10-Q 1 form10q.htm  
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

              (mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 000-31225

, Inc.
(Exact name of registrant as specified in its charter)

Tennessee
  
62-1812853
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)

150 Third Avenue South, Suite 900, Nashville, Tennessee
  
37201
(Address of principal executive offices)
  
(Zip Code)

(615) 744-3700
 (Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changes since last report)

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 
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 during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
Yes 
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer 
(do not check if you are a smaller reporting company)
Smaller reporting company  
 
Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of May 2, 2017 there were 49,828,669 shares of common stock, $1.00 par value per share, issued and outstanding.


Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2017

TABLE OF CONTENTS
Page No.
   
PART I – Financial Information:
  4
Item 1. Consolidated Financial Statements (Unaudited)
  4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
  33
Item 3. Quantitative and Qualitative Disclosures about Market Risk
  53
Item 4. Controls and Procedures
  53
   
PART II – Other Information:
  54
Item 1. Legal Proceedings
  54
Item 1A. Risk Factors
  54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  55
Item 3. Defaults Upon Senior Securities
  55
Item 4. Mine Safety Disclosures
  55
Item 5. Other Information
  55
Item 6. Exhibits
  56
Signatures
  57

2


FORWARD-LOOKING STATEMENTS

Certain of the statements in this Quarterly Report on Form 10-Q  may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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," "intend," "plan," "believe," "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 statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to:  (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 Partners, Inc. (Pinnacle Financial), or entities in which it has significant investments, like Bankers Healthcare Group, LLC (BHG), to maintain the historical growth rate of its, or such entities', 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, the Knoxville MSA, the Chattanooga, TN-GA MSA and the Memphis, TN-MS-AR 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) a merger or acquisition, like Pinnacle Financial's proposed merger with BNC Bancorp (BNC); (xii) risks of expansion into new geographic or product markets; (xiii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiv) reduced ability to attract additional financial advisors (or failure of such advisors to cause their clients to switch to Pinnacle Bank), to retain financial advisors or otherwise to attract customers from other financial institutions; (xv) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvi) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xvii) risks associated with litigation, including the applicability of insurance coverage; (xviii) the risk of successful integration of the businesses Pinnacle Financial has recently acquired with its business; (xix) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xx) the vulnerability of Pinnacle Bank's network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xxi) the possibility of increased compliance costs as a result of increased regulatory oversight, including oversight of companies in which Pinnacle Financial or Pinnacle Bank have significant investments, like BHG, and the development of additional banking products for Pinnacle Bank's corporate and consumer clients;  (xxii) the risks associated with Pinnacle Financial and Pinnacle Bank being a minority investor in BHG, including the risk that the owners of a majority of the equity interests in BHG decide to sell the company if not prohibited from doing so by the terms of our agreement with them; (xxiii) the possibility that the incremental cost and/or decreased revenues associated with exceeding $10 billion in assets will exceed current estimates; (xxiv) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxv) the risk that the cost savings and any revenue synergies from Pinnacle Financial's proposed merger with BNC may not be realized or take longer than anticipated to be realized; (xxvi) disruption from Pinnacle Financial's proposed merger with BNC with customers, suppliers, employee or other business partners relationships; (xxvii) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement between Pinnacle Financial and BNC; (xxviii) the risk of successful integration of Pinnacle Financial's and BNC's businesses; (xxix) the failure to obtain the necessary approvals by Pinnacle Financial and BNC shareholders; (xxx) the amount of the costs, fees, expenses and charges related to Pinnacle Financial's proposed merger with BNC; (xxxi) reputational risk and the reaction of the parties' customers, suppliers, employees or other business partners to Pinnacle Financial's proposed merger with BNC; (xxxii) the failure of the closing conditions with respect to Pinnacle Financial's proposed merger with BNC to be satisfied, or any unexpected delay in closing the proposed merger; (xxxiii) the risk that the integration of Pinnacle Financial's and BNC's operations will be materially delayed or will be more costly or difficult than expected; (xxxiv) the possibility that Pinnacle Financial's proposed merger with BNC may be more expensive to complete than anticipated, including as a result of unexpected factors or events; (xxxv) the dilution caused by Pinnacle Financial's issuance of additional shares of its common stock in its proposed merger with BNC; and (xxxvi) general competitive, economic, political and market conditions. A more detailed description of these and other risks is contained herein and in Pinnacle Financial's most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2017 and in Part II, 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 report, which speak only as of the date hereof, whether as a result of new information, future events or otherwise.
3


Item 1.
Part I. Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
March 31, 2017
    
December 31, 2016
  
ASSETS
            
Cash and noninterest-bearing due from banks
  
$
95,215,622
    
$
84,732,291
  
Interest-bearing due from banks
    
94,775,935
      
97,529,713
  
Federal funds sold and other
    
2,682,574
      
1,383,416
  
Cash and cash equivalents
    
192,674,131
      
183,645,420
  
                 
Securities available-for-sale, at fair value
    
1,579,776,402
      
1,298,546,056
  
Securities held-to-maturity (fair value of $25,035,844 and $25,233,254 at March 31, 2017 and December 31, 2016, respectively)
    
24,997,568
      
25,251,316
  
Consumer mortgage loans held-for-sale
    
70,597,985
      
47,710,120
  
Commercial mortgage loans held-for-sale
    
15,354,496
      
22,587,971
  
                 
Loans
    
8,642,032,280
      
8,449,924,736
  
Less allowance for loan losses
    
(58,349,769
)
    
(58,980,475
)
Loans, net
    
8,583,682,511
      
8,390,944,261
  
                 
Premises and equipment, net
    
97,003,955
      
88,904,145
  
Equity method investment
    
210,732,581
      
205,359,844
  
Accrued interest receivable
    
29,568,023
      
28,234,826
  
Goodwill
    
551,546,341
      
551,593,796
  
Core deposits and other intangible assets
    
13,907,909
      
15,104,038
  
Other real estate owned
    
6,234,962
      
6,089,804
  
Other assets
    
348,524,131
      
330,651,002
  
Total assets
  
$
11,724,600,995
    
$
11,194,622,599
  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Deposits:
                
Noninterest-bearing
  
$
2,508,679,583
    
$
2,399,191,152
  
Interest-bearing
    
1,970,312,733
      
1,808,331,784
  
Savings and money market accounts
    
3,938,368,793
      
3,714,930,351
  
Time
    
863,235,880
      
836,853,761
  
Total deposits
    
9,280,596,989
      
8,759,307,048
  
Securities sold under agreements to repurchase
    
71,157,282
      
85,706,558
  
Federal Funds purchased
    
50,000,000
      
-
  
Federal Home Loan Bank advances
    
181,264,257
      
406,304,187
  
Subordinated debt and other borrowings
    
350,848,829
      
350,768,050
  
Accrued interest payable
    
5,655,284
      
5,573,377
  
Other liabilities
    
62,002,877
      
90,267,267
  
Total liabilities
    
10,001,525,518
      
9,697,926,487
  
Stockholders' equity:
                
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued and outstanding
    
-
      
-
  
Common stock, par value $1.00; 90,000,000 shares authorized; 49,789,649 and 46,359,377 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
    
49,789,649
      
46,359,377
  
Additional paid-in capital
    
1,274,762,698
      
1,083,490,728
  
Retained earnings
    
413,700,739
      
381,072,505
  
Accumulated other comprehensive loss, net of taxes
    
(15,177,609
)
    
(14,226,498
)
Total stockholders' equity
    
1,723,075,477
      
1,496,696,112
  
Total liabilities and stockholders' equity
  
$
11,724,600,995
    
$
11,194,622,599
  

See accompanying notes to consolidated financial statements (unaudited).
4


PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
Three months ended
  
   
March 31, 2017
    
March 31, 2016
  
Interest income:
            
Loans, including fees
  
$
93,217,947
    
$
74,404,204
  
Securities:
                
Taxable
    
6,433,088
      
4,466,834
  
Tax-exempt
    
1,677,581
      
1,493,757
  
Federal funds sold and other
    
814,317
      
609,587
  
Total interest income
    
102,142,933
      
80,974,382
  
                 
Interest expense:
                
Deposits
    
8,118,914
      
4,915,563
  
Securities sold under agreements to repurchase
    
49,766
      
48,050
  
Federal Home Loan Bank advances and other borrowings
    
5,207,380
      
2,108,092
  
Total interest expense
    
13,376,060
      
7,071,705
  
Net interest income
    
88,766,873
      
73,902,677
  
Provision for loan losses
    
3,651,022
      
3,893,570
  
Net interest income after provision for loan losses
    
85,115,851
      
70,009,107
  
                 
Noninterest income:
                
Service charges on deposit accounts
    
3,855,483
      
3,442,684
  
Investment services
    
2,821,834
      
2,345,600
  
Insurance sales commissions
    
1,858,890
      
1,705,859
  
Gain on mortgage loans sold, net
    
4,154,952
      
3,567,551
  
Gain on sale of investment securities, net
    
-
      
-
  
Trust fees
    
1,705,279
      
1,580,612
  
Income from equity method investment
    
7,822,737
      
5,147,524
  
Other noninterest income
    
8,162,419
      
8,065,880
  
Total noninterest income
    
30,381,594
      
25,855,710
  
                 
Noninterest expense:
                
Salaries and employee benefits
    
38,352,184
      
32,516,856
  
Equipment and occupancy
    
9,674,658
      
8,130,464
  
Other real estate expense
    
251,973
      
112,272
  
Marketing and other business development
    
1,879,206
      
1,263,361
  
Postage and supplies
    
1,196,445
      
957,087
  
Amortization of intangibles
    
1,196,129
      
873,215
  
Merger related expense
    
672,016
      
1,829,472
  
Other noninterest expense
    
8,830,765
      
8,380,969
  
Total noninterest expense
    
62,053,376
      
54,063,696
  
Income before income taxes
    
53,444,069
      
41,801,121
  
Income tax expense
    
13,791,022
      
13,835,857
  
Net income
  
$
39,653,047
    
$
27,965,264
  
Per share information:
                
Basic net income per common share
  
$
0.83
    
$
0.70
  
Diluted net income per common share
  
$
0.82
    
$
0.68
  
Weighted average shares outstanding:
                
Basic
    
48,022,342
      
40,082,805
  
Diluted
    
48,517,920
      
40,847,027
  

See accompanying notes to consolidated financial statements (unaudited).
5

 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
Three months ended
March 31,
  
   
2017
    
2016
  
Net income
  
$
39,653,047
    
$
27,965,264
  
Other comprehensive income, net of tax:
                
Change in fair value on available-for-sale securities, net of tax
    
(808,155
)
    
6,431,468
  
Change in fair value of cash flow hedges, net of tax
    
(142,956
)
    
(923,703
)
Net gain on sale of investment securities reclassified from other comprehensive income into net income, net of tax
    
-
      
-
  
Total other comprehensive income (loss), net of tax
    
(951,111
)
    
5,507,765
  
Total comprehensive income
  
$
38,701,936
    
$
33,473,029
  

See accompanying notes to consolidated financial statements (unaudited).
6

 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

   
Common Stock
                      
   
Shares
    
Amounts
    
Additional Paid-in Capital
    
Retained Earnings
    
Accumulated Other Comp. Income, net
    
Total Stockholder's Equity
  
Balance at December 31, 2015
    
40,906,064
    
$
40,906,064
    
$
839,617,050
    
$
278,573,408
    
$
(3,485,222
)
  
$
1,155,611,300
  
Exercise of employee common stock options and related tax benefits
    
152,949
      
152,949
      
3,699,161
      
-
      
-
      
3,852,110
  
Common dividends paid
    
-
      
-
      
-
      
(5,791,835
)
    
-
      
(5,791,835
)
Issuance of restricted common shares, net of forfeitures
    
127,462
      
127,462
      
(127,462
)
    
-
      
-
      
-
  
Common stock issued in conjunction with Bankers Healthcare Group investment, net
    
860,470
      
860,470
      
38,939,530
      
-
      
-
      
39,800,000
  
Restricted shares withheld for taxes and related tax benefit
    
(51,990
)
    
(51,990
)
    
(741,561
)
    
-
      
-
      
(793,551
)
Compensation expense for restricted shares
    
-
      
-
      
2,628,788
      
-
      
-
      
2,628,788
  
Net income
    
-
      
-
      
-
      
27,965,264
      
-
      
27,965,264
  
Other comprehensive income
    
-
      
-
      
-
      
-
      
5,507,765
      
5,507,765
  
Balance at March 31, 2016
    
41,994,955
    
$
41,994,955
    
$
884,015,506
    
$
300,746,837
    
$
2,022,543
    
$
1,228,779,841
  
                                                 
Balance at December 31, 2016
    
46,359,377
    
$
46,359,377
    
$
1,083,490,728
    
$
381,072,505
    
$
(14,226,498
)
  
$
1,496,696,112
  
Exercise of employee common stock options
    
148,740
      
148,740
      
2,811,672
      
-
      
-
      
2,960,412
  
Common dividends paid
    
-
      
-
      
-
      
(7,024,813
)
    
-
      
(7,024,813
)
Issuance of restricted common shares, net of forfeitures
    
118,439
      
118,439
      
(118,439
)
    
-
      
-
      
-
  
Issuance of common equity, net of costs
    
3,220,000
      
3,220,000
      
188,973,750
      
-
      
-
      
192,193,750
  
Restricted shares withheld for taxes
    
(56,907
)
    
(56,907
)
    
(3,869,040
)
    
-
      
-
      
(3,925,947
)
Compensation expense for restricted shares
    
-
      
-
      
3,474,027
      
-
      
-
      
3,474,027
  
Net income
    
-
      
-
      
-
      
39,653,047
      
-
      
39,653,047
  
Other comprehensive loss
    
-
      
-
      
-
      
-
      
(951,111
)
    
(951,111
)
Balance at March 31, 2017
    
49,789,649
    
$
49,789,649
    
$
1,274,762,698
    
$
413,700,739
    
$
(15,177,609
)
  
$
1,723,075,477
  

See accompanying notes to consolidated financial statements (unaudited).
7

 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
   
Three months ended
March 31,
  
             
   
2017
    
2016
  
Operating activities:
            
Net income
  
$
39,653,047
    
$
27,965,264
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Net amortization/accretion of premium/discount on securities
    
1,977,703
      
1,303,239
  
Depreciation, amortization and accretion
    
(429,251
)
    
(428,254
)
Provision for loan losses
    
3,651,022
      
3,893,570
  
Gain on mortgage loans sold, net
    
(4,154,952
)
    
(3,567,551
)
Stock-based compensation expense
    
3,474,027
      
2,628,788
  
Deferred tax expense
    
8,699,482
      
921,718
  
Losses (gains) on dispositions of other real estate and other investments
    
79,571
      
(32,400
)
Income from equity method investment
    
(7,822,737
)
    
(5,147,524
)
Excess tax benefit from stock compensation
    
(3,760,322
)
    
(159,168
)
Gain on other loans sold, net
    
(186,793
)
    
-
  
Other loans held for sale:
                
Loans originated
    
(36,887,584
)
    
(10,504,481
)
Loans sold
    
44,307,853
      
-
  
Mortgage loans held for sale:
                
Loans originated
    
(179,473,354
)
    
(147,888,687
)
Loans sold
    
160,740,441
      
163,949,000
  
Increase in other assets
    
(136,250
)
    
(6,736,913
)
Decrease in other liabilities
    
(24,385,998
)
    
(2,169,127
)
Net cash provided by operating activities
    
5,345,905
      
24,027,474
  
                 
Investing activities:
                
Activities in securities available-for-sale:
                
Purchases
    
(334,875,094
)
    
(102,041,878
)
Sales
    
-
      
-
  
Maturities, prepayments and calls
    
50,445,311
      
28,996,005
  
Activities in securities held-to-maturity:
                
Purchases
    
-
      
-
  
Maturities, prepayments and calls
    
145,000
      
148,426
  
Increase in loans, net
    
(193,557,488
)
    
(289,043,266
)
Purchases of software, premises and equipment
    
(11,446,101
)
    
(2,849,721
)
Purchase of bank owned life insurance policies
    
(25,000,000
)
    
-
  
Increase in equity method investment
    
-
      
(74,100,000
)
Dividends received from equity method investment
    
2,450,000
      
4,920,103
  
Increase in other investments
    
(639,671
)
    
(1,918,978
)
Net cash used in investing activities
    
(512,478,043
)
    
(435,889,309
)
                 
Financing activities:
                
Net increase in deposits
    
521,563,077
      
109,015,688
  
Net decrease in securities sold under agreements to repurchase
    
(14,549,276
)
    
(16,282,804
)
Advances from Federal Home Loan Bank:
                
Issuances
    
-
      
631,000,000
  
Payments/maturities
    
(225,020,191
)
    
(315,015,246
)
Increase in other borrowings, net
    
50,000,000
      
67,344,645
  
Principal payments of capital lease obligation
    
(36,163
)
    
-
  
Proceeds from common stock issuance
    
192,193,750
      
-
  
Exercise of common stock options and stock appreciation rights, net of repurchase of restricted shares
    
(965,535
)
    
3,058,559
  
Excess tax benefit from stock compensation
    
-
      
159,168
  
Common stock dividends paid
    
(7,024,813
)
    
(5,791,835
)
Net cash provided by financing activities
    
516,160,849
      
473,488,175
  
Net increase in cash and cash equivalents
    
9,028,711
      
61,626,340
  
Cash and cash equivalents, beginning of period
    
183,645,420
      
320,951,333
  
Cash and cash equivalents, end of period
  
$
192,674,131
    
$
382,577,673
  

See accompanying notes to consolidated financial statements (unaudited).
8
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle Bank. Pinnacle Bank is a commercial bank headquartered in Nashville, Tennessee. Pinnacle Financial completed its acquisitions of CapitalMark Bank & Trust (CapitalMark), Magna Bank (Magna) and Avenue Financial Holdings, Inc. (Avenue) on July 31, 2015, September 1, 2015, and July 1, 2016, respectively. Pinnacle Financial and Pinnacle Bank also collectively hold a 49% interest in Bankers Healthcare Group, LLC (BHG), a full-service commercial loan provider to healthcare and other professional practices. Pinnacle Bank provides a full range of banking services, including investment, mortgage, insurance services, and comprehensive wealth management services, in its primary market areas of the Nashville-Davidson-Murfreesboro-Franklin, Tennessee, Knoxville, Tennessee, Chattanooga, Tennessee-Georgia and Memphis, Tennessee-Mississippi-Arkansas Metropolitan Statistical Areas. Additionally, on January 22, 2017, Pinnacle Financial and a wholly owned subsidiary of Pinnacle Financial entered into an Agreement and Plan of Merger (Merger Agreement) with BNC Bancorp, a North Carolina Corporation (BNC). Pinnacle Bank also entered into an Agreement and Plan of Merger with Bank of North Carolina, BNC's wholly-owned bank subsidiary, on January 22, 2017.

Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP).  All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included.  The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in the 2016 Annual Report previously filed on Form 10-K.

These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust II, PNFP Statutory Trust III and PNFP Statutory Trust IV are affiliates of Pinnacle Financial and are included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, determination of any impairment of intangible assets and the valuation of deferred tax assets. There have been no significant changes to Pinnacle Financial's significant accounting policies as disclosed in Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2016, with the exception of the adoption of ASU 2016-09, which became effective January 1, 2017, as described more fully in Recently Adopted Accounting Pronouncements below.

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the three months ended March 31, 2017 and March 31, 2016 was as follows:

   
For the three months ended
March 31,
  
   
2017
    
2016
  
Cash Transactions:
            
Interest paid
  
$
13,666,769
    
$
7,341,784
  
Income taxes paid, net
    
230,110
      
10,556,737
  
Noncash Transactions:
                
Loans charged-off to the allowance for loan losses
    
5,161,951
      
9,226,906
  
Loans foreclosed upon and transferred to other real estate owned
    
1,498,198
      
-
  
Loans foreclosed upon and transferred to other assets
    
2,593
      
1,384,511
  
Common stock issued in connection with equity-method investment
    
-
      
39,694,036
  
9


Income Per Common Share — Basic net income per common share (EPS) is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average shares outstanding is attributable to common stock options, common stock appreciation rights, restricted share awards, and restricted share unit awards. The dilutive effect of outstanding options, common stock appreciation rights, restricted share awards, and restricted share unit awards is reflected in diluted EPS by application of the treasury stock method.

The following is a summary of the basic and diluted net income per share calculations for the three months ended March 31, 2017 and 2016:

   
Three months ended
March 31,
  
   
2017
    
2016
  
Basic net income per share calculation:
            
Numerator - Net income
  
$
39,653,047
    
$
27,965,264
  
                 
Denominator - Weighted average common shares outstanding
    
48,022,342
      
40,082,805
  
Basic net income per common share
  
$
0.83
    
$
0.70
  
                 
Diluted net income per share calculation:
                
Numerator – Net income
  
$
39,653,047
    
$
27,965,264
  
                 
Denominator - Weighted average common shares outstanding
    
48,022,342
      
40,082,805
  
Dilutive shares contingently issuable
    
495,578
      
764,222
  
Weighted average diluted common shares outstanding
    
48,517,920
      
40,847,027
  
Diluted net income per common share
  
$
0.82
    
$
0.68
  

On January 27, 2017, Pinnacle Financial completed the issuance and sale of 3,220,000 shares of common stock (including 420,000 shares issued as a result of the underwriter exercising its over-allotment option) in an underwritten public offering, which shares are included in the share count above. The net proceeds of the offering, after deducting the underwriting discount and estimated offering expenses, were approximately $192.2 million.
 
Recently Adopted Accounting Pronouncements —  In March 2016, the FASB issued updated guidance to Accounting Standards Update 2016-09 Stock Compensation Improvements to Employee Share-Based Payment Activity (ASU 2016-09) intended to simplify and improve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities and classification of such awards on the statement of cash flows. This ASU impacted Pinnacle Financial's consolidated financial statements by requiring that all income tax effects related to settlements of share-based payment awards be reported as increases (or decreases) to income tax expense. Previously, income tax benefits at settlement of an award were reported as an increase (or decrease) to additional paid-in capital. The ASU also requires that all income tax related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows whereas cash flows were previously reported as a reduction to operating cash flows and an increase to financing cash flows. The guidance became effective for Pinnacle Financial on January 1, 2017. During the first quarter of 2017, the newly adopted standard resulted in a reduction in tax expense of $3.8 million.

Subsequent Events — ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Pinnacle Financial evaluated all events or transactions that occurred after March 31, 2017 through the date of the issued financial statements.

Note 2. Acquisitions
 
  Avenue Financial Holdings, Inc. On July 1, 2016, Pinnacle Financial consummated its merger with Avenue, and Avenue Bank, Avenue's wholly-owned bank subsidiary. Pursuant to the terms of the Agreement and Plan of Merger, dated as of January 28, 2016, by and between Pinnacle Financial and Avenue (the Avenue Merger Agreement), Avenue merged with and into Pinnacle Financial, with Pinnacle Financial continuing as the surviving corporation (the Avenue Merger). On that same day, Pinnacle Bank and Avenue Bank merged, with Pinnacle Bank continuing as the surviving entity.
10


The following summarizes the consideration paid and presents a preliminary allocation of purchase price to net assets acquired (dollars in thousands):

   
Number of Shares
    
Amount
  
Equity consideration:
            
Common stock issued
    
3,760,326
    
$
182,469
  
Total equity consideration
          
$
182,469
  
                 
Non-equity consideration:
                
Cash paid to redeem common stock
          
$
20,910
  
Cash paid to exchange outstanding stock options
            
987
  
Total consideration paid
          
$
204,366
  
                 
Allocation of total consideration paid:
                
Fair value of net assets assumed including estimated identifiable intangible assets
          
$
81,695
  
Goodwill
            
122,671
  
           
$
204,366
  
 
Pinnacle Financial accounted for the aforementioned completed 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 merger.

The following purchase price allocations on the Avenue Merger 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 Avenue Merger date, Pinnacle Financial will make any final adjustments to the purchase price allocation and prospectively adjust any goodwill recorded. Material adjustments to merger date estimated fair values would be recorded in the period in which the Avenue 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 recorded in the Avenue Merger, 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 Avenue Merger. Pinnacle Financial may incur losses on the acquired loans that are materially different from losses Pinnacle Financial originally projected.

   
As of July 1, 2016
  
   
Avenue Historical Cost Basis
    
Preliminary Fair Value Adjustments
    
As Recorded by Pinnacle Financial
  
Assets
                  
Cash and cash equivalents
  
$
39,485
    
$
-
    
$
39,485
  
Investment securities(1)
    
163,862
      
(463
)
    
163,399
  
Loans(2)
    
980,319
      
(27,789
)
    
952,530
  
Mortgage loans held for sale
    
3,310
      
-
      
3,310
  
Core deposit intangible(3)
    
-
      
8,845
      
8,845
  
Other assets(4)
    
47,729
      
8,774
      
56,503
  
Total Assets
  
$
1,234,705
    
$
(10,633
)
  
$
1,224,072
  
                         
Liabilities
                        
Interest-bearing deposits(5)
  
$
741,635
    
$
1,400
    
$
743,035
  
Non-interest bearing deposits
    
223,685
      
-
      
223,685
  
Borrowings(6)
    
142,639
      
3,240
      
145,879
  
Other liabilities
    
29,719
      
59
      
29,778
  
Total Liabilities
  
$
1,137,678
    
$
4,699
    
$
1,142,377
  
Net Assets Acquired
  
$
97,027
    
$
(15,332
)
  
$
81,695
  
 
11
Explanation of certain fair value adjustments:
(1)
The amount represents the adjustment of the book value of Avenue'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 Avenue's loans to their estimated fair value based on interest rates and expected cash flows as of the date of acquisition, which includes estimates of expected credit losses inherent in the portfolio.
(3)
The amount represents the fair value of the core deposit intangible asset representing the intangible value of the deposit base acquired.
(4)
The amount represents the deferred tax asset recognized on the fair value adjustment of Avenue's acquired assets and assumed liabilities as well as the fair value adjustment for property and equipment.
(5)
The amount represents the adjustment necessary because the weighted average interest rate of Avenue'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.
(6)
The amount represents the adjustment necessary because the weighted average interest rate of Avenue's FHLB advances and subordinated debt issuance 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.
 
Note 3. Equity method investment

A summary of BHG's financial position as of March 31, 2017 and December 31, 2016 and results of operations as of and for the three months ended March 31, 2017 and 2016, were as follows (in thousands):

   
As of
  
   
March 31, 2017
    
December 31, 2016
  
             
Assets
  
$
244,542
    
$
223,246
  
                 
Liabilities
    
165,271
      
139,531
  
Membership interests
    
79,271
      
83,715
  
Total liabilities and membership
  
$
244,542
    
$
223,246
  

 
For the three months ended March 31,
  
 
2017
  
2016
  
           
Revenues
$
34,235
    
$
31,288
  
Net income
$
16,012
    
$
12,154
  

At March 31, 2017, technology, trade name and customer relationship intangibles, net of related amortization, of $15.9 million compared to $16.8 million as of December 31, 2016. Amortization expense of $832,000 was included for the three months ended March 31, 2017 compared to $378,000 for the same period in the prior year. Accretion income of $806,000 was included in the three months ended March 31, 2017 compared to $871,000 for the same period in the prior year.

During the three months ended March 31, 2017, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $2.5 million in the aggregate, respectively, compared to $4.9 million for the same period in the prior year. Earnings from BHG are included in Pinnacle Financial's consolidated tax return. Profits from intercompany transactions are eliminated. No loans were purchased from BHG by Pinnacle Bank for the periods ended March 31, 2017 or March 31, 2016.

12
Note 4.  Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2017 and December 31, 2016 are summarized as follows (in thousands):

   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Fair
Value
  
March 31, 2017:
                        
Securities available-for-sale:
                        
U.S. Treasury securities
  
$
250
    
$
-
    
$
-
    
$
250
  
U.S. government agency securities
    
19,213
      
1
      
275
      
18,939
  
Mortgage-backed agency securities
    
1,240,671
      
4,205
      
17,899
      
1,226,977
  
State and municipal securities
    
247,210
      
4,611
      
2,824
      
248,997
  
Asset-backed securities
    
71,942
      
108
      
729
      
71,321
  
Corporate notes and other
    
13,245
      
152
      
105
      
13,292
  
   
$
1,592,531
    
$
9,077
    
$
21,832
    
$
1,579,776
  
Securities held-to-maturity:
                                
State and municipal securities
  
$
24,998
    
$
124
    
$
86
    
$
25,036
  
   
$
24,998
    
$
124
    
$
86
    
$
25,036
  

                         
December 31, 2016:
                        
Securities available-for-sale:
                        
U.S. Treasury securities
  
$
250
    
$
-
    
$
-
    
$
250
  
U.S. government agency securities
    
22,306
      
-
      
537
      
21,769
  
Mortgage-backed agency securities
    
988,008
      
4,304
      
15,686
      
976,626
  
State and municipal securities
    
211,581
      
4,103
      
2,964
      
212,720
  
Asset-backed securities
    
79,318
      
111
      
849
      
78,580
  
Corporate notes and other
    
8,608
      
39
      
46
      
8,601
  
   
$
1,310,071
    
$
8,557
      
20,082
    
$
1,298,546
  
Securities held-to-maturity:
                                
State and municipal securities
  
$
25,251
    
$
87
    
$
105
    
$
25,233
  
   
$
25,251
    
$
87
    
$
105
    
$
25,233
  
 
At March 31, 2017, approximately $1.045 billion of securities within Pinnacle Financial's investment portfolio were pledged to secure either public funds and other deposits or securities sold under agreements to repurchase. At March 31, 2017, repurchase agreements comprised of secured borrowings totaled $71.2 million and were secured by $71.2 million of pledged U.S. government agency securities, municipal securities, asset backed securities, and corporate debentures. As the fair value of securities pledged to secure repurchase agreements may decline, Pinnacle Financial regularly evaluates its need to pledge additional securities to remain adequately secured.

The amortized cost and fair value of debt securities as of March 31, 2017 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage- and asset-backed securities since the mortgages and assets underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary (in thousands):

   
Available-for-sale
    
Held-to-maturity
  
March 31, 2017:
  
Amortized
Cost
    
Fair
Value
    
Amortized Cost
    
Fair
Value
  
Due in one year or less
  
$
2,519
    
$
2,536
    
$
445
    
$
445
  
Due in one year to five years
    
45,041
      
46,143
      
8,262
      
8,285
  
Due in five years to ten years
    
128,637
      
130,524
      
10,817
      
10,897
  
Due after ten years
    
103,721
      
102,275
      
5,474
      
5,409
  
Mortgage-backed securities
    
1,240,671
      
1,226,977
      
-
      
-
  
Asset-backed securities
    
71,942
      
71,321
      
-
      
-
  
   
$
1,592,531
    
$
1,579,776
    
$
24,998
    
$
25,036
  
13
At March 31, 2017 and December 31, 2016, the following investments had unrealized losses. The table below classifies these investments according to the term of the unrealized losses of less than twelve months or twelve months or longer (in thousands):

   
Investments with an Unrealized Loss of
less than 12 months
    
Investments with an Unrealized Loss of
12 months or longer
    
Total Investments with an
Unrealized Loss
  
   
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized
Losses
  
At March 31, 2017
                                    
                                     
U.S. Treasury securities
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  
U.S. government agency securities
    
749
      
1
      
12,995
      
274
      
13,744
      
275
  
Mortgage-backed securities
    
1,009,381
      
17,214
      
53,060
      
685
      
1,062,441
      
17,899
  
State and municipal securities
    
101,430
      
2,909
      
310
      
1
      
101,740
      
2,910
  
Asset-backed securities
    
11,008
      
24
      
25,928
      
705
      
36,936
      
729
  
Corporate notes
    
4,542
      
105
      
-
      
-
      
4,542
      
105
  
Total temporarily-impaired securities
  
$
1,127,110
    
$
20,253
    
$
92,293
    
$
1,665
    
$
1,219,403
    
$
21,918
  
                                                 
At December 31, 2016
                                                
                                                 
U.S. Treasury securities
  
$
-
    
$
-
    
$
-
    
$
-
    
$
-
    
$
-
  
U.S. government agency securities
    
-
      
-
      
20,820
      
537
      
20,820
      
537
  
Mortgage-backed securities
    
801,213
      
15,073
      
43,148
      
613
      
844,361
      
15,686
  
State and municipal securities
    
87,277
      
3,068
      
312
      
1
      
87,589
      
3,069
  
Asset-backed securities
    
14,510
      
32
      
34,097
      
817
      
48,607
      
849
  
Corporate notes
    
4,810
      
46
      
-
      
-
      
4,810
      
46
  
Total temporarily-impaired securities
  
$
907,810
    
$
18,219
    
$
98,377
    
$
1,968
    
$
1,006,187
    
$
20,187
  

The applicable dates for determining when securities are in an unrealized loss position are March 31, 2017 and December 31, 2016. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month periods ended March 31, 2017 and December 31, 2016, but is in the "Investments with an Unrealized Loss of less than 12 months" category above.

As shown in the tables above, including both available-for-sale and held-to-maturity investment securities, at March 31, 2017, Pinnacle Financial had approximately $21.9 million in unrealized losses on $1.219 billion of securities. The unrealized losses associated with these investment securities are driven by changes in interest rates and are not due to the credit quality of the securities.  These securities will continue to be monitored as a part of Pinnacle Financial's ongoing impairment analysis. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at March 31, 2017, and it is not more-likely-than-not that Pinnacle Financial will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial does not consider these securities to be other-than-temporarily impaired at March 31, 2017.

Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes. Additionally, if an available-for-sale security loses its investment grade or tax-exempt status, the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, Pinnacle Financial will consider selling the security, but will review each security on a case-by-case basis as these factors become known.

14
The carrying values of Pinnacle Financial's investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that Pinnacle Financial will not recover the entire amortized cost bases of the securities.  As a result, there is a risk that other-than-temporary impairment charges may occur in the future. Additionally, there is a risk that other-than-temporary impairment charges may occur in the future if management's intention to hold these securities to maturity and/or recovery changes. 
 
Note 5. Loans and Allowance for Loan Losses

For financial reporting purposes, Pinnacle Financial classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed with the Federal Deposit Insurance Corporation (FDIC).

Pinnacle Financial uses five loan categories: commercial real estate mortgage, consumer real estate mortgage, construction and land development, commercial and industrial, and consumer and other.
Commercial real-estate mortgage loans. Commercial real-estate mortgage loans are categorized as such based on investor exposures where repayment is largely dependent upon the operation, refinance, or sale of the underlying real estate. Commercial real-estate mortgage also includes owner occupied commercial real estate which shares a similar risk profile to Pinnacle Financial's commercial and industrial products.
Consumer real-estate mortgage loans. Consumer real-estate mortgage consists primarily of loans secured by 1-4 residential properties including home equity lines of credit.
Construction and land development loans. Construction and land development loans include loans where the repayment is dependent on the successful operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development.
Commercial and industrial loans. Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes.
Consumer and other loans. Consumer and other loans include all loans issued to individuals not included in the consumer real-estate mortgage classification. Examples of consumer and other loans are automobile loans, credit cards and loans to finance education, among others.

Commercial loans receive risk ratings assigned by a financial advisor and approved by a senior credit officer subject to validation by Pinnacle Financial's independent loan review department.  Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual.  Pinnacle Financial believes that its categories follow those used by Pinnacle Bank's primary regulators.  At March 31, 2017, approximately 78% of Pinnacle Financial's loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating in the allowance for loan loss assessment.  Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans.  However, certain consumer real-estate mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature.
 
Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, Pinnacle Financial's credit procedures require that every risk rated loan of $500,000 or more be subject to a formal credit risk review process by the assigned financial advisor. Each loan's risk rating is also subject to review by Pinnacle Financial's independent loan review department, which reviews a substantial portion of Pinnacle Financial's risk rated portfolio annually. Included in the coverage are independent loan reviews of loans in targeted higher-risk portfolio segments such as certain commercial and industrial loans, land loans and/or loan types in certain geographies.
 
The following table presents Pinnacle Financial's loan balances by primary loan classification and the amount within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard, substandard-nonaccrual and doubtful-nonaccrual which are defined as follows:

15
·
Special mention loans have potential weaknesses that deserve management's close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit position at some future date.
·
Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize collection of the debt.  Substandard loans are characterized by the distinct possibility that Pinnacle Financial will sustain some loss if the deficiencies are not corrected.
·
Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.
·
Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following table outlines the amount of each loan classification categorized into each risk rating category as of March 31, 2017 and December 31, 2016 (in thousands):
 
   
Commercial real estate - mortgage
    
Consumer real estate - mortgage
    
Construction and land development
    
Commercial and industrial
    
Consumer
and other
    
Total
  
March 31, 2017
                                    
Accruing loans
                                    
        Pass
  
$
3,111,795
    
$
1,171,131
    
$
1,000,453
    
$
2,858,856
    
$
266,341
    
$
8,408,576
  
        Special Mention
    
39,448
      
1,620
      
4,800
      
37,387
      
783
      
84,038
  
        Substandard (1)
    
26,081
      
11,867
      
5,762
      
65,946
      
121
      
109,777
  
        Total
    
3,177,324
      
1,184,618
      
1,011,015
      
2,962,189
      
267,245
      
8,602,391
  
Impaired loans
                                                
        Nonaccrual loans(2)
                                                
                Substandard-nonaccrual
    
4,050
      
8,809
      
4,112
      
7,255
      
822
      
25,048
  
                Doubtful-nonaccrual
    
-
      
-
      
-
      
2
      
-
      
2
  
        Total nonaccrual loans
    
4,050
      
8,809
      
4,112
      
7,257
      
822
      
25,050
  
        Troubled debt restructurings(3)
                                                
                Pass
    
210
      
1,349
      
-
      
720
      
39
      
2,318
  
                Special Mention
    
-
      
233
      
-
      
-
      
-
      
233
  
                Substandard
    
-
      
1,366
      
-
      
10,674
      
-
      
12,040
  
         Total troubled debt restructurings
    
210
      
2,948
      
-
      
11,394
      
39
      
14,591
  
Total impaired loans
    
4,260
      
11,757
      
4,112
      
18,651
      
861
      
39,641
  
Total loans
  
$
3,181,584
    
$
1,196,375
    
$
1,015,127
    
$
2,980,840
    
$
268,106
    
$
8,642,032
  

December 31, 2016
                                    
Accruing loans
                                    
        Pass
  
$
3,137,239
    
$
1,159,003
    
$
897,549
    
$
2,782,000
    
$
264,682
    
$
8,240,473
  
        Special Mention
    
21,449
      
1,620
      
2,716
      
25,641
      
802
      
52,228
  
        Substandard (1)
    
29,674
      
13,833
      
5,788
      
65,215
      
129
      
114,639
  
        Total
    
3,188,362
      
1,174,456
      
906,053
      
2,872,856
      
265,613
      
8,407,340
  
Impaired loans
                                                
        Nonaccrual loans(2)
                                                
                Substandard-nonaccrual
    
4,921
      
8,073
      
6,613
      
7,492
      
475
      
27,574
  
                Doubtful-nonaccrual
    
-
      
-
      
-
      
3
      
-
      
3
  
        Total nonaccrual loans
    
4,921
      
8,073
      
6,613
      
7,495
      
475
      
27,577
  
        Troubled debt restructurings(3)
                                                
                Pass
    
213
      
1,358
      
7
      
713
      
41
      
2,332
  
                Special Mention
    
-
      
236
      
-
      
-
      
-
      
236
  
                Substandard
    
-
      
1,794
      
-
      
10,646
      
-
      
12,440
  
         Total troubled debt restructurings
    
213
      
3,388
      
7
      
11,359
      
41
      
15,008
  
Total impaired loans
    
5,134
      
11,461
      
6,620
      
18,854
      
516
      
42,585
  
Total loans
  
$
3,193,496
    
$
1,185,917
    
$
912,673
    
$
2,891,710
    
$
266,129
    
$
8,449,925
  

(1)
Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators for loans classified as substandard, excluding the impact of nonaccrual loans and troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $109.8 million at March 31, 2017, compared to $114.6 million at December 31, 2016.
(2)
Included in nonaccrual loans at March 31, 2017 and December 31, 2016 are $7.3 million and $8.8 million, respectively, in purchase credit impaired loans acquired with deteriorated credit quality.
(3)
Troubled debt restructurings are presented as an impaired loan; however, they continue to accrue interest at contractual rates.
16
For the three months ended March 31, 2017, the average balance of nonaccrual loans was $26.3 million compared to $43.7 million for the same period in 2016. Pinnacle Financial's policy is that the discontinuation of the accrual of interest income will occur when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date the above mentioned loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Pinnacle Financial's policy is that once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized approximately $49,000 in interest income from cash payments received on nonaccrual loans during the three months ended March 31, 2017, compared to $31,000 during the three months ended March 31, 2016. Had these nonaccruing loans been on accruing status, interest income would have been higher by $640,000 for the three months ended March 31, 2017 compared to $280,000 for the three months ended March 31, 2016, respectively.

Loans acquired with deteriorated credit quality are recorded pursuant to the provisions of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and are referred to as purchase credit impaired loans. The following table provides a rollforward of purchase credit impaired loans from December 31, 2016 through March 31, 2017 (in thousands):

   
Gross Contractual Receivable
    
Accretable
Yield
    
Nonaccretable
Yield
    
Carrying
Value
  
                         
December 31, 2016
  
$
12,468
    
$
-
    
$
(3,633
)
  
$
8,835
  
Acquisitions
    
-
      
-
      
-
      
-
  
Year-to-date settlements
    
(1,814
)
    
-
      
252
      
(1,562
)
Additional fundings
    
5
      
-
      
-
      
5
  
March 31, 2017
  
$
10,659
    
$
-
    
$
(3,381
)
  
$
7,278
  

These loans have been deemed to be collateral dependent and as such, no accretable yield has been recorded for these loans. The carrying value is adjusted for additional draws, pursuant to contractual arrangements, offset by loan paydowns. Year-to-date settlements include both loans that were charged-off as well as loans that were paid off, typically as a result of refinancings at other institutions.
 
The following table details the recorded investment, unpaid principal balance and related allowance of Pinnacle Financial's nonaccrual loans at March 31, 2017 and December 31, 2016 by loan classification (in thousands):

 
  
At March 31, 2017
    
At December 31, 2016
  
 
  
Recorded investment
    
Unpaid principal balances(1)
    
Related allowance(2)
    
Recorded investment
    
Unpaid principal balances (1)
    
Related allowance(2)
  
Collateral dependent nonaccrual loans:
                                    
Commercial real estate – mortgage
  
$
2,283
    
$
2,280
    
$
-
    
$
2,308
    
$
2,312
    
$
-
  
Consumer real estate – mortgage
    
2,513
      
2,544
      
-
      
2,880
      
2,915
      
-
  
Construction and land development
    
1,028
      
1,035
      
-
      
3,128
      
3,135
      
-
  
Commercial and industrial
    
6,252
      
6,266
      
-
      
6,373
      
6,407
      
-
  
Consumer and other
    
-
      
-
      
-
      
-
      
-
      
-
  
Total
  
$
12,076
    
$
12,125
    
$
-
    
$
14,689
    
$
14,769
    
$
-
  
 
                                                
Cash flow dependent nonaccrual loans:
                                                
Commercial real estate – mortgage
  
$
1,767
    
$
2,465
    
$
63
    
$
2,613
    
$
3,349
    
$
59
  
Consumer real estate – mortgage
    
6,296
      
6,883
      
1,085
      
5,193
      
5,775
      
688
  
Construction and land development
    
3,083
      
3,756
      
19
      
3,485
      
4,154
      
20
  
Commercial and industrial
    
1,006
      
2,379
      
220
      
1,122
      
2,714
      
77
  
Consumer and other
    
822
      
942
      
465
      
475
      
851
      
227
  
Total
  
$
12,974
    
$
16,425
    
$
1,852
    
$
12,888
    
$
16,843
    
$
1,071
  
 
                                                
Total nonaccrual loans
  
$
25,050
    
$
28,550
    
$
1,852
    
$
27,577
    
$
31,612
    
$
1,071
  

(1)
Unpaid principal balance presented net of fair value adjustments recorded in conjunction with purchase accounting.
(2)
Collateral dependent loans are typically charged-off to their net realizable value and no specific allowance is carried related to those loans.
17


The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three months ended March 31, 2017 and 2016, respectively, on Pinnacle Financial's nonaccrual loans that remain on the balance sheets as of such date (in thousands):

 
  
For the three months ended
March 31,
  
 
  
2017
    
2016
  
 
  
Average recorded investment
    
Interest income recognized
    
Average recorded investment
    
Interest income recognized
  
Collateral dependent nonaccrual loans:
                        
Commercial real estate – mortgage
  
$
2,100
    
$
-
    
$
3,854
    
$
-
  
Consumer real estate – mortgage
    
2,216
      
-
      
4,462
      
-
  
Construction and land development
    
2,078
      
49
      
7,320
      
31
  
Commercial and industrial
    
6,312
      
-
      
15,451
      
-