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EX-32.1 - EXHIBIT 32.1 - PINNACLE FINANCIAL PARTNERS INCex32_1.htm
EX-32.2 - EXHIBIT 32.2 - PINNACLE FINANCIAL PARTNERS INCex32_2.htm
EX-31.1 - EXHIBIT 31.1 - PINNACLE FINANCIAL PARTNERS INCex31_1.htm
EX-31.2 - EXHIBIT 31.2 - PINNACLE FINANCIAL PARTNERS INCex31_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 June 30, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 000-31225

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes 
No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
Yes 
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
Accelerated Filer
 
Non-accelerated Filer 
(do not check if you are a smaller reporting company)
Smaller reporting company 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes 
No
As of  August 5, 2015 there were 35,993,413 shares of common stock, $1.00 par value per share, issued and outstanding.


Pinnacle Financial Partners, Inc.
Report on Form 10-Q
June 30, 2015

TABLE OF CONTENTS
Page No.
   
 3
 3
 36
 57
 57
   
 58
 58
 58
 71
 71
 71
 71
 72
 73



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," "hope," "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 maintain the historical growth of 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, the Knoxville MSA and the Chattanooga, TN-GA 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, Knoxville, Chattanooga or Memphis MSAs; (xii) a merger or acquisition, like the proposed merger with Magna; (xiii) risks of expansion into new geographic or product markets, like the proposed expansion into the Memphis, TN-MS-AR MSA associated with the proposed merger with Magna; (xiv) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xv) reduced ability to attract additional financial advisors (or failure of such advisors to cause their clients to switch to Pinnacle Financial), to retain financial advisors (including those at CapitalMark and Magna) or otherwise to attract customers from other financial institutions; (xvi) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvii) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xviii) risks associated with litigation, including the applicability of insurance coverage; (xix) the risk that the cost savings and any revenue synergies from the recent merger with CapitalMark and the proposed merger with Magna may not be realized or take longer than anticipated to be realized; (xx) disruption from the CapitalMark and Magna mergers with customers, suppliers or employee relationships; (xxi) the occurrence of any event, change or other circumstances that could give rise to a  material delay or the termination of the merger agreement that Pinnacle Financial and Pinnacle Bank have entered into with Magna; (xxii) the risk of successful integration of CapitalMark's and Magna's business with ours; (xxiii) the amount of the costs, fees, expenses and charges related to the CapitalMark and Magna mergers; (xxiv) reputational risk and the reaction of Pinnacle Financial's, CapitalMark's and Magna's customers to the recent CapitalMark merger and proposed Magna merger; (xxv) the failure of the closing conditions of the Magna merger to be satisfied; (xxvi) the risk that the integration of CapitalMark's and Magna's operations with Pinnacle Financial's will be materially delayed or will be more costly or difficult than expected; (xxvii) the possibility that the CapitalMark and Magna mergers may be more expensive to complete than anticipated, including as a result of unexpected factors or events; (xxviii) the dilution caused by Pinnacle Financial's issuance of additional shares of its common stock in the Magna merger; (xxix) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xxx) 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; (xxxi) the possibility of increased compliance costs as a result of increased regulatory oversight, including oversight of companies in which Pinnacle Financial has significant investments, and the development of additional banking products for our corporate and consumer clients; (xxxii) the risks associated with our being a minority investor in Bankers Healthcare Group, LLC, including the risk that the owners of a majority of the equity interests in Bankers Healthcare Group decide to sell the company; and (xxiii) 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 herein and in Pinnacle Financial's most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2015 and Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2015. 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.
2


Item 1. Part I.  Financial Information

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

   
June 30, 2015
   
December 31, 2014
 
ASSETS
       
Cash and noninterest-bearing due from banks
 
$
66,487,191
   
$
48,741,692
 
Interest-bearing due from banks
   
201,761,829
     
134,176,054
 
Federal funds sold and other
   
4,698,433
     
4,989,764
 
Cash and cash equivalents
   
272,947,453
     
187,907,510
 
                 
Securities available-for-sale, at fair value
   
806,221,152
     
732,054,785
 
Securities held-to-maturity (fair value of $33,830,072 and $38,788,870 at
               
June 30, 2015 and December 31, 2014, respectively)
   
33,914,863
     
38,675,527
 
Mortgage loans held-for-sale
   
31,542,696
     
14,038,914
 
                 
Loans
   
4,830,353,621
     
4,590,026,505
 
Less allowance for loan losses
   
(65,572,050
)
   
(67,358,639
)
Loans, net
   
4,764,781,571
     
4,522,667,866
 
                 
Premises and equipment, net
   
73,633,237
     
71,576,016
 
Equity method investment
   
82,892,986
     
-
 
Accrued interest receivable
   
17,125,955
     
16,988,407
 
Goodwill
   
243,290,816
     
243,529,010
 
Core deposits and other intangible assets
   
2,438,245
     
2,893,072
 
Other real estate owned
   
6,792,503
     
11,186,414
 
Other assets
   
180,962,299
     
176,730,276
 
Total assets
 
$
6,516,543,776
   
$
6,018,247,797
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits:
               
Noninterest-bearing
 
$
1,473,086,196
   
$
1,321,053,083
 
Interest-bearing
   
1,071,433,689
     
1,005,450,690
 
Savings and money market accounts
   
2,031,801,876
     
2,024,957,383
 
Time
   
417,289,165
     
431,143,756
 
Total deposits
   
4,993,610,926
     
4,782,604,912
 
Securities sold under agreements to repurchase
   
61,548,547
     
93,994,730
 
Federal Home Loan Bank advances
   
445,345,050
     
195,476,384
 
Subordinated debt and other borrowings
   
133,908,292
     
96,158,292
 
Accrued interest payable
   
637,036
     
631,682
 
Other liabilities
   
40,103,864
     
46,688,416
 
Total liabilities
   
5,675,153,715
     
5,215,554,416
 
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;
               
35,977,987 and 35,732,483 shares issued and outstanding
               
at June 30, 2015 and December 31, 2014, respectively
   
35,977,987
     
35,732,483
 
Additional paid-in capital
   
567,945,383
     
561,431,449
 
Retained earnings
   
237,243,866
     
201,371,081
 
Accumulated other comprehensive income, net of taxes
   
222,825
     
4,158,368
 
Total stockholders' equity
   
841,390,061
     
802,693,381
 
Total liabilities and stockholders' equity
 
$
6,516,543,776
   
$
6,018,247,797
 

See accompanying notes to consolidated financial statements (unaudited).
3

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Interest income:
               
Loans, including fees
 
$
50,325,643
   
$
45,089,706
   
$
99,792,349
   
$
88,785,364
 
Securities:
                               
Taxable
   
3,460,243
     
3,628,264
     
6,904,842
     
7,348,543
 
Tax-exempt
   
1,400,479
     
1,563,612
     
2,883,786
     
3,161,409
 
Federal funds sold and other
   
316,286
     
282,822
     
600,264
     
559,880
 
Total interest income
   
55,502,651
     
50,564,404
     
110,181,241
     
99,855,196
 
                                 
Interest expense:
                               
Deposits
   
2,592,476
     
2,481,762
     
5,023,218
     
5,077,002
 
Securities sold under agreements to repurchase
   
29,371
     
31,329
     
60,288
     
61,844
 
Federal Home Loan Bank advances and other borrowings
   
1,050,119
     
824,912
     
1,998,671
     
1,582,134
 
Total interest expense
   
3,671,966
     
3,338,003
     
7,082,177
     
6,720,980
 
Net interest income
   
51,830,685
     
47,226,401
     
103,099,064
     
93,134,216
 
Provision for loan losses
   
1,186,116
     
254,348
     
1,501,207
     
741,986
 
Net interest income after provision for loan losses
   
50,644,569
     
46,972,053
     
101,597,857
     
92,392,230
 
                                 
Noninterest income:
                               
Service charges on deposit accounts
   
3,075,655
     
2,965,644
     
5,988,204
     
5,756,612
 
Investment services
   
2,399,054
     
2,164,410
     
4,658,494
     
4,292,244
 
Insurance sales commissions
   
1,105,783
     
1,144,871
     
2,618,401
     
2,529,792
 
Gain on mortgage loans sold, net
   
1,652,111
     
1,668,604
     
3,593,365
     
2,903,475
 
Investment gains on sales, net
   
556,014
     
-
     
562,017
     
-
 
Trust fees
   
1,230,415
     
1,071,848
     
2,542,400
     
2,217,599
 
Income from equity method investment
   
4,266,154
     
-
     
7,467,456
     
-
 
Other noninterest income
   
5,733,592
     
3,582,067
     
11,081,743
     
7,630,084
 
Total noninterest income
   
20,018,778
     
12,597,444
     
38,512,080
     
25,329,806
 
                                 
Noninterest expense:
                               
Salaries and employee benefits
   
23,774,558
     
21,772,469
     
47,305,418
     
43,522,429
 
Equipment and occupancy
   
5,877,971
     
5,822,662
     
11,924,194
     
11,531,692
 
Other real estate (benefit) expense, net
   
(114,567
)
   
226,006
     
280,721
     
877,158
 
Marketing and other business development
   
1,186,165
     
1,064,990
     
2,145,915
     
1,973,891
 
Postage and supplies
   
731,219
     
544,194
     
1,380,470
     
1,104,808
 
Amortization of intangibles
   
227,413
     
237,676
     
454,827
     
475,351
 
Merger related expense
   
59,053
     
-
     
59,053
     
-
 
Other noninterest expense
   
5,005,513
     
4,233,931
     
10,027,749
     
8,062,459
 
Total noninterest expense
   
36,747,325
     
33,901,928
     
73,578,347
     
67,547,788
 
Income before income taxes
   
33,916,022
     
25,667,569
     
66,531,590
     
50,174,248
 
Income tax expense
   
11,252,191
     
8,497,589
     
22,025,048
     
16,637,146
 
Net income
 
$
22,663,831
   
$
17,169,980
   
$
44,506,542
   
$
33,537,102
 
Per share information:
                               
Basic net income per common share
 
$
0.65
   
$
0.49
   
$
1.27
   
$
0.97
 
Diluted net income per common share
 
$
0.64
   
$
0.49
   
$
1.25
   
$
0.96
 
Weighted average shares outstanding:
                               
Basic
   
35,128,856
     
34,697,888
     
35,085,271
     
34,650,377
 
Diluted
   
35,554,683
     
35,081,702
     
35,477,098
     
35,024,859
 

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


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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Net income
 
$
22,663,831
   
$
17,169,980
   
$
44,506,542
   
$
33,537,102
 
Other comprehensive income (loss), net of tax:
                               
Change in fair value on available-for-sale securities, net of tax
   
(4,952,934
)
   
5,104,719
     
(3,009,581
)
   
10,050,631
 
Change in fair value of cash flow hedges, net of tax
   
(31,598
)
   
(1,535,212
)
   
(584,425
)
   
(2,829,518
)
    Net gain on sale of investment securities reclassified from other comprehensive income into net income, net of tax
   
(337,890
)
   
-
     
(341,537
)
   
-
 
Total other comprehensive income (loss), net of tax
   
(5,322,422
)
   
3,569,507
     
(3,935,543
)
   
7,221,113
 
Total comprehensive income
 
$
17,341,409
   
$
20,739,487
   
$
40,570,999
   
$
40,758,215
 
                                 

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


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
                 
                         
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
   
175,442
     
175,442
     
3,851,187
     
-
     
-
     
4,026,629
 
Common dividends paid
   
-
     
-
     
-
     
(5,679,659
)
   
-
     
(5,679,659
)
Issuance of restricted common shares,
                                               
net of forfeitures
   
259,197
     
259,197
     
(259,197
)
   
-
     
-
     
-
 
Restricted shares withheld for taxes and related tax benefit
   
(55,085
)
   
(55,085
)
   
(957,259
)
   
-
     
-
     
(1,012,344
)
Compensation expense for restricted shares
   
-
     
-
     
2,581,483
     
-
     
-
     
2,581,483
 
Net income
   
-
     
-
     
-
     
33,537,102
     
-
     
33,537,102
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
7,221,113
     
7,221,113
 
Balances, June 30, 2014
   
35,601,495
   
$
35,601,495
   
$
555,428,349
   
$
170,155,642
   
$
3,196,499
   
$
764,381,985
 
                                                 
Balances, December 31, 2014
   
35,732,483
   
$
35,732,483
   
$
561,431,449
   
$
201,371,081
   
$
4,158,368
   
$
802,693,381
 
Exercise of employee common stock
                                               
options and related tax benefits
   
152,544
     
152,544
     
4,144,437
     
-
     
-
     
4,296,981
 
Common dividends paid
   
-
     
-
     
-
     
(8,633,757
)
           
(8,633,757
)
Issuance of restricted common shares,
                                               
net of forfeitures
   
150,259
     
150,259
     
(150,259
)
   
-
     
-
     
-
 
Restricted shares withheld for taxes and related tax benefit
   
(57,299
)
   
(57,299
)
   
(841,791
)
   
-
     
-
     
(899,090
)
Compensation expense for restricted shares
   
-
     
-
     
3,361,547
     
-
     
-
     
3,361,547
 
Net income
   
-
     
-
     
-
     
44,506,542
     
-
     
44,506,542
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
(3,935,543
)
   
(3,935,543
)
Balances, June 30, 2015
   
35,977,987
   
$
35,977,987
   
$
567,945,383
   
$
237,243,866
   
$
222,825
   
$
841,390,061
 

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



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

   
Six Months Ended
June 30,
 
   
2015
   
2014
 
Operating activities:
       
Net income
 
$
44,506,542
   
$
33,537,102
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net amortization/accretion of premium/discount on securities
   
2,436,636
     
2,154,065
 
Depreciation and amortization
   
4,318,556
     
4,598,989
 
Provision for loan losses
   
1,501,207
     
741,986
 
Gain on mortgage loans sold, net
   
(3,593,365
)
   
(2,903,475
)
Investment gains on sales, net
   
(562,017
)
   
-
 
Stock-based compensation expense
   
3,361,547
     
2,581,483
 
Deferred tax expense (benefit)
   
613,022
     
(136,855
)
(Gains) losses on dispositions of other real estate and other investments
   
241,254
 
   
141,913
 
(Gains) losses from equity method investment
   
(7,467,456
)
   
-
 
Excess tax benefit from stock compensation
   
(1,398,876
)
   
(1,166,463
)
Mortgage loans held for sale:
               
Loans originated
   
(222,301,417
)
   
(153,548,739
)
Loans sold
   
208,391,000
     
144,711,000
 
Increase (decrease) in other assets
   
5,668,214
     
(1,504,523
)
Decrease in other liabilities
   
(6,601,764
)
   
(4,207,922
)
Net cash provided by operating activities
   
29,113,083
     
24,998,561
 
                 
Investing activities:
               
Activities in securities available-for-sale:
               
Purchases
   
(180,352,200
)
   
(96,556,556
)
Sales
   
33,290,733
     
1,273,528
 
Maturities, prepayments and calls
   
65,886,600
     
59,975,601
 
Activities in securities held-to-maturity:
               
Purchases
   
(1,550,995
)
   
-
 
Maturities, prepayments and calls
   
5,935,000
     
864,028
 
Increase in loans, net
   
(247,698,663
)
   
(171,994,156
)
Purchases of software, premises and equipment
   
(6,455,257
)
   
(3,265,513
)
Proceeds from sales of software, premises and equipment
   
654,069
     
-
 
Purchase of equity method investment
   
(75,425,530
)
   
-
 
Increase in other investments
   
(720,972
)
   
(178,118
)
Net cash used in investing activities
   
(406,437,215
)
   
(209,881,186
)
                 
Financing activities:
               
Net increase in deposits
   
211,006,014
     
118,040,619
 
Net decrease in securities sold under agreements to repurchase
   
(32,446,182
)
   
(8,192,656
)
Advances from Federal Home Loan Bank:
   
 
 
   
 
 
Issuances
   
1,740,000,000
     
410,000,000
 
Payments and maturities
   
(1,490,108,767
)
   
(330,047,151
)
Increase (decrease) in other borrowings
   
37,750,000
     
(1,250,000
)
Exercise of common stock options and stock appreciation rights,
               
net of repurchase of restricted shares
   
3,397,891
     
3,014,285
 
Excess tax benefit from stock compensation
   
1,398,876
     
1,166,463
 
Common stock dividends paid
   
(8,633,757
)
   
(5,679,659
)
Net cash provided by financing activities
   
462,364,075
     
187,051,901
 
Net increase in cash and cash equivalents
   
85,039,943
     
2,169,276
 
Cash and cash equivalents, beginning of period
   
187,907,510
     
208,938,737
 
Cash and cash equivalents, end of period
 
$
272,947,453
   
$
211,108,013
 

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


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 and following the merger with CapitalMark Bank and Trust (CapitalMark), as of July 31, 2015, the Chattanooga, Tennessee-Georgia Metropolitan Statistical Area.

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 2014 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, 2014. 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, 2014.
 
Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the six months ended June 30, 2015 and 2014 was as follows:

   
For the six months ended June 30,
 
   
2015
   
2014
 
Cash Transactions:
       
Interest paid
 
$
7,099,390
   
$
6,886,261
 
Income taxes paid, net
   
17,847,500
     
14,100,000
 
Noncash Transactions:
               
Loans charged-off to the allowance for loan losses
   
6,098,606
     
3,268,626
 
Loans foreclosed upon and transferred to other real estate owned
   
252,896
     
1,672,459
 
Loans foreclosed upon and transferred to other repossessed assets
   
3,478,159
     
347,800
 
 
8

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 six months ended June 30, 2015 and 2014:

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Basic net income per share calculation:
               
Numerator - Net income
 
$
22,663,831
   
$
17,169,980
   
$
44,506,542
   
$
33,537,102
 
                                 
Denominator - Average common shares outstanding
   
35,128,856
     
34,697,888
     
35,085,271
     
34,650,377
 
Basic net income per share
 
$
0.65
   
$
0.49
   
$
1.27
   
$
0.97
 
                                 
Diluted net income per share calculation:
                               
Numerator – Net income
 
$
22,663,831
   
$
17,169,980
   
$
44,506,542
   
$
33,537,102
 
                                 
Denominator - Average common shares outstanding
   
35,128,856
     
34,697,888
     
35,085,271
     
34,650,377
 
Dilutive shares contingently issuable
   
425,827
     
383,814
     
391,827
     
374,482
 
Average diluted common shares outstanding
   
35,554,683
     
35,081,702
     
35,477,098
     
35,024,859
 
Diluted net income per share
 
$
0.64
   
$
0.49
   
$
1.25
   
$
0.96
 
 
Subsequent Events — ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Pinnacle Financial evaluated all events or transactions that occurred after June 30, 2015 through the date of the issued financial statements.
 
Subordinated Debt Issuance
 
On July 30, 2015, Pinnacle Bank issued $60.0 million in aggregate principal amount of Fixed–to-Floating Rate Subordinated Notes due 2025 (the "Notes") in a private placement transaction to accredited institutional investors. The maturity date of the notes is July 30, 2025, although Pinnacle Bank may redeem some or all of the Notes beginning on the interest payment date of July 30, 2020 and on any interest payment date thereafter at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to the date of redemption, subject to the prior approval of the Federal Deposit Insurance Corporation (the "FDIC").
 
From the date of the issuance through July 29, 2020, the Notes will bear interest at the rate of 4.875% per year and will be payable semi-annually in arrears on January 30 and July 30 of each year, beginning on January 30, 2016. From July 30, 2020, the Notes will bear interest at a rate per annum equal to the three-month LIBOR rate plus 3.128%, payable quarterly in arrears on each January 30, April 30, July 30, and October 30, beginning on July 30, 2020, through the maturity date or the early redemption date of the Notes.
 
The sale of the Notes yielded net proceeds of  approximately $59.1 million after deducting the placement agents' fees and estimated expenses payable by Pinnacle Bank. Pinnacle Bank used the net proceeds from the offering, together with available cash, to pay the cash portion of the merger consideration payable to the shareholders of CapitalMark and intends to use the remaining net proceeds, together with available cash, to pay the cash portion of the merger consideration payable to Magna shareholders in connection with the mergers, to pay the amounts necessary to redeem the preferred shares that each of CapitalMark and Magna have issued to the United States Department of the Treasury in connection with their participation in the Treasury's Small Business Lending Fund and for general corporate purposes.
9

CapitalMark Bank & Trust

On April 7, 2015, Pinnacle Financial and Pinnacle Bank entered into a definitive agreement with CapitalMark to acquire CapitalMark via merger. On July 31, 2015, CapitalMark merged with Pinnacle Bank.

Under the terms of the merger agreement, CapitalMark shareholders could either convert each of their outstanding shares of common stock into 0.50 shares of Pinnacle Financial's common stock plus cash in lieu of any fractional shares, or into a cash payment equal to the product of 0.50 multiplied by the average trading price for Pinnacle Financial's common stock on the Nasdaq Global Select Market for a 10-day period prior to the closing of the transaction or into a mix of Pinnacle Financial common stock and cash. Pursuant to the merger agreement, notwithstanding the elections, 90% of the outstanding shares of CapitalMark common stock were required to be converted into Pinnacle Financial common stock and 10% of those shares were required to be converted into cash.

Additionally, CapitalMark's outstanding stock options converted into approximately 858,000 Pinnacle options and were fully vested upon consummation of the merger pursuant to CapitalMark's stock option plan.
 
As of July 31, 2015, the transaction was valued at $195.2 million and was comprised of stock consideration of approximately 3.3 million shares of Pinnacle Financial's common stock and $19.7 million in cash. Additionally, Pinnacle Bank redeemed the $18.2 million in preferred stock issued by CapitalMark in connection with its participation in the U.S. Treasury's Small Business Lending Fund program on July 31, 2015. CapitalMark shareholders own approximately 9.7% of Pinnacle Financial's outstanding shares of common stock on a diluted basis.
 
Magna Bank

On April 29, 2015, Pinnacle Financial and Pinnacle Bank entered into a definitive agreement with Magna to acquire Magna via merger. The proposed merger of Magna with and into Pinnacle Bank has been approved by Magna's shareholders and is expected to close during the third quarter of 2015.

Under the terms of the merger agreement, Magna shareholders will have the right to elect to convert their outstanding shares of common stock into 0.3369 shares of Pinnacle's common stock plus cash in lieu of any fractional shares, or into a cash payment equal to $14.32 per Magna share, or into a combination of 0.3369 shares of Pinnacle's common stock and $14.32 in cash at a ratio of 75% stock and 25% cash. Because the maximum amount of stock and cash that Pinnacle will pay in the merger is capped at 75% and 25%, respectively, of Magna's outstanding shares, those Magna shareholders that elect either all stock or all cash may automatically have their elections adjusted so that, in the aggregate, 75% of all Magna shares outstanding will be converted into shares of Pinnacle's common stock and 25% will be converted into cash.

Magna's 328,350 stock options will be fully vested upon consummation of the merger pursuant to Magna's stock option plan. At closing, Magna's outstanding unexercised stock options will be settled in cash for the difference between the option's exercise price and $14.32. At closing, Magna shareholders will own approximately 3.3% of Pinnacle Financial's outstanding common stock, assuming all of Magna's options are cashed out.

The transaction is currently valued at $83.4 million based on Pinnacle's closing price on April 28, 2015, related to the issuance of approximately 1.325 million shares of Pinnacle Financial's common stock and $20.7 million in cash, in each case assuming none of the options are exercised prior to closing. Additionally, Pinnacle Bank plans to redeem at closing the $18.35 million in Series C preferred stock issued by Magna in connection with its participation in the U.S. Treasury's Small Business Lending Fund program.
10

Note. 2 Equity method investment

On February 1, 2015, Pinnacle Bank acquired a 30% interest in Bankers Healthcare Group, LLC (BHG) for $75 million. Pinnacle Bank accounts for this investment pursuant to the equity method for unconsolidated subsidiaries and recognizes its interest in BHG's profits and losses in noninterest income with corresponding adjustments to the BHG investment account. Currently, the equity method of accounting requires that this investment is reported as a net investment on the financial statements, but that embedded goodwill and intangibles should be identified, tested for impairment and amortized over their useful life within the equity method investment line of the balance sheet. Amortization expense associated with BHG's customer list and data processing capabilities is recorded in income from equity method investments. Pinnacle has not yet completed the purchase accounting for this equity method investment, on the acquisition date, Pinnacle Bank estimated its investment included embedded goodwill of $40.8 million and $14.4 million of technology, trade name and customer relationship intangibles. However, the FASB has issued an exposure draft, "Proposed Accounting Standards Update 2015-280 - Investments - Equity Method and Joint Ventures (Topic 323)", that may result in equity method investments moving from the currently prescribed method of accounting to an impairment based model. Pinnacle Bank recorded earnings of $7.7 million, net of approximately $1.0 million in intangible amortization expense for the first six months of 2015. Earnings from BHG are included in Pinnacle Bank and Pinnacle Financial's consolidated tax return.
 
A summary of BHG's financial position and results of operations as of and for the six months ended June 30, 2015 were as follows (in thousands):
 
   
June 30, 2015
 
     
Assets
 
$
207,669
 
         
Liabilities
   
122,867
 
Member's equity
   
84,802
 
Total liabilities and equity
 
$
207,669
 
         
 
     
   
For the six months ended
 
   
June 30, 2015
 
     
Revenues
 
$
61,480
 
Net income, pre-tax
 
$
36,762
 

In connection with the BHG acquisition, Pinnacle Bank borrowed $40 million pursuant to a loan agreement which requires Pinnacle Financial and Pinnacle Bank to maintain certain financial covenants including minimum capital ratios, liquidity requirements and other non-financial covenants. The loan has a 5-year maturity and bears interest at approximately 2.95% per annum currently. The balance of the loans was $39.0 million at June 30, 2015.

While Pinnacle Bank's investment in BHG is expected to have a modest impact on Pinnacle Financial's balance sheet volumes throughout the remainder of 2015, this investment primarily serves to increase and diversify Pinnacle Financial's fee income. Additionally, Pinnacle Financial intends to seek to leverage BHG's marketing platform to distribute it's financial services through BHG's national distribution channel.
 
11

Note 3.  Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2015 and December 31, 2014 are summarized as follows (in thousands):

 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
June 30, 2015:
               
Securities available-for-sale:
               
U.S. Treasury securities
 
$
-
   
$
-
   
$
-
   
$
-
 
U.S. government agency securities
   
125,010
     
17
     
3,753
     
121,274
 
Mortgage-backed agency securities
   
462,472
     
8,463
     
3,503
     
467,432
 
State and municipal securities
   
125,112
     
6,535
     
320
     
131,327
 
Asset-backed securities
   
75,333
     
81
     
152
     
75,262
 
Corporate notes and other
   
10,035
     
892
     
1
     
10,926
 
   
$
797,962
   
$
15,988
   
$
7,729
   
$
806,221
 
Securities held-to-maturity:
                               
State and municipal securities
 
$
33,915
   
$
139
   
$
224
   
$
33,830
 
   
$
33,915
   
$
139
   
$
224
   
$
33,830
 
   
December 31, 2014:
                               
Securities available-for-sale:
                               
U.S. Treasury securities
 
$
-
   
$
-
   
$
-
   
$
-
 
U.S. government agency securities
   
117,098
     
12
     
3,654
     
113,456
 
Mortgage-backed agency securities
   
447,757
     
10,322
     
2,240
     
455,839
 
State and municipal securities
   
130,545
     
8,213
     
180
     
138,578
 
Asset-backed securities
   
13,089
     
14
     
85
     
13,018
 
Corporate notes and other
   
10,196
     
969
     
2
     
11,163
 
   
$
718,685
   
$
19,530
     
6,161
   
$
732,054
 
Securities held-to-maturity:
                               
State and municipal securities
 
$
38,676
   
$
205
   
$
92
   
$
38,789
 
   
$
38,676
   
$
205
   
$
92
   
$
38,789
 

At June 30, 2015, approximately $669.7 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.

12

The amortized cost and fair value of debt securities as of June 30, 2015 by contractual maturity are shown below. Actual maturities may differ from contractual maturities in the case 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
 
June 30, 2015:
 
Amortized
Cost
   
Fair
Value
   
Amortized Cost
   
Fair
Value
 
Due in one year or less
 
$
9,697
   
$
9,734
   
$
1,710
   
$
1,712
 
Due in one year to five years
   
34,300
     
35,689
     
10,374
     
10,408
 
Due in five years to ten years
   
149,167
     
151,803
     
12,514
     
12,469
 
Due after ten years
   
66,993
     
66,301
     
9,317
     
9,241
 
Mortgage-backed securities
   
462,472
     
467,432
     
-
     
-
 
Asset-backed securities
   
75,333
     
75,262
     
-
     
-
 
   
$
797,962
   
$
806,221
   
$
33,915
   
$
33,830
 
 
    At June 30, 2015 and December 31, 2014, 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 June 30, 2015:
                       
                         
U.S. Treasury securities
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
U.S. government agency securities
   
47,012
     
1,227
     
65,369
     
2,526
     
112,381
     
3,753
 
Mortgage-backed securities
   
143,785
     
1,114
     
104,901
     
2,389
     
248,506
     
3,503
 
State and municipal securities
   
22,639
     
263
     
5,076
     
281
     
27,715
     
544
 
Asset-backed securities
   
35,271
     
141
     
8,361
     
11
     
43,632
     
152
 
Corporate notes
   
250
     
1
     
151
     
-
     
401
     
1
 
Total temporarily-impaired securities
 
$
248,957
   
$
2,746
   
$
183,858
   
$
5,207
   
$
432,635
   
$
7,953
 
                                                 
At December 31, 2014:
                                               
                                                 
U.S. Treasury securities
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
U.S. government agency securities
   
3,593
     
10
     
103,658
     
3,644
     
107,251
     
3,654
 
Mortgage-backed securities
   
91,410
     
405
     
102,892
     
1,835
     
194,302
     
2,240
 
State and municipal securities
   
3,561
     
15
     
16,502
     
257
     
20,063
     
272
 
Asset-backed securities
   
-
     
-
     
9,289
     
85
     
9,289
     
85
 
Corporate notes
   
950
     
1
     
154
     
1
     
1,104
     
2
 
Total temporarily-impaired securities
 
$
99,514
   
$
431
   
$
232,495
   
$
5,822
   
$
332,009
   
$
6,253
 
 
The applicable dates for determining when securities are in an unrealized loss position are June 30, 2015 and December 31, 2014. 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 June 30, 2015 and December 31, 2014, but is in the "Investments with an Unrealized Loss of less than 12 months" category above.

13

As shown in the tables on the previous page, at June 30, 2015, Pinnacle Financial had approximately $8.0 million in unrealized losses on $432.8 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.  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 June 30, 2015, 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 June 30, 2015.

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 investment policy, available-for-sale securities of $33.3 million were sold and a gain of $562,000 realized during the six months ended June 30, 2015.

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

14

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 June 30, 2015, approximately 74% 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 by the assigned financial advisor. 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. Loans subjected to our independent loan review department's annual review includes loans in targeted higher-risk portfolio segments such as certain commercial and industrial loans, land loans and/or loan types in certain geographies.

The following table presents 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 June 30, 2015 and December 31, 2014 (in thousands):

   
Commercial real estate - mortgage
   
Consumer real estate - mortgage
   
Construction and land development
   
Commercial and industrial
   
Consumer
and other
   
Total
 
June 30, 2015
                       
Accruing loans
                       
        Pass
 
$
1,627,250
   
$
720,144
   
$
362,804
   
$
1,717,492
   
$
223,178
   
$
4,650,868
 
        Special Mention
   
16,027
     
2,209
     
2,086
     
42,976
     
-
     
63,298
 
        Substandard (1)
   
22,906
     
9,923
     
3,232
     
53,875
     
-
     
89,936
 
        Total
   
1,666,183
     
732,276
     
368,122
     
1,814,343
     
223,178
     
4,804,102
 
Impaired loans
                                               
        Nonaccrual loans
                                               
                Substandard-nonaccrual
   
5,546
     
4,513
     
3,454
     
1,064
     
2,973
     
17,550
 
                Doubtful-nonaccrual
   
-
     
-
     
-
     
-
     
-
     
-
 
        Total nonaccrual loans
   
5,546
     
4,513
     
3,454
     
1,064
     
2,973
     
17,550
 
        Troubled debt restructurings(2)
                                               
               Pass
   
-
     
415
     
428
     
587
     
229
     
1,659
 
               Special Mention
   
-
     
442
     
-
     
-
     
-
     
442
 
               Substandard
   
-
     
2,995
     
-
     
3,606
     
-
     
6,601
 
         Total troubled debt restructurings
   
-
     
3,852
     
428
     
4,193
     
229
     
8,702
 
Total impaired loans
   
5,546
     
8,365
     
3,882
     
5,257
     
3,202
     
26,252
 
Total loans
 
$
1,671,729
   
$
740,641
   
$
372,004
   
$
1,819,600
   
$
226,380
   
$
4,830,354
 

15


   
Commercial real estate - mortgage
   
Consumer real estate - mortgage
   
Construction and land development
   
Commercial and industrial
   
Consumer
and other
   
Total
 
December 31, 2014
                       
Accruing loans
                       
        Pass
 
$
1,510,718
   
$
697,607
   
$
295,645
   
$
1,704,910
   
$
216,155
   
$
4,425,035
 
        Special Mention
   
7,353
     
2,536
     
15,215
     
31,733
     
-
     
56,837
 
        Substandard (1)
   
21,707
     
12,631
     
5,997
     
42,704
     
-
     
83,039
 
        Total
   
1,539,778
     
712,774
     
316,857
     
1,779,347
     
216,155
     
4,564,911
 
Impaired loans
                                               
        Nonaccrual loans
                                               
                Substandard-nonaccrual
   
4,313
     
4,458
     
5,173
     
1,609
     
1,152
     
16,705
 
                Doubtful-nonaccrual
   
-
     
-
     
-
     
-
     
-
     
-
 
        Total nonaccrual loans
   
4,313
     
4,458
     
5,173
     
1,609
     
1,152
     
16,705
 
        Troubled debt restructurings(2)
                                               
                Pass
   
-
     
62
     
436
     
575
     
75
     
1,148
 
                Special Mention
   
-
     
811
     
-
     
-
     
201
     
1,012
 
                Substandard
   
-
     
3,053
     
-
     
3,198
     
-
     
6,251
 
         Total troubled debt restructurings
   
-
     
3,926
     
436
     
3,773
     
276
     
8,411
 
Total impaired loans
   
4,313
     
8,384
     
5,609
     
5,382
     
1,428
     
25,116
 
Total loans
 
$
1,544,091
   
$
721,158
   
$
322,466
   
$
1,784,729
   
$
217,583
   
$
4,590,027
 

(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 $89.9 million at June 30, 2015, compared to $83.0 million at December 31, 2014.
(2)
Troubled debt restructurings are presented as impaired loans; however, they continue to accrue interest at contractual rates.
 
At June 30, 2015 and December 31, 2014, all loans classified as nonaccrual were deemed to be impaired. The principal balances of these nonaccrual loans amounted to $17.6 million and $16.7 million at June 30, 2015 and December 31, 2014, respectively, and are included in the tables above.  For the six months ended June 30, 2015, the average balance of nonaccrual loans was $17.3 million compared to $17.5 million for the year ended December 31, 2014.  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 approximately $183,000 in interest income from cash payments received on nonaccrual loans during the six months ended June 30, 2015 and $256,000 interest income from cash payments received on nonaccrual loans during the year ended December 31, 2014. Had these remaining nonaccrual loans been on accruing status, interest income would have been higher by $398,000 for the six months ended June 30, 2015 and by $416,000 for the six months ended June 30, 2014. A nonaccrual loan may be returned to accruing status once the loan has been brought current as to the principal and interest and collection is reasonably assured or the loan has been "well secured" through other techniques.

16

The following table details the recorded investment, unpaid principal balance and related allowance and average recorded investment of our nonaccrual loans at June 30, 2015 and December 31, 2014 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 June 30, 2015
   
For the six months ended
June 30, 2015
 
   
Recorded investment
   
Unpaid principal balance
   
Related allowance(1)
   
Average recorded investment
   
Interest income recognized
 
Collateral dependent nonaccrual loans:
                   
    Commercial real estate – mortgage
 
$
3,753
   
$
3,807
   
$
-
   
$
3,148
   
$
53
 
    Consumer real estate – mortgage
   
606
     
671
     
-
     
617
     
-
 
    Construction and land development
   
3,160
     
3,160
     
-
     
3,277
     
130
 
    Commercial and industrial
   
909
     
1,176
     
-
     
932
     
-
 
    Consumer and other
   
-
     
-
     
-
     
-
     
-
 
Total
 
$
8,428
   
$
8,814
   
$
-
   
$
7,974
   
$
183
 
                                         
Cash flow dependent nonaccrual loans:
                                       
    Commercial real estate – mortgage
 
$
1,793
   
$
2,047
   
$
70
   
$
1,824
   
$
-
 
    Consumer real estate – mortgage
   
3,907
     
4,223
     
545
     
4,037
     
-
 
    Construction and land development
   
294
     
390
     
46
     
299
     
-
 
    Commercial and industrial
   
155
     
168
     
24
     
204
     
-
 
    Consumer and other
   
2,973
     
3,092
     
462
     
3,003
     
-
 
Total
 
$
9,122
   
$
9,920
   
$
1,147
   
$
9,367
   
$
-
 
Total nonaccrual loans
 
$
17,550
   
$
18,734
   
$
1,147
   
$
17,341
   
$
183
 
 
 
 
 
At December 31, 2014
   
For the year ended
December 31, 2014
 
   
Recorded investment
   
Unpaid principal balance
   
Related allowance(1)
   
Average recorded investment
   
Interest income recognized
 
Collateral dependent nonaccrual loans:
                   
    Commercial real estate – mortgage
 
$
2,422
   
$
2,641
   
$
-
   
$
2,624
   
$
-
 
    Consumer real estate – mortgage
   
1,472
     
1,901
     
-
     
1,552
     
-
 
    Construction and land development
   
4,810
     
4,810
     
-
     
5,016
     
256
 
    Commercial and industrial
   
1,325
     
1,804
     
-
     
1,561
     
-
 
    Consumer and other
   
-
     
-
     
-
     
-
     
-
 
Total
 
$
10,029
   
$
11,156
   
$
-
   
$
10,753
   
$
256
 
                                         
Cash flow dependent nonaccrual loans:
                                       
    Commercial real estate – mortgage
 
$
1,891
   
$
2,107
   
$
108
   
$
1,958
   
$
-
 
    Consumer real estate – mortgage
   
2,986
     
3,205
     
654
     
3,080
     
-
 
    Construction and land development
   
363
     
406
     
79
     
384
     
-
 
    Commercial and industrial
   
284
     
294
     
62
     
316
     
-
 
    Consumer and other
   
1,152
     
1,184
     
252
     
972
     
-
 
Total
 
$
6,676
   
$
7,196
   
$
1,155
   
$
6,710
   
$
-
 
Total nonaccrual loans
 
$
16,705
   
$
18,352
   
$
1,155
   
$
17,463