operation of the related real estate project. The credit quality of many of these loans deteriorated during the challenging economic period of 2008 to 2012 due to the adverse conditions in the real estate market during that period and that type of deterioration could occur again. Weakness in residential real estate market prices as well as demand could result in price reductions in home and land values adversely affecting the value of collateral securing the construction and development loans that we hold. Should we experience the return of these adverse economic and real estate market conditions we may again experience increases in non-performing loans and other real estate owned, increased losses and expenses from the management and disposition of non-performing assets, increases in provision for loan losses, and increases in operating expenses as a result of the allocation of management time and resources to the collection and work out of loans, all of which would negatively impact our financial condition and results of operations.

The effectiveness of our asset resolution activities are critical to our ability to improve, resolve or liquidate nonperforming loans and other real estate owned and thereby reduce loan losses and other real estate expense.

Over the last several years, we have undertaken various initiatives to enhance our credit review, loan administration and special asset management and administration procedures, and believe that these enhancements have begun to reduce the levels of our problem and potential problem assets.  However, continued improvement is dependent to a degree on the market conditions and other factors beyond our control and if we are unable to successfully manage our problem and potential problem assets in a timely matter, we could experience materially increased loan losses and other real estate expense.

Recently adopted changes to capital requirements for bank holding companies and depository institutions may negatively impact Pinnacle Financial's and Pinnacle Bank's results of operations

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to Pinnacle Bank and Pinnacle Financial. The final rules implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

---

 

Common equity Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions.

The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. Pinnacle Financial expects that it will opt-out of this requirement.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

The Company's executive offices are located at 150 Third Avenue South, Suite 900, Nashville, Tennessee. The Company operates 33 banking locations throughout our market areas, of which for 10 locations the Company leases the land, the building or both.  The Company has locations in the Tennessee municipalities of Nashville, Knoxville, Murfreesboro, Dickson, Ashland City, Mt. Juliet, Lebanon, Franklin, Brentwood, Hendersonville, Goodlettsville, Smyrna and Shelbyville.

ITEM 3.  LEGAL PROCEEDINGS

Various legal proceedings to which Pinnacle Financial or a subsidiary of Pinnacle Financial is party arise from time to time in the normal course of business. Except as described below, as of the date hereof, there are no material pending legal proceedings to which Pinnacle Financial or any of its subsidiaries is a party or of which any of its or its subsidiaries' properties are subject.

During the fourth quarter of 2011, a customer of Pinnacle Bank filed a putative class action lawsuit (styled John Higgins, et al, v. Pinnacle Financial Partners, Inc., d/b/a Pinnacle National Bank) in Davidson County, Tennessee Circuit Court against Pinnacle Bank and Pinnacle Financial, on his own behalf, as well as on behalf of a purported class of Pinnacle Bank's customers within the State of Tennessee alleging that Pinnacle Bank's method of ordering debit card transactions had caused customers of Pinnacle Bank to incur higher overdraft charges than had a different method been used. Pinnacle Financial and Pinnacle Bank reached a tentative settlement with the plaintiff during the second quarter of 2013. Although the settlement has not been finalized the court has preliminarily approved the settlement. Pinnacle Financial does not believe that any liability arising from this legal matter will have a material adverse effect on Pinnacle Financial's consolidated financial condition, operating results or cash flows.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

---

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Pinnacle Financial's common stock is traded on the Nasdaq Global Select Market under the symbol "PNFP" and has traded on that market since July 3, 2006. The following table shows the high and low closing sales price information for Pinnacle Financial's common stock for each quarter in 2013 and 2012 as reported on the Nasdaq Global Select Market.

As of February 21, 2014, Pinnacle Financial had approximately 3,087 stockholders of record.

During the fourth quarter of 2013, we paid a quarterly dividend on our common stock for the first time. The amount of the dividend was $0.08 per share.  See ITEM 1. "Business – Supervision and Regulation – Payment of Dividends" and ITEM 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information on dividend restrictions applicable to Pinnacle Financial and Pinnacle Bank.

In connection with the settlement of income tax liabilities associated with the Company's equity compensation plans, Pinnacle Financial repurchased shares of its common stock during the quarter ended December 31, 2013 as follows:

---

ITEM 6.  SELECTED FINANCIAL DATA

26

(1)	Net interest margin is the result of net interest income for the period divided by average interest earning assets.

(2)	Net interest spread is the result of the difference between the interest earned on interest earning assets less the interest paid on interest bearing liabilities.

(3)	Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.

(4)       The dividend payout ratio is calculated as the sum of the annualized dividend rate divided by the trailing 12-months of fully diluted earnings per share as of the dividend declaration date.

(5)       Allowance for loan loss coverage ratio is the ratio of the allowance for loan losses as a percentage of nonaccrual loans.

(6)       Leverage ratio is computed by dividing Tier 1 capital by average total assets for the fourth quarter of each year.

 

---

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our financial condition at December 31, 2013 and 2012 and our results of operations for each of the years in the three-year period ended December 31, 2013.  The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements.  The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.

Overview

General.  Our fully diluted net income per common share available to common stockholders for the year ended December 31, 2013 was $1.67 compared to fully diluted net income per common share available to common stockholders of $1.10 and $1.09 for the years ended December 31, 2012 and 2011, respectively.  Results for the year ended December 31, 2011, included a $22.5 million benefit associated with the reversal of the deferred tax valuation allowance which was established during the fiscal year ended December 31, 2010.

Results of operations.  Our net interest income increased to $175.9 million for 2013 compared to $162.9 million for 2012 and $151.5 million for 2011.   The net interest margin (the ratio of net interest income to average earning assets) for 2013 was 3.77% compared to 3.77% for 2012 and 3.55% for 2011. Our net interest margin was impacted favorably in all three years by loan growth and an increased effort to reduce our cost of funds and our decreased dependency on higher priced funding.

Our provision for loan losses was $7.9 million for 2013 compared to $5.6 million in 2012 and $21.8 million in 2011. Our net charge-offs were $9.3 million during 2013 compared to $10.1 million in 2012 and $30.4 million in 2011. During 2013, we decreased our allowance for loan losses as a percentage of loans from 1.87% at December 31, 2012 to 1.64% at December 31, 2013 primarily due to the ongoing resolution of non-performing loans, the reduction in our net charge-offs and, improvements in the overall quality of our loan portfolio during 2013.

Noninterest income for 2013 compared to 2012 increased by $3.7 million, or 8.5%. This growth was primarily attributable to increased production in our fee-based products such as investments, insurance and trust. Noninterest income for 2012 compared to 2011 increased by $5.5 million, or 14.4%, which was largely impacted by our mortgage origination business.

Noninterest expense for 2013 compared to 2012 decreased by $8.9 million, or 6.4%, primarily due to decreased other real estate owned expenses, which decreased by $8.4 million over the 2012 levels, decreased intangible amortization expense of $1.5 million, and decreased other noninterest expenses of $4.3 million offset in part by higher salaries and employee benefits expense, which increased by $4.6 million.  Noninterest expense for 2012 compared to 2011 decreased by $942,000, or 0.68%, primarily due to decreased other real estate owned expenses, which decreased by $5.9 million over the 2011 levels, and lower FDIC insurance expense, which decreased by $3.5 million, offset in part by higher salaries and employee benefits expense, which increased by $3.6 million. The number of full-time equivalent employees decreased from 747.0 at December 31, 2011 to 730.5 at December 31, 2012.  There were 751.0 full-time equivalent employees at December 31, 2013.

Income tax expense for 2013 was $28.2 million compared to $20.6 million in 2012 and an income tax benefit of $15.2 million in 2011.  The effective income tax expense rate for the year ended December 31, 2013 was approximately 32.8% compared to 33.0% for the year ended December 31, 2012 and an income tax benefit rate of 53.5% for the year ended December 31, 2011 due to the reversal of the deferred tax valuation allowance.  For the years ended December 31, 2013 and 2012, our effective income tax rate differs from the statutory rates primarily due to our investments in bank qualified municipal securities, our real estate investment trust and bank-owned life insurance.  For the year ended December 31, 2011, our income tax expense rate was principally impacted by the reversal of the deferred tax valuation allowance in the third quarter of 2011 which had been initially established during the second quarter of 2010.

Net income available to common stockholders for 2013 was $57.7 million compared to $38.1 million in net income in 2012 and $37.1 million in 2011.  Fully-diluted net income per common share available to common stockholders was $1.67 for 2013 compared to $1.10 for 2012 and $1.09 for 2011. Included in net income available to common stockholders for the year ended December 31, 2012 was approximately $3.8 million of charges related to preferred stock dividends and accretion of the preferred stock discount related to our participation in the U.S. Treasury's TARP Capital Purchase Program (CPP), as compared to $6.7 million for the year ended December 31, 2011. The charges associated with the preferred stock in fiscal 2012 and 2011 included the acceleration of the preferred stock discount associated with the redemption of 23,750 shares of Series A preferred stock during the fourth quarter of 2011 and the remaining 71,250 shares during the second quarter of 2012.

Financial Condition.  Our loan balances increased by $432.3 million during 2013 compared to an increase of $420.8 million in 2012.  The increase in our loan balances represents the result of increases in the number of relationship advisors in our markets and increased focus on attracting new customers to our Company.

Total deposits increased from $4.015 billion at December 31, 2012 to $4.533 billion at December 31, 2013.  Within our deposits, the ratio of core funding to total deposits decreased slightly from 87.6% at December 31, 2012 to 85.5% at December 31, 2013.  Core funding consists of all deposits other than time deposits issued in denominations of $250,000 or greater.

We believe we have hired experienced relationship managers that have significant client portfolios and longstanding reputations within the communities we serve.  As such, we believe they will attract additional loans and deposits from new and existing small-and middle-market clients as the economies in our principal markets continue to strengthen.

---

Capital and Liquidity.  At December 31, 2013 and 2012, our capital ratios, including our bank's capital ratios, exceeded regulatory minimum capital requirements.  From time to time we may be required to support the capital needs of our bank subsidiary. At December 31, 2013, we had approximately $21.1 million of cash at the holding company which could be used to support our bank. We believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary.

During the fourth quarter of 2008, we issued 95,000 shares of Series A preferred stock for $95 million to the U.S. Treasury as part of the CPP.   During the fourth quarter of 2011, we repurchased 25% of the shares of Series A preferred stock for approximately $23.9 million. During the second quarter of 2012, we completed the redemption of the remaining 71,250 outstanding preferred shares for approximately $71.6 million.  We accelerated the accretion of the remaining preferred stock discount of approximately $1.7 million during the second quarter of 2012.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with U.S. generally accepted accounting principles and with general practices within the banking industry.  In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, the valuation of other real estate owned, the assessment of the valuation of deferred tax assets and the assessment of impairment of intangibles, has been critical to the determination of our financial position and results of operations.

Allowance for Loan Losses (allowance).  Our management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay the loan (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.  The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the loan portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.  Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, is deemed to be uncollectible.

In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio.  Our loan review process includes the judgment of management, independent internal loan reviewers, and reviews that may have been conducted by third-party reviewers including regulatory examiners. We incorporate relevant loan review results in the loan impairment determination.

Our allowance for loan losses is composed of the result of two independent analyses pursuant to the provisions of ASC 450-20, Loss Contingencies and ASC 310-10-35, Receivables.  The ASC 450-20 analysis is intended to quantify the inherent risk in our performing loan portfolio.  The component of the allowance generated by ASC 310-10-35 is the result of an analysis of loans that have been specifically identified as impaired.

The ASC 450-20 component of the allowance for loan losses begins with a process of estimating the probable losses based on our internal system of risk ratings and historical loss data for our risk rated portfolio.  Prior to 2010, because of our limited loss history, loss estimates were primarily derived from historical loss data by loan categories for comparable peer institutions.  During 2010, we incorporated the results of our own historical migration analysis of all loans that were charged-off during the prior eight quarters.  The look-back period in our migration analysis was extended in 2011 to eleven quarters to continue to include the losses incurred in the second quarter of 2009.

 

Subsequently, we have increased our look-back period each quarter to include the most recent quarters' loss history for a total of 19 quarters as of December 31, 2013.  We will continue to increase our look-back period to incorporate at least twenty quarters of loss history. We do not currently expect to increase the look-back period beyond twenty quarters, but may do so after a more thorough analysis of these matters during 2014.   In this current economic environment, we believe the extension of our look-back period in our migration analysis has been appropriate due to the risks inherent in our loan portfolio.  Once the look-back period is limited to twenty quarters, the early cycle periods in which we experienced higher levels of losses would be excluded from the migration period.   This migration analysis assists in evaluating loan loss allocation rates for the various risk grades assigned to loans in our portfolio. The results of the migration analysis are then compared to other industry factors to determine the loss allocation rates for the risk rated loan portfolios.  The loss allocation rates from our migration analysis and the industry loss factors are weighted 75% - 25% respectively to determine a weighted average loss allocation rate for these portfolios.

The allowance allocation for non risk-rated portfolios is based on consideration of our actual historical loss rates and industry loss rates for those particular segments. Non risk-rated loans are evaluated as a group by category rather than on an individual loan basis because these loans are smaller and homogeneous. We weight the allocation methodologies for the non risk-rated loan portfolio and determine a weighted average allocation for these portfolios.

---

The estimated loan loss allocation for all loan segments is then adjusted for management's estimate of probable losses for a number of environmental factors. The allocation for environmental factors is particularly subjective and does not lend itself to exact mathematical calculation.  This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and is based upon quarterly trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors.  These environmental factors are considered for each of the five loan segments, and the allowance allocation, as determined by the processes noted above for each segment, is increased or decreased based on the incremental assessment of these various environmental factors.

 

The ASC 450-20 portion of the allowance also includes an unallocated component.  We believe that the unallocated amount is warranted for inherent factors that cannot be practically assigned to individual loan categories, such as the imprecision in the overall loss allocation measurement process, the volatility of the local economies in the markets we serve and imprecision in our credit risk ratings process.

The second component of the allowance for loan losses is determined pursuant to ASC 310-10-35.  Loans are impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.  This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely.  A loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the provision for loan losses and is a component of the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan's effective interest rate, or if the loan is collateral dependent, at the fair value of the collateral, less estimated disposal costs. If the loan is collateral dependent, the principal balance of the loan is charged-off in an amount equal to the impairment measurement. The fair value of collateral dependent loans is derived primarily from collateral appraisals performed by independent third-party appraisers.  Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans.

Pursuant to the guidance set forth in ASU No. 2011-02, A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, the above impairment methodology is also applied to those loans identified as troubled debt restructurings.

We then test the resulting total allowance for loan losses by comparing the balance in the allowance to historical trends and industry and peer information. Our management then evaluates the result of the procedures performed, including the results of our testing, and decides on the appropriateness of the balance of the allowance in its entirety. The audit committee of our board of directors reviews and approves the assessment prior to the filing of quarterly and annual financial information.

While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, a local real estate market or particular industry conditions which may negatively impact materially our asset quality and the adequacy of our allowance for loan losses and thus the resulting provision for loan losses.

Other Real Estate Owned. Other real estate owned (OREO), which consists of properties obtained through foreclosure or through deed in lieu of foreclosure in satisfaction of loans, is reported at the lower of cost or fair value based on appraised value less selling costs, estimated as of the date acquired, with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent downward valuation adjustments are determined on a specific property basis and are included as a component of other noninterest expense along with holding costs. The fair value of other real estate owned is derived primarily from independent appraisers. Our internal policies generally require OREO properties to be appraised every nine months.  At December 31, 2013, the average age of our OREO appraisals was 5.3 months. Any net gains or losses on disposal realized at the time of disposal are reflected, net, in noninterest income or noninterest expense, as applicable.  Significant judgments and complex estimates are required in estimating the fair value of other real estate owned, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility, as experienced during the last few years. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate owned.

Deferred Tax Asset Valuation. A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

---

Impairment of Intangible Assets.  Long-lived assets, including purchased intangible assets subject to amortization, such as our core deposit intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. There are no such assets to be disposed of at December 31, 2013.

Goodwill is evaluated for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired.  Our annual assessment date is September 30.  An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.

		Years ended December 31,								2013-2012 Percent Increase				Year ended December 31,				2012-2011 Percent Increase
		2013				2012				(Decrease)				2011				(Decrease)
Interest income		$	191,282			$	185,422				3.2	%		$	188,346				(1.6	%)
Interest expense			15,384				22,558				(31.8	%)			36,882				(38.8	%)
Net interest income			175,898				162,864				8.0	%			151,464				7.5	%
Provision for loan losses			7,857				5,569				41.1	%			21,798				(74.5	%)
Net interest income after provision for loan losses			168,041				157,295				6.8	%			129,666				21.3	%
Noninterest income			47,104				43,397				8.5	%			37,940				14.4	%
Noninterest expense			129,261				138,165				(6.4	%)			139,107				(0.7	%)
Net income before income taxes			85,884				62,527				37.4	%			28,499				119.4	%
Income tax expense (benefit)			28,158				20,643				36.4	%			(15,238	)			(235.5	%)
Net income			57,726				41,884				37.8	%			43,737				(4.2	%)
Preferred dividends and preferred stock discount accretion			-				3,814				(100.0	%)			6,665				(42.8	%)
Net income available to common stockholders		$	57,726			$	38,070				51.6	%		$	37,072				2.7	%
Basic net income per common share available to common stockholders		$	1.69			$	1.12				50.9	%		$	1.11				0.9	%
Diluted net income per common share available to common stockholders		$	1.67			$	1.10				51.8	%		$	1.09				0.9	%

	2013								2012								2011
	Average Balances		Interest		Rates/ Yields				Average Balances		Interest		Rates/ Yields				Average Balances		Interest		Rates/ Yields
Interest-earning assets:
Loans (1)	$	3,861,166		169,253		4.40	%		$	3,438,401		160,037		4.66	%		$	3,218,123		154,750		4.82	%
Securities:
Taxable		559,702		14,504		2.59	%			612,677		16,931		2.76	%			768,063		23,972		3.12	%
Tax-exempt (2)		173,202		6,378		4.91	%			182,217		6,577		4.82	%			193,397		7,394		5.10	%
Federal funds sold and other		144,948		1,147		0.93	%			155,876		1,877		1.33	%			167,932		2,232		1.43	%
Total interest-earning assets		4,739,018		191,282		4.10	%			4,389,171		185,422		4.29	%			4,347,515		188,348		4.40	%
Nonearning assets:
Intangible assets		248,291								250,619								253,443
Other nonearning assets		240,018								233,764								232,477
	$	5,227,327							$	4,873,554							$	4,833,435
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking	$	790,365		1,928		0.24	%		$	677,632		2,800		0.41	%		$	583,212		3,522		0.60	%
Savings and money market		1,714,154		5,795		0.34	%			1,575,174		7,884		0.50	%			1,597,965		13,773		0.86	%
Time deposits		564,766		3,998		0.71	%			644,039		6,158		0.96	%			876,864		13,293		1.52	%
Total interest-bearing deposits		3,069,285		11,721		0.38	%			2,896,845		16,842		0.58	%			3,058,041		30,588		1.00	%
Securities sold under agreements to repurchase		113,742		239		0.21	%			134,989		455		0.34	%			161,845		1,110		0.69	%
Federal Home Loan Bank advances		153,912		690		0.45	%			202,338		2,237		1.11	%			137,466		2,519		1.83	%
Subordinated debt and other borrowing		102,571		2,734		2.67	%			105,131		3,024		2.87	%			97,476		2,665		2.73	%
Total interest-bearing liabilities		3,439,510		15,384		0.45	%			3,339,303		22,558		0.68	%			3,454,828		36,882		1.07	%
Noninterest-bearing deposits		1,062,089		-		-				809,268		-		-				650,602		-		-
Total deposits and interest- bearing liabilities		4,501,599		15,384		0.34	%			4,148,571		22,558		0.54	%			4,105,430		36,882		0.90	%
Other liabilities		21,631								27,933								24,752
Stockholders' equity		704,097								697,050								703,253
	$	5,227,327							$	4,873,554							$	4,833,435
Net interest income			$	175,898							$	162,864							$	151,464
Net interest spread (3)						3.65	%							3.61	%							3.33	%
Net interest margin (4)						3.77	%							3.77	%							3.55	%

		2013 Compared to 2012 Increase (decrease) due to												2012 Compared to 2011 Increase (decrease) due to
		Rate				Volume				Net				Rate				Volume				Net
Interest-earning assets:
Loans		$	(8,940	)		$	18,156			$	9,216			$	(5,149	)		$	10,437			$	5,288
Securities:
Taxable			(1,042	)			(1,385	)			(2,427	)			(2,765	)			(4,276	)			(7,041	)
Tax-exempt			164				(363	)			(199	)			(542	)			(275	)			(817	)
Federal funds sold			(624	)			(106	)			(730	)			(168	)			(187	)			(355	)
Total interest-earning assets			(10,442	)			16,302				5,860				(8,623	)			5,698				(2,925	)
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking			(1,152	)			280				(872	)			(1,108	)			386				(722	)
Savings and money market			(2,520	)			431				(2,089	)			(5,753	)			(136	)			(5,889	)
Time deposits			(1,610	)			(550	)			(2,160	)			(4,910	)			(2,225	)			(7,135	)
Total deposits			(5,282	)			161				(5,121	)			(11,771	)			(1,975	)			(13,746	)
Securities sold under agreements to repurchase			(175	)			(41	)			(216	)			(566	)			(89	)			(655	)
Federal Home Loan Bank advances			(1,315	)			(232	)			(1,547	)			(998	)			723				(275	)
Subordinated debt and other borrowings			(210	)			(81	)			(291	)			137				215				352
Total interest-bearing liabilities			(6,982	)			(193	)			(7,175	)			(13,198	)			(1,126	)			(14,324	)
Net interest income		$	(3,460	)		$	16,495			$	13,035			$	4,575			$	6,824			$	11,399

		Years ended December 31,								2013-2012 Percent Increase				Year ended December 31,				2012-2011 Percent Increase
		2013				2012				(Decrease)				2011				(Decrease)
Noninterest income:
Service charges on deposit accounts		$	10,558			$	9,918				6.5	%		$	9,244				7.3	%
Investment services			8,038				6,985				15.1	%			6,246				11.8	%
Insurance sales commissions			4,537				4,461				1.7	%			3,999				11.6	%
Gains on mortgage loans sold, net			6,243				6,699				(6.8	%)			4,155				61.2	%
Investment gains (losses) on sales and impairments, net			(1,466	)			2,151				(168.2	%)			961				123.8	%
Trust fees			3,747				3,195				17.3	%			3,000				6.5	%
Other noninterest income:
ATM and other consumer card fees			7,517				6,264				20.0	%			6,381				(1.8	%)
Bank-owned life insurance			2,116				919				130.3	%			1,159				(20.7	%)
Loan swap fees			1,162				2,013				(42.3	%)			101				1,893.1	%
Other noninterest income			4,651				791				488.0	%			2,694				(70.6	%)
Total other noninterest income			15,446				9,987				54.7	%			10,335				(3.4	%)
Total noninterest income		$	47,103			$	43,396				8.5	%		$	37,940				14.4	%

		Years ended December 31,								2013-2012 Percent Increase				Year ended December 31,				2012-2011 Percent Increase
		2013				2012				(Decrease)				2011				(Decrease)
Noninterest expense:
Salaries and employee benefits:
Salaries		$	45,773			$	44,829				2.1	%		$	43,450				3.2	%
Commissions			4,641				4,283				8.4	%			3,992				7.3	%
Annual cash incentives			14,331				10,314				38.9	%			9,389				9.9	%
Employee benefits and other			17,902				18,631				(3.9	%)			17,594				5.9	%
Total salaries and employee benefits			82,647				78,057				5.9	%			74,425				4.9	%
Equipment and occupancy			21,274				20,420				4.2	%			19,987				2.2	%
Other real estate expense			3,113				11,544				(73.0	%)			17,432				(33.8	%)
Marketing and business development			3,638				3,636				0.1	%			3,303				10.1	%
Postage and supplies			2,250				2,380				(5.5	%)			2,121				12.2	%
Amortization of intangibles			1,263				2,739				(53.9	%)			2,863				(4.3	%)
Other noninterest expense:
Deposit related expenses			4,631				4,856				(4.6	%)			9,330				(48.0	%)
Lending related expenses			2,926				3,768				(22.3	%)			1,707				120.7	%
Investment sales expense			306				240				27.5	%			272				(11.8	%)
Trust expenses			452				376				20.2	%			376				0.0	%
FHLB restructuring			877				2,093				(58.1	%)			-				100.0	%
Administrative and other expenses			5,884				8,056				(27.0	%)			7,291				10.5	%
Total other noninterest expense			15,076				19,389				(22.2	%)			18,976				2.2	%
Total noninterest expense		$	129,261			$	138,165				(6.4	%)		$	139,107				(0.7	%)

		2013								2012								2011								2010								2009
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
Commercial real estate - Mortgage		$	1,383,435				33.4	%		$	1,178,196				31.7	%		$	1,110,962				33.8	%		$	1,094,615				34.1	%		$	1,118,068				31.4	%
Consumer real estate - Mortgage			695,616				16.8	%			679,926				18.3	%			695,745				21.1	%			705,487				22.0	%			756,015				21.2	%
Construction and land development			316,191				7.6	%			313,552				8.4	%			274,248				8.3	%			331,261				10.3	%			525,271				14.7	%
Commercial and industrial			1,605,547				38.7	%			1,446,578				39.0	%			1,145,735				34.8	%			1,012,091				31.5	%			1,071,444				30.0	%
Consumer and other			143,704				3.5	%			93,910				2.5	%			64,661				2.0	%			68,986				2.1	%			92,584				2.7	%
Total loans		$	4,144,493				100.0	%		$	3,712,162				100.0	%		$	3,291,351				100.0	%		$	3,212,440				100.0	%		$	3,563,382				100.0	%

	Amounts at December 31, 2013									Percentage of total at December 31,
	Fixed Rates			Variable Rates(*)			Totals			2013			2012
Based on contractual maturity:
Due within one year	$	226,288			803,407			1,029,695		24.8	%		28.5	%
Due in one year to five years		933,300			816,064			1,749,364		42.2	%		42.2	%
Due after five years		567,697			797,737			1,365,434		32.9	%		29.3	%
Totals	$	1,727,285			2,417,208			4,144,493		100.0	%		100.0	%
Based on contractual repricing dates:
Daily floating rate	$	-			1,267,537			1,267,537		30.6	%		30.4	%
Due within one year		226,288			471,417			697,706		16.8	%		27.2	%
Due in one year to five years		933,300			406,188			1,339,488		32.3	%		29.3	%
Due after five years		567,697			272,066			839,763		20.3	%		13.1	%
Totals	$	1,727,285			2,417,208			4,144,493		100.0	%		100.0	%

	At December 31, 2013
	Outstanding Principal Balances				Unfunded Commitments				Total Exposure				Percent of Pinnacle Bank Total Risk-Based Capital				Total Exposure at December 31, 2012
Lessors of nonresidential buildings		$	471,978			$	43,262			$	515,240				82.9	%		$	440,237
Lessors of residential buildings			242,029				28,744				270,773				43.6	%			215,899

Accruing loans past due 30 to 90 days:	December 31, 2013				December 31, 2012
Commercial real estate – mortgage	$	2,561			$	5,749
Consumer real estate – mortgage		2,215				2,589
Construction and land development		4,839				1,572
Commercial and industrial		1,847				648
Consumer and other		1,488				526
Total accruing loans past due 30 to 90 days	$	12,950			$	11,084
Accruing loans past due 90 days or more:
Commercial real estate – mortgage	$	2,232			$	-
Consumer real estate – mortgage		-				254
Construction and land development		-				-
Commercial and industrial		825				604
Consumer and other		289				-
Total accruing loans past due 90 days or more	$	3,346			$	858
Ratios:
Accruing loans past due 30 to 90 days as a percentage of total loans		0.31	%			0.34	%
Accruing loans past due 90 days or more as a percentage of total loans		0.08	%			0.03	%
Total accruing loans in past due status as a percentage of total loans		0.39	%			0.36	%

		December 31,
		2013				2012
Developed lots		$	1,296			$	1,835
Undeveloped land			11,564				13,285
Other			2,366				3,460
		$	15,226			$	18,580

		At December 31, 2012				Payments, Sales and Reductions (2)				Foreclosures (3)				Inflows(4)				At December 31, 2013
Nonperforming assets:
Nonperforming loans (1):
Commercial real estate – mortgage		$	9,291			$	(9,651	)		$	(1,604	)		$	10,981			$	9,017
Consumer real estate – mortgage			5,906				(8,650	)			(2,765	)			10,798				5,289
Construction and land development			4,509				(4,405	)			(262	)			1,228				1,070
Commercial and industrial			3,038				(19,027	)			-				18,554				2,565
Consumer and other			79				(884	)			(699	)			1,746				242
Total nonperforming loans (1)			22,823				(42,617	)			(5,330	)			43,307				18,183
Other real estate owned			18,580				(8,684	)			5,330				-				15,226
Total nonperforming assets			41,403				(51,301	)			-				43,307				33,410
Troubled debt restructurings:
Commercial real estate – mortgage			20,264				(6,811	)			-				-				13,453
Consumer real estate – mortgage			6,311				(2,754	)			-				427				3,984
Construction and land development			71				(7	)			-				49				113
Commercial and industrial			687				(455	)			-				1,588				1,820
Consumer and other			119				(86	)			-				243				276
Total troubled debt restructurings			27,452				(10,113	)			-				2,307				19,646
Total nonperforming assets and troubled debt restructurings		$	68,855			$	(61,414	)		$	-			$	45,615			$	53,056
Ratios:
Nonperforming loans to total loans			0.61	%															0.44	%
Nonperforming assets to total loans plus other real estate owned			1.11	%															0.88	%
Nonperforming assets plus troubled debt restructurings to total loans and other real estate owned			1.85	%															1.28	%
Nonperforming assets, potential problem loans and troubled debt restructurings to Pinnacle Bank Tier I capital and allowance for loan losses			31.04	%															19.02	%
Classified asset ratio  (Pinnacle Bank)(5)			29.40	%															18.50	%
Allowance for loan loss coverage ratio			304.2	%															373.8	%

		At December 31,
		2013								2012								2011								2010								2009
		Amount			Percent					Amount			Percent					Amount			Percent					Amount			Percent					Amount			Percent
Commercial real estate – Mortgage		$	21,372				33.4	%		$	19,634				31.7	%		$	23,397				33.8	%		$	19,252				34.1	%		$	22,505				31.4	%
Consumer real estate – Mortgage			8,355				16.8	%			8,762				18.3	%			10,302				21.1	%			9,898				22.0	%			10,725				21.2	%
Construction and land development			7,235				7.6	%			9,164				8.5	%			12,040				8.3	%			19,122				10.3	%			23,027				14.7	%
Commercial and industrial			25,134				38.7	%			24,738				39.0	%			20,789				34.8	%			21,426				31.5	%			26,332				30.0	%
Consumer and other			1,632				3.5	%			1,094				2.5	%			1,125				2.0	%			1,874				2.1	%			2,456				2.7	%
Unallocated			4,242				NA				6,025				NA				6,322				NA				11,003				NA				6,914				NA
Total allowance for loan losses		$	67,970				100.0	%		$	69,417				100.0	%		$	73,975				100.0	%		$	82,575				100.0	%		$	91,959				100.0	%

	For the year ended December 31,
	2013			2012			2011			2010			2009
Balance at beginning of period	$	69,417		$	73,975		$	82,575		$	91,959		$	36,484
Provision for loan losses		7,857			5,569			21,798			53,695			116,758
Charged-off loans:
Commercial real estate - Mortgage		(4,123)			(4,667)			(3,044)			(9,041)			(986)
Consumer real estate - Mortgage		(2,250)			(6,731)			(5,076)			(6,769)			(4,881)
Construction and land development		(1,351)			(2,530)			(10,157)			(27,526)			(23,952)
Commercial and industrial		(8,159)	(3)		(4,612)			(15,360)	(2)		(23,555)			(31,134)	(1)
Consumer and other		(1,369)			(1,117)			(1,213)			(652)			(1,646)
Total charged-off loans		(17,252)			(19,657)			(34,850)			(67,543)			(62,599)
Recoveries of previously charged-off loans:
Commercial real estate - Mortgage		500			285			116			343			-
Consumer real estate - Mortgage		1,209			818			495			377			622
Construction and land development		1,464			1,155			1,530			2,618			139
Commercial and industrial		4,531	(2)		7,175	(1)		2,167			874			258
Consumer and other loans		244			97			144			252			297
Total recoveries of previously charged-off loans		7,948			9,530			4,452			4,464			1,316
Net charge-offs		(9,304)			(10,127)			(30,397)			(63,079)			(61,283)
Balance at end of period		67,970		$	69,417		$	73,975		$	82,575		$	91,959
Ratio of allowance for loan losses to total loans outstanding at end of period		1.64%			1.87%			2.25%			2.57%			2.58%
Ratio of net charge-offs to average loans outstanding for the period		0.24%			0.29%			0.92%			1.96%			1.71%

	December 31,
	2013	2012
Weighted average life	5.22 years	4.77 years
Effective duration	4.61%	3.16%
Weighted average coupon	3.50%	3.88%
Tax equivalent yield	3.15%	3.26%

	U.S. Treasury securities					U.S. government agency securities					State and Municipal securities					Corporate securities					Totals
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
At December 31, 2013:
Securities available-for-sale:
Due in one year or less	$	-	0.0	%		$	500	0.3	%		$	3,015	5.9	%		$	-	0.0	%		$	3,515	5.1	%
Due in one year to five years		-	0.0	%			10,325	0.6	%			16,283	5.1	%			1,635	0.8	%			28,243	3.2	%
Due in five years to ten years		-	0.0	%			41,799	2.2	%			76,893	5.9	%			9,594	4.8	%			128,286	4.6	%
Due after ten years		-	0.0	%			51,249	2.7	%			52,220	5.5	%			-	0.0	%			103,469	4.1	%
	$	-	0.0	%		$	103,873	2.3	%		$	148,411	5.4	%		$	11,229	4.2	%			263,513	4.3	%
Mortgage-backed securities																						412,936	2.7	%
Asset-backed securities																						17,007	1.4	%
Total available-for sale securities																					$	693,456	3.3	%
Securities held-to-maturity:
Due in one year or less	$	-	0.0	%		$	-	0.0	%		$	317	1.6	%		$	-	0.0	%		$	317	1.6	%
Due in one year to five years		-	0.0	%			-	0.0	%			12,097	1.7	%			-	0.0	%			12,097	1.7	%
Due in five years to ten years		-	0.0	%			-	0.0	%			15,105	2.4	%			-	0.0	%			15,105	2.4	%
Due after ten years		-	0.0	%			-	0.0	%			12,277	3.8	%			-	0.0	%			12,277	3.8	%
	$	-	0.0	%		$	-	0.0	%		$	39,796	2.7	%		$	-	0.0	%		$	39,796	2.7	%
Mortgage-backed securities																						-	0.0	%
Asset-backed securities																						-	0.0	%
Total held-to-maturity securities																					$	39,796	2.7	%

	U.S. Treasury securities					U.S. government agency securities					State and Municipal securities					Corporate securities					Totals
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
At December 31, 2012:
Securities available-for-sale:
Due in one year or less	$	-	0.0	%		$	-	0.0	%		$	3,348	3.6	%		$	1,176	3.0	%		$	4,524	3.4	%
Due in one year to five years		-	0.0	%			6,057	0.6	%			29,468	3.5	%			615	1.5	%			36,140	3.0	%
Due in five years to ten years		-	0.0	%			45,329	1.9	%			79,010	4.1	%			9,605	5.0	%			133,944	3.4	%
Due after ten years		-	0.0	%			59,066	2.7	%			79,901	4.0	%			-	0.0	%			138,967	3.4	%
	$	-	0.0	%		$	110,452	2.3	%		$	191,727	4.0	%		$	11,396	4.6	%			313,575	3.4	%
Mortgage-backed securities																						375,651	3.3	%
Asset-backed securities																						17,352	1.4	%
Total available-for-sale securities																					$	706,578	3.3	%
Securities held-to-maturity:
Due in one year or less	$	-	0.0	%		$	-	0.0	%		$	200	3.0	%		$	-	0.0	%		$	200	3.0	%
Due in one year to five years		-	0.0	%			-	0.0	%			375	3.5	%			-	0.0	%			375	3.5	%
Due in five years to ten years		-	0.0	%			-	0.0	%			-	0.0	%			-	0.0	%			-	0.0	%
Due after ten years		-	0.0	%			-	0.0	%			-	0.0	%			-	0.0	%			-	0.0	%
	$	-	0.0	%		$	-	0.0	%		$	575	3.3	%		$	-	0.0	%		$	575	3.3	%
Mortgage-backed securities																						-	0.0	%
Asset-backed securities																						-	0.0	%
Total held-to-maturity securities																					$	575	3.3	%

		December 31, 2013				Percent				December 31, 2012				Percent
Core funding:
Noninterest-bearing deposit accounts		$	1,167,763				24.4	%		$	985,689				22.9	%
Interest-bearing demand accounts			870,662				18.2	%			760,787				17.6	%
Savings and money market accounts			1,655,087				34.5	%			1,561,715				36.2	%
Time deposit accounts less than $250,000			408,520				8.5	%			467,013				10.8	%
Total core funding			4,102,032				85.5	%			3,775,204				87.6	%
Non-core funding:
Relationship based non-core funding:
Reciprocating NOW deposits			13,633				0.3	%			-				-
Reciprocating money market accounts			309,276				6.4	%			100,542				2.3	%
Reciprocating time deposits (1)			32,689				0.7	%			52,239				1.2	%
Other time deposits			77,838				1.6	%			87,204				2.0	%
Securities sold under agreements to repurchase			70,465				1.5	%			114,667				2.7	%
Total relationship based non-core funding			503,901				10.5	%			354,651				8.2	%
Wholesale funding:
Public funds			-				0.0	%			-				0.0	%
Brokered deposits			-				0.0	%			-				0.0	%
Federal Home Loan Bank advances			90,637				1.9	%			75,850				1.8	%
Holding Company loan			16,182				0.3	%			23,682				0.6	%
Subordinated debt – Pinnacle Bank			-				0.0	%			-				0.0	%
Subordinated debt – Pinnacle Financial			82,476				1.7	%			82,476				1.8	%
Total wholesale funding			189,295				3.9	%			182,008				4.2	%
Total non-core funding			693,196				14.5	%			536,659				12.4	%
Totals		$	4,795,228				100.0	%		$	4,311,863				100.0	%

		Balances				Weighted Avg. Rate
Denominations less than $250,000
Three months or less		$	108,126				0.43	%
Over three but less than six months			121,965				0.43	%
Over six but less than twelve months			108,321				0.58	%
Over twelve months			102,797				0.95	%
			441,209				0.59	%
Denomination $250,000 and greater
Three months or less			17,320				0.48	%
Over three but less than six months			29,634				0.47	%
Over six but less than twelve months			17,427				0.64	%
Over twelve months			13,459				1.56	%
			77,840				0.70	%
Totals		$	519,049				0.60	%

		Scheduled Maturities				Weighted Average Interest Rates(1)
2014		$	75,000				0.12	%
2015			-				0.00	%
2016			15,000				2.39	%
2017			-				2.87	%
2018			12				2.00	%
Thereafter			467				2.45	%
		$	90,479
Weighted average interest rate							0.51	%

	Date Established	Maturity	Common Securities		Subordinated Debentures		Floating Interest Rate	Interest Rate at  December 31, 2013
Trust I	December 29, 2003	December 30, 2033	$	310,000	$	10,000,000	Libor + 2.80%	3.04	%
Trust II	September 15, 2005	September 30, 2035		619,000		20,000,000	Libor + 1.40%	1.65	%
Trust III	September 7, 2006	September 30, 2036		619,000		20,000,000	Libor + 1.65%	1.90	%
Trust IV	October 31, 2007	September 30, 2037		928,000		30,000,000	Libor + 2.85%	3.09	%

		At December 31,
		2013				2012				2011
Amounts outstanding at year-end:
Securities sold under agreements to repurchase		$	70,465			$	114,667			$	131,591
Federal funds purchased			-				-				-
Federal Home Loan Bank short-term  advances			75,000				25,000				115,000
Weighted average interest rates at year-end:
Securities sold under agreements to repurchase			0.20	%			0.21	%			0.44	%
Federal funds purchased			-				-				-
Federal Home Loan Bank short-term  advances			0.12	%			0.21	%			0.12	%
Maximum amount of borrowings at any month-end:
Securities sold under agreements to repurchase		$	236,145			$	153,327			$	244,233
Federal funds purchased			-				-				-
Federal Home Loan Bank short-term  advances			285,000				160,000				115,000
Average balances for the year:
Securities sold under agreements to repurchase		$	113,742			$	134,989			$	161,845
Federal funds purchased			644				1,325				-
Federal Home Loan Bank short-term  advances			62,500				96,250				31,250
Weighted average interest rates for the year:
Securities sold under agreements to repurchase			0.21	%			0.34	%			0.69	%
Federal funds purchased			0.59	%			0.49	%			0.94	%
Federal Home Loan Bank short-term  advances			0.18	%			0.18	%			0.12	%

		At December 31, 2013
		Next 12 months				13-36 months				37-60 months				More than 60 months				Totals
Contractual obligations:
Certificates of deposit		$	370,295			$	124,674			$	24,044			$	36			$	519,049
Securities sold under agreements to repurchase			70,465				-				-				-				70,465
Federal Home Loan Bank advances			75,000				15,000				12				467				90,479
Subordinated debt(1)			-				-				-				82,476				82,476
Minimum operating lease commitments			4,202				8,282				7,871				29,017				49,372
Holding company loan(1)			2,500				13,682				-				-				16,182
Totals		$	522,462			$	161,638			$	31,927			$	111,996			$	828,023

	At December 31, 2013
	Next 12 months				13-36 months				37-60 months				More than 60 months				Totals
Unfunded commitments:
Lines of credit		$	615,568			$	225,592			$	118,903			$	246,465			$	1,206,528
Letters of credit			60,547				6,202				2,000				482				69,231
Totals		$	676,115			$	231,794			$	120,903			$	246,947			$	1,275,759