10-Q 1 pnfp10q033119.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
o
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
pnfplogoa22.jpg, 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  x
No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit such files).
Yes  x
No o
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 x
Accelerated Filer o
Non-accelerated Filer  o
(do not check if you are a smaller reporting company)
Smaller reporting company o  
 
Emerging growth company o  
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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o
No x
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
Trading Symbol
Name of Exchange on which Registered
Common Stock, par value $1.00
PNFP
Nasdaq Global Select Market

As of April 30, 2019 there were 76,958,235 shares of common stock, $1.00 par value per share, issued and outstanding.


Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2019


2

FORWARD-LOOKING STATEMENTS

All statements, other than statements of historical fact, included in this report, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "expect," "anticipate," "intend," "may," "should," "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) the ability to grow and retain low-cost core deposits and retain large, uninsured deposits; (iii) the inability of Pinnacle Financial, or entities in which it has significant investments, like 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) the impact of competition with other financial institutions, including pricing pressures and the resulting impact on Pinnacle Financial’s results, including as a result of compression to net interest margin; (vii) greater than anticipated adverse conditions in the national or local economies including in Pinnacle Financial's markets throughout Tennessee, North Carolina, South Carolina and Virginia,  particularly in commercial and residential real estate markets; (viii) fluctuations or differences in interest rates on loans or deposits from those that Pinnacle Financial is modeling or anticipating or that affect the yield curve; (ix) the results of regulatory examinations; (x) a merger or acquisition; (xi) risks of expansion into new geographic or product markets; (xii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiii) 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 (including as a result of the competitive environment for associates) or otherwise to attract customers from other financial institutions; (xiv) deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xv) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies, required capital maintenance levels or regulatory requests or directives, particularly if Pinnacle Financial's level of applicable commercial real estate loans were to exceed percentage levels of total capital in guidelines recommended by its regulators; (xvi) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xvii) the vulnerability of Pinnacle Bank's network and online banking portals, and the systems of parties with whom Pinnacle Financial contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xviii) the possibility of increased compliance and operational costs as a result of increased regulatory oversight (including by the Consumer Financial Protection Bureau), 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;  (xix) 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 Pinnacle Financial or Pinnacle Bank; (xx) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxi) risk associated with the possible shutdown of the United States federal government, including the adverse effects on the national or local economies and adverse effects resulting from a shutdown of the U.S. Small Business Administration’s SBA loan program; (xxii) the availability of and access to capital; (xxiii) adverse results (including costs, fines, reputational harm, inability to obtain necessary approvals and/or other negative effects) from current or future litigation, regulatory examinations or other legal and/or regulatory actions; and (xxiv) general competitive, economic, political and market conditions. Additional factors which could affect the forward looking statements can be found in Pinnacle Financial's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K filed with the SEC and available on the SEC's website at http://www.sec.gov. 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)
(in thousands)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Cash and noninterest-bearing due from banks
$
167,181

 
$
137,433

Restricted cash
101,367

 
65,491

Interest-bearing due from banks
210,389

 
516,920

Federal funds sold and other
6,560

 
1,848

Cash and cash equivalents
485,497

 
721,692

 
 
 
 
Securities available-for-sale, at fair value
3,250,006

 
3,083,686

Securities held-to-maturity (fair value of $199.0 million and $193.1 million at Mar. 31, 2019 and Dec. 31, 2018, respectively)
194,043

 
194,282

Consumer loans held-for-sale
53,658

 
34,196

Commercial loans held-for-sale
14,456

 
15,954

 
 
 
 
Loans
18,174,906

 
17,707,549

Less allowance for loan losses
(87,194
)
 
(83,575
)
Loans, net
18,087,712

 
17,623,974

 
 
 
 
Premises and equipment, net
262,595

 
265,560

Equity method investment
239,861

 
239,237

Accrued interest receivable
79,594

 
79,657

Goodwill
1,807,121

 
1,807,121

Core deposits and other intangible assets
43,850

 
46,161

Other real estate owned
15,077

 
15,165

Other assets
1,024,388

 
904,359

Total assets
$
25,557,858

 
$
25,031,044

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
4,317,787

 
$
4,309,067

Interest-bearing
3,170,570

 
3,464,001

Savings and money market accounts
7,349,496

 
7,607,796

Time
3,642,608

 
3,468,243

Total deposits
18,480,461

 
18,849,107

Securities sold under agreements to repurchase
100,698

 
104,741

Federal Home Loan Bank advances
2,121,075

 
1,443,589

Subordinated debt and other borrowings
484,703

 
485,130

Accrued interest payable
26,052

 
23,586

Other liabilities
288,930

 
158,951

Total liabilities
21,501,919

 
21,065,104

Stockholders' equity:
 

 
 

Preferred stock, no par value; 10.0 million shares authorized; no shares issued and outstanding
—

 
—

Common stock, par value $1.00; 180.0 million shares authorized at Mar. 31, 2019 and Dec. 31, 2018; 77.1 million and 77.5 million shares issued and outstanding at Mar. 31, 2019 and Dec. 31, 2018, respectively
77,064

 
77,484

Additional paid-in capital
3,079,358

 
3,107,431

Retained earnings
914,545

 
833,130

Accumulated other comprehensive loss, net of taxes
(15,028
)
 
(52,105
)
Total stockholders' equity
4,055,939

 
3,965,940

Total liabilities and stockholders' equity
$
25,557,858

 
$
25,031,044

See accompanying notes to consolidated financial statements (unaudited).

4

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except per share data)
 
Three months ended
March 31,
 
2019
 
2018
Interest income:
 
 
 
Loans, including fees
$
229,379

 
$
191,214

Securities:
 
 
 
Taxable
13,540

 
11,222

Tax-exempt
11,672

 
7,285

Federal funds sold and other
3,292

 
1,807

Total interest income
257,883

 
211,528

 
 
 
 
Interest expense:
 
 
 
Deposits
54,217

 
23,981

Securities sold under agreements to repurchase
145

 
130

Federal Home Loan Bank advances and other borrowings
16,275

 
12,946

Total interest expense
70,637

 
37,057

Net interest income
187,246

 
174,471

Provision for loan losses
7,184

 
6,931

Net interest income after provision for loan losses
180,062

 
167,540

 
 
 
 
Noninterest income:
 
 
 
Service charges on deposit accounts
8,542

 
7,905

Investment services
5,404

 
5,245

Insurance sales commissions
2,928

 
3,119

Gain on mortgage loans sold, net
4,878

 
3,744

Investment gains and losses on sales, net
(1,960
)
 
30

Trust fees
3,295

 
3,117

Income from equity method investment
13,290

 
9,360

Other noninterest income
14,686

 
11,663

Total noninterest income
51,063

 
44,183

 
 
 
 
Noninterest expense:
 
 
 
Salaries and employee benefits
70,376

 
63,719

Equipment and occupancy
19,331

 
17,743

Other real estate expense (income), net
246

 
(794
)
Marketing and other business development
2,948

 
2,247

Postage and supplies
1,892

 
2,039

Amortization of intangibles
2,311

 
2,698

Merger-related expense
—

 
5,353

Other noninterest expense
16,947

 
15,575

Total noninterest expense
114,051

 
108,580

Income before income taxes
117,074

 
103,143

Income tax expense
23,114

 
19,633

Net income
$
93,960

 
$
83,510

Per share information:
 
 
 
Basic net income per common share
$
1.22

 
$
1.08

Diluted net income per common share
$
1.22

 
$
1.08

Weighted average shares outstanding:
 
 
 
Basic
76,803,171

 
77,077,957

Diluted
77,127,692

 
77,365,664


See accompanying notes to consolidated financial statements (unaudited).

5

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

 
Three months ended
March 31,
 
2019
 
2018
Net income
$
93,960

 
$
83,510

Other comprehensive income (loss), net of tax:
 
 
 
Change in fair value on available-for-sale securities, net of tax
36,379

 
(33,483
)
Change in fair value of cash flow hedges, net of tax
(523
)
 
1,720

Amortization of net unrealized losses (gains) on securities transferred from available-for-sale to held-to-maturity, net of tax

29

 
(58
)
Gain on cash flow hedges reclassified from other comprehensive income into net income, net of tax
(256
)
 
(141
)
Net loss (gain) on sale of investment securities reclassified from other comprehensive income into net income, net of tax
1,448

 
(22
)
Total other comprehensive income (loss), net of tax
37,077

 
(31,984
)
Total comprehensive income
$
131,037

 
$
51,526


See accompanying notes to consolidated financial statements (unaudited).

6

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(dollars and shares in thousands)

 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amounts
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comp. Income (Loss), net
 
Total Stockholder's Equity
Balance at December 31, 2017
77,740

 
$
77,740

 
$
3,115,304

 
$
519,144

 
$
(4,236
)
 
$
3,707,952

Exercise of employee common stock options and related tax benefits
87

 
87

 
1,529

 
—

 
—

 
1,616

Common dividends paid ($0.14 per share)
—

 
—

 
—

 
(10,974
)
 
—

 
(10,974
)
Issuance of restricted common shares, net of forfeitures
106

 
106

 
(106
)
 
—

 
—

 
—

Restricted shares withheld for taxes and related tax benefit
(80
)
 
(80
)
 
(5,185
)
 
—

 
—

 
(5,265
)
Compensation expense for restricted shares
—

 
—

 
4,448

 
—

 
—

 
4,448

Net income
—

 
—

 
—

 
83,510

 
—

 
83,510

Other comprehensive loss
—

 
—

 
—

 
—

 
(31,984
)
 
(31,984
)
Balance at March 31, 2018
77,853

 
$
77,853

 
$
3,115,990

 
$
591,680

 
$
(36,220
)
 
$
3,749,303

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
77,484

 
$
77,484

 
$
3,107,431

 
$
833,130

 
$
(52,105
)
 
$
3,965,940

Exercise of employee common stock options and related tax benefits
5

 
5

 
125

 
—

 
—

 
130

Common dividends paid ($0.16 per share)
—

 
—

 
—

 
(12,545
)
 
—

 
(12,545
)
Repurchase of common stock
(543
)
 
(543
)
 
(29,506
)
 
—

 
—

 
(30,049
)
Issuance of restricted common shares, net of forfeitures
180

 
180

 
(180
)
 
—

 
—

 
—

Restricted shares withheld for taxes and related tax benefit
(62
)
 
(62
)
 
(3,425
)
 
—

 
—

 
(3,487
)
Compensation expense for restricted shares
—

 
—

 
4,913

 
—

 
—

 
4,913

Net income
—

 
—

 
—

 
93,960

 
—

 
93,960

Other comprehensive income
—

 
—

 
—

 
—

 
37,077

 
37,077

Balance at March 31, 2019
77,064

 
$
77,064

 
$
3,079,358

 
$
914,545

 
$
(15,028
)
 
$
4,055,939


See accompanying notes to consolidated financial statements (unaudited).

7

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
 
Three months ended
March 31,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
93,960

 
$
83,510

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Net amortization/accretion of premium/discount on securities
4,309

 
4,775

Depreciation, amortization and accretion
468

 
(6,181
)
Provision for loan losses
7,184

 
6,931

Gain on mortgage loans sold, net
(4,878
)
 
(3,744
)
Investment losses (gains) on sales, net
1,960

 
(30
)
Stock-based compensation expense
4,913

 
4,448

Deferred tax expense
8,702

 
8,513

Gains on dispositions of other real estate and other investments
(50
)
 
(481
)
Income from equity method investment
(13,290
)
 
(9,360
)
   Dividends received from equity method investment
12,666

 
4,324

Excess tax benefit from stock compensation
(769
)
 
(2,681
)
Gain on commercial loans sold, net
(611
)
 
(936
)
Commercial loans held for sale:
 

 
 

Loans originated
(80,117
)
 
(80,193
)
Loans sold
82,225

 
87,960

Consumer loans held for sale:
 

 
 

Loans originated
(243,870
)
 
(247,025
)
Loans sold
229,286

 
254,266

Increase in other assets
(6,517
)
 
(9,302
)
Increase (decrease) in other liabilities
59,720

 
(13,901
)
Net cash provided by operating activities
155,291

 
80,893

Investing activities:
 

 
 

Activities in securities available-for-sale:
 

 
 

Purchases
(312,605
)
 
(590,328
)
Sales
126,579

 
14,454

Maturities, prepayments and calls
72,813

 
81,737

Activities in securities held-to-maturity:
 

 
 

Maturities, prepayments and calls
15

 
—

Increase in loans, net
(462,940
)
 
(683,710
)
Purchases of software, premises and equipment
(2,110
)
 
(8,806
)
Proceeds from sales of software, premises and equipment
53

 
164

Proceeds from sale of other real estate
840

 
4,663

Purchase of bank owned life insurance policies
(60,000
)
 
—

Increase in other investments
(12,582
)
 
(836
)
Net cash used in investing activities
(649,937
)
 
(1,182,662
)
Financing activities:
 

 
 

Net (decrease) increase in deposits
(368,466
)
 
52,039

Net decrease in securities sold under agreements to repurchase
(4,043
)
 
(3,398
)
Advances from Federal Home Loan Bank:
 

 
 

Issuances
1,147,500

 
762,000

Payments/maturities
(470,014
)
 
(105,014
)
Decrease in other borrowings, net
(520
)
 
(30
)
Principal payments of finance lease obligation
(55
)
 
(39
)
Exercise of common stock options, net of repurchase of restricted shares
(3,357
)
 
(3,649
)
Repurchase of common stock
(30,049
)
 
—

Common stock dividends paid
(12,545
)
 
(10,974
)
Net cash provided by financing activities
258,451

 
690,935

Net decrease in cash, cash equivalents, and restricted cash
(236,195
)
 
(410,834
)
Cash, cash equivalents, and restricted cash, beginning of period
721,692

 
779,597

Cash, cash equivalents, and restricted cash, end of period
$
485,497

 
$
368,763


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), Avenue Financial Holdings, Inc. (Avenue) and BNC Bancorp (BNC) on July 31, 2015, September 1, 2015, July 1, 2016 and June 16, 2017, 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, and comprehensive wealth management services, in its 11 primarily urban markets within Tennessee, the Carolinas and Virginia.

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 consolidated financial statements and related notes appearing in Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2018 (2018 10-K).

These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. Certain statutory trust affiliates of Pinnacle Financial, as noted in Note 11. Subordinated Debt and Other Borrowings 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 the 2018 10-K.

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for the three months ended March 31, 2019 and March 31, 2018 was as follows (in thousands):
 
For the three months ended
March 31,
 
2019
 
2018
Cash Transactions:
 
 
 
Interest paid
$
68,403

 
$
34,909

Income taxes paid, net
550

 
425

Noncash Transactions:
 

 
 

Loans charged-off to the allowance for loan losses
6,068

 
8,669

Loans foreclosed upon and transferred to other real estate owned
624

 
232

Loans foreclosed upon and transferred to other assets
87

 
392

Right-of-use asset recognized during the period in exchange for lease obligations (1)
81,249

 
—

(1) Includes $79.9 million recognized upon initial adoption of ASU 2016-02 on January 1, 2019.

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, 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.

9


The following is a summary of the basic and diluted net income per share calculations for the three months ended March 31, 2019 and 2018 (in thousands, except per share data):
 
Three months ended
March 31,
 
2019
2018
Basic net income per share calculation:
 
 
Numerator - Net income
$
93,960

$
83,510

 
 
 
Denominator - Weighted average common shares outstanding
76,803

77,078

Basic net income per common share
$
1.22

$
1.08

 
 
 
Diluted net income per share calculation:
 
 
Numerator – Net income
$
93,960

$
83,510

 
 
 
Denominator - Weighted average common shares outstanding
76,803

77,078

Dilutive shares contingently issuable
325

288

Weighted average diluted common shares outstanding
77,128

77,366

Diluted net income per common share
$
1.22

$
1.08


Recently Adopted Accounting Pronouncements — In March 2019, the FASB issued Accounting Standards Update No. 2019-01, Leases (Topic 842): Codification Improvements. The amendments in this ASU (i) reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers to use cost as the fair value of the underlying asset, (ii) state that lessors that are depository and lending institutions should present principal payments received under sales type and direct financing leases within investing activities, and (iii) exempt Topic 842 from certain transition related interim disclosure requirements. ASU 2019-01 became effective for Pinnacle Financial on January 1, 2019 and did not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases which requires recognition in the statement of financial position of lease right of use assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for operating leases. In July 2016, the FASB issued Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases which provided technical corrections and improvements to ASU 2016-02. In July 2016, the FASB issued Accounting Standards Update 2018-11, Leases (Topic 842): Targeted Improvements which provided an optional transition method to adopt the new requirements of ASU 2016-02 as of the adoption date with no adjustment to the presentation or disclosure of comparative prior periods included in the financial statements in the period of adoption. Pinnacle Financial has elected this optional transition method and has presented periods prior to adoption under the prior lease guidance of ASC Topic 840. In December 2018, the FASB issued Accounting Standards Update 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. ASU 2018-20 permits lessors to account for certain taxes as lessee costs, permits lessors to exclude from revenue certain lessor costs paid by lessees directly to third parties, and requires lessors to allocate certain variable payments to lease and non-lease components. ASU 2016-02 and the subsequently issued ASUs related to Topic 842 became effective for Pinnacle Financial on January 1, 2019.  As part of the adoption of these updates, Pinnacle Financial has elected the following practical expedients: 1) to not reassess whether existing contracts are or contain a lease, 2) to not reassess lease classification for existing leases, 3) to not reassess initial direct costs, 4) to not separate lease components from nonlease components for real estate leases, and 5) to not recognize short term leases (12 months or less) on the balance sheet. See Note 12 for additional detail related to lease amounts recognized as of March 31, 2019 under Topic 842.

In February 2018, the FASB issued Accounting Standards Update 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU addressed the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the lower federal corporate tax rate included in the Tax Cuts and Jobs Act issued December 22, 2017 (Tax Act). These amendments allow an entity to make a reclassification from other comprehensive income to retained earnings for the difference between the historical corporate income tax rate and the lower corporate income tax rate included in the Tax Act. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Pinnacle Financial has elected not to adopt this standard due to its insignificant impact on Pinnacle Financial's consolidated financial position.





10

Newly Issued not yet Effective Accounting Standards — In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify how entities other than private companies, such as public business entities and not-for-profit entities, are required to test goodwill for impairment by eliminating the comparison of the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those periods. If this standard had been effective as of the date of the financial statements included in this report, there would have been no impact on Pinnacle Financial's consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update 2016-13,  Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (CECL), which introduces the current expected credit losses methodology. Among other things, CECL requires the measurement of all expected credit losses for financial assets, including loans and held-to-maturity debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new model will require institutions to calculate all probable and estimable losses that are expected to be incurred through the financial asset's entire life through a provision for credit losses, including loans obtained as a result of any acquisition not deemed to be purchased credit deteriorated (PCD). CECL also requires the allowance for credit losses for PCD loans to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance will be added to the purchase price rather than recorded as provision expense. The disclosure of credit quality indicators related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Institutions are to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the standard is effective. The amendments are effective for fiscal years beginning after December 15, 2019. Early application is permitted for fiscal years beginning after December 15, 2018. Pinnacle Financial is currently assessing the impact of the new guidance on its consolidated financial statements. An increase in the overall allowance for loan losses is likely upon adoption in order to provide for expected credit losses over the life of the loan portfolio.

Other than those pronouncements discussed above and those which have been recently adopted, we do not believe there were any other recently issued accounting pronouncements that are expected to materially impact Pinnacle Financial.

Subsequent Events — ASC Topic 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, 2019 through the date of the issued financial statements.

Note 2. Equity method investment

A summary of BHG's financial position as of March 31, 2019 and December 31, 2018 and results of operations as of and for the three months ended March 31, 2019 and 2018, were as follows (in thousands):
 
As of
 
March 31, 2019
 
December 31, 2018
Assets
$
520,254

 
$
459,816

 
 
 
 
Liabilities
410,404

 
324,211

Equity interests
109,850

 
135,605

Total liabilities and equity
$
520,254

 
$
459,816

 
For the three months ended
March 31,
 
2019
 
2018
Revenues
$
62,817

 
$
43,750

Net income
$
27,135

 
$
19,003


At March 31, 2019, technology, trade name and customer relationship intangibles, net of related amortization, totaled $10.2 million compared to $10.7 million as of December 31, 2018. Amortization expense of $475,000 was included for the three months ended March 31, 2019 compared to $693,000 for the same period in the prior year. Accretion income of $683,000 was included in the three months ended March 31, 2019 compared to $742,000 for the same period in the prior year.


11


During the three months ended March 31, 2019, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $12.7 million in the aggregate compared to $4.3 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 three month periods ended March 31, 2019 or 2018.

Note 3.  Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2019 and December 31, 2018 are summarized as follows (in thousands):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2019:
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
48,612

 
$
5

 
$
5

 
$
48,612

U.S. government agency securities
68,219

 
25

 
1,275

 
66,969

Mortgage-backed securities
1,372,248

 
3,798

 
16,325

 
1,359,721

State and municipal securities
1,423,313

 
30,366

 
2,948

 
1,450,731

Asset-backed securities
269,941

 
1,026

 
1,957

 
269,010

Corporate notes and other
56,062

 
302

 
1,401

 
54,963

 
$
3,238,395

 
$
35,522

 
$
23,911

 
$
3,250,006

Securities held-to-maturity:
 

 
 

 
 

 
 

State and municipal securities
$
194,043

 
$
4,979

 
$
12

 
$
199,010

 
$
194,043

 
$
4,979

 
$
12

 
$
199,010

December 31, 2018:
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
30,325

 
$
—

 
$
25

 
$
30,300

U.S. government agency securities
71,456

 
49

 
1,346

 
70,159

Mortgage-backed securities
1,336,469

 
3,110

 
28,634

 
1,310,945

State and municipal securities
1,244,471

 
3,785

 
18,602

 
1,229,654

Asset-backed securities
379,107

 
820

 
4,345

 
375,582

Corporate notes and other
69,399

 
170

 
2,523

 
67,046

 
$
3,131,227

 
$
7,934

 
55,475

 
$
3,083,686

Securities held-to-maturity:
 

 
 

 
 

 
 

State and municipal securities
$
194,282

 
$
152

 
$
1,303

 
$
193,131

 
$
194,282

 
$
152

 
$
1,303

 
$
193,131

 
In the third quarter of 2018, Pinnacle Financial transferred, at fair value, $179.8 million of municipal securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized after tax losses of $2.2 million remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of discount on the transferred securities. No gains or losses were recognized at the time of the transfer.

At March 31, 2019, approximately $1.2 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, 2019, repurchase agreements comprised of secured borrowings totaled $100.7 million and were secured by $100.7 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.


12

The amortized cost and fair value of debt securities as of March 31, 2019 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, 2019:
Amortized
Cost
 
Fair
Value
 
Amortized
 Cost
 
Fair
Value
Due in one year or less
$
63,866

 
$
63,860

 
$
325

 
$
326

Due in one year to five years
22,546

 
22,533

 
5,679

 
5,678

Due in five years to ten years
103,720

 
103,272

 
7,962

 
8,003

Due after ten years
1,406,074

 
1,431,610

 
180,077

 
185,003

Mortgage-backed securities
1,372,248

 
1,359,721

 
—

 
—

Asset-backed securities
269,941

 
269,010

 
—

 
—

 
$
3,238,395

 
$
3,250,006

 
$
194,043

 
$
199,010


At March 31, 2019 and December 31, 2018, 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, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
29,824

 
$
3

 
$
248

 
$
2

 
$
30,072

 
$
5

U.S. government agency securities
6,631

 
58

 
51,280

 
1,217

 
57,911

 
1,275

Mortgage-backed securities
82,112

 
565

 
987,424

 
15,760

 
1,069,536

 
16,325

State and municipal securities
161,772

 
2,622

 
80,686

 
509

 
242,458

 
3,131

Asset-backed securities
152,062

 
1,534

 
26,675

 
423

 
178,737

 
1,957

Corporate notes
10,672

 
719

 
19,871

 
682

 
30,543

 
1,401

Total temporarily-impaired securities
$
443,073

 
$
5,501

 
$
1,166,184

 
$
18,593

 
$
1,609,257

 
$
24,094

 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury securities
$
30,054

 
$
22

 
$
246

 
$
3

 
$
30,300

 
$
25

U.S. government agency securities
13,697

 
328

 
42,539

 
1,018

 
56,236

 
1,346

Mortgage-backed securities
203,299

 
2,134

 
882,231

 
26,500

 
1,085,530

 
28,634

State and municipal securities
805,821

 
18,643

 
198,610

 
4,078

 
1,004,431

 
22,721

Asset-backed securities
268,677

 
4,118

 
11,828

 
227

 
280,505

 
4,345

Corporate notes
26,272

 
1,538

 
25,915

 
985

 
52,187

 
2,523

Total temporarily-impaired securities
$
1,347,820

 
$
26,783

 
$
1,161,369

 
$
32,811

 
$
2,509,189

 
$
59,594


The applicable dates for determining when securities were in an unrealized loss position were March 31, 2019 and December 31, 2018. 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, 2019 and December 31, 2018, but is not 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, 2019, Pinnacle Financial had approximately $24.1 million in unrealized losses on $1.6 billion of securities. The unrealized losses associated with $179.8 million of municipal securities transferred from the available-for-sale portfolio to the held-to-maturity portfolio in 2018 represent unrealized losses since the date of purchase, independent of the impact associated with changes in the cost basis upon transfer between portfolios. 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, 2019, 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, 2019.

13


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. Consistent with the investment policy, during the three months ended March 31, 2019 available-for-sale securities of approximately $126.6 million were sold and net unrealized losses, net of tax, of $1.4 million were reclassified from accumulated other comprehensive income into net income.

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 4. 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 by Pinnacle Bank 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 loans also includes owner-occupied commercial real estate which Pinnacle Financial believes 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 family 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 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. Pass rated loans include six distinct ratings categories for loans that represent specific attributes. Pinnacle Financial believes that its categories follow those used by Pinnacle Bank's primary regulators. At March 31, 2019, approximately 81.1% of Pinnacle Financial's loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating. 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 $1.0 million or more be subject to a formal credit risk review process. 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.
 


14


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:

•
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 net worth and financial 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 could 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, 2019 and December 31, 2018 (in thousands):
 
Commercial real estate - mortgage
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer
and other
Total
March 31, 2019
 
 
 
 
 
 
Pass
$
7,252,503

$
2,830,701

$
2,083,602

$
5,259,503

$
349,945

$
17,776,254

Special Mention
51,552

6,916

7,843

41,980

710

109,001

Substandard (1)
76,171

17,880

3,350

96,049

57

193,507

Substandard-nonaccrual
38,920

32,131

2,775

21,988

330

96,144

Doubtful-nonaccrual
—

—

—

—

—

—

Total loans
$
7,419,146

$
2,887,628

$
2,097,570

$
5,419,520

$
351,042

$
18,174,906

 
Commercial real estate - mortgage
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer
and other
Total
December 31, 2018
 
 
 
 
 
 
Pass
$
6,998,485

$
2,787,570

$
2,059,376

$
5,148,726

$
352,516

$
17,346,673

Special Mention
55,932

7,902

4,334

24,284

711

93,163

Substandard (1)
78,202

20,906

5,358

75,351

62

179,879

Substandard-nonaccrual
32,335

28,069

3,387

23,060

983

87,834

Doubtful-nonaccrual
—

—

—

—

—

—

Total loans
$
7,164,954

$
2,844,447

$
2,072,455

$
5,271,421

$
354,272

$
17,707,549


(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 troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $190.3 million at March 31, 2019, compared to $176.3 million at December 31, 2018.

Loans acquired with deteriorated credit quality are recorded pursuant to the provisions of ASC 310-30, and are referred to as purchase credit impaired loans. The following table provides a rollforward of purchase credit impaired loans from December 31, 2018 through March 31, 2019 (in thousands):
 
Gross Carrying Value
Accretable
Yield
Nonaccretable
Yield
Net Carrying
Value
December 31, 2018
$
42,837

$
(114
)
$
(17,394
)
$
25,329

Acquisition
—

—

—

—

Year-to-date settlements
(2,951
)
12

1,312

(1,627
)
March 31, 2019
$
39,886

$
(102
)
$
(16,082
)
$
23,702



15


Certain of 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.

Impaired loans include nonaccrual loans, troubled debt restructurings, and other loans deemed to be impaired but that continue to accrue interest. The following tables detail the recorded investment, unpaid principal balance and related allowance of Pinnacle Financial's impaired loans at March 31, 2019 and December 31, 2018 by loan classification (in thousands):
 
At March 31, 2019
 
At December 31, 2018
 
Recorded investment
Unpaid principal balances
Related allowance
 
Recorded investment
Unpaid principal balances
Related allowance
Impaired loans with an allowance:
 
 
 
 
 
 
Commercial real estate – mortgage
$
18,539

$
18,543

$
1,521

 
$
14,114

$
14,124

$
724

Consumer real estate – mortgage
24,668

24,784

2,381

 
19,864

19,991

1,443

Construction and land development
868

864

55

 
581

579

28

Commercial and industrial
8,802

8,773

1,461

 
9,252

9,215

1,441

Consumer and other
331

352

100

 
983

1,005

328

Total
$
53,208

$
53,316

$
5,518

 
$
44,794

$
44,914

$
3,964

 
 
 
 
 
 
 
 
Impaired loans without an allowance:
 

 

 
 

 

 

Commercial real estate – mortgage
$
16,674

$
16,678

$
—

 
$
14,724

$
14,739

$
—

Consumer real estate – mortgage
10,431

10,466

—

 
7,247

7,271

—

Construction and land development
—

—

—

 
1,786

1,786

—

Commercial and industrial
15,691

15,712

—

 
14,595

14,627

—

Consumer and other
—

—

—

 
—

—

—

Total
$
42,796

$
42,856

$
—

 
$
38,352

$
38,423

$
—

 
 
 
 
 
 
 
 
Total impaired loans
$
96,004

$
96,172

$
5,518

 
$
83,146

$
83,337

$
3,964


For the three months ended March 31, 2019, the average balance of impaired loans, was $89.6 million, compared to $64.2 million for the same period in 2018. Pinnacle Financial's policy is that the accrual of interest income will be discontinued 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 loans are placed on nonaccrual status, Pinnacle Financial reverses 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. As detailed in the following table, Pinnacle Financial recognized $87,000 in interest income from cash payments received on nonaccrual loans during the three months ended March 31, 2019 compared to $101,000 during the three months ended March 31, 2018. Had these nonaccruing loans been on accruing status, interest income would have been $1.6 million higher for the three months ended March 31, 2019 compared to $1.4 million higher for the three months ended March 31, 2018.


16


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, 2019 and 2018, respectively, of impaired loans by loan classification (in thousands):
 
For the three months ended
March 31,
 
2019
 
2018
 
Average recorded investment
Interest income recognized
 
Average recorded investment
Interest income recognized
Impaired loans with an allowance:
 
 
 
 
 
Commercial real estate – mortgage
$
16,327

$
—

 
$
5,119

$
—

Consumer real estate – mortgage
22,266

—

 
8,792

—

Construction and land development
724

—

 
1,451

—

Commercial and industrial
9,027

—

 
11,220

—

Consumer and other
657

—

 
390

—

Total
$
49,001

$
—

 
$
26,972

$
—

 
 
 
 
 
 
Impaired loans without an allowance:
 

 

 
 

 

Commercial real estate – mortgage
$
15,699

$
87

 
$
15,375

$
101

Consumer real estate – mortgage
8,839

—

 
4,369

—

Construction and land development
893

—

 
1,322

—

Commercial and industrial
15,143

—

 
16,185

—

Consumer and other
—

—

 
—

—

Total
$
40,574

$
87

 
$
37,251

$
101

 
 
 
 
 
 
Total impaired loans
$
89,575

$
87

 
$
64,223

$
101


At March 31, 2019 and December 31, 2018, there were $5.5 million and $5.9 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. Troubled commercial loans are restructured by specialists within Pinnacle Bank's Special Assets Group, and all restructurings are approved by committees and/or credit officers separate and apart from the normal loan approval process.  These specialists are charged with reducing Pinnacle Financial's overall risk and exposure to loss in the event of a restructuring by obtaining some or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral release terms, additional collateral or other similar strategies.

During the three months ended March 31, 2019 and 2018, there were no additional troubled debt restructurings or troubled debt restructurings that subsequently defaulted within twelve months of the restructuring. At both March 31, 2019 and December 31, 2018, the allowance for loan losses included no allowance specifically related to accruing troubled debt restructurings, which are classified as impaired loans pursuant to U.S. GAAP, but which continued to accrue interest at contractual rates at those dates.

In addition to the loan metrics above, Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industries. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications.  Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at March 31, 2019 with the comparative exposures for December 31, 2018 (in thousands):
 
March 31, 2019
 
 
 
Outstanding Principal Balances
 
Unfunded Commitments
 
Total exposure
 
Total Exposure at
December 31, 2018
Lessors of nonresidential buildings
$
3,208,737

 
$
894,936

 
$
4,103,673

 
$
3,932,059

Lessors of residential buildings
1,038,462

 
335,860

 
1,374,322

 
1,484,697

New Housing For-Sale Builders
509,750

 
586,983

 
1,096,733

 
1,100,989

Hotels (except Casino Hotels) and Motels
825,627

 
137,885

 
963,512

 
920,001



17


Additionally, Pinnacle Financial monitors two ratios regarding construction and commercial real estate lending as part of its concentration management processes.  Both ratios are calculated by dividing certain types of loan balances for each of the two categories by Pinnacle Bank’s total risk-based capital. At March 31, 2019 and December 31, 2018, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were 84.1% and 85.2%, respectively. Non-owner occupied commercial real estate and multifamily loans (including construction and land development loans) as a percentage of total risk-based capital were 282.5% and 277.7% as of March 31, 2019 and December 31, 2018, respectively. Banking regulations have established guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-owner occupied ratio of less than 300% of total risk-based capital. When a bank’s ratios are in excess of one or both of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. At March 31, 2019, Pinnacle Bank was within the 100% and 300% guidelines and has established what it believes to be appropriate controls to monitor its lending in these areas as it aims to keep the level of these loans to below the 100% and 300% thresholds.

The table below presents past due balances by loan classification and segment at March 31, 2019 and December 31, 2018, allocated between accruing and nonaccrual status (in thousands):
 
Accruing
 
Nonaccruing
 
 
March 31, 2019
30-89 days past due and accruing
90 days or more past due and accruing
Total past due and accruing
Current and accruing
Purchase credit impaired
 
Nonaccrual (1)
Nonaccruing purchase credit impaired
 
Total loans
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Owner-occupied
$
8,302

$
—

$
8,302

$
2,583,109

$
2,577

 
$
22,436

$
1,117

 
$
2,617,541

All other
6,569

—

6,569

4,774,555

5,119

 
12,601

2,761

 
4,801,605

Consumer real estate – mortgage
10,982

39

11,021

2,840,793

3,683

 
27,336

4,795

 
2,887,628

Construction and land development
795

—

795

2,092,563

1,437

 
868

1,907

 
2,097,570

Commercial and industrial
9,068

1,323

10,391

5,386,830

306

 
21,993

—

 
5,419,520

Consumer and other
2,736

620

3,356

347,356

—

 
330

—

 
351,042

Total
$
38,452

$
1,982

$
40,434

$
18,025,206

$
13,122

 
$
85,564

$
10,580

 
$
18,174,906

 
Accruing
 
Nonaccruing
 
 
December 31, 2018
30-89 days past due and accruing
90 days or more past due and accruing
Total past due and accruing
Current and accruing
Purchase credit impaired
 
Nonaccrual (1)
Nonaccruing purchase credit impaired
 
Total loans
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
Owner-occupied
$
10,170

$
—

$
10,170

$
2,623,700

$
2,664

 
$
16,025

$
874

 
$
2,653,433

All other
1,586

—

1,586

4,488,840

5,659

 
12,634

2,802

 
4,511,521

Consumer real estate – mortgage
18,059

—

18,059

2,794,630

3,689

 
22,564

5,505

 
2,844,447

Construction and land development
3,759

—

3,759

2,063,201

2,108

 
2,020

1,367

 
2,072,455

Commercial and industrial
21,451

1,082

22,533

5,225,205

623

 
23,022

38

 
5,271,421

Consumer and other
3,276

476

3,752

349,537

—

 
983

—

 
354,272

Total
$
58,301

$
1,558

$
59,859

$
17,545,113

$
14,743

 
$
77,248

$
10,586

 
$
17,707,549


(1)
Approximately $47.4 million and $52.5 million of nonaccrual loans as of March 31, 2019 and December 31, 2018, respectively, were performing pursuant to their contractual terms at those dates.


18


The following table details the changes in the allowance for loan losses for the three months ended March 31, 2019 and 2018, respectively, by loan classification (in thousands):
 
Commercial real estate - mortgage
Consumer
 real estate - mortgage
Construction and land development
Commercial and industrial
Consumer
and other
Unallocated
Total
Three months ended March 31, 2019:
 
 
 
 
 
 
 
Balance at December 31, 2018
$
26,946

$
7,670

$
11,128

$
31,731

$
5,423

$
677

$
83,575

Charged-off loans
(534
)
(350
)
—

(3,352
)
(1,832
)
—

(6,068
)
Recovery of previously charged-off loans
72

369

122

1,598

342

—

2,503

Provision for loan losses
3,683

680

(335
)
2,722

870

(436
)
7,184

Balance at March 31, 2019
$
30,167

$
8,369

$
10,915

$
32,699

$
4,803

$
241

$
87,194

 
 
 
 
 
 
 
 
Three months ended March 31, 2018:
 

 

 

 

 

 

 

Balance at December 31, 2017
$
21,188

$
5,031

$
8,962

$
24,863

$
5,874

$
1,322

$
67,240

Charged-off loans
(728
)
(336
)
(2
)
(2,540
)
(5,063
)
—

(8,669
)
Recovery of previously charged-off loans
1,396

666

565

888

1,187

—

4,702

Provision for loan losses
832

(261
)
591

3,437

3,478

(1,146
)
6,931

Balance at March 31, 2018
$
22,688

$
5,100

$
10,116

$
26,648

$
5,476

$
176

$
70,204


The following table details the allowance for loan losses and recorded investment in loans by loan classification and by impairment evaluation method as of March 31, 2019 and December 31, 2018, respectively (in thousands):
 
Commercial real estate - mortgage
Consumer
real estate - mortgage
Construction and land development
Commercial and industrial
Consumer
and other
Unallocated
Total
March 31, 2019
 

 

 

 

 

 

 

Allowance for Loan Losses:
 

 

 

 

 

 

 

Collectively evaluated for impairment
$
28,646

$
5,988

$
10,860

$
31,238

$
4,703



$
81,435

Individually evaluated for impairment
1,521

2,381

55

1,461

100



5,518

Loans acquired with deteriorated credit quality(1)
—

—

—

—

—



—

Total allowance for loan losses
$
30,167

$
8,369

$
10,915

$
32,699

$
4,803

$
241

$
87,194

 
 
 
 
 
 
 
 
Loans:
 

 

 

 

 

 

 

Collectively evaluated for impairment
$
7,372,359

$
2,844,051

$
2,093,358

$
5,394,721

$
350,711

 

$
18,055,200

Individually evaluated for impairment
35,213

35,099

868

24,493

331

 

96,004

Loans acquired with deteriorated credit quality
11,574

8,478

3,344

306

—

 

23,702

Total loans
$
7,419,146

$
2,887,628

$
2,097,570

$
5,419,520

$
351,042

 

$
18,174,906

 
 
 
 
 
 
 
 
December 31, 2018
 

 

 

 

 

 

 

Allowance for Loan Losses:
 

 

 

 

 

 

 

Collectively evaluated for impairment
$
26,222

$
6,227

$
11,100

$
30,290

$
5,095



$
78,934

Individually evaluated for impairment
724

1,443

28

1,441

328



3,964

Loans acquired with deteriorated credit quality(1)
—

—

—

—

—



—

Total allowance for loan losses
$
26,946

$
7,670

$
11,128

$
31,731

$
5,423

$
677

$
83,575

 
 
 
 
 
 
 
 
Loans:
 

 

 

 

 

 

 

Collectively evaluated for impairment
$
7,124,117

$
2,808,142

$
2,066,613

$
5,246,913

$
353,289

 

$
17,599,074

Individually evaluated for impairment
28,838

27,111

2,367

23,847

983

 

83,146

Loans acquired with deteriorated credit quality
11,999

9,194

3,475

661

—

 

25,329

Total loans
$
7,164,954

$
2,844,447

$
2,072,455

$
5,271,421

$
354,272

 

$
17,707,549

(1) Loans acquired with deteriorated credit quality are recorded at fair value at the time of acquisition. An allowance for loan losses is recorded only in the event of subsequent credit deterioration.


19


The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The allowance for loan losses for purchased loans is calculated similarly to the method utilized for legacy Pinnacle Bank loans. Pinnacle Financial's accounting policy is to compare the computed allowance for loan losses for purchased loans on a loan-by-loan basis to any remaining fair value adjustment. If the computed allowance is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a charge to the provision for loan losses.

At March 31, 2019, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $38.4 million to current directors, executive officers, and their related entities, of which $18.1 million had been drawn upon. At December 31, 2018, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $37.9 million to directors, executive officers, and their related entities, of which approximately $18.3 million had been drawn upon. None of these loans to directors, executive officers, and their related entities were impaired at March 31, 2019 or December 31, 2018.

At March 31, 2019, Pinnacle Financial had approximately $14.5 million in commercial loans held for sale compared to $16.0 million at December 31, 2018, which primarily included commercial real estate and apartment loans originated for sale to a third-party as part of a multi-family loan program. Such loans are closed under a pass-through commitment structure wherein Pinnacle Bank's loan commitment to the borrower is the same as the third party's take-out commitment to Pinnacle Bank and the third party purchase typically occurs within thirty days of Pinnacle Bank closing with the borrowers.

Residential Lending

At March 31, 2019, Pinnacle Financial had approximately $45.5 million of mortgage loans held-for-sale compared to approximately $31.8 million at December 31, 2018. Total loan volumes sold during the three months ended March 31, 2019 were approximately $193.8 million compared to approximately $247.1 million for the three months ended March 31, 2018. During the three months ended March 31, 2019, Pinnacle Financial recognized $4.9 million in gains on the sale of these loans, net of commissions paid, compared to $3.7 million, net of commissions paid, during the three months ended March 31, 2018.

These mortgage loans held-for-sale are originated internally and are primarily to borrowers in Pinnacle Bank's geographic markets. These sales are typically on a mandatory basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines.
 
Each purchaser of a mortgage loan held-for-sale has specific guidelines and criteria for sellers of loans and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require Pinnacle Bank to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties, Pinnacle Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan. To date, Pinnacle Bank's liability pursuant to the terms of these representations and warranties has been insignificant to Pinnacle Bank.

Note 5. Income Taxes

ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods.
 
The unrecognized tax benefit related to uncertain tax positions related to state income tax filings was $5.1 million at March 31, 2019 compared to $2.8