M&A Dry Spell Over for Pinnacle, But CEO Says Pickings Still Slim

Terry Turner, the chief executive of Pinnacle Financial Partners, gets quizzed about acquisitions often. After all, the company has a premium stock, lots of capital and an interest in new markets in Tennessee.

Yet until Tuesday, when it struck a deal to buy CapitalMark Bank & Trust in Chattanooga, it hadn't announced a deal in more than eight years. Turner is primarily interested in commercially focused banks that have proven adept at stealing business from larger banks and he says there just aren't that many banks in the Volunteer State that fit that bill.

"We're willing to do it, we know we have an advantaged stock," Turner said in an interview on Thursday. But, he added, "There are five or so companies that might be able to do what we do and will be additive to what we do. It is a short list of targets."

CapitalMark Bank had been on its short list because it's a fast-growing company in a market, Chattanooga, that Pinnacle has been eager to enter.

Just eight years old, CapitalMark already has $1 billion of assets. Its growth has been entirely organic, as loans and assets have increased at an average 18% a year over the last half-decade. Further, its growth hasn't come at the expense of profits, Turner said. The company has a 1% return on assets and a 59% efficiency ratio.

"When we look at acquisitions, we are looking for organic growers where we can sustain the growth or augment it," Turner said. "Often in deals, people talk about what the synergies are and we certainly have that in this deal, but over time I would expect more folks to be working in Chattanooga than they have now."

Despite the dearth of deals, Pinnacle has still managed to increase its assets by nearly 28%, to $6 billion, since the end of 2008 by focusing on poaching commercial lenders and clients from regional and national banks.

Kevin Fitzsimmons, an analyst at Hovde Group, said that questions about Pinnacle's M&A ambitions are perfectly natural, given the bank's stock price, which, at $45, trades at nearly three times its tangible book value.

"They've really prided themselves on organic growth, but they have such a strong multiple they are constantly fielding questions about why they wouldn't use it to buy," he said. "This deal is a bit of a milestone; it is good to see them stepping up and using it."

Certainly, the stock valuation gives Pinnacle an edge over other buyers as sellers are looking to trade into a better investment through M&A, said Stephen Scouten, an analyst at Sandler O'Neill.

He agreed that questions about M&A will likely increase now.

"They still have plenty of capital, they still have the multiple and they still want to grow … so the question about more deals will only persist now that they've done one," Scouten said.

Pinnacle has two remaining goals where M&A may play a role, too. The company still wants to get into Memphis, the last major metropolitan area in Tennessee where it doesn't have a presence. Turner says he is ambivalent about whether that foray will be done via de novo expansion - the way it did several years ago in Knoxville - or if it acquires a bank there.

Secondly, the company's long-stated goal is to get to $13 billion to $15 billion in assets. Turner said he thinks $1 billion to $2 billion of that will come through acquisition and the rest would be de novo. Of course, in the middle of that path to $15 billion is the $10 billion-asset threshold, where the cap on interchange fees is triggered and banks are subject to greater oversight by regulators. Bankers often manage their assets to stay less than $10 billion or find an acquisition that would take their assets well above it in order to offset the extra costs. Turner said he is undeterred by it.

"I'm in the banking business and it is a regulated industry, so I'm not going to say I'm afraid of regulation and sit at $9 billion," Turner said. "Not to be cavalier about the impact, but we are not going to try to manage beneath it. We would cross it."