PINNACLE FINANCIAL PARTNERS INC - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - PINNACLE FINANCIAL PARTNERS INC	ex32209302017.htm
EX-32.1 - EXHIBIT 32.1 - PINNACLE FINANCIAL PARTNERS INC	ex32109302017.htm
EX-31.2 - EXHIBIT 31.2 - PINNACLE FINANCIAL PARTNERS INC	ex31209302017.htm
EX-31.1 - EXHIBIT 31.1 - PINNACLE FINANCIAL PARTNERS INC	ex31109302017.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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

, 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 October 31, 2017 there were 77,722,855 shares of common stock, $1.00 par value per share, issued and outstanding.

Table of Contents

Pinnacle Financial Partners, Inc.

Report on Form 10-Q

September 30, 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	37
Item 3. Quantitative and Qualitative Disclosures about Market Risk	59
Item 4. Controls and Procedures	59

PART II – Other Information:	59
Item 1. Legal Proceedings	59
Item 1A. Risk Factors	59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3. Defaults Upon Senior Securities	60
Item 4. Mine Safety Disclosures	60
Item 5. Other Information	60
Item 6. Exhibits	61
Signatures	62

Table of Contents

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 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 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 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; (xxii) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxiv) 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; (xxv) disruption from Pinnacle Financial's merger with BNC with customers, suppliers, employee or other business partners relationships; (xxvi) the risk of successful integration of Pinnacle Financial's and BNC's businesses; (xxvii) the amount of the costs, fees, expenses and charges related to Pinnacle Financial's merger with BNC; (xxviii) reputational risk and the reaction of the parties' customers, suppliers, employees or other business partners to Pinnacle Financial's merger with BNC; (xxix) the risk that the integration of Pinnacle Financial's and BNC's operations (including the conversion of Pinnacle Financial's core processing system to that of BNC) will be materially delayed or will be more costly or difficult than expected; and (xxx) general competitive, economic, political and market conditions. A more detailed description of these and other risks is contained herein and in Pinnacle Financial's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 as filed with the Securities and Exchange commission on August 4, 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.

Table of Contents



Item 1.	Part I. Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)



	September 30, 2017			December 31, 2016
ASSETS
Cash and noninterest-bearing due from banks	$	132,324,313		$	84,732,291
Interest-bearing due from banks	270,563,317			97,529,713
Federal funds sold and other	5,394,587			1,383,416
Cash and cash equivalents	408,282,217			183,645,420

Securities available-for-sale, at fair value	2,880,180,805			1,298,546,056
Securities held-to-maturity (fair value of $21,021,555 and $25,233,254 at September 30, 2017 and December 31, 2016, respectively)	20,847,849			25,251,316
Consumer loans held-for-sale	105,031,578			47,710,120
Commercial mortgage loans held-for-sale	20,385,491			22,587,971

Loans	15,259,785,972			8,449,924,736
Less allowance for loan losses	(65,159,286		)	(58,980,475		)
Loans, net	15,194,626,686			8,390,944,261

Premises and equipment, net	270,136,166			88,904,145
Equity method investment	211,501,901			205,359,844
Accrued interest receivable	54,286,991			28,234,826
Goodwill	1,802,534,059			551,593,796
Core deposits and other intangible assets	59,780,903			15,104,038
Other real estate owned	24,338,967			6,089,804
Other assets	738,437,468			330,651,002
Total assets	$	21,790,371,081		$	11,194,622,599

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	4,099,086,158		$	2,399,191,152
Interest-bearing	2,571,764,582			1,808,331,784
Savings and money market accounts	6,595,639,931			3,714,930,351
Time	2,523,094,175			836,853,761
Total deposits	15,789,584,846			8,759,307,048
Securities sold under agreements to repurchase	129,557,107			85,706,558
Federal Home Loan Bank advances	1,623,946,639			406,304,187
Subordinated debt and other borrowings	465,460,556			350,768,050
Accrued interest payable	10,715,285			5,573,377
Other liabilities	97,757,463			90,267,267
Total liabilities	18,117,021,896			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; 77,652,143 and 46,359,377 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	77,652,143			46,359,377
Additional paid-in capital	3,105,577,594			1,083,490,728
Retained earnings	503,270,311			381,072,505
Accumulated other comprehensive loss, net of taxes	(13,150,863		)	(14,226,498		)
Total stockholders' equity	3,673,349,185			1,496,696,112
Total liabilities and stockholders' equity	$	21,790,371,081		$	11,194,622,599

See accompanying notes to consolidated financial statements (unaudited).

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Interest income:
Loans, including fees	$	183,841,608	$	90,090,166	$	389,379,255	$	241,537,476
Securities:
Taxable	12,066,502		5,012,047		26,764,815		14,050,757
Tax-exempt	4,620,340		1,544,535		8,533,438		4,481,309
Federal funds sold and other	1,638,704		732,951		3,375,817		2,046,244
Total interest income	202,167,154		97,379,699		428,053,325		262,115,786

Interest expense:
Deposits	19,103,495		6,625,534		38,216,351		16,614,664
Securities sold under agreements to repurchase	148,442		51,270		276,646		138,852
Federal Home Loan Bank advances and other borrowings	9,733,510		4,067,951		20,984,034		9,781,363
Total interest expense	28,985,447		10,744,755		59,477,031		26,534,879
Net interest income	173,181,707		86,634,944		368,576,294		235,580,907
Provision for loan losses	6,920,184		6,108,183		17,383,595		15,281,854
Net interest income after provision for loan losses	166,261,523		80,526,761		351,192,699		220,299,053

Noninterest income:
Service charges on deposit accounts	5,920,824		3,778,070		13,955,043		10,651,145
Investment services	3,660,103		2,592,077		9,592,025		7,437,396
Insurance sales commissions	2,123,549		1,233,098		5,443,599		4,131,784
Gain on mortgage loans sold, net	5,962,916		5,096,838		14,785,405		12,885,690
Gain on sale of investment securities, net	—		—		—		—
Trust fees	2,636,212		1,522,763		6,018,570		4,595,330
Income from equity method investment	8,936,626		8,474,899		25,514,081		23,266,733
Other noninterest income	13,736,779		8,994,164		33,106,437		27,292,477
Total noninterest income	42,977,009		31,691,909		108,415,160		90,260,555

Noninterest expense:
Salaries and employee benefits	64,287,986		36,053,673		146,315,721		102,824,676
Equipment and occupancy	16,590,119		9,401,001		36,977,488		25,843,737
Other real estate expense	512,490		17,032		827,423		351,777
Marketing and other business development	2,222,290		1,349,557		6,228,189		4,150,761
Postage and supplies	1,754,789		922,078		4,073,485		2,929,007
Amortization of intangibles	3,077,277		1,424,956		5,744,974		3,144,786
Merger related expense	8,847,306		5,672,731		12,740,382		8,482,385
Other noninterest expense	12,443,659		8,685,238		30,679,179		25,793,600
Total noninterest expense	109,735,916		63,526,266		243,586,841		173,520,729
Income before income taxes	99,502,616		48,692,404		216,021,018		137,038,879
Income tax expense	35,060,471		16,316,209		68,839,305		45,910,648
Net income	$	64,442,145	$	32,376,195	$	147,181,713	$	91,128,231
Per share information:
Basic net income per common share	$	0.84	$	0.71	$	2.48	$	2.16
Diluted net income per common share	$	0.83	$	0.71	$	2.46	$	2.12
Weighted average shares outstanding:
Basic	76,678,584		45,294,051		59,371,202		42,228,280
Diluted	77,232,098		45,918,368		59,910,344		42,928,467

See accompanying notes to consolidated financial statements (unaudited).

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Net income	$	64,442,145		$	32,376,195		$	147,181,713		$	91,128,231
Other comprehensive (loss) income, net of tax:
Change in fair value on available-for-sale securities, net of tax	(1,014,484		)	(1,444,262		)	(27,633		)	8,198,248
Change in fair value of cash flow hedges, net of tax	99,972			438,078			1,103,268			(825,586		)
Net gain on sale of investment securities reclassified from other comprehensive income into net income, net of tax	—			—			—			—
Total other comprehensive (loss) income, net of tax	(914,512		)	(1,006,184		)	1,075,635			7,372,662
Total comprehensive income	$	63,527,633		$	31,370,011		$	148,257,348		$	98,500,893

See accompanying notes to consolidated financial statements (unaudited).

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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 (Loss), 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	507,406		507,406			10,178,388			—			—			10,685,794
Common dividends paid	—		—			—			(18,217,159		)	—			(18,217,159		)
Issuance of restricted common shares, net of forfeitures	190,783		190,783			(190,783		)	—			—			—
Common stock issued in conjunction with Bankers Healthcare Group investment, net	860,470		860,470			38,833,566			—			—			39,694,036
Common stock issued in conjunction with Avenue Financial Holdings, Inc., net of issuance costs	3,760,326		3,760,326			178,708,278			—			—			182,468,604
Restricted shares withheld for taxes and related tax benefit	(65,217	)	(65,217		)	(1,135,457		)	—			—			(1,200,674		)
Compensation expense for restricted shares	—		—			8,101,176			—			—			8,101,176
Net income	—		—			—			91,128,231			—			91,128,231
Other comprehensive income	—		—			—			—			7,372,662			7,372,662
Balance at September 30, 2016	46,159,832		$	46,159,832		$	1,074,112,218		$	351,484,480		$	3,887,440		$	1,475,643,970

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	193,867		193,867			3,626,545			—			—			3,820,412
Common dividends paid	—		—			—			(24,983,907		)	—			(24,983,907		)
Issuance of restricted common shares, net of forfeitures	263,989		263,989			(263,989		)	—			—			—
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	(72,190	)	(72,190		)	(4,808,181		)	—			—			(4,880,371		)
Compensation expense for restricted shares	—		—			14,412,692			—			—			14,412,692
Net income	—		—			—			147,181,713			—			147,181,713
Other comprehensive income	—		—			—			—			1,075,635			1,075,635
Balance at September 30, 2017	77,652,143		$	77,652,143		$	3,105,577,594		$	503,270,311		$	(13,150,863	)	$	3,673,349,185

See accompanying notes to consolidated financial statements (unaudited).

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine months ended September 30,
	2017			2016
Operating activities:
Net income	$	147,181,713		$	91,128,231
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities	8,387,520			5,051,304
Depreciation, amortization and accretion	(14,847,816		)	1,897,617
Provision for loan losses	17,383,595			15,281,854
Gain on mortgage loans sold, net	(14,785,405		)	(12,885,690		)
Stock-based compensation expense	14,412,692			8,101,176
Deferred tax expense	15,646,059			6,130,773
Losses on dispositions of other real estate and other investments	74,126			191,650
Income from equity method investment	(25,514,081		)	(23,266,733		)
Excess tax benefit from stock compensation	(4,607,840		)	(2,796,548		)
Gain on other loans sold, net	(791,260		)	(703,680		)
Other loans held for sale:
Loans originated	(116,013,551		)	(79,939,089		)
Loans sold	119,007,292			65,111,181
Consumer loans held for sale:
Loans originated	(772,239,380		)	(541,282,243		)
Loans sold	756,729,398			549,421,861
Increase in other assets	(13,206,158		)	(14,772,526		)
Increase (decrease) in other liabilities	(30,057,022		)	11,353,236
Net cash provided by operating activities	86,759,882			78,022,374
Investing activities:
Activities in securities available-for-sale:
Purchases	(1,158,037,705		)	(372,949,548		)
Sales	7,492,168			29,470,014
Maturities, prepayments and calls	207,209,100			220,047,077
Activities in securities held-to-maturity:
Purchases	—			(560,000		)
Maturities, prepayments and calls	4,115,000			4,960,000
Increase in loans, net	(1,194,966,485		)	(756,625,718		)
Purchases of software, premises and equipment	(36,045,278		)	(10,691,917		)
Capital improvements to other real estate	(658,032		)	—
Proceeds from sales of software, premises and equipment	23,038			2,156,831
Proceeds from sale of other real estate	6,930,571			2,468,699
Acquisitions, net of cash acquired	155,141,674			17,608,471
Purchase of bank owned life insurance policies	(55,000,000		)	—
Increase in equity method investment	—			(74,100,000		)
Dividends received from equity method investment	19,372,024			26,776,629
Increase in other investments	(7,850,556		)	(16,736,665		)
Net cash used in investing activities	(2,052,274,481		)	(928,176,127		)
Financing activities:
Net increase in deposits	825,059,947			732,811,751
Net increase (decrease) in securities sold under agreements to repurchase	(18,459,533		)	5,232,620
Advances from Federal Home Loan Bank:
Issuances	1,934,750,000			1,623,000,000
Payments/maturities	(717,048,332		)	(1,647,078,975		)
Increase (decrease) in other borrowings, net	(190,100		)	80,946,100
Principal payments of capital lease obligation	(110,471		)	—
Proceeds from common stock issuance, net	192,193,750			—
Exercise of common stock options and stock appreciation rights, net of repurchase of restricted shares	(1,059,958		)	6,688,572
Excess tax benefit from stock compensation	—			2,796,548
Common stock dividends paid	(24,983,907		)	(18,217,159		)
Net cash provided by financing activities	2,190,151,396			786,179,457
Net increase (decrease) in cash and cash equivalents	224,636,797			(63,974,296		)
Cash and cash equivalents, beginning of period	183,645,420			320,951,333
Cash and cash equivalents, end of period	$	408,282,217		$	256,977,037

See accompanying notes to consolidated financial statements (unaudited).

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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 within Tennessee, the Carolinas and Virginia.

Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2016 (2016 10-K).

These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. Certain statutory trust affiliates of Pinnacle Financial, as noted in Note 12. Subordinated Debt and Other Borrowings are included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, determination of any impairment of intangible assets and the valuation of deferred tax assets. Certain refinements to the determination of the allowance for loan losses were made during the quarter ended September 30, 2017 and are discussed more fully below. Additionally, the adoption of ASU 2016-09, which became effective January 1, 2017, and is described more fully in Recently Adopted Accounting Pronouncements below is representative of a change in estimate. Other than the items noted herein, there have been no significant changes to Pinnacle Financial's significant accounting policies as disclosed in the 2016 10-K.

Allowance for Loan Losses (allowance) - Pinnacle Financial's management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of the loan portfolio, loan loss experience, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay the loan (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level of allowance maintained by management is believed adequate to absorb probable losses inherent in the loan portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, is deemed uncollectible.

Pinnacle Financial's allowance for loan loss assessment methodology was modified in the quarter ended September 30, 2017 to (i) extend the lookback period from 24 quarters to a period beginning January 1, 2006 to better capture a complete economic cycle, (ii) eliminate the use of risk ratings in the calculation of the loss rate and instead focus on risk by loan type and (iii) expand the economic variables used in the qualitative assessment to incorporate our expanded footprint. Pinnacle Financial also eliminated the use of a loss emergence period in light of the minimal population of losses available to evaluate that were previously being extrapolated to the full population of loans, and shifted the focus of its analysis to more of a quantitative model. There was no material impact on the adoption of the change in the allowance for loan loss assessment methodology.

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Pinnacle Financial's allowance for loan losses is composed of the result of two independent analyses pursuant to the provisions of ASC 450-20, Loss Contingencies and ASC 310-10-35, Receivables. The ASC 450-20 analysis is intended to quantify the inherent risks in its performing loan portfolio. The ASC 310-10-35 analysis includes a loan-by-loan analysis of impaired loans, both those reported as nonaccrual and troubled-debt restructurings.

In assessing the adequacy of the allowance, Pinnacle Financial also considers the results of Pinnacle Financial's ongoing independent loan review process. Pinnacle Financial undertakes this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in its overall evaluation of the risk characteristics of the entire loan portfolio. Its loan review process includes the judgment of management, independent internal loan reviewers, and reviews that may have been conducted by third-party reviewers including regulatory examiners. Pinnacle Financial incorporates relevant loan review results in the allowance.

The ASC 450-20 component of the allowance for loan losses begins with a historical loss rate calculation for each loan pool with similar risk characteristics. The losses realized over a rolling four-quarter cycle are utilized to determine an annual loss rate for each loan pool for each quarter-end in our look-back period. The look-back period in our loss rate calculation begins with January 2006, as we believe the period from January 1, 2006 to September 30, 2017 is more representative of a complete economic cycle. The loss rates for each category are then averaged and applied to the end of period loan portfolio balances to determine estimated losses. The loss rates provide a quantitative estimate of credit losses inherent in our end of period loan portfolio based on our actual loss experience.

The estimated loan loss allocation for all loan segments is then adjusted for management's estimate of probable losses for a number of qualitative factors that have not been considered in the quantitative analysis. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting factor is applied to the non-impaired loan portfolio. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified either in its risk rating or impairment process, as of the balance sheet date, and is based upon quarterly trend assessments in portfolio concentrations, policy exceptions, economic conditions, associate retention, independent loan review results, collateral considerations, credit quality, competition and regulatory requirements, enterprise wide risk assessments, and peer group credit quality. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors.

The allowance for loan losses for purchased loans is calculated similar to that utilized for legacy Pinnacle Bank loans. Pinnacle Financial's accounting policy is to compare the computed allowance for loan losses for each purchased loan to the remaining fair value adjustment at the individual loan level. If the computed allowance at the loan level is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a charge to the provision for loan losses.

The ASC 450-20 portion of the allowance includes a small unallocated component. Pinnacle Financial believes that the unallocated amount is warranted for inherent factors that cannot be practically assigned to individual loan categories, such as the imprecision in the overall loss allocation measurement process, the subjectivity risk of potentially not considering all relevant environmental categories and related measurements and imprecision in its credit risk ratings process. The appropriateness of the unallocated component of the allowance is assessed each quarter end based upon changes in the overall business environment not otherwise captured.

The impaired loan allowance is determined pursuant to ASC 310-10-35. Loans are impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means collecting all interest and principal payments of a loan as scheduled in the loan agreement. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the provision for loan losses and is a component of the allowance for loan losses. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan's effective interest rate, or if the loan is collateral dependent, at the fair value of the collateral, less estimated disposal costs. If the loan is cash flow dependent, a specific reserve is established as a component of the allowance. If the loan is collateral dependent, the principal balance of the loan is charged-off in an amount equal to the impairment measurement. The fair value of collateral dependent loans is derived primarily

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from collateral appraisals performed by independent third-party appraisers. Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans. This analysis is completed for all individual loans greater than $250,000. The resulting allowance percentage by segment adjusted for specific trends identified, if applicable, is then applied to the remaining population of impaired loans.

Pursuant to the guidance set forth in ASU No. 2011-02, A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, the above impairment methodology is also applied to those loans identified as troubled debt restructurings.

Sufficiency of the computed allowance is then tested by comparison to historical trends and industry and peer information. Pinnacle Financial then evaluates the result of the procedures performed, including the results of our testing, and concludes on the appropriateness of the balance of the allowance in its entirety. The audit committee of the board of directors reviews and approves the methodology and resultant allowance prior to the filing of quarterly and annual financial information.

While its policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to income, are considered adequate by management and are reviewed from time to time by regulators, they are necessarily approximate and imprecise. There are factors beyond its control, such as conditions in the local, national, and international economy, a local real estate market or particular industry conditions which may negatively impact materially asset quality and the adequacy of the allowance for loan losses and thus the resulting provision for loan losses.

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the nine months ended September 30, 2017 and September 30, 2016 was as follows:



	For the nine months ended September 30,
	2017		2016
Cash Transactions:
Interest paid	$	56,804,275	$	27,053,796
Income taxes paid, net	53,199,410		37,434,336
Noncash Transactions:
Loans charged-off to the allowance for loan losses	16,308,540		25,256,610
Loans foreclosed upon and transferred to other real estate owned	3,573,211		3,166,176
Loans foreclosed upon and transferred to other assets	640,737		1,842,318
Common stock issued in connection with equity-method investment	—		39,694,036
Common stock issued in connection with acquisition ⁽¹⁾	1,858,132,809		182,468,604

___________________

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

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

The following is a summary of the basic and diluted net income per share calculations for the three and nine months ended September 30, 2017 and 2016:

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	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Basic net income per share calculation:
Numerator - Net income	$	64,442,145	$	32,376,195	$	147,181,713	$	91,128,231

Denominator - Weighted average common shares outstanding	76,678,584		45,294,051		59,371,202		42,228,280
Basic net income per common share	$	0.84	$	0.71	$	2.48	$	2.16

Diluted net income per share calculation:
Numerator – Net income	$	64,442,145	$	32,376,195	$	147,181,713	$	91,128,231

Denominator - Weighted average common shares outstanding	76,678,584		45,294,051		59,371,202		42,228,280
Dilutive shares contingently issuable	553,514		624,317		539,142		700,187
Weighted average diluted common shares outstanding	77,232,098		45,918,368		59,910,344		42,928,467
Diluted net income per common share	$	0.83	$	0.71	$	2.46	$	2.12

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 nine months ended September 30, 2017, the newly adopted standard resulted in a reduction in tax expense of $59,000 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 September 30, 2017 through the date of the issued financial statements.

Note 2. Acquisitions

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, 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):

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	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		$	607,275
Goodwill		1,250,987
		$	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. Adjustments totaling $1.8 million were recorded to goodwill to appropriately reflect the valuation of the loan portfolio, OREO acquired, and certain liabilities assumed and have been included in the table below.

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.

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.

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	As of June 16, 2017
	BNC Historical Cost Basis		Fair Value Adjustments⁽¹⁾			As Recorded by Pinnacle Financial
Assets
Cash and cash equivalents	$	155,271	$	—		$	155,271
Investment securities	643,875		1,667			645,542
Loans ⁽²⁾	5,782,720		(181,430		)	5,601,290
Mortgage loans held for sale	27,026		—			27,026
Other real estate owned ⁽³⁾	20,143		880			21,023
Core deposit and other intangible ⁽⁴⁾	—		50,422			50,422
Property, plant and equipment ⁽⁵⁾	156,805		—			156,805
Other assets ⁽⁶⁾	320,988		50,468			371,456
Total Assets	$	7,106,828	$	(77,993	)	$	7,028,835

Liabilities
Interest-bearing deposits ⁽⁷⁾	$	5,003,653	$	4,355		$	5,008,008
Non-interest bearing deposits	1,199,342		—			1,199,342
Borrowings ⁽⁸⁾	183,389		(6,412		)	176,977
Other liabilities	35,729		1,504			37,233
Total Liabilities	$	6,422,113	$	(553	)	$	6,421,560
Net Assets Acquired	$	684,715	$	(77,440	)	$	607,275

Explanation of certain fair value adjustments:


(1)	The amount represents the adjustment of the book value of BNC's assets and liabilities to their estimated fair value on the date of acquisition. Fair value adjustments are updated subsequent to the merger date based on the results of finalized valuation assessements.

(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 2.6% of the 3.1% mark on the acquired loan portfolio. The discount recorded was increased by $6.0 million during the third quarter as valuation information related to certain purchase credit impaired loans became available.


(3)	Although not complete this adjustment reflects the Day 1 value of OREO properties subsequently sold.


(4)	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 assets representing the intangible value of customer relationships acquired.


(5)	A fair value adjustment for property and equipment will be recorded, but no estimate is determinable at this time.


(6)	The amount represents the deferred tax asset recognized on the fair value adjustment of BNC's acquired assets and assumed liabilities.


(7)	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.

(8)

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.

Supplemental Pro Forma Combined Results of Operations

The supplemental proforma information below for the three and nine months ended September 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 BNC Merger 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 nine 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.

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	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands)	2017		2016		2017		2016
Revenue ⁽¹⁾	$	218,919	$	185,181	$	619,326	$	513,565
Income before income taxes	$	98,218	$	73,446	$	261,516	$	203,454

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⁽¹⁾	Net interest income plus noninterest income.

Note 3. Equity method investment

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



	As of
	September 30, 2017		December 31, 2016
Assets	$	296,267	$	223,246

Liabilities	202,336		139,531
Membership interests	93,931		83,715
Total liabilities and membership interests	$	296,267	$	223,246



	For the three months ended September 30,				For the nine months ended September 30,
	2017		2016		2017		2016
Revenues	$	41,997	$	37,587	$	113,244	$	108,205
Net income	$	20,428	$	17,440	$	54,453	$	51,033

At September 30, 2017, technology, trade name and customer relationship intangibles, net of related amortization, totaled $14.3 million compared to $16.8 million as of December 31, 2016. Amortization expense of $832,000 and $2.5 million was included for the three and nine months ended September 30, 2017, respectively, compared to $1.5 million and $2.4 million, respectively, for the same periods in the prior year. Accretion income of $758,000 and $2.3 million was included in the three and nine months ended September 30, 2017, respectively, compared to $599,000 and $1.8 million for the same periods in the prior year, respectively.

During the three and nine months ended September 30, 2017, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $4.5 million and $19.4 million in the aggregate, respectively, compared to $5.0 million and $26.8 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 nine-month periods ended September 30, 2017 or 2016, respectively.

Note 4. Securities

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

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	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017:
Securities available-for-sale:
U.S. Treasury securities	$	31,004	$	—	$	26	$	30,978
U.S. government agency securities	162,686		170		1,774		161,082
Mortgage-backed securities	1,629,860		5,004		16,065		1,618,799
State and municipal securities	754,474		5,703		3,452		756,725
Asset-backed securities	184,981		194		415		184,760
Corporate notes and other	128,480		460		1,103		127,837
	$	2,891,485	$	11,531	$	22,835	$	2,880,181
Securities held-to-maturity:
State and municipal securities	$	20,848	$	209	$	35	$	21,022
	$	20,848	$	209	$	35	$	21,022



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 September 30, 2017, approximately $1.19 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 September 30, 2017, repurchase agreements comprised of secured borrowings totaled $129.6 million and were secured by $129.6 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 September 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
September 30, 2017:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	63,065	$	62,852	$	1,017	$	1,019
Due in one year to five years	65,300		66,392		6,565		6,593
Due in five years to ten years	186,811		188,734		10,466		10,577
Due after ten years	761,468		758,644		2,800		2,833
Mortgage-backed securities	1,629,860		1,618,799		—		—
Asset-backed securities	184,981		184,760		—		—
	$	2,891,485	$	2,880,181	$	20,848	$	21,022

At September 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):

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	Investments with an Unrealized Loss of less than 12 months				Investments with an Unrealized Loss of 12 months or longer				Total Investments with an Unrealized Loss
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
At September 30, 2017

U.S. Treasury securities	$	30,228	$	26	$	—	$	—	$	30,228	$	26
U.S. government agency securities	158,315		1,774		—		—		158,315		1,774
Mortgage-backed securities	1,001,269		10,985		231,553		5,080		1,232,822		16,065
State and municipal securities	325,168		2,252		45,374		1,235		370,542		3,487
Asset-backed securities	59,102		146		19,098		269		78,200		415
Corporate notes	66,306		975		13,332		128		79,638		1,103
Total temporarily-impaired securities	$	1,640,388	$	16,158	$	309,357	$	6,712	$	1,949,745	$	22,870

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 September 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 September 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 September 30, 2017, Pinnacle Financial had approximately $22.9 million in unrealized losses on $1.95 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 September 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 September 30, 2017.

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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.

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 September 30, 2017, approximately 81% of Pinnacle Financial's loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating. Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans. However, certain consumer real-estate mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature.

Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, Pinnacle Financial's credit procedures require that every risk rated loan of $1.0 million or more be subject to a formal credit risk review process 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:

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•	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 could sustain some loss if the deficiencies are not corrected.


•	Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.


•	Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following table outlines the amount of each loan classification categorized into each risk rating category as of September 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
September 30, 2017
Pass	$	6,267,036	$	2,440,653	$	1,909,631	$	3,862,830	$	355,786	$	14,835,936
Special Mention	107,739		57,482		8,552		33,828		1,375		208,976
Substandard ⁽¹⁾	58,276		22,310		15,234		65,541		101		161,462
Substandard-nonaccrual	16,920		19,981		6,392		9,028		266		52,587
Doubtful-nonaccrual	71		754		—		—		—		825
Total loans	$	6,450,042	$	2,541,180	$	1,939,809	$	3,971,227	$	357,528	$	15,259,786



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 $148.7 million at September 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 September 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
September 30, 2017
Pass	$	3,049,607	$	1,241,566	$	746,206	$	496,445	$	78,137	$	(129,907	)	$	5,482,054
Special Mention	69,746		57,359		5,868		6,242		632		(4,439		)	135,408
Substandard	47,027		13,619		10,220		8,724		—		(17,227		)	62,363
Substandard-nonaccrual	7,742		13,786		6,966		2,102		44		(10,934		)	19,706
Doubtful-nonaccrual	189		854		—		—		—		(217		)	826
Total loans	$	3,174,311	$	1,327,184	$	769,260	$	513,513	$	78,813	$	(162,724	)	$	5,700,357

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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 September 30, 2017 (in thousands):



	Gross Carrying Value			Accretable Yield			Nonaccretable Yield			Net Carrying Value
December 31, 2016	$	12,451		$	—		$	(3,633	)	$	8,818
Acquisition	80,229			(300		)	(32,211		)	47,718
Year-to-date settlements	(10,868		)	4			2,659			(8,205		)
September 30, 2017	$	81,812		$	(296	)	$	(33,185	)	$	48,331

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 nine months ended September 30, 2017, the average balance of nonaccrual loans was $52.4 million and $66.9 million, respectively, compared to $31.6 million and $35.1 million, respectively, for the same periods in 2016. Pinnacle Financial's policy is that the accrual of interest income will be discontinued when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date 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 no interest income from cash payments received on nonaccrual loans during the three months ended September 30, 2017 and $65,000 during the nine months ended September 30, 2017, compared to approximately $47,000 and $95,000, respectively, during the three and nine months ended September 30, 2016. Had these nonaccruing loans been on accruing status, interest income would have been higher by $849,000 and $2.1 million for the three and nine months ended September 30, 2017, respectively, compared to $478,000 and $999,000 higher for the three and nine months ended September 30, 2016, respectively.

The following table details the recorded investment, unpaid principal balance and related allowance of Pinnacle Financial's nonaccrual loans at September 30, 2017 and December 31, 2016 by loan classification (in thousands):



	At September 30, 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	$	16,600	$	18,992	$	—	$	2,308	$	2,312	$	—
Consumer real estate – mortgage	16,406		19,808		—		2,880		2,915		—
Construction and land development	4,472		8,587		—		3,128		3,135		—
Commercial and industrial	8,077		9,393		—		6,373		6,407		—
Consumer and other	15		17		—		—		—		—
Total	$	45,570	$	56,797	$	—	$	14,689	$	14,769	$	—

Cash flow dependent nonaccrual loans:
Commercial real estate – mortgage	$	391	$	616	$	—	$	2,613	$	3,349	$	59
Consumer real estate – mortgage	4,329		4,386		723		5,193		5,775		688
Construction and land development	1,920		2,369		13		3,485		4,154		20
Commercial and industrial	951		941		108		1,122		2,714		77
Consumer and other	251		154		88		475		851		227
Total	$	7,842	$	8,466	$	932	$	12,888	$	16,843	$	1,071

Total nonaccrual loans	$	53,412	$	65,263	$	932	$	27,577	$	31,612	$	1,071


⁽¹⁾	Unpaid principal balance presented net of fair value adjustments recorded in conjunction with purchase accounting.


⁽²⁾	Collateral dependent loans are typically charged-off to their net realizable value and no specific allowance is carried related to those loans.

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The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three and nine months ended September 30, 2017 and 2016, respectively, on Pinnacle Financial's nonaccrual loans that remain on the balance sheets as of such date (in thousands):



	For the three months ended September 30,								For the nine months ended September 30,
	2017				2016				2017				2016
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Collateral dependent nonaccrual loans:
Commercial real estate – mortgage	$	15,602	$	—	$	3,579	$	—	$	17,854	$	—	$	3,786	$

PINNACLE FINANCIAL PARTNERS INC - FORM 10-Q - November 7, 2017

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