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EX-10.2 - EXHIBIT 10.2 - PINNACLE FINANCIAL PARTNERS INCexhibit10_2.htm
EX-10.1 - EXHIBIT 10.1 - PINNACLE FINANCIAL PARTNERS INCexhibit10_1.htm
EX-32.2 - EXHIBIT 32.2 - PINNACLE FINANCIAL PARTNERS INCex32_2.htm
EX-32.1 - EXHIBIT 32.1 - PINNACLE FINANCIAL PARTNERS INCex32_1.htm
EX-31.2 - EXHIBIT 31.2 - PINNACLE FINANCIAL PARTNERS INCex31_2.htm
EX-31.1 - EXHIBIT 31.1 - PINNACLE FINANCIAL PARTNERS INCex31_1.htm
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes 
No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
Yes 
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer 
(do not check if you are a smaller reporting company)
Smaller reporting company  
 
Emerging growth company  

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

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

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


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

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

2


FORWARD-LOOKING STATEMENTS

Certain of the statements in this Quarterly Report on Form 10-Q  may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to:  (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) the inability of Pinnacle Financial Partners, Inc. (Pinnacle Financial), or entities in which it has significant investments, like Bankers Healthcare Group, LLC (BHG), to maintain the historical growth rate of its, or such entities', loan portfolio; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; (vi) increased competition with other financial institutions; (vii) greater than anticipated adverse conditions in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA, the Knoxville MSA, the Chattanooga, TN-GA MSA and the Memphis, TN-MS-AR MSA,  particularly in commercial and residential real estate markets; (viii) rapid fluctuations or unanticipated changes in interest rates on loans or deposits; (ix) the results of regulatory examinations; (x) the ability to retain large, uninsured deposits; (xi) a merger or acquisition, like Pinnacle Financial's proposed merger with BNC Bancorp (BNC); (xii) risks of expansion into new geographic or product markets; (xiii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiv) reduced ability to attract additional financial advisors (or failure of such advisors to cause their clients to switch to Pinnacle Bank), to retain financial advisors or otherwise to attract customers from other financial institutions; (xv) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvi) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xvii) risks associated with litigation, including the applicability of insurance coverage; (xviii) the risk of successful integration of the businesses Pinnacle Financial has recently acquired with its business; (xix) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xx) the vulnerability of Pinnacle Bank's network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xxi) the possibility of increased compliance costs as a result of increased regulatory oversight, including oversight of companies in which Pinnacle Financial or Pinnacle Bank have significant investments, like BHG, and the development of additional banking products for Pinnacle Bank's corporate and consumer clients;  (xxii) the risks associated with Pinnacle Financial and Pinnacle Bank being a minority investor in BHG, including the risk that the owners of a majority of the equity interests in BHG decide to sell the company if not prohibited from doing so by the terms of our agreement with them; (xxiii) the possibility that the incremental cost and/or decreased revenues associated with exceeding $10 billion in assets will exceed current estimates; (xxiv) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxv) the risk that the cost savings and any revenue synergies from Pinnacle Financial's proposed merger with BNC may not be realized or take longer than anticipated to be realized; (xxvi) disruption from Pinnacle Financial's proposed merger with BNC with customers, suppliers, employee or other business partners relationships; (xxvii) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement between Pinnacle Financial and BNC; (xxviii) the risk of successful integration of Pinnacle Financial's and BNC's businesses; (xxix) the failure to obtain the necessary approvals by Pinnacle Financial and BNC shareholders; (xxx) the amount of the costs, fees, expenses and charges related to Pinnacle Financial's proposed merger with BNC; (xxxi) reputational risk and the reaction of the parties' customers, suppliers, employees or other business partners to Pinnacle Financial's proposed merger with BNC; (xxxii) the failure of the closing conditions with respect to Pinnacle Financial's proposed merger with BNC to be satisfied, or any unexpected delay in closing the proposed merger; (xxxiii) the risk that the integration of Pinnacle Financial's and BNC's operations will be materially delayed or will be more costly or difficult than expected; (xxxiv) the possibility that Pinnacle Financial's proposed merger with BNC may be more expensive to complete than anticipated, including as a result of unexpected factors or events; (xxxv) the dilution caused by Pinnacle Financial's issuance of additional shares of its common stock in its proposed merger with BNC; and (xxxvi) general competitive, economic, political and market conditions. A more detailed description of these and other risks is contained herein and in Pinnacle Financial's most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2017 and in Part II, Item 1A "Risk Factors" below. Many of such factors are beyond Pinnacle Financial's ability to control or predict and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this report, which speak only as of the date hereof, whether as a result of new information, future events or otherwise.
3


Item 1.
Part I. Financial Information

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

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

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


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

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

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

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

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

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

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

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

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

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

See accompanying notes to consolidated financial statements (unaudited).
8

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Summary of Significant Accounting Policies

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

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

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

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

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

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


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

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

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

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

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

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


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

   
Number of Shares
   
Amount
 
Equity consideration:
           
Common stock issued
   
3,760,326
   
$
182,469
 
Total equity consideration
         
$
182,469
 
                 
Non-equity consideration:
               
Cash paid to redeem common stock
         
$
20,910
 
Cash paid to exchange outstanding stock options
           
987
 
Total consideration paid
         
$
204,366
 
                 
Allocation of total consideration paid:
               
Fair value of net assets assumed including estimated identifiable intangible assets
         
$
81,695
 
Goodwill
           
122,671
 
           
$
204,366
 
 
Pinnacle Financial accounted for the aforementioned completed mergers under the acquisition method in accordance with ASC Topic 805. Accordingly, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the date of merger.

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

   
As of July 1, 2016
 
   
Avenue Historical Cost Basis
   
Preliminary Fair Value Adjustments
   
As Recorded by Pinnacle Financial
 
Assets
                 
Cash and cash equivalents
 
$
39,485
   
$
-
   
$
39,485
 
Investment securities(1)
   
163,862
     
(463
)
   
163,399
 
Loans(2)
   
980,319
     
(27,789
)
   
952,530
 
Mortgage loans held for sale
   
3,310
     
-
     
3,310
 
Core deposit intangible(3)
   
-
     
8,845
     
8,845
 
Other assets(4)
   
47,729
     
8,774
     
56,503
 
Total Assets
 
$
1,234,705
   
$
(10,633
)
 
$
1,224,072
 
                         
Liabilities
                       
Interest-bearing deposits(5)
 
$
741,635
   
$
1,400
   
$
743,035
 
Non-interest bearing deposits
   
223,685
     
-
     
223,685
 
Borrowings(6)
   
142,639
     
3,240
     
145,879
 
Other liabilities
   
29,719
     
59
     
29,778
 
Total Liabilities
 
$
1,137,678
   
$
4,699
   
$
1,142,377
 
Net Assets Acquired
 
$
97,027
   
$
(15,332
)
 
$
81,695
 
 
11

Explanation of certain fair value adjustments:
(1)
The amount represents the adjustment of the book value of Avenue's investment securities to their estimated fair value on the date of acquisition.
(2)
The amount represents the adjustment of the net book value of Avenue's loans to their estimated fair value based on interest rates and expected cash flows as of the date of acquisition, which includes estimates of expected credit losses inherent in the portfolio.
(3)
The amount represents the fair value of the core deposit intangible asset representing the intangible value of the deposit base acquired.
(4)
The amount represents the deferred tax asset recognized on the fair value adjustment of Avenue's acquired assets and assumed liabilities as well as the fair value adjustment for property and equipment.
(5)
The amount represents the adjustment necessary because the weighted average interest rate of Avenue's deposits exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio.
(6)
The amount represents the adjustment necessary because the weighted average interest rate of Avenue's FHLB advances and subordinated debt issuance exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio.
 
Note 3. Equity method investment

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

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

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

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

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

12

Note 4.  Securities

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

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

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

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

   
Available-for-sale
   
Held-to-maturity
 
March 31, 2017:
 
Amortized
Cost
   
Fair
Value
   
Amortized Cost
   
Fair
Value
 
Due in one year or less
 
$
2,519
   
$
2,536
   
$
445
   
$
445
 
Due in one year to five years
   
45,041
     
46,143
     
8,262
     
8,285
 
Due in five years to ten years
   
128,637
     
130,524
     
10,817
     
10,897
 
Due after ten years
   
103,721
     
102,275
     
5,474
     
5,409
 
Mortgage-backed securities
   
1,240,671
     
1,226,977
     
-
     
-
 
Asset-backed securities
   
71,942
     
71,321
     
-
     
-
 
   
$
1,592,531
   
$
1,579,776
   
$
24,998
   
$
25,036
 
13

At March 31, 2017 and December 31, 2016, the following investments had unrealized losses. The table below classifies these investments according to the term of the unrealized losses of less than twelve months or twelve months or longer (in thousands):

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

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

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

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

14

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

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

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

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

15

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

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

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

(1)
Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators for loans classified as substandard, excluding the impact of nonaccrual loans and troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $109.8 million at March 31, 2017, compared to $114.6 million at December 31, 2016.
(2)
Included in nonaccrual loans at March 31, 2017 and December 31, 2016 are $7.3 million and $8.8 million, respectively, in purchase credit impaired loans acquired with deteriorated credit quality.
(3)
Troubled debt restructurings are presented as an impaired loan; however, they continue to accrue interest at contractual rates.
16

For the three months ended March 31, 2017, the average balance of nonaccrual loans was $26.3 million compared to $43.7 million for the same period in 2016. Pinnacle Financial's policy is that the discontinuation of the accrual of interest income will occur when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date the above mentioned loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Pinnacle Financial's policy is that once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized approximately $49,000 in interest income from cash payments received on nonaccrual loans during the three months ended March 31, 2017, compared to $31,000 during the three months ended March 31, 2016. Had these nonaccruing loans been on accruing status, interest income would have been higher by $640,000 for the three months ended March 31, 2017 compared to $280,000 for the three months ended March 31, 2016, respectively.

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

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

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

 
 
At March 31, 2017
   
At December 31, 2016
 
 
 
Recorded investment
   
Unpaid principal balances(1)
   
Related allowance(2)
   
Recorded investment
   
Unpaid principal balances (1)
   
Related allowance(2)
 
Collateral dependent nonaccrual loans:
                                   
Commercial real estate – mortgage
 
$
2,283
   
$
2,280
   
$
-
   
$
2,308
   
$
2,312
   
$
-
 
Consumer real estate – mortgage
   
2,513
     
2,544
     
-
     
2,880
     
2,915
     
-
 
Construction and land development
   
1,028
     
1,035
     
-
     
3,128
     
3,135
     
-
 
Commercial and industrial
   
6,252
     
6,266
     
-
     
6,373
     
6,407
     
-
 
Consumer and other
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
12,076
   
$
12,125
   
$
-
   
$
14,689
   
$
14,769
   
$
-
 
 
                                               
Cash flow dependent nonaccrual loans:
                                               
Commercial real estate – mortgage
 
$
1,767
   
$
2,465
   
$
63
   
$
2,613
   
$
3,349
   
$
59
 
Consumer real estate – mortgage
   
6,296
     
6,883
     
1,085
     
5,193
     
5,775
     
688
 
Construction and land development
   
3,083
     
3,756
     
19
     
3,485
     
4,154
     
20
 
Commercial and industrial
   
1,006
     
2,379
     
220