Pinnacle Financial Partners, Inc. and Chattanooga-based CapitalMark Bank & Trust jointly announced on Tuesday the signing of a definitive agreement for Pinnacle to acquire CapitalMark via merger.
The proposed merger of CapitalMark with and into Pinnacle has been approved by each company’s board of directors and is expected to close late in the third quarter or early in the fourth quarter of 2015. Completion of the transaction is subject to satisfaction of customary closing conditions, including the receipt of required regulatory approvals and the approval of CapitalMark’s shareholders.
At the time of closing, the combined companies are projected to have total assets of more than $7 billion, with Pinnacle operating 37 offices in 12 counties, including three high-growth counties new to the Pinnacle footprint.
It marks the second recent sale of a Chattanooga bank, coming after the sale of FSG Bank to an Atlanta bank.
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Craig Holley, chairman, president and chief executive officer of CapitalMark, will be named Chattanooga chairman for Pinnacle after the acquisition is consummated. He will serve on Pinnacle’s 10-member Senior Leadership Team and will report to Pinnacle’s president and chief executive officer, M. Terry Turner.
“CapitalMark is excited to partner with an organization that shares our commitment to excellent client service and has demonstrated strong operating performance and a long-term track record of growth,” Mr. Holley said. “I strongly believe that, collectively, the two franchises can accomplish more, grow more efficiently and realize more value for our shareholders together than independently. Since CapitalMark’s founding in 2007 we have focused on businesses and their owners, and we will continue that tradition with Pinnacle.”
Officials said the combination of Pinnacle and CapitalMark "provides many opportunities to both companies’ shareholders, including":
§ Growth potential – Pinnacle and CapitalMark are among the highest performing or fastest growing banks in the United States. Pinnacle was the second-highest performing bank stock in the nation from fourth quarter 2000 to fourth quarter 2014, and its stock is up 12.44 percent in the first quarter of 2015. CapitalMark is among the fastest growing in terms of total assets from the field of over 131 banks that opened in 2007.
§ Expansion of Pinnacle’s presence to a third urban, high-growth market in Tennessee. Currently, the Chattanooga MSA is the fourth-largest market area in Tennessee as measured by both deposits and population. From April 1, 2010, to July 1, 2013, Chattanooga’s population grew at a faster rate than the state and national average, according to the U.S. Census Bureau.
§ Accretion to Pinnacle’s operating earnings and modest dilution to tangible book value with an approximate earn-back period of 2.5 years.
§ Excellent credit quality from both institutions, which is the principal determinant of a bank’s ability to provide long-term shareholder value.
“This acquisition is consistent with Pinnacle’s strategy to grow rapidly while operating in all of Tennessee’s four urban markets. CapitalMark has built a very successful firm in Chattanooga and the surrounding areas,” Pinnacle CEO Turner said. “In addition to accelerating the rapid growth we had already projected for Pinnacle, this acquisition brings together two institutions with strong records of performance, credit quality, client satisfaction and a highly complementary geographic footprint. CapitalMark had many strategic opportunities to consider, and we are excited to have them join us.”
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, or to convert their shares into a cash payment equal to the product of 0.50 multiplied by the average trading price for Pinnacle’s common stock on the Nasdaq Global Select Market for a 10-day period prior to the closing of the transaction, provided that 90 percent of the consideration paid to the CapitalMark common shareholders shall be paid in shares of Pinnacle’s common stock.
Additionally, CapitalMark’s outstanding stock options will be converted into approximately 860,000 Pinnacle options and will be fully vested upon consummation of the merger pursuant to CapitalMark’ s stock option plan. At closing, CapitalMark shareholders will own approximately 9.7 percent of the combined firm on a fully diluted basis.
The transaction is currently valued at approximately $187 million based on Pinnacle’s closing price on April 7, 2015, and is comprised of stock consideration of approximately 3.3 million shares of PNFP common stock and $16.4 million in cash. Additionally, Pinnacle plans 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.
CapitalMark reported $968 million in total assets and $840 million in deposits as of March 31, 2015, and currently operates four offices in Tennessee, one each in Chattanooga and Cleveland, as well as two in the Knoxville market. During the first quarter of 2015, CapitalMark reported loan growth of $48 million and deposit growth of $60 million.
CapitalMark’s tangible equity approximated $10.93 per common share as of March 31, 2015, and the firm reported first quarter 2015 net income of approximately $2.3 million. CapitalMark’s return on average assets for the first quarter of 2015 was 1.00 percent, its net interest margin was 3.85 percent, and its efficiency ratio was 59.8 percent.
Pinnacle, with 29 offices in eight Middle Tennessee counties and five offices in Knox County, reported total assets of $6.0 billion and total deposits of nearly $4.8 billion as of Dec. 31, 2014.
Pinnacle plans to consolidate CapitalMark’s Knoxville office into nearby Pinnacle locations in Knox County and to redeploy the staff from these offices to other nearby offices. The combined institution will have the No. 4 market share in the Nashville MSA; the No. 4 market share in the Chattanooga MSA; and the No. 6 share position in the Knoxville MSA.
Upon consummation of the merger, CapitalMark director Charles E. Brock, president and CEO of Launch Tennessee, is expected to become a director of Pinnacle’s board. Additionally, Kenneth C. Dyer III, CapitalMark’s banking group president, will become Pinnacle’s Chattanooga president and a member of its Leadership Team. R. Ryan Murphy III, CapitalMark’s business unit group head, will be responsible for Pinnacle’s client services group in Chattanooga and also will join its Leadership Team.
“CapitalMark is an impressive franchise that has been built in a manner similar to Pinnacle: by attracting the best financial services professionals and providing them a platform to serve their clients in a distinctive way,” Pinnacle Chairman Robert A. McCabe Jr. said. “We look forward to offering expanded wealth management capabilities, including trust, brokerage, investment advisory services and insurance to the CapitalMark client base. Pinnacle is also excited about investing in Chattanooga with several new office locations planned over the next few years and contributions to the organizations that make a positive difference in this market.”
Systems conversions are scheduled to be completed during the second quarter of 2016. Until that time, CapitalMark will continue to operate under its current brand as a division of Pinnacle Bank.
Sterne, Agee & Leach, Inc. served as financial advisor to Pinnacle, and Bass, Berry & Sims PLC was Pinnacle’s legal advisor. Raymond James Financial Services and Banks Street Partners acted as financial advisors to CapitalMark, and Butler Snow LLP was CapitalMark’s legal advisor.
In connection with the proposed acquisition of CapitalMark, Pinnacle will file with the Securities and Exchange Commission a registration statement on Form S-4 to register the shares of Pinnacle common stock to be issued to the shareholders of CapitalMark.