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EX-32.2 - EXHIBIT 32.2 - PINNACLE FINANCIAL PARTNERS INCex32206302017.htm
EX-32.1 - EXHIBIT 32.1 - PINNACLE FINANCIAL PARTNERS INCex32106302017.htm
EX-31.2 - EXHIBIT 31.2 - PINNACLE FINANCIAL PARTNERS INCex31206302017.htm
EX-31.1 - EXHIBIT 31.1 - PINNACLE FINANCIAL PARTNERS INCex31106302017.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, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 000-31225

pnfplogoa01.jpg, Inc.
(Exact name of registrant as specified in its charter)
Tennessee
 
62-1812853
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
150 Third Avenue South, Suite 900, Nashville, Tennessee
 
37201
(Address of principal executive offices)
 
(Zip Code)
(615) 744-3700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changes since last report)

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

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

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

As of August 1, 2017 there were 77,658,511 shares of common stock, $1.00 par value per share, issued and outstanding.



Pinnacle Financial Partners, Inc.
Report on Form 10-Q
June 30, 2017

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

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, or entities in which it has significant investments, like BHG, to maintain the historical growth rate of its, or such entities', loan portfolio; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; (vi) increased competition with other financial institutions; (vii) greater than anticipated adverse conditions in the national or local economies including in Pinnacle Financial's markets throughout Tennessee, North Carolina, South Carolina and Virginia,  particularly in commercial and residential real estate markets; (viii) 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 merger with 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 merger with BNC may not be realized or take longer than anticipated to be realized; (xxvi) disruption from Pinnacle Financial's merger with BNC with customers, suppliers, employee or other business partners relationships; (xxvii) the risk of successful integration of Pinnacle Financial's and BNC's businesses; (xxviii) the amount of the costs, fees, expenses and charges related to Pinnacle Financial's merger with BNC; (xxix) reputational risk and the reaction of the parties' customers, suppliers, employees or other business partners to Pinnacle Financial's merger with BNC; (xxx) 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; (xxxi) the dilution caused by Pinnacle Financial's issuance of additional shares of its common stock in its merger with BNC; and (xxxii) 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, Pinnacle Financial's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 as filed with the Securities and Exchange Commission on May 5, 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)
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and noninterest-bearing due from banks
$
121,804,437

 
$
84,732,291

Interest-bearing due from banks
416,980,586

 
97,529,713

Federal funds sold and other

 
1,383,416

Cash and cash equivalents
538,785,023

 
183,645,420

 
 
 
 
Securities available-for-sale, at fair value
2,427,034,287

 
1,298,546,056

Securities held-to-maturity (fair value of $21,322,047 and $25,233,254 at June 30, 2017 and December 31, 2016, respectively)
21,163,360

 
25,251,316

Consumer mortgage loans held-for-sale
90,275,468

 
47,710,120

Commercial mortgage loans held-for-sale
11,367,997

 
22,587,971

 
 
 
 
Loans
14,758,764,516

 
8,449,924,736

Less allowance for loan losses
(61,944,494
)
 
(58,980,475
)
Loans, net
14,696,820,022

 
8,390,944,261

 
 
 
 
Premises and equipment, net
258,037,159

 
88,904,145

Equity method investment
207,020,432

 
205,359,844

Accrued interest receivable
48,417,956

 
28,234,826

Goodwill
1,800,741,933

 
551,593,796

Core deposits and other intangible assets
60,963,513

 
15,104,038

Other real estate owned
24,805,764

 
6,089,804

Other assets
700,720,864

 
330,651,002

Total assets
$
20,886,153,778

 
$
11,194,622,599

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
3,893,603,182

 
$
2,399,191,152

Interest-bearing
2,602,527,348

 
1,808,331,784

Savings and money market accounts
6,820,024,282

 
3,714,930,351

Time
2,441,319,823

 
836,853,761

Total deposits
15,757,474,635

 
8,759,307,048

Securities sold under agreements to repurchase
205,008,077

 
85,706,558

Federal Home Loan Bank advances
725,230,449

 
406,304,187

Subordinated debt and other borrowings
465,419,408

 
350,768,050

Accrued interest payable
7,630,882

 
5,573,377

Other liabilities
110,063,488

 
90,267,267

Total liabilities
17,270,826,939

 
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; 77,646,512 and 46,359,377 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
77,646,512

 
46,359,377

Additional paid-in capital
3,100,154,656

 
1,083,490,728

Retained earnings
449,762,022

 
381,072,505

Accumulated other comprehensive loss, net of taxes
(12,236,351
)
 
(14,226,498
)
Total stockholders' equity
3,615,326,839

 
1,496,696,112

Total liabilities and stockholders' equity
$
20,886,153,778

 
$
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
June 30,
 
Six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
112,319,700

 
$
77,043,106

 
$
205,537,647

 
$
151,447,310

Securities:
 
 
 
 
 

 
 

Taxable
8,265,225

 
4,571,876

 
14,698,313

 
9,038,710

Tax-exempt
2,235,517

 
1,443,017

 
3,913,098

 
2,936,774

Federal funds sold and other
922,796

 
703,706

 
1,737,113

 
1,313,293

Total interest income
123,743,238

 
83,761,705

 
225,886,171

 
164,736,087

 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 

 
 

Deposits
10,993,942

 
5,073,567

 
19,112,856

 
9,989,130

Securities sold under agreements to repurchase
78,438

 
39,532

 
128,204

 
87,582

Federal Home Loan Bank advances and other borrowings
6,043,144

 
3,605,320

 
11,250,524

 
5,713,412

Total interest expense
17,115,524

 
8,718,419

 
30,491,584

 
15,790,124

Net interest income
106,627,714

 
75,043,286

 
195,394,587

 
148,945,963

Provision for loan losses
6,812,389

 
5,280,101

 
10,463,411

 
9,173,671

Net interest income after provision for loan losses
99,815,325

 
69,763,185

 
184,931,176

 
139,772,292

 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 

 
 

Service charges on deposit accounts
4,178,736

 
3,430,391

 
8,034,219

 
6,873,075

Investment services
3,110,088

 
2,499,719

 
5,931,922

 
4,845,319

Insurance sales commissions
1,461,160

 
1,192,827

 
3,320,050

 
2,898,686

Gain on mortgage loans sold, net
4,667,537

 
4,221,301

 
8,822,489

 
7,788,852

Gain on sale of investment securities, net

 

 

 

Trust fees
1,677,079

 
1,491,955

 
3,382,358

 
3,072,567

Income from equity method investment
8,754,718

 
9,644,310

 
16,577,455

 
14,791,834

Other noninterest income
11,207,239

 
10,232,433

 
19,369,658

 
18,298,313

Total noninterest income
35,056,557

 
32,712,936

 
65,438,151

 
58,568,646

 
 
 
 
 
 
 
 
Noninterest expense:
 
 
 
 
 

 
 

Salaries and employee benefits
43,675,551

 
34,254,147

 
82,027,735

 
66,771,003

Equipment and occupancy
10,712,711

 
8,312,272

 
20,387,369

 
16,442,736

Other real estate expense
62,960

 
222,473

 
314,933

 
334,745

Marketing and other business development
2,126,693

 
1,537,843

 
4,005,899

 
2,801,204

Postage and supplies
1,122,251

 
1,049,842

 
2,318,696

 
2,006,929

Amortization of intangibles
1,471,568

 
846,615

 
2,667,697

 
1,719,830

Merger related expense
3,221,060

 
980,182

 
3,893,076

 
2,809,654

Other noninterest expense
9,404,755

 
8,727,393

 
18,235,520

 
17,108,362

Total noninterest expense
71,797,549

 
55,930,767

 
133,850,925

 
109,994,463

Income before income taxes
63,074,333

 
46,545,354

 
116,518,402

 
88,346,475

Income tax expense
19,987,812

 
15,758,582

 
33,778,834

 
29,594,439

Net income
$
43,086,521

 
$
30,786,772

 
$
82,739,568

 
$
58,752,036

Per share information:
 
 
 
 
 

 
 

Basic net income per common share
$
0.81

 
$
0.75

 
$
1.64

 
$
1.44

Diluted net income per common share
$
0.80

 
$
0.73

 
$
1.62

 
$
1.42

Weighted average shares outstanding:
 
 
 
 
 

 
 

Basic
53,097,776

 
41,274,450

 
50,574,079

 
40,678,669

Diluted
53,665,925

 
41,974,483

 
51,105,996

 
41,411,248


See accompanying notes to consolidated financial statements (unaudited).

5


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

 
Three months ended
June 30,
 
Six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
43,086,521

 
$
30,786,772

 
$
82,739,568

 
$
58,752,036

Other comprehensive income, net of tax:
 
 
 
 
 

 
 

Change in fair value on available-for-sale securities, net of tax
1,795,006

 
3,211,042

 
986,851

 
9,642,510

Change in fair value of cash flow hedges, net of tax
1,146,252

 
(339,961
)
 
1,003,296

 
(1,263,664
)
Net gain on sale of investment securities reclassified from other comprehensive income into net income, net of tax

 

 

 

Total other comprehensive income, net of tax
2,941,258

 
2,871,081

 
1,990,147

 
8,378,846

Total comprehensive income
$
46,027,779

 
$
33,657,853

 
$
84,729,715

 
$
67,130,882


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
332,094

 
332,094

 
6,798,402

 

 

 
7,130,496

Common dividends paid

 

 

 
(11,717,393
)
 

 
(11,717,393
)
Issuance of restricted common shares, net of forfeitures
141,331

 
141,331

 
(141,331
)
 

 

 

Common stock issued in conjunction with Bankers Healthcare Group investment, net
860,470

 
860,470

 
38,827,126

 

 

 
39,687,596

Restricted shares withheld for taxes and related tax benefit
(55,839
)
 
(55,839
)
 
(878,179
)
 

 

 
(934,018
)
Compensation expense for restricted shares

 

 
5,244,947

 

 

 
5,244,947

Net income

 

 

 
58,752,036

 

 
58,752,036

Other comprehensive income

 

 

 

 
8,378,846

 
8,378,846

Balance at June 30, 2016
42,184,120

 
$
42,184,120

 
$
889,468,015

 
$
325,608,051

 
$
4,893,624

 
$
1,262,153,810

 
 
 
 
 
 
 
 
 
 
 
 
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
183,708

 
183,708

 
3,399,370

 

 

 
3,583,078

Common dividends paid

 

 

 
(14,050,051
)
 

 
(14,050,051
)
Issuance of restricted common shares, net of forfeitures
259,156

 
259,156

 
(259,156
)
 

 

 

Issuance of common equity, net of costs
3,220,000

 
3,220,000

 
188,973,750

 

 

 
192,193,750

Common stock issued in conjunction with acquisition of BNC Bancorp, net of issuance costs
27,687,100

 
27,687,100

 
1,820,146,049

 

 

 
1,847,833,149

Restricted shares withheld for taxes
(62,829
)
 
(62,829
)
 
(4,229,294
)
 

 

 
(4,292,123
)
Compensation expense for restricted shares

 

 
8,633,209

 

 

 
8,633,209

Net income

 

 

 
82,739,568

 

 
82,739,568

Other comprehensive income

 

 

 

 
1,990,147

 
1,990,147

Balance at June 30, 2017
77,646,512

 
$
77,646,512

 
$
3,100,154,656

 
$
449,762,022

 
$
(12,236,351
)
 
$
3,615,326,839


See accompanying notes to consolidated financial statements (unaudited).

7


PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six months ended
June 30,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
82,739,568

 
$
58,752,036

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

 
 

Net amortization/accretion of premium/discount on securities
4,388,093

 
2,940,923

Depreciation, amortization and accretion
(1,927,832
)
 
1,220,878

Provision for loan losses
10,463,411

 
9,173,671

Gain on mortgage loans sold, net
(8,822,489
)
 
(7,788,852
)
Stock-based compensation expense
8,633,209

 
5,244,947

Deferred tax expense
15,371,727

 
1,750,526

Losses on dispositions of other real estate and other investments
36,874

 
218,568

Income from equity method investment
(16,577,455
)
 
(14,791,834
)
Excess tax benefit from stock compensation
(4,548,841
)
 
(2,422,226
)
Gain on other loans sold, net
(483,402
)
 
(548,560
)
Other loans held for sale:
 

 
 

Loans originated
(60,171,584
)
 
(30,854,000
)
Loans sold
71,874,960

 
22,079,777

Mortgage loans held for sale:
 

 
 

Loans originated
(268,698,182
)
 
(195,638,601
)
Loans sold
261,981,394

 
198,239,000

Increase in other assets
(4,092,485
)
 
(18,585,336
)
Increase (decrease) in other liabilities
(21,164,810
)
 
30,286,044

Net cash provided by operating activities
69,002,156

 
59,276,961

Investing activities:
 

 
 

Activities in securities available-for-sale:
 

 
 

Purchases
(611,442,128
)
 
(265,495,464
)
Sales
7,492,168

 

Maturities, prepayments and calls
118,629,440

 
104,509,440

Activities in securities held-to-maturity:
 

 
 

Purchases

 
(560,000
)
Maturities, prepayments and calls
3,885,000

 
3,170,000

Increase in loans, net
(700,982,747
)
 
(559,866,109
)
Purchases of software, premises and equipment
(18,690,967
)
 
(6,700,278
)
Proceeds from sales of software, premises and equipment

 
1,949,036

Proceeds from sale of other real estate
2,910,226

 
2,323,953

Acquisitions, net of cash paid
155,141,674

 

Purchase of bank owned life insurance policies
(25,000,000
)
 

Increase in equity method investment

 
(74,100,000
)
Dividends received from equity method investment
14,916,867

 
21,824,256

Increase in other investments
(5,376,058
)
 
(16,944,435
)
Net cash used in investing activities
(1,058,516,525
)
 
(789,889,601
)
Financing activities:
 

 
 

Net increase in deposits
791,495,223

 
321,819,132

Net increase (decrease) in securities sold under agreements to repurchase
56,991,437

 
(5,767,418
)
Advances from Federal Home Loan Bank:
 

 
 

Issuances
836,000,000

 
1,528,000,000

Payments/maturities
(517,034,260
)
 
(1,045,064,801
)
Increase (decrease) in other borrowings, net
(160,100
)
 
87,976,401

Principal payments of capital lease obligation
(72,982
)
 

Proceeds from common stock issuance, net
192,193,750

 

Exercise of common stock options and stock appreciation rights, net of repurchase of restricted shares
(709,045
)
 
3,774,252

Excess tax benefit from stock compensation

 
2,422,226

Common stock dividends paid
(14,050,051
)
 
(11,717,393
)
Net cash provided by financing activities
1,344,653,972

 
881,442,399

Net increase in cash and cash equivalents
355,139,603

 
150,829,759

Cash and cash equivalents, beginning of period
183,645,420

 
320,951,333

Cash and cash equivalents, end of period
$
538,785,023

 
$
471,781,092

See accompanying notes to consolidated financial statements (unaudited).

8


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

Note 1. Summary of Significant Accounting Policies

Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle Bank. Pinnacle Bank is a commercial bank headquartered in Nashville, Tennessee. Pinnacle Financial completed its acquisitions of CapitalMark Bank & Trust (CapitalMark), Magna Bank (Magna), Avenue Financial Holdings, Inc. (Avenue) and BNC Bancorp (BNC) on July 31, 2015, September 1, 2015, July 1, 2016 and June 16, 2017, respectively. Pinnacle Financial and Pinnacle Bank also collectively hold a 49% interest in Bankers Healthcare Group, LLC (BHG), a full-service commercial loan provider to healthcare and other professional practices. Pinnacle Bank provides a full range of banking services, including investment, mortgage, insurance services, and comprehensive wealth management services, in its 11 primarily urban markets of Tennessee, the Carolinas and Virginia.

Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP).  All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included.  The accompanying unaudited consolidated financial statements should be read in conjunction with the 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. Certain statutory trust affiliates of Pinnacle Financial as noted in footnote 12 of this report 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 six months ended June 30, 2017 and June 30, 2016 was as follows:

 
For the six months ended
June 30,
 
2017
 
2016
Cash Transactions:
 
 
 
Interest paid
$
29,310,536

 
$
14,722,572

Income taxes paid, net
25,035,510

 
22,364,686

Noncash Transactions:
 

 
 

Loans charged-off to the allowance for loan losses
10,320,665

 
16,372,819

Loans foreclosed upon and transferred to other real estate owned
1,520,444

 
2,464,945

Loans foreclosed upon and transferred to other assets
446,487

 
1,673,946

Common stock issued in connection with equity-method investment

 
39,694,036

Common stock issued in connection with acquisition (1)
1,858,132,809

 

___________________
(1) See Note 2 to these consolidated financial statements for more detailed information.

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 and six months ended June 30, 2017 and 2016:

 
Three months ended
June 30,
 
Six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
Basic net income per share calculation:
 
 
 
 
 
 
 
Numerator - Net income
$
43,086,521

 
$
30,786,772

 
$
82,739,568

 
$
58,752,036

 
 
 
 
 
 
 
 
Denominator - Weighted average common shares outstanding
53,097,776

 
41,274,450

 
50,574,079

 
40,678,669

Basic net income per common share
$
0.81

 
$
0.75

 
$
1.64

 
$
1.44

 
 
 
 
 
 
 
 
Diluted net income per share calculation:
 
 
 
 
 

 
 

Numerator – Net income
$
43,086,521

 
$
30,786,772

 
$
82,739,568

 
$
58,752,036

 
 
 
 
 
 
 
 
Denominator - Weighted average common shares outstanding
53,097,776

 
41,274,450

 
50,574,079

 
40,678,669

Dilutive shares contingently issuable
568,149

 
700,033

 
531,917

 
732,579

Weighted average diluted common shares outstanding
53,665,925

 
41,974,483

 
51,105,996

 
41,411,248

Diluted net income per common share
$
0.80

 
$
0.73

 
$
1.62

 
$
1.42


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. Also, Pinnacle Financial issued 27,687,100 shares of common stock in conjunction with the acquisition of BNC on June 16, 2017.
 
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 Accounting Standards Update (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 these 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 three and six months ended June 30, 2017, the newly adopted standard resulted in a reduction in tax expense of $789,000 and $4.6 million, respectively.

Subsequent Events  Accounting Standards Codification (ASC) Topic 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Pinnacle Financial evaluated all events or transactions that occurred after June 30, 2017 through the date of the issued financial statements.




10


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.

The following summarizes the consideration paid and an 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 identifiable intangible assets
 

 
$
81,695

Goodwill
 

 
122,671

 
 

 
$
204,366


Goodwill originating from the Avenue Merger resulted primarily from anticipated synergies arising from the combination of certain operational areas of the businesses of Avenue and Pinnacle Financial as well as the purchase premium inherent in buying a complete and successful banking operation. Goodwill associated with the Avenue Merger is not amortizable for book or tax purposes.

Pinnacle Financial accounted for the Avenue Merger 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. Purchase price allocations related to the acquisition of Avenue have been completed and are reflected in the following table (in thousands):
 
As of July 1, 2016
 
Avenue Historical Cost Basis
 
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.

BNC Bancorp. On June 16, 2017, Pinnacle Financial consummated its merger with BNC. Pursuant to the terms of the Agreement and Plan of Merger, dated as of January 22, 2017, by and between Pinnacle Financial and BNC (the BNC Merger Agreement), BNC merged with and into Pinnacle Financial, with Pinnacle Financial continuing as the surviving corporation (the BNC Merger). On that same day, Pinnacle Bank and Bank of North Carolina, BNC's wholly-owned bank subsidiary, merged, with Pinnacle Bank continuing as the surviving entity.

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
27,687,100

 
$
1,858,133

Total equity consideration
 
 
$
1,858,133

 
 
 
 
Non-equity consideration:
 
 
 
Cash paid to redeem common stock
 
 
$
129

Total consideration paid
 
 
$
1,858,262

 
 
 
 
Allocation of total consideration paid:
 
 
 
Fair value of net assets assumed including estimated identifiable intangible assets
 
 
$
609,068

Goodwill
 
 
1,249,194

 
 
 
$
1,858,262

 
Subsequently, Pinnacle Financial recorded costs incurred in connection with the issuance of Pinnacle Financial common stock resulting from the BNC Merger of $10.3 million which was recorded as a reduction to additional paid in capital. Certain merger-related charges resulting from cultural and systems integrations, as well as stock-based compensation expense incurred as a result of change-in-control provisions applicable to assumed equity-based awards were recorded as merger related expense.

Goodwill originating from the BNC Merger resulted primarily from anticipated synergies arising from the combination of certain operational areas of the businesses of BNC and Pinnacle Financial as well as the purchase premium inherent in buying a complete and successful banking operation. Goodwill associated with the BNC Merger is not amortizable for book or tax purposes.

Pinnacle Financial accounted for the BNC Merger 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.

12



The following purchase price allocations on the BNC 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 received within one year of the BNC Merger date, Pinnacle Financial will make any final adjustments to the purchase price allocation and prospectively adjust any goodwill recorded. 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 BNC 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 BNC Merger. Pinnacle Financial may incur losses on the acquired loans that are materially different from losses Pinnacle Financial originally projected.

 
As of June 16, 2017
 
BNC
Historical Cost Basis
 
Preliminary Fair Value Adjustments
 
As Recorded by Pinnacle Financial
Assets
 
 
 
 
 
Cash and cash equivalents
$
155,271

 
$

 
$
155,271

Investment securities (1)
643,875

 
1,667

 
645,542

Loans (2)
5,782,720

 
(175,473
)
 
5,607,247

Mortgage loans held for sale
27,026

 

 
27,026

Other real estate owned
20,143

 

 
20,143

Core deposit intangible (3)

 
48,528

 
48,528

Property, plant and equipment (4)
156,805

 

 
156,805

Other assets (5)
320,988

 
49,311

 
370,299

Total Assets
$
7,106,828

 
$
(75,967
)
 
$
7,030,861

 
 
 
 
 
 
Liabilities
 
 
 

 
 

Interest-bearing deposits (6)
$
5,003,653

 
$
4,355

 
$
5,008,008

Non-interest bearing deposits
1,199,342

 

 
1,199,342

Borrowings (7)
183,389

 
(6,412
)
 
176,977

Other liabilities
35,729

 
1,737

 
37,466

Total Liabilities
$
6,422,113

 
$
(320
)
 
$
6,421,793

Net Assets Acquired
$
684,715

 
$
(75,647
)
 
$
609,068


Explanation of certain fair value adjustments:
(1)
The amount represents the adjustment of the book value of BNC'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 BNC'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 of approximately 2.5% of the 3% mark on the acquired loan portfolio.
(3)
The amount represents the fair value of the core deposit intangible asset representing the intangible value of the deposit base acquired and the fair value of the customer relationship intangible asset representing the intangible value of customer relationships acquired.
(4)
A fair value adjustment for property and equipment will be recorded, but no estimate is determinable at this time.
(5)
The amount represents the deferred tax asset recognized on the fair value adjustment of BNC's acquired assets and assumed liabilities.
(6)
The amount represents the adjustment necessary because the weighted average interest rate of BNC'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.
(7)
The amount represents the combined adjustment necessary because the weighted average interest rate of BNC's subordinated debt issuance exceeded the cost of similar funding at the time of acquisition and because the weighted average interest rate of BNC's trust preferred securities issuances was lower than the cost of similar funding at the time of acquisition. The combined fair value adjustments will be amortized to increase future interest expense over the lives of the portfolios.






13


Supplemental Pro Forma Combined Results of Operations
The supplemental proforma information below for the three and six months ended June 30, 2017 and 2016 gives effect to the BNC acquisition as if it had occurred on January 1, 2016. These results combine the historical results of BNC into Pinnacle Financial's consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments, they are not indicative of what would have occurred had the acquisition taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of BNC's provision for credit losses for the first six months of 2016 that may not have been necessary had the acquired loans been recorded at fair value as of the beginning of 2016. Additionally, these financials were not adjusted for non-recurring expenses, such as merger-related charges incurred by either Pinnacle Financial or BNC. Pinnacle Financial expects to achieve operating cost savings and other business synergies as a result of the acquisition which are also not reflected in the proforma amounts.
 
 
Three months ended
 
Six months ended
 
 
 
June 30,
 
June 30,
 
(dollars in thousands)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
Revenue (1)
 
$
204,172

 
$
180,436

 
$
400,407

 
$
328,384

 
Income before income taxes
 
$
90,743

 
$
66,510

 
$
163,298

 
$
127,744

 
_______________________
(1) 
Net interest income plus noninterest income.

Note 3. Equity method investment

A summary of BHG's financial position as of June 30, 2017 and December 31, 2016 and results of operations as of and for the six months ended June 30, 2017 and 2016, were as follows (in thousands):

 
As of
 
June 30, 2017
 
December 31, 2016
Assets
$
253,355

 
$
223,246

 
 
 
 
Liabilities
169,357

 
139,531

Membership interests
83,998

 
83,715

Total liabilities and membership
$
253,355

 
$
223,246


 
For the three months ended
June 30,
 
For the six months ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
37,012

 
$
39,330

 
$
71,247

 
$
70,618

Net income
$
18,013

 
$
21,439

 
$
34,024

 
$
33,593


At June 30, 2017, technology, trade name and customer relationship intangibles, net of related amortization, totaled $15.1 million compared to $16.8 million as of December 31, 2016. Amortization expense of $832,000 and $1.7 million was included for the three and six months ended June 30, 2017, respectively, compared to $575,000 and $953,000, respectively, for the same periods in the prior year. Accretion income of $767,000 and $1.6 million was included in the three and six months ended June 30, 2017, respectively, compared to $303,000 and $1.2 million for the same periods in the prior year, respectively.

During the three and six months ended June 30, 2017, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $12.5 million and $14.9 million in the aggregate, respectively, compared to $16.5 million and $21.8 million, respectively, for the same periods 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 six-month periods ended June 30, 2017 or June 30, 2016, respectively.

Note 4.  Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2017 and December 31, 2016 are summarized as follows (in thousands):


14


 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
June 30, 2017:
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
250

 
$
1

 
$

 
$
251

U.S. government agency securities
62,659

 

 
759

 
61,900

Mortgage-backed securities
1,548,758

 
5,440

 
15,148

 
1,539,050

State and municipal securities
532,508

 
5,209

 
4,115

 
533,602

Asset-backed securities
190,560

 
134

 
474

 
190,220

Corporate notes and other
102,016

 
182

 
187

 
102,011

 
$
2,436,751

 
$
10,966

 
$
20,683

 
$
2,427,034

Securities held-to-maturity:
 

 
 

 
 

 
 

State and municipal securities
$
21,163

 
$
199

 
$
40

 
$
21,322

 
$
21,163

 
$
199

 
$
40

 
$
21,322

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 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 June 30, 2017, approximately $1.24 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 June 30, 2017, repurchase agreements comprised of secured borrowings totaled $205.0 million and were secured by $205.0 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 June 30, 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
June 30, 2017:
Amortized
Cost
 
Fair
Value
 
Amortized Cost
 
Fair
Value
Due in one year or less
$
31,917

 
$
31,811

 
$
1,021

 
$
1,023

Due in one year to five years
82,347

 
83,312

 
6,603

 
6,631

Due in five years to ten years
166,329

 
168,799

 
10,219

 
10,323

Due after ten years
416,840

 
413,842

 
3,320

 
3,345

Mortgage-backed securities
1,548,758

 
1,539,050

 

 

Asset-backed securities
190,560

 
190,220

 

 

 
$
2,436,751

 
$
2,427,034

 
$
21,163

 
$
21,322




15



At June 30, 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 June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$

 
$

 
$

 
$

 
$

 
$

U.S. government agency securities
49,120

 
536

 
12,780

 
223

 
61,900

 
759

Mortgage-backed securities
1,097,974

 
13,490

 
85,658

 
1,658

 
1,183,632

 
15,148

State and municipal securities
324,824

 
3,379

 
20,830

 
776

 
345,654

 
4,155

Asset-backed securities
113,296

 
157

 
19,153

 
317

 
132,449

 
474

Corporate notes
62,023

 
187

 

 

 
62,023

 
187

Total temporarily-impaired securities
$
1,647,237

 
$
17,749

 
$
138,421

 
$
2,974

 
$
1,785,658

 
$
20,723

 
 
 
 
 
 
 
 
 
 
 
 
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 June 30, 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 June 30, 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 June 30, 2017, Pinnacle Financial had approximately $20.7 million in unrealized losses on $1.79 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 June 30, 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 June 30, 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.

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. 




16


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 June 30, 2017, approximately 77% 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 $1.0 million 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:

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.

17



The following table outlines the amount of each loan classification categorized into each risk rating category as of June 30, 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
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Pass
$
6,192,533

 
$
2,449,319

 
$
1,737,057

 
$
3,565,754

 
$
355,314

 
$
14,299,977

Special Mention
112,120

 
58,928

 
12,628

 
36,759

 
1,432

 
221,867

Substandard (1)
72,603

 
26,116

 
19,241

 
78,637

 
108

 
196,705

Substandard-nonaccrual
10,042

 
17,810

 
3,873

 
7,206

 
456

 
39,387

Doubtful-nonaccrual
74

 
754

 

 
1

 

 
829

Total loans
$
6,387,372

 
$
2,552,927

 
$
1,772,799

 
$
3,688,357

 
$
357,310

 
$
14,758,765


December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Pass
$
3,137,452

 
$
1,160,361

 
$
897,556

 
$
2,782,713

 
$
264,723

 
$
8,242,805

Special Mention
21,449

 
1,856

 
2,716

 
25,641

 
802

 
52,464

Substandard (1)
29,674

 
15,627

 
5,788

 
75,861

 
129

 
127,079

Substandard-nonaccrual
4,921

 
8,073

 
6,613

 
7,492

 
475

 
27,574

Doubtful-nonaccrual

 

 

 
3

 

 
3

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 $182.5 million at June 30, 2017, compared to $114.6 million at December 31, 2016.

The table below details the loans acquired from BNC and the fair value adjustment with respect thereto as of June 30, 2017 (dollars in thousands):
 
Commercial real estate - mortgage
 
Consumer real estate - mortgage
 
Construction and land development
 
Commercial and industrial
 
Consumer
and other
 
Fair value adjustment
 
Net total acquired loans
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
3,029,203

 
$
1,247,986

 
$
699,921

 
$
489,340

 
$
79,163

 
$
(143,783
)
 
$
5,401,830

Special Mention
73,517

 
58,876

 
9,385

 
7,881

 
678

 
(5,111
)
 
145,226

Substandard (1)
46,825

 
14,650

 
17,717

 
9,881

 

 
(16,335
)
 
72,738

Substandard-nonaccrual
9,719

 
12,302

 
1,157

 
1,783

 
4

 
(7,257
)
 
17,708

Doubtful-nonaccrual
193

 
858

 

 

 

 
(220
)
 
831

Total loans
$
3,159,457

 
$
1,334,672

 
$
728,180

 
$
508,885

 
$
79,845

 
$
(172,706
)
 
$
5,638,333


Loans acquired with deteriorated credit quality are recorded pursuant to the provisions of ASC 310-30, and are referred to as purchase credit impaired loans. The following table provides a rollforward of purchase credit impaired loans from December 31, 2016 through June 30, 2017 (in thousands):
 
Gross Carrying Value
 
Accretable
Yield
 
Nonaccretable
Yield
 
Net Carrying
Value
December 31, 2016
$
12,468

 
$

 
$
(3,633
)
 
$
8,835

Acquisitions
75,425

 
(300
)
 
(25,953
)
 
49,172

Year-to-date settlements
(2,919
)
 
2

 
796

 
(2,121
)
June 30, 2017
$
84,974

 
$
(298
)
 
$
(28,790
)
 
$
55,886


18



Certain of these loans have been deemed to be collateral dependent and as such, no accretable yield has been recorded for these loans. The carrying value is adjusted for additional draws, pursuant to contractual arrangements, offset by loan paydowns. Year-to-date settlements include both loans that were charged-off as well as loans that were paid off, typically as a result of refinancings at other institutions.
 
For the three and six months ended June 30, 2017, the average balance of nonaccrual loans was $26.7 million and $26.7 million, respectively, compared to $37.0 million and $36.6 million, respectively, for the same periods 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 col