Note 2. Acquisitions

Acquisition of CapitalMark Bank & Trust

On July 31, 2015, Pinnacle Financial consummated its previously announced acquisition of CapitalMark Bank & Trust (CapitalMark). Pursuant to the terms of the Agreement and Plan of Merger dated as of April 7, 2015 by and among Pinnacle Financial, Pinnacle Bank, and CapitalMark (the CapitalMark Merger Agreement), CapitalMark merged with and into Pinnacle Bank, with Pinnacle Bank continuing as the surviving corporation (the CapitalMark Merger).

By virtue of the CapitalMark Merger, each holder of an issued and outstanding share of common stock of CapitalMark had the right to elect, for each share of CapitalMark common stock held by such holder, to receive either (i) 0.50 shares of Pinnacle Financial's common stock, (ii) an amount in cash equal to the value of 0.50 shares of Pinnacle Financial's common stock, based on the 10-day average closing price for Pinnacle Financial's common stock prior to July 31, 2015 (which such amount equaled $26.78), or (iii) a combination of stock and cash.

Approximately 90% and 10%, respectively, of CapitalMark's outstanding shares of common stock as of the effective time of the CapitalMark Merger were converted into shares of Pinnacle Financial common stock and cash, respectively. As a result, Pinnacle Financial issued approximately 3.3 million shares of its common stock and paid approximately $19.7 million in cash (including payments related to fractional shares) to the CapitalMark shareholders. Fractional shares were converted to cash based on the 10-day average closing price for Pinnacle Financial's common stock prior to July 31, 2015. All of CapitalMark's outstanding stock options vested upon consummation of the CapitalMark Merger and were converted into options to purchase shares of Pinnacle Financial's common stock at the common stock exchange rates. The fair market value of stock options assumed was $30.4 million.

With this acquisition, Pinnacle Financial expanded its presence in the East Tennessee region by expanding into Chattanooga. Pinnacle Financial believes that cost savings will be recognized in future periods through the elimination of redundant operations. The following summarizes consideration paid and a preliminary allocation of purchase price to net assets acquired (in thousands):

	Number of Shares		Amount
Equity consideration:
Common stock issued		3,306,184	$	175,525
Fair value of stock options assumed				30,430
Total equity consideration			$	205,955

Non-equity consideration - Cash			$	19,675
Total consideration paid			$	225,630

Allocation of total consideration paid:
Preliminary fair value of net assets assumed including estimated identifiable intangible assets			$	69,018
Goodwill			$	156,612

Acquisition of Magna Bank

On September 1, 2015, Pinnacle Financial consummated its previously announced acquisition of Magna Bank (Magna). Pursuant to the terms of the Agreement and Plan of Merger dated as of April 28, 2015 by and among Pinnacle Financial, Pinnacle Bank and Magna (the Magna Merger Agreement), Magna merged with and into Pinnacle Bank, with Pinnacle Bank continuing as the surviving corporation (the Magna Merger and together with the CapitalMark Merger, the Mergers).

By virtue of the Magna Merger, each holder of an issued and outstanding share of common stock of Magna (including shares of Magna's common stock issued automatically upon conversion of Magna's Series D preferred stock immediately prior to the effective time of the Magna Merger) had the right to elect, for each share of Magna common stock held by such holder (including shares of Magna's common stock issued automatically upon conversion of Magna's Series D preferred stock immediately prior to the effective time of the Magna Merger), to receive either (i) 0.3369 shares of Pinnacle Financial's common stock, (ii) an amount in cash equal to $14.32, or (iii) a combination of stock and cash.

In total, Magna common shareholders (including holders of shares of Magna's common stock issued automatically upon conversion of Magna's Series D preferred stock immediately prior to the effective time of the Merger) had approximately 75% of their shares of Magna common stock as of the effective time of the Merger (including shares of Magna's common stock issued automatically upon conversion of Magna's Series D preferred stock immediately prior to the effective time of the Merger) converted into shares of common stock of the Company and approximately 25% of their shares converted into cash. As a result, Pinnacle Financial issued approximately 1.4 million shares of its common stock and paid approximately $19.5 million in cash (including payments related to fractional shares) to the Magna shareholders. Additionally, at the time of the merger there were 139,417 unexercised stock options that were exchanged for cash equal to $14.32 less the respective exercise price. This consideration totaled approximately $848,000, including all applicable payroll taxes.

With this acquisition, Pinnacle Financial expanded its presence in the Memphis market of Tennessee. Pinnacle Financial believes that cost savings will be recognized in future periods through the elimination of redundant operations. The following summarizes consideration paid and a preliminary allocation of purchase price to net assets acquired (in thousands):

	Number of Shares		Amount
Equity consideration:
Common stock issued		1,371,717	$	63,538
Total equity consideration			$	63,538

Non-Equity Consideration:
Cash paid to redeem common stock			$	19,453
Cash paid to exchange outstanding stock options				847
Total consideration paid			$	83,838

Allocation of total consideration paid:
Preliminary fair value of net assets assumed including estimated identifiable intangible assets				54,132
Goodwill				29,706

Pinnacle Financial accounted for the Mergers under the acquisition method in accordance with ASC Topic 805. Accordingly, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the date of the Mergers. The following purchase price allocations on the Mergers are preliminary and will be finalized upon the receipt of final valuations on certain assets and liabilities. Upon receipt of final fair value estimates, which must be within one year of the merger dates, Pinnacle Financial will make any final adjustments to the purchase price allocation and prospectively adjust any goodwill recorded. Material adjustments to estimated fair values as of the date of the Mergers would be recorded in the period in which the Merger occurred, and as a result, previously reported results are subject to change. Information regarding Pinnacle Financial's loan discount and related deferred tax asset, core deposit intangible asset and related deferred tax liability, as well as income taxes payable and the related deferred tax balances, and potentially other account balances recorded in the Mergers may be adjusted as Pinnacle Financial refines its estimates. Determining the fair value of assets and liabilities, particularly illiquid assets and liabilities, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair value. Fair value adjustments based on updated estimates could materially affect the goodwill recorded on the Mergers. Pinnacle Financial may incur losses on the acquired loans that are materially different from losses Pinnacle Financial originally projected.

The acquired assets and liabilities, as well as the preliminary adjustments to record the assets and liabilities at their estimated fair values, are presented in the following tables (in thousands):

CapitalMark

	As of July 31, 2015
	CapitalMark Historical Cost Basis		Preliminary Fair Value Adjustments			As Recorded by Pinnacle Financial
Assets
Cash and cash equivalents	$	28,021	$	-		$	28,021
Investment securities⁽¹⁾		150,799		(399	)		150,400
Loans, net of allowance for loan losses⁽²⁾		881,906		(20,704	)		861,202
Other real estate owned		1,728		-			1,728
Core deposit intangible⁽³⁾		-		6,193			6,452
Other assets		36,113		6,239			42,352
Total Assets	$	1,098,826	$	(8,671	)	$	1,090,155

Liabilities
Interest-bearing deposits⁽⁴⁾	$	758,492	$	891		$	759,383
Non-interest bearing deposits		193,798		-			193,798
Borrowings⁽⁵⁾		32,874		228			33,102
Other liabilities		34,854		-			34,854
Total Liabilities	$	1,020,018	$	1,119		$	1,021,137
Net Assets Acquired	$	78,808	$	(9,790	)	$	69,018

Explanation of certain fair value adjustments

⁽¹⁾	The amount represents the adjustment of the book value of CapitalMark's investment securities to their estimated fair value on the date of acquisition.
⁽²⁾	The amount represents the adjustment of the net book value of CapitalMark's loans to their estimated fair value based on current interest rates and expected cash flows, which includes estimates of expected credit losses inherent in the portfolio.
⁽³⁾	The amount represents the fair value of the core deposit intangible asset created in the acquisition.
⁽⁴⁾	The adjustment is necessary because the weighted average interest rate of CapitalMark's deposits exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio.
⁽⁵⁾	The adjustment is necessary because the weighted average interest rate of CapitalMark's FHLB advances exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio.

Magna

	As of September 1, 2015
	Magna Historical Cost Basis		Preliminary Fair Value Adjustments			As Recorded by Pinnacle Financial
Assets
Cash and cash equivalents	$	17,832	$	-		$	17,832
Investment securities⁽¹⁾		59,719		(281	)		59,438
Loans, net of allowance for loan losses⁽²⁾		471,994		(10,009	)		461,985
Other real estate owned⁽³⁾		1,471		139			1,610
Core deposit intangible⁽⁴⁾		-		3,169			3,169
Other assets⁽⁵⁾		36,794		5,300			42,094
Total Assets	$	587,810	$	(1,682	)	$	586,128

Liabilities
Interest-bearing deposits⁽⁶⁾	$	402,535	$	1,268		$	403,803
Non-interest bearing deposits		48,851		-			48,851
Borrowings⁽⁷⁾		46,900		506			47,406
Other liabilities		31,936		-			31,936
Total Liabilities	$	530,222	$	1,774		$	531,996
Net Assets Acquired	$	57,888	$	(3,456	)	$	54,132

Explanation of certain fair value adjustments:

⁽¹⁾	The amount represents the adjustment of the book value of Magna's investment securities to their estimated fair value on the date of acquisition.
⁽²⁾	The amount represents the adjustment of the net book value of Magna's loans to their estimated fair value based on current interest rates and expected cash flows, which includes estimates of expected credit losses inherent in the portfolio.
⁽³⁾	The amount represents the adjustment to the book value of Magna's OREO to fair value on the date of acquisition.
⁽⁴⁾	The amount represents the fair value of the core deposit intangible asset created in the acquisition.
⁽⁵⁾	The amount represents the deferred tax asset recognized on the fair value adjustment of Magna's acquired assets and assumed liabilities as well as the fair value adjustment for the mortgage servicing right and property and equipment.
⁽⁶⁾	The adjustment is necessary because the weighted average interest rate of Magna's deposits exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio.
⁽⁷⁾	The adjustment is necessary because the weighted average interest rate of Magna's FHLB advances exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio.