PINNACLE FINANCIAL PARTNERS INC - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - PINNACLE FINANCIAL PARTNERS INC	ex31_1.htm
EXCEL - IDEA: XBRL DOCUMENT - PINNACLE FINANCIAL PARTNERS INC	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - PINNACLE FINANCIAL PARTNERS INC	ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - PINNACLE FINANCIAL PARTNERS INC	ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - PINNACLE FINANCIAL PARTNERS INC	ex31_2.htm

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 September 30, 2014

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

, 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 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 x

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting 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 companyo

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

As of November 6, 2014 there were 35,660,470 shares of common stock, $1.00 par value per share, issued and outstanding.

Pinnacle Financial Partners, Inc.

Report on Form 10-Q

September 30, 2014

TABLE OF CONTENTS	Page No.

PART I – Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)	4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3. Quantitative and Qualitative Disclosures about Market Risk	61
Item 4. Controls and Procedures	61

PART II – Other Information:
Item 1. Legal Proceedings	62
Item 1A. Risk Factors	62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3. Defaults Upon Senior Securities	64
Item 4. Mine Safety Disclosures	64
Item 5. Other Information	64
Item 6. Exhibits	65
Signatures	66

FORWARD-LOOKING STATEMENTS

Certain of the statements in this quarterly report on Form 10-Q may constitute forward-looking statements within the meaning of 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," "goal," "objective," "intend," "plan," "believe," "should," "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. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Such risks include, without limitation, (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 to grow its 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 and the Knoxville 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) the development of any new market other than Nashville or Knoxville; (xii) a merger or acquisition; (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 Financial) 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) approval of the declaration of any dividend by Pinnacle Financial's board of directors, (xix) the vulnerability of our network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches, (xx) the possibility of increased compliance costs as a result of increased regulatory oversight and the development of additional banking products for our corporate and consumer clients, and (xxi) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2014 and Pinnacle Financial's most recent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on May 2, 2014 and August 1, 2014. 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, whether as a result of new information, future events or otherwise.

Item 1.

Part I. Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2014			December 31, 2013
ASSETS
Cash and noninterest-bearing due from banks	$	64,743,501		$	79,785,004
Interest-bearing due from banks		148,068,613			124,509,486
Federal funds sold and other		4,757,438			4,644,247
Cash and cash equivalents		217,569,552			208,938,737

Securities available-for-sale, at fair value		714,920,906			693,456,314
Securities held-to-maturity (fair value of $38,112,282 and $38,817,467 at
September 30, 2014 and December 31, 2013, respectively)		38,106,986			39,795,649
Mortgage loans held-for-sale		19,130,001			12,850,339

Loans		4,421,250,676			4,144,493,486
Less allowance for loan losses		(66,159,575	)		(67,969,693	)
Loans, net		4,355,091,101			4,076,523,793

Premises and equipment, net		71,551,257			72,649,574
Other investments		33,599,454			33,226,195
Accrued interest receivable		16,949,949			15,406,389
Goodwill		243,533,067			243,651,006
Core deposits and other intangible assets		3,129,236			3,840,750
Other real estate owned		12,329,278			15,226,136
Other assets		139,792,704			148,210,975
Total assets	$	5,865,703,491		$	5,563,775,857
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	1,357,934,212		$	1,167,414,487
Interest-bearing		860,781,126			884,294,802
Savings and money market accounts		1,983,237,139			1,962,714,398
Time		460,378,271			519,049,037
Total deposits		4,662,330,748			4,533,472,724
Securities sold under agreements to repurchase		64,772,511			70,465,326
Federal Home Loan Bank advances		215,523,517			90,637,328
Subordinated debt and other borrowings		96,783,292			98,658,292
Accrued interest payable		622,908			792,703
Other liabilities		43,736,364			46,041,823
Total liabilities		5,083,769,340			4,840,068,196
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;
35,654,541 and 35,221,941 shares issued and outstanding
at September 30, 2014 and December 31, 2013, respectively		35,654,541			35,221,941
Additional paid-in capital		558,070,636			550,212,135
Retained earnings		185,496,234			142,298,199
Accumulated other comprehensive gain (loss), net of taxes		2,712,740			(4,024,614	)
Total stockholders' equity		781,934,151			723,707,661
Total liabilities and stockholders' equity	$	5,865,703,491		$	5,563,775,857

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
Interest income:
Loans, including fees	$	47,510,761	$	42,778,193		$	136,296,125	$	126,441,555
Securities:
Taxable		3,469,311		3,538,446			10,817,854		10,860,146
Tax-exempt		1,533,029		1,601,067			4,694,438		4,741,440
Federal funds sold and other		268,455		259,536			828,335		834,748
Total interest income		52,781,556		48,177,242			152,636,752		142,877,889

Interest expense:
Deposits		2,435,426		2,708,376			7,512,428		9,076,757
Securities sold under agreements to repurchase		38,702		55,601			100,546		204,240
Federal Home Loan Bank advances and other borrowings		770,367		840,318			2,352,501		2,666,721
Total interest expense		3,244,495		3,604,295			9,965,475		11,947,718
Net interest income		49,537,061		44,572,947			142,671,277		130,930,171
Provision for loan losses		851,194		684,956			1,593,180		5,631,408
Net interest income after provision for loan losses		48,685,867		43,887,991			141,078,097		125,298,763

Noninterest income:
Service charges on deposit accounts		2,912,617		2,797,342			8,669,229		7,818,452
Investment services		2,353,118		1,955,652			6,645,362		5,643,690
Insurance sales commissions		1,037,043		1,021,430			3,566,835		3,522,430
Gain on mortgage loans sold, net		1,352,976		1,326,469			4,256,451		5,130,411
Gain (loss) on sale of investment securities		29,221		(1,441,234	)		29,221		(1,466,475	)
Trust fees2983		1,109,278		931,543			3,326,877		2,756,079
Other noninterest income		4,094,200		4,796,079			11,724,284		11,210,770
Total noninterest income		12,888,453		11,387,281			38,218,259		34,615,357

Noninterest expense:
Salaries and employee benefits		21,721,663		21,009,680			65,244,092		61,152,789
Equipment and occupancy		6,477,076		5,412,865			18,103,458		15,730,074
Other real estate expense		417,197		699,211			1,294,355		2,810,779
Marketing and other business development		945,805		720,866			2,919,696		2,498,708
Postage and supplies		569,707		581,433			1,674,515		1,690,588
Amortization of intangibles		236,163		246,675			711,514		1,015,848
Other noninterest expense		3,991,944		4,652,161			11,959,708		11,725,844
Total noninterest expense		34,359,555		33,322,891			101,907,338		96,624,630
Income before income taxes		27,214,765		21,952,381			77,389,018		63,289,490
Income tax expense		9,017,943		7,305,431			25,655,089		20,883,883
Net income	$	18,196,822	$	14,646,950		$	51,733,929	$	42,405,607
Per share information:
Basic net income per common share	$	0.52	$	0.43		$	1.49	$	1.24
Diluted net income per common share	$	0.52	$	0.42		$	1.48	$	1.23
Weighted average shares outstanding:
Basic		34,762,206		34,282,899			34,688,064		34,148,562
Diluted		35,155,224		34,606,567			35,069,764		34,415,776

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income	$	18,196,822		$	14,646,950		$	51,733,929		$	42,405,607
Other comprehensive income (loss), net of tax:
Change in fair value on available-for-sale securities, net of tax		(739,313	)		(1,191,495	)		9,311,318			(17,396,100	)
Change in fair value of cash flow hedges, net of tax		273,312			(421,473	)		(2,556,206	)		2,925,895
Net gain (loss) on sale of investment securities reclassified from other comprehensive income into net income, net of tax		(17,758	)		875,838			(17,758	)		891,177
Total comprehensive income	$	17,713,063		$	13,909,820		$	58,471,283		$	28,826,579

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

	Common Stock						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comp. Income (Loss), net			Total Stockholders' Equity
	Shares			Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comp. Income (Loss), net			Total Stockholders' Equity
Balances, December 31, 2012		34,696,597		$	34,696,597		$	543,760,439		$	87,386,689		$	13,227,634		$	679,071,359
Exercise of employee common stock
options and related tax benefits		191,928			191,928			2,372,601			-			-			2,564,529
Issuance of restricted common shares,
net of forfeitures		300,718			300,718			(300,718	)		-			-			-
Restricted shares withheld for taxes		(55,510	)		(55,510	)		(1,218,326	)		-			-			(1,273,836	)
Compensation expense for restricted shares		-			-			3,014,761			-			-			3,014,761
Compensation expense for stock options		-			-			12,470			-			-			12,470
Net income		-			-			-			42,405,607			-			42,405,607
Other comprehensive loss		-			-			-			-			(13,579,028	)		(13,579,028	)
Balances, September 30, 2013		35,133,733		$	35,133,733		$	547,641,227		$	129,792,296		$	(351,394	)	$	712,215,862

Balances, December 31, 2013		35,221,941		$	35,221,941		$	550,212,135		$	142,298,199		$	(4,024,614	)	$	723,707,661
Exercise of employee common stock
options and related tax benefits		218,108			218,108			6,347,045			-			-			6,565,153
Common dividends paid		-			-			-			(8,535,894	)					(8,535,894	)
Issuance of restricted common shares,
net of forfeitures		281,416			281,416			(281,416	)		-			-			-
Restricted shares withheld for taxes		(66,924	)		(66,924	)		(2,177,101	)		-			-			(2,244,025	)
Compensation expense for restricted shares		-			-			3,969,973			-			-			3,969,973
Net income		-			-			-			51,733,929			-			51,733,929
Other comprehensive income		-			-			-			-			6,737,354			6,737,354
Balances, September 30, 2014		35,654,541		$	35,654,541		$	558,070,636		$	185,496,234		$	2,712,740		$	781,934,151

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2014			2013
Operating activities:
Net income	$	51,733,929		$	42,405,607
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities		3,353,794			3,444,484
Depreciation and amortization		6,987,533			6,918,189
Provision for loan losses		1,593,180			5,631,408
Gain on mortgage loans sold, net		(4,256,451	)		(5,130,411	)
(Gain) loss on sale of investment securities		(29,221	)		1,466,475
Stock-based compensation expense		3,969,973			3,027,231
Deferred tax benefit		(361,424	)		(51,547	)
(Gains) losses on dispositions of other real estate and other investments		(92,577	)		2,889,742
Excess tax benefit from stock compensation		(1,526,772	)		(232,776	)
Mortgage loans held for sale:
Loans originated		(242,784,212	)		(320,203,874	)
Loans sold		240,761,000			349,567,000
Decrease in other assets		3,978,907			12,875,979
Decrease in other liabilities		(2,526,028	)		(3,105,860	)
Net cash provided by operating activities		60,801,631			99,501,647

Investing activities:
Activities in securities available-for-sale:
Purchases		(97,806,318	)		(182,289,872	)
Sales		2,360,478			1,414,628
Maturities, prepayments and calls		86,531,771			111,542,890
Activities in securities held-to-maturity:
Purchases		-			(2,452,919	)
Maturities, prepayments and calls		1,094,966			2,982,450
Increase in loans, net		(283,931,233	)		(269,103,013	)
Purchases of software, premises and equipment		(3,991,211	)		(4,371,613	)
Purchase of bank owned life insurance		-			(30,000,000	)
Decrease (increase) in other investments		31,553			(3,611,128	)
Net cash used in investing activities		(295,709,994	)		(375,888,577	)

Financing activities:
Net increase in deposits		128,858,023			318,355,000
Net decrease in securities sold under agreements to repurchase		(5,692,815	)		(30,635,547	)
Advances from Federal Home Loan Bank:
Issuances		585,000,000			624,000,000
Payments/maturities		(460,063,036	)		(584,128,201	)
Decrease in other borrowings		(1,875,000	)		(6,875,000	)
Exercise of common stock options and stock appreciation rights,
net of repurchase of restricted shares		4,321,128			1,290,692
Excess tax benefit from stock compensation		1,526,772			232,776
Common stock dividends paid		(8,535,894	)		-
Net cash provided by financing activities		243,539,178			322,239,720
Net decrease in cash and cash equivalents		8,630,815			45,852,790
Cash and cash equivalents, beginning of period		208,938,737			165,288,669
Cash and cash equivalents, end of period	$	217,569,552		$	211,141,459

See accompanying notes to consolidated financial statements (unaudited).

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 Bank provides a full range of banking services in its primary market areas of the Nashville-Davidson-Murfreesboro-Franklin, Tennessee and Knoxville, Tennessee Metropolitan Statistical Areas.

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 2013 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, any potential impairment of intangible assets, including goodwill and the valuation of deferred tax assets, other real estate owned, and our investment portfolio, including other-than-temporary impairment. These financial statements should be read in conjunction with Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2013. 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, 2013.

Recently Adopted Accounting Pronouncements — In February 2013, the FASB issued Accounting Standards Update 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" which provides disclosure guidance on amounts reclassified out of AOCI by component. The adoption did not have any impact on our financial position or results of operations but has impacted our financial statement disclosure. As shown on the statement of comprehensive income for the three and nine months ended September 30, 2014, Pinnacle Financial reclassifed net losses of approximately $18,000 out of other comprehensive income into loss on the sale of investment securities, net of tax, compared to reclassifications of net losses for the three and nine months ended September 30, 2013, of approximately $876,000 and $891,000, net of tax, respectively.

Goodwill — ASC 350-35-3 provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the quantitative two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). Based on the qualitative assessment, if an entity determines that the fair value of a reporting unit is more than its carrying amount, the quantitative two-step goodwill impairment test is not required. Pinnacle Financial performed its annual qualitative assessment as of September 30, 2014. No impairment was noted as a result of this assessment.

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the nine months ended September 30, 2014 and 2013 was as follows:

	For the nine months ended September 30,
	2014		2013
Cash Transactions:
Interest paid	$	10,186,045	$	12,434,753
Income taxes paid, net		22,150,000		20,850,009
Noncash Transactions:
Loans charged-off to the allowance for loan losses		5,634,327		14,088,656
Loans foreclosed upon and transferred to other real estate owned		1,672,459		3,491,421
Loans foreclosed upon and transferred to other repossessed assets		1,398,823		366,072
Available-for-sale securities transferred to held-to-maturity portfolio		-		39,959,647

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 and nine months ended September 30, 2014 and 2013:

	For the three months ended September 30				For the nine months ended September 30,
	2014		2013		2014		2013
Basic net income per share calculation:
Numerator - Net income	$	18,196,822	$	14,646,950	$	51,733,929	$	42,405,607

Denominator - Average common shares outstanding		34,762,206		34,282,899		34,688,064		34,148,562
Basic net income per share	$	0.52	$	0.43	$	1.49	$	1.24

Diluted net income per share calculation:
Numerator – Net income	$	18,196,822	$	14,646,950	$	51,733,929	$	42,405,607

Denominator - Average common shares outstanding		34,762,206		34,282,899		34,688,064		34,148,562
Dilutive shares contingently issuable		393,018		323,668		381,700		267,214
Average diluted common shares outstanding		35,155,224		34,606,567		35,069,764		34,415,776
Diluted net income per share	$	0.52	$	0.42	$	1.48	$	1.23

Note 2. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at September 30, 2014 and December 31, 2013 are summarized as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2014:
Securities available-for-sale:
U.S. Treasury securities	$	-	$	-	$	-	$	-
U.S. government agency securities		117,053		14		5,969		111,098
Mortgage-backed agency securities		429,834		10,086		4,266		435,654
State and municipal securities		135,043		8,407		255		143,195
Asset-backed securities		13,891		-		125		13,766
Corporate notes and other		10,202		1,007		1		11,208
	$	706,023	$	19,514	$	10,616	$	714,921
Securities held-to-maturity:
State and municipal securities	$	38,107	$	186	$	181	$	38,112
	$	38,107	$	186	$	181	$	38,112

December 31, 2013:
Securities available-for-sale:
U.S. Treasury securities	$	-	$	-	$	-	$	-
U.S. government agency securities		117,282		13		13,422		103,873
Mortgage-backed agency securities		411,967		9,771		8,802		412,936
State and municipal securities		143,763		5,504		856		148,411
Asset-backed securities		17,262		-		255		17,007
Corporate notes and other		10,218		1,018		7		11,229
	$	700,492	$	16,306		23,342	$	693,456
Securities held-to-maturity:
State and municipal securities	$	39,796	$	72	$	1,051	$	38,817
	$	39,796	$	72	$	1,051	$	38,817

At September 30, 2014, approximately $598.9 million of securities within Pinnacle Financial's investment portfolio were either pledged to secure public funds and other deposits or securities sold under agreements to repurchase.

The amortized cost and fair value of debt securities as of September 30, 2014 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
September 30, 2014:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	7,676	$	7,725	$	1,770	$	1,776
Due in one year to five years		38,854		40,900		16,485		16,562
Due in five years to ten years		152,474		154,797		13,323		13,263
Due after ten years		63,294		62,079		6,529		6,511
Mortgage-backed agency securities		429,834		435,654		-		-
Asset-backed securities		13,891		13,766		-		-
	$	706,023	$	714,921	$	38,107	$	38,112

At September 30, 2014 and December 31, 2013, the following investments had unrealized losses. The table below classifies these investments according to the time period 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 September 30, 2014:

U.S. Treasury securities	$	-	$	-	$	-	$	-	$	-	$	-
U.S. government agency securities		3,097		5		101,336		5,964		104,433		5,969
Mortgage-backed agency securities		89,115		457		104,285		3,809		193,400		4,266
State and municipal securities		1,175		14		22,918		422		24,093		436
Asset-backed securities		-		-		13,766		125		13,766		125
Corporate notes		250		-		155		1		405		1
Total temporarily-impaired securities	$	93,637	$	476	$	242,460	$	10,321	$	336,097	$	10,797

At December 31, 2013:

U.S. Treasury securities	$	-	$	-	$	-	$	-	$	-	$	-
U.S. government agency securities		8,742		22		92,869		13,400		101,611		13,422
Mortgage-backed agency securities		157,262		3,913		42,903		4,889		200,165		8,802
State and municipal securities		46,282		1,351		3,798		555		50,080		1,906
Asset-backed securities		-		-		17,006		255		17,006		255
Corporate notes		946		6		159		2		1,105		8
Total temporarily-impaired securities	$	213,232	$	5,292	$	156,735	$	19,101	$	369,967	$	24,393

The applicable dates for determining when securities are in an unrealized loss position are September 30, 2014 and December 31, 2013. 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 September 30, 2014 and December 31, 2013, but is in the "Investments with an Unrealized Loss of less than 12 months" category above.

As shown in the tables above, at September 30, 2014, Pinnacle Financial had approximately $10.8 million in unrealized losses on $336.1 million of securities. The unrealized losses associated with these investment securities are driven by changes in interest rates and the unrealized loss is recorded as a component of equity, net of taxes. These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers. 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. If a shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.

Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at September 30, 2014, 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 September 30, 2014.

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.

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. There is also 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 3. 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).

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 September 30, 2014, approximately 75% of our 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, our credit procedures require that every risk rated loan of $500,000 or more be subject to a formal credit risk review process. Each loan's risk rating is also subject to review by our independent loan review department, which reviews a substantial portion of our risk rated portfolio annually. Independent loan reviews are also performed of loans in targeted higher-risk portfolio segments.

The following table presents our 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 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 September 30, 2014 and December 31, 2013 (in thousands):

	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
September 30, 2014
Accruing loans
Pass	$	1,441,581	$	680,485	$	283,725	$	1,640,609	$	188,486	$	4,234,886
Special Mention		7,834		2,660		26,293		32,674		143		69,604
Substandard ⁽¹⁾		21,968		13,496		6,598		45,440		1		87,503
Total		1,471,383		696,641		316,616		1,718,723		188,630		4,391,993
Impaired loans
Nonaccrual loans
Substandard-nonaccrual		7,486		6,248		5,474		1,948		496		21,652
Doubtful-nonaccrual		-		-		-		-		-		-
Total nonaccrual loans		7,486		6,248		5,474		1,948		496		21,652
Troubled debt restructurings⁽²⁾
Pass		-		64		-		253		79		396
Special Mention		-		815		-		-		200		1,015
Substandard		-		3,033		-		3,162		-		6,195
Total troubled debt restructurings		-		3,912		-		3,415		279		7,606
Total impaired loans		7,486		10,160		5,474		5,363		775		29,258
Total loans	$	1,478,869	$	706,801	$	322,090	$	1,724,086	$	189,405	$	4,421,251


December 31, 2013
Accruing loans
Pass	$	1,332,387	$	670,412	$	275,876	$	1,557,923	$	143,032	$	3,979,630
Special Mention		8,282		1,824		31,835		20,065		-		62,006
Substandard ⁽¹⁾		20,296		14,107		7,297		23,174		154		65,028
Total		1,360,965		686,343		315,008		1,601,162		143,186		4,106,664
Impaired loans
Nonaccrual loans
Substandard-nonaccrual		9,017		5,289		1,070		2,565		242		18,183
Doubtful-nonaccrual		-		-		-		-		-		-
Total nonaccrual loans		9,017		5,289		1,070		2,565		242		18,183
Troubled debt restructurings⁽²⁾
Pass		2,564		1,666		113		320		276		4,939
Special Mention		-		-		-		-		-		-
Substandard		10,889		2,318		-		1,500		-		14,707
Total troubled debt restructurings		13,453		3,984		113		1,820		276		19,646
Total impaired loans		22,470		9,273		1,183		4,385		518		37,829
Total loans	$	1,383,435	$	695,616	$	316,191	$	1,605,547	$	143,704	$	4,144,493

(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 $87.5 million at September 30, 2014, compared to $65.0 million at December 31, 2013.

(2)	Troubled debt restructurings are presented as impaired loans; however, they continue to accrue interest at modified contractual rates.

At September 30, 2014 and December 31, 2013, all loans classified as nonaccrual were deemed to be impaired. The principal balances of these nonaccrual loans amounted to $21.7 million and $18.2 million at September 30, 2014 and December 31, 2013, respectively, and are included in the tables above. For the nine months ended September 30, 2014, the average balance of nonaccrual loans was $22.1 million as compared to $21.5 million for the twelve months ended December 31, 2013. At the date such 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 $205,000 in interest income from cash payments received on nonaccrual loans during the three and nine months ended September 30, 2014 and no interest income from cash payments received on nonaccrual loans during the year ended December 31, 2013. Had these remaining nonaccrual loans been on accruing status, interest income would have been higher by $682,000 for the nine months ended September 30, 2014 and by $901,000 for the nine months ended September 30, 2013.

The following table details the recorded investment, unpaid principal balance and related allowance and average recorded investment of our nonaccrual loans at September 30, 2014 and December 31, 2013 by loan classification and the amount of interest income recognized on a cash basis throughout the fiscal year-to-date period then ended, respectively, on these loans that remain on the balance sheets (in thousands):

	At September 30, 2014						For the nine months ended September 30, 2014
	Recorded investment		Unpaid principal balance		Related allowance⁽¹⁾		Average recorded investment		Interest income recognized
Collateral dependent nonaccrual loans:
Commercial real estate – mortgage	$	5,679	$	6,363	$	-	$	5,847	$	-
Consumer real estate – mortgage		1,700		1,707		-		1,562		-
Construction and land development		4,810		4,810		-		4,992		205
Commercial and industrial		975		1,154		-		989		-
Consumer and other		-		-		-		-		-
Total	$	13,164	$	14,034	$	-	$	13,390	$	205

Cash flow dependent nonaccrual loans:
Commercial real estate – mortgage	$	1,807	$	2,003	$	62	$	1,819	$	-
Consumer real estate – mortgage		4,548		4,870		571		4,568		-
Construction and land development		664		755		47		673		-
Commercial and industrial		973		1,004		110		1,110		-
Consumer and other		496		517		435		500		-
Total	$	8,488	$	9,149	$	1,225	$	8,670	$	-
Total nonaccrual loans	$	21,652	$	23,183	$	1,225	$	22,060	$	205

	At December 31, 2013						For the year ended December 31, 2013
	Recorded investment		Unpaid principal balance		Related allowance⁽¹⁾		Average recorded investment		Interest income recognized
Collateral dependent nonaccrual loans:
Commercial real estate – mortgage	$	7,035	$	7,481	$	-	$	6,522	$	-
Consumer real estate – mortgage		2,162		2,209		-		2,234		-
Construction and land development		545		545		-		938		-
Commercial and industrial		1,828		1,901		-		3,911		-
Consumer and other		-		-		-		-		-
Total	$	11,570	$	12,136	$	-	$	13,605	$	-

Cash flow dependent nonaccrual loans:
Commercial real estate – mortgage	$	1,982	$	2,166	$	142	$	2,448	$	-
Consumer real estate – mortgage		3,127		3,334		722		3,405		-
Construction and land development		525		609		33		568		-
Commercial and industrial		737		1,029		218		1,216		-
Consumer and other		242		252		72		242		-
Total	$	6,613	$	7,390	$	1,187	$	7,879	$	-
Total nonaccrual loans	$	18,183	$	19,526	$	1,187	$	21,484	$	-

(1)	Collateral dependent loans are typically charged-off to their net realizable value and no specific allowance is carried related to those loans.

Impaired loans also include loans that Pinnacle Bank has elected to formally restructure due to the weakening credit status of a borrower. The restructuring may facilitate a repayment plan that seeks to minimize the potential losses that Pinnacle Bank may otherwise incur. If on nonaccrual status as of the date of restructuring, the loans are included in nonaccrual loans. Loans that have been restructured that were performing as of the restructure date and continue to perform in accordance with the restructured terms are reported separately as troubled debt restructurings.

At September 30, 2014 and December 31, 2013, there were $7.6 million and $19.6 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. These troubled debt restructurings are considered impaired loans pursuant to U.S. GAAP. Troubled commercial loans are restructured by specialists within our Special Assets Group, and all restructurings are approved by committees and 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.

The following table outlines the amount of each troubled debt restructuring categorized by loan classification made during the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three months ended September 30, 2014						Nine months ended September 30, 2014
	Number of contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance		Number of contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance
Commercial real estate – mortgage		-	$	-	$	-		-	$	-	$	-
Consumer real estate – mortgage		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-
Commercial and industrial		1		215		171		8		3,162		2,273
Consumer and other		-		-		-		-		-		-
		1	$	215	$	171		8	$	3,162	$	2,273

	Three months ended September 30, 2013						Nine months ended September 30, 2013
	Number of contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance		Number of contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance
Commercial real estate – mortgage		-	$	-	$	-		-	$	-	$	-
Consumer real estate – mortgage		-		-		-		1		428		368
Construction and land development		-		-		-		1		50		43
Commercial and industrial		1		37		32		2		1,537		1,322
Consumer and other		1		58		51		2		258		223
		2	$	95	$	83		6	$	2,273	$	1,956

During the three months ended September 30, 2014 and 2013, Pinnacle Financial did not have any troubled debt restructurings that subsequently defaulted within twelve months of the restructuring. During the nine months ended September 30, 2014, Pinnacle Financial did not have any troubled debt restructurings that subsequently defaulted within twelve months of the restructuring. During the nine months ended ended September 30, 2013, one consumer real estate loan totaling $480,000 which was previously classified as a troubled debt restructuring subsequently defaulted, within twelve months of the restructuring. A default of a troubled debt restructuring is defined as an occurrence which violates the terms of the receivable's contract.

Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industry. 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 September 30, 2014 with the comparative exposures for December 31, 2013 (in thousands):

	At September 30, 2014
	Outstanding Principal Balances			Unfunded Commitments			Total exposure			Total Exposure at December 31, 2013

Lessors of nonresidential buildings		$	492,242		$	68,316		$	560,558		$	515,240
Lessors of residential buildings			276,848			39,529			316,377			270,773

The table below presents past due balances at September 30, 2014 and December 31, 2013, by loan classification and segment allocated between accruing and nonaccrual status (in thousands):

September 30, 2014	30-89 days past due and accruing		90 days or more past due and accruing		Total past due and accruing		Nonaccrual⁽¹⁾		Current and accruing		Total Loans
Commercial real estate:
Owner-occupied	$	245	$	-	$	245	$	7,486	$	720,352	$	728,083
All other		-		-		-		-		750,786		750,786
Consumer real estate – mortgage		4,327		-		4,327		6,248		696,226		706,801
Construction and land development		863		-		863		5,474		315,753		322,090
Commercial and industrial		3,615		75		3,690		1,948		1,718,448		1,724,086
Consumer and other		4,967		8		4,975		496		183,934		189,405
	$	14,017	$	83	$	14,100	$	21,652	$	4,385,499	$	4,421,251

December 31, 2013
Commercial real estate:
Owner-occupied	$	2,534	$	-	$	2,534	$	7,750	$	669,014	$	679,298
All other		27		2,232		2,259		1,267		700,611		704,137
Consumer real estate – mortgage		2,215		-		2,215		5,289		688,112		695,616
Construction and land development		4,839		-		4,839		1,070		310,282		316,191
Commercial and industrial		1,847		825		2,672		2,565		1,600,310		1,605,547
Consumer and other		1,488		289		1,777		242		141,685		143,704
	$	12,950	$	3,346	$	16,296	$	18,183	$	4,110,014	$	4,144,493

(1)	Approximately $15.6 million and $10.9 million of nonaccrual loans as of September 30, 2014 and December 31, 2013, respectively, were performing pursuant to their contractual terms at those dates.

The following table shows the allowance allocation by loan classification and accrual status at September 30, 2014 and December 31, 2013 (in thousands):

					Impaired Loans
	Accruing Loans				Nonaccrual Loans				Troubled Debt Restructurings⁽¹⁾				Total Allowance for Loan Losses
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Commercial real estate –mortgage	$	18,597	$	19,298	$	62	$	142	$	35	$	1,932	$	18,694	$	21,372
Consumer real estate – mortgage		6,052		7,090		571		722		758		543		7,381		8,355
Construction and land development		5,763		7,186

PINNACLE FINANCIAL PARTNERS INC - FORM 10-Q - November 7, 2014

Attached files