2018 ANNUAL REPORT
UNIQUELY PINNACLE
We founded this firm to battle the bureaucratic and impersonal.
No other bank can do what we do, because we genuinely believe people matter
above all else and have built Pinnacle on that foundation.
PARTNERING WITH PINNACLE
Our financial advisors serve as trusted partners to help
clients like these succeed in their businesses.
Mako medical
church child care
Nobody seemed to believe Mako
Medical would make it past startup. But
a conversation with a Pinnacle financial
advisor changed everything. Now they
have the rocket fuel they need to grow.
Church Child Care is the only licensed
child care facility in Walkertown, NC.
When they wanted to expand to serve
more kids and create more jobs, they
turned to Pinnacle for help.
PNFP.com/Mako
PNFP.com/ChurchChild
watch the videos and see
highlights from each of our
11 major markets online.
PNFP.com/AnnualReport
glorybeans coffeehouse
charleston shipyard
GloryBeans Coffeehouse offers
fellowship, ministry and top-notch coffee
in its small-town home. When the owner
went through a fight for her life, her
partner from Pinnacle was there to help.
Reopening this shuttered Navy shipyard
was a massive project with thousands of
jobs at stake. Working with their “super
banker,” a group of Charleston business
leaders pulled off the impossible.
PNFP.com/Coffee
PNFP.com/Shipyard
SEE MORE STORIES FROM OUR CLIENTS AND ASSOCIATES AT PNFP.COM/CLIENTSTORIES AND YOUTUBE.COM/WATCHPNFP .
INVESTOR RELATIONS
Shareholders and others seeking
a copy of the Firm’s public filings
should visit the Investor Relations
section of our website at
www.pnfp.com or contact:
Chief Financial Officer
Pinnacle Financial Partners, Inc.
150 Third Ave. South, Suite 900
Nashville, TN 37201
(615) 744-3742
GENERAL COUNSEL
Bass, Berry & Sims PLC
Nashville, Tennessee
STOCK LISTING
The common stock of Pinnacle
Financial Partners, Inc. is traded on
the Nasdaq Global Select market
under the trading symbol “PNFP.”
SHAREHOLDER SERVICES
ANNUAL MEETING OF SHAREHOLDERS
Shareholders desiring to change
address or ownership of stock,
report lost certificates or to
consolidate accounts should
contact:
Computershare
Shareholder Services
P.O. Box 30170
College Station, TX 77842-3170
The Annual Meeting of Shareholders
will convene at 11 a.m. CT on
Tuesday, April 16, 2019. The meeting
will be held at Pinnacle Financial
Partners, Pinnacle at Symphony
Place, 150 Third Ave. South,
Nashville, TN. Further information
regarding this meeting can be found
in the firm’s proxy statement for the
2019 Annual Meeting.
DEAR FELLOW
SHAREHOLDERS,
In a sea of regional and national financial firms offering
similar products, how can a single bank claim to be distinctive?
Pinnacle is one of thousands of banks nationwide and hundreds in
Tennessee, the Carolinas and Virginia. All of us are competing
for the same clients, offering essentially the same products
and services at about the same price.
So what makes a bank distinctive?
The Dale Carnegie Research Institute says it’s trust and
relationships. Their research finds that, in the “Era of the
Consumer,” a relationship manager earns trust by being
customer-focused, competent and prioritizing what’s right
over making the sale.
Many banks are trying desperately to catch up with that idea,
to turn around their massive ships in the new prevailing wind.
They often do it with impersonal technology that’s designed
to make things easier; in reality, it’s engineered to make it
cheaper to serve the customer.
We believe what’s missing are people. Savvy consumers long
for something personal – and they value a good experience
over price. Carnegie’s data back this up, with 71 percent of
survey respondents saying they would rather buy from a
salesperson they completely trust than one who gave them
a lower price.
Unlike the large national and regional franchises we compete
with, Pinnacle doesn’t have to adjust. We’ve always been
intentional about valuing people more than sales.
Pinnacle was founded in 2000 explicitly to battle against the
impersonal service that has infected big banks. We start with
a core philosophy that “people matter.” We carry that out by
building a team of financial professionals who are experienced
and well-equipped to be trusted partners with their clients,
not just their bankers.
They are bringing their best clients and creating a
broader pipeline for new business.
• Growth Across Metrics
Those new hires joined a group of dedicated financial
advisors who collectively drove results well ahead of
our peers. They grew loans by double digits while most
of our peers hit singles. They funded them largely with
core deposits that also grew by double digits. Revenues
hit a new record at nearly a billion dollars, with both
net interest income and fee income jumping more
than 35 percent.
• Outstanding Credit Quality
A disciplined approach to lending gave us another year
of rock solid credit quality with nonperforming assets
at just above a half-percent. Hiring people who know
their books of business well and leave troubled accounts
at their previous banks improves asset quality.
• Deposit Share Victories in High-growth Markets
Recruiting the best bankers and their clients from our
competitors is a winning strategy, and it paid off in 2018
as we grew market share in substantially all of the MSAs
we serve. According to FDIC deposit rankings at June 30, 2018:
○ Pinnacle is now the No. 1 bank in Nashville
○ More than half of our MSAs – eight – grew deposits
by double digits
○ Knoxville and Memphis both crossed the $1 billion
mark for deposits
○ Pinnacle has climbed to the No. 3 bank in
Greensboro-High Point, NC
• Validation from Independent Researchers
In its research, Carnegie found that people are more
likely to do business with a firm, recommend it and pay
a premium for services if they have a good relationship
with their advisor. How does Pinnacle fare against this
standard? Greenwich Associates surveyed our clients
to find out. In our home market in Nashville, which is
our gold standard and model for how all our markets
operate, this is what they said.
○ 98% express overall satisfaction with Pinnacle
○ 93% are likely to recommend Pinnacle – with by
far the highest “net promoter” score in the market
and no detractors in any survey response
○ 95% say Pinnacle values long-term relationships
○ 97% are satisfied with their Pinnacle banker
Based on those foundational building blocks, the strategy
is clear:
• Create a top-notch place to work and leverage it to
recruit and retain the very best bankers.
• Empower them to bring over their best clients and
engage them fully so they give better service and are
easier to do business with.
• Excite and create loyalty in our clients so they love
doing business with us and trust us with every need.
• Grow our company in a smart, sustainable way that
aims to bring shareholders meaningful returns.
Focusing on people is the right thing to do for our clients and
associates. As it happens, it’s also a more profitable way to
do business, as the last 18 years have proven.
2018 saw our strategy play
out successfully in many ways.
It looked like a tough year if all you did was watch the share
price. But long-term shareholder value is created by consistently
out-performing peers on the fundamentals, so we’ll keep setting
tall targets and striving to hit them consistently.
• Hiring
Pinnacle hired 107 new revenue producers in 2018,
many of them from large regional and national banks,
with an average of more than 20 years of experience.
The data from Greenwich were so strong, in fact, that we
earned 21 Greenwich Excellence Awards for 2018 and another
four Greenwich Best Brand Awards, both given for small
business and middle market banking.
There’s nothing radical about the way we accomplished all this.
We just executed our strategy faithfully all year long. The same
strategy we’ve been executing since we started in 2000.
Going forward, we are focused on executing
our strategy to the utmost to deliver long-
term shareholder value.
With all that worked in 2018, and has worked throughout the
history of this firm, we’ve set more tall targets for 2019 and
have every intention of hitting them.
We currently anticipate low- to mid-double digit loan growth
with a focus on building upon the C&I momentum our team has
in the Carolinas and Virginia. C&I now represents more than
20 percent of this region’s total portfolio, and we expect that
growth to continue as we bring on more talented people with
meaningful books of business.
Our recruiting pipelines are very promising in all markets. We’ll
spend the year closing in on our goal of hiring 65 C&I/private
banking advisors in the Carolinas and Virginia. Just because
we’re far ahead of our original target doesn’t mean we’ll take
our foot off the gas. We expect our pursuit of the best bankers
to pay off.
The chance to take more market share will come with them,
because we expect that their best clients will follow them
to our firm. Opportunities for new business abound. We
believe Pinnacle is best positioned to take advantage of the
robust economic development in many of our major markets,
as well as poor service levels at the other banks. Data from
Greenwich Associates plot a very telling graph that shows great
vulnerability among the biggest firms – low overall satisfaction
among those who have the most significant market share.
greenwich associates data
These Nashville numbers from 2018
illustrate the gold standard and
model for how all markets operate.
98%
express overall
satisfaction
with Pinnacle
95%
say Pinnacle
values long-term
relationships
93%
of our clients
are likely to
recommend us
97%
are satisfied
with their
Pinnacle banker
25
awards
Pinnacle earned 25 Greenwich
Excellence and Best Brand Awards
for both small business and middle
market banking.
service quality scores
From Pinnacle’s 2018 client surveys
experience to meet my needs
needs before proposing a solution
94% Listens to me and understands my
93% Demonstrates knowledge and
92% Provides me with knowledge and
91% Delivers against his/her commitments
insights I would not have otherwise
national and local workplace awards
We continued racking up trophies and recognition for the unique culture
and engaging workplace we work so hard to create.
American Banker
named Pinnacle the
No. 16
Best Bank to Work For
Pinnacle earned the
No. 22
spot on the 2018 list of
the 100 Best Companies
to Work For from
FORTUNE magazine and
Great Place to Work®
In 2018, FORTUNE and Great
Place to Work® also named us:
No. 3 Best Workplace in Financial
Services and Insurance
No. 12 Best Workplace for Women
No. 24 Best Workplace for Millenials
No. 40 Best Workplace for Parents
We win because we believe that people matter.
It’s not just a marketing gimmick. We believe in our bones
that people matter, and it’s why we designed every facet
of our company to support that philosophy.
That is why we stand out from the pack. It’s the reason
why we’ve shot from $0 in assets to $25 billion in less than
20 years, why we went from de novo to the 44th largest
banking franchise in the country and why we have been
one of the top performing bank stocks in the country
over our history.
Shareholders should reap the benefits in the end. We
have remained tightly focused on the three metrics we
believe will drive the greatest returns, and we have done
so successfully: Revenue per share has never been higher.
Neither has earnings per share. And we did it with a
fortress balance sheet that saw our non-performing
asset ratio fall.
Our belief is that those three measurements have
traditionally been the most tightly correlated with long-
term shareholder value, and yet our share price in 2018
did not reflect the many wins we had. In the end, that
could be good news for those who invest in our success.
We remain committed to managing the fundamentals
and consistently outperforming peers relative to revenue
growth, earnings growth and loan quality. We believe
a focus on those priorities should, over time, produce
outsized share price appreciation.
pinnacle’s why
We believe that people matter. Period.
Everyone deserves a bank that takes
that to heart. That’s why Pinnacle was
designed to battle the bureaucratic and
impersonal service that’s taken over
much of the banking world. This is
why we’re different.
PNFP.com/OurStory
Onward!
M. Terry Turner
President and
Chief Executive Officer
Robert A. McCabe, Jr.
Chairman
FINANCIAL
REVIEW
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 000-31225
(Exact name of registrant as specified in charter)
, Inc.
Tennessee
(State or other jurisdiction
of incorporation)
62-1812853
(I.R.S. Employer
Identification No.)
150 Third Avenue South, Suite 900, Nashville, Tennessee
(Address of principal executive offices)
37201
(Zip Code)
Registrant's telephone number, including area code: (615) 744-3700
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class
Common Stock, par value $1.00
Name of Exchange on which Registered
Nasdaq Global Select Market
Securities registered to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated Filer
Non-accelerated Filer
Accelerated Filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid and asked price of such common equity as of the last business day
of the registrant's most recently completed second fiscal quarter: $4,632,460,322 as of June 30, 2018.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable
date: 77,531,750 shares of common stock as of February 26, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held April 16, 2019, are
incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Page No.
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
SIGNATURES
4
19
40
40
40
40
41
41
42
43
77
78
137
137
137
138
138
138
138
138
138
139
143
144
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this Annual Report on Form 10-K, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the
Exchange Act. 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) the impact of competition with other financial institutions, including pricing pressures and the resulting impact on Pinnacle
Financial’s results, including as a result of compression to net interest margin; (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) fluctuations or unanticipated changes in interest rates on loans or
deposits or that affect the yield curve; (ix) the results of regulatory examinations; (x) the ability to retain large, uninsured deposits; (xi)
a merger or acquisition; (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 (including as a result
of the competitive environment for associates) 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, required capital maintenance levels or
regulatory requests or directives, particularly if Pinnacle Financial's level of applicable commercial real estate loans were to exceed
percentage levels of total capital in guidelines recommended by its regulators; (xvii) approval of the declaration of any dividend by
Pinnacle Financial's board of directors; (xviii) the vulnerability of Pinnacle Bank's network and online banking portals, and the systems
of parties with whom Pinnacle Financial contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human
error, natural disasters, power loss and other security breaches; (xix) the possibility of increased compliance costs as a result of increased
regulatory oversight, including oversight by the Consumer Financial Protection Bureau, 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; (xx) 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 Pinnacle Financial or Pinnacle Bank; (xxi) changes in state and federal legislation, regulations or policies applicable to banks
and other financial service providers, like BHG, including regulatory or legislative developments; (xxii) the availability and access to
capital; (xxiii) adverse results (including costs, fines, reputational harm, inability to obtain necessary approvals and/or other negative
effects) from current or future litigation, regulatory examinations or other legal and/or regulatory actions; and (xxiv) general competitive,
economic, political and market conditions. A more detailed description of these and other risks is contained in "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 release, whether as a result of new information, future events or otherwise.
3
PART I
Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms "we," "our," "us," "the firm," "Pinnacle
Financial Partners," "Pinnacle" or "Pinnacle Financial" as used herein refer to Pinnacle Financial Partners, Inc., and its
subsidiaries, including Pinnacle Bank, which we sometimes refer to as "our bank subsidiary" or "our bank" and its other subsidiaries.
References herein to the fiscal years 2014, 2015, 2016, 2017 and 2018 mean our fiscal years ended December 31, 2014, 2015, 2016,
2017 and 2018, respectively.
ITEM 1. BUSINESS
OVERVIEW
Pinnacle Financial Partners is a bank holding company headquartered in Tennessee, with approximately $25.0 billion in total assets as
of December 31, 2018. The holding company is the parent company of Pinnacle Bank, a Tennessee state-chartered bank, and owns 100%
of the capital stock of Pinnacle Bank. The firm started operations on October 27, 2000, in Nashville, Tennessee, and has since grown
through a combination of acquisitions and organic growth to 114 offices, including 47 in Tennessee, 38 in North Carolina, 21 in South
Carolina and eight in Virginia.
The firm operates as a community bank in 11 primarily urban markets and their surrounding communities. As an urban community bank,
Pinnacle provides the personalized service most often associated with smaller banks while offering many of the sophisticated products
and services, such as investments and treasury management, more typically found at much larger banks. This approach has enabled
Pinnacle Bank to attract clients from the regional and national banks in all its markets. As a result, Pinnacle Bank has grown steadily in
market share rankings in many of its markets, according to the 2018 FDIC Summary of Deposits data.
The FDIC Summary of Deposits data as of June 30, 2018 is as follows:
Metropolitan Statistical Area (MSA)
Deposit Rank
PNFP Deposit
Market Share
Nashville-Davidson-Murfreesboro-Franklin, TN
Knoxville, TN
Chattanooga, TN-GA
Memphis, TN-MS-AR
Greensboro-High Point, NC
Charlotte-Concord-Gastonia, NC-SC
Raleigh, NC
Charleston-North Charleston, SC
Greenville-Anderson-Mauldin, SC
Roanoke, VA
Winston-Salem, NC
1
5
4
6
3
9
14
8
14
5
3
14.7%
7.9%
7.1%
3.2%
11.4%
0.4%
1.1%
4.1%
1.3%
7.3%
2.8%
ACQUISITIONS
In July 2015, Pinnacle Financial completed the acquisition of CapitalMark Bank & Trust ("CapitalMark") for approximately $19.7
million in cash (including payments related to fractional shares) and 3,306,184 shares of Pinnacle Financial's common stock valued at
approximately $175.5 million. All of CapitalMark's outstanding stock options vested upon consummation of the CapitalMark
acquisition and were converted into options to purchase shares of Pinnacle Financial's common stock at the common stock exchange
rate for the merger. The fair market value of stock options assumed was approximately $30.4 million. The CapitalMark merger
increased our presence in the Knoxville MSA and expanded our operations into the Chattanooga MSA and surrounding counties.
In September 2015, Pinnacle Financial completed the acquisition of Magna Bank ("Magna Bank") for an aggregate of $19.5 million in
cash (including payments related to fractional shares) and 1,371,717 shares of Pinnacle Financial's common stock valued at
approximately $63.5 million. Additionally, at the time of the merger there were 139,417 unexercised stock options that were
exchanged for cash equal to $14.32 less the option's exercise price. This consideration totaled approximately $847,000, including all
applicable payroll taxes. The Magna merger expanded our operations into the Memphis MSA.
In July 2016, Pinnacle Financial completed the acquisition of Avenue Financial Holdings, Inc. ("Avenue") for an aggregate of $20.9
million in cash (including payments related to fractional shares) and 3,760,326 shares of Pinnacle Financial's common stock valued at
approximately $182.5 million. Additionally, at the time of merger there were 257,639 unexercised stock options that were exchanged for
4
cash equal to $20.00 per share less the option's exercise price. This consideration totaled approximately $987,000, including all applicable
payroll taxes. The Avenue merger increased our presence in the Nashville MSA.
In June 2017, Pinnacle Financial completed the acquisition of BNC Bancorp ("BNC") for an aggregate of 27,687,100 shares of Pinnacle
Financial's common stock valued at $1.9 billion and approximately $129,000 in cash (related to fractional shares). Included in the shares
of common stock issued were 136,890 shares of unvested restricted stock that Pinnacle Financial assumed and which are continuing to
vest over their original contractual terms. The fair value of these awards was $9.2 million, with $5.4 million attributable to services
provided by the recipients prior to the merger, that accordingly was included as merger consideration. This acquisition expanded our
operations into the Carolinas and Virginia.
In February 2015, Pinnacle Bank acquired a 30% membership interest in Bankers Healthcare Group, LLC ("BHG"), a company which
primarily is engaged in the business of making term loans to healthcare practices, for $75 million in cash. On March 1, 2016, Pinnacle
Financial and Pinnacle Bank entered into an agreement to acquire 8.55% and 10.45%, respectively, of the outstanding membership
interests in BHG for $114.0 million, payable in a mix of cash and stock consideration. The cash consideration was $74.1 million and the
stock consideration was 860,470 shares of Pinnacle Financial's common stock, with a fair value of $39.9 million on the date of acquisition.
On March 1, 2016, Pinnacle Financial, Pinnacle Bank and the other members of BHG entered into an Amended and Restated Limited
Liability Company Agreement of BHG that provides for, among other things, the following terms: (i) the inability of any member of
BHG to transfer its ownership interest in BHG without the consent of the other members of BHG until March 1, 2021, other than transfers
to family members, trusts or affiliates of the transferring member, in connection with the acquisition of Pinnacle Financial or Pinnacle
Bank or as a result of a change in applicable law that forces Pinnacle Financial and/or Pinnacle Bank to divest their ownership interests
in BHG; (ii) the inability of the board of managers of BHG (of which Pinnacle Financial and Pinnacle Bank have two of the five members
(the "Pinnacle Managers")) to approve a sale of BHG until March 1, 2020 without the consent of one of the Pinnacle Managers; (iii) co-
sale rights for Pinnacle Financial and Pinnacle Bank in the event the other members of BHG decide to sell all or a portion of their ownership
interests after March 1, 2021; and (iv) a right of first refusal for BHG and the other members of BHG in the event that Pinnacle Financial
and/or Pinnacle Bank were to sell all or a portion of their ownership interests after March 1, 2021, except in connection with a transfer
of their ownership interests to an affiliate or in connection with the acquisition of Pinnacle Financial or Pinnacle Bank.
PRODUCTS AND SERVICES
Lending Services
We offer a full range of lending products, including commercial, real estate and consumer loans to individuals and small-to medium-
sized businesses and professional entities. We compete for these loans with competitors who are also well established in our geographic
markets.
Pinnacle Bank's loan approval policies provide for various levels of officer lending authority. When the total amount of loans to a single
borrower exceeds an individual officer's lending authority, officers with higher lending authority determine whether to approve any new
loan requests or renewals of existing loans. Loans to directors and executive officers subject to Regulation O of the FDIC's rules and
regulations require approval of the board, and, certain extensions of credit, including loans above certain amounts require approval of a
committee of the board.
Pinnacle Bank's lending activities are subject to a variety of lending limits imposed by federal and state law. Differing limits apply based
on the type of loan or the nature of the borrower, including the borrower's relationship to Pinnacle Bank. In general, however, at December
31, 2018, we were able to loan any one borrower a maximum amount equal to approximately $364.9 million, for loans that meet certain
additional collateral guidelines. These legal limits will increase or decrease as Pinnacle Bank's capital increases or decreases as a result
of its earnings or losses, the injection of additional capital, payments of dividends, acquisitions, or for other reasons. Pinnacle Bank has
internal loan limits ranging from $15 million to $60 million, dependent upon the internal risk rating of a loan, all of which limits are well
below the legal lending limit of the bank. All relationships in excess of their limit were each approved by the executive committee of the
board of directors or the full board of directors. Pinnacle Bank currently has 39 relationships in excess of the $60 million internal loan
limit.
The principal economic risk associated with each category of loans that Pinnacle Bank has made or may in the future make is the
creditworthiness of the borrower. General economic factors affecting a commercial or consumer borrower's ability to repay include
interest, inflation and unemployment rates, as well as other factors affecting a borrower's assets, clients, suppliers and employees. Many
of Pinnacle Bank's commercial loans are made to small- to medium-sized businesses that are sometimes less able to withstand competitive,
economic and financial pressures than larger borrowers. During periods of economic weakness these businesses may be more adversely
affected than other enterprises and may cause increased levels of nonaccrual or other problem loans, loan charge-offs and higher provision
for loan losses.
5
Pinnacle Bank's commercial clients borrow for a variety of purposes. The terms of these loans (which include equipment loans and
working capital loans) will vary by purpose and by type of any underlying collateral. Commercial loans may be unsecured or secured by
accounts receivable or by other business assets. Pinnacle Bank also makes a variety of commercial real estate loans, including both loans
secured by investment properties and business loans secured by real estate.
Pinnacle Bank also makes a variety of loans to individuals for personal, family, investment and household purposes, including secured
and unsecured installment and term loans and lines of credit, residential first mortgage loans, home equity loans and home equity lines
of credit. We also offer credit cards for consumers and businesses directly as well as through the marketing efforts of BHG.
Deposit Services
Pinnacle Bank seeks to establish a broad base of core deposits, including savings, checking, noninterest-bearing checking, interest-bearing
checking, money market and certificate of deposit accounts, including access to products offered through various CDARS programs.
Rates paid on such deposits vary among banking markets and deposit categories due to different terms and conditions, individual deposit
size, services rendered and rates paid by competitors on similar deposit products. We act as a depository for a number of state and local
governments and government agencies or instrumentalities. Such public fund deposits are often subject to competitive bid and in many
cases must be secured by pledging a portion of our investment securities or a letter of credit.
To attract deposits, Pinnacle Bank has typically employed a marketing plan in its current geographic markets primarily based on relationship
banking and features a broad product line and competitive rates and services. The primary sources of deposits are individuals and businesses
located in those geographic markets. Pinnacle Bank traditionally has obtained these deposits primarily through personal solicitation by
its officers and directors, although its use of media advertising has increased in recent years, primarily due to its advertising and banking
sponsorships with the Tennessee Titans NFL football team and the Memphis Grizzlies NBA basketball team.
Pinnacle Bank also offers its targeted commercial clients a comprehensive array of treasury management services as well as remote
deposit services, which allow electronic deposits to be made from the client's place of business. Our treasury management services include,
among other products, online wire origination, enhanced ACH origination services, positive pay, zero balance and sweep accounts,
automated bill pay services, electronic receivables processing, lockbox processing, merchant card acceptance services, small business
and commercial credit cards, and corporate purchasing cards.
Investment, Trust and Insurance Services
Pinnacle Bank contracts with Raymond James Financial Services, Inc. ("RJFS"), a registered broker-dealer and investment adviser, to
offer and sell various securities and other financial products to the public from Pinnacle Bank's locations through Pinnacle Bank employees
that are also RJFS employees. RJFS is a subsidiary of Raymond James Financial, Inc.
Pinnacle Bank offers, through RJFS, non-FDIC insured investment products in order to assist Pinnacle Bank's clients in achieving their
financial objectives consistent with their risk tolerances. We believe that the brokerage and investment advisory program offered by
RJFS complements Pinnacle Bank's general banking business and further supports its business philosophy and strategy of delivering to
our clients a comprehensive array of products and services that meet their financial needs. Pursuant to its contract with us, RJFS is
primarily responsible for the compliance monitoring of dual employees of RJFS and Pinnacle Bank. Additionally, Pinnacle Bank has
developed its own compliance-monitoring program in an effort to further ensure that Pinnacle Bank personnel deliver these products in
a manner consistent with the various regulations governing such activities. Pinnacle Bank receives a percentage of commission credits
and fees generated by the program. Pinnacle Bank remains responsible for various expenses associated with the program, including
promotional expenses, furnishings and equipment expenses and general personnel costs including commissions paid to licensed brokers.
Pinnacle Bank also maintains a trust department which provides fiduciary and investment management services for individual and
commercial clients. Account types include personal trust, endowments, foundations, individual retirement accounts, pensions and custody.
Additionally, Pinnacle Wealth Advisors and Pinnacle Advisory Services, Inc., registered investment advisors, provide investment advisory
services to its clients and Miller Loughry Beach Insurance Services, Inc. and HPB Insurance Group, Inc., each insurance agency subsidiaries
of Pinnacle Bank, provide insurance products, particularly in the property and casualty area, to their respective clients.
M&A Advisory and Securities Offering Services
During 2015, we formed PNFP Capital Markets, a registered broker dealer that partners with our financial advisors to offer corporate
clients merger and acquisition advisory services, private debt, equity and mezzanine placement services, interest rate derivatives and
other selected middle-market advisory services.
6
Other Banking Services
Given client demand for being able to access banking and investment services easily, Pinnacle Bank also offers a broad array of
convenience-centered products and services, including 24-hour telephone and online banking, mobile banking, debit and credit cards,
direct deposit, remote deposit capture and mobile deposit options. We also offer cash management services for small- to medium-sized
businesses. Additionally, Pinnacle Bank is associated with a nationwide network of automated teller machines of other financial institutions
that our clients are able to use throughout Tennessee and other regions. In many cases, Pinnacle Bank reimburses its clients for any fees
that may be charged to the client for using the nationwide ATM network, providing greater convenience as compared to regional
competitors.
Competitive Conditions
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have
more financial resources than we do. Such competitors primarily include national, regional, and internet banks within the various markets
in which we operate though we also compete with smaller community banks that seek to offer service levels similar to ours. We also face
competition from many others types of institutions, including, without limitation, savings and loans associations, credit unions, finance
companies, brokerage firms, insurance companies, and other financial intermediaries.
The financial services industry is becoming even more competitive as a result of legislative, regulatory and technological changes and
continued consolidation. Banks, securities firms, and insurance companies can operate as affiliates under the umbrella of a financial
holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both
agency and underwriting), and merchant banking. Also, technology has lowered barriers to entry and made it possible for nonbanks to
offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our non-
bank competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors
may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing
for those products and services than we can. Finally, our competitors may choose to offer lower interest rates and pay higher deposit rates
than we do.
We believe that the most important criteria to our bank's targeted clients when selecting a bank is their desire to receive exceptional and
personal customer service while being able to enjoy convenient access to a broad array of financial products. Additionally, when presented
with a choice, we believe that many of our bank's targeted clients would prefer to deal with an institution that favors local decision making
as opposed to where many important decisions regarding a client's financial affairs are made outside of the local community.
Employees
As of December 31, 2018, we employed 2,297.0 full-time equivalent associates. We believe these associates are Pinnacle's most important
asset and we strive to create a culture where associates are engaged and excited to come to work. All associates joining Pinnacle, including
those joining as a result of an acquisition, participate in a three-day orientation that focuses on our culture. Our employee focused culture
is supported by the fact that consulting firm Great Place to Work and FORTUNE magazine recognized us as one of the 100 Best Companies
to Work For in 2017 and 2018. Prior to this eligibility, these organizations named us among best workplaces in the United States on their
Best Small & Medium Workplaces list in 2012, 2013 and 2014. American Banker also recognized Pinnacle Bank as one of the top six
"Best Banks to Work For" in the country in 2013, 2014, 2015, 2016, 2017 and 2018. Additionally, we were inducted into the Nashville
Business Journal's "Best Places to Work" Hall of Fame in 2013 after winning the award for 10 consecutive years. We were also awarded
the “Best Place to Work” among mid-sized companies by the Memphis Business Journal in 2015, 2017 and 2018. And we were named
a Top Workplace among mid-sized companies by the Knoxville News Sentinel in 2017 and 2018. All of these awards place heavy emphasis
on anonymous surveys of associates in the judging criteria. These awards illustrate that our culture is strong, and our financial returns
illustrate that our focus on culture is a winning business strategy.
None of our employees are represented by a union, collective bargaining agreement or similar arrangement, and we have not experienced
any labor disputes or strikes arising from any organized labor groups. We believe our employee relations are good.
OTHER INFORMATION
Investment Securities
In addition to loans, Pinnacle Bank has investments primarily in United States agency securities, mortgage-backed securities, and state
and municipal securities. No investment in any of those instruments exceeds any applicable limitation imposed by law or regulation. The
risk committee of the board of directors reviews the investment portfolio on an ongoing basis in order to ensure that the investments
conform to Pinnacle Bank's asset liability management policy as set by the board of directors.
7
Asset and Liability Management
Our Asset Liability Management Committee ("ALCO"), composed of senior managers of Pinnacle Bank, manages Pinnacle Bank's assets
and liabilities and strives to provide a stable, optimized net interest income and margin, adequate liquidity and ultimately a suitable after-
tax return on assets and return on equity. ALCO conducts these management functions within the framework of written policies that
Pinnacle Bank's board of directors has adopted. ALCO works to maintain an acceptable position between rate sensitive assets and rate
sensitive liabilities. The Risk Committee of the board of directors oversees the ALCO function on an ongoing basis.
Available Information
We file reports with the Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K. The SEC maintains an Internet site at www.sec.gov that contains the reports, proxy and
information statements, and other information we have filed or furnished with the SEC.
Our website address is www.pnfp.com. Please note that our website address is provided as an inactive textual reference only. We
make available free of charge through our website, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or
furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference
unless such information is otherwise specifically referenced elsewhere in this report.
We have also posted our Corporate Governance Guidelines, Corporate Code of Conduct for directors, officers and employees, and the
charters of our Audit Committee, Human Resources and Compensation Committee, Executive Committee, Risk Committee and
Nominating and Corporate Governance Committee of our board of directors on the Corporate Governance section of our website at
www.pnfp.com. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our Corporate
Code of Conduct, Corporate Governance Guidelines or current committee charters on our website. Our corporate governance materials
are available free of charge upon request to our Corporate Secretary, Pinnacle Financial Partners, Inc., 150 Third Avenue South, Suite
900, Nashville, Tennessee 37201.
SUPERVISION AND REGULATION
Both Pinnacle Financial and Pinnacle Bank are subject to extensive state and federal banking laws and regulations that impose restrictions
on and provide for general regulatory oversight of Pinnacle Financial's and Pinnacle Bank's operations. These laws and regulations are
generally intended to protect depositors and borrowers, not shareholders.
Pinnacle Financial
Pinnacle Financial is a bank holding company under the federal Bank Holding Company Act of 1956 that has elected to become a "financial
holding company" thereunder. As a result, it is subject to the supervision, examination, and reporting requirements of the Bank Holding
Company Act and the regulations of the Board of Governors of the Federal Reserve System ("Federal Reserve").
Acquisition of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve's prior
approval before:
• Acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding
company will directly or indirectly own or control more than 5% of the bank's voting shares;
• Acquiring all or substantially all of the assets of any bank; or
•
Subject to certain exemptions, merging or consolidating with any other bank holding company.
Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would
substantially lessen competition or otherwise function as a restraint of trade, or result in or tend to create a monopoly, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs
of the communities to be served. The Federal Reserve is also required to consider the financial and managerial resources and future
prospects of the bank holding companies and banks concerned; the effectiveness of the applicant in combating money laundering; the
convenience and needs of the communities to be served; and the extent to which the proposal would result in greater or more concentrated
risk to the United States banking or financial system.
8
Under the Bank Holding Company Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank
Act"), if well capitalized and well managed, a bank holding company located in Tennessee may purchase a bank located outside of
Tennessee. Conversely, a well capitalized and well managed bank holding company located outside of Tennessee may purchase a bank
located inside Tennessee. In each case, however, state law restrictions may be placed on the acquisition of a bank that has only been in
existence for a limited amount of time or will result in specified concentrations of deposits. For example, Tennessee law currently prohibits
a bank holding company from acquiring control of a Tennessee-based financial institution until the target financial institution has been
in operation for three years.
Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Federal Change in Bank Control Act,
together with related regulations, require Federal Reserve approval prior to any person or company acquiring "control" of a bank holding
company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities
of the bank holding company. Control is rebutably presumed to exist if a person or company acquires 10% or more, but less than 25%,
of any class of voting securities and either:
• The bank holding company has registered securities under Section 12 of the Exchange Act; or
• No other person owns a greater percentage of that class of voting securities immediately after the transaction.
Pinnacle Financial's common stock is registered under Section 12 of the Exchange Act. The regulations provide a procedure for challenge
of the rebuttable control presumption.
Permitted Activities. Bank holding companies generally are prohibited, except in certain statutorily prescribed instances including
exceptions for financial holding companies, from acquiring direct or indirect ownership or control of 5% or more of any class of the
outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, subject to prior notice or
Federal Reserve approval, bank holding companies may engage in, or acquire shares of companies engaged in, activities determined by
the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Gramm-
Leach-Bliley Act of 1999 amended the Bank Holding Company Act and expanded the activities in which bank holding companies and
affiliates of banks are permitted to engage. The Gramm-Leach-Bliley Act eliminated many federal and state law barriers to affiliations
among banks and securities firms, insurance companies, and other financial service providers, and provided that holding companies which
elected to become financial holding companies, as Pinnacle Financial has done, could engage in activities that are:
•
•
Financial in nature;
Incidental to a financial activity (as determined by the Federal Reserve in consultation with the Secretary of the U.S. Treasury);
or
• Complementary to a financial activity and do not pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally (as determined by the Federal Reserve).
The Gramm-Leach-Bliley Act identifies the following activities as financial in nature:
• Lending, trust and other banking activities;
•
Insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent,
or broker for these purposes, in any state;
Providing financial, investment, or advisory services;
Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
•
•
• Underwriting, dealing in or making a market in securities;
• Activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be
a proper incident to banking or managing or controlling banks;
• Activities permitted outside of the United States that the Federal Reserve has determined to be usual in connection with banking
or other financial operations abroad;
• Merchant banking, including through securities or insurance affiliates; and
•
Insurance company portfolio investments.
The Gramm-Leach-Bliley Act also authorizes the Federal Reserve, in consultation with the Secretary of the U.S. Treasury, to determine
activities in addition to those listed above that are financial in nature or incidental or complementary to such financial activity. In
determining whether a particular activity is financial in nature or incidental or complementary to a financial activity, the Federal Reserve
must consider (1) the purpose of the Bank Holding Company Act and the Gramm-Leach-Bliley Act, (2) changes or reasonably expected
changes in the marketplace in which financial holding companies compete and in the technology for delivering financial services, and
(3) whether the activity is necessary or appropriate to allow financial holding companies to effectively compete with other financial
service providers and to efficiently deliver information and services. Pinnacle Financial became a financial holding company effective
as of February 17, 2016.
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To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be "well
capitalized" and "well managed" and, except in limited circumstances, in satisfactory compliance with the Community Reinvestment
Act. A depository institution subsidiary is considered to be "well capitalized" if it satisfies the requirements for this status discussed in
the section captioned "Capital Adequacy" below. A depository institution subsidiary is considered "well managed" if it received a
composite rating and management rating of at least "satisfactory" in its most recent examination. A financial holding company's status
will also depend upon it maintaining its status as "well capitalized" and "well managed" under applicable Federal Reserve regulations.
If a financial holding company ceases to meet these capital and management requirements, the Federal Reserve's regulations provide that
the financial holding company must enter into an agreement with the Federal Reserve to comply with all applicable capital and management
requirements. Until the financial holding company returns to compliance, the Federal Reserve may impose limitations or conditions on
the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding
companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve. If the company does
not return to compliance within 180 days, the Federal Reserve may require divestiture of the holding company's depository institutions
or alternatively the holding company may be required to cease to engage in the activities that it is engaged in that a bank holding company
is not permitted to engage in without being a financial holding company.
In order for a financial holding company to commence any new activity permitted by the Bank Holding Company Act or to acquire a
company engaged in any new activity permitted by the Bank Holding Company Act, each insured depository institution subsidiary of
the financial holding company must have received a rating of at least "satisfactory" in its most recent examination under the Community
Reinvestment Act.
Despite prior approval, the Federal Reserve may order a financial holding company or its subsidiaries to terminate any of these activities
or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the financial holding company's
continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of any of its bank subsidiaries
or if there is a failure to maintain certain capital or management standards.
Support of Subsidiary Institutions. Pinnacle Financial is required to act as a source of financial and managerial strength for its bank
subsidiary, Pinnacle Bank, and to commit resources to support Pinnacle Bank. This support can be required at times when it would not
be in the best interest of Pinnacle Financial's shareholders or creditors to provide it. In the event of Pinnacle Financial's bankruptcy, any
commitment by it to a federal bank regulatory agency to maintain the capital of Pinnacle Bank would be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Pinnacle Bank
Pinnacle Financial owns one bank - Pinnacle Bank. Pinnacle Bank is a state bank chartered under the laws of the State of Tennessee that
is not a member of the Federal Reserve. As a result, it is subject to the supervision, examination and reporting requirements and the
regulations of the Federal Deposit Insurance Corporation ("FDIC") and Tennessee Department of Financial Institutions ("TDFI"). The
TDFI has the authority to approve or disapprove mergers, the issuance of preferred stock and capital notes, the establishment of branches
and similar corporate actions. The TDFI regularly examines state banks like Pinnacle Bank and in connection with its examinations may
identify matters necessary to improve a bank's operation in accordance with principles of safety and soundness. The FDIC also has
examination powers with respect to state, non-member banks like Pinnacle Bank. Any matters identified in such examinations are required
to be appropriately addressed by the bank. Pinnacle Bank is also subject to numerous state and federal statutes and regulations that will
affect its business, activities and operations.
Branching. While the TDFI has authority to approve branch applications, state banks are required by the State of Tennessee to adhere
to branching laws applicable to state chartered banks in the states in which they are located. With prior regulatory approval, Tennessee
law permits banks based in the state to either establish new or acquire existing branch offices throughout Tennessee. As a result of the
Dodd-Frank Act, Pinnacle Bank and any other national or state-chartered bank generally may branch across state lines to the same extent
as banks chartered in the state where the branch is located.
FDIC Insurance. Deposits in Pinnacle Bank are insured by the FDIC up to $250,000 subject to applicable limitations. To offset the cost
of this insurance, the FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the
risks attributable to different categories and concentrations of an insured depository institution’s assets and liabilities. An institution’s
assessment rate depends on the category to which it is assigned and certain adjustments specified by the FDIC, with less risky institutions
paying lower assessments. Under the Dodd-Frank Act, the FDIC has adopted regulations that base deposit insurance assessments on total
assets less capital rather than deposit liabilities and include off-balance sheet liabilities of institutions and their affiliates in risk-based
assessments. After an institution's average assets exceed $10 billion over four quarters as ours have, the assessment rate increases compared
to institutions at lower average asset levels. In addition, the FDIC retains the authority to further increase Pinnacle Bank’s assessment
rates and the FDIC has established a higher reserve ratio of 2% as a long-term goal which goes beyond what is required by statute.
10
Continued increases in our FDIC insurance premiums could have an adverse effect on Pinnacle Bank’s and Pinnacle Financial’s results
of operations.
The FDIC may terminate its insurance of an institution's deposits if it finds that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed
by the FDIC.
General Enforcement Authority of Regulators
Bank holding companies (including those that have elected to be financial holding companies) and insured banks also may be subject to
potential enforcement actions of varying levels of severity by the federal regulators for unsafe or unsound practices in conducting their
business, or for violation of any law, rule, regulation, condition imposed in writing by any applicable agency or term of a written agreement
with that agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of
formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially
enforced; the issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; the termination
of the bank’s deposit insurance; the appointment of a conservator or receiver for the bank; and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not
granted.
Capital Adequacy
The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. Pinnacle Bank
is also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by
the Federal Reserve for bank holding companies. The risk-based capital standards are designed to make regulatory capital requirements
more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and
to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan
commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as
a percentage of total risk-weighted assets and off-balance-sheet items. Tennessee state banks are required to have the capital structure
that the TDFI deems adequate, and the Commissioner of the TDFI as well as federal regulators may require a state bank (or its holding
company in the case of federal regulators) to increase its capital structure to the point deemed adequate by the Commissioner or such
other federal regulator before granting approval of a branch application, merger application or charter amendment.
The Dodd-Frank Act contains a number of provisions dealing with capital adequacy of insured depository institutions and their holding
companies, and for the most part these provisions have resulted in insured depository institutions and their holding companies being
subject to more stringent capital requirements than before passage of the act. Under the Dodd-Frank Act, federal regulators have established
minimum Tier 1 leverage and risk-based capital requirements for, among other entities, banks and bank holding companies on a
consolidated basis. These minimum requirements require that a bank holding company maintain a ratio of Tier 1 capital to average assets,
less goodwill, other intangible assets and other required deductions ("Tier 1 leverage ratio") of not less than 4% and a total capital ratio
of not less than 8%.
In July 2013, the Federal Reserve and the FDIC approved final rules that substantially amended the regulatory capital rules applicable
to Pinnacle Bank and Pinnacle Financial, effective January 1, 2015. The final rules implement the regulatory capital reforms of the Basel
Committee on Banking Supervision reflected in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking
Systems" (Basel III) and changes required by the Dodd-Frank Act.
Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-
based capital ratios for insured depository institutions. The final capital rules implementing Basel III include minimum risk-based capital
and leverage ratios for banks and their holding companies. Moreover, these rules refined the definition of what constitutes "capital" for
purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. Total capital consists of two components,
Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, minority
interests in the equity accounts of consolidated subsidiaries and noncumulative perpetual preferred stock and related surplus, less goodwill
and other specified intangible assets and other regulatory deductions. A portion of Pinnacle Financial's and Pinnacle Bank's recorded
investment in BHG, which as a minority interest in an unconsolidated entity, is subject to specified deductions. Tier 2 capital generally
consists of perpetual preferred stock and related surplus not meeting the Tier 1 capital definition, qualifying subordinated debt, qualifying
mandatorily convertible debt securities, and a limited amount of loan loss reserves. The Dodd-Frank Act also excludes trust preferred
securities issued after May 19, 2010 from being included in Tier 1 capital unless the issuing company is a bank holding company with
less than $500 million in total assets. Trust preferred securities issued prior to that date will continue to count as Tier 1 capital for bank
holding companies with less than $15.0 billion in total assets on that date unless the company's assets thereafter exceed $15.0 billion as
a result of a merger or acquisition. The trust preferred securities issued by Pinnacle Financial or entities it has acquired previously qualified
as Tier 1 capital, but no longer qualify as Tier 1 capital under the Dodd-Frank Act and Basel III as a result of our total assets exceeding
11
$15.0 billion as a result of the BNC merger. For a bank holding company to be considered "well-capitalized," it must maintain a Tier 1
capital ratio of at least 8%, a total capital ratio of at least 10%, and not be subject to a written agreement, order or directive to maintain
a specific capital level.
The minimum capital level requirements applicable to bank holding companies and banks subject to the federal regulators' capital rules
are: (i) a Tier 1 common equity (“CET1”) capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6%; (iii) a total risk-based capital
ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also established a "capital conservation buffer" of 2.5%
(to consist of CET1 capital and that was phased in over three years) above the regulatory minimum capital ratios, that has resulted in the
following minimum ratios: (i) a CET1 capital ratio of 7%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The
phase-in of the capital conservation buffer requirement was fully implemented in January 2019. An institution will be subject to limitations
on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus
the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Under the Basel III capital rules, CET1 consists of common stock and paid in capital and retained earnings. CET1 is reduced by goodwill,
certain intangible assets, net of associated deferred tax liabilities, deferred tax assets that arise from tax credit and net operating loss
carryforwards, net of any valuation allowance, and certain other items specified in the Basel III capital rules. The Basel III capital rules
also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage
servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks
and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds
10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a
requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. Pinnacle
Financial and Pinnacle Bank each opted out of this requirement.
Pinnacle Financial must qualify as "well capitalized," among other requirements, in order for it to engage in certain acquisitions or be
eligible for expedited treatment of certain regulatory applications, including those related to mergers and acquisitions. For Pinnacle
Financial to qualify as "well capitalized," for these purposes it must have a Tier 1 risk-based capital ratio of at least 6% and a total risk-
based capital ratio of at least 10% and not be subject to a written agreement, order or directive to maintain a specific capital level.
Failure to meet statutorily mandated capital requirements or more restrictive ratios separately established for a financial institution or its
holding company by its regulators could subject a bank or bank holding company to a variety of enforcement remedies, including issuance
of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits,
limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business.
Additionally, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") establishes a system of prompt corrective
action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established
five capital categories (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized) into one of which all institutions are placed. Federal banking regulators are required to take various mandatory
supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories.
The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception,
the banking regulator must appoint a receiver or conservator within a specified period for an institution that is critically undercapitalized.
The federal banking agencies have specified by regulation the relevant capital level for each category.
Under FDIC regulations, a state regulated bank which is not a member of the Federal Reserve (a state non-member bank) like Pinnacle
Bank is "well capitalized" if it has a Tier 1 leverage ratio of 5% or better, a CET1 capital ratio of 6.5% or better, a Tier 1 risk-based capital
ratio of 8% or better, a total risk-based capital ratio of 10% or better, and is not subject to a regulatory agreement, order or directive to
maintain a specific level for any capital measure. A state non-member bank is considered "adequately capitalized" if it has a Tier 1 leverage
ratio of at least 4%, a CET1 capital ratio of 4.5% or better, a Tier 1 risk-based capital ratio of at least 6.0%, a total risk-based capital ratio
of at least 8.0% and does not meet the definition of a well-capitalized bank. Lower levels of capital result in a bank being considered
undercapitalized, significantly undercapitalized and critically undercapitalized.
State non-member banks are required to be "well capitalized" in order to take advantage of expedited procedures on certain applications,
such as those related to the opening of branches and mergers, and to accept and renew brokered deposits without further regulatory
approval.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit
an acceptable capital restoration plan to its appropriate federal banking agency. In addition, a bank holding company must guarantee that
a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company's
obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the amount required
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to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration
plan or with FDIC approval. The FDIC is required to resolve a bank when its ratio of tangible equity to tangible assets reaches 2%. The
regulations also establish procedures for downgrading an institution into a lower capital category based on supervisory factors other than
capital. As of December 31, 2018, Pinnacle Bank maintained capital levels that would qualify it as "well-capitalized".
The Basel III capital rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four
Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the
nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and
resulting in higher risk weights for a variety of asset categories. Specific changes to the rules impacting Pinnacle Financial’s and Pinnacle
Bank’s determination of risk-weighted assets include, among other things:
•
•
•
•
•
•
applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition,
development and construction loans;
assigning a 150% risk weight to the unsecured portion of non-residential mortgage loans that are 90 days past due or
otherwise on nonaccrual status;
providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or
less that is not unconditionally cancellable (previously set at 0%);
providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the
risk weight category of the underlying collateral securing the transaction;
providing for a 600% risk weight on equity exposures; and
eliminating the 50% cap on the risk weight for OTC derivatives.
In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred
to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive
variability of risk-weighted assets (“RWA”), which will be accomplished by enhancing the robustness and risk sensitivity of the
standardized approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining
the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised
and robust capital floor. Leadership of the federal banking agencies who are tasked with implementing Basel IV has indicated that it is
considering how to appropriately apply these revisions in the United States. Although it is uncertain at this time, we anticipate some, if
not all, of the Basel IV accord may be incorporated into the capital requirements framework applicable to Pinnacle Financial and Pinnacle
Bank.
At December 31, 2018, Pinnacle Bank's CET1 capital ratio was 10.5%, Tier 1 risk-based capital ratio was 10.5%, total risk-based capital
ratio was 11.5% and Tier 1 leverage ratio was 9.8%, compared to 10.3%, 10.3%, 11.3% and 9.7% at December 31, 2017, respectively.
At December 31, 2018, Pinnacle Financial's CET1 capital ratio was 9.6%, Tier 1 risk-based capital ratio was 9.6%, total risk-based capital
ratio was 12.2% and Tier 1 leverage ratio was 8.9%, compared to 9.1%, 9.1%, 12.0% and 8.6% at December 31, 2017, respectively. All
of these ratios exceeded regulatory minimums and those required by Basel III and FDICIA (including after application of any capital
conservation buffer) to be considered well capitalized. More information concerning Pinnacle Financial's and Pinnacle Bank's regulatory
ratios at December 31, 2018 is included in Note 20 to the "Notes to Consolidated Financial Statements" included elsewhere in this Annual
Report on Form 10-K.
Capital Planning
Banking organizations must have appropriate capital planning processes, with proper oversight from the board of directors. Accordingly,
pursuant to a separate, general supervisory letter from the Federal Reserve, bank holding companies are expected to conduct and document
comprehensive capital adequacy analyses prior to the declaration of any dividends (on common stock, preferred stock, trust preferred
securities or other Tier 1 capital instruments), capital redemptions or capital repurchases. Moreover, the federal banking agencies have
adopted a joint agency policy statement, noting that the adequacy and effectiveness of a bank’s interest rate risk management process
and the level of its interest rate exposures are critical factors in the evaluation of the bank’s capital adequacy. A bank with material
weaknesses in its interest rate risk management process or high levels of interest rate exposure relative to its capital will be directed by
the relevant federal banking agencies to take corrective actions.
In November 2018, Pinnacle Financial announced that its board of directors had authorized a $100 million common stock repurchase
program. Repurchases of shares of Pinnacle Financial's common stock will be made in accordance with applicable laws and may be made
at management’s discretion from time to time in the open market, through privately negotiated transactions or otherwise. The board
authorized the repurchase program to remain in effect through Dec. 31, 2019, unless the entire repurchase amount has been acquired
before that date. As of December 31, 2018, Pinnacle Financial repurchased 405,200 shares for $20.7 million, representing a weighted
average repurchase price of $51.05 per share.
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Payment of Dividends
Pinnacle Financial is a legal entity separate and distinct from Pinnacle Bank. The principal source of Pinnacle Financial's cash flow,
including cash flow to pay interest to its holders of subordinated debentures and subordinated notes, and any dividends payable to common
shareholders, are dividends that Pinnacle Bank pays to Pinnacle Financial as its sole shareholder. Under Tennessee law, Pinnacle Financial
is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the
usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any
preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, Pinnacle
Financial's board of directors must consider its and Pinnacle Bank's current and prospective capital, liquidity, and other needs.
In addition to state law limitations on Pinnacle Financial's ability to pay dividends, the Federal Reserve imposes limitations on Pinnacle
Financial's ability to pay dividends. As noted above, effective January 1, 2016, Federal Reserve regulations limit dividends, stock
repurchases and discretionary bonuses to executive officers if Pinnacle Financial's regulatory capital is below the level of regulatory
minimums plus the applicable capital conservation buffer.
Statutory and regulatory limitations also apply to Pinnacle Bank's payment of dividends to Pinnacle Financial. Pinnacle Bank is required
by Tennessee law to obtain the prior approval of the Commissioner of the TDFI for payments of dividends if the total of all dividends
declared by its board of directors in any calendar year will exceed (1) the total of Pinnacle Bank's net income for that year, plus (2)
Pinnacle Bank's retained net income for the preceding two years. As of December 31, 2018, Pinnacle Bank could pay dividends to
Pinnacle Financial of up to $465.8 million. Generally, federal regulatory policy encourages holding company debt to be serviced by
subsidiary bank dividends or additional equity rather than debt issuances. Pinnacle Financial had available cash balances of approximately
$93.5 million at December 31, 2018.
The payment of dividends by Pinnacle Bank and Pinnacle Financial may also be affected by other factors, such as the requirement to
maintain adequate capital above statutory and regulatory requirements imposed on Pinnacle Bank or Pinnacle Financial by their regulators.
The federal banking agencies have indicated that paying dividends that deplete a depository institution's capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the FDICIA, a depository institution may not pay any dividend if payment
would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements
that provide that bank holding companies and insured depository institutions should generally only pay dividends out of current operating
earnings, and the capital rules adopted implementing Basel III prohibit the payment of dividends when a holding company or insured
depository institution is not in compliance with the capital conservation buffer described elsewhere in this report. See "Capital Adequacy"
above.
During the fourth quarter of 2013, Pinnacle Financial initiated a quarterly common stock dividend in the amount of $0.08 per share. The
board of directors of Pinnacle Financial has increased the dividend amount per share over time. The most recent increase occurred on
October 16, 2018, when the board of directors increased the dividend to $0.16 per share. During the year ended December 31, 2018,
Pinnacle Financial paid $45.5 million in dividends to its common shareholders. On January 15, 2019, our board of directors declared a
$0.16 per share quarterly cash dividend to common shareholders which approximated $12.7 million in aggregate dividend payments paid
on February 22, 2019 to common shareholders of record as of the close of business on February 1, 2019. The amount and timing of all
future dividend payments, if any, is subject to our board's discretion and will depend on our earnings, capital position, financial condition
and other factors, including new regulatory capital requirements, as they become known to us.
Restrictions on Transactions with Affiliates
Both Pinnacle Financial and Pinnacle Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places
limits on the amount of:
• A bank's loans or extensions of credit, including purchases of assets subject to an agreement to repurchase, to or for the benefit
of affiliates;
• A bank's investment in affiliates;
• Assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
• The amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates;
• Transactions involving the borrowing or lending of securities and any derivative transaction that results in credit exposure to an
affiliate; and
• A bank's guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank's capital and surplus and, as to
all affiliates combined, to 20% of a bank's capital stock and surplus. In addition to the limitation on the amount of these transactions,
each of the above transactions must also meet specified collateral requirements. Pinnacle Bank must also comply with other provisions
designed to avoid the taking of low-quality assets.
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Pinnacle Financial and Pinnacle Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other
things, prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially
the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies.
Pinnacle Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their
related interests. These extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties, and must not involve more than the normal risk of repayment or
present other unfavorable features.
Community Reinvestment Act and Fair Lending
The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within their respective
jurisdictions, the Federal Reserve and the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its
local communities, including low- and moderate-income neighborhoods consistent with safe and sound operations of the institutions.
These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately
meet these criteria could impose additional requirements and limitations on Pinnacle Bank. Additionally, banks are required to publicly
disclose the terms of various Community Reinvestment Act-related agreements. Pinnacle Bank received an "outstanding" CRA rating
from its primary federal regulator on its most recent regulatory examination.
Pinnacle Bank is also subject to certain fair lending requirements and reporting obligations involving its home mortgage lending operations.
Fair lending laws prohibit discrimination in the provision of banking services, and bank regulators have increasingly focused on the
enforcement of these laws. Fair lending laws include the Equal Credit Opportunity Act of 1974 and the Fair Housing Act of 1968, which
prohibit discrimination in credit and residential real estate transactions on the basis of prohibited factors including, among others, race,
color, national origin, gender and religion. Pinnacle Bank may be liable, either through administrative enforcement or private civil actions,
for policies that result in a disparate treatment of or have a disparate impact on a protected class of applicants or borrowers. If a pattern
or practice of lending discrimination is alleged by a regulator, then that agency may refer the matter to the U.S. Department of Justice
(“DOJ”) for investigation. Pursuant to a Memorandum of Understanding, the DOJ and Consumer Financial Protection Bureau (“CFPB”)
have agreed to share information, coordinate investigations and generally commit to strengthen their coordination efforts. Pinnacle Bank
is required to have a fair lending program that is of sufficient scope to monitor the inherent fair lending risk of the institution and that
appropriately remediates issues which are identified.
Cybersecurity and Data Privacy
State and federal banking regulators have issued various policy statements and, in some cases, regulations, emphasizing the importance
of technology risk management and supervision. Such policy statements and regulations indicate that financial institutions should design
multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk
posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based
services of the financial institution. A financial institution’s management is expected to maintain sufficient business continuity planning
processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive
malware. A financial institution is expected to develop appropriate processes to enable recovery of data and business operations and
address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-
attack.
Federal statutes and regulations, including the Gramm-Leach-Bliley Act and the Right to Financial Privacy Act of 1978, limit Pinnacle
Financial’s and Pinnacle Bank’s ability to disclose non-public information about consumers, customers and employees to nonaffiliated
third parties. Specifically, the Gramm-Leach-Bliley Act requires disclosure of our privacy policies and practices relating to sharing non-
public information and enables retail customers to opt out of the institution’s ability to share information with unaffiliated third parties
under certain circumstances. The Gramm-Leach-Bliley Act also requires Pinnacle Financial and Pinnacle Bank to implement a
comprehensive information security program that includes administrative, technical and physical safeguards to ensure the security and
confidentiality of customer records and information and, if applicable state law is more protective of customer privacy than the Gramm-
Leach-Bliley Act, financial institutions, including Pinnacle Bank, will be required to comply with such state law. Other laws and regulations
impact Pinnacle Financial’s and Pinnacle Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/
or non-marketing purposes. These regulations affect how consumer information is transmitted through diversified financial companies
and conveyed to outside vendors. In connection with the regulations governing the privacy of consumer financial information, the federal
banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and programs to protect
such information. In addition, Pinnacle Bank has established a privacy policy that it believes promotes compliance with the federal
requirements.
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Other Consumer Laws and Regulations
Interest and other charges collected or contracted for by Pinnacle Bank are subject to state usury laws and federal laws concerning interest
rates. For example, under the Service Members Civil Relief Act, a lender is generally prohibited from charging an annual interest rate in
excess of 6% on any obligations for which the borrower is a person on active duty with the United States military.
Pinnacle Bank's loan operations are also subject to federal laws applicable to credit transactions, such as the:
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Federal Truth-In-Lending Act, governing disclosures of credit terms and costs to consumer borrowers, giving consumers the
right to cancel certain credit transactions, and defining requirements for servicing consumer loans secured by a dwelling;
• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the
community it serves;
• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending
•
•
•
credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;
Service Members Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of
persons in active military service;
• Rules and regulations of the various federal agencies charged with the responsibility of implementing the federal laws;
• Electronic Fund Transfers Act, which regulates fees and other terms of electronic funds transactions;
•
Fair and Accurate Credit Transactions Act of 2003, which permanently extended the national credit reporting standards of the
Fair Credit Reporting Act, and permits consumers, including our customers, to opt out of information sharing among
affiliated companies for marketing purposes and requires financial institutions, including banks, to notify a customer if the
institution provides negative information about the customer to a national credit reporting agency or if the credit that is
granted to the customer is on less favorable terms than those generally available;
Fair Housing Act, which prohibits discriminatory practices relative to real estate related transactions, including the financing
of housing and the rules and regulations of the various federal agencies charged with the responsibility of implementing such
federal laws; and
•
• Real Estate Settlement and Procedures Act of 1974, which affords consumers greater protection pertaining to federally related
mortgage loans by requiring, among other things, improved and streamlined loan estimate forms including clear summary
information and improved disclosure of yield spread premiums.
Pinnacle Bank's deposit operations are subject to the:
• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial records;
• Electronic Fund Transfers Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic
deposits to and withdrawals from deposit accounts and customers' rights and liabilities (including with respect to the
permissibility of overdraft charges) arising from the use of automated teller machines and other electronic banking services.
• Truth in Savings Act, which requires depository institutions to disclose the terms of deposit accounts to consumers;
• Expedited Funds Availability Act, which requires financial institutions to make deposited funds available according to
specified time schedules and to disclose funds availability policies to consumers; and
• Check Clearing for the 21st Century Act ("Check 21"), which is designed to foster innovation in the payments system and to
enhance its efficiency by reducing some of the legal impediments to check truncation. Check 21 created a new negotiable
instrument called a substitute check and permits, but does not require banks to truncate original checks, process check
information electronically, and deliver substitute checks to banks that wish to continue receiving paper checks.
Pinnacle Bank's loan and deposit operations are both subject to the Bank Secrecy Act which governs how banks and other firms report
certain currency transactions and maintain appropriate safeguards against "money laundering" activities.
Examination and enforcement by the state and federal banking agencies, and other such enforcement authorities, for non-compliance
with consumer protection laws and their implementing regulations have increased and become more intense. The advent of the CFPB,
as described in more detail below, further heightens oversight and review of compliance with consumer protection laws and regulations.
Due to these heightened regulatory concerns, including increased enforcement of the CRA by the federal banking agencies, and new
powers and authority of the CFPB, Pinnacle Bank and its affiliates may incur additional compliance costs or be required to expend
additional funds for investments in their local community.
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Anti-Terrorism Legislation and Anti-Money Laundering
Pursuant to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (“USA
PATRIOT”) Act of 2001, as amended, financial institutions are subject to prohibitions against specified financial transactions and account
relationships as well as enhanced due diligence and "know your customer" standards in their dealings with foreign financial institutions
and foreign customers.
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist
financing. The Bank Secrecy Act (“BSA”) and its implementing regulations and parallel requirements of the federal banking regulators
require Pinnacle Bank to maintain a risk-based anti-money laundering (“AML”) program reasonably designed to prevent and detect
money laundering and terrorist financing and to comply with the recordkeeping and reporting requirements of the BSA, including the
requirement to report suspicious activity. The USA PATRIOT Act substantially broadened the scope of AML laws and regulations by
imposing significant new compliance and due diligence obligations on financial institutions, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States. Financial institutions, including banks, are required under final rules
implementing Section 326 of the USA PATRIOT Act to establish procedures for collecting standard information from customers opening
new accounts and verifying the identity of these new account holders within a reasonable period of time. Financial institutions are also
prohibited from entering into specified financial transactions and account relationships and must take certain steps to assist government
agencies in detecting and preventing money laundering and to report certain types of suspicious transactions. In May 2016, Treasury’s
Financial Crimes Enforcement Network (“FinCEN”) issued rules under the BSA requiring financial institutions to identify the beneficial
owners who own or control certain legal entity customers at the time an account is opened and to update their AML compliance programs
no later than May 11, 2018, to include risk-based procedures for conducting ongoing customer due diligence.
Pinnacle Bank currently has policies and procedures in place designed to comply with the USA PATRIOT Act, the BSA and the other
regulations targeting terrorism and money laundering. Federal banking regulators are required, when reviewing bank holding company
acquisition and bank merger applications, to consider the effectiveness of the anti-money laundering activities of the applicants. Material
deficiencies in anti-money laundering compliance, and non-compliance with related requirements such as the U.S. economic and trade
sanctions regimes, can result in public enforcement actions by the bank regulatory agencies and other government agencies, including
the imposition of civil money penalties and supervisory restrictions on growth and expansion. Such enforcement actions could also have
serious reputational consequences for Pinnacle Financial and Pinnacle Bank.
The Office of Foreign Assets Control
The Office of Foreign Assets Control (“OFAC”), which is an office in the U.S. Department of the Treasury, is responsible for helping
to ensure that U.S. entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders
and Acts of Congress. OFAC publishes lists of names of persons and organizations suspected of aiding, harboring or engaging in
terrorist acts; owned or controlled by, or acting on behalf of target countries, and narcotics traffickers. If a bank finds a name on any
transaction, account or wire transfer that is on an OFAC list, it must freeze or block the transactions on the account. Pinnacle Bank has
appointed a compliance officer to oversee the inspection of its accounts and the filing of any notifications. Pinnacle Bank actively
checks high risk OFAC areas such as new accounts, wire transfers and customer files. These checks are performed using software that
is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and
Blocked Persons.
The Dodd-Frank Act
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and
competitive relationships of the nation's financial institutions. In 2010, the U.S. Congress passed the Dodd-Frank Act, which includes
significant consumer protection provisions related to, among other things, residential mortgage loans that have increased, and are likely
to further increase, our regulatory compliance costs. The Dodd-Frank Act also imposes other restrictions on our operations, including
restrictions on the types of investments that bank holding companies and banks can make. Given the sweeping nature of the Dodd-Frank
Act and the fact that our total assets now exceed $10 billion, which results in the imposition of certain additional requirements thereunder,
we expect that the Dodd-Frank Act will continue to have a negative impact on our earnings through fee reductions, higher costs and
restrictions on certain activities. Failure to comply with the requirements would negatively impact our results of operations and financial
condition and could limit our growth or expansion activities. While we cannot predict what effect any presently contemplated or future
changes in the laws or regulations or their interpretations would have on us, such changes could be materially adverse to our investors.
Set out below are certain of the additional provisions of the Dodd-Frank Act to which we are subject since our total assets exceed $10
billion.
Durbin Amendment. The Dodd-Frank Act included provisions (known as the "Durbin Amendment") which restrict interchange
fees to those which are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to
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restrict debit card transaction routing. The Federal Reserve issued final rules implementing the Durbin Amendment on June 29,
2011. In the final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points (plus $0.01 for fraud
loss) in order to be eligible for a safe harbor such that the fee is conclusively determined to be reasonable and proportionate. The
interchange fee restrictions contained in the Durbin Amendment, and the rules promulgated thereunder, only apply to debit card
issuers with $10 billion or more in total consolidated assets, like Pinnacle Bank. The implications of the Durbin Amendment first
became applicable to us on July 1, 2017.
Consumer Financial Protection Bureau. The Dodd-Frank Act also created the CFPB, which took over responsibility for enforcing
the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate
Settlement Procedures Act and the Truth in Saving Act, among others, on July 21, 2011. We are subject to oversight by the CFPB.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks including, among
other things, the authority to prohibit "unfair, deceptive, or abusive" acts and practices. Abusive acts or practices are defined as those
that (1) materially interfere with a consumer's ability to understand a term or condition of a consumer financial product or service,
or (2) take unreasonable advantage of a consumer's (a) lack of financial savvy, (b) inability to protect himself in the selection or use
of consumer financial products or services, or (c) reasonable reliance on a covered entity to act in the consumer's interests. The CFPB
has the authority to investigate possible violations of federal consumer financial law, hold hearings and commence civil litigation.
The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may
also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or an
injunction. The CFPB has been active in bringing enforcement actions related to consumer financial protection laws and obtaining
the forms of relief described above.
The rules issued by the CFPB will have a long-term impact on our business, including our mortgage loan origination and servicing
activities. Compliance with these rules will increase our overall regulatory compliance costs. On July 1, 2017, the CFPB took over
conducting on-site consumer examinations from the FDIC for all regulations that transferred under their supervision.
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Growth
Act”). The Growth Act alters some of the provisions of the Dodd-Frank Act. Certain of these provisions, to which we became subject
once our total assets exceeded $10 billion, are set out below, along with the changes made to such provisions under the Growth Act.
Under the Dodd-Frank Act, publicly traded bank holding companies with $10 billion or more in total assets like Pinnacle Financial were
required to establish a risk committee responsible for oversight of enterprise-wide risk management practices. Pinnacle Financial
established a risk committee on February 7, 2017. The Growth Act raised the minimum asset threshold triggering the requirement to
establish a risk committee from $10 billion to $50 billion. As a result, Pinnacle Financial is no longer required to maintain its standalone
risk committee.
Pursuant to the Dodd-Frank Act, any banking organization, including whether a bank holding company or a depository institution, with
more than $10 billion in total consolidated assets and regulated by a federal financial regulatory agency was required to conduct annual
company-run stress tests to ensure it had sufficient capital during periods of economic downturn. Pinnacle Financial’s and Pinnacle Bank’s
first stress tests were due in July 2018. The Growth Act raised the asset threshold at which companies are required to conduct the stress
tests from $10 billion to $250 billion. While we are no longer required to annually conduct stress tests under the Dodd-Frank Act, we
expect to continue to perform stress tests from time to time in connection with our capital planning process.
Securities Registration and Listing
Pinnacle Financial’s securities are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed
on the Nasdaq Global Select Market. As such, Pinnacle Financial is subject to the information, proxy solicitation, insider trading, corporate
governance, and other requirements and restrictions of the Exchange Act, as well as the Marketplace Rules and other requirements
promulgated by the Nasdaq Stock Market, LLC.
As a public company, Pinnacle Financial is also subject to the accounting oversight and corporate governance requirements of the Sarbanes-
Oxley Act of 2002, including, among other things, required executive certification of financial presentations, increased requirements for
board audit committees and their members, and enhanced requirements relating to disclosure controls and procedures and internal control
over financial reporting.
Insurance Agencies
Each of Miller Loughry Beach and HPB Insurance Group is subject to licensing requirements and extensive regulation under the laws
of the various states in which it conducts its insurance agency business. These laws and regulations are primarily for the protection of
policyholders. In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities.
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Generally, those authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement
regulations. Licenses may be denied or revoked for various reasons, including for regulatory violations or upon conviction for certain
crimes. Possible sanctions that may be imposed for violation of regulations include the suspension of individual employees, limitations
on engaging in a particular business for a specified period of time, revocation of licenses, censures and fines.
Effect of Governmental Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve's monetary policies have had, and are likely to continue to have, an important impact on the operating
results of commercial banks through the Federal Reserve's statutory power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank
loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount
rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the
nature or impact of future changes in monetary and fiscal policies.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging provisions for altering the structures, regulations and
competitive relationships of the nation’s financial institutions. Throughout 2017 and 2018, the U.S. Congress has debated, proposed and,
in some cases, passed changes to the financial institution regulatory landscape, including the Growth Act and other proposed amendments
to the Dodd-Frank Act, including raising the asset threshold levels at which financial institutions and their holding companies become
subject to enhanced regulatory oversight and compliance requirements. We cannot predict whether or in what form any proposed regulation
or statute will be adopted or the extent to which our business may be affected by any new regulation or statute. Even if modifications are
enacted to existing or proposed regulations, including raising certain assets thresholds above those currently in place, we may continue
to face enhanced scrutiny from our regulators who may expect us to continue to comply with the current, more stringent requirements
as part of their safety and soundness and compliance examinations and general oversight of our operations.
ITEM 1A. RISK FACTORS
Investing in our common stock involves various risks which are particular to our company, our industry and our market areas.
If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our results of
operations and financial condition could be materially and negatively impacted. These matters could cause the trading price of our
common stock to decline in future periods.
Our net interest margin, and consequently our net earnings, are significantly affected by interest rate levels.
Our profitability is dependent to a large extent on net interest income, which is the difference between interest income earned
on loans and investment securities and interest expense paid on deposits, other borrowings, subordinated debentures and
subordinated notes. The absolute level of interest rates as well as changes in interest rates or that affect the yield curve may affect
our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rate
fluctuations are caused by many factors which, for the most part, are not under our control. For example, national monetary policy
plays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that
occur with our customers also impact the rates we collect on loans and the rates we pay on deposits. In addition, changes in the
method of determining the London Interbank Offered Rate (LIBOR) or other reference rates, or uncertainty related to such
potential changes, may adversely affect the value of reference rate-linked debt securities that we hold or issue, which could
further impact our interest rate spread.
Changes in the level of interest rates also may negatively affect our ability to originate loans, the value of our assets and our
ability to realize gains from the sale of our assets, all of which could ultimately affect our results of operations and financial
condition. A decline in the market value of our assets may limit our ability to borrow additional funds. As a result, we could be
required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in
order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur
losses. Following an increase in the general level of interest rates, our ability to maintain a positive net interest spread is
dependent on our ability to increase our loan offering rates, replace loan maturities with new originations, minimize increases on
our deposit rates, and maintain an acceptable level and mix of funding. Although we have implemented procedures we believe
will reduce the potential effects of changes in interest rates on our net interest income, these procedures may not always be
successful. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest income
and our net interest margin, asset quality, loan origination volume, liquidity, and overall profitability. We cannot assure you that
we can minimize our interest rate risk.
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Over the last few years, interest rates have increased. Since December 2015, the Federal Reserve has raised short-term
interest rates nine times and may institute further changes in the future. Because of significant competitive pressures in our
markets and the negative impact of these pressures on our deposit and loan pricing, coupled with the fact that a significant portion
of our loan portfolio has variable rate pricing that moves in concert with changes to the Federal Reserve’s federal funds rate or
LIBOR, our net interest margin may be negatively impacted if these short-term rates decline or do not continue to rise. However,
further increases may also negatively impact our results of operations if we are unable to increase the rates we charge on loans or
earn on our investment securities in excess of the increases we must pay on deposits and our other funding sources.
As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets
and liabilities, meaning that either our interest-bearing liabilities (usually deposits and borrowings) will be more sensitive to
changes in market interest rates than our interest-earning assets (usually loans and investment securities), or vice versa. In either
event, if market interest rates should move contrary to our position, this “gap” may work against us, and our results of operations
and financial condition may be negatively affected. We attempt to manage our risk from changes in market interest rates by
adjusting the rates, maturity, repricing characteristics, and balances of the different types of interest-earning assets and interest-
bearing liabilities. Interest rate risk management techniques are not exact. We employ the use of models and modeling techniques
to quantify the levels of risks to net interest income, which inherently involve the use of assumptions, judgments, and estimates.
While we strive to ensure the accuracy of our modeled interest rate risk profile, there are inherent limitations and imprecisions in
this determination and actual results may differ.
We have entered into certain hedging transactions including interest rate swaps, which are designed to lessen elements of our
interest rate exposure. We utilize fair value hedges in an effort to manage future interest rate exposure in both our loan book and
our investment securities portfolio. At December 31, 2018, these fair value hedges totaled a liability of $21.8 million. In addition,
we utilize cash flow hedges to manage interest rate exposure for our wholesale borrowings portfolio. The hedging strategy
converts the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and is used in an effort to protect
us from floating interest rate variability. At December 31, 2018, these cash flow hedges totaled a liability of $1.8 million. In the
event that interest rates do not change in the manner anticipated, such transactions may adversely affect our results of operations.
We have a concentration of credit exposure to borrowers in certain industries, and we also target small to medium-sized
businesses.
We have meaningful credit exposures to borrowers in certain businesses, including commercial and residential building
lessors, new home builders. These industries experienced adversity during 2008 through 2010 as a result of sluggish economic
conditions, and, as a result, an increased level of borrowers in these industries were unable to perform under their loan agreements
with us, or suffered loan downgrades which negatively impacted our results of operations. If the economic environment in our
markets weakens in 2019 or beyond, these industry or other concentrations could result in increased deterioration in credit quality,
past dues, loan charge offs and collateral value declines, which could cause our results of operations and financial condition to be
negatively impacted. Furthermore, any of our large credit exposures that deteriorate unexpectedly could cause us to have to make
significant additional loan loss provisions, negatively impacting our results of operations and financial condition.
A substantial focus of our marketing and business strategy is to serve small to medium-sized businesses in our market areas.
As a result, a relatively high percentage of our loan portfolio consists of commercial loans primarily to small to medium-sized
businesses. At December 31, 2018, our commercial and industrial loans accounted for almost 29.8% of our total loans.
Additionally, approximately, 37.0% of our commercial real-estate mortgage loans at December 31, 2018 are owner-occupied
commercial real estate loans, which are loans to businesses secured by the businesses’ real estate. We expect to seek to expand the
amount of such loans in our portfolio in 2019. During periods of lower economic growth or challenging economic periods, small
to medium-sized businesses may be impacted more severely and more quickly than larger businesses. Consequently, the ability of
such businesses to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would
adversely impact our results of operations and financial condition.
As a result of our recent acquisitions and our organic growth in our legacy markets as well as our revaluation of deferred tax
assets and recognized investment securities losses following the passage of the Tax Cuts and Jobs Act during the fourth quarter of
2017, our level of commercial real estate loans increased markedly from approximately 190% of total risk-based capital as of
December 31, 2014 to approximately 278% of total risk-based capital as of December 31, 2018. If our level of commercial real
estate loans were to exceed regulatory guidelines (as was the case during the first half of 2018), our ability to grow our loan
portfolio in line with our targets may be negatively impacted if we don’t increase our capital levels and it may be more difficult to
secure any required regulatory approvals necessary to execute on our expansion strategy without increasing our capital levels.
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The percentage of real estate construction and development loans in our loan portfolio was approximately 11.7% of total
loans at December 31, 2018 and approximately 80.3% of Pinnacle Financial's total risk-based capital. These loans make up
approximately 3.9% of our non-performing loans at December 31, 2018. This type of lending is generally considered to have
relatively high credit risks because the principal is concentrated in a limited number of loans with repayment dependent on the
successful completion and operation of the related real estate project. Real estate industry pricing dynamics in the geographical
markets in which we operate can vary from year to year, and with respect to construction, can vary between project funding and
project completion. Asset values to which we underwrite loans can fluctuate from year to year and impact collateral values and
the ability of our borrowers to repay their loans. Like regulatory guidelines on commercial real estate loans, federal regulators
have issued guidance that imposes additional restrictions on banks with construction and development loans in excess of 100% of
total capital. If our level of these loans was to exceed these guidelines, our ability to make additional loans in this segment would
be limited.
Weakness in residential real estate market prices as well as demand could result in price reductions in home and land values
adversely affecting the value of collateral securing some of the construction and development loans that we hold. Should we
experience the return of adverse economic and real estate market conditions similar to those we experienced from 2008 through
2010 we may again experience increases in non-performing loans and other real estate owned, increased losses and expenses from
the management and disposition of non-performing assets, increases in provision for loan losses, and increases in operating
expenses as a result of the allocation of management time and resources to the collection and work out of loans, all of which
would negatively impact our financial condition and results of operations.
Our ability to grow our loan portfolio may be limited by, among other things, economic conditions, competition within our
market areas, the timing of loan repayments and seasonality.
Our ability to continue to improve our results of operations is dependent upon, among other things, aggressively growing our
loan portfolio. While we believe that our strategy to grow our loan portfolio is sound and our growth targets are achievable over
an extended period of time, competition within our market areas is significant, particularly for borrowers whose businesses were
less negatively impacted by the challenging economic conditions of the recession. We compete with both large regional and
national financial institutions, who are sometimes able to offer more attractive interest rates and other financial terms than we
choose to offer, and smaller community-based financial institutions who seek to offer a similar level of service to that which we
offer. This competition can make loan growth challenging, particularly if we are unwilling to price loans at levels that would
cause unacceptable levels of compression of our net interest margin or if we are unwilling to structure a loan in a manner that we
believe results in a level of risk to us that we are not willing to accept. Moreover, loan growth throughout the year can fluctuate
due in part to seasonality of the businesses of our borrowers and potential borrowers and the timing on loan repayments,
particularly those of our borrowers with significant relationships with us, resulting from, among other things, excess levels of
liquidity. In addition, the passage of the Tax Cuts and Jobs Act, which contains provisions limiting the mortgage interest tax
deduction and eliminating the deduction for interest paid on home equity loans, may negatively affect our ability to originate
residential real estate loans (including home equity lines of credit).
Much of our organic loan growth that we have experienced in recent years (and a key part of our loan growth strategy in 2019
and beyond) was the result not of strong loan demand but rather of our ability to attract experienced financial services
professionals who have been able to attract customers from other financial institutions. Inability to retain these key personnel
(including key personnel of the businesses we have acquired) or to continue to attract experienced lenders with established books
of business (including, in either case, as a result of competitive compensation and other hiring and retention pressures), at all or at
the pace we have anticipated, could negatively impact our growth because of the loss of these individuals’ skills and customer
relationships and/or the potential difficulty of promptly replacing them. Moreover, if these advisors we hire are unable to cause
their customers to move their relationships to us in the time periods that we are targeting or at all, or if we are unable to retain
such business, our loan growth may be negatively affected, which could have a material adverse effect on our results of operations
and financial condition.
Negative developments in the U.S. and local economy may adversely impact our results in the future.
Our financial performance is highly dependent on the business environment in the markets where we operate and in the
U.S. as a whole. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth,
business activity, investor or business confidence, consumer sentiment, limitations on the availability or increases in the cost of
credit and capital, increases in inflation or interest rates, natural disasters, terrorist attacks, acts of war, or a combination of these
or other factors. Economic conditions in the markets in which we operate deteriorated significantly between early 2008 and the
middle of 2010. These challenges manifested themselves primarily in the form of increased levels of provisions for loan losses
and other real estate expense related to declining collateral values in our real estate loan portfolio and increased costs associated
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with our portfolio of other real estate owned. A worsening of business and economic conditions generally or specifically in the
principal markets in which we conduct business could have adverse effects, including the following:
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•
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a decrease in deposit balances or the demand for loans and other products and services we offer;
an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or
default on their loans or other obligations to us, which could lead to higher levels of nonperforming assets, net
charge-offs and provisions for credit losses;
a decrease in the value of loans and other assets secured by real estate;
a decrease in net interest income from our lending and deposit gathering activities; and
an increase in competition resulting from financial services companies.
Although economic conditions have strengthened in most of our markets in recent periods and we have focused our efforts on
growing our earning assets, we believe that it is possible we will continue to experience an uncertain and volatile economic
environment during 2019, including as a result of political uncertainties that led to the shutdown of the federal government in
January 2019 and which may contribute to similar shutdowns in the future. There can be no assurance that these conditions will
improve in the near term or that conditions will not worsen. Such conditions could adversely affect our business, financial
condition, and results of operations.
In addition, over the last several years, including beginning on December 22, 2018, the federal government has shut down
several times, in some cases for prolonged periods. It is possible that the federal government may shut down again in the future. If
a prolonged government shutdown occurs, it could significantly impact business and economic conditions generally or
specifically in our principal markets, which could have a material adverse effect on our results of operations and financial
condition.
Our operations are principally geographically concentrated in certain markets in the southeastern United States, and changes
in local economic conditions impact our profitability.
A significant percentage of our borrowers are situated in various MSAs in Tennessee, North Carolina, South Carolina and
Virginia in which we operate. Our success significantly depends upon the growth in population, income levels, deposits,
employment levels and housing starts in our markets, along with the continued attraction of business ventures to these areas, and
our profitability is impacted by the changes in general economic conditions in these markets and other markets in which collateral
securing our loans is located. We cannot assure you that economic conditions, including loan demand, in these markets will not
deteriorate during 2019 or thereafter, and upon any deterioration, we may not be able to grow our loan portfolio in line with our
expectations and the ability of our customers to repay their loans to us may be negatively impacted and our financial condition
and results of operations could be negatively and materially impacted.
Our business may suffer if there are significant declines in the value of real estate.
The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the
geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to
decline materially, a significant part of our loan portfolio could become under-collateralized. If the loans that are collateralized by
real estate become troubled during a time when market conditions are declining or have declined, we may not be able to realize
the value of the security anticipated when we originated the loan, which in turn could have an adverse effect on our allowance and
provision for loan and lease losses and our financial condition, results of operations and liquidity.
Most of our foreclosed assets are comprised of real estate properties. We carry these properties at their estimated fair values
less estimated selling costs. While we believe the carrying values for such assets are reasonable and appropriately reflect current
market conditions, there can be no assurance that the values of such assets will not further decline prior to sale or that the amount
of proceeds realized upon disposition of foreclosed assets will approximate the carrying value of such assets. If the proceeds from
any such dispositions are less than the carrying value of foreclosed assets, we will record a loss on the disposition of such assets,
which in turn could have an adverse effect on our results of operations.
Compared to national financial institutions, we are less able to spread the risks of unfavorable local economic conditions
across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market
growth or return of more favorable economic conditions in our primary market areas if they do occur.
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If our allowance for loan losses is not sufficient to cover losses inherent in our loan portfolio, our results of operations and
financial condition will be negatively impacted.
If loan customers with significant loan balances fail to repay their loans, our results of operations, financial condition and
capital levels will suffer. We make various assumptions and judgments about the probable losses in our loan portfolio, including
the creditworthiness of our borrowers and the value of any collateral securing the loans. Utilizing objective and subjective factors,
we maintain an allowance for loan losses, established through a provision for loan losses charged to expense, to cover our
estimate of the probable losses in our loan portfolio. In determining the size of this allowance, we utilize estimates based on
analyses of volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies,
nonaccruals and charge-offs, loss experience of various loan categories, national and local economic conditions, industry and peer
bank loan quality indications, and other pertinent factors and information. Actual losses are difficult to forecast, especially if those
losses stem from factors beyond our historical experience or are otherwise inconsistent with our credit quality assessments. If our
assumptions are inaccurate, our current allowance may not be sufficient to cover potential loan losses, and additional provisions
may be necessary which would negatively impact our results of operations and financial condition.
In addition, federal and state regulators periodically review our loan portfolio and may require us to increase our allowance
for loan losses or recognize loan charge-offs. Their conclusions about the quality of a particular borrower or our entire loan
portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge offs as required by these
regulatory agencies could have a negative effect on our results of operations and financial condition. Moreover, additions to the
allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing
loans, identification of additional problem loans, accounting rule changes (like those related to the Financial Accounting
Standards Board’s rules regarding accounting for current expected credit losses that are not yet effective) and other factors, both
within and outside of our management’s control. These additions may require increased provision expense which would
negatively impact our results of operations and financial condition.
Liquidity risk could impair our ability to fund our operations and jeopardize our financial condition.
Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors
by either converting assets into cash or accessing new or existing sources of incremental funds. Liquidity risk arises from the
possibility that we may be unable to satisfy current or future funding requirements and needs.
The objective of managing liquidity risk is to ensure that our cash flow requirements resulting from depositor, borrower and
other creditor demands as well as our operating cash needs, are met, and that our cost of funding such requirements and needs is
reasonable. We maintain an asset/liability and interest rate risk policy and a liquidity and funds management policy, including a
contingency funding plan that, among other things, include procedures for managing and monitoring liquidity risk. Generally we
rely on deposits, repayments of loans and cash flows from our investment securities as our primary sources of funds. Our
principal deposit sources include consumer, commercial and public funds customers in our markets. We have used these funds,
together with wholesale deposit sources such as brokered deposits, along with Federal Home Loan Bank of Cincinnati (“FHLB
Cincinnati”) advances, federal funds purchased and other sources of short-term and long-term borrowings, to make loans, acquire
investment securities and other assets and to fund continuing operations.
An inability to maintain or raise funds in amounts necessary to meet our liquidity needs could have a substantial negative
effect, individually or collectively, on Pinnacle Financial and Pinnacle Bank's liquidity. Our access to funding sources in amounts
adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the
financial services industry in general. For example, factors that could detrimentally impact our access to liquidity sources include
a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, a reduction in our
credit rating, any damage to our reputation or any other decrease in depositor or investor confidence in our creditworthiness and
business. Our access to liquidity could also be impaired by factors that are not specific to us, such as severe volatility or
disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a
whole. Any such event or failure to manage our liquidity effectively could affect our competitive position, increase our borrowing
costs and the interest rates we pay on deposits, limit our access to the capital markets, cause our regulators to criticize our
operations and have a material adverse effect on our results of operations or financial condition.
Deposit levels may be affected by a number of factors, including demands by customers, rates paid by competitors, general
interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other
factors. Loan repayments are a relatively stable source of funds but are subject to the borrowers’ ability to repay loans, which can
be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting
business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement
weather, natural disasters, prolonged government shutdowns and other factors. Furthermore, loans generally are not readily
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convertible to cash. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet growth
in loans, deposit withdrawal demands or otherwise fund operations. Such secondary sources include FHLB Cincinnati advances,
brokered deposits, secured and unsecured federal funds lines of credit from correspondent banks, Federal Reserve borrowings
and/or accessing the equity or debt capital markets.
We anticipate we will continue to rely primarily on deposits, loan repayments, and cash flows from our investment securities
to provide liquidity. Additionally, where necessary, the secondary sources of borrowed funds described above will be used to
augment our primary funding sources. If we are unable to access any of these secondary funding sources when needed, we might
be unable to meet our customers’ or creditors’ needs, which would adversely affect our financial condition, results of operations,
and liquidity.
The performance of our investment securities portfolio is subject to fluctuation due to changes in interest rates and market
conditions, including credit deterioration of the issuers of individual securities.
Changes in interest rates can negatively affect the performance of most of our investment securities. Interest rate volatility
can reduce unrealized gains or increase unrealized losses in our portfolio. Interest rates are highly sensitive to many factors
including monetary policies, domestic and international economic and political issues, including trade disputes, and other factors
beyond our control. Fluctuations in interest rates can materially affect both the returns on and market value of our investment
securities. Additionally, actual investment income and cash flows from investment securities that carry prepayment risk, such as
mortgage-backed securities and callable securities, may materially differ from those anticipated at the time of investment or
subsequently as a result of changes in interest rates and market conditions.
Our investment securities portfolio consists of several securities whose trading markets are “not active.” As a result, we
utilize alternative methodologies for pricing these securities that include various estimates and assumptions. There can be no
assurance that we can sell these investment securities at the price derived by these methodologies, or that we can sell these
investment securities at all, which could have an adverse effect on our financial condition, results of operations and liquidity.
We monitor the financial position of the various issues of investment securities in our portfolio, including each of the state
and local governments and other political subdivisions where we have exposure. To the extent we have securities in our portfolio
from issuers who have experienced a deterioration of financial condition, or who may experience future deterioration of financial
condition, the value of such securities may decline and could result in an other-than-temporary impairment charge, which could
have an adverse effect on our financial condition, results of operations and liquidity.
In addition, from time to time we may restructure portions of our investment securities portfolio as part of our asset liability
management strategies, and may incur losses, which may be material, in connection with any such restructuring.
A new accounting standard may require us to increase our ALLL and could have a material adverse effect on our financial
condition and results of operations.
The FASB has adopted a new accounting standard that will be effective for Pinnacle Bank beginning January 1, 2020. This
standard, referred to as current expected credit loss, or CECL, will require financial institutions to determine periodic estimates of
lifetime expected credit losses on loans, and recognize the expected credit losses through provision for loan losses. This will
change the current method of provisioning for loan losses that are probable, which may require us to increase our allowance for
loan losses, and is likely to increase the types of data we would need to collect and review to determine the appropriate level of
our allowance for loan losses. In addition, this change may result in more volatility in the level of our allowance for loan losses.
An increase, to the extent material, in our allowance for loan losses or expenses incurred to determine the appropriate level of the
allowance for loan losses could have a material adverse effect on our capital levels, financial condition and results of operations.
As discussed above, a reduction in our capital levels could subject us to a variety of enforcement remedies available to the federal
regulatory authorities and would negatively impact our ability to pursue acquisitions or other expansion opportunities if we are
unable to satisfactorily raise additional capital.
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A decline in our stock price or expected future cash flows, or a material adverse change in our results of operations or
prospects, could result in impairment of our goodwill.
A significant and sustained decline in our stock price and market capitalization below book value, a significant decline in our
expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result
in impairment of our goodwill. At December 31, 2018, our goodwill and other identifiable intangible assets totaled approximately
$1.9 billion. If we were to conclude that a write-down of our goodwill is necessary, then the appropriate charge would likely cause
a material loss. Any significant loss would further adversely impact the capacity of Pinnacle Bank to pay dividends to Pinnacle
Financial without seeking prior regulatory approval, which could adversely affect Pinnacle Financial’s ability to pay required
interest payments on its outstanding indebtedness or to continue to pay dividends to its shareholders.
Our accounting estimates and risk management processes rely on analytical and forecasting models and tools.
The processes we use to estimate probable credit losses and to measure the fair value of financial instruments, as well as the
processes used to estimate the effects of changing interest rates and other measures of our financial condition and results of
operations, depend upon the use of analytical and forecasting models and tools. These models and tools reflect assumptions that
may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are
accurate, the models and tools may prove to be inadequate or inaccurate because of other flaws in their design or their
implementation. Any such failure in our analytical or forecasting models and tools could have a material adverse effect on our
business, financial condition and results of operations.
Our selection of accounting policies and methods may affect our reported financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of
operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so
they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and
results of operations. In some cases, management must select the accounting policy or method to apply from two or more
alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting materially different
results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They require
management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts
could be reported under different conditions or using different assumptions or estimates. Because of the uncertainty of estimates
involved in these matters, we may be required to do one or more of the following: significantly increase the allowance for loan
losses or sustain loan losses that are significantly higher than the reserve provided; recognize significant impairment on goodwill
and other intangible asset balances; reduce the carrying value of an asset measured at fair value; or significantly increase our
accrued tax liability. Any of these could have a material adverse effect on our business, financial condition or results of
operations. For a discussion of our critical accounting policies, see “Part II, Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Estimates” included elsewhere in this Annual Report on
Form 10-K.
Changes to LIBOR may adversely affect the holder of, the market value of, and the interest expense paid on our subordinated
notes and our subordinated debentures and related trust preferred securities, and may affect certain of our loans.
On July 27, 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or
compelling banks to submit rates for the calculation of LIBOR to the LIBOR administrator. The announcement indicates that the
continuation of LIBOR on the current basis will not be guaranteed after 2021. It is impossible to predict whether and to what
extent banks will continue to provide LIBOR submissions to the LIBOR administrator, whether LIBOR will cease to be published
or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or
elsewhere. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR and it is
impossible to predict the effect of any such alternatives on the value of securities based on LIBOR such as our subordinated notes
and our subordinated debentures and related trust preferred securities.
Uncertainty as to the nature of such potential changes, alternative reference rates, the replacement or disappearance of
LIBOR or other reforms may adversely affect the value of and the return on our subordinated notes and our subordinated
debentures and related trust preferred securities, as well as the interest we pay on those securities.
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At December 31, 2018, approximately 31.4% of our total loan portfolio was indexed to 30-day, 90-day, 180-day and one-year
LIBOR. Many of our loan agreements that are indexed to LIBOR include provisions that do not require us to default to any
alternative index recommendations but instead allow us, in our sole discretion, to designate an alternative interest rate index in the
event that LIBOR should become unavailable or unstable. While we believe these provisions within our loan agreements address
the potential future unavailability of LIBOR, there can be no assurance that such provisions will be effective or will not be
challenged by our borrowers.
Our investment in BHG may not produce the contribution to our results of operations that we expect.
Pinnacle Financial and Pinnacle Bank collectively hold a 49% interest in BHG. While we have a significant stake in BHG,
are entitled to designate two members of BHG’s five person board of managers and in some instances have protective rights to
block BHG from engaging in certain activities, including, until March 1, 2020, a sale of BHG (following March 1, 2020, the other
managers can approve a sale of BHG without our consent), the other managers and members of BHG may make most decisions
regarding BHG’s operations without our consent or approval. Any sale of all or a portion of our interest in BHG would adversely
affect our recurring noninterest income. Moreover, there are certain limitations on our ability to sell our interest in BHG without
first offering BHG and the other members a right of first refusal, and we are prohibited from transferring any portion of our
interest without the consent of the other members of BHG prior to March 1, 2021, other than transfers in connection with an
acquisition of Pinnacle Financial or Pinnacle Bank or as a result of a change in applicable law that forces Pinnacle Financial and/
or Pinnacle Bank to divest Pinnacle Financial’s or Pinnacle Bank’s ownership interests in BHG.
A significant portion of BHG’s revenue (and correspondingly our interest in any of BHG’s net profits) comes from the sale of
loans originated by BHG to community banks. Moreover, the aggregate purchase price we paid to acquire our interest in BHG
was based on our expectation that BHG will continue to grow its business and increase the amount of loans that it is able to
originate and sell. In the event that BHG’s loan growth slows over historical levels or its loan sales decrease (including but not
limited to as a result of regulatory restrictions on banks that are the principal purchasers of BHG’s loans), its results of operations
and our non-interest income would be adversely affected. BHG currently operates in most states without the need for a permit or
any other license. In the event that BHG was required to register or become licensed in any state in which it operates, or
regulations are adopted that seek to limit BHG’s ability to operate in any jurisdiction or that seek to limit the amounts of interest
that BHG can charge on its loans, BHG’s results of operations (and Pinnacle Financial’s and Pinnacle Bank’s interest in BHG’s
net profits) could be materially and adversely affected.
BHG’s business may become subject to increased scrutiny by the FDIC or the Federal Reserve as it grows or as a result of
our investment. The FDIC has published guidance related to the operation of marketplace lenders and banks’ business
relationships with such lenders and other third parties in which banks are required to exercise increased oversight and ongoing
monitoring and other responsibility for such third parties’ compliance with applicable regulatory guidance and requirements. As a
result, we are subject to enhanced responsibility for and risk related to BHG and our relationship with it. BHG’s compliance costs
may increase and its loan yields may be negatively impacted, which would negatively impact its results of operations and
Pinnacle Financial’s and Pinnacle Bank’s interest in BHG’s net profits. If banks that are examined by the FDIC became restricted
in their ability to buy loans originated by BHG, BHG’s business would be negatively impacted, which would negatively impact
our interest in BHG’s profits.
BHG may expand its business into other types of lending, which may not be as profitable as BHG’s current lending products
or successful at all. In addition, if any such expansion includes consumer lending, BHG’s compliance costs may increase as it
would likely become subject to increased regulatory and compliance scrutiny. Failure to realize the expected revenue increases
and/or other projected benefits from, and any increased compliance costs in connection with, any such expansion could have a
negative impact on BHG’s business, which would negatively impact our interest in BHG’s profits.
Because of our ownership of a portion of BHG, BHG is limited in the types of activities in which it may engage. Were BHG
to desire to expand its operations into areas that are not permissible for an entity owned by a state member bank like Pinnacle
Bank, it may need to do so through separate entities in which we do not have an ownership interest. Were these businesses to be
more profitable than BHG’s core business or require BHG’s management’s attention in ways that are detrimental to BHG, our
investment in BHG may be negatively impacted.
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Implementation of the various provisions of the Dodd-Frank Act may increase our operating costs or otherwise have a
material adverse effect on our business, financial condition or results of operations.
Since the 2008 financial crisis, financial institutions generally have been subjected to increased regulation and scrutiny from
federal regulatory authorities. The U.S. Congress responded to the financial crisis by enacting a variety of statutes, in particular
the Dodd-Frank Act, which contained numerous far-reaching changes and reforms for the financial services industry and directs
federal regulatory agencies to issue regulations to implement these reforms. The Dodd-Frank Act also restructured the regulation
of depository institutions, including the creation of the CFPB to administer consumer protection and fair lending laws, a function
that was formerly performed by the depository institution regulators. The provisions of the Dodd-Frank Act and the rules adopted
to implement those provisions have made far-reaching changes to the regulatory framework under which we operate and have
had, and may continue to have, a material impact on our operations, particularly through increased regulatory burdens and
compliance costs.
The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies
with $10 billion or more in total assets, including compliance with portions of the Federal Reserve’s enhanced prudential
oversight requirements. In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with
respect to various federal consumer financial protection laws and regulations. Previously, Pinnacle Bank was subject to
regulations adopted by the CFPB, but the FDIC was primarily responsible for examining our compliance with consumer
protection laws and those CFPB regulations. As a relatively new agency with evolving regulations and practices, there is
uncertainty as to how the CFPB’s examination and regulatory authority might impact our business. Should the CFPB take issue
with our operations or determine that we are not complying with applicable rules and regulations, we may incur additional costs
(including personnel costs) which may be significant to comply with those rules and regulations for which the CFPB has
oversight responsibility or fines for noncompliance.
Beginning on July 1, 2017 we became subject to the Durbin Amendment promulgated under the Dodd-Frank Act. Under the
Durbin Amendment, interchange fees for debit card transactions are capped at $0.21 plus five basis points (plus $0.01 for fraud
loss). This limitation on interchange fees has adversely impacted our results of operations and will continue to do so.
Ongoing compliance with our regulatory obligations may result in further increased regulatory compliance costs, fee
reductions and restrictions on activities in which we may have otherwise engaged, any of which could have a material adverse
effect on our business, financial condition or results of operations. Moreover, our failure to comply with these or other regulations
could result in regulatory enforcement actions against us or make it more difficult to receive any required regulatory approvals
necessary to execute on our growth strategy, each of which could have a material adverse effect on our results of operations,
business or financial condition.
Future changes to the laws and regulations applicable to the financial industry, if enacted or adopted, may impact our
profitability or financial condition, require more oversight or change certain of our business practices, and expose us to additional
costs, including increased compliance costs. We cannot predict whether any such legislative or regulatory changes, including
those that could benefit our business and results of operations, will be enacted or adopted or, if they are, whether they will have a
material effect on us.
Changes to capital requirements for bank holding companies and depository institutions that became effective January 1, 2015
and that are now fully phased in may negatively impact Pinnacle Financial’s and Pinnacle Bank’s results of operations.
In July 2013, the Federal Reserve and the FDIC approved final rules that substantially amended the regulatory risk-based
capital rules applicable to Pinnacle Bank and Pinnacle Financial. The final rules, which became effective on January 1, 2015,
implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage
and risk-based capital ratios for insured depository institutions. The final rules include new minimum risk-based capital and
leverage ratios. Moreover, these rules refine the definition of what constitutes “capital” for purposes of calculating those ratios,
including the definitions of Tier 1 capital and Tier 2 capital. The minimum capital level requirements now applicable to bank
holding companies and banks subject to the rules are: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total
capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation
buffer” of 2.5% (that is now fully phased in as of January 1, 2019) above the new regulatory minimum risk-based capital ratios,
and result in the following minimum ratios now that the capital conservation buffer is fully phased in: (i) a CET1 capital ratio of
7%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. We will be subject to limitations on paying dividends,
engaging in share repurchases and paying discretionary bonuses if our capital levels fall below these minimums plus the buffer
amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
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Under these rules, Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, minority
interest in the equity accounts of consolidated subsidiaries, and noncumulative preferred stock and related surplus, less goodwill
and other specified intangible assets and other regulatory deductions. CET1 capital generally consists of common stock, retained
earnings and paid in capital. CET1 capital is reduced by goodwill, certain intangible assets, net of associated deferred tax
liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and
certain other items specified in the Basel III capital rules. The Basel III capital rules also provide for a number of deductions from
and adjustments to CET1 capital. These include, for example, the requirement that mortgage servicing rights, deferred tax assets
arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in
non-consolidated financial entities be deducted from CET1 capital to the extent that any one such category exceeds 10% of CET1
capital or all such categories in the aggregate exceed 15% of CET1 capital.
Tier 2 capital generally consists of perpetual preferred stock and related surplus not meeting the Tier 1 capital definition,
qualifying subordinated debt, qualifying mandatorily convertible debt securities, and a limited amount of loan loss reserves.
Cumulative preferred stock and trust preferred securities issued after May 19, 2010, no longer qualify as Tier 1 capital, but such
securities issued prior to May 19, 2010, including in the case of bank holding companies with less than $15.0 billion in total assets
at that date, trust preferred securities issued prior to that date, continue to count as Tier 1 capital subject to certain limitations.
Following the merger with BNC and as a result of that merger, our total assets were in excess of $15.0 billion which caused the
subordinated debentures we and BNC issued related to trust preferred offerings to cease to qualify as Tier 1 capital under
applicable banking regulations. Though these securities no longer qualify as Tier 1 capital, we believe these subordinated
debentures continue to qualify as Tier 2 capital. We may need to increase the level of Tier 1 capital we maintain through issuance
of common stock or noncumulative perpetual preferred stock, which could cause dilution to our existing common shareholders.
The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-
out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital
calculation. Both Pinnacle Financial and Pinnacle Bank opted-out of this requirement.
The application of more stringent capital requirements for Pinnacle Financial and Pinnacle Bank, like those adopted to
implement the Basel III reforms or future reforms, could, among other things, result in lower returns on invested capital, require
the raising of additional capital, particularly in the form of common stock, make it more difficult for us to receive regulatory
approvals related to our growth initiatives and result in regulatory actions if we were to be unable to comply with such
requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III either
because we became subject to those requirements directly or because our regulators seek to propose additional on-balance sheet
liquidity requirements on us, could result in our having to lengthen the term of our funding, restructure our business models and/
or increase our holdings of liquid assets, which could adversely impact our results of operations.
Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in
calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business
strategy and could limit our ability to make distributions, including paying dividends or buying back shares.
Our ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in
the capital markets and deteriorating economic and market conditions.
Federal and state bank regulators require Pinnacle Financial and Pinnacle Bank to maintain adequate levels of capital to
support operations. At December 31, 2018, Pinnacle Financial’s and Pinnacle Bank’s regulatory capital ratios were at “well-
capitalized” levels under regulatory guidelines. Growth in assets (either organically or as a result of acquisitions) at rates in excess
of the rate at which our capital is increased through retained earnings will reduce our capital ratios unless we continue to increase
capital. Failure by us to meet applicable capital guidelines or to satisfy certain other regulatory requirements could subject us to a
variety of enforcement remedies available to the federal regulatory authorities and would negatively impact our ability to pursue
acquisitions or other expansion opportunities.
We may need to raise additional capital (including through the issuance of common stock) in the future to provide us with
sufficient capital resources and liquidity to meet our commitments and business needs or in connection with our growth or as a
result of deterioration in our asset quality. Our ability to maintain capital levels, sources of funding and liquidity could be
impacted by negative perceptions of our business or prospects, changes in the capital markets and deteriorating economic and
market conditions. Pinnacle Bank is required to obtain regulatory approval in order to pay dividends to Pinnacle Financial unless
the amount of such dividends does not exceed its net income for that calendar year plus retained net income for the preceding two
years. Any restriction on the ability of Pinnacle Bank to pay dividends to Pinnacle Financial could impact Pinnacle Financial’s
ability to continue to pay dividends on its common stock or its ability to pay interest on its indebtedness.
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We cannot assure you that access to capital will be available to us on acceptable terms or at all. Any occurrence that may
limit our access to the capital markets may materially and adversely affect our capital costs and our ability to raise capital and/or
debt and, in turn, our liquidity. If we cannot raise additional capital when needed, our ability to expand through internal growth or
acquisitions or to continue operations could be impaired.
We currently invest in bank owned life insurance (“BOLI”) and may continue to do so in the future.
We had $525.7 million in general, hybrid and separate account BOLI contracts at December 31, 2018. BOLI is an illiquid
long-term asset that provides tax savings because cash value growth and life insurance proceeds are not taxable. However, if we
needed additional liquidity and converted the BOLI to cash, such transaction would be subject to ordinary income tax and
applicable penalties. We are also exposed to the credit risk of the underlying securities in the investment portfolio and to the
insurance carrier’s credit risk (in a general account contract). If BOLI was exchanged to another carrier, additional fees would be
incurred and a tax-free exchange could only be done for insureds that were still actively employed by us at that time. There is
interest rate risk relating to the market value of the underlying investment securities associated with the BOLI in that there is no
assurance that the market value of these securities will not decline. Investing in BOLI exposes us to liquidity, credit and interest
rate risk, which could adversely affect our results of operations, financial condition and liquidity.
Our acquisitions and future expansion may result in additional risks.
From 2015 through 2017, we completed the acquisitions of CapitalMark, Magna, Avenue and BNC. We expect to continue to
consider and explore opportunities to expand in our current markets and in select primarily high-growth markets located outside
of Tennessee in the southeastern portion of the United States through additional branches and also may consider expansion within
these markets through additional acquisitions of all or part of other financial institutions. These types of expansions involve
various risks, including:
Management of Growth. We may be unable to successfully:
identify and expand into suitable markets;
obtain regulatory and other approvals;
identify and acquire suitable sites for new banking offices;
attract sufficient deposits and capital to fund anticipated loan growth;
• maintain loan quality in the context of significant loan growth;
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• maintain adequate common equity and regulatory capital;
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• maintain adequate management personnel and systems to oversee and support such growth;
• maintain adequate internal audit, loan review and compliance functions; and
•
scale our technology platform and operational infrastructure;
avoid diversion or disruption of our existing operations or management as well as those of the acquired institution;
implement additional policies, internal controls, procedures and operating systems required to support such growth.
Results of Operations. There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan
balances or other operating results necessary to avoid losses or produce profits. Our growth strategy necessarily entails growth in
overhead expenses as we add new offices and staff. Our historical results may not be indicative of future results or results that
may be achieved as we continue to evaluate opportunities to increase the number and concentration of our branch offices in our
newer markets.
Development of offices. There are considerable costs involved in opening branches, and new branches generally do not generate
sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, any new
branches we establish can be expected to negatively impact our earnings for some period of time until they reach certain
economies of scale. The same is true for our efforts to expand in these markets with the hiring of additional seasoned
professionals with significant experience in that market. Our expenses could be further increased if we encounter delays in
opening any of our new branches. We may be unable to accomplish future branch expansion plans due to a lack of available
satisfactory sites, difficulties in acquiring such sites, failure or inability to receive any required regulatory approvals, increased
expenses or loss of potential sites due to complexities associated with zoning and permitting processes, higher than anticipated
merger and acquisition costs or other factors. Finally, we have no assurance any branch will be successful even after it has been
established or acquired, as the case may be.
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Regulatory and economic factors. Our growth and expansion plans may be adversely affected by a number of regulatory and
economic developments or other events. Failure or inability to obtain required regulatory approvals, changes in laws and
regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may
prevent or adversely affect our continued growth and expansion. Such factors may cause us to alter our growth and expansion
plans or slow or halt the growth and expansion process, which may prevent us from entering into or expanding in our targeted
markets or allow competitors to gain or retain market share in our existing markets.
Infrastructure and Controls. We may not successfully implement improvements to, or integrate, our information and control
systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and
controls. In particular, our systems, controls and procedures must be able to accommodate an increase in transaction volume and
the infrastructure that comes with new products, branches, markets or any combination thereof. Thus, our growth strategy may
divert management from our existing operation and may require us to incur additional expenditures to expand our administrative
and operational infrastructure, which may adversely affect earnings, shareholder returns, and our efficiency ratio.
Failure to successfully address these and other issues related to our expansion could have a material adverse effect on our
financial condition and results of operations, and could adversely affect our ability to successfully implement our business
strategy. Also, if our growth occurs more slowly than anticipated or declines, our results of operations and financial condition
could be materially adversely affected.
We may face risks with respect to future acquisitions.
When we attempt to expand our business through mergers and acquisitions (as we did from 2015 through 2017), we seek
targets that are culturally similar to us, have experienced management and possess either significant market presence or have
potential for improved profitability through economies of scale or expanded services. In addition to the general risks associated
with our growth plans which are highlighted above, in general acquiring other banks, businesses or branches, particularly those in
markets with which we are less familiar, involves various risks commonly associated with acquisitions, including, among other
things:
•
•
the time and costs associated with identifying and evaluating potential acquisition and merger targets;
inaccuracies in the estimates and judgments used to evaluate credit, operations, culture, management and market risks
with respect to the target institution;
the time and costs of evaluating new markets, hiring experienced local management, including as a result of de novo
expansion into a market, and opening new bank locations, and the time lags between these activities and the generation
of sufficient assets and deposits to support the significant costs of the expansion that we may incur, particularly in the
first 12 to 24 months of operations;
our ability to finance an acquisition and possible dilution to our existing shareholders;
the diversion of our management’s attention to the negotiation of a transaction and integration of an acquired company’s
operations with ours;
the incurrence of an impairment of goodwill associated with an acquisition and adverse effects on our results of
operations;
entry into new markets where we have limited or no direct prior experience;
closing delays and increased expenses related to the resolution of lawsuits filed by our shareholders or shareholders of
companies we may seek to acquire;
the inability to receive regulatory approvals timely or at all, including as a result of community objections, or such
approvals being restrictively conditional; and
risks associated with integrating the operations, technologies and personnel of the acquired business.
•
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•
•
•
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•
Though we expect to remain principally focused on organically growing our business in our existing markets in 2019, we
nonetheless may have opportunities to evaluate merger and acquisition opportunities that are presented to us in our current
markets as well as other markets throughout the southeastern portion of the United States and conduct due diligence activities
related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases,
negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities and related capital raising
transactions may occur at any time. Generally, acquisitions of financial institutions involve the payment of a premium over book
and market values, and, therefore, some dilution of our book value and fully diluted earnings per share may occur in connection
with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in product presence and/or
other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of
operations.
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In addition, we may face significant competition from numerous other financial services institutions, many of which may
have greater financial resources than we do, when considering acquisition opportunities, particularly in our targeted high-growth
markets located outside of Tennessee. Accordingly, attractive acquisition opportunities may not be available to us. There can be
no assurance that we will be successful in identifying or completing any potential future acquisitions.
Certain of our deposits and other funding sources may be volatile and impact our liquidity.
In addition to the traditional core deposits, such as demand deposit accounts, interest checking, money market savings and
certificates of deposits less than $250,000, we utilize or in the past have utilized several noncore funding sources, such as
brokered certificates of deposit, FHLB Cincinnati advances, federal funds purchased and other sources. Our dependence on our
noncore funding has and will continue to fluctuate in future periods due to increased competition in our markets or as a result of
our growth.
We utilize these noncore funding sources to fund the ongoing operations and growth of Pinnacle Bank. The availability of
these noncore funding sources is subject to broad economic conditions, in some instances regulation, and to investor assessment
of our financial strength and, as such, the cost of funds may fluctuate significantly and/or the availability of such funds may be
restricted, thus impacting our net interest income, our immediate liquidity and/or our access to additional liquidity. We have
somewhat similar risks to the extent high balance core deposits exceed the amount of deposit insurance coverage available.
We use brokered deposits, subject to certain limitations and requirements, as a source of funding to augment deposits
generated from our branch network, which are our principal source of funding. In the event that our funding strategies call for the
use of brokered deposits, there can be no assurance that such sources will be available, or will remain available, or that the cost of
such funding sources will be reasonable. Additionally, should we no longer be considered well-capitalized, our ability to access
new brokered deposits or retain existing brokered deposits could be affected by market conditions, regulatory requirements or a
combination thereof, which could result in most, if not all, brokered deposit sources being unavailable. The inability to utilize
brokered deposits as a source of funding could have an adverse effect on our results of operations, financial condition and
liquidity.
We impose certain internal limits as to the absolute level of noncore funding we will incur at any point in time. Should we
exceed those limitations, we may need to modify our growth plans, liquidate certain assets, participate loans to correspondents or
execute other actions to allow for us to return to an acceptable level of noncore funding within a reasonable amount of time, any
one of which actions could adversely affect our results of operations.
An ineffective risk management framework could have a material adverse effect on our strategic planning and our ability to
mitigate risks and/or losses and could have adverse regulatory consequences.
We have implemented a risk management framework to identify and manage our risk exposure. This framework is comprised
of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including,
among others, credit, market, liquidity, operational, capital, compliance, strategic and reputational risks. Our framework also
includes financial, analytical, forecasting, or other modeling methodologies, which involves management assumptions and
judgment. In addition, our board of directors, in consultation with management, has adopted a risk appetite statement, which sets
forth certain thresholds and limits to govern our overall risk profile. However, there is no assurance that our risk management
framework, including the risk metrics under our risk appetite statement, will be effective under all circumstances or that it will
adequately identify, manage or mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer
unexpected losses and become subject to regulatory consequences, as a result of which our business, financial condition, results of
operations or prospects could be materially adversely affected.
We are dependent on our information technology and telecommunications systems and third-party servicers, and systems
failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of
operations.
We are dependent upon information technologies, computer systems and networks, including those maintained by us and
those maintained and provided to us by third parties, to conduct operations and are reliant on technology to help increase
efficiency in our business. These systems could become unavailable or impaired from a variety of causes, including storms and
other natural disasters, terrorist attacks, fires, utility outages, internal or external theft or fraud, design defects, human error or
complications encountered as existing systems are maintained, replaced or upgraded. We maintain a system of internal controls
and security to mitigate the risks of many of these occurrences and maintain insurance coverage for certain risks; however, should
an event occur that is not prevented or detected by our internal controls, causes an interruption in service, or is uninsured against
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or in excess of applicable insurance limits, such occurrence could have an adverse effect on our business and our reputation,
which, in turn, could have a material adverse effect on our financial condition, results of operations and liquidity.
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer
systems and networks. Although we take protective measures and endeavor to modify these systems as circumstances warrant, the
security of our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer
viruses or other malicious code and other events that could have a security impact. We provide our customers the ability to bank
remotely, including over the Internet or through their mobile device. The secure transmission of confidential information is a
critical element of remote and mobile banking. Our network, and the systems of parties with whom we contract or on which we
rely, as well as those of our customers and regulators, could be vulnerable to unauthorized access, computer viruses, phishing
schemes, spam attacks, human error, natural disasters, power loss and other security breaches. Sources of attacks vary and may
include hackers, disgruntled employees or vendors, organized crime, terrorists, foreign governments, corporate espionage and
activists. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within
the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank
accounts.
Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation
of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions. For
example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based
product offerings and expand our internal usage of web-based products and applications. Even the most advanced internal control
environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are
extremely difficult to prevent. The techniques used by bad actors change frequently, may not be recognized until launched and
may not be recognized until well after a breach has occurred. Additionally, the existence of cyber attacks or security breaches at
third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner. Consistent with industry
trends, we remain at risk for attempted electronic fraudulent activity, as well as attempts at security breaches and cybersecurity-
related incidents. We may be required to spend significant capital and other resources to protect against the threat of security
breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or
the activities of our vendors, regulators or customers involve the storage and transmission of confidential information, security
breaches (including breaches of security of customer, vendor or regulator systems and networks) and viruses could expose us to
claims, litigation and other possible liabilities, which may be significant. Any inability to prevent security breaches or computer
viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation, results of
operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject us to
additional regulatory scrutiny, expose us to civil litigation and possible financial liability and cause reputational damage.
In addition, we outsource many of our major systems, such as data processing, loan servicing and deposit processing systems.
The failure of these systems, or the termination of a third-party software license or service agreement on which any of these
systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface
with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such
third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a
deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our
ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional
regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition
and results of operations.
We also face the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that
facilitate our business activities, including vendors, exchanges, and other financial intermediaries. Such parties could also be the
source or cause of an attack on, or breach of, our operational systems, data or infrastructure, and could disclose such attack or
breach to us in a delayed manner or not at all. In addition, we may be at risk of an operational failure with respect to our
customers’ systems. Our risk and exposure to these matters remains heightened because of, among other things, the evolving
nature of these threats and the continued uncertain global economic environment.
As cyber threats continue to evolve, we may be required to expend significant, additional resources to continue to modify or
enhance our protective measures, investigate and remediate any information security vulnerabilities, or respond to any changes to
state or federal regulations, policy statements or laws concerning information systems or security. Any failure to maintain
adequate security over our information systems, our technology-driven products and services or our customers’ personal and
transactional information could negatively affect our business and our reputation and result in fines, penalties, or other costs,
including litigation expense and/or additional compliance costs, all of which could have material adverse effect on our financial
condition, results of operations and liquidity. Furthermore, the public perception that a cyber attack on our systems has been
successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we
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do business. A successful penetration or circumvention of system security could cause us negative consequences, including loss of
customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our
confidential information and/or that of our customers, or damage to our customers’ and/or third parties’ computers or systems, and
could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or
intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs,
additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.
Our risk and exposure to cyber threats and other information security breaches is heightened as we expand our use of cloud
technology and internet and mobile banking delivery channels for our products and services.
Environmental liability associated with commercial lending could result in losses.
In the course of business, Pinnacle Bank may acquire, through foreclosure, or deed in lieu of foreclosure, properties securing
loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that
hazardous substances could be discovered on these properties. In this event, Pinnacle Financial, or Pinnacle Bank, might be
required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could
substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other
responsible parties and could find it difficult or impossible to sell the affected properties. These events could have a material
adverse effect on our business, results of operations and financial condition.
We have acquired a number of retail banking facilities and other real properties, any of which may contain hazardous or toxic
substances. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and
property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected
property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or
enforcement policies with respect to existing laws may increase our exposure to environmental liability.
National or state legislation or regulation may increase our expenses and reduce earnings.
Bank regulators are increasing regulatory scrutiny, and additional restrictions (including those originating from the Dodd-
Frank Act) on financial institutions have been proposed or adopted by regulators and by Congress. Changes in tax law, federal
legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer protection laws, and capital
requirements, among others, can result in significant increases in our expenses and/or charge-offs, which may adversely affect our
results of operations and financial condition. Changes in state or federal tax laws or regulations can have a similar impact. State
and municipal governments, including the State of Tennessee, could seek to increase their tax revenues through increased tax
levies which could have a meaningful impact on our results of operations. Furthermore, financial institution regulatory agencies
are expected to continue to be aggressive in responding to concerns and trends identified in examinations, including the continued
issuance of additional formal or informal enforcement or supervisory actions. These actions, whether formal or informal, could
result in our agreeing to limitations or to take actions that limit our operational flexibility, restrict our growth or increase our
capital or liquidity levels. Failure to comply with any formal or informal regulatory restrictions, including informal supervisory
actions, could lead to further regulatory enforcement actions. In addition, the issuance of certain regulatory enforcement actions
against Pinnacle Financial or Pinnacle Bank could constitute an event of default under our loan agreement with U.S. Bank, which
could cause the acceleration of any outstanding borrowings under the loan agreement and termination of the agreement.
Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to
those developments could negatively impact our operations by restricting our business operations, including our ability to
originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory
developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating
plans.
Our business reputation and relationships are important and any damage to them could have a material adverse effect on our
business.
Our reputation is very important in sustaining our business and we rely on our relationships with our current, former and
potential clients and shareholders and other actors in the industries that we serve. Any damage to our reputation, whether arising
from regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and
exchange listing requirements, negative publicity, the way in which we conduct our business or otherwise could strain our
existing relationships and make it difficult for us to develop new relationships. Any such damage to our reputation and
relationships could in turn lead to a material adverse effect on our business.
33
We face substantial competition and are subject to certain regulatory constraints not applicable to some of our competitors,
which may decrease our growth or profits.
We face substantial competition for deposits, and for credit and trust relationships, and other financial services and products
in the communities we serve. Competing providers include other banks, thrifts and trust companies, insurance companies,
mortgage banking operations, credit unions, finance companies, title companies, money market funds and other financial and
nonfinancial companies which may offer products functionally equivalent to those offered by us. Competing providers may have
greater financial resources than we do and offer services within and outside the market areas we serve. In addition to this
challenge of attracting and retaining customers for traditional banking services, our competitors include securities dealers,
brokers, mortgage bankers, investment advisors and finance and insurance companies who seek to offer one-stop financial
services to their customers that may include services that financial institutions have not been able or allowed to offer to their
customers in the past. The increasingly competitive environment is primarily a result of changes in regulation, changes in
technology and product delivery systems and the accelerating pace of consolidation among financial service providers. If we are
unable to adjust both to increased competition for traditional banking services and changing customer needs and preferences, our
financial performance could be adversely affected.
Some of our competitors, including credit unions, are not subject to certain regulatory constraints, such as the Community
Reinvestment Act, which, among other things, requires us to implement procedures to make and monitor loans throughout the
communities we serve. Credit unions also have federal tax exemptions that may allow them to offer lower rates on loans and
higher rates on deposits than taxpaying financial institutions such as commercial banks. In addition, non-depository institution
competitors are generally not subject to the extensive regulation applicable to institutions, like Pinnacle Bank, that offer federally
insured deposits. Other institutions may have other competitive advantages in particular markets or may be willing to accept
lower profit margins on certain products. These differences in resources, regulation, competitive advantages, and business strategy
may decrease our net interest margin, may increase our operating costs, and may make it harder for us to compete profitably.
Inability to retain senior management and key employees or to attract new experienced financial services professionals could
impair our relationship with our customers, reduce growth and adversely affect our business.
We have assembled a senior management team which has substantial background and experience in banking and financial
services in our markets. Moreover, much of our organic loan growth that we have experienced in recent years (and that we are
seeking in 2019 and beyond) was the result not of strong loan demand but rather of our ability to attract experienced financial
services professionals who have been able to attract customers from other financial institutions. We are deploying a similar hiring
strategy in the Carolinas and Virginia. Inability to retain these key personnel (including key personnel of the businesses we have
acquired) or to continue to attract experienced lenders with established books of business (including, in either case, as a result of
competitive compensation and other hiring and retention pressures), at all or at the pace we have anticipated, could negatively
impact our growth because of the loss of these individuals’ skills and customer relationships and/or the potential difficulty of
promptly replacing them. Moreover, the higher costs we have to pay to hire and retain these experienced individuals could cause
our noninterest expense levels to rise and negatively impact our results of operations.
We are subject to certain litigation, and our expenses related to this litigation may adversely affect our results.
We are from time to time subject to certain litigation in the ordinary course of our business. As we have aggressively hired
new revenue producing associates over the last five years we, and the associates we have hired, have also periodically been the
subject of litigation and threatened litigation with these associates’ former employers. We may also be subject to claims related to
our loan servicing programs, particularly those involving servicing of commercial real estate loans. These and other claims and
legal actions, as well as supervisory and enforcement actions by our regulators, including the CFPB or other regulatory agencies
with which we deal, including those with oversight of our loan servicing programs, could involve large monetary claims, capital
directives, agreements with federal regulators, cease and desist orders and significant defense costs. The outcome of any such
cases or actions is uncertain. Substantial legal liability or significant regulatory action against us could have material adverse
financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects.
In accordance with GAAP, for matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual
is established. For matters where it is probable we will incur a loss and the amount can be reasonably estimated, we establish an
accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of
any outstanding legal proceedings or threatened claims, however, may turn out to be substantially higher than the amount accrued.
Further, our insurance may not cover all litigation, other proceedings or claims, or the costs of defense. Future developments
could result in an unfavorable outcome for any existing or new lawsuits or investigations in which we are, or may become,
involved, which may have a material adverse effect on our business and our results of operations.
34
Our business is dependent on technology, and an inability to invest in technological improvements may adversely affect our
results of operations and financial condition.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-
driven solutions, and as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and
made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and
automatic payment systems, as well as nontraditional alternatives like crowdfunding and digital wallets. In addition to better
serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. We have
made significant investments in data processing, management information systems and internet banking accessibility. Our future
success will depend in part upon our ability to create additional efficiencies in our operations through the use of technology. Many
of our competitors have substantially greater resources to invest in technological improvements. We cannot make assurances that
our technological improvements will increase our operational efficiency or that we will be able to effectively implement new
technology-driven solutions or be successful in marketing these products and services to our customers.
We are subject to various statutes and regulations that may impose additional costs or limit our ability to take certain actions.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by
various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including
payment of dividends, mergers and acquisitions, investments, loans and interest rates charged on loans, interest rates paid on
deposits and locations of offices. We are also subject to capital requirements established by our regulators, which require us to
maintain specified levels of capital. It is possible that our FDIC assessments may increase in the future. Any future assessment
increases could negatively impact our results of operations. Significant changes in laws and regulations applicable to the banking
industry have been recently adopted and others are being considered in Congress. We cannot predict the effects of these changes
on our business and profitability. Because government regulation greatly affects the business and financial results of commercial
banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and financial stability of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other
relationships. We have exposure to various counterparties, including brokers and dealers, commercial and correspondent banks,
and others. As a result, defaults by, or rumors or questions about, one or more financial services institutions, or the financial
services industry generally, may result in market-wide liquidity problems and could lead to losses or defaults by such other
institutions. Such occurrences could expose us to credit risk in the event of default of one or more counterparties and could have a
material adverse effect on our financial position, results of operations and liquidity.
We depend on the accuracy and completeness of information about customers.
In deciding whether to extend credit or enter into certain transactions, we rely on information furnished by or on behalf of
customers, including financial statements, credit reports, tax returns and other financial information. We may also rely on
representations of those customers or other third parties, such as independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading personal information, financial statements, credit reports, tax returns or other
financial information, including information falsely provided as a result of identity theft, could have an adverse effect on our
business, financial condition and results of operations.
We may be subject to claims and litigation asserting lender liability.
From time to time, and particularly during periods of economic stress, customers, including real estate developers and
consumer borrowers, may make claims or otherwise take legal action pertaining to performance of our responsibilities. These
claims are often referred to as “lender liability” claims and are sometimes brought in an effort to produce or increase leverage
against us in workout negotiations or debt collection proceedings. Lender liability claims frequently assert one or more of the
following allegations: breach of fiduciary duties, fraud, economic duress, breach of contract, breach of the implied covenant of
good faith and fair dealing, and similar claims. Whether customer claims and legal action related to the performance of our
responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a favorable manner, they may result
in significant financial liability and/or adversely affect our market reputation, products and services, as well as potentially
affecting customer demand for those products and services. Any financial liability or reputation damage could have a material
adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition, results of
operations and liquidity.
35
We may be subject to claims and litigation pertaining to fiduciary responsibility.
From time to time as part of our normal course of business, customers may make claims and take legal action against us
based on actions or inactions related to the fiduciary responsibilities of Pinnacle Bank’s trust and wealth management associates.
If such claims and legal actions are not resolved in a manner favorable to us, they may result in financial liability and/or adversely
affect our market reputation or our products and services. Any financial liability or reputation damage could have a material
adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of
operations.
Natural disasters may adversely affect us.
Our operations and customer base are located in markets where natural disasters, including tornadoes, severe storms, fires,
wildfires, floods, hurricanes and earthquakes often occur. Such natural disasters could significantly impact the local population
and economies and our business, and could pose physical risks to our properties. Although our banking offices are geographically
dispersed throughout portions of the southeastern United States and we maintain insurance coverages for such events, a
significant natural disaster in or near one or more of our markets could have a material adverse effect on our financial condition,
results of operations or liquidity.
Pinnacle Financial is required to act as a source of financial and managerial strength for Pinnacle Bank in times of stress.
Under federal law, Pinnacle Financial is required to act as a source of financial and managerial strength to Pinnacle Bank, and
to commit resources to support Pinnacle Bank if necessary. Pinnacle Financial may be required to commit additional resources to
Pinnacle Bank at times when Pinnacle Financial may not be in a financial position to provide such resources or when it may not
be in Pinnacle Financial’s, or its shareholders’ or its creditors’ best interests to do so. Providing such support is more likely during
times of financial stress for Pinnacle Financial and Pinnacle Bank, which may make any capital Pinnacle Financial is required to
raise to provide such support more expensive than it might otherwise be. In addition, any capital loans Pinnacle Financial makes
to Pinnacle Bank are subordinate in right of payment to depositors and to certain other indebtedness of Pinnacle Bank. In the
event of Pinnacle Financial’s bankruptcy, any commitment by it to a federal banking regulator to maintain the capital of Pinnacle
Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines or
sanctions against us.
The Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, requires financial institutions to design and
implement programs to prevent financial institutions from being used for money laundering and terrorist activities. If such
activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department's
Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying
and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could
result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches, as well as additional
operating expenses to add staff and/or technological enhancements to our systems to better comply with our obligations. Failure
to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious
reputational consequences for us, which could have a material adverse effect on our business, financial condition or results of
operations.
The price of our common stock may be volatile or may decline.
The trading price of our common stock may fluctuate as a result of a number of factors, many of which are outside our
control. In addition, the stock market is subject to fluctuations in trading volumes that affect the market prices of the shares of
many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the
factors that could affect our stock price are:
•
•
•
•
•
•
•
•
actual or anticipated quarterly fluctuations in our results of operations and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors;
actions by institutional shareholders;
fluctuations in the stock price and operating results of our competitors;
general market conditions and, in particular, developments related to market conditions for the financial services
industry;
36
• market perceptions about the innovation economy, including levels of funding or "exit" activities of companies in the
industries we serve;
proposed or adopted regulatory changes or developments;
changes in the political climate;
•
•
• market reactions to social media messages or posts;
•
•
anticipated or pending investigations, proceedings or litigation that involve or affect us; and
domestic and international economic factors unrelated to our performance.
The trading price of the shares of our common stock and the value of our other securities will further depend on many factors,
which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and
prospects, and future sales of our equity or equity-related securities. In some cases, the markets have produced downward
pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. A
significant decline in our stock price could result in substantial losses for individual shareholders and could lead to costly and
disruptive securities litigation, as well as the loss of key employees.
Our ability to declare and pay dividends is limited.
While our board of directors has approved the payment of a quarterly cash dividend on our common stock since the fourth
quarter of 2013, there can be no assurance of whether or when we may pay dividends on our common stock in the future. Future
dividends, if any, will be declared and paid at the discretion of our board of directors and will depend on a number of factors,
including our and Pinnacle Bank’s capital levels. Our principal source of funds used to pay cash dividends on our common stock
will be dividends that we receive from Pinnacle Bank. Although Pinnacle Bank’s asset quality, earnings performance, liquidity
and capital requirements will be taken into account before we declare or pay any future dividends on our common stock, our
board of directors will also consider our liquidity and capital requirements and our board of directors could determine to declare
and pay dividends without relying on dividend payments from Pinnacle Bank.
Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends we may declare and
pay and that Pinnacle Bank may declare and pay to us. For example, Federal Reserve regulations implementing the capital rules
required under Basel III do not permit dividends unless capital levels exceed certain higher levels applying capital conservation
buffers.
In addition, the terms of (i) our subordinated debentures, (ii) the subordinated notes we assumed upon consummation of the
Avenue merger, and (iii) the subordinated debentures and subordinated notes we assumed upon the consummation of the BNC
merger, prohibit us from paying dividends on our common stock at times when we are deferring the payment of interest on such
subordinated debentures or subordinated notes. Moreover, the terms of the loan agreement for Pinnacle Financial’s line of credit
prohibits us from paying dividends when there is an event of default existing under the loan agreement, or the payment of a
dividend would cause an event of default.
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of
existing shareholders.
We may issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to
acquire shares of common stock, including in connection with acquisitions. We may sell these shares at prices below the current
market price of shares, and the sale of these shares may significantly dilute shareholder ownership. We could also issue additional
shares in connection with acquisitions of other financial institutions (as we did in connection with our acquisition of BNC and our
other recent acquisitions) or investments in fee-related businesses such as BHG, which could also dilute shareholder ownership.
Holders of Pinnacle Financial’s and Pinnacle Bank’s indebtedness and junior subordinated debentures have rights that are
senior to those of Pinnacle Financial’s shareholders.
At December 31, 2018, Pinnacle Financial had outstanding trust preferred securities and accompanying junior subordinated
debentures totaling $133.0 million. Payments of the principal and interest on the trust preferred securities are conditionally
guaranteed by Pinnacle Financial, and the accompanying subordinated debentures are senior to shares of Pinnacle Financial’s
common stock. As a result, Pinnacle Financial must make payments on the subordinated debentures (and the related trust
preferred securities) before any dividends can be paid on common stock and, in the event of Pinnacle Financial’s bankruptcy,
dissolution or liquidation, the holders of the subordinated debentures must be satisfied before any distributions can be made on
Pinnacle Financial’s common stock. Pinnacle Financial has the right to defer distributions on its junior subordinated debentures
(and the related trust preferred securities) for up to five years, during which time no dividends may be paid on its common stock.
37
If our financial condition deteriorates or if we do not receive required regulatory approvals, we may be required to defer
distributions on our junior subordinated debentures.
From time to time, Pinnacle Financial and Pinnacle Bank have issued, and in connection with the Avenue merger and BNC
merger, assumed, subordinated notes. At December 31, 2018, Pinnacle Financial and Pinnacle Bank had an aggregate of $339.9
million of subordinated notes outstanding, not including the subordinated debentures issued in connection with our trust preferred
securities. The terms of these notes prohibit or will prohibit Pinnacle Financial or Pinnacle Bank, as applicable, from declaring or
paying any dividends or distributions on its common stock at any time when payment of interest on these notes has not been
timely made and while any such accrued and unpaid interest remains unpaid. Moreover, the notes we have issued or assumed rank
senior to shares of Pinnacle Financial’s common stock. In the event of any bankruptcy, dissolution or liquidation of Pinnacle
Financial, these notes, along with Pinnacle Financial’s other indebtedness, would have to be repaid before Pinnacle Financial’s
shareholders would be entitled to receive any of the assets of Pinnacle Financial.
Pinnacle Financial or Pinnacle Bank may from time to time issue additional subordinated indebtedness that would have to be
repaid before Pinnacle Financial’s shareholders would be entitled to receive any of the assets of Pinnacle Financial or Pinnacle
Bank.
We identified a material weakness in our internal controls over financial reporting and determined that our disclosure controls
and procedures were not effective. We may be unable to develop, implement and maintain effective internal control over
financial reporting and disclosure controls and procedures in future periods.
The Sarbanes-Oxley Act and related rules and regulations require that management report annually on the effectiveness of
our internal control over financial reporting and assess the effectiveness of our disclosure controls and procedures on a quarterly
basis. Among other things, management must conduct an assessment of our internal control over financial reporting to allow
management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act and related rules and regulations. Maintaining and adapting our internal controls is expensive and requires
significant management attention. Moreover, as we continue to grow, our internal controls may become more complex and require
additional resources to ensure they remain effective amid dynamic regulatory and other guidance. Failure to maintain effective
controls or implement required new or improved controls or difficulties encountered in the process may harm our results of
operations and financial condition or cause us to fail to meet our reporting obligations.
Based on management’s assessment, we concluded that our disclosure controls and procedures were not effective as of
December 31, 2018 and that we had as of such date a material weakness in our internal control over financial reporting. The
specific issues leading to these conclusions are described in Part II - Item 9A. “Controls and Procedures” of this Form 10-K and in
“Management’s Report on Internal Control over Financial Reporting” appearing elsewhere in this Form 10-K. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be
prevented or detected on a timely basis. The material weakness identified in Item 9A did not result in any material misstatement in
our consolidated financial statements and we have implemented remedial measures intended to address the material weaknesses
and related disclosure controls. However, if the remedial measures we have implemented are insufficient, or if additional material
weakness or significant deficiencies in our internal control over financial reporting or in our disclosure controls occur in the
future, our future consolidated financial statements or other information filed with the SEC may contain material misstatements.
Any material misstatements could require a restatement of our consolidated financial statements, cause us to fail to meet our
reporting obligations or cause investors to lose confidence in our reported financial information, leading to a decline in the market
value of our securities.
Our issuance of preferred stock could adversely affect holders of our common stock.
We have the ability under our current effective shelf registration statement to issue shares of preferred stock. Further, our
shareholders authorized our board of directors to issue up to 10,000,000 shares of preferred stock without any further action on
the part of our shareholders. Our board also has the power, without shareholder approval, to set the terms of any series of
preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to
dividends or in the event of a dissolution, liquidation or winding up, and other terms. In the event that we issue preferred stock in
the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution, or
winding up, or if we issue debt securities, incur other borrowings or issue preferred stock with voting rights that dilute the voting
power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be
adversely affected.
38
We and/or the holders of certain classes of our securities could be adversely affected by unfavorable ratings from rating
agencies.
The ratings agencies regularly evaluate Pinnacle Financial and Pinnacle Bank, and their ratings of our long-term debt are
based on a number of factors, including our financial strength as well as factors not entirely within our control, including
conditions affecting the financial services industry generally. There can be no assurance that we will not receive adverse changes
in our ratings in the future, which could adversely affect the cost and other terms upon which we are able to obtain funding, and
the way in which we are perceived in the capital markets. Actual or anticipated changes, or downgrades in our credit ratings,
including any announcement that our ratings are under review for a downgrade, could affect the market value and liquidity of our
securities, increase our borrowing costs and negatively impact our profitability. Additionally, a downgrade of the credit rating of
any particular security issued by us or our subsidiaries could negatively affect the ability of the holders of that security to sell the
securities and the prices at which any such securities may be sold.
Even though our common stock is currently traded on the Nasdaq Stock Market’s Global Select Market, it has less liquidity
than many other stocks quoted on a national securities exchange.
The trading volume in our common stock on the Nasdaq Global Select Market has been relatively low when compared with
larger companies listed on the Nasdaq Global Select Market or other stock exchanges. Although we have experienced increased
liquidity in our stock, we cannot say with any certainty that a more active and liquid trading market for our common stock will
continue to develop. Because of this, it may be more difficult for shareholders to sell a substantial number of shares for the same
price at which shareholders could sell a smaller number of shares.
We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of
common stock for sale in the market, will have on the market price of our common stock. We can give no assurance that sales of
substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the
price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.
The market price of our common stock has fluctuated significantly, and may fluctuate in the future. These fluctuations may
be unrelated to our performance. General market or industry price declines or overall market volatility in the future could
adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Our corporate organizational documents and the provisions of Tennessee law to which we are subject contain certain
provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition of
Pinnacle Financial that you may favor.
Our amended and restated charter, as amended, and bylaws, as amended, contain various provisions that could have an anti-
takeover effect and may delay, discourage or prevent an attempted acquisition or change of control of Pinnacle Financial. These
provisions include:
•
•
•
•
a provision requiring our board of directors to take into account specific factors when considering an acquisition
proposal;
a provision that all extraordinary corporate transactions to which we are a party must be approved by a majority of the
directors and a majority of the shares entitled to vote;
a provision that any special meeting of our shareholders may be called only by our chairman, our chief executive officer,
our president, our board of directors, or the holders of 25% of the outstanding shares of our voting stock that have held
those shares for at least one year; and
a provision establishing certain advance notice procedures for nomination of candidates for election as directors at an
annual or special meeting of shareholders at which directors are elected.
Additionally, our amended and restated charter, as amended, authorizes the board of directors to issue shares of our preferred
stock without shareholder approval and upon such terms as the board of directors may determine. The issuance of our preferred
stock, while providing desirable flexibility in connection with possible acquisitions, financings, and other corporate purposes,
could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a
controlling interest in us. In addition, certain provisions of Tennessee law, including a provision which restricts certain business
combinations between a Tennessee corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted
acquisition or change in control of our company.
39
An investment in our common stock is not an insured deposit and is not guaranteed by the FDIC.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the
FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently
risky for the reasons described herein and our shareholders will bear the risk of loss if the value or market price of our common
stock is adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's executive offices are located at 150 Third Avenue South, Suite 900, Nashville, Tennessee. At December 31, 2018, we
conducted banking operations in 114 offices in four states. These offices include both owned and leased facilities as follows:
State
Owned
Leased
Total
Tennessee
North Carolina
South Carolina
Virginia
27
30
12
6
75
20
8
9
2
39
47
38
21
8
114
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings to which Pinnacle Financial or a subsidiary of Pinnacle Financial is party arise from time to time in the normal
course of business. There are no material pending legal proceedings to which Pinnacle Financial or any of its subsidiaries is a party or
of which any of its or its subsidiaries' properties are subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
40
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Pinnacle Financial's common stock is traded on the Nasdaq Global Select Market under the symbol "PNFP" and has traded on that
market since July 3, 2006. As of February 22, 2019, Pinnacle Financial had approximately 4,936 stockholders of record.
In connection with the settlement of income tax liabilities associated with the Company's equity compensation plans and pursuant to
the common stock share repurchase program approved by the Pinnacle Financial board of directors and announced during the fourth
quarter of 2018, Pinnacle Financial repurchased shares of its common stock during the quarter ended December 31, 2018 as follows:
Period
October 1, 2018 to October 31, 2018
November 1, 2018 to November 30, 2018
December 1, 2018 to December 31, 2018
Total
Total Number of
Shares
Repurchased (1)
Average Price Paid
Per Share
1,782
$
161,482
244,000
407,264
$
55.27
56.13
47.69
51.12
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans or
Programs
— $
161,200
244,000
405,200
$
—
90,950,000
79,314,000
79,314,000
(1) During the quarter ended December 31, 2018, 48,225 shares of restricted stock previously awarded to certain of our associates vested.
40,306 of these shares that vested were subject to Section 83(b) elections made at the time the award was granted. For the remaining 7,919
restricted share awards which vested during the quarter ended December 31, 2018, we withheld 2,064 shares to satisfy tax withholding
requirements associated with their vesting.
(2) On November 13, 2018, Pinnacle Financial announced that its board of directors authorized a share repurchase program for up to $100.0
million of Pinnacle Financial’s outstanding common stock. The repurchase program is scheduled to expire upon the earlier of Pinnacle
Financial’s repurchase of shares of its common stock having an aggregate purchase price of $100.0 million and December 31, 2019.
Pinnacle Financial repurchased 405,200 shares of its common stock at an aggregate cost of $20.7 million in the fiscal year ended December
31, 2018. Share repurchases may be made from time to time, on the open market or in privately negotiated transactions, at the discretion of
the management of Pinnacle Financial, after the board of directors of Pinnacle Financial authorizes a repurchase program. The approved
share repurchase program does not obligate Pinnacle Financial to repurchase any dollar amount or number of shares, and the program may
be extended, modified, suspended, or discontinued at any time. Stock repurchases generally are affected through open market purchases,
and may be made through unsolicited negotiated transactions. The timing of these repurchases will depend on market conditions and other
requirements.
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ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
Total assets
Loans, net of unearned income
Allowance for loan losses
Total securities
Goodwill, core deposit and other intangible assets
Deposits and securities sold under agreements to repurchase
Advances from FHLB
Subordinated debt and other borrowings
Stockholders' equity
Statement of Operations Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per Share Data:
Earnings per share available to common stockholders – basic
Weighted average common shares outstanding – basic
Earnings per share available to common stockholders –
diluted
Weighted average common shares outstanding – diluted
Common dividends per share
Book value per common share
Common shares outstanding at end of period
Performance Ratios:
Return on average assets
Return on average stockholders' equity
Net interest margin
Net interest spread
Noninterest income to average assets
Noninterest expense to average assets
Efficiency ratio
Average loan to average deposit ratio
Average interest-earning assets to average interest-bearing
liabilities
Average equity to average total assets ratio
Dividend payout ratio
Asset Quality Ratios:
Allowance for loan losses to nonaccrual loans
Allowance for loan losses to total loans
Nonperforming assets to total assets
Nonperforming assets to total loans and other real estate
Net loan charge-offs to average loans
Capital Ratios:
Common equity Tier 1 capital
Leverage
Tier 1 capital
Total capital
$
$
$
$
$
$
2018
25,031,044
17,707,549
83,575
3,277,968
1,853,282
18,953,848
1,443,589
485,130
3,965,940
946,717
210,375
736,342
34,377
701,965
200,870
452,887
449,948
90,508
359,440
4.66
77,111,372
4.64
77,449,917
0.58
51.18
77,483,796
$
$
$
$
$
$
2017 (1)
22,205,700
15,633,116
67,240
2,536,045
1,864,712
16,586,964
1,319,909
465,505
3,707,952
636,138
92,831
543,307
23,664
519,643
144,903
366,560
297,986
124,007
173,979
2.73
63,760,578
2.70
64,328,189
0.56
47.70
77,739,636
$
$
$
$
$
2016 (2)(3)
11,194,623
8,449,925
58,980
1,323,797
566,698
8,845,014
406,304
350,768
1,496,696
363,609
38,615
324,994
18,328
306,666
121,003
236,285
191,384
64,159
127,225
2.96
43,037,083
2.91
43,731,992
0.56
32.28
46,359,377
$
$
$
$
$
2015 (4)(5)
8,714,544
6,543,235
65,432
966,442
442,773
7,050,498
300,305
141,606
1,155,611
255,169
18,537
236,632
9,188
227,444
86,530
170,877
143,098
47,589
95,509
2.58
37,015,468
2.52
37,973,788
0.48
28.25
40,906,064
$
$
$
$
$
2014
6,018,248
4,590,026
67,359
770,730
246,422
4,876,600
195,476
96,158
802,693
206,170
13,185
192,985
3,635
189,350
52,602
136,300
105,653
35,182
70,471
2.03
34,723,335
2.01
35,126,890
0.32
22.45
35,732,483
1.53%
9.37%
3.68%
3.35%
0.85%
1.92%
48.32%
96.92%
132.69%
16.29%
13.79%
95.15%
0.47%
0.41%
0.58%
0.11%
9.58%
8.91%
9.58%
12.21%
1.02%
6.26%
3.76%
3.53%
0.85%
2.15%
53.26%
95.14%
136.10%
16.32%
20.00%
117.00%
0.43%
0.38%
0.55%
0.13%
9.14%
8.65%
9.14%
12.01%
1.27%
9.47%
3.70%
3.46%
1.21%
2.36%
52.98%
96.66%
139.39%
13.40%
19.31%
213.90%
0.70%
0.30%
0.40%
0.21%
7.86%
8.55%
8.64%
11.86%
1.36%
10.06%
3.72%
3.55%
1.23%
2.42%
52.88%
96.39%
142.77%
13.47%
18.97%
222.90%
1.00%
0.42%
0.55%
0.21%
8.61%
9.37%
9.63%
11.24%
1.27%
9.33%
3.75%
3.65%
0.90%
2.33%
55.50%
93.15%
142.64%
13.46%
16.67%
403.20%
1.47%
0.46%
0.62%
0.10%
10.10%
11.30%
12.10%
13.40%
(1)
(2)
(3)
(4)
(5)
Information for the 2017 fiscal year includes the operation of BNC from its acquisition date of June 16, 2017 and reflects approximately 27.7 million shares of
Pinnacle Financial Common Stock issued in connection with the BNC merger and approximately 3.2 million shares issued in connection with a public offering
consummated in January 2017.
Information for the 2016 fiscal year includes the operations of Avenue from its acquisition date of July 1, 2016 and reflects approximately 3.8 million shares of
Pinnacle Financial Common Stock issued in connection with the Avenue merger.
Information for the 2016 fiscal year includes our additional 19% membership interest in BHG which we acquired in March 2016 and reflects approximately
861,000 shares of Pinnacle Financial Common Stock issued in connection with the additional investment in BHG.
Information for the 2015 fiscal year includes the operations of CapitalMark from its acquisition date of July 31, 2015 and Magna from its acquisition date of
September 1, 2015 and reflects approximately 3.3 million shares and 1.4 million shares of Pinnacle Financial Common Stock issued in connection with the
CapitalMark merger and the Magna merger, respectively.
Information for 2015 fiscal year includes our 30% membership interest in BHG which we acquired in February 2015.
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of our financial condition at December 31, 2018 and 2017 and our results of operations for each of the
years in the three-year period ended December 31, 2018. The purpose of this discussion is to focus on information about our financial
condition and results of operations which is not otherwise apparent from our consolidated financial statements. The following discussion
and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.
Overview
General. Our fully diluted net income per common share for the year ended December 31, 2018 was $4.64 compared to fully diluted
net income per common share of $2.70 and $2.91 for the years ended December 31, 2017 and 2016, respectively. At December 31, 2018,
loans had increased by $2.1 billion as compared to December 31, 2017. The comparability of our financial condition and performance
has been impacted by the acquisitions we have completed as well as the passage of the Tax Cuts and Jobs Act in December 2017, in each
case as discussed below.
Acquisitions. We acquired a 30% membership interest in Bankers Healthcare Group, LLC (BHG) on February 1, 2015 for $75.0
million in cash and acquired an additional 19% membership interest in BHG on March 1, 2016 for $74.1 million in cash and
860,470 shares of Pinnacle Financial common stock, with a fair value of $39.9 million on the date of the acquisition.
We acquired CapitalMark Bank and Trust (CapitalMark) on July 31, 2015 and Magna Bank (Magna) on September 1, 2015. We
acquired Avenue Financial Holdings, Inc. and its wholly owned bank subsidiary, Avenue Bank (together, Avenue), on July 1,
2016. At the acquisition date, CapitalMark's net assets were fair valued at $73.2 million, including loans of $857.5 million and
deposits valued at $953.2 million. At the acquisition date, Magna's net assets were fair valued at $49.1 million, including loans
of $440.7 million and deposits valued at $452.7 million. At the acquisition date, Avenue's net assets were fair valued at $81.7
million, including loans of $952.5 million and deposits valued at $966.7 million. These acquisitions further expanded our
franchise within our Tennessee market.
We acquired BNC Bancorp and its wholly owned bank subsidiary, Bank of North Carolina (together, BNC), on June 16, 2017.
At acquisition date, BNC's net assets were fair valued at $602.7 million, including loans valued at $5.6 billion and deposits
valued at $6.2 billion. This acquisition expanded our footprint into the Carolinas and Virginia.
Each holder of BNC common stock (including restricted shares) received 0.5235 shares of Pinnacle Financial's common stock
for each share of BNC common stock held by each shareholder on the closing date. We issued 27,687,100 shares of common
stock and paid cash consideration of approximately $129,000, related to fractional shares, to the BNC shareholders. Included
in the common stock issued were 136,890 assumed shares of unvested restricted stock that are continuing to vest in accordance
with their original contractual terms. The fair value of these awards was $9.2 million, with $5.4 million attributable to
precombination services provided by the recipients prior to the merger, that accordingly was included as merger consideration.
Tax Cuts and Jobs Act. On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Act") was signed into law. Among other items,
the Tax Act reduced the corporate statutory tax rate from 35% to 21%, which resulted in a reduction of our blended statutory
tax rate from 39.23% in 2017 to 26.14% in 2018. As a result of such decrease, we recognized a charge of $31.5 million in the
fourth quarter of 2017 resulting from the revaluation of our deferred tax assets.
Results of operations. Our net interest income increased to $736.3 million for 2018 compared to $543.3 million for 2017 and $325.0
million for 2016. Much of this growth in net interest income was largely the result of our acquisition of BNC as well as continued organic
growth subsequent to the merger. The net interest margin (the ratio of net interest income to average earning assets) for 2018 was 3.68%
compared to 3.76% and 3.70% for 2017 and 2016, respectively.
Our provision for loan losses was $34.4 million for 2018 compared to $23.7 million in 2017 and $18.3 million in 2016. Provision expense
for the year ended December 31, 2018 when compared to the comparable periods in 2017 and 2016 was impacted by organic loan growth
and by charge-offs realized in our consumer portfolio, primarily related to non-prime automobile loans and our commercial and industrial
portfolio. Our net charge-offs were $18.0 million during 2018 compared to $15.4 million in 2017 and $24.8 million in 2016. Additionally,
in 2018, our provision expense was impacted by a $1.8 million provision for potential losses incurred in connection with Hurricane
Florence that impacted operations in the Carolinas and Virginia.
43
Our allowance for loan losses as a percentage of total loans increased from 0.43% at December 31, 2017 to 0.47% at December 31, 2018.
The increase in the allowance as a percentage of total loans is primarily attributable to provision expense related to organic loan growth
and new loan originations in our expanded footprint during 2018. The overall balance of our allowance for loan losses is impacted by
fair value accounting on our acquired loan portfolios. At December 31, 2018, the remaining fair value discount for all acquired portfolios
was $95.7 million. For loans acquired in connection with our acquisitions, the calculation of the allowance for loan losses subsequent to
the acquisition date is consistent with that utilized for legacy Pinnacle Financial loans. Our accounting policy is to compare the computed
allowance for loan losses on purchased loans to the remaining fair value adjustment at the individual loan level. Generally the fair value
adjustments are expected to accrete to interest income over the remaining expected life of the underlying loan agreements and decrease
proportionately with the related loan balance. However, if the computed allowance is greater than the remaining fair value adjustment,
the excess is added to the allowance for loan losses by a provision for loan losses. Additional provisioning for purchased portfolios results
from credit deterioration on the individual loan or from increased borrowings on loans and lines that existed as of the acquisition date.
Should a loan with a remaining fair value discount be paid off prior to maturity, the remaining fair value discount is recognized as interest
income in the period when the loan is paid off.
Noninterest income for 2018 compared to 2017 increased by $56.0 million, or 38.6%. Noninterest income for 2017 compared to 2016
increased by $23.9 million, or 19.8%. The increase in noninterest income from 2018 to 2017 and 2017 to 2016 was partially due to an
increase in income from our investment in BHG, which was $51.2 million for the year ended December 31, 2018 compared to $38.0
million and $31.4 million for the years ended December 31, 2017 and December 31, 2016, respectively. The growth unrelated to our
BHG investment in both comparable periods was attributable to our overall increase in our geographic footprint in those periods as well
as increased transaction accounts and increased production in our fee-based products such as investments, insurance and trust resulting
from both organic growth and our merger with BNC. Also impacting noninterest income was a $2.3 million net pre-tax loss on the sale
of $169.9 million of investment securities in 2018 and an $8.3 million net pre-tax loss on the sale of $319.1 million of investment
securities in 2017 as we sought to restructure a portion of our securities portfolio in each period in preparation for a flattening yield curve.
The year-over-year decline in 2018 in net gains on the sale of mortgage loans was attributable to the impact of the interest rate environment
on mortgage production during those periods. The year-over-year growth in 2017 in net gains on the sale of mortgage loans was attributable
to increased volumes due to our acquistion of BNC.
Noninterest expense for 2018 compared to 2017 increased by $86.3 million, or 23.6%, primarily due to the inclusion of our expanded
footprint in the Carolinas and Virginia for all of 2018 compared to just over six months of operations in 2017. With the exception of
OREO and merger-related expenses, we realized increases in all noninterest expense categories. Salaries and employee benefits expense
increased $62.0 million, primarily resulting from annual merit increases awarded in the first quarter of 2018 as well as the increase in
our associate base primarily as a result of our merger with BNC, including their participation in the 2018 annual incentive program as
compared to 2017, and continued hiring of experienced bankers throughout our footprint. We also realized increases in equipment and
occupancy costs of $20.2 million in 2018 versus 2017 due to our expanded footprint. Additionally, other noninterest expense, which
includes deposit and lending related expenses, investment and trust sales expenses and administrative expenses, increased $20.9 million
in 2018 compared to 2017. Offsetting these increases was a decrease in merger-related expenses of $23.6 million in 2018 compared to
2017. There were no merger-related expenses recorded in the second half of 2018. Noninterest expense for 2017 compared to 2016
increased by $130.3 million, or 55.1%, primarily due to an increase in salaries and employee benefits expense. Salaries and employee
benefits expense increased $68.8 million, resulting from annual merit increases awarded in the first quarter of 2017 as well as the increase
in our associate base primarily as a result of our mergers with Avenue and BNC. We also realized increases in equipment and occupancy
costs due to our merger with BNC. Additionally, merger-related expense accounted for approximately $31.8 million of non-interest
expense for the year ended December 31, 2017 compared to $11.7 million of merger-related expense during the same period in 2016.
Among other items, merger-related expense for the years ended December 31, 2017 and 2016 includes the costs of technical conversions
which were completed in the third quarter of 2016 for Avenue and in the fourth quarter of 2017 for BNC. Certain associate-related
expenses such as retention bonuses are also included in merger-related expenses for all periods.
The number of full-time equivalent employees increased from 1,179.5 at December 31, 2016 to 2,132.0 at December 31, 2017 and 2,297.0
at December 31, 2018.
During the three years ended December 31, 2018, 2017 and 2016, we recorded income tax expense of $90.5 million, $124.0 million and
$64.2 million, respectively. Income tax expense for 2018 was impacted by the reduction in the statutory federal income tax rate from
35% to 21% as a result of the Tax Act, which was signed into law in December 2017. The Tax Act also impacted income tax expense for
the year ended December 31, 2017 as our deferred tax assets were revalued as a result of such rate change, resulting in a charge of $31.5
million.
44
Our effective tax rate for the years ended December 31, 2018, 2017 and 2016, was 20.1%, 41.6% and 33.5%, respectively. Our effective
tax rate differs from the combined federal and state income tax statutory rate primarily due to our investments in bank-qualified municipal
securities, tax benefits from our real estate investment trust subsidiary, participation in Tennessee's Community Investment Tax Credit
(CITC) program, tax benefits associated with bank-owned life insurance and tax savings from our captive insurance subsidiary, offset in
part by the limitation on deductibility of meals and entertainment expense, certain merger-related expenses and, in 2018, non-deductible
FDIC insurance premiums and non-deductible executive compensation.We also recorded tax benefits associated with our equity-based
compensation program pursuant to the adoption of ASU 2016-09 for the years ended December 31, 2018 and 2017, resulting in the
recognition of $3.0 million and $5.4 million of tax benefits, respectively. Prior to the adoption of ASU 2016-09, these tax benefits were
recorded in the statement of stockholders' equity directly to additional paid-in-capital.
Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 48.3%, 53.3% and
53.0% for the three years ended December 31, 2018, 2017 and 2016, respectively. The efficiency ratio measures the amount of expense
that is incurred to generate a dollar of revenue. The efficiency ratio improved in 2018 primarily due to the completion in 2018 of the
integration and technology conversion associated with the acquisition of BNC and the growth in net interest income and noninterest
income.
Net income for 2018 was $359.4 million compared to $174.0 million in net income for 2017 and $127.2 million in net income in 2016.
Fully-diluted net income per common share was $4.64 for 2018 compared to $2.70 for 2017 and $2.91 for 2016. Net income and fully-
diluted net income per common share in 2017 were each significantly and negatively impacted by the $31.5 million charge resulting from
the revaluation of our deferred tax assets following the passage of the Tax Act, while net income and fully-diluted net income per common
share in 2018 benefited from the reduced rate under the Tax Act.
Financial Condition. Our loan balances increased by $2.07 billion during 2018 compared to an increase of $7.18 billion during 2017.
The increase in our outstanding loan balances during 2018 is largely due to the continued economic growth in our core markets, increases
in the number of relationship managers, primarily in our commercial lending program, and increased focus on attracting new customers
to our company. During 2017, the increase was primarily the result of our acquisition of BNC in addition to organic growth caused by
similar factors that resulted in growth in 2018.
Total deposits increased from $16.45 billion at December 31, 2017 to $18.85 billion at December 31, 2018. Within our deposits, the ratio
of core funding to total deposits decreased slightly from 80.8% at December 31, 2017 to 79.0% at December 31, 2018.
We believe we have hired experienced relationship managers that have significant client portfolios and longstanding reputations within
the communities we serve. As such, we believe they will attract more relationship managers to our firm as well as loans and deposits
from new and existing small-and middle-market clients particularly if the economies in our principal markets continue to expand.
Capital and Liquidity. At December 31, 2018 and 2017, our capital ratios, including our bank's capital ratios, exceeded regulatory
minimum capital requirements and those necessary to be considered well-capitalized under applicable federal regulations. From time to
time, we may be required to support the capital needs of our bank subsidiary. At December 31, 2018, we had approximately $94.0 million
of cash at the holding company which could be used to support our bank. We believe we have various capital raising techniques available
to us to provide for the capital needs of our bank, including an established line of credit with another bank that can be utilized to provide
up to $75 million of additional capital support to Pinnacle Bank, if needed.
In January 2017, we completed a public offering of 3.22 million shares of our common stock in a transaction that resulted in net proceeds
to us, after deducting underwriting discounts and commissions and other expenses payable by us, of approximately $191.2 million. We
contributed $185.0 million of these net proceeds to our bank subsidiary.
On November 13, 2018, we announced that our board of directors had authorized a share repurchase program for up to $100.0 million
of our outstanding common stock. The repurchase program is scheduled to expire upon the earlier of our repurchase of shares of our
common stock having an aggregate purchase price of $100.0 million and December 31, 2019. We repurchased 405,200 shares of our
common stock at an aggregate cost of $20.7 million in 2018.
Critical Accounting Estimates
The accounting principles we follow and our methods of applying these principles conform with U.S. generally accepted accounting
principles and with general practices within the banking industry. In connection with the application of those principles, we have made
judgments and estimates which, in the case of the determination of our allowance for loan losses and the assessment of impairment of
goodwill, has been critical to the determination of our financial position and results of operations.
45
Allowance for Loan Losses (allowance). Our 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 is
believed by management to be 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 to be uncollectible.
Our allowance for loan loss assessment methodology was modified during the year ended December 31, 2017 to (i) extend the lookback
period from 24 quarters to a period beginning January 1, 2006 to better capture the risk associated with this extended economic cycle,
(ii) eliminate the use of risk ratings in the calculation of the loss rate and instead focus on loss rate by loan type and (iii) expand the
economic variables used in the qualitative assessment to incorporate our expanded footprint. We 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 our 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.
Our 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 our performing
loan portfolio. The ASC 310-10-35 analysis includes a loan-by-loan analysis of impaired loans, including those reported as nonaccrual,
troubled-debt restructurings and purchase credit impaired.
In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake
this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in our overall evaluation of the risk
characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, independent internal loan
reviewers, and reviews that may have been conducted by third-party reviewers, primarily regulatory examiners. We incorporate 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 present is more representative of this 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 also considers 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 our 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 similarly to that utilized for our legacy loans. Our accounting policy is
to compare the computed allowance for loan losses for purchased loans to any remaining fair value adjustment on a loan-by-loan basis.
If the computed allowance is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a
provision for loan losses.
The ASC 450-20 portion of the allowance also includes a small unallocated component. We believe 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 not considering all relevant environmental categories and related measurements
and imprecision in our 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.
46
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. 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 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
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 $750,000. 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 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.
We then test the resulting allowance by comparing the balance in the allowance to historical trends and industry and peer information.
Our management then evaluates the result of the procedures performed, including the results of our testing, and decides on the
appropriateness of the balance of the allowance in its entirety. The audit committee of our board of directors approves the allowance for
loan loss policy annually and reviews the methodology and approves the resultant allowance prior to the filing of quarterly and annual
financial information.
While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged
to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are necessarily
approximate and inherently imprecise. There are factors beyond our control, such as conditions in the local, national, and international
economy, a local real estate market or particular industry conditions which may materially negatively impact our asset quality and the
adequacy of our allowance for loan losses and thus the resulting provision for loan losses.
Effective January 1, 2020, management will adopt ASU 2016-13, Financial Instruments - Measurement of Current Expected Credit Losses
on Financial Instruments (CECL), which will modify the accounting for the allowance for loan losses from an incurred loss model to an
expected loss model, as discussed more fully under "Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Summary
of Significant Accounting Policies" of this Report for further information.
Impairment of Goodwill. Goodwill is evaluated for impairment annually and more frequently if events and circumstances indicate that
the asset might be impaired. ASC 350, Intangibles — Goodwill and Other, provides an entity the option to first perform a qualitative
assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an
entity does a qualitative assessment and determines it is necessary, or if a qualitative assessment is not performed, it is required to perform
a two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to
be recognized for that reporting unit (if any). If, based on a qualitative assessment, an entity determines that the fair value of a reporting
unit is more than its carrying amount, the two-step goodwill impairment test is not required. The results of our qualitative assessment as
of September 30, 2018, our annual assessment date, indicated that the fair value of our reporting unit was more than its carrying value,
and accordingly, the two-step goodwill impairment test was not performed.
Should our common stock price decline or other impairment indicators become known, additional impairment testing of goodwill may
be required. Should it be determined in a future period that the goodwill has become impaired, then a charge to earnings will be recorded
in the period such determination is made. While we believe that the assumptions utilized in our testing were appropriate, they may not
reflect actual outcomes that could occur. Specific factors that could negatively impact the assumptions used include the following: a
change in the control premium being realized in the market or a meaningful change in the number of mergers and acquisitions occurring;
the amount of expense savings that may be realized in an acquisition scenario; significant fluctuations in our asset/liability balances or
the composition of our balance sheet; a change in the overall valuation of the stock market, specifically bank stocks; performance of
Southeast U.S. Banks; and Pinnacle Financial's performance relative to peers. Changing these assumptions, or any other key assumptions,
could have a material impact on the amount of goodwill impairment, if any.
47
Results of Operations
The following is a summary of our results of operations for 2018, 2017 and 2016 (in thousands except per share data):
Years ended
December 31,
2018
2017
2018-2017
Percent
Increase
(Decrease)
Year ended
December 31,
2016
2017-2016
Percent
Increase
(Decrease)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Net income before income taxes
Income tax expense
Net income
Basic net income per common share
Diluted net income per common share
$
946,717
$
210,375
736,342
34,377
701,965
200,870
452,887
449,948
90,508
359,440
4.66
4.64
$
$
$
$
$
$
636,138
92,831
543,307
23,664
519,643
144,903
366,560
297,986
124,007
173,979
2.73
2.70
48.82 % $
126.62 %
35.53 %
45.27 %
35.09 %
38.62 %
23.55 %
51.00 %
(27.01)%
106.60 % $
70.70 % $
71.85 % $
363,609
38,615
324,994
18,328
306,666
121,003
236,285
191,384
64,159
127,225
2.96
2.91
74.95 %
140.40 %
67.17 %
29.11 %
69.45 %
19.75 %
55.13 %
55.70 %
93.28 %
36.75 %
(7.77)%
(7.22)%
Net Interest Income. Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid
on deposits and other interest bearing liabilities and is the most significant component of our revenues. For the year ended December 31,
2018, we recorded net interest income of approximately $736.3 million, which resulted in a net interest margin of 3.68%. For the year
ended December 31, 2017, we recorded net interest income of approximately $543.3 million, which resulted in a net interest margin of
3.76%. For the year ended December 31, 2016, we recorded net interest income of approximately $325.0 million, which resulted in a net
interest margin of 3.70%. These increases in net interest income were attributable to the growth in our loan portfolio due to our mergers
with BNC and Avenue, organic growth, and an increase in the interest rates we receive on interest earning assets offset in part by increases
in the volume and the rates we pay on deposits and our other funding sources.
48
Interest-earning assets:
Loans (1) (2)
Securities:
Taxable
Tax-exempt (2)
Federal funds sold and other
The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning
assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net
interest spread and net interest margin for each of the years in the three-year period ended December 31, 2018 (in thousands):
2018
2017
2016
Average
Balances
Interest
Rates/
Yields
Average
Balances
Interest
Rates/
Yields
Average
Balances
Interest
Rates/
Yields
$ 16,899,738 $850,472
5.09% $ 12,254,790 $578,286
4.79% $ 7,586,346 $335,735
4.51%
Total interest-earning assets
20,425,762
946,717
4.71% 14,803,371
636,138
1,804,958
1,202,143
518,923
48,192
35,995
12,058
2.67%
3.58%
2.32%
1,724,612
488,478
335,491
39,060
13,712
5,080
2.26%
3.76%
1.51%
4.38%
937,710
19,179
201,842
293,542
6,014
2,681
9,019,440
363,609
2.05%
4.00%
0.91%
4.06%
Nonearning assets:
Intangible assets
Other nonearning assets
Interest-bearing liabilities:
Interest-bearing deposits:
1,859,183
1,269,083
$ 23,554,028
1,273,577
939,269
$ 17,016,217
509,899
495,554
$ 10,024,893
Interest bearing demand deposits
$
835,929 $
9,774
1.17% $
583,052 $
3,926
0.67% $
303,390 $
1,147
Interest checking
Savings and money market
Time deposits
2,228,399
6,994,938
3,070,071
18,993
73,431
48,845
Total interest-bearing deposits
13,129,337
151,043
Securities sold under agreements to
repurchase
129,899
588
Federal Home Loan Bank advances
1,663,968
34,174
0.85%
1.05%
1.59%
1.15%
0.45%
2.05%
1,745,298
5,455,607
1,765,089
9,549,046
7,335
32,844
15,479
59,584
119,055
406
788,237
12,399
Subordinated debt and other
borrowings
470,189
24,570
5.23%
420,790
Total interest-bearing liabilities
15,393,393
210,375
1.37% 10,877,128
Noninterest-bearing deposits
4,305,942
—
0.00%
3,331,741
20,443
92,832
—
0.42%
0.60%
0.88%
0.62%
0.34%
1.57%
4.86%
0.85%
0.00%
1,161,281
2,993
3,426,842
14,289
777,343
5,489
5,668,856
23,918
75,981
481,711
243,905
6,470,453
2,179,398
185
4,136
10,376
38,615
—
0.38%
0.26%
0.42%
0.71%
0.42%
0.24%
0.86%
4.25%
0.60%
0.00%
Total deposits and interest- bearing
liabilities
19,699,335
210,375
1.07% 14,208,869
92,832
0.65%
8,649,851
38,615
0.45%
Other liabilities
Stockholders' equity
Net interest income
Net interest spread (3)
Net interest margin (4)
18,281
3,836,412
$ 23,554,028
30,218
2,777,130
$ 17,016,217
31,349
1,343,693
$ 10,024,893
$736,342
$543,306
$324,994
3.35%
3.68%
3.53%
3.76%
3.46%
3.70%
(1) Average balances of nonperforming loans are included in average loan balances.
(2) Yields computed on tax-exempt instruments on a tax equivalent basis and include $16.2 million, $12.3 million and $8.7 million for the years
ended December 31, 2018, 2017 and 2016, respectively. The tax-exempt benefit has been reduced by the projected impact of tax-exempt income
that will be disallowed pursuant to IRS Regulations for the period presented.
(3) Yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. The net interest spread calculation excludes the impact
of demand deposits. Had the impact of demand deposits been included, the net interest spread for the year ended December 31, 2018 would have
been 3.65% compared to a net interest spread for the years ended December 31, 2017 and 2016 of 3.73% and 3.61%, respectively.
(4) Net interest margin is the result of net interest income calculated on a tax-equivalent basis divided by average interest earning assets for the
period.
For the year ended December 31, 2018, our net interest spread was 3.35%, while the net interest margin was 3.68% compared to a net
interest spread of 3.53% for the year ended December 31, 2017 and 3.46% for the year ended December 31, 2016, and a net interest
margin of 3.76% and 3.70%, respectively. Although our net interest margin was positively impacted by yield expansion in our earning
asset portfolio, these increases were offset by increases in our total funding costs.
49
The expansion of our earning asset yields was driven in part by the impact of Federal funds rate increases, which positively impacted
our floating and variable rate loan and investment portfolios. During the year-ended December 31, 2018, our earning asset yield increased
by 33 basis points and 65 basis points, from the years ended December 31, 2017 and 2016, respectively, while total funding rates increased
by 42 basis points and 62 basis points compared to the years ended December 31, 2017 and 2016, respectively. The increase in our core
funding costs was primarily caused by higher prevailing market interest rates and increased FHLB borrowings which have higher interest
rates than our deposits. The application of fair value accounting on the BNC accounts we acquired also positively impacted our net interest
margin in 2018 and 2017, but will continue to become less impactful in future periods.
We continue to deploy various asset liability management strategies to manage our risk to interest rate fluctuations. Although the rise in
interest rates over the last two years has lifted the yields we receive on earning assets, pricing for creditworthy borrowers and meaningful
depositors is very competitive in our markets and this competition has adversely impacted, and may continue to adversely impact our
margins. Although we believe our net interest margin should remain relatively stable in 2019, we do anticipate that this challenging
competitive environment will continue in 2019. We also expect the impact of purchase accounting on our net interest income will continue
to lessen in future periods, which will negatively affect our net interest margin in 2019. More importantly, we believe our net interest
income should continue to increase in 2019 compared to 2018 primarily due to an increase in average earning asset volumes, including
both loans and our securities portfolio. We seek to fund these increased earning assets by growing our core deposits, but will utilize
noncore funding to fund a shortfall, if any.
Rate and Volume Analysis. Net interest income increased by $193.0 million between the years ended December 31, 2017 and 2018
and by $218.3 million between the years ended December 31, 2016 and 2017. The following is an analysis of the changes in our net
interest income comparing the changes attributable to rates and those attributable to volumes (in thousands):
Interest-earning assets:
Loans
Securities:
Taxable
Tax-exempt
Federal funds sold
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing deposits:
Interest bearing demand deposits
Interest checking
Savings and money market
Time deposits
Total deposits
Securities sold under agreements to
repurchase
Federal Home Loan Bank advances
Subordinated debt and other borrowings
Total interest-bearing liabilities
2018 Compared to 2017
Increase (decrease) due to
2017 Compared to 2016
Increase (decrease) due to
Rate
Volume
Net
Rate
Volume
Net
$
43,386
$
228,800
$
272,186
$
26,745
$
215,806
$
242,551
7,195
(2,575)
3,551
51,557
1,937
24,858
3,427
259,022
3,608
8,674
28,261
17,969
58,512
138
6,134
1,643
66,427
2,240
2,984
12,326
15,397
32,947
44
15,641
2,484
51,116
9,132
22,283
6,978
310,579
5,848
11,658
40,587
33,366
91,459
182
21,775
4,127
117,543
2,901
(1,837)
1,896
29,705
16,980
9,535
503
19,881
7,698
2,399
242,824
272,529
1,372
2,401
8,326
2,225
14,324
99
4,693
2,048
21,164
1,407
1,941
10,229
7,765
21,342
122
3,570
8,018
33,052
2,779
4,342
18,555
9,990
35,666
221
8,263
10,066
54,216
Net interest income
$
(14,870) $
207,906
$
193,036
$
8,541
$
209,772
$
218,313
Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate
change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume
times the previous rate while rate change is change in rate times the previous volume. The change attributed to rates and volumes (change
in rate times change in volume) is considered above as a change in volume.
Provision for Loan Losses. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan
losses that, in management's evaluation, we believe to be adequate to provide coverage for the inherent losses on outstanding loans. The
provision for loan losses amounted to approximately $34.4 million, $23.7 million and $18.3 million for the years ended December 31,
2018, 2017 and 2016, respectively.
50
Impacting the provision for loan losses in any accounting period are several factors including the change in outstanding loan balances,
the level of charge-offs and recoveries, the changes in the amount of impaired loans, results of regulatory examinations, credit quality
comparison to peer banks, the industry at large, economic conditions both in our market areas and more broadly, and, ultimately, the
results of our quarterly assessment of the inherent risks of our loan portfolio including past loan loss experience.
Provision expense for the year ended December 31, 2018 has increased as compared to 2017 and continued to be negatively impacted
due to charge-offs realized in our consumer portfolio, primarily related to non-prime automobile loans and in 2018, our commercial and
industrial portfolio. Additionally, in 2018, our provision expense was impacted by a $1.8 million provision for potential losses incurred
in connection with Hurricane Florence that impacted operations in the Carolinas and Virginia. Provision expense for the year ended
December 31, 2017 increased as compared to 2016 and was negatively impacted due to charge-offs realized in our consumer portfolio,
primarily related to non-prime automobile loans. The balance of our non-prime automobile portfolio was $6.3 million at December 31,
2018 compared to $21.8 million at December 31, 2017 and $30.0 million at December 31, 2016. We expect the percentage of our loan
portfolio represented by non-prime automobile loans will continue to decrease in 2019.
Our allowance for loan losses is adjusted to an amount deemed appropriate to adequately cover probable losses in the loan portfolio based
on our allowance for loan loss methodology. Our allowance for loan losses as a percentage of loans increased from 0.43% at December
31, 2017 to 0.47% at December 31, 2018. The increase in the allowance as a percentage of total loans is primarily attributable to provision
expense associated with organic loan growth and new loan originations in our expanded footprint during 2018. The absolute level of our
allowance for loan losses is largely driven by continued favorable credit experienced in our larger portfolios and we believe it is supported
by the strong economies presently in place in the markets in which we operate.
Noninterest Income. Our noninterest income is composed of several components, some of which vary significantly between annual
periods. Service charges on deposit accounts and other noninterest income generally reflect our growth, while investment services, fees
from the origination of mortgage loans, swap fees and gains or losses on the sale of securities will often reflect market conditions and
fluctuate from period to period.
The following is our noninterest income for the years ended December 31, 2018, 2017, and 2016 (in thousands):
Years ended
December 31,
2018
2017
2018-2017
Percent
Increase
(Decrease)
Year ended
December 31,
2016
2017-2016
Percent
Increase
(Decrease)
Noninterest income:
Service charges on deposit accounts
$
24,906
$
Investment services
Insurance sales commissions
Gains on mortgage loans sold, net
Investment gains (losses) on sales and impairments, net
Trust fees
Income from equity method investment
Other noninterest income:
Interchange and other consumer fees
Bank-owned life insurance
Loan swap fees
SBA loan sales
Gain on other equity investments
Other noninterest income
Total other noninterest income
Total noninterest income
21,175
9,331
14,564
(2,254)
13,143
51,222
39,928
12,535
4,043
4,604
2,778
4,895
20,034
14,315
7,405
18,625
(8,265)
8,664
37,958
29,887
7,945
1,795
2,879
365
3,297
24.32% $
47.92%
26.01%
(21.80%)
72.73%
51.70%
34.94%
33.60%
57.77%
125.24%
59.92%
661.10%
48.47%
48.98%
14,501
10,757
5,310
15,754
395
6,328
31,403
24,221
3,547
3,865
1,275
533
3,114
36,555
68,783
46,168
$
200,870
$
144,904
38.62% $
121,003
38.16%
33.08%
39.45%
18.22%
NM
36.92%
20.87%
23.39%
123.99%
(53.56%)
125.80%
(31.52%)
5.88%
26.30%
19.75%
The increase in service charges on deposit accounts in 2018 compared to 2017 and 2016 is primarily related to increased analysis fees
due to an increase in the volume and number of commercial checking accounts resulting from our acquisitions and organic growth within
this product subsequent to the closing of our acquisitions.
51
Income from our wealth management groups (investments, insurance and trust) is also included in noninterest income. For the year ended
December 31, 2018, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division
of Pinnacle Bank, were $21.2 million, compared to $14.3 million at December 31, 2017 and $10.8 million at December 31, 2016, reflecting
increases in brokerage assets and, for much of 2018, 2017 and 2016, year-over-year increases in the value of the stock market. At December
31, 2018, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $3.8 billion in brokerage
assets compared to $3.3 billion and $2.2 billion at December 31, 2017 and 2016, respectively. Insurance commissions were approximately
$9.3 million during 2018 compared to $7.4 million during 2017 and $5.3 million during 2016. Additionally, at December 31, 2018, our
trust department was receiving fees on approximately $2.1 billion and $1.5 billion of managed and custodied assets, respectively, compared
to approximately $1.8 billion and $1.1 billion at December 31, 2017 and $1.0 billion and $755 million at December 31, 2016. The growth
in our wealth management businesses is attributable to our expanded distribution platform in our new markets as well as the addition of
associates in our legacy Tennessee markets.
Gains on mortgage loans sold, net of related expenses, including commissions, consists of fees from the origination and sale of
residential mortgage loans. These mortgage fees are for loans originated in our current markets that are subsequently sold to third-party
investors. Substantially all of these loan sales transfer servicing rights to the buyer. Generally, mortgage origination fees increase in lower
interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging
housing markets. Mortgage origination fees will fluctuate as the rate environment changes. Gains on mortgage loans sold, net, were $14.6
million, $18.6 million and $15.8 million, respectively, for the years ended December 31, 2018, 2017 and 2016. The year-over-year decline
in 2018 in net gains on the sale of mortgage loans was attributable to the impact of the generally rising interest rate environment on
mortgage production. The year-over-year growth in net gains on the sale of mortgage loans in 2017 was due to increased volumes due
in large part to our acquisition with BNC. We hedge a portion of our mortgage pipeline as part of a mandatory delivery program. The
hedge is not designated as a hedge for GAAP purposes and, as such, changes in its fair value are recorded directly through the income
statement.There is a positive correlation between the dollar amount of the mortgage pipeline and the value of this hedge. Therefore, the
change in the outstanding mortgage pipeline at any reporting period will directly impact the amount of gain recorded for mortgage loans
held for sale in any reporting period. At December 31, 2018, the mortgage pipeline included $77.0 million in loans expected to close in
2019 compared to $131.5 million in loans at December 31, 2017 expected to close in 2018, respectively.
For the year ended December 31, 2018, investment gains (losses) on sales and impairments, net, represent a $2.3 million pre-tax loss we
recognized upon the sale of $169.9 million of investment securities as we sought to restructure a portion of our securities portfolio to
offer some protection against a flattening yield curve in 2018 and 2019. For the year ended December 31, 2017, investment gains (losses)
on sales and impairments, net, represent an $8.3 million pre-tax loss we recognized in order to reposition $319.1 million of investment
securities as we sought to provide our balance sheet more protection from a potentially flatter yield curve in the future. This loss also
allowed us to capture an increased tax deduction in 2017 due to the reduction in corporate tax rates beginning in 2018 as a result of the
passage of the Tax Cuts and Jobs Act.
Income from equity-method investment is comprised solely of income from our 49% equity-method investment in BHG. We acquired
a 30% investment during the first quarter of 2015 and subsequently increased our investment by 19% in the first quarter of 2016. Income
from this equity-method investment was $51.2 million for the year ended December 31, 2018 compared to $38.0 million and $31.4 million
for the years ended December 31, 2017 and 2016, respectively. Income from equity-method investment is recorded net of associated
expenses, including amortization expense associated with customer lists and other intangible assets of $2.8 million, $3.3 million and $3.4
million for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, there were $10.7 million of these
intangible assets that are expected to be amortized in lesser amounts over the next 17 years. Also included in income from equity-method
investment, is accretion income associated with the fair value of certain of BHG's liabilities of $2.9 million, $3.1 million and $2.5 million
for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, there were $7.4 million of these liabilities
that are expected to be accreted into income in lesser amounts over the next 8 years.
During the years ended December 31, 2018, 2017 and 2016, respectively, Pinnacle Financial and Pinnacle Bank received $33.7 million,
$21.7 million and $29.0 million in dividends in the aggregate from BHG, which reduced the carrying amount of our investment in BHG
while earnings from BHG increase the carrying amount of our investment in BHG. Our proportionate share of earnings from BHG are
included in our consolidated tax return. Profits from intercompany transactions are eliminated. Earnings from BHG may fluctuate from
period-to-period.
As our ownership interest in BHG is 49% and our representatives do not occupy a majority of the seats on BHG's board of managers,
we do not consolidate BHG's results of operations or financial position into our financial statements but record the net result of BHG's
activities at our percentage ownership in income from equity method investment in noninterest income. For the year ended December
31, 2018, BHG reported $220.3 million in gross revenues, net of substitution losses of $43.7 million, compared to $160.2 million and
$136.7 million, respectively, for the years ended December 31, 2017 and 2016, net of substitution losses of $42.5 million and $23.4
million, respectively. The following discussion considers BHG's results of operations for 2018, 2017 and 2016 prior to consideration of
our ownership interest.
52
• Approximately $175.8 million, or 79.8%, of these revenues for the year ended December 31, 2018 related to gains on the sale
of commercial loans BHG had previously issued primarily to doctor, dentist and other medical practices compared to $127.2
million, or 79.4%, for the year ended December 31, 2017 and $95.6 million, or 69.9%, for the year ended December 31, 2016.
BHG refers to this activity as its core product. BHG typically funds these loans from cash reserves on its balance sheet.
Subsequently, these core product loans are sold with no recourse to BHG to a network of community banks and other financial
institutions at a premium to the par value of the loan. The purchaser may access a BHG cash reserve account of up to 3% of
the loan balance to support loan payments. BHG retains no servicing or other responsibilities related to the core product loan
once sold. As a result, this gain on sale premium represents BHG's compensation for absorbing the costs to originate the loan
as well as marketing expenses associated with maintaining its business model.
• At December 31, 2018 and 2017, there were $1.9 billion and $1.5 billion, respectively, in core product loans previously sold by
BHG that were actively serviced by BHG's network of bank purchasers. BHG, at its sole option, may also provide purchasers
of these core product loans the ability to substitute the acquired loan with another more recently-issued BHG loan should the
previously-acquired loan become at least 90-days past due as to its monthly payments. This substitution is subject to the purchaser
having adhered to the standards of its purchase agreement with BHG. Additionally, all substitutions are subject to the approval
by BHG's board of managers. As a result, the reacquired loans are deemed purchase credit impaired and recorded on BHG's
balance sheet at the net present value of the loan's anticipated cash flows. BHG will then initiate collection efforts and attempt
to restore the reacquired loan to performing status. As a result, BHG maintained a liability as of December 31, 2018 and 2017
of $88.9 million and $69.8 million, respectively, that represents an estimate of the future inherent losses for the outstanding core
portfolio that may be subject to future substitution. This liability represents 4.7% of core product loans previously sold by BHG
as of both December 31, 2018 and 2017.
• BHG will maintain loans on its balance sheet for a period of time prior to sale or transfer to a purchaser. BHG also has an
investment portfolio on which it earns interest and dividend income. Net interest income and fees associated with these activities
amounted to $32.5 million, $19.6 million and $20.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.
• Additionally, BHG will also refer loans to other financial institutions and, based on an agreement with the institution, earn a fee
for doing so. Typically, these are loans that BHG believes would either be classified as consumer-type loans rather than
commercial loans, fail to meet the credit underwriting standards of BHG but another institution will accept the loans or are to
borrowers in certain geographic locations where BHG has elected not to do business. For the years ended December 31, 2018,
2017 and 2016, BHG recognized fee income of $1.5 million, $6.5 million and $10.0 million, respectively, from these activities.
Included in other noninterest income are interchange and other consumer fees, gains from bank-owned life insurance, swap fees earned
for the facilitation of derivative transactions for our clients, SBA loan sales, gains or losses on other equity investments and other noninterest
income items. Interchange revenues increased in 2018 as a result of increased debit and credit card transactions as compared to the
comparable periods in 2017 and 2016 resulting from both customers added through acquisition and organic growth, but were negatively
impacted by the Durbin amendment which was applicable to us beginning on July 1, 2017. Other noninterest income included changes
in the cash surrender value of bank-owned life insurance which was $12.5 million for the year ended December 31, 2018 compared to
$7.9 million and $3.5 million for the years ended December 31, 2017 and 2016, respectively. The increase in earnings on these bank-
owned life insurance policies resulted from the purchase of $100.0 million in policies with similar terms to our existing policies during
the year ended December 31, 2018 and the additional $202.3 million in bank-owned life insurance with terms similar to our existing
policies which were added upon acquisition of BNC in June of 2017. The assets that support these policies are administered by the life
insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies) on these policies is
dependent upon the returns the insurance carriers are able to earn on the underlying investments that support the policies. Earnings on
these policies generally are not taxable. Loan swap fees and SBA loan sales are all included in other noninterest income and fluctuate
based on the current market environment. Additionally, included in other noninterest income are changes in the value of other primarily
equity investments. The carrying values of these investments are adjusted either upwards or downwards from the transaction price to
reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation
adjustment is confirmed through ongoing reviews by senior investment managers.
53
Noninterest Expense. The following is our noninterest expense for the years ended December 31, 2018, 2017, and 2016 (in thousands):
Years ended
December 31,
2018
2017
2018-2017
Percent
Increase
(Decrease)
Year ended
December 31,
2016
2017-2016
Percent
Increase
(Decrease)
Noninterest expense:
Salaries and employee benefits:
Salaries
Commissions
Cash and equity incentives
Employee benefits and other
Total salaries and employee benefits
Equipment and occupancy
Other real estate expense
Marketing and business development
Postage and supplies
Amortization of intangibles
Merger-related expenses
Other noninterest expense:
Deposit related expenses
Lending related expenses
Wealth management related expenses
Audit, exam and insurance expense
Administrative and other expenses
Total other noninterest expense
$
161,229
$
130,929
23.14% $
12,644
53,990
43,810
271,673
74,276
723
11,712
7,815
10,549
8,259
22,768
19,448
1,837
7,791
16,036
67,880
7,573
40,693
30,467
209,662
54,092
1,079
8,321
5,736
8,816
66.96%
32.68%
43.79%
29.58%
37.31%
(32.99%)
40.75%
36.24%
19.66%
31,843
(74.06%)
13,098
13,422
1,271
5,785
13,435
47,011
73.83%
44.90%
44.53%
34.68%
19.36%
44.39%
Total noninterest expense
$
452,887
$
366,560
23.55% $
83,164
5,932
27,182
24,541
140,819
35,072
396
6,536
3,929
4,281
11,747
8,315
11,938
1,316
4,178
7,758
33,505
236,285
57.43%
27.66%
49.71%
24.15%
48.89%
54.23%
172.47%
27.31%
45.99%
105.93%
171.07%
57.52%
12.43%
(3.42%)
38.46%
73.18%
40.31%
55.13%
The increase in total salaries and employee benefits expense in 2018 over 2017 and 2016 is primarily the result of an increase in the
number of employees in 2018 over 2017 and 2016 and annual merit increases to base salaries. At December 31, 2018, our associate base
had expanded to 2,297.0 full-time equivalent associates as compared to 2,132.0 and 1,179.5 at December 31, 2017 and 2016, respectively,
primarily resulting from our acquisition of BNC and our efforts to continue to hire experienced bankers and other associates throughout
our footprint. We expect salary and employee benefit expenses will continue to rise as we continue to hire more experienced bankers and
other associates throughout our expanded footprint. We also expect salaries and benefits expense will increase in 2019 when compared
to 2018 due to our increased associate base and annual merit increases given in the first quarter of each fiscal year and as we continue to
enhance the infrastructure around our operations to account for our increased size and geographic reach.
Commissions expense represents compensation paid to our wealth management lines of business including investment services, trust,
insurance and capital markets. Commissions expense for the year ended December 31, 2018 was 67.0% greater than in 2017 which was
27.7% greater than in 2016. The increase in 2018 as compared to 2017 and 2016 is primarily related to growth in our investment portfolio
commissions. Commissions expense incurred related to the production of residential mortgages is recorded net of the related mortgage
revenues.
We believe that cash and equity incentives are a valuable tool in motivating an employee base that is focused on providing our clients
effective financial advice and increasing shareholder value. As a result, and unlike many other financial institutions, all of our non-
commissioned associates participate in our annual cash incentive plan with a minimum targeted bonus equal to 10% of each associate's
annual salary, and all of our associates participate in our equity compensation plans. Under the annual cash incentive plan, the targeted
level of incentive payments requires achievement of a certain soundness threshold and a targeted level of revenues and diluted earnings
per share (subject to certain adjustments). To the extent that the soundness threshold is met and revenues and earnings are above or below
the targeted amount, the aggregate incentive payments are increased or decreased. Historically, we have paid between 0% and 125% of
our targeted incentives. In 2018, our cash incentives represented 100% of targeted incentive compensation compared to 105% in 2017
and 90% in 2016. Cash incentives paid in 2018 totaled $36.4 million, compared to $24.1 million in 2017 and $16.2 million in 2016. The
increase in 2018 when compared to 2017 was primarily the result of certain new associates that we had hired being able to participate in
the annual cash incentive plan, particularly the BNC associates that did not participate in the company-wide plan in 2017. Similarly, the
increase in 2017 when compared to 2016 was the result of certain new associates that we had hired being able to participate in the plan,
54
particularly the Avenue associates that had not participated in 2016, and the payout in 2017 being at 105% of target compared to 90% of
target in 2016.
Also, included in cash and equity incentives for the years ended December 31, 2018, 2017 and 2016, were approximately $12.0 million,
$10.3 million and $7.7 million, respectively, of compensation expenses related to equity-based restricted share awards and approximately
$5.7 million, $6.3 million and $3.2 million, respectively, of compensation expenses related to equity-based restricted share units with
performance-based vesting criteria. We have not issued stock options since 2008. Under our equity incentive plans, we provide a broad-
based equity incentive program for all associates. We believe that equity incentives provide a vehicle for all associates to become
meaningful shareholders of Pinnacle Financial over an extended period of time and create a shareholder-centric culture throughout our
organization. Our compensation expense associated with equity awards for 2018 increased when compared to 2017 and 2016 as a result
of the additional associates we hired in those periods, including associates obtained in connection with an acquisition as well as increases
in the amount of performance units awarded to our senior associates. We expect our compensation expense associated with equity awards
to increase in 2019 when compared to 2018 as a result of our intention to hire additional experienced financial advisors in 2019 as well
as increases in the amount of performance units awarded to our senior associates.
Employee benefits and other expenses include costs associated with our 401k plan, health insurance, payroll taxes and contract labor.
These expenses increased by $13.3 million in 2018 compared to 2017 which increased by $5.9 million when compared to 2016. The
increase in 2018 as compared to 2017 and 2017 as compared to 2016 was primarily the result of the increase in full-time equivalent
associates in each respective period.
Equipment and occupancy expense for the year ended December 31, 2018 was 37.3% greater than in 2017 which was 54.2% greater than
in 2016. The increase in 2018 as compared to 2017 and 2016 is due to our BNC merger, including the completion and opening of an
office in North Carolina in 2018, and two new locations opened in our Tennessee markets in the latter part of 2017. We believe the number
of our locations will increase over an extended period of time. In future periods, these expansions may lead to higher equipment and
occupancy expenses as well as related increases in salaries and benefits expense.
Other real estate expense for the year ended December 31, 2018 was $723,000 compared to $1.1 million in 2017 and $396,000 in 2016.
The decrease in 2018 compared to 2017 is related to the $12.7 million decrease in other real estate owned during the year ended December
31, 2018. The increase in 2017 is primarily related to the acquisition of $20.7 million in other real estate due to our merger with BNC.
Marketing and business development expense for the year ended December 31, 2018 was 40.8% greater than in 2017 which was 27.3%
greater than in 2016. The primary source of the increases in 2018 as compared to 2017 and 2017 as compared to 2016 is related to our
merger with BNC and the associated marketing and business development expenses for our expanded footprint. Additionally, our
relationship with a Memphis professional sports franchise, which began in the latter half of 2016, was in place for the full year in 2017,
representing a larger expense in 2017 when compared to 2016.
Noninterest expense related to the amortization of intangibles was $10.5 million for the year ended December 31, 2018 compared to $8.8
million and $4.3 million for the years ended December 31, 2017 and 2016, respectively. The increase in amortization expense is attributable
to an increase in amortizing intangibles resulting from our acquisitions in 2017 and 2016, respectively. The following table outlines our
amortizing intangible assets, their initial valuations and their intangible lives as of December 31, 2018:
Year
acquired
Initial
Valuation
(in millions)
Amortizable
Life
(in years)
Remaining
Value
(in millions)
Core Deposit Intangible:
CapitalMark
Magna Bank
Avenue
BNC
Book of Business Intangible:
Miller Loughry Beach Insurance
CapitalMark
BNC Insurance
BNC Trust
6.2
3.2
8.8
48.1
1.3
0.3
0.4
1.9
7
6
9
10
20
16
20
10
1.6
0.6
4.6
36.8
0.3
0.2
0.4
1.6
2015
2015
2016
2017
2008
2015
2017
2017
55
These assets are being amortized on an accelerated basis which reflects the anticipated life of the underlying assets. Amortization expense
related to these assets is estimated to decrease from $9.1 million per year to $4.7 million per year over the next five years with lesser
amounts for the remaining amortization period.
During the years ended December 31, 2018, 2017 and 2016, respectively, merger-related expenses of $8.3 million, $31.8 million and
$11.7 million were incurred associated with our acquisitions which occurred in, or prior to, those respective periods. Merger-related
expenses in 2018 included costs to finalize the cultural and technical integrations related to our acquisition of BNC and associate retention
packages. Merger-related expenses in 2017 primarily included the cost of the technical and cultural integration, lease termination fees,
costs associated with the BNC branch rationalization plan we executed in 2017, the cost of certain assumed equity awards that vested
upon the change in control, and retention bonuses paid to former BNC associates for their services during the conversion. Merger-related
expenses during 2016 include legal costs incurred associated with the Avenue merger to defend ourselves and Avenue's directors in a
shareholder suit as well as investigation and other legal costs associated with a former director's alleged improper trading in Avenue
common stock. Merger-related expenses for the years ended December 31, 2018, 2017 and 2016, also include the costs of technical
conversions which were completed during, or prior to, those periods. Certain associate-related expenses such as retention bonuses are
also included in these expenses.
Total other noninterest expenses increased by $20.9 million to $67.9 million during 2018 when compared to 2017. Included in other
noninterest expenses are deposit and lending related expenses, investment and trust sales expenses, audit, exam and insurance expense
and administrative expenses. Deposit and lending expenses increased by $9.7 million and $6.0 million, respectively, in 2018 primarily
as a result of our increased loan and deposit volumes in the period and, in the case of deposit-related expenses, as a result of an increase
in FDIC deposit insurance premiums of $6.0 million in 2018. Audit, exam and insurance expense is comprised of the fees associated
with ongoing audit and regulatory exams of our operations as well as the cost of our corporate insurance. Increases in audit, exam and
insurance expense in 2018 as compared to 2017 and 2016 is primarily related to increased regulation of our operations as a result of our
expanded footprint and increased asset size following the acquisition of BNC. Administrative and other expenses increased by $2.6
million to $16.0 million during 2018 when compared to 2017. Additionally, franchise tax expense increased $1.4 million in connection
with our expanded tax base.
Total other noninterest expenses increased by $13.5 million to $47.0 million during 2017 when compared to 2016. Included in other
noninterest expenses are deposit and lending related expenses, investment and trust sales expenses, audit, exam and insurance expense
and administrative expenses. Deposit and lending expenses increased by $4.8 million and $1.5 million, respectively, in 2017 primarily
as a result of our acquisition of BNC and in the case of deposit-related expenses, as a result of an increase in FDIC deposit insurance
premiums of $3.2 million in 2017. Administrative and other expenses increased by $5.7 million to $13.4 million during 2017 when
compared to 2016. Included in those expenses were increased legal fees, director fees and insurance costs as a result of our acquisition
of BNC. Franchise tax expense increased $952,000 in connection with our expanded tax base.
Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and noninterest income) was 48.3% in fiscal year 2018
compared to 53.3% in fiscal year 2017 and 53.0% in fiscal year 2016. The efficiency ratio measures the amount of expense that is incurred
to generate a dollar of revenue. Improvements in our efficiency ratio in each of 2018, 2017 and 2016 when compared to the prior years
were largely driven by our increase in size and growth in net interest income and noninterest income as a result of our acquisitions we
completed during those periods.
Income Taxes. During the year ended December 31, 2018, we recorded income tax expense of $90.5 million compared to $124.0 million
and $64.2 million in 2017 and 2016, respectively. As a result of the Tax Act, in 2017 we recorded a non-cash charge of $31.5 million
related to the revaluation of our net deferred tax assets due to the statutory federal income tax rate for corporate entities decreasing from
35 percent to 21 percent for 2018 and future periods. Our effective income tax rate was 20.1%, 41.6% and 33.5%, respectively, for the
years ended December 31, 2018, 2017 and 2016. The reduction in 2018 was primarily due to the reduction in the federal statutory corporate
tax rate following enactment of the Tax Act. Our effective tax rate differs from the combined federal and state income tax statutory rate
in effect of 26.14% and 39.23%, during the respective periods, primarily due to our investments in bank-qualified municipal securities,
tax benefits from our real estate investment trust subsidiary, participation in Tennessee's CITC program, tax benefits associated with
bank-owned life insurance and tax savings from our captive insurance subsidiary, offset in part by the limitation on deductibility of meals
and entertainment expense, certain merger-related expenses and, in 2018, non-deductible FDIC insurance premiums and non-deductible
executive compensation. Impacting tax expense during the years ended December 31, 2018 and 2017, was also our adoption on January
1, 2017 of FASB Accounting Standards Update (ASU) 2016-09, Stock Compensation Improvements to Employee Share-Based Payment
Activity, which represented a change in accounting for the tax effects related to vesting of common shares and the exercise of stock
options previously granted to our employees through our various equity compensation plans. This change resulted in a reduction in tax
expense of $3.0 million and $5.4 million, respectively, for the years ended December 31, 2018 and 2017 as the income tax effects related
to settlements of share-based payment awards is now required to 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.
56
Financial Condition
Our consolidated balance sheet at December 31, 2018 reflects an increase of $2.1 billion in outstanding loans to $17.7 billion and an
increase of $2.4 billion in total deposits to $18.8 billion from December 31, 2017. Total assets were $25.0 billion at December 31, 2018
as compared to $22.2 billion at December 31, 2017. We acquired loans of $5.6 billion and deposits totaling $6.2 billion upon our acquisition
of BNC in 2017. We acquired loans of $952.5 million and deposits totaling $966.7 million upon our acquisition of Avenue in 2016.
Collectively, we acquired $1.3 billion in loans and $1.4 billion in deposits upon our acquisitions of CapitalMark and Magna in 2015.
Loans. The composition of loans at December 31 for each of the past five years and the percentage (%) of each segment to total loans are
summarized as follows (dollars in thousands):
2018
2017
2016
2015
2014
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
$ 7,164,954
40.4% $ 6,669,610
42.7% $ 3,193,496
37.8% $ 2,275,483
34.8% $ 1,544,091
33.6%
2,844,447
16.1%
2,561,214
16.4% 1,185,917
14.0% 1,046,517
16.0%
721,158
15.7%
Commercial real estate -
Mortgage
Consumer real estate -
Mortgage
Construction and land
development
Commercial and industrial
5,271,421
Consumer and other
354,272
2,072,455
11.7%
29.8%
2.0%
1,908,288
12.2%
912,673
10.8%
747,697
11.4%
322,466
7.0%
4,141,341
26.5% 2,891,710
34.2% 2,228,542
34.1% 1,784,729
38.9%
352,663
2.2%
266,129
3.2%
244,996
3.7%
217,583
4.8%
Total loans
$17,707,549
100.0% $ 15,633,116
100.0% $ 8,449,925
100.0% $ 6,543,235
100.0% $ 4,590,027
100.0%
The composition of our loan portfolio has changed due to our acquisition of BNC, which focused more on commercial real estate lending,
including construction, than we did in our legacy Tennessee markets. As we intend to focus on growth of the commercial and industrial
segment in our expanded footprint, we continue to believe our commercial and industrial portfolio will again become a more substantial
portion of our total loan portfolio at December 31, 2018. This focus was evident in 2018, as the commercial and industrial segment
represented 3.3% more of our total loan portfolio than it did at December 31, 2017. We will continue to focus on the growth of this segment
in 2019 and future periods, as well as growth in owner-occupied commercial real estate loans.
The commercial real estate – mortgage category includes owner-occupied commercial real estate loans. At December 31, 2018,
approximately 37.0% of the outstanding principal balance of our commercial real estate - mortgage loans was secured by owner-occupied
commercial real estate properties. Owner-occupied commercial real estate is similar in many ways to our commercial and industrial lending
in that these loans are generally made to businesses on the basis of the cash flows of the business rather than on the valuation of the real
estate. While the construction and land development loan segment continued to grow in 2018, this segment represents a smaller portion
of our portfolio as compared to 2017 as we continued our efforts to reduce the level of these loans as a percentage of our total portfolio
to pre-BNC merger levels. Nonetheless, construction and land development lending continues to be a meaningful portion of our portfolio
and reflects the development in the local economies in which we operate and is diversified between commercial, residential and land.
The following table classifies our fixed and variable rate loans at December 31, 2018 according to contractual maturities of (1) one year
or less, (2) after one year through five years, and (3) after five years. The table also classifies our variable rate loans pursuant to the
contractual repricing dates of the underlying loans (dollars in thousands):
Based on contractual maturity:
Due within one year
Due in one year to five years
Due after five years
Totals
Amounts at December 31, 2018
Fixed
Rates
Variable
Rates
Totals
At December 31,
2018
At December 31,
2017
$
$
952,826
$
2,394,299
$
4,734,961
2,685,100
4,057,543
2,882,820
3,347,125
8,792,504
5,567,920
8,372,887
$
9,334,662
$
17,707,549
18.9%
49.7%
31.4%
100.0%
18.2%
48.2%
33.6%
100.0%
57
Amounts at December 31, 2018
Fixed
Rates
Variable
Rates
Totals
At December 31,
2018
At December 31,
2017
Based on contractual repricing dates:
Daily floating rate
Due within one year
Due in one year to five years
Due after five years
Totals
$
— $
952,826
4,734,961
2,685,100
2,755,333
5,952,578
363,959
262,792
2,755,333
6,905,404
5,098,920
2,947,892
$
8,372,887
$
9,334,662
$
17,707,549
15.6%
39.0%
28.8%
16.6%
100.0%
16.4%
37.8%
28.4%
17.4%
100.0%
The above information does not consider the impact of scheduled principal payments.
Loan Origination Risk Management. We maintain lending policies and procedures designed to maximize lending opportunities within an
acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements
the review process by providing management with frequent reports related to loans in our portfolio, loan quality, concentrations of credit,
loan delinquencies and non-performing loans. Diversification in the loan portfolio is measured and monitored as a means of managing
risk associated with fluctuations in economic conditions.
Underwriting standards are designed to promote relationship banking rather than transactional banking. Management examines current
and projected cash flows to determine the expected ability of a borrower to repay its obligations as agreed. Commercial and industrial
loans are primarily underwritten based on the identified cash flows of the borrower and generally are collateralized by business assets and
may have a personal guaranty of business principals. Collateral pledged may include the assets being financed or other assets such as
accounts receivable, inventory or equipment. Some short-term loans may be advanced on an unsecured basis.
Commercial real estate mortgage loans are subject to underwriting standards and processes similar to commercial and industrial loans.
These loans are viewed primarily as cash flow loans and are underwritten based on the ability of the property (in the case of income
producing property), or the borrower's business (if owner occupied) to generate sufficient cash flow to amortize the debt. Secondary
emphasis is placed upon collateral value and the financial strength of guarantors, if any. Commercial real estate loans may be adversely
affected by conditions in the real estate markets or in the general economy. As detailed in the discussion of real estate loans below, the
properties securing our commercial real estate portfolio generally are diverse in terms of type and industry and we measure and monitor
concentrations regularly. We believe this diversity helps reduce our exposure to adverse economic events that affect any single industry
or type of real estate product. Management monitors and evaluates commercial real estate loans based on cash flow, collateral, geography
and risk grade criteria. We also utilize third-party experts to provide insight and guidance about economic conditions and trends affecting
market areas we serve.
Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption and lease rates, financial analysis
of the developers and property owners, and expectations of the permanent mortgage market, among other items. Construction loans are
generally based upon estimates of costs and appraised value associated with the completed project, which may be inaccurate. Construction
loans involve the disbursement of funds during construction with repayment substantially dependent on the success of the ultimate project.
Sources of repayment for these types of loans may be sales of developed property, refinancing in the permanent mortgage market, or an
interim loan commitment from us until permanent financing is obtained. These loans are closely monitored by on-site inspections and are
considered to have higher risks than other real estate loans because their ultimate repayment depends on the satisfactory completion of
construction and is sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the
availability of long-term financing.
We also originate consumer loans, including consumer real-estate loans, where we typically use a computer-based credit scoring analysis
to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified,
as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many
individual borrowers, seeks to minimize risk. Additionally, trend and outlook reports are reviewed by management on a regular basis.
Underwriting standards for home equity loans are heavily influenced by statutory requirements.
We also maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results
of these reviews are presented to management and the audit and risk committees of our board of directors. The loan review process
complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies
and procedures.
58
Lending Concentrations. We periodically analyze our loan portfolio to determine if a concentration of credit risk exists to any one or more
industries. We use broadly accepted industry classification systems in order to classify borrowers into various industry classifications. We
have a credit exposure (loans outstanding plus unfunded commitments) exceeding 25% of Pinnacle Bank's total risk-based capital to
borrowers in the following industries at December 31, 2018 and 2017 (in thousands):
At December 31, 2018
Outstanding
Principal Balances
Unfunded
Commitments
Total exposure
Total Exposure at
December 31, 2017
Lessors of nonresidential buildings
$
3,149,948
$
782,111 $
3,932,059
$
Lessors of residential buildings
New housing for-sale builders
Hotels and motels
1,200,653
511,484
779,390
284,044
589,505
140,611
1,484,697
1,100,989
920,001
3,483,597
1,151,676
780,137
836,320
Banking regulations have established guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-
owner occupied ratio of less than 300%. Should a bank’s ratios be in excess of these guidelines, banking regulations generally require an
increased level of monitoring in these lending areas by bank management. Both ratios are calculated by dividing certain types of loan
balances for each of the two categories by Pinnacle Bank’s total risk-based capital. At December 31, 2018 and 2017, Pinnacle Bank’s
construction and land development loans as a percentage of total risk-based capital was 85.2% and 89.4%, respectively. Non-owner
occupied commercial real estate and multifamily loans (including construction and loan development loans) was 277.7% and 297.1% for
December 31, 2018 and 2017, respectively. While Pinnacle Bank was in excess of the 300% guideline for the first six months of 2018,
Pinnacle Bank was within the 100% and 300% guidelines for the remainder of 2018 and has established what it believes to be appropriate
controls to monitor its lending in these areas as it aims to keep the level of these loans to below the 100% and 300% thresholds.
Performing Loans in Past Due Status. The following table is a summary of our accruing loans that were past due at least 30 days but
less than 89 days and 90 days or more past due as of December 31, 2018 and 2017 (dollars in thousands):
Accruing loans past due 30 to 89 days:
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total accruing loans past due 30 to 89 days
Accruing loans past due 90 days or more:
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total accruing loans past due 90 days or more
Ratios:
Accruing loans past due 30 to 89 days as a percentage of total loans
Accruing loans past due 90 days or more as a percentage of total loans
Total accruing loans in past due status as a percentage of total loans
$
$
$
$
December 31, 2018
December 31, 2017
$
11,756
18,059
3,759
21,451
3,276
58,301
$
— $
—
—
1,082
476
1,558
$
0.33%
0.01%
0.34%
23,331
14,835
4,136
7,406
6,311
56,019
104
1,265
146
1,348
1,276
4,139
0.36%
0.02%
0.38%
Potential Problem Loans. Potential problem loans amounted to approximately $176.3 million, or 1.0% of total loans outstanding at
December 31, 2018, compared to $164.0 million, or 1.1% of total loans outstanding at December 31, 2017. Potential problem loans, which
are not included in nonperforming 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 or worse, but not considered nonperforming loans. Approximately $17.1 million of potential problem loans were past due
at least 30 but less than 90 days as of December 31, 2018.
59
Non-Performing Assets and Troubled Debt Restructurings. At December 31, 2018, we had $103.2 million in nonperforming assets
compared to $85.5 million at December 31, 2017. Included in nonperforming assets were $87.8 million in nonperforming loans and $15.4
million in other real estate owned and other nonperforming assets at December 31, 2018 and $57.5 million in nonperforming loans and
$28.0 million in other real estate owned and other nonperforming assets at December 31, 2017. At December 31, 2018 and 2017, there
were $5.9 million and $6.6 million, respectively, of troubled debt restructurings that were performing as of the restructured date and remain
on accrual status but are considered impaired loans pursuant to U.S. GAAP.
All nonaccruing loans are reassigned to a special assets officer who was not responsible for originating the loan. The special assets officer
is responsible for developing an action plan designed to minimize our future losses. Typically, these special assets officers review our loan
files, interview prior officers assigned to the relationship, meet with borrowers, inspect collateral, reappraise collateral and/or consult with
legal counsel. The special assets officer then recommends an action plan to a committee of senior associates including lenders and workout
specialists, which could include foreclosing on collateral, restructuring the loan, issuing demand letters or other actions.
We discontinue the accrual of interest income 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. During 2018, 2017 and 2016, respectively, we recognized $469,000, $95,000 and $159,000
of interest income from nonperforming loans, reflecting cash payments received from the borrower and our belief, at the time of payment,
that the underlying collateral supported the carrying amount of the loans.
Due to the weakening credit status of a borrower, we may elect to formally restructure certain loans to facilitate a repayment plan that
seeks to minimize the potential losses, if any, that we might incur. These loans are considered troubled debt restructurings and are considered
to be impaired loans pursuant to U.S. GAAP. If on nonaccruing status as of the date of restructuring, any restructured loan is included in
the nonperforming loan balances as discussed above and is classified as an impaired loan. Loans that have been restructured that are on
accrual status as of the restructure date are not included in nonperforming loans; however, such loans are still considered impaired.
At December 31, 2018, we owned $15.2 million in other real estate which we had acquired, usually through foreclosure, or by deed in
lieu of foreclosure, from borrowers compared to $27.8 million at December 31, 2017; the majority of this real estate is located within our
principal markets. Of the $27.8 million balance at December 31, 2017, $21.5 million was acquired in conjunction with our merger with
BNC.
60
The following table is a summary of our nonperforming assets and troubled debt restructurings at December 31, 2018 and 2017 (in
thousands):
December 31, 2018
December 31, 2017
Nonperforming assets:
Nonperforming loans (1):
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total nonperforming loans (1)
Other real estate owned
Other repossessed assets
Total nonperforming assets
Accruing troubled debt restructurings:
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total accruing troubled debt restructurings
$
$
32,335
28,069
3,387
23,060
983
87,834
15,165
228
103,227
179
4,547
347
826
—
5,899
Total nonperforming assets and accruing troubled debt restructurings
$
109,126
$
Ratios:
Nonperforming loans to total loans
Nonperforming assets to total loans plus other real estate owned
Nonperforming assets plus troubled debt restructurings to total loans plus other real estate owned
Nonperforming assets, potential problem loans and troubled debt restructurings to Pinnacle Bank
Tier 1 capital and allowance for loan losses
Classified Asset Ratio (Pinnacle Bank) (2)
Allowance for loan loss coverage ratio
0.50%
0.58%
0.62%
12.40%
12.40%
95.2%
16,064
18,117
5,968
17,306
—
57,455
27,831
197
85,483
194
2,852
—
3,565
—
6,611
92,094
0.37%
0.55%
0.59%
12.80%
12.90%
117.0%
(1) Approximately $52.5 million and $45.8 million as of December 31, 2018 and 2017, respectively, of nonperforming loans included
above were currently paying pursuant to their contractual terms at December 31, 2018 and December 31, 2017.
(2) Classified assets as a percentage of Tier 1 capital plus allowance for loan losses.
Allowance for Loan Losses (allowance). We maintain the allowance at a level that our management deems appropriate to adequately cover
the probable losses inherent in the loan portfolio. As of December 31, 2018 and 2017, our allowance for loan losses was $83.6 million
and $67.2 million, respectively, which our management deemed to be adequate at each of the respective dates. Our allowance for loan
loss as a percentage of total loans has increased from 0.43% at December 31, 2017 to 0.47% at December 31, 2018. The increase in the
allowance as a percentage of total loans is primarily attributable to provision expense associated with organic loan growth and new loan
originations in our expanded footprint during 2018 in contrast to 2017 when much of our loan growth was the result of our acquisition of
BNC. The absolute level of our allowance for loan losses is largely driven by continued favorable credit experience in our larger portfolios
and we believe it is supported by the strong economies presently in place in the markets in which we operate.
61
Also impacting the overall balance of our allowance for loan losses is fair value accounting on our acquired loan portfolios as no allowance
for loan losses is assigned to acquired loans as of the date of acquisition; however, an allowance for loan losses is recorded for purchased
loans that have experienced credit deterioration subsequent to acquisition or increases in balances outstanding. Our accounting policy is
to compare the computed allowance for loan losses on a loan-by-loan basis for purchased loans to the remaining fair value adjustment. 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 judgments and estimates associated with our allowance determination are described
under "Critical Accounting Estimates" above. As of December 31, 2018, net loans included a net fair value discount of $95.7 million. For
the years ended December 31, 2018 and 2017, respectively, the net fair value discount changed as follows:
December 31, 2016
Acquisitions
Year-to-date accretion/settlement
December 31, 2017
Year-to-date accretion/settlement
December 31, 2018
Accretable
Yield(1)
Nonaccretable
Yield(2)
Total
$
$
$
(30,364) $
(3,633) $
(149,116)
47,478
(32,314)
4,410
(33,997)
(181,430)
51,888
(132,002) $
(31,537) $
(163,539)
53,720
14,143
(78,282) $
(17,394) $
67,863
(95,676)
(1)
(2)
The accretable yield will be recorded as a component of interest income using the level-yield method based on the life of the underlying loans.
The nonaccretable yield will be reduced as purchase credit impaired loans are settled.
The following table sets forth, based on management's best estimate, the allocation of the allowance to types of loans as well as the
unallocated portion as of December 31 for each of the past five years and the percentage of loans in each category to total loans (in
thousands):
2018
2017
2016
2015
2014
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
At December 31,
Commercial real estate –
Mortgage
$ 26,946
40.4% $ 21,188
42.7% $ 13,655
37.8% $ 15,513
34.8% $ 22,202
Consumer real estate – Mortgage
7,670
16.1%
5,031
16.4%
6,564
14.0%
7,220
16.0%
5,424
Construction and land
development
Commercial and industrial
Consumer and other
Unallocated
11,128
31,731
5,423
677
11.7%
29.8%
2.0%
NA
8,962
24,863
5,874
1,322
12.2%
26.5%
2.2%
NA
3,624
24,743
9,520
874
10.8%
34.2%
3.2%
NA
2,903
23,643
15,616
537
11.4%
34.1%
3.7%
NA
5,724
29,167
1,570
3,272
33.6%
15.7%
7.0%
38.9%
4.8%
NA
Total allowance for loan losses
$ 83,575
100.0% $ 67,240
100.0% $ 58,980
100.0% $ 65,432
100.0%
67,359
100.0%
The allocation of the allowance for loan losses by category is determined based on historical loss experience for that category and qualitative
factors applicable to each category of loans. The allocated loan loss attributable to impaired loans is included in the respective category
above. The unallocated category is intended to allow for losses that are inherent in our portfolio that we have not yet identified or attributable
to a specific risk factor and for modeling imprecision. Additional information on the allocation of the allowance between performing and
impaired loans is provided in Note 6 to the "Notes to the Consolidated Financial Statements."
62
The following is a summary of changes in the allowance for loan losses for each of the years in the five-year period ended December
31, 2018 and the ratio of the allowance for loan losses to total loans as of the end of each period (in thousands):
2018
2017
2016
2015
2014
Balance at beginning of period
Provision for loan losses
Charged-off loans:
Commercial real estate - Mortgage
Consumer real estate - Mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total charged-off loans
Recoveries of previously charged-off loans:
Commercial real estate - Mortgage
Consumer real estate - Mortgage
Construction and land development
Commercial and industrial
Consumer and other loans
Total recoveries of previously charged-off loans
Net charge-offs
Balance at end of period
Ratio of allowance for loan losses to total loans
outstanding at end of period
Ratio of net charge-offs to average loans outstanding
for the period
$
$
67,240
34,377
$
58,980
23,664
65,432
18,328
(3,030)
(1,593)
(74)
(13,175)
(12,528)
(30,400)
2,096
2,653
1,863
3,035
2,711
12,358
(18,042)
(633)
(1,461)
(137)
(4,297)
(15,518)
(22,046)
671
1,516
1,136
1,317
2,002
6,642
(276)
(788)
(231)
(5,801)
(24,016)
(31,112)
208
546
545
2,138
2,895
6,332
(15,404)
(24,780)
$
67,359
$
9,188
(384)
(365)
(190)
(2,207)
(18,002)
(21,148)
85
874
1,479
1,730
5,865
10,033
(11,115)
$
83,575
$
67,240
$
58,980
$
65,432
$
67,970
3,635
(875)
(1,621)
(301)
(3,095)
(1,811)
(7,703)
538
671
277
1,484
487
3,457
(4,246)
67,359
0.47%
0.11%
0.43%
0.13%
0.70%
0.33%
1.00%
0.21%
1.47%
0.10%
The decrease in the allowance for loan loss as a percentage of total loans over the last several years is primarily as a result of recording
our acquired portfolios at fair value upon acquisition. Net charge-offs in the consumer portfolio remained elevated in 2018, primarily due
to the non-prime automobile portfolio, which continues to become a less meaningful portion of our portfolio. Balances in the non-prime
automobile portfolio decreased from $21.8 million at December 31, 2017 to $6.3 million as of December 31, 2018. The increase in charge
offs in the commercial and industrial portfolio is largely due to loans that were reported as nonperforming assets as of December 31, 2017,
and for which further deterioration resulted in charge-offs during the year ended December 31, 2018.
As noted in our critical accounting policies, management assesses the adequacy of the allowance at 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 portfolios, past loan loss experience, known and inherent risks in the
portfolio, the views of Pinnacle Bank's regulators, adverse situations that may affect the borrower's ability to repay (including the timing
of future payments), 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. 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.
Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of inherent
losses existing in the loan portfolio at December 31, 2018. While our policies and procedures used to estimate the allowance for loan
losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily
approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, local real estate
market or a particular industry or borrower which may negatively impact, materially, our asset quality and the adequacy of our allowance
for loan losses and, thus, the resulting provision for loan losses.
63
Investments. Our investment portfolio, consisting primarily of Federal agency bonds, state and municipal securities and mortgage-backed
securities, amounted to $3.28 billion and $2.54 billion at December 31, 2018 and 2017, respectively. Our investment to asset ratio has
increased from 11.4% at December 31, 2017 to 13.1% at December 31, 2018. Our investment portfolio serves many purposes including
serving as a stable source of income, collateral for public funds and as a potential liquidity source. During 2018, Pinnacle sold $169.9
million of investment securities for a net pre-tax loss of $2.3 million. During 2017, $319.1 million of investment securities were sold at
a net pre-tax loss of $8.3 million. These sales were implemented as part of our efforts to reposition our investment portfolio to provide
our balance sheet more protection from a potentially flatter yield curve in the future. The timing of the sales in 2017 also allowed us to
capture an increased tax deduction in 2017 due to the reduction in corporate tax rates beginning in 2018 as a result of the passage of the
Tax Act. During the third quarter of 2018, Pinnacle Financial transferred, at fair value, $179.8 million of municipal securities from the
available-for-sale portfolio to the held-to-maturity portfolio to manage the earning asset potential and associated risk assumed with the
purchase of these types of securities. The related net unrealized after tax losses of $2.2 million remained in accumulated other comprehensive
income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of discount on the transferred
securities. No gains or losses were recognized at the time of transfer.
A summary of certain aspects of our investment portfolio at December 31, 2018 and 2017 follows:
Weighted average life
Effective duration (*)
Weighted average coupon
Tax equivalent yield
December 31,
2018
2017
7.23 years
6.29 years
3.62%
3.67%
3.22%
3.49%
2.99%
2.68%
(*) The metric is presented net of fair value hedges tied to certain investment portfolio holdings. The effective duration of the investment
portfolio without the fair value hedges as of December 31, 2018 was 4.82%.
The following table shows the carrying value of investment securities according to contractual maturity classifications of (1) one year or
less, (2) after one year through five years, (3) after five years through ten years, and (4) after ten years. Actual maturities may differ from
contractual maturities of mortgage-backed and asset-backed securities because the mortgages or other assets underlying the securities may
be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories but are listed below
these categories as of December 31, 2018 and 2017 (in thousands):
U.S. Treasury
securities
U.S. government
agency securities
State and Municipal
securities
Corporate
securities
Totals
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
At December 31, 2018:
Securities available-for-sale:
Due in one year or less
$ 29,805
2.33% $
Due in one year to five years
495
2.08%
Due in five years to ten years
Due after ten years
— 0.00%
— 0.00%
9,911
3,083
13,549
43,616
$ 30,300
2.32% $ 70,159
2.63% $1,229,654
4.44% $ 67,046
Mortgage-backed securities
Asset-backed securities
Securities held-to-maturity:
2,835
1.91% $
4,923
2.39% $
2.70%
2.27%
2.16%
24,936
44,883
4.96%
3.09%
4.49%
16,411
39,993
5,719
2.78% 1,157,000
4.58%
4.65%
4.49%
4.46%
47,474
44,925
98,425
1,206,335
1,397,159
1,310,945
375,582
$ 3,083,686
Due in one year or less
$
— 0.00% $
— 0.00% $
325
5.06% $
— 0.00% $
Due in one year to five years
Due in five years to ten years
Due after ten years
— 0.00%
— 0.00%
— 0.00%
— 0.00%
— 0.00%
5,710
7,980
— 0.00%
180,267
2.35%
2.88%
4.35%
— 0.00%
— 0.00%
— 0.00%
$
— 0.00% $
— 0.00% $ 194,282
4.23% $
— 0.00%
325
5,710
7,980
180,267
194,282
Mortgage-backed securities
Asset-backed securities
Total held-for-sale securities
— 0.00%
— 0.00%
$
194,282
4.23%
64
2.39%
4.60%
3.61%
4.43%
4.31%
2.78%
3.42%
3.55%
5.06%
2.35%
2.88%
4.35%
4.23%
33,196
65,775
187,198
792,003
1,078,172
1,263,819
173,292
$ 2,515,283
1.36%
4.16%
4.05%
3.84%
3.82%
2.45%
2.63%
3.05%
4.63%
2.46%
3.00%
4.02%
3.08%
U.S. Treasury
securities
U.S. government
agency securities
State and
Municipal
securities
Corporate
securities
Totals
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
At December 31, 2017:
Securities available-for-sale:
Due in one year or less
$ 30,196
1.20% $
248
1.25% $
2,752
3.08% $
— 0.00% $
Due in one year to five years
Due in five years to ten years
249
1.75%
— 0.00%
2,082
9,658
2.23%
53,611
1.67% 118,784
Due after ten years
— 0.00% 168,813
2.46% 609,465
4.43%
4.11%
4.25%
9,833
58,756
13,725
$ 30,445
1.21% $ 180,801
2.41% $ 784,612
4.24% $ 82,314
3.19%
4.32%
3.18%
4.00%
Mortgage-backed securities
Asset-backed securities
Securities held-to-maturity:
Due in one year or less
$
— 0.00% $
— 0.00% $
1,329
4.63% $
— 0.00% $
Due in one year to five years
Due in five years to ten years
Due after ten years
— 0.00%
— 0.00%
— 0.00%
— 0.00%
— 0.00%
— 0.00%
6,210
10,425
2,798
2.46%
3.00%
4.02%
— 0.00%
— 0.00%
— 0.00%
1,329
6,210
10,425
2,798
$
— 0.00% $
— 0.00% $ 20,762
3.08% $
— 0.00% $
20,762
Mortgage-backed securities
Asset-backed securities
Total held-for-sale securities
— 0.00%
— 0.00%
$
20,762
3.08%
We computed yields using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable
basis over the life of each security. We computed the weighted average yield for each maturity range using the acquisition price of each
security in that range.
Deposits and Other Borrowings. We had approximately $18.8 billion of deposits at December 31, 2018 compared to $16.5 billion at
December 31, 2017. Our deposits consist of noninterest and interest-bearing demand accounts, savings accounts, money market accounts
and time deposits. Additionally, we entered into agreements with certain customers to sell certain of our securities under agreements to
repurchase the security the following day. These agreements (which are typically associated with comprehensive treasury management
programs for our commercial clients and provide the client with short-term returns for their excess funds) amounted to $104.7 million at
December 31, 2018 and $135.3 million at December 31, 2017. Average balances for these repurchase agreements were $129.9 million in
2018 and $119.1 million in 2017. Additionally, at December 31, 2018, we had borrowed $1.4 billion in advances from the Federal Home
Loan Bank of Cincinnati (FHLB Cincinnati) compared to $1.3 billion at December 31, 2017. At December 31, 2018, we had an estimated
$2.6 billion in additional borrowing capacity with the FHLB Cincinnati; however, incremental borrowings are made via a formal request
by us and the subsequent approval by the FHLB Cincinnati.
65
Generally, we have classified our funding base as either core funding or non-core funding as shown in the table below. The following
table represents the balances of our deposits and other funding and the percentage of each type to the total at December 31, 2018 and
2017 (in thousands):
December 31,
2018
Percent
December 31,
2017
Percent
Core funding:
Noninterest-bearing deposit accounts
Interest-bearing demand accounts
Savings and money market accounts
Time deposit accounts less than $250,000
Reciprocating demand deposit accounts (1)
Reciprocating savings accounts (1)
Reciprocating CD accounts (1)
Total core funding
Non-core funding:
Relationship based non-core funding:
Other time deposits
Securities sold under agreements to repurchase
Total relationship based non-core funding
Wholesale funding:
Brokered deposits
Brokered time deposits
Federal Home Loan Bank advances
Subordinated debt and other funding
Total wholesale funding
Total non-core funding
Totals
$
4,309,067
3,097,110
6,805,186
1,605,983
162,410
418,230
91,187
20.63% $
14.83%
32.59%
7.69%
0.78%
2.00%
0.44%
4,381,386
2,756,506
5,847,650
1,260,162
77,472
408,806
106,227
16,489,173
78.96%
14,838,209
687,427
104,741
792,168
588,861
1,083,646
1,443,589
485,130
3,601,226
4,393,394
3.29%
0.50%
3.79%
2.82%
5.19%
6.91%
2.33%
17.25%
21.04%
444,951
135,262
580,213
445,822
722,721
1,319,909
465,505
2,953,957
3,534,170
$
20,882,567
100.00% $
18,372,379
23.85%
15.00%
31.83%
6.86%
0.42%
2.23%
0.58%
80.77%
2.42%
0.74%
3.16%
2.43%
3.93%
7.18%
2.53%
16.07%
19.23%
100.00%
(1) The reciprocating categories consists of deposits we receive from a bank network (the Promontory network) in connection with deposits
of our customers in excess of our FDIC coverage limit that we place with the Promontory network.
As noted in the table above, our core funding as a percentage of total funding decreased from 80.8% at December 31, 2017 to 79.0% at
December 31, 2018 primarily as a result of increased levels of brokered time deposits and other time deposits. Core deposits at December
31, 2017 have been restated from prior presentation for the regulatory changes implemented in 2018 that allow for the treatment of reciprocal
deposits as core funding. Growing our core deposit base is a key strategic objective of our firm. Our current growth plans contemplate
that we may increase our non-core funding amounts from current levels, but we do not currently anticipate that such increases will exceed
our internal policies.
When wholesale funding is necessary to complement the company's core deposit base, management determines which source is best suited
to address both liquidity risk management and interest rate risk management objectives. We increased our exposure to brokered deposits
and brokered time deposits in 2018 as a measure to diversify wholesale funding sources. Our Asset Liability Management Policy imposes
limitations on overall wholesale funding reliance and on brokered deposit exposure specifically. Both our overall reliance on wholesale
funding and exposure to brokered deposits and brokered time deposits were within those policy limitations as of December 31, 2018.
Our funding policies impose limits on the amount of non-core funding we can utilize based on the non-core funding dependency ratio
which is calculated pursuant to regulatory guidelines. Periodically, we may exceed our policy limitations, at which time management will
develop plans to bring our funding sources back into compliance with our core funding ratios. At December 31, 2018 and December 31,
2017, we were in compliance with our core funding policies. Though growing our core deposit base is a key strategic objective of our
firm, our current growth plans contemplate that we may temporarily increase our non-core funding amounts from current levels, but we
do not currently anticipate that such increases will exceed our internal policies.
66
The amount of time deposits as of December 31, 2018 amounted to $3.5 billion. The following table, which includes core, non-core and
reciprocal deposits, shows our time deposits in denominations of under $100,000 and those of denominations of $100,000 and greater by
category based on time remaining until maturity of (1) three months or less, (2) over three but less than six months, (3) over six but less
than twelve months and (4) over twelve months and the weighted average rate for each category (in thousands):
Balances
Weighted Avg. Rate
Denominations less than $100,000
Three months or less
Over three but through six months
Over six but through twelve months
Over twelve months
Denomination $100,000 and greater
Three months or less
Over three but through six months
Over six but through twelve months
Over twelve months
Totals
$
$
385,312
266,498
511,372
509,482
1,672,664
373,184
328,520
593,951
499,924
1,795,579
3,468,243
1.71%
1.83%
2.12%
2.44%
2.08%
1.59%
1.87%
1.86%
2.46%
1.97%
2.02%
Subordinated debt and other borrowings. Pinnacle Bank receives advances from the FHLB Cincinnati, pursuant to the terms of various
borrowing agreements, which assist it in the funding of its home mortgage and commercial real estate loan portfolios. Under the borrowing
agreements with the FHLB Cincinnati, Pinnacle Bank has pledged certain qualifying residential mortgage loans and, pursuant to a blanket
lien, all qualifying commercial mortgage loans as collateral. At December 31, 2018 and 2017, Pinnacle Financial had received advances
from the FHLB Cincinnati totaling $1.4 billion and $1.3 billion, respectively. At December 31, 2018, the scheduled maturities of FHLB
Cincinnati advances and interest rates are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Weighted average interest rate
Scheduled
Maturities
Weighted
average
interest rates
$
356,000
297,572
398,750
41,250
—
350,017
$
1,443,589
1.64%
1.83%
2.44%
2.85%
—
2.36%
2.11%
(1) Some FHLB Cincinnati advances include variable interest rates and could increase in the future. The table reflects rates in effect as of
December 31, 2018.
67
We have entered into and acquired a number of statutory business trusts which were established to issue 30-year trust preferred securities
and related junior subordinated debt instruments, certain other subordinated debt agreements and a $75.0 million revolving credit facility.
These instruments are outlined below (in thousands):
Name
Date Established
Maturity
Total Debt
Outstanding
Interest Rate at
December 31, 2018
Coupon Structure
Trust preferred securities
Pinnacle Statutory Trust I
December 29, 2003 December 30, 2033
$
Pinnacle Statutory Trust II
September 15, 2005
September 30, 2035
Pinnacle Statutory Trust III
September 7, 2006
September 30, 2036
Pinnacle Statutory Trust IV
October 31, 2007
September 30, 2037
BNC Capital Trust I
BNC Capital Trust II
BNC Capital Trust III
BNC Capital Trust IV
Valley Financial Trust I
Valley Financial Trust II
Valley Financial Trust III
April 3, 2003
April 15, 2033
March 11, 2004
April 7, 2034
September 23, 2004
September 23, 2034
September 27, 2006 December 31, 2036
June 26, 2003
June 26, 2033
September 26, 2005 December 15, 2035
December 15, 2006
January 30, 2037
10,310
20,619
20,619
30,928
5,155
6,186
5,155
7,217
4,124
7,217
5,155
Southcoast Capital Trust III
August 5, 2005
September 30, 2035
10,310
Subordinated Debt
Pinnacle Bank Subordinated Notes
July 30, 2015
Pinnacle Bank Subordinated Notes
March 10, 2016
July 30, 2025
July 30, 2025
Avenue Subordinated Notes
December 29, 2014 December 29, 2024
Pinnacle Financial Subordinated Notes November 16, 2016 November 16, 2026
BNC Subordinated Notes
BNC Subordinated Note
September 25, 2014
October 1, 2024
October 15, 2013
October 15, 2023
60,000
70,000
20,000
120,000
60,000
9,880
Other Borrowings
Revolving credit facility(6)
Debt issuance costs and fair value adjustment
April 26, 2018
Total subordinated debt and other borrowings
April 25, 2019
20,000
(7,745)
$
485,130
5.59% 30-day LIBOR + 2.80%
4.20% 30-day LIBOR + 1.40%
4.45% 30-day LIBOR + 1.65%
5.64% 30-day LIBOR + 2.85%
5.69% 30-day LIBOR + 3.25%
5.29% 30-day LIBOR + 2.85%
4.84% 30-day LIBOR + 2.40%
4.50% 30-day LIBOR + 1.70%
5.92% 30-day LIBOR + 3.10%
4.28% 30-day LIBOR + 1.49%
4.25% 30-day LIBOR + 1.73%
4.30% 30-day LIBOR + 1.50%
4.88%
4.88%
6.75%
5.25%
Fixed(1)
Fixed(1)
Fixed(2)
Fixed(3)
Fixed(4)
5.50%
7.34% 30-day LIBOR + 5.0%(5)
4.10% 30-day LIBOR + 1.75%
(1) Migrates to three month LIBOR + 3.128% beginning July 30, 2020 through the end of the term.
(2) Migrates to three month LIBOR + 4.95% beginning January 1, 2020 through the end of the term.
(3) Migrates to three month LIBOR + 3.884% beginning November 16, 2021 through the end of the term.
(4) Migrates to three month LIBOR + 3.59% beginning October 1, 2019 through the end of the term if not redeemed on that date.
(5) Coupon structure includes a floor of 5.0% and a cap of 9.5%.
(6) Borrowing capacity on the revolving credit facility is $75.0 million. An unused fee of 0.35% is assessed on the average daily unused
amount of the loan.
Pinnacle Financial's total assets are in excess of $15.0 billion as a result of acquisitions, which caused the subordinated debentures Pinnacle
Financial and its acquired entities issued in connection with trust preferred transactions to cease to qualify as Tier 1 capital under applicable
banking regulations. Though these securities no longer qualify as Tier 1 capital, Pinnacle Financial believes these subordinated debentures
continue to qualify as Tier 2 capital.
At December 31, 2018, we had borrowed $20.0 million under our $75.0 million revolving credit facility that matures on April 25, 2019.
Borrowings under the revolving credit facility bear interest at a rate of 30-day LIBOR plus 1.75%.
Capital Resources. At December 31, 2018 and 2017, our stockholders' equity amounted to $4.0 billion and $3.7 billion, respectively. The
increase is primarily attributable to net income and partially offset by a decrease in other comprehensive income. At December 31, 2018,
Pinnacle Bank's CET1 capital ratio was 10.5%, Tier 1 capital ratio was 10.5%, total capital ratio was 11.5% and Tier 1 leverage ratio was
9.8%, compared to 10.3%, 10.3%, 11.3% and 9.7% at December 31, 2017, respectively. At December 31, 2018, Pinnacle Financial's CET1
capital ratio was 9.6%, Tier 1 capital ratio was 9.6%, total capital ratio was 12.2% and Tier 1 leverage ratio was 8.9%, compared to 9.1%,
9.1%, 12.0% and 8.6% at December 31, 2017, respectively.
68
We and our bank subsidiary are subject to various regulatory capital requirements administered by federal banking agencies. Failure to
meet minimum capital requirements can lead to certain mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on our financial condition or results of operations. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, we and our bank subsidiary must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our
and Pinnacle Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require us and our bank subsidiary to maintain minimum
amounts and ratios of CET1 capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and
of Tier 1 capital to average assets.
The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became
effective for us on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully
phased in by January 1, 2019. The minimum capital level requirements applicable to bank holding companies and banks subject to the
rules are: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio
of 4% for all institutions. The Basel III rules, also establish a capital conservation buffer of 2.5% (to be phased in over three years) above
the regulatory minimum risk-based capital ratios. The capital conservation buffer was phased in beginning in January 2016 at 0.625% and
increased each year by a like percentage until fully implemented in January 2019. The net unrealized gain or loss on available-for-sale
securities is not included in computing regulatory capital. Management believes, as of December 31, 2018, that we had met all capital
adequacy requirements to which we are subject.
In December 2017, the Basel Committee on Banking Supervision published the last version of the Basel III accord, generally referred to
as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive
variability of risk-weighted assets (“RWA”), which will be accomplished by enhancing the robustness and risk sensitivity of the standardized
approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of
internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust
capital floor. Leadership of the federal banking agencies who are tasked with implementing Basel IV has indicated that it is considering
how to appropriately apply these revisions in the United States. Although it is uncertain at this time, we anticipate some, if not all, of the
Basel IV accord may be incorporated into the capital requirements framework applicable to us and Pinnacle Bank.
In January 2017, we completed the public offering of 3.22 million shares of our common stock in a transaction that resulted in net proceeds
to us, after deducing underwriting discounts and commissions and estimated other expenses payable by us, of $191.2 million. We have
contributed $185.0 million of these net proceeds to our bank subsidiary.
Share Repurchase Program. In November 2018, our board of directors authorized a stock repurchase program pursuant to which we may
purchase up to $100 million in shares of our outstanding common stock. Share repurchases under the program will be made from time to
time, in the open market, in privately negotiated transactions or otherwise, at the discretion of the management and in accordance with
applicable legal requirements. The timing of these repurchases will depend on a number of factors, including the market price of our
common stock, general market and economic conditions, and applicable legal requirements. We currently anticipate that the stock repurchase
program will remain in effect through December 31, 2019, or earlier if the entire authorized amount of shares has been repurchased. The
stock repurchase program does not obligate us to repurchase any dollar amount or number of shares, and the program may be extended,
modified, amended, suspended, or discontinued at any time. As of December 31, 2018, we had repurchased 405,200 shares under the
program for an aggregate purchase price of $20.7 million.
Dividends. Pursuant to Tennessee banking law, Pinnacle Bank may not, without the prior consent of the TDFI, pay any dividends to us
in a calendar year in excess of the total of its retained net profits for that year plus the retained net profits for the preceding two years. During
the year ended December 31, 2018, Pinnacle Bank paid dividends of $83.1 million to us which was within the limits allowed by the TDFI.
During the year ended December 31, 2018, we paid $45.5 million in dividends to common shareholders. On January 15, 2019 our board
of directors declared a $0.16 quarterly cash dividend to common shareholders of approximately $12.7 million in aggregate that was paid
on February 22, 2019 to common shareholders of record as of the close of business on February 1, 2019. The amount and timing of all
future dividend payments, if any, is subject to board discretion and will depend on our earnings, capital position, financial condition and
other factors, including new regulatory capital requirements, as they become known to us.
69
Market and Liquidity Risk Management
Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established
liquidity, loan, investment, borrowing, and capital policies. Our Asset Liability Management Committee (ALCO) is charged with the
responsibility of monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix. Two critical areas
of focus for ALCO are interest rate sensitivity and liquidity risk management.
Interest Rate Sensitivity. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO
measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits. ALCO
determines the most appropriate amounts of on-balance sheet and off-balance sheet items. Measurements which we use to help us manage
interest rate sensitivity include an earnings simulation model and an economic value of equity (EVE) model.
Our interest rate sensitivity modeling incorporates a number of assumptions for both earnings simulation and EVE, including loan and
deposit re-pricing characteristics, the rate of loan prepayments, etc. ALCO periodically reviews these assumptions for accuracy based
on historical data and future expectations. Our ALCO policy requires that the base scenario assumes rates remain flat and is the scenario
to which all others are compared in order to measure the change in net interest income and EVE. Policy limits are applied to the results
of certain modeling scenarios. While the primary policy scenarios focus is on a twelve month time frame for the earnings simulations
model, longer time horizons are also modeled. All policy scenarios assume a static volume forecast where the balance sheet is held
constant, although other scenarios are modeled.
Earnings simulation model. We believe interest rate risk is best measured by our earnings simulation modeling. Earning assets, interest-
bearing liabilities and off-balance sheet financial instruments are combined with forecasts of interest rates for the next 12 months and
are combined with other factors in order to produce various earnings simulations over that same 12-month period. To limit interest rate
risk, we have policy guidelines for our earnings at risk which seek to limit the variance of net interest income in both gradual and
instantaneous changes to interest rates. For instantaneous upward and downward changes in rates from management's flat interest rate
forecast over the next twelve months, assuming a static balance sheet, the following changes are predicted:
Instantaneous Rate Change
December 31, 2018
100 bps increase
200 bps increase
100 bps decrease
4.2 %
7.6 %
(5.4%)
While an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios,
we believe that a gradual shift in interest rates would have a more modest impact. Further, the earnings simulation model does not take
into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing
product spreads that could mitigate any potential adverse impact of changes in interest rates.
The behavior of our deposit portfolio in the baseline forecast and in alternate interest rate scenarios set out in the table above is a key
assumption in our projected estimates of net interest income. The projected impact on net interest income in the table above assumes no
change in deposit portfolio size or mix from the baseline forecast in alternative rate environments. In higher rate scenarios, any customer
activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher-yielding deposits or market-based funding
would reduce our benefit in those scenarios.
At December 31, 2018, our earnings simulation model indicated we were in compliance with our policies for interest rate scenarios for
which we model as required by our board approved Asset Liability Policy. The board has suspended the requirement to model the down
300 and 400 bps scenario while 10 year maturity Treasury rates are below 3.0%, which was the case as of December 31, 2018.
Economic value of equity model. While earnings simulation modeling attempts to determine the impact of a changing rate environment
to our net interest income, our EVE model measures estimated changes to the economic values of our assets, liabilities and off-balance
sheet items as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities
and off-balance sheet items, which establishes a base case EVE. We then shock rates as prescribed by our Asset Liability Policy and
measure the sensitivity in EVE values for each of those shocked rate scenarios versus the base case. The Asset Liability Policy sets limits
for those sensitivities. At December 31, 2018, our EVE modeling indicates the following changes in EVE due to instantaneous upward
and downward changes in rates:
70
Instantaneous Rate Change
December 31, 2018
100 bps increase
200 bps increase
100 bps decrease
(1.2%)
(4.0%)
(1.8%)
While an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios,
we believe that a gradual shift in interest rates would have a more modest impact. Since EVE measures the discounted present value of
cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be
impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet
growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact
of changes in interest rates.
At December 31, 2018, our EVE model indicated we were in compliance with our policies for all interest rate scenarios for which we
model as required by our board approved Asset Liability Policy. The board has suspended the requirement to model the down 300 and
400 bps scenario while 10 year maturity Treasury rates are below 3.0%, which was the case as of December 31, 2018.
Most likely earnings simulation models. We also analyze a most-likely earnings simulation scenario that projects the expected change
in rates based on a forward yield curve adopted by management using expected balance sheet volumes forecasted by management.
Separate growth assumptions are developed for loans, investments, deposits, etc. Other interest rate scenarios analyzed by management
may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements to further analyze or stress
our balance sheet under various interest rate scenarios. Each scenario is evaluated by management and weighted to determine the most
likely result. These processes assist management to better anticipate our financial results and, as a result, management may determine
the need to invest in other operating strategies and tactics which might enhance results or better position the firm's balance sheet to reduce
interest rate risk going forward.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in
interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected
uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact
on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance
of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain
assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes
in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity
of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates.
ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its
responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment,
borrowing, and capital policies.
Management's model governance, model implementation and model validation processes and controls are subject to review in our
regulatory examinations to ensure they are in compliance with the most recent regulatory guidelines and consistent with the best practices
of our industry. Management utilizes a respected, sophisticated third party asset liability modeling software to help ensure implementation
of management's assumptions into the model are processed as intended in a robust manner. That said, there are numerous assumptions
regarding financial instrument behavior that are integrated into the model. The assumptions are formulated by combining observations
gleaned from our historical studies of financial instruments and our best estimations of how, if at all, these instruments may behave in
the future given changes in economic conditions, technology, etc. These assumptions may prove to be inaccurate. Additionally, given the
large number of assumptions built into firms' asset liability modeling software, it is difficult, at best, to compare our results to other firms.
ALCO may determine that Pinnacle Financial should over time become more or less asset or liability sensitive depending on the underlying
balance sheet circumstances and our conclusions as to anticipated interest rate fluctuations in future periods. At present, ALCO has
determined that its "most likely" rate scenario considers two increases in short-term interest rates in 2019. Should these two rate hikes
not occur, net interest income in 2019 could be modestly lower as we believe our balance sheet will react more favorably to the forecasted
rate hikes. Our "most likely" rate forecast has been largely consistent over recent quarters and is based primarily on information we
acquire from a service which includes a consensus forecast of numerous interest rate benchmarks. We may implement additional actions
designed to achieve our desired sensitivity position which could change from time to time.
We have in the past used, and may in the future continue to use, derivative financial instruments as one tool to manage our interest rate
sensitivity, including that inherent in our mortgage lending program, while continuing to meet the credit and deposit needs of our customers.
71
We may also enter into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps qualify as
derivatives, even though they are not designated as hedging instruments.
Liquidity Risk Management. The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan
demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core
deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated
funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other
earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of
increased deposits and borrowing funds from various other institutions.
To assist in determining the adequacy of our liquidity, we perform a variety of liquidity stress tests including idiosyncratic, systemic and
combined scenarios for both moderate and severe events. Liquidity is defined as the ability to convert assets into cash or cash equivalents
without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining our ability to
meet the daily cash flow requirements of our customers, both depositors and borrowers. We seek to maintain a sufficiently liquid asset
balance to ensure our ability to meet our obligations. The amount of the appropriate minimum liquid asset balance is determined through
severe liquidity stress testing as measured by our liquidity coverage ratio calculation. At December 31, 2018, we were in compliance with
our liquidity coverage ratio.
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates, and our management
intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively
affect our liquidity position.
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced
by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and
call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/
liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our
regulators also monitor our liquidity and capital resources on a periodic basis.
As noted previously, Pinnacle Bank is a member of the FHLB Cincinnati and, pursuant to a borrowing agreement with the FHLB Cincinnati,
has pledged certain assets pursuant to a blanket lien. As such, Pinnacle Bank may use the FHLB Cincinnati as a source of liquidity
depending on the firm's ALCO strategies. Additionally, we may pledge additional qualifying assets or reduce the amount of pledged
assets with the FHLB Cincinnati to increase or decrease our borrowing capacity at the FHLB Cincinnati. At December 31, 2018, we
believe we had an estimated $2.6 billion in additional borrowing capacity with the FHLB Cincinnati; however, incremental borrowings
are made via a formal request by Pinnacle Bank and the subsequent approval by the FHLB Cincinnati.
Pinnacle Bank also has accommodations with upstream correspondent banks for unsecured short-term advances which aggregate $170.0
million. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within
less than a month. There were no outstanding borrowings under these agreements at December 31, 2018, or during the year then ended,
although we test the availability of these accommodations annually. Pinnacle Bank also had approximately $3.4 billion in available
Federal Reserve discount window lines of credit at December 31, 2018.
At December 31, 2018, we had approximately $1.7 billion in brokered deposits compared to approximately $1.2 billion in brokered
deposits at December 31, 2017. Historically, we have issued brokered certificates through several different brokerage houses based on
competitive bid. Our brokered deposit levels increased from 2017 by approximately $500 million as we issued more brokered deposits
in the second quarter of 2018 to augment funding needs of the bank. Typically, these funds have been for varying maturities of up to two
years and were issued at rates which were competitive to rates that we would be required to pay to attract similar deposits within many
of our local markets as well as rates for FHLB Cincinnati advances of similar maturities.
Industry regulators have defined additional liquidity guidelines, through the issuance of the Basel III Liquidity Coverage Ratio (LCR)
and the Modified LCR, for banking institutions greater than $250 billion in assets, and $50 billion in assets respectively, in the United
States. These regulatory guidelines became effective January 2015 with phase in over subsequent years and will require these large
institutions to follow prescriptive guidance in determining an absolute level of a high quality liquid asset (HQLA) buffer that must be
maintained on their balance sheets in order to withstand a potential liquidity crisis event. Although Pinnacle Financial follows the principles
outlined in the Interagency Policy Statement on Liquidity Risk Management, issued March 2010, to determine its HQLA buffer, Pinnacle
Financial is not currently subject to these regulations. However, these formulas could eventually be imposed on smaller banks, such as
Pinnacle Bank, and require an increase in the absolute level of liquidity on our balance sheet, which could result in lower net interest
margins for us in future periods.
At December 31, 2018, we had no individually significant commitment for capital expenditures. But, we believe the number of our
locations will increase over an extended period time, particularly in our Tennessee markets. In future periods, these expansions may lead
72
to higher equipment and occupancy expenses as well as related increases in salaries and benefits expense. There are no current plans to
materially expand our branch distribution in the Carolinas and Virginia though we anticipate replacing a location in Virginia with a newly
constructed facility in 2019.
Our short-term borrowings (borrowings which mature within the next fiscal year) consist primarily of securities sold under agreements
to repurchase (these agreements are typically associated with comprehensive treasury management programs for our clients and provide
them with short-term returns on their excess funds), FHLB Cincinnati advances and borrowings under our revolving credit facility.
Information concerning our short-term borrowings as of and for each of the years in the three-year period ended December 31, 2018 is
as follows (in thousands):
At December 31,
2018
2017
2016
Amounts outstanding at year-end:
Securities sold under agreements to repurchase
$
104,741
$
135,262
$
Federal funds purchased
Federal Home Loan Bank short-term advances
Borrowings under credit facility
Weighted average interest rates at year-end:
Securities sold under agreements to repurchase
Federal funds purchased
Federal Home Loan Bank short-term advances
Borrowings under credit facility
Maximum amount of borrowings at any month-end:
Securities sold under agreements to repurchase
Federal funds purchased
Federal Home Loan Bank short-term advances
Borrowings under credit facility
Average balances for the year:
—
356,000
20,000
—
557,501
—
0.50%
—
1.64%
4.10%
0.35%
—
1.46%
—
$
143,686
$
205,008
$
—
1,002,501
20,000
50,000
1,011,500
—
Securities sold under agreements to repurchase
$
129,899
$
115,573
$
Federal funds purchased
Federal Home Loan Bank short-term advances
Borrowings under credit facility
Weighted average interest rates for the year:
Securities sold under agreements to repurchase
Federal funds purchased
Federal Home Loan Bank short-term advances
Borrowings under credit facility
1,132
604,646
109
1,189
528,042
—
0.45%
1.87%
1.76%
3.48%
0.36%
1.02%
1.22%
—
85,706
—
392,000
—
0.22%
—
0.79%
—
92,941
2,567
763,000
—
75,950
1,219
489,333
—
0.24%
0.98%
0.62%
—
The following table presents additional information about our contractual obligations as of December 31, 2018, which by their terms
have contractual maturity and termination dates subsequent to December 31, 2018 (in thousands):
73
Contractual obligations:
Certificates of deposit (1)
At December 31, 2018
Next 12
months
13-36
months
37-60 months
More than 60
months
Totals
$
2,477,701
$
1,055,615
$
46,821
$
3,030
$
3,583,167
Deposits without a stated maturity (2)
15,382,427
Securities sold under agreements to repurchase (1)
Federal Home Loan Bank advances (3)
Junior subordinated debentures (4)
Subordinated notes (5)
Minimum operating lease commitments
Capital lease obligations
Totals
104,741
356,000
—
2,080
12,889
470
—
—
696,322
—
4,160
23,332
940
—
—
41,250
—
3,640
18,230
949
—
—
350,017
132,995
330,000
43,730
2,548
15,382,427
104,741
1,443,589
132,995
339,880
98,181
4,907
$
18,336,308
$
1,780,369
$
110,890
$
862,320
$
21,089,887
(1)
(2)
(3)
(4)
(5)
Includes interest through the contractual maturity.
Includes interest accrued and unpaid through December 31, 2018.
Represents principal payments on Federal Home Loan Bank Advances. See Note 9 "Federal Home Loan Bank Advances" to our consolidated
financial statements for information on the interest rates paid on these advances.
Represents principal payments on junior subordinated debentures issued in connection with trust preferred securities sold by affiliated trusts.
See Note 10 "Other Borrowings" to our consolidated financial statements for information on interest rates paid on these debentures.
Represents principal payments on subordinated notes outstanding. See Note 10 "Other Borrowings" to our consolidated financial statements
for information on interest rates paid on these notes.
Our management believes that we have adequate liquidity to meet all known contractual obligations and unfunded commitments, including
loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months. Our operating lease
commitments are primarily related to our branch and headquarters facilities. The terms of these leases expire at various points ranging
from 2019 through 2048. At December 31, 2018, our total minimum operating lease commitment was $98.2 million. Effective January
1, 2019, Pinnacle Financial adopted FASB ASC 842, which requires the recognition of a right of use asset and a lease liability generally
equal to the present value of these minimum operating lease commitments. See Recently Adopted Accounting Pronouncements for
additional information related to the adoption of FASB ASC 842.
Off-Balance Sheet Arrangements. At December 31, 2018, we had outstanding standby letters of credit of $177.5 million and unfunded
loan commitments outstanding of $6.9 billion. Because these commitments generally have fixed expiration dates and many will expire
without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these
outstanding commitments, Pinnacle Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-
term basis to borrow and purchase Federal funds from other financial institutions. The following table presents additional information
about our unfunded commitments as of December 31, 2018, which by their terms, have contractual maturity dates subsequent to December
31, 2018 (in thousands):
Unfunded commitments:
Lines of credit
Letters of credit
Totals
At December 31, 2018
Next 12
months
13-36 months
37-60 months
More than 60
months
Totals
$
$
2,672,405
156,193
2,828,598
$
$
1,839,802
20,301
1,860,103
$
$
1,101,051
631
1,101,682
$
$
1,308,431
350
1,308,781
$
$
6,921,689
177,475
7,099,164
We follow the same credit policies and underwriting practices when making these commitments as we do for on-balance sheet instruments.
Each customer's creditworthiness is evaluated on a case-by-case basis and the amount of collateral obtained, if any, is based on
management's credit evaluation of the customer. However, should the commitments be drawn upon and should our customers default
on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual
amount of those instruments. At December 31, 2018, we had accrued $2.9 million for the inherent risks associated with off-balance sheet
commitments.
Risk Management
As a financial institution, we take on a certain amount of risk in every business decision, transaction and activity. Risk management does
not eliminate risk, but seeks to achieve an appropriate balance between risk and return, which is critical to optimizing shareholder value.
74
Understanding our risks and managing them appropriately can enhance our ability to make better decisions, deliver on objectives, and
improve performance.
Our board of directors and members of senior management have identified major categories of risk: credit risk, liquidity risk, strategic
risk, reputational risk, operational risk, compliance risk, information technology risk, asset liability management risk, capital risk, financial
reporting risk, HR employment practices risk and non-bank activities risk. In its oversight role of our risk management function, our
board of directors, acting principally, but not exclusively, through a Risk Committee comprised solely of independent directors, focuses
on the strategies, analyses and conclusions of management relating to identifying, understanding and managing risks so as to optimize
total shareholder value, while balancing prudent business and safety and soundness considerations. The Risk Committee (or in some
cases the full board of directors) fulfills the overarching oversight role for the risk management process, including approving risk appetite
and tolerance levels, risk policies and limits, monitoring key and emerging risks, and reviewing risk assessment results. In addition,
oversight of certain risk is allocated to other committees of the board of directors that meet regularly and report to our board of directors,
including the Audit Committee and Human Resources and Compensation Committee.
The Chief Risk Officer reports to the Chief Executive Officer and provides overall vision, direction and leadership regarding the enterprise
risk management framework. The framework includes an Enterprise Wide Risk Management Committee, chaired by the Chief Risk
Officer, and various management-level risk committees that focus on specific areas of risk management. The Enterprise Wide Risk
Management Committee, which is comprised of the Chief Executive Officer, Chief Financial Officer, Chief Administrative Officer, Chief
Risk Officer, Chief Compliance Officer and Chief Credit Officer, provides management oversight of our enterprise-wide risk management
program. Additional management-level risk committees are responsible for effective risk measurement, management and reporting of
their respective risk categories. The Chief Risk Officer is an active member of each of the management-level risk committees.
Our board of directors has adopted a risk appetite statement that seeks to balance the amount of risk we are willing take as we seek to
achieve our financial performance objectives, i.e. returns. As such, our board of directors, principally acting through the Risk Committee,
routinely monitors a host of risk metrics from both business and operational units, as well as by risk category, in an effort to appropriately
balance the manner in which our performance aligns with our risk appetite. The Risk Committee and members of senior management,
including the Chief Risk Officer, review assessments of our risk ratings within each of our key areas of risk on a regular basis. The Chief
Risk Officer’s report to the Risk Committee includes the assessment of level and direction of risk within each key area, an assessment
of critical factors that influence firm risks as well as the status of risk actions management is taking to mitigate and control key risks.
These reviews are done in an effort to ensure performance alignment with our risk appetite, and where appropriate, trigger adjustments
to applicable business strategies and tactics where risks approach our desired risk tolerance limits.
We support our risk management process through a governance structure involving our board of directors and senior management. The
Risk Committee strives to ensure that business decisions are executed within appropriate risk tolerances. The Risk Committee is responsible
for overseeing senior management’s establishment and operation of our risk framework and our strategic and capital plans are aligned
with the risk appetite approved by our board of directors. The Risk Committee serves as the primary point of contact between our board
of directors and the Enterprise Wide Risk Management Committee. Management-level risk committees are responsible for effective risk
measurement, managing and reporting of their respective risk categories.
Risk appetite is an integral element of our business and capital planning processes through our Risk Committee and Enterprise Wide Risk
Management Committee. We use our risk appetite processes to promote appropriate alignment of risk, capital and performance tactics,
while also considering risk capacity and appetite constraints from both financial and non-financial risks. Our Risk Committee, in
collaboration with our Enterprise Wide Risk Management Committee, approves our risk appetite on an annual basis, or more frequently,
as needed to reflect changes in the risk environment, with the goal of ensuring that our risk appetite remains consistent with our strategic
plans and business operations, regulatory environment and our shareholders' expectations. Reports relating to our risk appetite and strategic
plans, and our ongoing monitoring thereof, are regularly presented to our various management-level risk oversight and planning committees
and periodically reported up to the Risk Committee of our board of directors.
As noted above, we have an Enterprise Wide Risk Management Committee comprised of key members of senior management. The
purpose of this committee is to provide regular oversight of specific areas of risk within the tolerances and framework established by our
Risk Committee and board of directors. The Enterprise Wide Risk Management Committee reports on a regular basis to the Risk Committee
of our board of directors regarding our enterprise-wide risk profile and other significant risk management issues. Our Chief Risk Officer
is responsible for the design and implementation of our enterprise-wide risk management strategy and framework and through his work
with other senior associates seeks to ensure the coordinated and consistent implementation of risk management initiatives and strategies
on a day-to-day basis.
Various departments within Pinnacle Bank, working with our Chief Risk Officer, are responsible for developing policies and procedures
to effectively monitor risks within their areas. For instance, our compliance department is responsible for developing policies and
procedures and monitoring compliance with applicable laws and regulations while our information technology department is responsible
for maintaining a risk assessment of our information and cyber security risks and ensuring appropriate controls are in place to manage
75
and control such risks, including designing appropriate testing plans to ensure the integrity of information and cyber security controls.
Further, our audit function (including our outsourced internal audit function) performs an independent assessment of our internal controls
environment and plays an integral role in testing the operation of the internal controls systems and reporting findings to management and
our Audit Committee. Both the Risk Committee and Audit Committee of our board of directors regularly report on risk-related matters
to the full board of directors. In addition, both the Risk Committee of our board of directors and our Enterprise Wide Risk Management
Committee regularly assess our enterprise-wide risk profile and provide guidance on actions needed to address key and emerging risk
issues.
Our board of directors believes that our enterprise-wide risk management process is effective and enables the board of directors to:
• assess the quality of the information we receive;
• understand the businesses, investments and financial, accounting, legal, regulatory and strategic considerations and the risks
that we face;
• oversee and assess how senior management evaluates and manages risk; and
• assess appropriately the quality of our enterprise-wide risk management process.
Impact of Inflation
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with
U.S. generally accepted accounting principles and practices within the banking industry which require the measurement of financial
position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general
levels of inflation.
Recently Adopted and Issued Accounting Pronouncements
See "Part II- Item 8. Financial Statements and Supplementary Data - Note 1. - Summary of Significant Accounting Policies" of this Report
for further information.
76
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The response to this Item is included in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations", on pages 43 through 78 and is incorporated herein by reference.
77
ITEM 8. FINANCIAL STATEMENTS
Pinnacle Financial Partners, Inc. and Subsidiaries
Consolidated Financial Statements
Table of Contents
Management Report on Internal Control Over Financial Reporting
2018 and 2017 Report of Independent Registered Public Accounting Firm – Financial Statements
2018 Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting
Consolidated Financial Statements:
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of comprehensive income
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
79
81
82
84
85
86
87
88
89
78
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Pinnacle Financial Partners, Inc. (the "Company") is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the
Exchange Act. The Company's internal control over financial reporting is a process designed by, or under the supervision
of, the Company’s principal executive and principal financial officer and effected by the Company’s Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. The Company's management assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2018. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Material Weakness Related to Certain Residential Mortgage Loan Originations
Based on the assessment of the effectiveness of the Company’s internal control over financial reporting discussed above,
management concluded that the Company did not maintain effective internal control over financial reporting as of
December 31, 2018 due to a material weakness arising from certain control deficiencies existing during 2018 related to
residential mortgage loans originated by the Company. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The Company’s internal controls are designed such that all loans recorded in its loan accounting system must be
subsequently agreed to source documentation by someone independent of the recording function to ensure the loan was
recorded accurately (i.e., an accuracy control). Additionally, the Company has a separate completeness control to ensure
that all loans recorded to the loan accounting system have been subjected to this accuracy control (i.e., a completeness
control). In the fourth of quarter 2018, management determined that these controls were not operating in a timely manner
for mortgage loans recorded to the Company’s loan accounting system. Further, management identified a limited number
of individuals in the Company’s mortgage loan group that had the ability to record a mortgage loan to the system during
2018 and subsequently create and approve a wire transfer to disburse the funds on the mortgage loan. The wire access
available to these associates, without sufficient segregation of duties, combined with the previously described control
deficiencies, resulted in management concluding that the combination of these control deficiencies represented a material
weakness in internal control over financial reporting.
Upon identification of these control deficiencies, management performed the controls as described to ensure mortgage
loans originated in 2018 existed and were accurately entered into the Company’s financial records. Management also
performed procedures regarding the wire transfers initiated by the mortgage associates which had the ability to both
record a loan and initiate wire transfers. It was concluded that all of these wire transfers, which totaled $2.6 million, were
initiated to fund valid loans. As a result of these procedures, management concluded that the existence of this material
weakness did not result in any material misstatement of the Company’s interim or annual financial statements or related
disclosures for the fiscal year ended December 31, 2018, nor was there any financial loss incurred by the Company as a
result of this material weakness.
The Company's independent registered public accounting firm has issued an audit report on the Company's internal
control over financial reporting. This report appears on page 82 of this Annual Report on Form 10-K.
79
Remediation of Material Weakness
The Company has made progress toward remediation of the underlying causes of the above-described material weakness
for residential mortgage loans originated in 2018. Prior to the filing of this Annual Report on Form 10-K Company
associates independent of those responsible for recording the residential mortgage loans have performed the required
internal controls that were previously not completed in a timely manner.
As a result of these remediation efforts, the Company has verified that the residential mortgage loans originated by the
Company during the period of time when the controls were not functioning properly existed and were accurately recorded
at the time of origination. However, the identified material weakness in internal control over financial reporting will not
be considered fully addressed until the internal controls over this area have been in operation for a sufficient period of
time for the Company’s management to conclude that the material weakness has been fully remediated. The Company will
continue to evaluate these internal controls in 2019. As a result, the Company may alter its control structure to enhance
these and other related controls in this area, but the Company’s evaluation as to full remediation will primarily involve an
ongoing review of its current control structure to make sure the controls in this area are being performed as designed by
the individuals responsible for performance of these controls. Once this evaluation is complete, the Company will make
its final determination as to full remediation.
80
Report of Independent Registered Public Accounting Firm
Stockholders and the Board of Directors of
Pinnacle Financial Partners, Inc.
Nashville, Tennessee
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Pinnacle Financial Partners, Inc. (the "Company") as of December
31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements").
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control -
Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated February 28, 2019 expressed an adverse opinion.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2016.
Franklin, Tennessee
February 28, 2019
/s/ Crowe LLP
81
Report of Independent Registered Public Accounting Firm
Stockholders and the Board of Directors of
Pinnacle Financial Partners, Inc.
Nashville, Tennessee
Opinion on Internal Control over Financial Reporting
We have audited Pinnacle Financial Partners, Inc.’s (the “Company”) internal control over financial reporting as of December
31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, because of the effects of the material weakness discussed
in the following paragraphs, the Company has not maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework: (2013) issued by
COSO.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis. A material weakness related to controls over verifying the accuracy of new residential
mortgage loans on the loan accounting system has been identified and included in Management Report on Internal Control over
Financial Reporting.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2018, and the related notes (collectively referred to as the "financial statements") and our report dated
February 28, 2019 expressed an unqualified opinion. We considered the material weakness identified above in determining the
nature, timing, and extent of audit procedures applied in our audit of the 2018 financial statements, and this report on Internal
Control over Financial Reporting does not affect such report on the financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
82
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Crowe LLP
Franklin, Tennessee
February 28, 2019
83
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Cash and noninterest-bearing due from banks
Restricted cash
Interest-bearing due from banks
Federal funds sold and other
Cash and cash equivalents
Securities available-for-sale, at fair value
Securities held-to-maturity (fair value of $193.1 million and $20.8 million at Dec. 31, 2018
and Dec. 31, 2017, respectively)
Consumer loans held-for-sale
Commercial loans held-for-sale
Loans
Less allowance for loan losses
Loans, net
Premises and equipment, net
Equity method investment
Accrued interest receivable
Goodwill
Core deposits and other intangible assets
Other real estate owned
Other assets
Total assets
Deposits:
Non-interest-bearing
Interest-bearing
Savings and money market accounts
Time
Total deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated debt and other borrowings
Accrued interest payable
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock, no par value; 10.0 million shares authorized; no shares issued and
outstanding
Common stock, par value $1.00; 180.0 million shares authorized at Dec. 31, 2018 and 90.0
million shares authorized at Dec. 31, 2017; 77.5 million and 77.7 million shares issued and
outstanding at Dec. 31, 2018 and 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of taxes
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2018
2017
$
137,433
65,491
516,920
1,848
721,692
155,815
20,738
496,911
106,132
779,596
3,083,686
2,515,283
194,282
34,196
15,954
20,762
103,729
25,456
17,707,549
(83,575)
17,623,974
15,633,116
(67,240)
15,565,876
$
$
265,560
239,237
79,657
1,807,121
46,161
15,165
904,359
25,031,044
4,309,067
3,464,001
7,607,796
3,468,243
18,849,107
104,741
1,443,589
485,130
23,586
158,951
21,065,104
266,014
221,667
57,440
1,808,002
56,710
27,831
757,334
22,205,700
4,381,386
2,987,291
6,548,964
2,534,061
16,451,702
135,262
1,319,909
465,505
10,480
114,890
18,497,748
—
—
77,484
3,107,431
833,130
(52,105)
3,965,940
25,031,044
$
77,740
3,115,304
519,144
(4,236)
3,707,952
22,205,700
$
$
$
$
See accompanying notes to consolidated financial statements.
84
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
For the years ended December 31,
2017
2016
2018
Interest income:
Loans, including fees
Securities:
Taxable
Tax-exempt
Federal funds sold and other
Total interest income
Interest expense:
Deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances and other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Investment services
Insurance sales commissions
Gains on mortgage loans sold, net
Investment gains (losses) on sales, net
Trust fees
Income from equity method investment
Other noninterest income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Equipment and occupancy
Other real estate expense, net
Marketing and other business development
Postage and supplies
Amortization of intangibles
Merger related expenses
Other noninterest expense
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Per share information:
Basic net income per common share
Diluted net income per common share
Weighted average common shares outstanding:
Basic
Diluted
$
850,472
$
578,286
$
335,735
48,192
35,995
12,058
946,717
151,043
588
58,744
210,375
736,342
34,377
701,965
24,906
21,175
9,331
14,564
(2,254)
13,143
51,222
68,783
200,870
271,673
74,276
723
11,712
7,815
10,549
8,259
67,880
452,887
449,948
90,508
359,440
4.66
4.64
$
$
$
39,060
13,712
5,080
636,138
59,584
406
32,842
92,832
543,306
23,664
519,642
20,034
14,315
7,405
18,625
(8,265)
8,664
37,958
46,168
144,904
209,662
54,092
1,079
8,321
5,736
8,816
31,843
47,011
366,560
297,986
124,007
173,979
2.73
2.70
$
$
$
19,179
6,014
2,681
363,609
23,918
185
14,512
38,615
324,994
18,328
306,666
14,501
10,757
5,310
15,754
395
6,328
31,403
36,555
121,003
140,819
35,072
396
6,536
3,929
4,281
11,747
33,505
236,285
191,384
64,159
127,225
2.96
2.91
77,111,372
77,449,917
63,760,578
64,328,189
43,037,083
43,731,992
$
$
$
See accompanying notes to consolidated financial statements.
85
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income:
Other comprehensive income (loss), net of tax:
Changes in fair value on available-for-sale securities, net of tax
Changes in fair value of cash flow hedges, net of tax
Amortization of net unrealized gains on securities transferred from available-
for-sale to held-to-maturity, net of tax
Gain on cash flow hedges reclassified from other comprehensive income into
net income, net of tax
Net loss (gain) on sale of investment securities reclassified from other
comprehensive income into net income, net of tax
Total other comprehensive income (loss), net of tax
Total comprehensive income
Year Ended December 31,
2018
2017
2016
$
359,440
$
173,979
$
127,225
(51,464)
2,660
(73)
(657)
3,036
2,487
(208)
(347)
1,665
(47,869)
311,571
$
5,022
9,990
183,969
$
$
(9,408)
(749)
(293)
(51)
(240)
(10,741)
116,484
See accompanying notes to consolidated financial statements.
86
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
For the each of the years in the three-year period ended December 31, 2018
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
December 31, 2015
40,906 $
40,906 $
839,617 $
278,573 $
(3,485) $
1,155,611
Exercise of employee common stock options, stock
appreciation rights and related tax benefits
Common dividends paid ($0.14 per share)
Issuance of restricted common shares, net of
forfeitures
Common stock issued in conjunction with BHG
investment, net of issuance costs
Common stock issued in conjunction with Avenue
acquisition, net of issuance costs
Restricted shares withheld for taxes
Compensation expense for restricted shares
Net income
Other comprehensive loss
December 31, 2016
Exercise of employee common stock options and
stock appreciation rights
Common dividends paid ($0.14 per share)
Issuance of restricted common shares, net of
forfeitures
Issuance of common stock
Common stock issued in conjunction with the
acquisition of BNC Bancorp, net of issuance costs
Restricted shares withheld for taxes
Compensation expense for restricted shares
Net income
Other comprehensive income
December 31, 2017
Exercise of employee common stock options
Repurchase of common stock
Common dividends paid ($0.16 per share)
Issuance of restricted common shares, net of
forfeitures
Restricted shares withheld for taxes
Compensation expense for restricted shares
Net income
Other comprehensive loss
December 31, 2018
700
—
200
860
3,760
(67)
—
—
—
700
—
200
860
3,760
(67)
—
—
—
16,736
—
(200)
38,834
178,708
(1,175)
10,971
—
—
—
(24,726)
—
—
—
—
—
127,225
—
—
—
—
—
—
—
—
—
(10,741)
17,436
(24,726)
—
39,694
182,468
(1,242)
10,971
127,225
(10,741)
46,359 $
46,359 $
1,083,491 $
381,072 $
(14,226) $
1,496,696
276
—
272
3,220
276
—
272
3,220
27,687
(74)
27,687
(74)
—
—
—
—
—
—
5,209
—
—
(35,907)
(272)
188,974
1,823,281
(4,917)
19,538
—
—
—
—
—
—
—
173,979
—
—
—
—
—
—
—
—
—
9,990
5,485
(35,907)
—
192,194
1,850,968
(4,991)
19,538
173,979
9,990
77,740 $
77,740 $
3,115,304 $
519,144 $
(4,236) $
3,707,952
98
(405)
—
157
(106)
—
—
—
98
(405)
—
157
(106)
—
—
—
1,753
(20,289)
—
—
—
(45,454)
(157)
(6,816)
17,636
—
—
—
—
—
359,440
—
—
—
—
—
—
—
—
(47,869)
1,851
(20,694)
(45,454)
—
(6,922)
17,636
359,440
(47,869)
77,484 $
77,484 $
3,107,431 $
833,130 $
(52,105) $
3,965,940
See accompanying notes to consolidated financial statements.
87
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities:
For the years ended December 31,
2017
2018
2016
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
359,440
$
173,979
$
127,225
Net amortization/accretion of premium/discount on securities
Depreciation, amortization and accretion
Provision for loan losses
Gains on mortgage loans sold, net
Investment losses (gains) on sales, net
Stock-based compensation expense
Deferred tax expense
Revaluation of deferred tax assets and liabilities
Losses (gains) on disposition of other real estate and other investments
Income from equity method investment
Dividends received from equity method investment
Excess tax benefit from stock compensation
Gains on other loans sold, net
Commercial loans held for sale originated
Commercial loans held for sale sold
Consumer loans held for sale originated
Consumer loans held for sale sold
Increase in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Investing activities:
Activities in securities available-for-sale:
Purchases
Sales
Maturities, prepayments and calls
Activities in securities held-to-maturity:
Purchases
Maturities, prepayments and calls
Increase in loans, net
Purchases of premises and equipment and software
Purchase of BOLI
Proceeds from BOLI settlement
Proceeds from sales of software, premises, and equipment
Proceeds from sale of mortgage servicing rights
Acquisitions, net of cash acquired
Proceeds from sale of other real estate
Increase in equity method investment
Increase in other investments
Net cash used in investing activities
Financing activities:
Net increase in deposits
Net increase (decrease) in repurchase agreements
Advances from Federal Home Loan Bank: Issuances
Advances from Federal Home Loan Bank: Payments
Proceeds from subordinated debt and other borrowings, net of issuance costs
Repayment of other borrowings
Principal payments of capital lease obligation
Proceeds from common stock issuance
Exercise of common stock options and stock appreciation rights, net of shares surrendered for taxes
Repurchase of common stock
Excess tax benefit from stock compensation
Common dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash, beginning of year
Cash, cash equivalents, and restricted cash, end of year
$
19,141
(23,604)
34,377
(14,564)
2,254
17,636
11,765
—
84
(51,222)
33,651
(2,966)
(3,287)
(356,597)
369,387
(1,195,435)
1,234,551
(24,471)
60,617
470,757
(1,314,721)
169,850
323,571
—
5,775
(1,995,424)
(23,739)
(100,000)
3,467
2,967
—
—
16,088
—
(56,918)
(2,969,084)
2,399,407
(30,521)
1,664,906
(1,541,212)
19,850
(620)
(168)
—
(5,071)
(20,694)
—
(45,454)
2,440,423
(57,904)
779,596
721,692
$
12,847
(23,618)
23,664
(18,625)
8,265
19,538
28,165
31,486
(203)
(37,958)
21,650
(5,366)
(1,488)
(177,434)
176,062
(1,100,866)
1,090,489
(37,022)
(17,700)
165,865
(1,290,717)
363,898
323,235
—
4,115
(1,558,646)
(53,499)
(55,000)
—
23
—
155,142
3,725
—
(7,804)
(2,115,528)
1,488,274
(12,754)
1,964,750
(1,051,067)
—
(220)
(149)
192,194
493
—
—
(35,907)
2,545,614
595,951
183,645
779,596
$
8,630
186
18,328
(15,754)
(395)
10,971
14,390
—
141
(31,403)
28,982
(4,604)
(885)
(112,670)
90,967
(784,214)
803,498
(5,275)
4,198
152,316
(583,330)
72,829
280,806
(560)
6,200
(966,208)
(17,058)
—
—
2,187
6,748
17,608
3,305
(74,100)
(27,509)
(1,279,082)
822,307
6,622
1,934,000
(1,934,093)
243,227
(74,000)
(70)
—
11,589
—
4,604
(24,726)
989,460
(137,306)
320,951
183,645
See accompanying notes to consolidated financial statements.
88
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company that has elected to be a
financial holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle Bank (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 company that primarily serves as a full-service
commercial loan provider to healthcare and other professional practices. Pinnacle Bank provides a full range of banking services,
including investment, mortgage, and insurance services, and comprehensive wealth management services, in its 11 primarily urban
markets within Tennessee, the Carolinas and Virginia.
Basis of Presentation — These consolidated financial statements include the accounts of Pinnacle Financial and its direct and
indirect wholly-owned subsidiaries. Certain statutory trust affiliates of Pinnacle Financial, as noted in Note 10. 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. generally accepted accounting principles
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 dates and the reported amounts of revenues and expenses during the reporting
periods. 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 goodwill or intangible
assets and the valuation of deferred tax assets.
Impairment — Long-lived assets, including purchased intangible assets subject to amortization, such as core deposit intangible
assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer depreciated. Pinnacle Financial had $46.2 million and $56.7 million
of long-lived amortizing intangibles at December 31, 2018 and 2017, respectively.
Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset
might be impaired. The Accounting Standards Codification (ASC) 350, Goodwill and Other, regarding testing goodwill for
impairment provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount. If an entity does a qualitative assessment and determines that this is
the case, or if a qualitative assessment is not performed, it is required to perform additional goodwill impairment testing to identify
potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any).
Based on a qualitative assessment, if an entity determines that the fair value of a reporting unit is more than its carrying amount, the
two-step goodwill impairment test is not required. Pinnacle Financial performed its annual assessment as of September 30, 2018. The
results of the qualitative assessment indicated that the fair value of Pinnacle Financial's sole reporting unit was more than its carrying
value, and accordingly, the two-step goodwill impairment test was not performed.
In December 2018, the overall stock market decreased significantly. As a result, at December 31, 2018, Pinnacle Financial's
common stock was trading below book value per share. Pinnacle Financial updated its annual goodwill impairment analysis and
evaluated the market forces and changes in the underlying business to determine if further goodwill impairment testing was required.
The results of that evaluation indicated that further goodwill impairment testing was not required. Subsequently to December 31,
2018, the common stock returned to trading at prices in excess of book value per share.
Should Pinnacle Financial's common stock price decline below book value per share and remain below book value per share for
an extended duration or other impairment indicators become known, additional impairment testing of goodwill may be required.
Should it be determined in a future period that the goodwill has become impaired, then a charge to earnings will be recorded in the
period such determination is made. The following table presents activity for goodwill and other intangible assets (in thousands):
89
Balance at December 31, 2017
$
1,808,002
$
56,710
$
1,864,712
Acquisitions
Amortization
Change in purchase price allocation of prior acquisitions
—
—
(881)
—
(10,549)
—
—
(10,549)
(881)
Balance at December 31, 2018
$
1,807,121
$
46,161
$
1,853,282
Goodwill
Core deposit and
other intangible assets
Total
The following table presents the gross carrying amount and accumulated amortization for the core deposit and other intangible
assets, which are subject to amortization (in thousands):
Gross carrying amount
Accumulated amortization
Net book value
December 31, 2018
December 31, 2017
$
$
92,787
(46,626)
46,161
$
$
92,787
(36,077)
56,710
Cash Equivalents and Cash Flows — Cash on hand, cash items in process of collection, amounts due from banks, Federal funds
sold, short-term discount notes and securities purchased under agreements to resell, with original maturities within ninety days, are
included in cash and cash equivalents. The following supplemental cash flow information addresses certain cash payments and
noncash transactions for each of the years in the three-year period ended December 31, 2018 as follows (in thousands):
For the years ended December 31,
2018
2017
2016
Cash Payments:
Interest
Income taxes paid
Noncash Transactions:
$
199,464
$
91,628
$
55,626
81,539
Loans charged-off to the allowance for loan losses
Loans foreclosed upon with repossessions transferred to other real estate
Loans foreclosed upon with repossessions transferred to other repossessed assets
Other real estate sales financed
Available-for-sale securities transferred to held-to-maturity portfolio
Held-for-sale loans transferred to held-for-investment loan portfolio
Common stock issued in connection with acquisitions
30,400
3,524
1,899
891
179,763
44,980
—
22,046
6,228
646
908
—
—
37,003
49,504
31,112
4,453
1,842
—
—
—
1,850,968
222,162
Securities — Securities are classified based on management's intention on the date of purchase. All debt securities classified as
available-for-sale are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income
(loss), net of the deferred income tax effects. Securities that Pinnacle Financial has both the positive intent and ability to hold to
maturity are classified as held-to-maturity and are carried at historical cost and adjusted for amortization of premiums and accretion of
discounts.
Interest and dividends on securities, including amortization of premiums and accretion of discounts calculated under the effective
interest method, are included in interest income. For certain securities, amortization of premiums and accretion of discounts is
computed based on the anticipated life of the security which may be shorter than the stated life of the security. Realized gains and
losses from the sale of securities are determined using the specific identification method and are recorded on the trade date of the sale.
Other-than-temporary Impairment — A decline in the fair value of any available-for-sale or held-to-maturity security below cost
that is deemed to be other-than-temporary results in a reduction in the carrying amount of the security. To determine whether
impairment is other-than-temporary, management considers whether the entity expects to recover the entire amortized cost basis of the
security by reviewing the present value of the future cash flows associated with the security. The shortfall of the present value of the
cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss and is deemed to be other-than-
temporary impairment. If a credit loss is identified, the credit loss is recognized as a charge to earnings and a new cost basis for the
security is established. If management concludes that a decline in fair value of a security is temporary and a full recovery of principal
and interest is expected and it is not more-likely-than-not that it will be required to sell the security before recovery of its amortized
cost basis, then the security is not other-than-temporarily impaired and the shortfall is recorded as a component of equity.
90
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, 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.
Resultantly, other-than-temporary charges may be incurred as management's intention related to a particular security changes.
The carrying values of Pinnacle Financial's investment securities could decline in the future if the financial condition of the
securities' issuer deteriorates and management determines it is probable that Pinnacle Financial will not recover the entire amortized
cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future. There is
also a risk that other-than-temporary impairment charges may occur in the future if management's intention to hold these securities to
maturity and or recovery changes.
Loans held-for-sale — Loans originated and intended for sale are carried at the lower of cost or estimated fair value as determined
on a loan-by-loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Realized
gains and losses are recognized when legal title to the loans has been transferred to the purchaser and sales proceeds have been
received and are reflected in the accompanying consolidated statement of income in gains on mortgage loans sold, net of related costs
such as compensation expenses, for mortgage loans, and as a component of other noninterest income for commercial loans held-for-
sale.
Loans — Pinnacle Financial has five loan segments for financial reporting purposes: commercial and industrial, commercial real
estate mortgage, construction and land development, consumer and other and consumer real estate mortgage. The appropriate
classification is determined based on the underlying collateral utilized to secure each loan. These classifications are consistent with
those utilized in the Quarterly Report of Condition and Income filed by Pinnacle Bank with the Federal Deposit Insurance Corporation
(FDIC).
Loans are reported at their outstanding principal balances, net of applicable purchase accounting and any deferred fees or costs on
originated loans. Interest income on loans is accrued based on the principal balance outstanding. Loan origination fees, net of certain
loan origination costs, are deferred and recognized as an adjustment to the related loan yield using a method which approximates the
interest method. At December 31, 2018 and 2017, net deferred loan fees of $7.4 million and $7.8 million respectively, were included
as a reduction to loans on the accompanying consolidated balance sheets.
As part of our routine credit monitoring process, commercial loans receive risk ratings by the assigned financial advisor and are
subject to validation by our 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 outlined by Pinnacle
Bank's primary federal regulator. At December 31, 2018, approximately 80.8% of Pinnacle Financial's loan portfolio was assigned a
specifically assigned risk rating. Certain consumer loans and commercial relationships that possess certain qualifying characteristics,
including individually smaller balances, are generally not assigned an individual risk rating but are evaluated collectively for credit
risk as a homogeneous pool of loans and individually as either accrual or nonaccrual based on the performance of the loan.
Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which
generally is the case but is not limited to when the principal or interest is more than 90 days past due, unless the loan is both well-
secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual status is
reversed against current interest income. Interest income is subsequently recognized only if certain cash payments are received while
the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis to determine if the payment
should be applied to interest or principal pursuant to regulatory guidelines. A nonaccrual loan is returned to accruing status once the
loan has been brought current as to principal and interest and collection is reasonably assured or the loan has been well-secured
through other techniques.
All loans that are placed on nonaccrual status are further analyzed to determine if they should be classified as impaired loans. A
loan is considered to be impaired when it is probable Pinnacle Financial will be unable to collect all principal and interest payments
due in accordance with the contractual terms of the loan. This determination is made using a variety of techniques, which include a
review of the borrower's financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file
information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results
of reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc.).
Loans are charged off when management believes that the full collectability of the loan is unlikely. As such, 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.
91
Purchased Loans — Purchased loans, including loans acquired through a merger, are initially recorded at fair value on the date of
purchase. Purchased loans that contain evidence of post-origination credit deterioration as of the purchase date are carried at the net
present value of expected future cash flows. All other purchased loans are recorded at their initial fair value, and adjusted for
subsequent advances, pay downs, amortization or accretion of any fair value premium or discount on purchase, charge-offs and any
other adjustment to carrying value. Pursuant to U.S. generally accepted accounting principles (U. S. GAAP), management has up to 12
months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities as of the acquisition
date. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period,
management considers such values to be the day 1 fair values (Day 1 Fair Values).
At the time of acquisition, management evaluates all purchased loans using a variety of factors such as current classification or
risk rating, past due status and history as a component of the fair value determination. For those purchased loans without evidence of
credit deterioration, management evaluates each reviewed loan using an internal grading system with a grade assigned to each loan at
the date of acquisition. To the extent that any purchased loan is not specifically reviewed, such loan is assumed to have characteristics
similar to the characteristics of the specifically reviewed acquired portfolio of purchased loans. The grade for each purchased loan
without evidence of credit deterioration is reviewed subsequent to the date of acquisition any time a loan is renewed or extended or at
any time information becomes available to Pinnacle Financial that provides material insight regarding the loan's performance, the
borrower's capacity to repay or the underlying collateral.
In determining the Day 1 Fair Values of purchased loans without evidence of post-origination credit deterioration at the date of
acquisition, management includes (i) no carryover of any previously recorded allowance for loan losses (ALL) and (ii) an adjustment
of the unpaid principal balance to reflect an appropriate market rate of interest and expected loss, given the risk profile and risk rating
assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective yield method, over the
remaining life of each loan.
Purchased loans that contain evidence of credit deterioration on the date of purchase are individually evaluated by management
to determine the estimated fair value of each loan. This evaluation includes no carryover of any previously recorded ALL. In
determining the estimated fair value of purchased loans with evidence of credit deterioration, management considers a number of
factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated
value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received.
In determining the Day 1 Fair Values of purchased loans with evidence of credit deterioration, management calculates a non-
accretable difference (the credit risk component of the purchased loans) and an accretable difference (the yield component of the
purchased loans). The non-accretable difference is the difference between the contractually required payments and the cash flows
expected to be collected in accordance with management's determination of the Day 1 Fair Values. Subsequent increases in expected
cash flows will result in an adjustment to accretable yield, which will have a positive impact on interest income. Subsequent decreases
in expected cash flows will generally result in increased provision for loan losses. Subsequent increases in expected cash flows
following any previous decrease will result in a reversal of the provision for loan losses to the extent of prior charges and then an
adjustment to accretable yield. The accretable difference on purchased loans with evidence of credit deterioration is the difference
between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the
effective yield method over the term of the loans. For purchased loans with evidence of credit deterioration for which the expected
cash flows cannot be forecasted, these loans are deemed to be collateral dependent, are recorded at their fair value and are placed on
nonaccrual, with interest payments recorded on a cash basis, as appropriate.
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 during the year ended December 31, 2017 to
(i) extend the look-back period from 24 quarters to a period beginning January 1, 2006 to better capture the risk associated with this
extended economic cycle, (ii) eliminate the use of risk ratings in the calculation of the loss rate and instead focus on loss rate 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
92
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 changes in the allowance for loan loss assessment methodology.
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, including those
reported as nonaccrual, troubled-debt restructurings and purchase credit impaired.
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 1,
2006, as we believe the period from January 1, 2006 to present is more representative of this 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, 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.
93
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, any portion of the loan confirmed
to be uncollectible is charged off, and a specific reserve is established for any remaining impairment. The fair value of collateral
dependent loans is derived primarily from collateral appraisals performed by independent third-party appraisers. This analysis is
completed for all individual loans greater than $750,000. 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 total 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 its testing, and concludes on the
appropriateness of the balance of the allowance in its entirety. The audit committee of Pinnacle Financial's 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 Pinnacle Financial's control, such as conditions in the local, national, and
international economy, a local real estate market or particular industry conditions which may materially negatively impact asset
quality and the adequacy of the allowance for loan losses and thus the resulting provision for loan losses.
Transfers of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered or in the case of a loan participation, a portion of the asset has been surrendered and meets the definition of a
"participating interest". Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from
Pinnacle Financial, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets, and (3) Pinnacle Financial does not maintain effective control over the transferred assets
through an agreement to repurchase them before maturity.
Premises and Equipment and Leaseholds — Premises and equipment are carried at cost less accumulated depreciation and
amortization computed principally by the straight-line method over the estimated useful lives of the assets or the expected lease terms
for leasehold improvements, whichever is shorter. Useful lives for all premises and equipment range between three and thirty years.
Pinnacle Bank is the lessee with respect to several office locations. At December 31, 2018, all such leases were being accounted
for as operating leases within the accompanying consolidated financial statements, with the exception of the one capital lease
agreement discussed below. Several of these leases include rent escalation clauses. Pinnacle Bank expenses the costs associated with
these escalating payments over the life of the expected lease term using the straight-line method. At December 31, 2018, the deferred
liability associated with these escalating rentals was approximately $3.8 million and is included in other liabilities in the
accompanying consolidated balance sheets. As addressed in the Newly Issued not yet Effective Accounting Standards section later
within this Note, beginning January 1, 2019, Pinnacle Financial will recognize a lease right of use asset and additional lease liabilities
reflecting the present value of future minimum lease payments under its lease agreements.
Pinnacle Bank has one lease being accounted for as a capital lease within the accompanying consolidated financial statements.
Amortization of property under the capital lease is expensed over the life of the expected lease term using the straight-line method and
is included in depreciation expense.
Other Real Estate Owned — Other real estate owned (OREO) represents real estate foreclosed upon or acquired by deed in lieu of
foreclosure by Pinnacle Bank through loan defaults by customers. Substantially all of these amounts relate to lots, homes and
residential development projects that are either completed or are in various stages of construction for which Pinnacle Financial
believes it has adequately supported the value recorded. Upon its acquisition by Pinnacle Bank, the property is recorded at fair value,
based on appraised value, less selling costs estimated as of the date acquired. The difference from the loan balance is recognized as a
charge-off through the allowance for loan losses. Additional OREO losses for subsequent downward valuation adjustments and
expenses to maintain OREO are determined on a specific property basis and are included as a component of noninterest expense. Net
gains or losses realized at the time of disposal are reflected in noninterest expense.
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Included in the accompanying consolidated balance sheet at December 31, 2018 is $16.2 million of OREO with related property-
specific valuation allowances of $1.0 million. At December 31, 2017, OREO totaled $29.1 million with related property-specific
valuation allowances of $1.2 million. During the years ended December 31, 2018, 2017 and 2016, Pinnacle Financial had expense
of $723,000, expense of $1.1 million and a benefit of $396,000, respectively, of net foreclosed real estate expense.
Other Assets — Included in other assets as of December 31, 2018 and 2017, is approximately $7.7 million and $9.3 million,
respectively, of computer software related assets, net of amortization. This software supports Pinnacle Financial's primary data
systems and relates to amounts paid to vendors for installation and development of such systems. These amounts are amortized on a
straight-line basis over periods of three to seven years. For the years ended December 31, 2018, 2017, and 2016, Pinnacle Financial's
amortization expense was approximately $3.0 million, $2.5 million, and $2.3 million, respectively. Software maintenance fees are
capitalized in other assets and amortized over the term of the maintenance agreement.
Pinnacle Financial is required to maintain certain minimum levels of equity investments with certain regulatory and other entities
in which Pinnacle Bank has outstanding borrowings, including the Federal Home Loan Bank of Cincinnati. At December 31, 2018 and
2017, the cost of these investments was $70.2 million and $46.4 million, respectively. Pinnacle Financial determined that cost
approximates the fair value of these investments. Additionally, Pinnacle Financial has recorded certain investments in other non-public
entities and funds at fair value, of $26.4 million and $16.7 million at December 31, 2018 and 2017, respectively. During 2018 and
2017, Pinnacle Financial recorded net gains of $2.7 million and $364,000, respectively, due to changes in the fair value of these
investments. As more fully described in Note 10, Pinnacle Financial has an investment in twelve Trusts valued at $4.0 million as of
December 31, 2018. The Trusts were established to issue preferred securities, the dividends for which are paid with interest payments
Pinnacle Financial makes on subordinated debentures it issued to the Trusts.
Pinnacle Bank is the owner and beneficiary of various life insurance policies on certain key executives and certain current and
former directors and associates, including policies that were acquired in its mergers. Collectively, these policies are reflected in other
assets in the accompanying consolidated balance sheets at their respective cash surrender values. At December 31, 2018 and 2017, the
aggregate cash surrender value of these policies was approximately $525.7 million and $415.9 million, respectively. Noninterest
income related to these policies was $12.5 million, $7.9 million, and $3.5 million, during the years ended December 31, 2018, 2017
and 2016, respectively.
Also, as part of our compliance with the Community Reinvestment Act, we have investments in low income housing entities
totaling $72.6 million and $53.8 million, net, as of December 31, 2018 and 2017, respectively. Included in our CRA investments are
investments of $32.8 million and $22.0 million at December 31, 2018 and 2017, respectively, net of amortization, that qualify for
federal low income housing tax credits. The investments are accounted for under the proportional amortization method. Under the
proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits
received. The amortization and benefits are recognized as a component of income tax expense in the consolidated statements of
income. The investments are recorded using the cost method.
Derivative Instruments — In accordance with ASC Topic 815, Derivatives and Hedging, all derivative instruments are recorded
on the accompanying consolidated balance sheet at their respective fair values. The accounting for changes in fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. If the
derivative instrument is not designated as a hedge, changes in the fair value of the derivative instrument are recognized in earnings in
the period of change.
Pinnacle Financial enters into interest rate swaps (swaps) to facilitate customer transactions and meet their financing needs. Upon
entering into these instruments to meet customer needs, Pinnacle Financial enters into offsetting positions with large U.S. financial
institutions in order to minimize the risk to Pinnacle Financial. These swaps are derivatives, but are not designated as hedging
instruments.
Pinnacle Financial enters into forward cash flow hedge relationships in the form of interest rate swap agreements to manage its future
interest rate exposure. These derivative contracts have been designated as a hedge and, as such, changes in the fair value of the derivative
instrument are recorded in other comprehensive income. Pinnacle Financial also enters into fair value hedge relationships to mitigate the
effect of changing interest rates on the fair values of fixed rate securities and loans. The gain or loss on the derivative instrument as well
as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain
or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. Pinnacle
Financial prepares written hedge documentation for all derivatives which are designated as hedges. The written hedge documentation
includes identification of, among other items, the risk management objective, hedging instrument, hedged item and methodologies for
assessing and measuring hedge effectiveness and ineffectiveness, along with support for management's assertion that the hedge will be
highly effective.
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For designated hedging relationships, Pinnacle Financial performs retrospective and prospective effectiveness testing using
quantitative methods and does not assume perfect effectiveness through the matching of critical terms. Assessments of hedge effectiveness
and measurements of hedge ineffectiveness are performed at least quarterly. The effective portion of the changes in the fair value of a
derivative that is highly effective and that has been designated and qualifies as a cash flow hedge are initially recorded in accumulated
other comprehensive income (AOCI) and will be reclassified to earnings in the same period that the hedged item impacts earnings; any
ineffective portion is recorded in current period earnings.
Hedge accounting ceases on transactions that are no longer deemed effective, or for which the derivative has been terminated or de-
designated.
Securities Sold Under Agreements to Repurchase — Pinnacle Financial routinely sells securities to certain treasury management
customers and then repurchases these securities the next day. Securities sold under agreements to repurchase are reflected as a secured
borrowing in the accompanying consolidated balance sheets at the amount of cash received in connection with each transaction.
Income Taxes — ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial
statements as "more-likely-than-not" to be sustained by the taxing authority. ASC 740 also provides guidance on the derecognition,
measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance
concerning accounting for income tax uncertainties in interim periods.
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and
tax bases of assets and liabilities, computed using enacted tax rates. Accordingly, deferred tax assets that will be realized after
December 31, 2017 were revalued using the tax rates enacted as a result of the 2017 Tax Cuts and Jobs Act resulting in a revaluation
charge of $31.5 million. The net deferred tax asset is reflected as a component of other assets on the consolidated balance sheet. A
valuation allowance is required for deferred tax assets if, based on available evidence, it is more likely than not that all or some
portion of the asset may not be realized due to the inability to generate sufficient taxable income in the period and/or of the character
necessary to utilize the benefit of the deferred tax asset.
Income tax expense or benefit for the year is allocated among continuing operations and other comprehensive income (loss), as
applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss from continuing
operations that occurred during the year, plus or minus income tax effects of (i) changes in certain circumstances that cause a change
in judgment about the realization of deferred tax assets in future years, including the valuation of deferred tax assets due to changes in
enacted income tax rates (ii) changes in income tax laws or rates, and (iii) changes in income tax status, subject to certain exceptions.
The amount allocated to other comprehensive income (loss) is related solely to changes in the valuation allowance on items that are
normally accounted for in other comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities.
In accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes, uncertain tax positions are recognized if it is more
likely than not, based on technical merits, that the tax position will be realized or sustained upon examination. The term more likely
than not means a likelihood of more than 50 percent; the terms realized and upon examination also include resolution of the related
appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially and
subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon
settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax
position has met the more likely than not recognition threshold considers the facts, circumstances and information available at the
reporting date.
Pinnacle Financial and its subsidiaries file consolidated U.S. Federal and state income tax returns. Each entity provides for
income taxes based on its contribution to income or loss of the consolidated group. Pinnacle Financial has a Real Estate Investment
Trust subsidiary that files a separate federal tax return, but its income is included in the consolidated group's return as required by the
federal tax laws. Pinnacle Financial remains open to audit under the statute of limitations by the IRS and the states in which Pinnacle
operates for the years ended December 31, 2015 through 2018.
Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. No
amounts were accrued for interest and/or penalties at December 31, 2018, 2017 or 2016. Pinnacle Financial's policy is to recognize
interest and/or penalties related to income tax matters in income tax expense.
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.
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As of December 31, 2018, there were 176,709 stock options outstanding to purchase common shares. For the years ended
December 31, 2018, 2017 and 2016, respectively, 338,545, 567,611 and 694,909 of dilutive stock options, dilutive restricted shares,
restricted share units and stock appreciation rights were included in the diluted earnings per share calculation under the treasury stock
method. For the year ended December 31, 2018, there were 253,193 restricted shares excluded from the calculation because they were
deemed to be antidilutive. For the years ended December 31, 2017 and 2016, there were no stock options, restricted shares, restricted
share units and stock appreciation rights excluded from the calculation because they were deemed to be antidilutive.
The following is a summary of the basic and diluted earnings per share calculation for each of the years in the three-year period
ended December 31, 2018 (dollars in thousands):
Basic earnings per share calculation:
Numerator - Net income
Denominator – Weighted average common shares outstanding
Basic net income per common share
Diluted earnings per share calculation:
Numerator - Net income
Denominator – Weighted average common shares outstanding
Dilutive shares contingently issuable
Weighted average diluted common shares outstanding
Diluted net income per common share
December 31, 2018
December 31, 2017
December 31, 2016
$
$
$
$
359,440
$
173,979
$
127,225
77,111,372
63,760,578
4.66
$
2.73
$
43,037,083
2.96
359,440
$
173,979
$
127,225
77,111,372
338,545
77,449,917
63,760,578
567,611
64,328,189
4.64
$
2.70
$
43,037,083
694,909
43,731,992
2.91
Stock-Based Compensation — Stock-based compensation expense is recognized based on the fair value of the portion of stock-
based payment awards that are ultimately expected to vest, reduced for estimated forfeitures. ASC 718-20, Compensation – Stock
Compensation Awards Classified as Equity requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Service based awards with multiple vesting periods are expensed
over the entire requisite period as if the award were a single award. For awards with performance vesting criteria, anticipated
performance is projected to determine the number of awards expected to vest, and the corresponding aggregate expense is adjusted to
reflect the elapsed portion of the applicable performance period.
Comprehensive Income (Loss) — Comprehensive income (loss) consists of the total of all components of comprehensive income
(loss) including net income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S.
GAAP are included in comprehensive income (loss) but excluded from net income (loss). Currently, Pinnacle Financial's other
comprehensive income (loss) consists primarily of unrealized gains and losses on securities available-for-sale, net of deferred tax
expense (benefit) and unrealized gains (losses) on derivative hedging relationships.
Fair Value Measurement — ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a
framework for measuring fair value in U.S. GAAP and established required disclosures about fair value measurements. ASC 820
applies only to fair value measurements that are already required or permitted by other accounting standards and increases the
consistency of those measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry
price, (i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date). The statement
emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement
should be determined based on the assumptions that market participants would use in pricing the asset or liability.
Pinnacle Financial has an established process for determining fair values. Fair value is based upon quoted market prices, where
available. If listed prices or quotes are not available, fair value is based upon internally developed models or processes that use
primarily market-based or independently-sourced market data, including interest rate yield curves, option volatilities and third party
information such as prices of similar assets or liabilities. Valuation adjustments may be made to ensure that financial instruments are
recorded at fair value. Furthermore, while Pinnacle Financial believes its valuation methods are appropriate and consistent with other
market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the reporting date.
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Recently Adopted Accounting Pronouncements — In August 2017, the FASB issued Accounting Standards Update No. 2017-12,
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU make more
financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure
requirements and changes how companies assess effectiveness. The amendments will be effective for public companies for interim
and annual periods beginning after December 15, 2018. Early adoption is permitted. Pinnacle Financial early adopted this standard in
the first quarter of 2018 and subsequently entered into four hedging transactions during the year ended December 31, 2018, all of
which are eligible for hedge accounting as a result of the new standard, as noted in Note 15. Derivative Instruments.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables - Nonrefundable Fees and Other Costs
(Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendment in this ASU shortens the
amortization period for certain callable debt securities held at a premium to the earliest call date. The amendment does not require an
accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendment is effective for
fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted with
modified retrospective application. Pinnacle Financial elected to early adopt this standard in 2018 and it continues to have no material
impact to its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business. The amendment in this ASU clarifies the definition of a business with the objective of adding guidance to
assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The
amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. There has
been no material impact on Pinnacle Financial's consolidated financial statements due to the adoption of this standard in the first
quarter of 2018.
In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230) intended to reduce
the diversity in practice around how certain transactions are classified within the statement of cash flows. The guidance became
effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal
years. Pinnacle Financial adopted this standard in the first quarter of 2018 and it continues to have no material impact to its
consolidated financial statements, with the exception of dividends received from its and Pinnacle Bank's equity method investments
which were reclassified from cash flow from investments to operating cash flow.
In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments – Overall (Subtopic 825-10)
which, among other things, (i) requires equity investments, excluding those accounted for under the equity method or that result in
consolidation, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify
impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to
estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv)
requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure
purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of
a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial
statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity's other deferred tax assets. ASU 2016-01 became effective for Pinnacle
Financial in the first quarter of 2018. See Note 18. Fair Value of Financial Instruments for disclosure of the fair value of financial
instruments based on an exit price notion as required by ASU 2016-01.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606),
which was developed as a joint project with the International Accounting Standards Board to remove inconsistencies in revenue
requirements and provide a more robust framework for addressing revenue issues. The ASU's core principle is that an entity should
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an
entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards
Update 2015-14, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December
15, 2017). Pinnacle Financial adopted the ASU during the first quarter of 2018, as required, using a modified retrospective approach.
The majority of Pinnacle Financial's revenue stream is generated from interest income on loans and deposits, which are outside the
scope of Topic 606. Pinnacle Financial’s sources of income that fall within the scope of Topic 606 include service charges on deposits,
investment services, insurance sales commissions, trust fees, interchange fees and gains and losses on sales of other real estate, all of
which are presented within noninterest income. Pinnacle Financial has evaluated the effect of Topic 606 on these fee-based income
streams and concluded that adoption of the standard did not materially impact its consolidated financial statements. The following is a
summary of the implementation considerations for the revenue streams that fall within the scope of Topic 606:
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•
•
Service charges on deposits, investment services, trust fees and interchange fees — Fees from these services are either
transaction based, for which the performance obligations are satisfied when the individual transaction is processed, or set
periodic service charges, for which the performance obligations are satisfied over the period the service is provided.
Transaction-based fees are recognized at the time the transaction is processed, and periodic service charges are recognized
over the service period. The adoption of Topic 606 had no impact on Pinnacle Financial's revenue recognition practice for
these services.
Insurance sales commissions — Insurance commissions are received from insurance companies in return for the placement
of policies with customers. While additional services, such as claims assistance, may be provided over the term of the policy,
the revenues are substantially earned at the time of policy placement. The only contingency in earning the revenue relates to
the potential for subsequent cancellation of policies. Accordingly, revenue is recognized at the time of policy placement, net
of an allowance for estimated policy cancellations. The adoption of Topic 606 had no impact on Pinnacle Financial's revenue
recognition related to insurance sales commissions.
• Gains on sales of other real estate — ASU 2014-09 also creates Topic 610-20, under which a gain on sale should be
recognized when a contract for sale exists and control of the asset has been transferred to the buyer. Topic 606 lists several
criteria which must exist to conclude that a contract for sale exists, including a determination that the institution will collect
substantially all of the consideration to which it is entitled. This presents a key difference between the prior and new guidance
related to the recognition of the gain when the institution finances the sale of the property. Rather than basing recognition on
the amount of the buyer's initial investment, which was the primary consideration under prior guidance, the analysis is now
based on various factors including not only the loan to value ratio, but also the credit quality of the borrower, the structure of
the loan, and any other factors that may affect collectability. While these differences may affect the decision to recognize or
defer gains on sales of other real estate in circumstances where Pinnacle Bank has financed the sale, the effects would not be
material to Pinnacle Financial's consolidated financial statements.
Newly Issued not yet Effective Accounting Standards — In February 2018, the FASB issued Accounting Standards Update
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income. The amendments in this ASU addressed the income tax accounting treatment of the stranded tax effects
within other comprehensive income due to the newly enacted federal corporate tax rate included in the Tax Cuts and Jobs Act issued
December 22, 2017. These amendments allow an entity to make a reclassification from other comprehensive income to retained
earnings for the difference between the historical corporate income tax rate and the newly enacted corporate income tax rate. The
amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early
adoption is permitted with retrospective application. This standard will not have a material impact on Pinnacle Financial's consolidated
financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment to simplify how entities other than private companies, such as public business entities
and not-for-profit entities, are required to test goodwill for impairment by eliminating the comparison of the implied fair value of the
reporting unit's goodwill with the carrying amount of that goodwill. The amendments are effective for fiscal years beginning after
December 15, 2019, including interim periods within those periods. If this standard had been effective as of the date of the financial
statements included in this report, there would have been no impact on Pinnacle Financial's consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases which requires recognition in the statement of
financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.
The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not
require lease assets and lease liabilities to be recognized for operating leases. The guidance becomes effective for Pinnacle Financial
on January 1, 2019. In July 2016, the FASB issued Accounting Standards Update 2018-10, Codification Improvements to Topic 842,
Leases which provides technical corrections and improvements to ASU 2016-02. It is not anticipated that this update will have an
impact on our adoption of ASU 2016-02. In July 2016, the FASB issued Accounting Standards Update 2018-11, Leases (Topic 842):
Targeted Improvements which provides an optional transition method to adopt the new requirements of ASU 2016-02 as of the
adoption date with no adjustment to the presentation or disclosure of comparative prior periods included in the financial statements in
the period of adoption. Pinnacle Financial intends to elect the optional transition method which will result in presentation of periods
prior to adoption under the prior lease guidance of ASC Topic 840. In December 2018, the FASB issued Accounting Standards Update
2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. ASU 2018-20 permits lessors to account for certain taxes as
lessee costs, permits lessors to exclude from revenue certain lessor costs paid by lessees directly to third parties, and requires lessors to
allocate certain variable payments to lease and non-lease components. Had these standards been effective as of December 31, 2018,
we would have recorded a right of use asset and additional lease liabilities of approximately $80 million.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of
Credit Losses on Financial Instruments (CECL), which introduces the current expected credit losses methodology. Among other
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things, CECL requires the measurement of all expected credit losses for financial assets, including loans and held-to-maturity debt
securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that
affect the collectability of the reported amount. The new model will require institutions to calculate all probable and estimable losses
that are expected to be incurred through the financial asset's entire life through a provision for credit losses, including loans obtained
as a result of any acquisition not deemed to be purchased credit deteriorated (PCD). CECL also requires the allowance for credit losses
for PCD loans to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial
allowance will be added to the purchase price rather than recorded as provision expense. The disclosure of credit quality indicators
related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Institutions are
to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period
in which the standard is effective. The amendments are effective for fiscal years beginning after December 15, 2019. Early application
will be permitted for fiscal years beginning after December 15, 2018. Pinnacle Financial is currently assessing the impact of the new
guidance on its consolidated financial statements. An increase in the overall allowance for loan losses is likely upon adoption in order
to provide for expected credit losses over the life of the loan portfolio.
Other than those pronouncements discussed above and those which have been recently adopted, we do not believe there were any
other recently issued accounting pronouncements that are expected to materially impact Pinnacle Financial.
Reclassifications — Some items in the prior year financial statements were reclassified to conform to the current presentation.
Reclassifications had no effect on prior year net income or shareholders' equity.
Subsequent Events — 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 December 31, 2018 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 an allocation of purchase price to net assets acquired (in thousands):
Equity consideration
Common stock issued
Total equity consideration
Non-Equity Consideration:
Cash paid to redeem common stock
Total consideration paid
Allocation of total consideration paid:
Fair value of net assets assumed including estimated identifiable intangible assets
Goodwill
Number of
Shares
Amount
27,687,100
$
$
1,858,133
1,858,133
129
$
1,858,262
$
$
602,689
1,255,573
1,858,262
Pinnacle Financial recorded costs incurred in connection with the issuance of Pinnacle Financial common stock resulting from
the BNC Merger of $7.2 million, net of related tax benefits, as a reduction to additional paid in capital. Certain merger-related
expenses 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 $82.0 million were recorded in 2017 to goodwill to appropriately reflect the valuation of the acquired loan
portfolio, OREO acquired, and certain liabilities assumed and have been included in the table below.
100
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.
Purchase price allocations related to the acquisition of BNC have been completed and are reflected in the following table (in
thousands):
Assets
Cash and cash equivalents
Investment securities
Loans, net of allowance for loan losses (2)
Mortgage loans held for sale
Other real estate owned (3)
Core deposit and other intangible (4)
Property, plant and equipment (5)
Other assets (6)
Total Assets
Liabilities
Interest-bearing deposits (7)
Non-interest bearing deposits
Borrowings (8)
Other liabilities (9)
Total Liabilities
Net Assets Acquired
Explanation of certain fair value adjustments:
BNC
Historical Cost Basis
Fair Value Adjustments (1)
As Recorded by
Pinnacle Financial
As of June 16, 2017
$
$
$
$
$
155,271
$
— $
643,875
5,782,720
27,026
20,143
—
156,805
320,988
1,667
(181,430)
—
1,382
50,422
(3,341)
54,057
155,271
645,542
5,601,290
27,026
21,525
50,422
153,464
375,045
7,106,828
$
(77,243) $
7,029,585
5,003,653
$
1,199,342
183,389
35,729
6,422,113
684,715
$
$
4,355
$
—
(6,412)
6,840
4,783
$
(82,026) $
5,008,008
1,199,342
176,977
42,569
6,426,896
602,689
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
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 were updated subsequent to the merger date based on the results of finalized valuation assessments.
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.
This adjustment reflects the Day 1 value of OREO properties.
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.
The amount represents the adjustment of the net book value of BNC's property, plant and equipment to estimated fair value based on
market values of similar assets.
The amount represents the deferred tax asset recognized on the fair value adjustment of BNC's acquired assets and assumed liabilities
and an adjustment to the Day 1 fair value of an alternative investment.
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.
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 instruments.
The amount represents the adjustment to accrue obligations that existed but had not been recorded as of the acquisition date and the fair
value of BNC lease obligations.
Supplemental Pro Forma Combined Results of Operations
For the year ended December 31, 2018, BNC was included in the operations of PNFP and, as such, no supplemental proforma
information is necessary. The supplemental proforma information below for the year ended December 31, 2017 gives effect to the
BNC acquisition as if it had occurred on January 1, 2017. 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
101
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 year ended December 31, 2017 that may not have been necessary
had the acquired loans been recorded at fair value as of the beginning of 2017. Additionally, these financial statements were not
adjusted for non-recurring expenses, such as merger-related expenses 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.
(dollars in thousands)
Revenue (1)
Income before income taxes
(1) Net interest income plus noninterest income.
Note 3. Equity Method Investment
Year Ended
December 31, 2017
$
844,896
347,983
On February 1, 2015, Pinnacle Bank acquired a 30% interest in Bankers Healthcare Group, LLC (BHG) for $75 million in cash.
On March 1, 2016, Pinnacle Bank and Pinnacle Financial increased their investment in BHG by a combined 19%, for a total
investment in BHG of 49%. The additional 19% interest was acquired pursuant to a purchase agreement whereby both Pinnacle
Financial and Pinnacle Bank acquired 8.55% and an additional 10.45%, respectively, of the outstanding membership interests in BHG
in exchange for $74.1 million in cash and 860,470 shares of Pinnacle Financial common stock valued at $39.9 million.
On March 1, 2016, Pinnacle Financial, Pinnacle Bank and the other members of BHG entered into an Amended and Restated
Limited Liability Company Agreement of BHG that provides for, among other things, the following terms:
•
•
•
•
the inability of any member of BHG to transfer its ownership interest in BHG without the consent of the other members of
BHG for five years, other than transfers to family members, trusts or affiliates of the transferring member, in connection with
the acquisition of Pinnacle Financial or Pinnacle Bank or as a result of a change in applicable law that forces Pinnacle
Financial and/or Pinnacle Bank to divest their ownership interests in BHG;
the inability of the board of managers of BHG (of which Pinnacle Financial and Pinnacle Bank have the right to designate
two of the five members (the Pinnacle Managers) to approve a sale of BHG without the consent of one of the Pinnacle
Managers until March 1, 2020;
co-sale rights for Pinnacle Financial and Pinnacle Bank in the event the other members of BHG decide to sell all or a portion
of their ownership interests and are permitted to do so pursuant to the Limited Liability Company Agreement; and
a right of first refusal for BHG and the other members of BHG in the event that Pinnacle Financial and/or Pinnacle Bank
decide to sell all or a portion of their ownership interests and are permitted to do so pursuant to the Limited Liability
Company Agreement, except in connection with a transfer of their ownership interests to an affiliate or in connection with the
acquisition of Pinnacle Financial or Pinnacle Bank.
Pinnacle Financial accounts for this investment pursuant to the equity method for unconsolidated subsidiaries and will recognize
its interest in BHG's profits and losses in noninterest income with corresponding adjustments to the BHG investment account. Because
BHG has been determined to be a voting interest entity of which Pinnacle Financial and Pinnacle Bank together control less than a
majority of the board seats following the closing of the additional investment in March 2016, this investment does not require
consolidation and is accounted for pursuant to the equity method of accounting. Additionally, Pinnacle Financial did not recognize any
goodwill or other intangible asset associated with these transactions as of the respective purchase dates, however, it will recognize
accretion income and amortization expense associated with the fair value adjustments to the net assets acquired including the fair
value of certain of BHG's liabilities which are recorded as a component of income from equity method investment, pursuant to the
equity method of accounting.
At December 31, 2018, Pinnacle Financial has recorded technology, trade name and customer relationship intangibles, net of
related amortization, of $10.7 million compared to $13.4 million as of December 31, 2017. Amortization expense of $2.8 million was
included in Pinnacle Financial's results for the year ended December 31, 2018 compared to $3.3 million for 2017. Accretion income of
$2.9 million was included in Pinnacle Financial's results for the year ended December 31, 2018, while $3.1 million of accretion
income was recorded in 2017. Additionally, at December 31, 2018, Pinnacle Financial had recorded accretable discounts associated
with certain liabilities of BHG of $7.4 million compared to $10.3 million as of December 31, 2017.
During the year ended December 31, 2018, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $33.7 million
in the aggregate, compared to $21.7 million during the year ended December 31, 2017. Earnings from BHG are included in Pinnacle
Financial's consolidated tax return. Profits from intercompany transactions are eliminated.
102
A summary of BHG's financial position and results of operations as of and for the years ended December 31, 2018 and 2017,
respectively, were as follows (unaudited, in thousands):
Banker's Healthcare Group
Assets
Liabilities
Equity interests
Total liabilities and equity
Revenues
Net income, pre-tax
Note 4. Restricted Cash Balances
December 31,
2018
December 31,
2017
$
$
$
459,816
324,211
135,605
459,816
$
$
$
330,030
224,837
105,193
330,030
For the year ended December 31,
2018
2017
2016
$
$
220,253
104,297
$
$
160,209
77,941
$
$
136,693
67,135
Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve Bank based
principally on the type and amount of their deposits. At our option, Pinnacle Financial maintains additional balances to compensate for
clearing and other services. For the years ended December 31, 2018 and 2017, the average daily balance maintained at the Federal
Reserve was approximately $329.6 million and $229.9 million, respectively.
Restricted cash included on the consolidated balance sheets was $65.5 million and $20.7 million at December 31, 2018 and 2017,
respectively. This restricted cash is maintained at a bank as collateral primarily for our derivative portfolio.
Pinnacle Financial maintains some of its cash in bank deposit accounts at financial institutions other than Pinnacle Bank that, at
times, may exceed federally insured limits. Pinnacle Financial may lose all uninsured balances if one of the correspondent banks fails
without warning. Pinnacle Financial has not experienced any losses in such accounts. Pinnacle Financial believes it is not exposed to
any significant credit risk on cash and cash equivalents.
103
Note 5. Securities
The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2018 and 2017 are
summarized as follows (in thousands):
December 31, 2018
Securities available-for-sale:
U.S Treasury securities
U.S. Government agency securities
Mortgage-backed securities
State and municipal securities
Asset-backed securities
Corporate notes
Securities held-to-maturity:
State and municipal securities
December 31, 2017
Securities available-for-sale:
U.S Treasury securities
U.S. Government agency securities
Mortgage-backed securities
State and municipal securities
Asset-backed securities
Corporate notes
Securities held-to-maturity:
State and municipal securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
30,325
$
— $
25
$
71,456
1,336,469
1,244,471
379,107
69,399
49
3,110
3,785
820
170
1,346
28,634
18,602
4,345
2,523
30,300
70,159
1,310,945
1,229,654
375,582
67,046
$
$
$
$
$
3,131,227
$
7,934
$
55,475
$
3,083,686
194,282
194,282
$
152
152
$
1,303
1,303
$
193,131
193,131
30,505
$
182,500
1,270,625
774,949
173,346
81,615
— $
67
5,318
12,251
262
1,346
60
$
1,766
12,124
2,588
316
647
30,445
180,801
1,263,819
784,612
173,292
82,314
2,513,540
$
19,244
$
17,501
$
2,515,283
20,762
20,762
$
114
114
$
46
46
$
20,830
20,830
In 2018, Pinnacle Financial transferred, at fair value, $179.8 million of municipal securities from the available-for-sale portfolio
to the held-to-maturity portfolio. The related net unrealized after tax losses of $2.2 million remained in accumulated other
comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of
discount on the transferred securities. No gains or losses were recognized at the time of the transfer. At December 31, 2018,
approximately $1.2 billion of Pinnacle Financial's investment portfolio was pledged to secure public funds and other deposits and
securities sold under agreements to repurchase. At December 31, 2018, repurchase agreements comprised of secured borrowings
totaled $104.7 million and were secured by $104.7 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 for the counterparty to remain adequately secured.
104
The amortized cost and fair value of debt securities as of December 31, 2018 by contractual maturity are shown below. Actual
maturities may differ from contractual maturities of mortgage-backed securities since the mortgages 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):
Due in one year or less
Due in one year to five years
Due in five years to ten years
Due after ten years
Mortgage-backed securities
Asset-backed securities
Available-for-sale
Held-to-maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
47,546
$
47,474
$
325
$
45,037
100,401
1,222,667
1,336,469
379,107
44,925
98,424
1,206,336
1,310,945
375,582
5,710
7,980
180,267
—
—
326
5,700
7,935
179,170
—
—
$
3,131,227
$
3,083,686
$
194,282
$
193,131
At December 31, 2018 and 2017, included in securities were the following investments with unrealized losses. The information
below classifies these investments according to the term of the unrealized loss of less than twelve months or twelve months or longer
(in thousands):
December 31, 2018
U.S. Treasury securities
U.S. government agency securities
Mortgage-backed securities
State and municipal securities
Asset-backed securities
Corporate notes
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
$
30,054
$
22
$
246
$
3
$
30,300
$
13,697
203,299
805,821
268,677
26,272
328
2,134
18,643
4,118
1,538
42,539
882,231
198,610
11,828
25,915
1,018
26,500
4,078
227
985
56,236
1,085,530
1,004,431
280,505
52,187
25
1,346
28,634
22,721
4,345
2,523
Total temporarily-impaired securities
$ 1,347,820
$
26,783
$ 1,161,369
$
32,811
$ 2,509,189
$
59,594
December 31, 2017
U.S. Treasury securities
U.S. government agency securities
Mortgage-backed securities
State and municipal securities
Asset-backed securities
Corporate notes
$
29,948
$
60
$
173,677
607,408
115,403
68,742
22,168
1,766
5,042
1,408
198
547
— $
—
285,561
50,083
14,136
11,944
— $
29,948
$
—
7,082
1,226
118
100
173,677
892,969
165,486
82,878
34,112
60
1,766
12,124
2,634
316
647
Total temporarily-impaired securities
$ 1,017,346
$
9,021
$
361,724
$
8,526
$ 1,379,070
$
17,547
The applicable date for determining when securities are in an unrealized loss position is December 31, 2018 and 2017. As such, it
is possible that a security had a market value less than its amortized cost on other days during the twelve-month periods ended
December 31, 2018 and 2017, but is not in the "Investments with an Unrealized Loss of less than 12 months" category above.
As shown in the table above, at December 31, 2018 and 2017, Pinnacle Financial had unrealized losses of $59.6 million and $17.5
million on $2.5 billion and $1.4 billion, respectively, of available-for-sale and held-to-maturity securities. The unrealized losses
associated with the $179.8 million of municipal securities transferred from the available-for-sale portfolio to the held-to-maturity
portfolio represent unrealized losses since the date of purchase, independent of the impact associated with changes in the cost basis
upon transfer between portfolios. The unrealized losses associated with these investment securities are primarily driven by changes in
interest rates and typically are not due to the credit quality of the securities. These securities will continue to be monitored as a part of
our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers.
Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can
make all contractual principal and interest payments. Because Pinnacle Financial currently does not intend to sell these securities and
105
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
December 31, 2018.
Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or
marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and
raising funds for liquidity purposes. Additionally, if an available-for-sale security loses its investment grade or tax-exempt status, the
underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, Pinnacle
Financial will consider selling the security, but will review each security on a case-by-case basis as these factors become
known. Consistent with the investment policy, in 2018 available-for-sale securities of approximately $169.9 million were sold and net
unrealized losses of $1.7 million were reclassified from accumulated other comprehensive income into net income.
The carrying values of Pinnacle Financial's investment securities could decline in the future if the financial condition of the
securities' 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 6. 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 by
Pinnacle Bank 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 loans also includes owner-occupied commercial real estate which Pinnacle Financial
believes 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 family
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 by the assigned financial advisor 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. Pass-rated loans include five distinct ratings categories for loans that represent specific attributes. Pinnacle Financial
believes that its categories follow those outlined by Pinnacle Bank's primary regulators. At December 31, 2018, approximately 80.8%
of our loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating in the allowance for loan loss
assessment. Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either
accrual or nonaccrual based on the performance of the individual loans. However, certain consumer real estate-mortgage loans and
certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even
though the collateral may be of a consumer loan nature.
Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, our credit policy
requires that every risk rated loan of $1.0 million or more be subject to a formal credit risk review process. Each loan's risk rating is
also subject to review by our independent loan review department, which reviews a substantial portion of our risk-rated portfolio
annually. 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.
106
The following table presents our loan balances by primary loan classification and the amount within each risk rating category.
Pass-rated loans include all credits other than those included in special mention, substandard, substandard-nonaccrual and doubtful-
nonaccrual which are defined as follows:
•
•
Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit
position at some future date.
Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the
collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize
collection of the debt. Substandard loans are characterized by the distinct possibility that Pinnacle Financial will sustain
some loss if the deficiencies are not corrected.
Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.
•
• Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values,
highly questionable and improbable.
The following table outlines the amount of each loan classification categorized into each risk rating category as of December 31,
2018 and 2017 (in thousands):
December 31, 2018
Pass
Special Mention
Substandard
Substandard-nonaccrual
Doubtful-nonaccrual
Commercial
real estate -
mortgage
Consumer real
estate -
mortgage
Construction
and land
development
Commercial
and industrial
Consumer
and other
Total
$
6,998,485
$
2,787,570
$
2,059,376
$
5,148,726
$
352,516
$ 17,346,673
55,932
78,202
32,335
—
7,902
20,906
28,069
—
4,334
5,358
3,387
—
24,284
75,351
23,060
—
711
62
983
—
93,163
179,879
87,834
—
Total loans
$
7,164,954
$
2,844,447
$
2,072,455
$
5,271,421
$
354,272
$ 17,707,549
December 31, 2017
Pass
Special Mention
Substandard
Substandard-nonaccrual
Doubtful-nonaccrual
Commercial
real estate -
mortgage
Consumer real
estate -
mortgage
Construction
and land
development
Commercial
and industrial
Consumer
and other
Total
$
6,487,368
$
2,503,688
$
1,880,704
$
4,014,656
$
351,359
$ 15,237,775
94,134
72,044
16,064
—
18,356
21,053
18,117
—
8,148
13,468
5,968
—
46,898
62,529
17,258
—
1,177
79
48
—
168,713
169,173
57,455
—
Total loans
$
6,669,610
$
2,561,214
$
1,908,288
$
4,141,341
$
352,663
$ 15,633,116
At December 31, 2018 and 2017, all loans classified as nonaccrual were deemed to be impaired. The principal balances of
impaired loans amounted to $83.1 million and $59.0 million at December 31, 2018 and 2017, respectively, and are included in the
table above. For the twelve months ended December 31, 2018, the average balance of impaired loans was $75.3 million as compared
to $40.8 million for the twelve months ended December 31, 2017. Pinnacle Financial's policy is that the discontinuation of the accrual
of interest income will occur when (1) there is a significant deterioration in the financial condition of the borrower and full repayment
of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well
secured and in the process of collection. As such, at the date the above mentioned loans were placed on nonaccrual status, Pinnacle
Financial reversed all previously accrued interest income against current year earnings. Had these nonaccruing loans been on accruing
status, interest income would have been higher by $4.2 million, $2.7 million and $2.1 million for the years ended December 31, 2018,
2017 and 2016, respectively.
107
The following table provides a rollforward of purchase credit impaired loans from December 31, 2016 through December 31,
2018 (in thousands):
December 31, 2016
Acquisitions
Settlements, net
December 31, 2017
Acquisitions
Settlements, net
December 31, 2018
Gross
Carrying
Value
Accretable
Yield
Nonaccretable
Yield
Carrying
Value
$
12,468
$
— $
(3,633) $
80,812
(18,956)
74,324
—
(31,487)
(196)
64
(132)
—
18
(32,314)
4,410
(31,537)
—
14,143
$
42,837
$
(114) $
(17,394) $
8,835
48,302
(14,482)
42,655
—
(17,326)
25,329
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.
Purchase credit impaired loans purchased during the three years ended December 31, 2018 for which it was probable at acquisition
that all contractually required payments would not be collected are as follows (in thousands):
Contractually required payments receivable
$
Cash flows expected to be collected at acquisition
Fair value of acquired loans at acquisition
— $
—
—
94,312 $
48,498
48,302
1,359
547
547
2018
December 31,
2017
2016
Impaired loans, as disclosed in the table below, include troubled debt restructurings, nonaccrual loans, and loans deemed to be
impaired but that continue to accrue interest. The following tables detail the recorded investment, unpaid principal balance and related
allowance of Pinnacle Financial's impaired loans at December 31, 2018, 2017 and 2016 by loan classification (in thousands):
Impaired loans with an allowance:
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
Impaired loans without an allowance:
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
Total impaired loans
December 31, 2018
For the year ended
December 31, 2018
Recorded
investment
Unpaid
principal
balance
Related
allowance
Average
recorded
investment
Cash basis
interest
income
recognized
$
$
$
$
$
14,114
19,864
581
9,252
983
44,794
14,724
7,247
1,786
14,595
—
38,352
83,146
$
$
$
$
$
14,124
19,991
579
9,215
1,005
44,914
14,739
7,271
1,786
14,627
—
38,423
83,337
108
$
$
$
$
$
724
1,443
28
1,441
328
3,964
—
—
—
—
—
—
3,964
$
$
$
$
$
10,260
13,154
1,157
9,326
718
34,615
17,906
5,477
1,463
15,796
—
40,642
75,257
$
$
$
$
$
—
—
—
—
—
—
469
—
—
—
—
469
469
Impaired loans with an allowance:
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
Impaired loans without an allowance:
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
Total impaired loans
Impaired loans with an allowance:
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
Impaired loans without an allowance
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
Total impaired loans
December 31, 2017
For the year ended
December 31, 2017
Recorded
investment
Unpaid
principal
balance
Related
allowance
Average
recorded
investment
Cash basis
interest
income
recognized
$
$
$
$
$
$
$
$
$
$
1,850
8,028
2,522
12,521
—
24,921
16,364
4,144
2,645
10,905
—
34,058
58,979
$
$
$
$
$
1,863
8,079
2,528
12,644
—
25,114
16,514
4,174
2,650
10,902
—
34,240
59,354
December 31, 2016
Recorded
investment
Unpaid
principal
balance
442
3,300
84
4,054
516
8,396
2,308
5,641
3,128
14,277
—
25,354
33,750
$
$
$
$
$
452
3,303
129
4,051
819
8,754
2,312
5,674
3,135
14,367
—
25,488
34,242
$
$
$
$
$
$
$
$
$
$
95
410
66
1,627
—
2,198
—
—
—
—
—
—
2,198
$
$
$
$
$
650
4,990
567
10,559
425
17,191
6,983
5,727
1,890
9,039
—
23,639
40,830
$
$
$
$
$
—
—
—
—
—
—
—
—
95
—
—
95
95
For the year ended
December 31, 2016
Related
allowance
Average
recorded
investment
Cash basis
interest income
recognized
60
690
20
95
227
1,092
—
—
—
—
—
—
1,092
$
$
$
$
$
537
6,503
77
5,868
2,488
15,473
2,346
2,065
3,403
9,187
—
17,001
32,474
$
$
$
$
$
—
—
—
—
—
—
—
—
159
—
—
159
159
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 $469,000 in interest income from cash payments received on nonaccrual loans during the year ended December 31, 2018
compared to $95,000 and $159,000 during the years ended December 31, 2017, and 2016, respectively.
109
At December 31, 2018 and 2017, there were $5.9 million and $6.6 million, respectively, of troubled debt restructurings that were
performing as of their restructure date and which are accruing interest. These troubled debt restructurings are considered impaired
loans pursuant to U.S. GAAP. Troubled commercial loans are restructured by specialists within Pinnacle Bank's Special Assets Group,
and all restructurings are approved by committees and credit officers separate and apart from the normal loan approval process. These
specialists are charged with reducing Pinnacle Financial's overall risk and exposure to loss in the event of a restructuring by obtaining
some or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral release
terms, additional collateral or other similar strategies.
The following table outlines the amount of each troubled debt restructuring by loan classification made during the years ended
December 31, 2018, 2017 and 2016 (dollars in thousands):
Number
of contracts
Pre Modification
Outstanding Recorded
Investment
Post Modification Outstanding
Recorded Investment, net of
related allowance
December 31, 2018
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
December 31, 2017
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
December 31, 2016
Commercial real estate – mortgage
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
— $
— $
3
1
—
—
4
$
— $
1
—
2
—
3
$
— $
—
—
6
—
6
$
1,967
347
—
—
2,314
$
— $
6
—
3,776
—
3,782
$
— $
—
—
11,084
—
11,084
$
—
1,967
347
—
—
2,314
—
5
—
3,751
—
3,756
—
—
—
11,083
—
11,083
During the years ended December 31, 2018, 2017 and 2016, Pinnacle Financial had no troubled debt restructurings that
subsequently defaulted within twelve months of the restructuring. A default is defined as an occurrence which violates the terms of the
receivable's contract.
At December 31, 2018 and 2017, the allowance for loan losses included no allowance specifically related to accruing troubled debt
restructurings compared to $21,000 at December 31, 2016. These accruing troubled debt restructurings are classified as impaired loans
pursuant to U.S. GAAP; however, these loans continue to accrue interest at contractual rates.
In addition to the loan metrics above, Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of
credit risk exists to any industries. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify
borrowers into various industry classifications. Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of
credit) exceeding 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at December 31, 2018 with
the comparative exposures for December 31, 2017 (in thousands):
110
Lessors of nonresidential buildings
Lessors of residential buildings
New housing for-sale builders
Hotels and motels
At December 31, 2018
Outstanding
Principal
Balances
Unfunded
Commitments
Total
exposure
Total Exposure at
December 31,
2017
$
3,149,948
$
782,111
$
3,932,059
$
1,200,653
511,484
779,390
284,044
589,505
140,611
1,484,697
1,100,989
920,001
3,483,597
1,151,676
780,137
836,320
Additionally, Pinnacle Financial monitors two ratios regarding construction and commercial real estate lending as part of its
concentration management processes. Both ratios are calculated by dividing certain types of loan balances for each of the two
categories by Pinnacle Bank’s total risk-based capital. At December 31, 2018 and December 31, 2017, Pinnacle Bank’s construction
and land development loans as a percentage of total risk-based capital were 85.2% and 89.4%, respectively. Non-owner occupied
commercial real estate and multifamily loans (including construction and land development loans) as a percentage of total risk-based
capital were 277.7% and 297.1% as of December 31, 2018 and December 31, 2017, respectively. Banking regulations have established
guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-owner occupied commercial real
estate and multifamily ratio of less than 300% of total risk-based capital. When a bank’s ratios are in excess of one or both of these
guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank
management. Pinnacle Bank was within the 100% and 300% guidelines as of December 31, 2018 and has established what it believes
to be appropriate controls to monitor its lending in these areas as it aims to keep the level of these loans to below the 100% and 300%
thresholds.
The table below presents past due balances at December 31, 2018 and 2017, by loan classification and segment allocated between
performing and nonperforming status (in thousands):
30-89 days
past due and
accruing
90 days or
more past
due and
accruing
Accruing
Total past
due and
accruing
Nonaccruing
Current and
accruing
Purchase
credit
impaired
Nonaccrual (1)
Nonaccruing
purchase
credit
impaired
Total loans
December 31, 2018
Commercial real estate:
Owner-occupied
$
10,170 $
— $
10,170 $
2,623,700 $
2,664
$
16,025 $
874
$ 2,653,433
All other
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
1,586
18,059
3,759
21,451
3,276
—
—
—
1,082
476
1,586
18,059
3,759
22,533
3,752
4,488,840
2,794,630
2,063,201
5,225,205
349,537
5,659
3,689
2,108
623
—
12,634
22,564
2,020
23,022
983
2,802
5,505
1,367
38
—
4,511,521
2,844,447
2,072,455
5,271,421
354,272
Total
$
58,301 $
1,558 $
59,859 $ 17,545,113 $
14,743
$
77,248 $
10,586
$ 17,707,549
30-89 days
past due and
accruing
90 days or
more past
due and
accruing
Accruing
Total past
due and
accruing
Nonaccruing
Current and
accruing
Purchase
credit
impaired
Nonaccrual (1)
Nonaccruing
purchase
credit
impaired
Total loans
December 31, 2017
Commercial real estate:
Owner-occupied
$
6,772 $
104 $
6,876 $
2,435,819 $
4,820
$
11,395 $
1,105
$ 2,460,015
All other
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
16,559
14,835
4,136
7,406
6,311
—
1,265
146
1,348
1,276
16,559
16,100
4,282
8,754
7,587
4,177,454
2,521,748
1,894,560
4,114,127
345,076
12,018
5,249
3,478
1,154
—
704
9,320
2,878
17,222
—
2,860
8,797
3,090
84
—
4,209,595
2,561,214
1,908,288
4,141,341
352,663
Total
$
56,019 $
4,139 $
60,158 $ 15,488,784 $
26,719
$
41,519 $
15,936
$ 15,633,116
(1) Approximately $52.5 million and $45.8 million of nonaccrual loans as of December 31, 2018 and December 31, 2017, respectively, were
performing pursuant to their contractual terms at those dates.
111
The following table details the changes in the allowance for loan losses from December 31, 2016 to December 31, 2017 to
December 31, 2018 by loan classification and the allocation of allowance for loan losses (in thousands):
Commercial
real estate -
mortgage
Consumer
real estate -
mortgage
Construction
and land
development
Commercial
and industrial
Consumer
and other
Unallocated
Total
Allowance for Loan Losses:
Balance at December 31, 2015
Charged-off loans
Recovery of previously charged-off loans
Provision for loan losses
Balance at December 31, 2016
Collectively evaluated for impairment
Individually evaluated for impairment
Loans acquired with deteriorated credit
quality
Balance at December 31, 2016
Loans:
Collectively evaluated for impairment
Individually evaluated for impairment
Loans acquired with deteriorated credit
quality
$
$
$
$
$
15,513 $
7,220 $
2,903 $
23,643 $
15,616 $
537 $
65,432
(276)
208
(1,790)
(788)
546
(414)
(231)
545
407
(5,801)
(24,016)
2,138
4,763
2,895
15,025
—
—
337
13,655 $
6,564 $
3,624 $
24,743 $
9,520 $
874 $
13,595 $
5,874 $
3,604 $
24,648 $
60
—
690
—
20
—
95
—
9,293
227
—
$
(31,112)
6,332
18,328
58,980
57,014
1,092
—
13,655 $
6,564 $
3,624 $
24,743 $
9,520 $
874 $
58,980
3,188,361 $
1,174,456 $
906,053 $
2,872,855 $
265,613
$
8,407,338
2,750
2,385
8,941
2,520
3,212
3,408
18,331
524
516
—
33,750
8,837
Balance at December 31, 2016
$
3,193,496 $
1,185,917 $
912,673 $
2,891,710 $
266,129
$
8,449,925
Commercial
real estate -
mortgage
Consumer
real estate -
mortgage
Construction
and land
development
Commercial
and industrial
Consumer
and other
Unallocated
Total
Allowance for Loan Losses:
Balance at December 31, 2016
Charged-off loans
Recovery of previously charged-off loans
Provision for loan losses
Balance at December 31, 2017
Collectively evaluated for impairment
Individually evaluated for impairment
Loans acquired with deteriorated credit
quality
Balance at December 31, 2017
Loans:
Collectively evaluated for impairment
$
$
$
$
$
13,655 $
6,564 $
3,624 $
24,743 $
9,520 $
874 $
58,980
(633)
671
7,495
(1,461)
1,516
(1,588)
(137)
1,136
4,339
(4,297)
(15,518)
1,317
3,100
2,002
9,870
—
—
448
21,188 $
5,031 $
8,962 $
24,863 $
5,874 $
1,322 $
20,753 $
4,460 $
8,879 $
23,181 $
5,874
$
95
340
410
161
66
17
1,627
55
—
—
(22,046)
6,642
23,664
67,240
63,147
2,198
573
21,188 $
5,031 $
8,962 $
24,863 $
5,874 $
1,322 $
67,240
6,630,593 $
2,534,996 $
1,896,553 $
4,116,677 $
352,663
$ 15,531,482
Individually evaluated for impairment
18,214
12,172
Loans acquired with deteriorated credit
quality
20,803
14,046
5,167
6,568
23,426
1,238
—
—
58,979
42,655
Balance at December 31, 2017
$
6,669,610 $
2,561,214 $
1,908,288 $
4,141,341 $
352,663
$ 15,633,116
112
Commercial
real estate -
mortgage
Consumer
real estate -
mortgage
Construction
and land
development
Commercial
and industrial
Consumer
and other
Unallocated
Total
Allowance for Loan Losses:
Balance at December 31, 2017
Charged-off loans
Recovery of previously charged-off loans
Provision for loan losses
Balance at December 31, 2018
Collectively evaluated for impairment
Individually evaluated for impairment
Loans acquired with deteriorated credit
quality
Balance at December 31, 2018
Loans:
Collectively evaluated for impairment
$
$
$
$
$
21,188 $
5,031 $
8,962 $
24,863 $
5,874 $
1,322 $
(3,030)
2,096
6,692
(1,593)
2,653
1,579
(74)
1,863
377
(13,175)
(12,528)
3,035
17,008
2,711
9,366
26,946 $
7,670 $
11,128 $
31,731 $
5,423 $
26,222 $
724
—
6,227 $
1,443
—
11,100 $
30,290 $
28
—
1,441
—
5,095
328
—
(645)
677 $
$
67,240
(30,400)
12,358
34,377
83,575
78,934
3,964
—
26,946 $
7,670 $
11,128 $
31,731 $
5,423 $
677 $
83,575
7,124,117 $
2,808,142 $
2,066,613 $
5,246,913 $
353,289
$
17,599,074
Individually evaluated for impairment
28,838
27,111
Loans acquired with deteriorated credit
quality
11,999
9,194
2,367
3,475
23,847
661
983
—
83,146
25,329
Balance at December 31, 2018
$
7,164,954 $
2,844,447 $
2,072,455 $
5,271,421 $
354,272
$
17,707,549
The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based
upon evaluation of the loan portfolio, current asset quality trends, known and inherent risks in the portfolio, adverse situations that
may affect the borrowers' ability to repay (including the timing of future payment), the estimated value of any underlying collateral,
composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and
other pertinent factors, including regulatory recommendations. The allowance for loan losses for purchased loans is calculated
similarly to the method utilized for legacy Pinnacle Bank loans. Pinnacle Financial's accounting policy is to compare the computed
allowance for loan losses for purchased loans on a loan-by-loan basis to any remaining fair value adjustment. If the computed
allowance 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.
At December 31, 2018, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $37.9
million to current directors, executive officers, and their related interests, of which $18.3 million had been drawn upon. At
December 31, 2017, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $26.4 million to
directors, executive officers, and their related interests, of which approximately $16.1 million had been drawn upon. These loans and
extensions of credit were made in the ordinary course of business. None of these loans to directors, executive officers, and their related
entities were impaired at December 31, 2018 or 2017.
At December 31, 2018, Pinnacle Financial had approximately $16.0 million in commercial loans held for sale compared to $25.5
million at December 31, 2017, which primarily included commercial real estate and apartment loans originated for sale to a third-
party as part of a multi-family loan program. Such loans are closed under a pass-through commitment structure wherein Pinnacle
Bank's loan commitment to the borrower is the same as the third party's take-out commitment to Pinnacle Bank and the third party
purchase typically occurs within thirty days of Pinnacle Bank closing with the borrowers.
Residential Lending
At December 31, 2018, Pinnacle Financial had approximately $31.8 million of mortgage loans held-for-sale compared to
approximately $102.7 million at December 31, 2017. Total loan volumes sold during the year ended December 31, 2018 were
approximately $1.2 billion compared to approximately $1.1 billion for the year ended December 31, 2017. During the year ended
December 31, 2018, Pinnacle Financial recognized $14.6 million in gains on the sale of these loans, net of commissions paid,
compared to $18.6 million and $15.8 million, respectively, during the years ended December 31, 2017 and 2016.
These mortgage loans held-for-sale are originated internally and are primarily to borrowers in Pinnacle Bank's geographic
markets. These sales are typically on a mandatory basis to investors that follow conventional government sponsored entities (GSE)
and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines.
Each purchaser of a mortgage loan held-for-sale has specific guidelines and criteria for sellers of loans and the risk of credit loss
with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold
113
without recourse, the purchase agreements require Pinnacle Bank to make certain representations and warranties regarding the
existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in
connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties,
Pinnacle Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the
purchaser whole for the economic benefits of the loan. To date, Pinnacle Bank's liability pursuant to the terms of these representations
and warranties has been insignificant to Pinnacle Bank.
Note 7. Premises and Equipment and Lease Commitments
Premises and equipment at December 31, 2018 and 2017 are summarized as follows (in thousands):
Range of Useful Lives
2018
2017
Land
Buildings
Leasehold improvements
Furniture and equipment
Less: accumulated depreciation and amortization
Not applicable
15 to 30 years
15 to 20 years
3 to 20 years
$
64,898
$
170,829
43,536
100,946
380,209
114,649
$
265,560
$
65,649
164,748
38,913
93,841
363,151
97,137
266,014
Depreciation and amortization expense was approximately $21.5 million, $13.7 million, and $9.9 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
Pinnacle Financial has entered into various operating leases, primarily for office space and branch facilities. Rent expense related
to these leases for 2018, 2017 and 2016 totaled $12.4 million, $11.9 million and $8.4 million, respectively. At December 31, 2018, the
approximate future minimum lease payments due under the aforementioned operating leases for their base term are as follows (in
thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
12,889
11,805
11,527
9,410
8,820
43,730
98,181
Through acquisition, Pinnacle Financial assumed a single capital lease, primarily for office space at an interest rate of 7.22% per
year. Rent expense related to this lease for 2018 was approximately $225,000 and is included in total rent expense above. At
December 31, 2018, the approximate future minimum lease payments due under the aforementioned capital lease for its base term are
as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of net minimum lease payments
114
$
$
$
470
470
470
470
479
2,548
4,907
1,437
3,470
Note 8. Deposits
At December 31, 2018, the scheduled maturities of time deposits are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
2,458,837
717,024
246,827
33,925
9,330
2,300
3,468,243
Additionally, at December 31, 2018 and 2017, approximately $1.8 billion and $1.3 billion, respectively, of time deposits had been
issued in denominations of $100,000 or greater, and $819.3 million and $495.6 million, respectively, had been issued in denominations
of $250,000 or greater.
At December 31, 2018 and 2017, Pinnacle Financial had $1.7 million and $3.5 million, respectively, of deposit accounts in
overdraft status that have been reclassified to loans on the accompanying consolidated balance sheets.
Note 9. Federal Home Loan Bank Advances
Pinnacle Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB) and as a result, is eligible for advances from
the FHLB pursuant to the terms of various borrowing agreements, which assist Pinnacle Bank in the funding of its home mortgage and
commercial real estate loan portfolios. Pinnacle Bank has pledged certain qualifying residential mortgage loans and, pursuant to a
blanket lien, certain qualifying commercial mortgage loans with an aggregate carrying value of approximately $5.9 billion as
collateral under the borrowing agreements with the FHLB.
At December 31, 2018 and 2017, Pinnacle Bank had received advances from the FHLB totaling $1.4 billion and $1.3 billion,
respectively. Additionally, Pinnacle Financial recognized a discount of $167,000 on FHLB advances in conjunction with its
acquisition of Avenue in July 2016. At December 31, 2018 there was no remaining discount. At December 31, 2017, the remaining
discount was $13,000. At December 31, 2018, the scheduled maturities of FHLB advances and interest rates are as follows (in
thousands):
2019
2020
2021
2022
2023
Thereafter
Weighted average interest rate
Scheduled
Maturities
Weighted
average
interest rates
$
356,000
297,572
398,750
41,250
—
350,017
$
1,443,589
1.64%
1.83%
2.44%
2.85%
—
2.36%
2.11%
At December 31, 2018, Pinnacle Bank had accommodations which allow it to borrow from the Federal Reserve Bank of Atlanta's
discount window and purchase Federal funds from several of its correspondent banks on an overnight basis at prevailing overnight
market rates. These accommodations are subject to various restrictions as to their term and availability, and in most cases, must be
repaid within less than a month. At December 31, 2018, Pinnacle Bank had approximately $6.2 billion in borrowing availability with
the FHLB, the Federal Reserve Bank discount window, and other correspondent banks with whom Pinnacle Bank has arranged lines
of credit. At December 31, 2018, Pinnacle Bank was not carrying any balances with the Federal Reserve Bank discount window or
correspondent banks under these arrangements.
Note 10. Other Borrowings
Pinnacle Financial has twelve wholly-owned subsidiaries that are statutory business trusts created for the exclusive purpose of
issuing 30-year capital trust preferred securities. Additionally, Pinnacle Financial and Pinnacle Bank have entered into, or assumed in
connection with acquisitions, certain other subordinated debt agreements and a revolving credit facility as outlined below (in
thousands):
115
Name
Date Established
Maturity
Total Debt
Outstanding
Interest Rate at
December 31, 2018
Coupon Structure
Trust preferred securities
Pinnacle Statutory Trust I
Pinnacle Statutory Trust II
Pinnacle Statutory Trust III
Pinnacle Statutory Trust IV
BNC Capital Trust I
BNC Capital Trust II
BNC Capital Trust III
BNC Capital Trust IV
Valley Financial Trust I
Valley Financial Trust II
Valley Financial Trust III
December 29, 2003 December 30, 2033
$
September 15, 2005 September 30, 2035
September 7, 2006
September 30, 2036
October 31, 2007
September 30, 2037
April 3, 2003
April 15, 2033
March 11, 2004
April 7, 2034
September 23, 2004 September 23, 2034
September 27, 2006 December 31, 2036
June 26, 2003
June 26, 2033
September 26, 2005 December 15, 2035
December 15, 2006 January 30, 2037
10,310
20,619
20,619
30,928
5,155
6,186
5,155
7,217
4,124
7,217
5,155
Southcoast Capital Trust III
August 5, 2005
September 30, 2035
10,310
5.59% 30-day LIBOR + 2.80%
4.20% 30-day LIBOR + 1.40%
4.45% 30-day LIBOR + 1.65%
5.64% 30-day LIBOR + 2.85%
5.69% 30-day LIBOR + 3.25%
5.29% 30-day LIBOR + 2.85%
4.84% 30-day LIBOR + 2.40%
4.50% 30-day LIBOR + 1.70%
5.92% 30-day LIBOR + 3.10%
4.28% 30-day LIBOR + 1.49%
4.25% 30-day LIBOR + 1.73%
4.30% 30-day LIBOR + 1.50%
Subordinated Debt
Pinnacle Bank Subordinated Notes
Pinnacle Bank Subordinated Notes
July 30, 2015
March 10, 2016
July 30, 2025
July 30, 2025
Avenue Subordinated Notes
December 29, 2014 December 29, 2024
Pinnacle Financial Subordinated Notes November 16, 2016 November 16, 2026
BNC Subordinated Notes
September 25, 2014
October 1, 2024
BNC Subordinated Note
October 15, 2013
October 15, 2023
Other Borrowings
Revolving credit facility(6)
Debt issuance costs and fair value adjustment
Total subordinated debt and other borrowings
April 26, 2018
April 25, 2019
60,000
70,000
20,000
120,000
60,000
9,880
20,000
(7,745)
$
485,130
4.88%
4.88%
6.75%
5.25%
Fixed(1)
Fixed(1)
Fixed(2)
Fixed(3)
Fixed(4)
5.50%
7.34% 30-day LIBOR + 5.0%(5)
4.10% 30-day LIBOR + 1.75%
(1) Migrates to three month LIBOR + 3.128% beginning July 30, 2020 through the end of the term.
(2) Migrates to three month LIBOR + 4.95% beginning January 1, 2020 through the end of the term.
(3) Migrates to three month LIBOR + 3.884% beginning November 16, 2021 through the end of the term.
(4) Migrates to three month LIBOR + 3.59% beginning October 1, 2019 through the end of the term if not redeemed on that date.
(5) Coupon structure includes a floor of 5.0% and a cap of 9.5%.
(6) Borrowing capacity on the revolving credit facility is $75.0 million. An unused fee of 0.35% is assessed on the average daily unused
amount of the loan.
Note 11. Income Taxes
Income tax expense attributable to continuing operations for each of the years ended December 31 is as follows (in thousands):
Current tax expense :
Federal
State
Total current tax expense
Deferred tax expense:
Federal
State
Deferred tax revaluation expense
Total deferred tax expense
Total income tax expense
2018
2017
2016
$
73,921
$
63,496
$
4,822
78,743
10,162
1,603
—
11,765
860
64,356
26,339
1,826
31,486
59,651
$
90,508
$
124,007
$
49,769
—
49,769
12,776
1,614
—
14,390
64,159
116
Pinnacle Financial's income tax expense differs from the amounts computed by applying the Federal income tax statutory rates of
21% to income before income taxes for 2018 and 35% for 2017 and 2016. A reconciliation of the differences for each of the years in
the three-year period ended December 31, 2018 is as follows (in thousands):
Income tax expense at statutory rate
State excise tax expense, net of federal tax effect
Tax-exempt securities
Federal tax credits
Bank owned life insurance
Insurance premiums
Revaluation of deferred tax assets and liabilities due to Tax Cuts and Jobs Act
Excess tax benefits associated with equity compensation
Change in uncertain tax positions
Other items
Income tax expense
2018
2017
2016
94,489
5,076
(7,222)
(845)
(2,764)
(112)
—
(2,966)
—
4,852
90,508
$
$
104,295
1,746
(5,666)
(434)
(2,778)
(283)
31,486
(5,365)
—
1,006
124,007
$
$
66,984
1,049
(2,510)
(282)
(1,242)
(159)
—
—
—
319
64,159
$
$
Pinnacle Financial's effective tax rate for 2018 and 2017 differs from the Federal income tax rates primarily due to a state excise
tax expense, investments in bank qualified municipal securities, our real estate investment trust, and tax benefits associated with share-
based compensation, bank owned life insurance, and our captive insurance subsidiary, offset in part by the limitation on deductibility
of meals and entertainment expense, and for 2018, non-deductible executive compensation and FDIC premiums. Pinnacle Financial
recognized a charge of $31.5 million in 2017 resulting from the revaluation of its deferred tax assets in accordance with the Tax Cuts
and Jobs Act which reduced the corporate Federal tax rate from 35% to 21% effective January 1, 2018.
The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at
December 31, 2018 and 2017 are as follows (in thousands):
Deferred tax assets:
Loan loss allowance
Loans
Insurance
Accrued liability for supplemental retirement agreements
Restricted stock and stock options
Securities
Cash flow hedge
Equity method investment
Leases
Other real estate owned
Net federal operating loss carryforward and credits
Annual incentive compensation
Other deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Core deposit intangible asset
Securities
REIT dividends
FHLB related liabilities
Subordinated debt
Other deferred tax liabilities
Total deferred tax liabilities
Net deferred tax assets
117
2018
2017
$
20,449
$
29,453
1,955
6,231
9,026
15,974
459
602
1,460
1,158
13,754
9,996
2,503
16,240
46,567
614
7,413
8,232
—
499
635
1,738
2,809
18,085
2,922
2,451
113,020
108,205
11,769
11,408
—
1,589
925
1,134
1,444
28,269
$
84,751
$
11,504
14,073
616
3,073
922
1,077
1,171
32,436
75,769
ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as
"more-likely-than-not" to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement
and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning
accounting for income tax uncertainties in interim periods. At December 31, 2018, the Company had federal and state loss and tax
credit carryforwards of approximately $13.8 million that expire at various dates from 2028 to 2034.
A reconciliation of the beginning and ending unrecognized tax benefit related to state uncertain tax positions is as follows (in
thousands):
Balance at January 1,
Increases due to tax positions taken during the current year
Increases due to tax positions taken during a prior year
Decreases due to the lapse of the statute of limitations during the current year
Decreases due to settlements with the taxing authorities during the current year
Balance at December 31,
2018
2017
2016
2,838
$
2,245
1,274
$
1,564
—
—
—
—
—
—
134
1,140
—
—
—
5,083
$
2,838
$
1,274
$
$
Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. No interest
and penalties were recorded for the year ended December 31, 2018.
Note 12. Commitments and Contingent Liabilities
In the normal course of business, Pinnacle Financial has entered into off-balance sheet financial instruments which include
commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are
usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not
exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to
supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based
on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity
loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may
require payment of a fee. At December 31, 2018, these commitments amounted to $6.9 billion, of which approximately $974.0 million
related to home equity lines of credit.
Standby letters of credit are generally issued on behalf of an applicant (customer) to a specifically named beneficiary and are the
result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed
expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby
letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory
purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit
the beneficiary to obtain payment from Pinnacle Financial under certain prescribed circumstances. Subsequently, Pinnacle Financial
would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit. At December 31, 2018, these
commitments amounted to $177.5 million.
Pinnacle Financial follows the same credit policies and underwriting practices when making these commitments as it does for on-
balance sheet instruments. Each customer's creditworthiness is evaluated on a case-by-case basis and the amount of collateral
obtained, if any, is based on management's credit evaluation of the customer. Collateral held varies but may include cash, real estate
and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.
The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be
reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do
not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers
default on their resulting obligation to us, Pinnacle Financial's maximum exposure to credit loss, without consideration of collateral, is
represented by the contractual amount of those instruments. At December 31, 2018, Pinnacle Financial had accrued $2.9 million for
the inherent risks associated with off balance sheet commitments.
Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of
these routine claims outstanding at December 31, 2018 will not have a material impact on Pinnacle Financial's consolidated financial
condition, operating results or cash flows.
118
Note 13. Salary Deferral Plans
Pinnacle Financial has a 401(k) retirement plan (the 401k Plan) covering all employees who elect to participate, subject to certain
eligibility requirements. The 401(k) Plan allows employees to defer up to 50% of their salary subject to regulatory limitations with
Pinnacle Financial matching 100% of the first 4% of employee self-directed contributions during 2018, 2017, and 2016. Pinnacle
Financial's expense associated with the matching component of the plan for each of the years in the three-year period ended
December 31, 2018 was approximately $7.6 million, $5.9 million and $4.0 million, respectively, and is included in the accompanying
consolidated statements of operations in salaries and employee benefits expense.
Pinnacle Financial has assumed supplemental retirement plans for certain directors and executive officers of banks which we have
acquired. At December 31, 2018 and 2017, respectively, Pinnacle Financial had recorded $28.1 million and $34.4 million of liabilities
on its balance sheet associated with these supplemental executive retirement plans. A portion of these assumed plans were fully funded
with Rabbi Trust whose balances at December 31, 2018 totaled $28.9 million. At December 31, 2018, the remaining amounts that are
not yet funded are included in other liabilities in the accompanying consolidated balance sheets.
Note 14. Stock Options, Stock Appreciation Rights and Restricted Shares
At Pinnacle Financial's annual shareholders' meeting on April 17, 2018, the shareholders of Pinnacle Financial adopted the
2018 Omnibus Equity Incentive Plan (the "2018 Plan"). The 2018 Plan subsumed the then existing Pinnacle Financial Partners,
Inc. 2014 Equity Incentive Plan (the "2014 Plan") including the approximately 500,000 shares in the aggregate that remained
available for issuance thereunder on the date the 2018 Plan was approved by shareholders and increased the maximum number of
shares of common stock that may be issued to associates, directors and contractors of Pinnacle Financial and Pinnacle Bank by an
additional 1.2 million shares. The 2018 Plan permits Pinnacle Financial to reissue outstanding awards that are subsequently
forfeited, settled in cash, withheld by Pinnacle Financial to cover withholding taxes or that expire unexercised and are returned to
the 2018 Plan. At December 31, 2018, there were approximately 1.7 million shares available for issuance under the 2018 Plan.
The BNC Bancorp 2013 Amended and Restated Omnibus Stock Incentive Plan (the "BNC Plan") was assumed by Pinnacle
Financial in connection with the BNC Merger. As of December 31, 2018, the BNC Plan had approximately 9,000 shares remaining
available for issuance to existing associates that were previously BNC associates in future periods. No new awards may be granted
under plans other than the 2018 Plan except for shares remaining available for issuance to the former BNC associates pursuant to
the BNC Plan.
Upon the acquisition of CapitalMark, Pinnacle Financial assumed approximately 858,000 stock options under the CapitalMark
Option Plan. No further shares remain available for issuance under the CapitalMark Option Plan. At December 31, 2018, all of the
remaining options outstanding were granted under the CapitalMark Option Plan.
Common Stock Options and Stock Appreciation Rights
As of December 31, 2018, of the 176,709 stock options outstanding, approximately 106,173 options were granted with the
intention to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment to the
option holder while approximately 70,536 options would be deemed non-qualified stock options and thus not subject to favorable
tax treatment to the option holder. Favorable treatment generally refers to the recipient of the award not having to report ordinary
income at the date of exercise assuming certain conditions are met. All stock options granted under the Pinnacle Financial equity
incentive plans vested in equal increments over five years from the date of grant, are fully vested as of December 31, 2018 and are
exercisable over a period of ten years from the date of grant. All stock options granted under the CapitalMark Plan were fully
vested at the date of the CapitalMark merger.
119
A summary of stock option and stock appreciation right activity within the equity incentive plans during each of the years in
the three-year period ended December 31, 2018 and information regarding expected vesting, contractual terms remaining, intrinsic
values and other matters was as follows:
Outstanding at December 31, 2015
1,251,601
$
21.23
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Remaining Term
(in years)
Aggregate
Intrinsic
Value (1)
(000's)
Number
Granted
Stock options exercised
Stock appreciation rights exercised (2)
Forfeited
Outstanding at December 31, 2016
Granted
Stock options exercised (3)
Forfeited
Outstanding at December 31, 2017
Granted
Stock options exercised
Forfeited
Outstanding at December 31, 2018
Options exercisable at December 31, 2018
—
(698,673)
(2,435)
(3)
550,490
$
—
(275,904)
—
274,586
$
—
(97,877)
—
176,709
176,709
$
$
—
21.63
15.60
29.50
20.75
—
20.09
—
21.40
—
18.91
—
22.77
22.77
2.23
2.23
$
$
4,123
4,123
(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of
Pinnacle Financial Common Stock of $46.10 per common share at December 31, 2018 for the 176,709 options that were in-the-money
at December 31, 2018.
(2) The 2,435 stock appreciation rights exercised during 2016 settled in 1,137 shares of Pinnacle Financial Common Stock.
(3) Includes 750 stock options which were exercised in a stock swap transaction which settled in 277 shares of Pinnacle Financial common
stock.
During each of the years in the three-year period ended December 31, 2018, the aggregate intrinsic value of stock options and
stock appreciation rights exercised under Pinnacle Financial's equity incentive plans was $2.7 million, $12.7 million and $21.7
million, respectively, determined as of the date of option exercise.
There have been no options granted by Pinnacle Financial since 2008. All stock option awards granted by Pinnacle Financial
were fully vested during 2013. Stock options granted under the CapitalMark Plan were fully vested at the time of acquisition. As
such, there was no impact on the results of operations for stock-based compensation related to stock options for the three-year
period ended December 31, 2018, except for windfall tax benefits recorded as a component of income tax expense.
120
Restricted Shares
A summary of activity for unvested restricted share awards for the years ended December 31, 2018, 2017, and 2016 follows:
Unvested at December 31, 2015
Shares awarded
Conversion of previously awarded restricted share units to restricted share awards
Restrictions lapsed and shares released to associates/directors
Shares forfeited
Unvested at December 31, 2016
Shares awarded
Conversion of previously awarded restricted share units to restricted share awards
Shares assumed in connection with acquisition of BNC
Restrictions lapsed and shares released to associates/directors
Shares forfeited
Unvested at December 31, 2017
Shares awarded
Conversion of previously awarded restricted share units to restricted share awards
Restrictions lapsed and shares released to associates/directors
Shares forfeited
Unvested at December 31, 2018
Number
866,314
$
177,664
43,694
(245,873)
(21,260)
820,539
$
261,942
43,680
136,890
(292,896)
(34,020)
936,135
$
180,450
6,200
(400,820)
(29,159)
692,806
$
Grant Date Weighted-
Average Cost
31.39
48.61
46.37
28.39
39.88
36.47
67.14
69.40
67.25
37.59
54.71
50.08
62.40
67.85
46.33
59.51
55.19
Pinnacle Financial grants restricted share awards to associates (including members of executive management) and outside
directors with a combination of time and, in the case of the annual leadership team award, performance vesting criteria. The
following tables outline restricted stock grants that were made by grant year, grouped by similar vesting criteria, during the three-
year period ended December 31, 2018. The table below reflects the life-to-date activity for these awards:
Grant
Year
Group (1)
Time Based Awards
Vesting
Period in
years
Shares
awarded
Restrictions
Lapsed and
shares released
to participants
Shares
Withheld
for taxes by
participants
Shares
Forfeited by
participants (7)
Shares
Unvested
2016
2017
2017
Associates (2)
Associates (2)
Associates (2) (3)
Associates (2)
Associates (2) (3)
Performance Based Awards
2018
2018
2016
2016
2017
2018
Leadership team (4)
Leadership team (5)
Leadership team (4)
Leadership team (4)
Outside Director Awards (6)
2016
2017
2018
Outside directors
Outside directors
Outside directors
5
3 - 5
3 - 5
3 - 5
3 - 5
3
3
3
3
1
1
1
143,273
248,265
136,890
147,601
16,777
43,694
15,468
43,680
6,200
18,923
13,677
16,072
37,574
42,615
85,061
224
—
14,991
3,904
14,649
4,340
15,471
12,139
1,148
14,249
12,687
2,415
89
—
7,324
1,250
7,664
1,860
2,266
1,538
—
17,942
27,647
1,292
4,927
500
—
—
—
—
1,186
—
—
73,508
165,316
48,122
142,361
16,277
21,379
10,314
21,367
—
—
—
14,924
(1) Groups include employees (referred to as associates above), the leadership team which includes our named executive officers and other
key senior leadership members, and outside directors. When the restricted shares are awarded, a participant receives voting rights and
forfeitable dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. Once the
restrictions lapse, the participant is taxed on the value of the award and may elect to sell some shares (or have Pinnacle Financial
withhold some shares) to pay the applicable income taxes associated with the vested portion of the award. For time-based vesting
restricted share awards, dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle
121
Financial at the time of termination. For performance-based vesting awards and time-based vesting awards to Pinnacle Financial's
executive officers, dividends are placed into escrow until the forfeiture restrictions on such shares lapse.
(2) The forfeiture restrictions on these restricted share awards lapse in equal annual installments on the anniversary date of the grant.
(3) Restricted share awards issued to associates that were former associates of BNC and to Pinnacle Financial's Chairman of the Carolina's
and Virginia pursuant to legacy BNC incentive plans assumed by Pinnacle Financial.
(4) Reflects conversion of restricted share units issued in prior years to restricted share awards. The forfeiture restrictions on these
restricted share awards lapse should Pinnacle Financial achieve certain soundness targets at the end of the fifth year following the grant
date. See further details of these awards under the caption "Restricted Share Units" below.
(5) These shares were awarded to individuals joining the leadership team upon acquisition of Avenue. The forfeiture restrictions on these
restricted share awards lapse in separate equal installments should Pinnacle Financial achieve certain earnings targets over each year of
the vesting period and should the recipient thereafter remain employed by Pinnacle Financial for a subsequent vesting period.
(6) Restricted share awards are issued to the outside members of the board of directors in accordance with their board compensation plan.
Restrictions lapse on February 28, 2019 based on each individual board member meeting their attendance goals for the various board
and board committee meetings to which each member was scheduled to attend.
(7) These shares represent forfeitures resulting from recipients whose employment or board membership is terminated during each of the
years in the three-year period ended December 31, 2018 or for which the performance criteria applicable to the award are not achieved.
Any dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of
termination or will not be distributed from escrow, as applicable.
Compensation expense associated with the performance-based vesting restricted share awards is recognized over the time
period that the restrictions associated with the awards are anticipated to lapse based on a graded vesting schedule such that each
tranche is amortized separately. Compensation expense associated with the time-based vesting restricted share awards is
recognized over the time period that the restrictions associated with the awards lapse on a straight-line basis based on the total cost
of the award.
Restricted Share Units
The following table details the restricted share unit awards (all of which are performance units) outstanding at December 31,
2018:
Units Awarded
Grant
year
2018
Named Executive
Officers
(NEOs) (1)
96,878-145,339
Leadership Team
other than NEOs
25,990
2017
72,537-109,339
24,916
2016
73,474-110,223
26,683
2015
58,200-101,850
28,378
Applicable
Performance
Periods associated
with each tranche
(fiscal year)
Service period per
tranche
(in years)
Subsequent
holding period
per tranche
(in years)
Period in which
shares to be
settled into
RSAs(2)
2018
2019
2020
2017
2018
2019
2016
2017
2018
2015
2016
2017
2
2
2
2
2
2
2
2
2
2
2
2
3
2
1
3
2
1
3
2
1
3
2
1
2023
2023
2023
2022
2022
2022
2021
2021
2021
2020
2020
2020
(1) The named executive officers are awarded a range of awards that may be earned based on attainment of goals at a target level of performance
to the maximum level of performance.
(2) Performance-based vesting restricted stock unit awards granted in the years ended December 31, 2015 through December 31, 2018, if
earned, will be settled in shares of Pinnacle Financial Common Stock in the periods noted in the table, if Pinnacle Bank's ratio of non-
performing assets to the assets is less than amounts established in the applicable award agreement.
122
A summary of stock compensation expense, net of the impact of income taxes, related to restricted share awards and restricted
share units for the three-year period ended December 31, 2018, follows (in thousands):
Restricted stock expense
Income tax benefit
Restricted stock expense, net of income tax benefit
2018
2017
2016
$
$
17,636
4,610
13,026
$
$
19,538
7,665
11,873
$
$
10,971
4,306
6,665
As of the December 31, 2018, the total compensation cost related to unvested restricted share awards and restricted share units
not yet recognized was $32.9 million. This expense is expected to be recognized over a weighted-average period of 1.77 years.
Note 15. Derivative Instruments
Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a
derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as
hedges, the gain or loss is recognized in current earnings.
Non-hedge derivatives
Pinnacle Financial enters into interest rate swaps (swaps) to facilitate customer transactions and meet their financing needs. Upon
entering into these instruments to meet customer needs, Pinnacle Financial enters into offsetting positions in order to minimize the risk
to Pinnacle Financial. These swaps qualify as derivatives, but are not designated as hedging instruments.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the
fair value of a derivative instrument contract is positive, this generally indicates that the counter party or customer owes Pinnacle
Financial, and results in credit risk to Pinnacle Financial. When the fair value of a derivative instrument contract is negative, Pinnacle
Financial owes the customer or counterparty and therefore, Pinnacle Financial has no credit risk.
A summary of Pinnacle Financial's interest rate swaps to facilitate customer transactions as of December 31, 2018 and 2017 is
included in the following table (in thousands):
Interest rate swap agreements:
Assets
Liabilities
Total
December 31, 2018
December 31, 2017
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
$
$
1,059,724
1,059,724
2,119,448
$
$
$
22,273
(22,401)
(128) $
748,625
748,625
1,497,250
$
$
13,771
(13,866)
(95)
Interest rate swap agreements
Other noninterest income
$
(33) $
39
$
65
Location of Gain (Loss)
Recognized in Income
Amount of Gain (Loss) Recognized in Income
Year ended December 31,
2018
2017
2016
Derivatives designated as cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative
instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated
other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset
or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or
liability. Pinnacle Financial uses forward cash flow hedge relationships in an effort to manage future interest rate exposure. The
hedging strategy converts the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and is used in an
effort to protect Pinnacle Financial from floating interest rate variability. A summary of Pinnacle Financial's cash flow hedge
relationships as of December 31, 2018 and 2017 are as follows (in thousands):
123
Weighted
Average
Remaining
Maturity
(In Years)
Weighted
Average
Pay Rate
Balance Sheet
Location
Receive Rate
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
December 31, 2018
December 31, 2017
Liability derivatives
Interest rate swap agreements Other liabilities
3.34
3.09%
3 month LIBOR $
99,000
$
(1,757) $
200,000
$
(4,583)
The effects of Pinnacle Financial's cash flow hedge relationships on the statement of comprehensive income (loss) during the
years ended December 31, 2018, 2017 and 2016 were as follows:
Amount of Gain (Loss) Recognized in Other Comprehensive Income
Years ended December 31,
2018
2017
2016
Interest rate swap agreements
$
2,660
$
2,487
$
(749)
The cash flow hedges were determined to be highly effective during the periods presented and as a result qualify for hedge
accounting treatment. If a hedge was deemed to be ineffective, the amount included in accumulated other comprehensive (loss)
income would be reclassified into a line item within the statement of income that impacts operating results. The hedge would no
longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or Pinnacle
Financial discontinues hedge accounting. Pinnacle Financial expects the hedges to continue to be highly effective and qualify for
hedge accounting during the remaining terms of the swaps. No amounts were reclassified from accumulated other comprehensive
income into net income related to hedge ineffectiveness for these derivatives during the years ended December 31, 2018, 2017 or
2016, and no amounts are expected to be reclassified from accumulated other comprehensive income into net income related to hedge
ineffectiveness over the next twelve months. On October 24, 2018, cash flow swaps with a notional amount of $101.0 million were
terminated resulting in a cash settlement equal to previously unrealized gains of $1.0 million. These gains are included in accumulated
other comprehensive income and are being amortized into net income over the remaining contractual terms of the swaps.
Derivatives designated as fair value hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as
well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The
gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item.
Pinnacle Financial utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the
fair values of fixed rate callable securities available-for-sale and fixed rate prepayable loans. The hedging strategy on securities
converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of
selected cash flows covering specified periods of time prior to the call dates of the hedged securities. Pinnacle Financial has elected
early adoption of FASB ASU 2017-12, which allows such partial term hedge designations. Pinnacle Financial also utilizes interest rate
swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of the loans. As allowed under
FASB ASU 2017-12, a specified portion of the prepayable loans have been designated as the hedged assets under the "last-of-layer"
method. Such hedging designations are allowed on the portion of a closed portfolio of prepayable assets that is not expected to be
affected by prepayments, defaults, and other factors affecting the timing and amount of cash flows.
A summary of Pinnacle Financial's fair value hedge relationships as of December 31, 2018 and 2017 are as follows (in
thousands):
Liability derivatives
Interest rate swap
agreements - securities
Interest rate swap
agreements - loans
Balance Sheet
Location
Other liabilities
Other liabilities
December 31, 2018
December 31, 2017
Weighted
Average
Remaining
Maturity
(In Years)
Weighted
Average
Pay Rate
Receive
Rate
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
8.04
2.63
4.51
3.08%
2.77%
2.88%
3 month
LIBOR
3 month
LIBOR
$
477,905
$
(14,796) $
— $
900,000
(7,037)
$
1,377,905
$
(21,833) $
—
— $
—
—
—
124
The effects of Pinnacle Financial's fair value hedge relationships on the income statement during the years end December 31,
2018, 2017 and 2016 were as follows:
Liability derivatives
Location of Gain
on Derivative
Interest rate swap agreements - securities
Interest income on securities
Interest rate swap agreements - loans
Interest income on loans
Liability derivatives
Location of Loss
on Hedged Item
Interest rate swap agreements - securities
Interest income on securities
Interest rate swap agreements - loans
Interest income on loans
Amount of Gain Recognized in Income
Year ended December 31,
2018
2017
2016
(14,796) $
(7,037) $
— $
— $
Amount of Loss Recognized in Income
Years ended December 31,
2018
2017
2016
14,796
7,037
$
$
— $
— $
$
$
$
$
—
—
—
—
The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at
December 31, 2018 and 2017:
Line item on the balance sheet
Securities available-for-sale
Loans (1)
Carrying Amount of the Hedged Assets
Cumulative Amount of Fair Value Hedging
Adjustment Included in the Carrying Amount
of the Hedged Assets
December 31, 2018
December 31, 2017
December 31, 2018
December 31, 2017
$
$
513,116
907,037
$
$
— $
— $
14,796
7,037
$
$
—
—
(1) The carrying amount as shown represents the designated last-of-layer. At December 31, 2018, the total amortized cost basis of the closed portfolio of loans
designated in these hedging relationships was $2.7 billion.
Note 16. Employment Contracts
Pinnacle Financial has entered into, and subsequently amended employment agreements with five of its senior executives: the
President and Chief Executive Officer, the Chairman of the Board, the Chairman of the Carolinas and Virginia, the Chief
Administrative Officer and the Chief Financial Officer. Other than the agreement with the Chairman of the Carolinas and Virginia,
these agreements, as amended, automatically renew each year on January 1 for an additional year unless any of the parties to the
agreements gives notice of intent not to renew the agreement prior to November 30th of the preceding year, in which case the
agreement terminates 30 days later. The agreement with the Chairman of the Carolinas and Virginia has a three-year term that expires
on June 16, 2020 and is thereafter renewable in the same manner as the other senior executives' agreements. The agreements specify
that in certain defined "Terminating Events," Pinnacle Financial will be obligated to pay each of the four senior executives certain
amounts, which vary according to the Terminating Event, which is based on their annual salaries and bonuses. These Terminating
Events include termination for disability, cause, without cause and other events. The agreement with the Chairman of the Carolinas
and Virginia also provides for the payment of certain deferred benefits under his prior employment agreement with BNC upon
termination of his employment with Pinnacle Financial.
In connection with the Avenue Merger, Pinnacle Financial entered into an employment agreement with its Vice Chairman. This
agreement is on similar terms as the employment agreements with the four senior executives described above, except that it provides
for a fixed three-year term and does not automatically renew.
Note 17. Related Party Transactions
Also see Note 6 - "Loans and Allowance for Loan Losses", concerning loans and other extensions of credit to certain directors,
officers, and their related entities and individuals and Note 13 – "Salary Deferral Plans" regarding supplemental retirement agreement
obligations to certain directors who were formerly directors of acquired banks.
125
Note 18. Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair
value in U.S. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price,
i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume
the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-
specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability.
Valuation Hierarchy
FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three
levels are defined as follows:
• Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active
markets.
• Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the
financial instrument.
• Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. The following is a description of the valuation methodologies used for assets and liabilities
measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Assets
Securities available-for-sale – Where quoted prices are available for identical securities in an active market, securities are
classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other
financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use
observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation
hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex
pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.
Other investments – Included in other investments are investments recorded at fair value primarily in certain nonpublic
investments and funds. The valuation of these nonpublic investments requires management judgment due to the absence of
observable quoted market prices, inherent lack of liquidity and the long-term nature of such assets. These investments are valued
initially based upon transaction price. The carrying values of other investments are adjusted either upwards or downwards from the
transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when
determination of a valuation adjustment is confirmed through ongoing reviews by senior investment managers. A variety of factors
are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating
performance and future expectations of the particular investment, industry valuations of comparable public companies and changes
in market outlook and the third-party financing environment over time. In determining valuation adjustments resulting from the
investment review process, emphasis is placed on current company performance and market conditions. These investments are
included in Level 3 of the valuation hierarchy if the entities and funds are not widely traded and the underlying investments are in
privately-held and/or start-up companies for which market values are not readily available. Certain investments in funds for which
the underlying assets of the fund represent publicly traded investments are included in Level 2 of the valuation hierarchy.
Other assets – Included in other assets are certain assets carried at fair value, including interest rate swap agreements, cash
flow hedge agreements and interest rate locks associated with the mortgage loan pipeline. The carrying amount of interest rate
swap agreements is based on Pinnacle Financial's pricing models that utilize observable market inputs. The fair value of the cash
flow hedge agreements is determined by calculating the difference between the discounted fixed rate cash flows and the discounted
variable rate cash flows. The fair value of the mortgage loan pipeline rate locks is based upon the projected sales price of the
underlying loans, taking into account market interest rates and other market factors at the measurement date, net of the projected
fallout rate. Pinnacle Financial reflects these assets within Level 2 of the valuation hierarchy as these assets are valued using
similar transactions that occur in the market.
126
Impaired loans – A loan is classified as impaired when it is probable Pinnacle Financial will be unable to collect all principal
and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on
the present value of expected payments using the loan's original effective rate as the discount rate, the loan's observable market
price, or the fair value of the collateral less selling costs if the loan is collateral dependent. If the recorded investment in the
impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for
loan losses or the difference may be recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy due to
the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial
condition.
Other real estate owned – Other real estate owned (OREO) represents real estate foreclosed upon by Pinnacle Bank through
loan defaults by customers or acquired by deed in lieu of foreclosure. Substantially all of these amounts relate to lots, homes and
development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has
adequate collateral. Upon foreclosure, the property is recorded at the lower of cost or fair value, based on appraised value, less
selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for loan losses.
Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are
included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are
also reflected in noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of
observable market inputs into the determination of fair value as appraisal values are property-specific and sensitive to the changes
in the overall economic environment.
Liabilities
Other liabilities – Pinnacle Financial has certain liabilities carried at fair value including certain interest rate swap agreements
to facilitate customer transactions and the cash flow hedge and interest rate locks associated with the funding for its mortgage loan
originations. The fair value of these liabilities is based on Pinnacle Financial's pricing models that utilize observable market inputs
and is reflected within Level 2 of the valuation hierarchy.
The following tables present the financial instruments carried at fair value on a recurring basis as of December 31, 2018 and
2017, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (in
thousands):
Total carrying
value in the
consolidated
balance sheet
Quoted market
prices in an
active market
(Level 1)
Models with
significant
observable
market
parameters
(Level 2)
Models with
significant
unobservable
market
parameters
(Level 3)
December 31, 2018
Investment securities available-for-sale:
U.S. treasury securities
U.S. government agency securities
Mortgage-backed securities
State and municipal securities
Asset- backed securities
Corporate notes and other
Total investment securities available-for-sale
Other investments
Other assets
Total assets at fair value
Other liabilities
Total liabilities at fair value
$
$
$
$
30,300
70,159
1,310,945
1,229,654
375,582
67,046
3,083,686
50,791
24,524
3,159,001
46,550
46,550
$
$
$
$
— $
—
—
—
—
—
—
—
—
— $
— $
— $
30,300
70,159
1,310,945
1,215,059
375,582
67,046
3,069,091
24,369
24,524
3,117,984
46,550
46,550
$
$
$
$
—
—
—
14,595
—
—
14,595
26,422
—
41,017
—
—
127
Total carrying
value in the
consolidated
balance sheet
Quoted market
prices in an
active market
(Level 1)
Models with
significant
observable
market
parameters
(Level 2)
Models with
significant
unobservable
market
parameters
(Level 3)
December 31, 2017
Investment securities available-for-sale:
U.S. treasury securities
U.S. government agency securities
Mortgage-backed securities
State and municipal securities
Asset- backed securities
Corporate notes and other
Total investment securities available-for-sale
Other investments
Other assets
Total assets at fair value
Other liabilities
Total liabilities at fair value
$
$
$
$
30,445
180,801
1,263,819
784,612
173,292
82,314
2,515,283
53,796
11,812
2,580,891
13,886
13,886
$
$
$
$
— $
—
—
—
—
—
—
—
—
— $
— $
— $
30,445
180,801
1,263,819
767,583
173,292
82,314
2,498,254
24,922
11,812
2,534,988
13,886
13,886
$
$
$
$
—
—
—
17,029
—
—
17,029
28,874
—
45,903
—
—
The following table presents assets measured at fair value on a nonrecurring basis as of December 31, 2018 and 2017 (in
thousands):
December 31, 2018
Other real estate owned
Impaired loans, net (1)
Total
December 31, 2017
Other real estate owned
Impaired loans, net (1)
Total
Total carrying
value in the
consolidated
balance sheet
Quoted market
prices in an
active market
(Level 1)
Models with
significant
observable
market
parameters
(Level 2)
Models with
significant
unobservable
market
parameters
(Level 3)
Total gains
(losses) for the
period ended
$
$
$
$
15,165
40,830
55,995
27,831
22,723
50,554
$
$
$
$
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
15,165
40,830
55,995
27,831
22,723
50,554
$
$
$
$
(84)
(1,214)
(1,298)
203
(4)
199
(1) Amount is net of a valuation allowance of $4.0 million and $2.2 million at December 31, 2018 and 2017, respectively, as required by
ASC 310-10, "Receivables."
In the case of the investment securities portfolio, Pinnacle Financial monitors the portfolio to ascertain when transfers between
levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are
expected to be rare. For the year ended December 31, 2018, there were no transfers between Levels 1, 2 or 3. There were $12.2
million transfers out of Level 3 of the valuation hierarchy representing equity securities for which the fair values have been
deemed to be not readily determinable and for which the securities are currently carried at cost and evaluated for impairment.
The table below includes a rollforward of the balance sheet amounts for the years ended December 31, 2018 and December
31, 2017, (including the change in fair value) for financial instruments classified by Pinnacle Financial within Level 3 of the
valuation hierarchy measured at fair value on a recurring basis including changes in fair value due in part to observable factors that
are part of the valuation methodology (in thousands):
128
For the year ended December 31,
2018
2017
Available-
for-sale
Securities
Other
assets
Other
liabilities
Available-
for-sale
Securities
Other
assets
Other
liabilities
Fair value, Jan. 1
$
17,029
$ 28,874
$
— $
— $ 10,478
$
Total net realized losses included in income
34
2,932
Change in unrealized gains/losses included in other
comprehensive income for assets and liabilities still held at
Dec. 31
Acquired
Purchases
Issuances
Settlements
Transfers out of Level 3
Fair value, Dec. 31
Total realized losses included in income related to financial
assets and liabilities still on the consolidated balance sheet
at Dec. 31
(1,300)
—
—
—
—
—
9,013
—
(1,168)
(2,231)
— (12,166)
—
—
—
—
—
—
—
66
605
709
16,254
—
—
—
—
—
17,062
2,330
—
(1,601)
—
$
$
14,595
$ 26,422
$
— $
17,029
$ 28,874
$
34
$ 2,932
$
— $
66
$
605
$
—
—
—
—
—
—
—
—
—
—
The following methods and assumptions were used by Pinnacle Financial in estimating its fair value disclosures for financial
instruments that are not measured at fair value. In cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the
discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on
pertinent information available to management as of December 31, 2018 and 2017, respectively. Such amounts have not been
revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value
may differ significantly from the amounts presented herein.
Securities held-to-maturity - Estimated fair values for investment securities are based on quoted market prices where
available. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable
inputs or quoted prices of securities with similar characteristics.
Loans - The fair value of Pinnacle Financial's loan portfolio includes a credit risk factor in the determination of the fair value
of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a
hypothetical orderly transaction. Pinnacle Financial's loan portfolio is initially fair valued using a segmented approach. Pinnacle
Financial divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results
are then adjusted to account for credit risk.
The values derived from the discounted cash flow approach for our performing loan portfolio incorporate credit risk to
determine the exit price. Fair values for impaired loans are estimated using discounted cash flow models or are based on the fair
value of the underlying collateral.
Purchased loans, including loans acquired through a merger, are initially recorded at fair value on the date of purchase.
Purchased loans that contain evidence of post-origination credit deterioration as of the purchase date are carried at the net present
value of expected future cash flows. All other purchased loans are recorded at their initial fair value, and adjusted for subsequent
advances, pay downs, amortization or accretion of any fair value premium or discount on purchase, charge-offs and any other
adjustment to carrying value.
Loans held-for-sale - Loans held-for-sale are carried at the lower of cost or fair value. The estimate of fair value is based on
pricing models and other information.
Deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances, subordinated
debt and other borrowings - The fair value of demand deposits, savings deposits and securities sold under agreements to
repurchase are derived from a selection of market transactions reflecting our peer group. Fair values for certificates of deposit,
FHLB advances and subordinated debt are estimated using discounted cash flow models, using current market interest rates offered
on certificates, advances and other borrowings with similar remaining maturities.
129
Off-balance sheet instruments - The fair values of Pinnacle Financial's off-balance-sheet financial instruments are based on
fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to
Pinnacle Financial until such commitments are funded.
The following table presents the carrying amounts, estimated fair value and placement in the fair value hierarchy of Pinnacle
Financial's financial instruments at December 31, 2018 and 2017. This table excludes financial instruments for which the carrying
amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a
reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected
realization. For financial liabilities such as non-interest bearing demand, interest-bearing demand, and savings deposits, the
carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
December 31, 2018
Financial assets:
Carrying/
Notional
Amount
Estimated
Fair Value (1)
Quoted
market
prices in an
active
market
(Level 1)
Models with
significant
observable
market
parameters
(Level 2)
Models with
significant
unobservable
market
parameters
(Level 3)
Securities held-to-maturity
$
194,282
$
193,131
$
— $
193,131
$
—
Loans, net
Consumer loans held-for-sale
Commercial loans held-for-sale
Financial liabilities:
17,623,974
17,288,795
34,196
15,954
34,929
16,296
Deposits and securities sold under agreements to
repurchase
Federal Home Loan Bank advances
Subordinated debt and other borrowings
18,953,848
18,337,848
1,443,589
1,432,003
485,130
464,616
Off-balance sheet instruments:
Commitments to extend credit (2)
Standby letters of credit (3)
December 31, 2017
Financial assets:
6,921,689
177,475
1,733
1,131
—
—
—
—
—
—
—
—
—
17,288,795
34,929
16,296
—
—
—
—
—
—
—
18,337,848
1,432,003
464,616
1,733
1,131
Securities held-to-maturity
$
20,762
$
20,830
$
— $
20,830
$
—
Loans, net
Consumer loans held-for-sale
Commercial loans held-for-sale
Financial liabilities:
15,565,876
15,252,953
103,729
25,456
104,986
25,761
Deposits and securities sold under agreements to
repurchase
Federal Home Loan Bank advances
Subordinated debt and other borrowings
16,586,964
16,516,342
1,319,909
1,313,311
465,505
445,098
Off-balance sheet instruments:
Commitments to extend credit (2)
Standby letters of credit (3)
5,788,425
143,684
2,264
800
—
—
—
—
—
—
—
—
—
15,252,953
104,986
25,761
—
—
—
—
—
—
—
16,516,342
1,313,311
445,098
2,264
800
(1) Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to
approximate those that a market-participant would realize in a hypothetical orderly transaction.
(2) At the end of each period, Pinnacle Financial evaluates the inherent risks of the outstanding off-balance sheet commitments. In making
this evaluation, Pinnacle Financial evaluates the credit worthiness of the borrower, the collateral supporting the commitments and any
other factors similar to those used to evaluate the inherent risks of our loan portfolio. Additionally, Pinnacle Financial evaluates the
probability that the outstanding commitment will eventually become a funded loan. As a result, at both December 31, 2018 and 2017,
respectively, Pinnacle Financial included in other liabilities $1.7 million and $2.3 million representing the inherent risks associated with
these off-balance sheet commitments.
(3) At December 31, 2018 and 2017, the fair value of Pinnacle Financial's standby letters of credit totaled $1.1 million and $800,000,
respectively. This amount represents the unamortized fee associated with these standby letters of credit, which were priced at market
130
when issued, and is included in the consolidated balance sheet of Pinnacle Financial and is believed to approximate fair value. This fair
value will decrease over time as the existing standby letters of credit approach their expiration dates.
Note 19. Variable Interest Entities
Under ASC 810, Pinnacle Financial is deemed to be the primary beneficiary and required to consolidate a variable interest entity
(VIE) if it has a variable interest in the VIE that provides it with a controlling financial interest. For such purposes, the determination
of whether a controlling financial interest exists is based on whether a single party has both the power to direct the activities of the
VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could potentially be significant to the VIE. ASC 810 requires continual reconsideration of
conclusions reached regarding which interest holder is a VIE's primary beneficiary and disclosures surrounding those VIE's which
have not been consolidated. The consolidation methodology provided in this footnote as of December 31, 2018 and 2017 has been
prepared in accordance with ASC 810.
Non-consolidated Variable Interest Entities
At December 31, 2018, Pinnacle Financial did not have any consolidated VIEs to disclose but did have the following non-
consolidated VIEs: low income housing partnerships, trust preferred issuances, troubled debt restructuring commercial loans, and
managed discretionary trusts.
Since 2003, Pinnacle Financial has made equity investments as a limited partner in various partnerships that sponsor affordable
housing projects. The purpose of these investments is to achieve a satisfactory return on capital and to support Pinnacle Financial's
community reinvestment initiatives. The activities of the limited partnerships include the identification, development, and operation of
multi-family housing that is leased to qualifying residential tenants generally within Pinnacle Financial's primary geographic region.
These partnerships are considered VIEs because Pinnacle Financial, as the holder of the equity investment at risk, does not have the
ability to direct the activities that most significantly affect the success of the entity through voting rights or similar rights. While
Pinnacle Financial could absorb losses that are significant to these partnerships as it has a risk of loss for its initial capital
contributions and funding commitments to each partnership, it is not considered the primary beneficiary of the partnerships as the
general partners whose managerial functions give them the power to direct the activities that most significantly impact the
partnerships' economic performance and who are exposed to all losses beyond Pinnacle Financial's initial capital contributions and
funding commitments are considered the primary beneficiaries.
Pinnacle Financial (or companies it has acquired) has previously issued subordinated debt totaling $133.0 million to certain
statutory trusts which are considered VIEs because Pinnacle Financial's capital contributions to these trusts are not considered "at risk"
in evaluating whether the holders of the equity investments at risk in the trusts have the power through voting rights or similar rights
to direct the activities that most significantly impact the entities' economic performance. These trusts were not consolidated by
Pinnacle Financial because the holders of the securities issued by the trusts absorb a majority of expected losses and residual returns.
For certain troubled commercial loans, Pinnacle Financial restructures the terms of the borrower's debt in an effort to increase the
probability of receipt of amounts contractually due. However, Pinnacle Financial does not assume decision-making power or
responsibility over the borrower's operations. Following a debt restructuring, the borrowing entity typically meets the definition of a
VIE as the initial determination of whether the entity is a VIE must be reconsidered and economic events have proven that the entity's
equity is not sufficient to permit it to finance its activities without additional subordinated financial support or a restructuring of the
terms of its financing. As Pinnacle Financial does not have the power to direct the activities that most significantly impact such
troubled commercial borrowers' operations, it is not considered the primary beneficiary even in situations where, based on the size of
the financing provided, Pinnacle Financial is exposed to potentially significant benefits and losses of the borrowing entity. Pinnacle
Financial has no contractual requirements to provide financial support to the borrowing entities beyond certain funding commitments
established upon restructuring of the terms of the debt to allow for completion of activities which prepare the collateral related to the
debt for sale.
Pinnacle Financial serves as manager over certain discretionary trusts, for which it makes investment decisions on behalf of the
trusts' beneficiaries in return for a management fee. The trusts meet the definition of a VIE since the holders of the equity investments
at risk do not have the power through voting rights or similar rights to direct the activities that most significantly impact the entities'
economic performance. However, since the management fees Pinnacle Financial receives are not considered variable interests in the
trusts as all of the requirements related to permitted levels of decision maker fees are met, such VIEs are not consolidated by Pinnacle
Financial because it cannot be the trusts' primary beneficiary. Pinnacle Financial has no contractual requirements to provide financial
support to the trusts.
131
The following table summarizes VIE's that are not consolidated by Pinnacle Financial as of December 31, 2018 and 2017 (in
thousands):
Type
December 31, 2018
December 31, 2017
Maximum
Loss Exposure
Liability
Recognized
Maximum
Loss Exposure
Liability
Recognized
Low Income Housing Partnerships
$
39,582
$
— $
23,912
$
—
N/A
132,995
N/A
132,995
Classification
Other Assets
Subordinated Debt
1,352
N/A
—
N/A
3,760
N/A
—
N/A
Loans
N/A
Trust Preferred Issuances
Commercial Troubled Debt
Restructurings
Managed Discretionary Trusts
Note 20. Regulatory Matters
Pursuant to Tennessee banking law, Pinnacle Bank may not, without the prior consent of the Commissioner of the TDFI, pay any
dividends to Pinnacle Financial in a calendar year in excess of the total of Pinnacle Bank's retained net income for that year plus the
retained net income for the preceding two years. Under Tennessee corporate law, Pinnacle Financial is not permitted to pay dividends
if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or its
total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were
dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, Pinnacle Financial's board of directors
must consider its and Pinnacle Bank's current and prospective capital, liquidity, and other needs. In addition to state law limitations on
Pinnacle Financial's ability to pay dividends, the Federal Reserve imposes limitations on Pinnacle Financial's ability to pay dividends.
Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if Pinnacle Financial's
regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer. During the year ended
December 31, 2018, Pinnacle Bank paid $83.1 million in dividends to Pinnacle Financial. As of December 31, 2018, Pinnacle Bank
could pay approximately $510.2 million of additional dividends to Pinnacle Financial without prior approval of the Commissioner of
the TDFI. Pinnacle Financial initiated payment of a quarterly dividend of $0.08 per share of common stock in the fourth quarter of
2013 and has since increased the dividend to $0.12 beginning in the first quarter of 2015, to $0.14 beginning in the first quarter of
2016, and to $0.16 beginning in the fourth quarter of 2018. During the first quarter of 2019, Pinnacle Financial’s board of directors
declared a dividend of $0.16 per share. The amount and timing of all future dividend payments, if any, is subject to the discretion of
Pinnacle Financial's board of directors and will depend on Pinnacle Financial's earnings, capital position, financial condition and other
factors, including new regulatory capital requirements, as they become known to us.
Pinnacle Financial and Pinnacle Bank are subject to various regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions,
by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, Pinnacle Financial and Pinnacle Bank must meet specific capital guidelines
that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Pinnacle Financial's and Pinnacle Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and its banking subsidiary
to maintain minimum amounts and ratios of common equity Tier 1 capital to risk-weighted assets, Tier 1 capital to risk-weighted
assets, total capital to risk-weighted assets and of Tier 1 capital to average assets.
132
The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules)
became effective for Pinnacle Financial on January 1, 2015 with full compliance with all of the requirements being phased in over a
multi-year schedule, and fully phased in by January 1, 2019. The minimum capital level requirements applicable to bank holding
companies and banks subject to the rules are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a
total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. The Basel III rules, also establish a capital
conservation buffer of 2.5% (to be phased in over three years) above the regulatory minimum risk-based capital ratios. The phase-in of
the capital conservation buffer requirement commenced in January 2016 at 0.625% of risk-weighted assets and increases each year by
a like percentage until fully implemented in January 2019. The net unrealized gain or loss on available-for-sale securities is not
included in computing regulatory capital. Management believes, as of December 31, 2018, that Pinnacle Financial and Pinnacle Bank
met all capital adequacy requirements to which they are subject. To be categorized as well-capitalized under applicable banking
regulations, Pinnacle Financial and Pinnacle Bank must maintain certain total, Tier 1, common equity Tier 1 and Tier 1 leverage
capital ratios as set forth in the following table and not be subject to a written agreement, order or directive to maintain a higher capital
level. The capital conservation buffer is not included in the required ratios of the table presented below. Pinnacle Financial's and
Pinnacle Bank's actual capital amounts and ratios are presented in the following table (in thousands):
Actual
Minimum Capital
Requirement
Minimum
To Be Well-Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2018
Total capital to risk weighted assets:
Pinnacle Financial
Pinnacle Bank
Tier 1 capital to risk weighted assets:
Pinnacle Financial
Pinnacle Bank
Common equity Tier 1 capital:
Pinnacle Financial
Pinnacle Bank
Tier 1 capital to average assets (*):
Pinnacle Financial
Pinnacle Bank
December 31, 2017
Total capital to risk weighted assets:
Pinnacle Financial
Pinnacle Bank
Tier 1 capital to risk weighted assets:
Pinnacle Financial
Pinnacle Bank
Common equity Tier 1 capital:
Pinnacle Financial
Pinnacle Bank
Tier 1 capital to average assets (*):
Pinnacle Financial
Pinnacle Bank
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,580,143
2,432,419
2,024,193
2,218,003
2,024,070
2,217,880
2,024,193
2,218,003
2,266,161
2,134,344
1,725,323
1,936,313
1,725,219
1,936,209
1,725,323
1,936,313
12.2% $
1,691,017
11.5% $
1,686,046
8.0%
N/A
8.0% $
2,107,558
9.6% $
1,268,263
10.5% $
1,264,535
6.0%
N/A
6.0% $
1,686,046
9.6% $
10.5% $
951,197
948,401
4.5%
N/A
4.5% $
1,369,912
8.9% $
9.8% $
909,102
906,185
4.0%
N/A
4.0% $
1,132,731
12.0% $
1,509,496
11.3% $
1,504,765
8.0%
N/A
8.0% $
1,880,956
9.1% $
1,132,122
10.3% $
1,128,574
6.0%
N/A
6.0% $
1,504,765
9.1% $
10.3% $
849,092
846,430
4.5%
N/A
4.5% $
1,222,621
8.6% $
9.7% $
797,861
796,235
4.0%
N/A
4.0% $
995,294
N/A
10.0%
N/A
8.0%
N/A
6.5%
N/A
5.0%
N/A
10.0%
N/A
8.0%
N/A
6.5%
N/A
5.0%
(*) Average assets for the above calculations were based on the most recent quarter.
Pinnacle Financial's total assets exceeded $15.0 billion as a result of its acquisitions, which caused the subordinated debentures
Pinnacle Financial and its acquired banks' previously issued in connection with the trust preferred securities of their affiliates to cease
to qualify as Tier 1 capital under applicable banking regulations. Though these securities no longer qualify as Tier 1 capital, Pinnacle
Financial believes these subordinated debentures continue to qualify as Tier 2 capital.
133
Note 21. Parent Company Only Financial Information
The following information presents the condensed balance sheets, statements of operations, and cash flows of Pinnacle Financial
as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018 (in thousands):
CONDENSED BALANCE SHEETS
2018
2017
$
94,043
$
4,096,349
6,511
3,995
79,646
19,032
26,668
64,851
3,855,483
6,025
3,995
69,256
20,017
29,524
$
4,326,244
$
4,049,151
—
357,153
3,151
3,965,940
$
4,326,244
$
24
337,818
3,357
3,707,952
4,049,151
CONDENSED STATEMENTS OF OPERATIONS
2018
2017
2016
Assets:
Cash and cash equivalents
Investments in bank
Investments in consolidated subsidiaries
Investment in unconsolidated subsidiaries:
Statutory Trusts
Other investments
Current income tax receivable
Other assets
Liabilities and stockholders' equity:
Income taxes payable to subsidiaries
Subordinated debt and other borrowings
Other liabilities
Stockholders' equity
Revenues:
Income from bank subsidiaries
Income from nonbank subsidiaries
Income from equity method investment
Other income
Expenses:
Interest expense
$
83,090
1,214
13,731
266
11,821
17,636
7,194
61,650
(8,570)
70,220
288,728
492
63,100
297
10,126
380
9,856
16,629
8,076
39,342
(12,748)
52,090
121,341
548
27,663
5,198
7,663
21
1,997
10,971
3,653
23,924
(3,428)
27,352
104,318
(4,445)
127,225
Personnel expense, including stock compensation
Other expense
Income before income taxes and equity in undistributed income of subsidiaries
Income tax benefit
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of bank subsidiaries
Equity in undistributed income (loss) of nonbank subsidiaries
Net income
$
359,440
$
173,979
$
134
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
2018
2017
2016
$
359,440
$
173,979
$
127,225
Amortization and accretion
Stock-based compensation expense
Increase (decrease) in income tax payable, net
Deferred tax expense
Income from equity method investments, net
Dividends received from equity method investment
Excess tax benefit from stock compensation
Loss (gain) on other investments
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Equity in undistributed income of bank subsidiary
Equity in undistributed income of nonbank subsidiary
Net cash provided by operating activities
Investing activities:
Investment in consolidated banking subsidiaries
Increase in equity method investment
Increase in other investments
Net cash provided by (used in) investing activities
Financing activities:
Net (decrease) increase in subordinated debt and other borrowings
Proceeds from common stock issuance
Exercise of common stock options and stock appreciation rights, net of repurchase of
restricted shares
Repurchase of common stock
Excess tax benefit from stock compensation
Common dividends paid
Net cash provided by (used in) financing activities
Net increase in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
105
17,636
(24)
(549)
48
19,538
24
5,919
(13,731)
(10,126)
5,872
(2,966)
(209)
4,390
2,758
(288,728)
(492)
83,502
—
—
(2,321)
(2,321)
19,230
—
(5,071)
(20,694)
—
(45,454)
(51,989)
29,192
64,851
5,655
(5,365)
(350)
(3,989)
(9,194)
(121,341)
(548)
54,250
(182,288)
—
(815)
(183,103)
(60)
192,194
493
—
—
(35,907)
156,720
27,867
36,984
$
94,043
$
64,851
$
(144)
10,971
(12)
1,025
(7,663)
3,255
(4,604)
497
2,636
3,157
(104,318)
4,445
36,470
(118,878)
(11,400)
(710)
(130,988)
118,294
—
11,589
—
4,604
(24,725)
109,762
15,244
21,740
36,984
Pinnacle Bank is subject to restrictions on the payment of dividends to Pinnacle Financial under Tennessee banking laws. Pinnacle
Bank paid dividends of $83.1 million, $63.1 million and $27.7 million, respectively to Pinnacle Financial in each of the years ended
December 31, 2018, 2017 and 2016.
135
Note 22. Quarterly Financial Results (unaudited)
A summary of selected consolidated quarterly financial data for each of the years in the three-year period ended December 31,
2018 follows:
(in thousands, except per share data)
2018
Interest income
Net interest income
Provision for loan losses
Net income before taxes
Net income
Basic net income per share
Diluted net income per share
2017
Interest income
Net interest income
Provision for loan losses
Net income before taxes
Net income
Basic net income per share
Diluted net income per share
2016
Interest income
Net interest income
Provision for loan losses
Net income before taxes
Net income
Basic net income per share
Diluted net income per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
211,528
$
230,984
$
248,110
$
174,471
6,931
103,143
83,510
182,236
9,402
109,865
86,865
189,420
8,725
118,183
93,747
1.08
1.08
$
$
1.13
1.12
$
$
1.22
1.21
$
$
102,143
$
123,743
$
202,167
$
88,767
3,651
53,444
39,653
106,627
6,812
63,074
43,086
173,182
6,920
99,503
64,442
0.83
0.82
$
$
0.81
0.80
$
$
0.84
0.83
$
$
256,095
190,215
9,319
118,757
95,318
1.24
1.23
208,085
174,731
6,281
81,965
26,798
0.35
0.35
80,974
$
83,762
$
97,380
$
101,493
73,902
3,894
41,800
27,964
75,044
5,280
46,546
30,787
86,635
6,108
48,693
32,377
0.70
0.68
$
$
0.75
0.73
$
$
0.71
0.71
$
$
89,413
3,046
54,345
36,097
0.79
0.78
$
$
$
$
$
$
$
$
136
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of Pinnacle Financial's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2018 was carried out under the supervision and with the
participation of Pinnacle Financial's Principal Executive Officer, Principal Financial Officer and other members of the
Company’s senior management. Based up that evaluation, Pinnacle Financial's Principal Executive Officer and Principal
Financial Officer concluded that as of December 31, 2018, due to the identification of a material weakness in Pinnacle
Financial's internal control over financial reporting related to mortgage loan account set up controls, as further described
below, Pinnacle Financial's disclosure controls and procedures were not effective in ensuring that the information required to
be disclosed by Pinnacle Financial in the reports it files or submits under the Exchange Act is (i) accumulated and
communicated to Pinnacle Financial's management (including the Principal Executive Officer and Principal Financial
Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms.
Notwithstanding the identified material weakness related to Pinnacle Financial's control environment, Pinnacle Financial
believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material
respects Pinnacle Financial's financial condition, results of operations and cash flows at and for the periods presented in
accordance with U.S. GAAP.
Management Report on Internal Control Over Financial Reporting
The report of Pinnacle Financial's management on Pinnacle Financial's internal control over financial reporting begins on
page 79 of this Annual Report on Form 10-K. The report of Pinnacle Financial's independent registered public accounting
firm on Pinnacle Financial's internal control over financial reporting is set forth on page 82 of this Annual Report on Form
10-K.
Changes in Internal Controls
Other than as described in Pinnacle Financial's management report on internal control over financial reporting beginning on
page 79 of this Annual Report on Form 10-K, no change in our internal control over financial reporting (as such term is
defined in Exchange Act Rule 13a-15(f)or 15d-15(f)) occurred during the fiscal quarter ended December 31, 2018 that
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As discussed in Pinnacle Financial's management report on internal control over financial reporting beginning on page 79 of
this Annual Report on Form 10-K, we identified certain control deficiencies during 2018 that constituted a material weakness
in our internal control over financial reporting as of December 31, 2018. This material weakness did not result in any material
misstatement of our financial statements and disclosures for the fiscal years ended December 31, 2018, 2017 or 2016. As
discussed above, we took actions during the fourth quarter of 2018 in an effort to remediate the material weakness related to
our internal controls related to the timely verification of the existence and accuracy of certain residential mortgage loans
booked to our core processing system. The identified material weakness in internal control over financial reporting will not
be considered fully addressed until the performance of the internal controls related to this material weakness have been in
operation for a sufficient period of time for our management to conclude that the material weakness has been fully
remediated. We will continue to work on testing these controls in order to make this final determination.
ITEM 9B. OTHER INFORMATION
None.
137
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The responses to this Item will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held
April 16, 2019 under the headings "Corporate Governance-Code of Conduct," "Proposal #1 Election of Directors-Audit Committee,"
"Proposal #1 Election of Directors," "Executive Officers," and "Section 16A Beneficial Ownership Reporting Compliance" and are
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The responses to this Item will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held
April 16, 2019 under the headings "Proposal #1 Election of the Directors-Director Compensation" and "Executive Compensation" and
are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The response to this Item regarding security ownership of certain beneficial owners and management will be included in Pinnacle
Financial's Proxy Statement for the Annual Meeting of Shareholders to be held April 16, 2019 under the heading, "Security Ownership
of Certain Beneficial Owners and Management" and is incorporated herein by reference.
The following table summarizes information concerning Pinnacle Financial's equity compensation plans at December 31, 2018:
Plan Category
Equity compensation plans approved by
shareholders:
2014 Equity Incentive Plan
2018 Omnibus Equity Incentive Plan
Equity compensation plans not approved
by shareholders
Total
Number of Securities to be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights (1)(2)
Weighted Average Exercise
Price of Outstanding Options,
Warrants and Rights (1)
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in First Column)
401,389
171,329
N/A
572,718 $
—
—
N/A
—
—
1,664,101
N/A
1,664,101
(1) Includes 171,329 and 401,389 performance-based restricted stock units under the 2018 Plan and the 2014 Plan, respectively. Performance-based
restricted stock units do not have an exercise price because their value is dependent upon continued employment over a period of time or the
achievement of certain performance goals, and are to be settled for shares of common stock. Accordingly, they have been disregarded for
purposes of computing the weighted-average exercise price.
(2) All of CapitalMark's outstanding stock options vested upon consummation of the CapitalMark merger and were converted into options to
purchase shares of Pinnacle Financial's Common Stock. 176,709 shares of Pinnacle Financial's common stock remain subject to outstanding
options issued to the CapitalMark option holders and the weighted average exercise price of those options is $21.38.
(3) In connection with the BNC Merger, the Company assumed and subsequently amended and restated the BNC Bancorp 2013 Stock Incentive
Plan. No options, warrants, rights or restricted stock units are outstanding under this plan, and 9,198 shares remained available for issuance
thereunder as of December 31, 2018.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The responses to this Item will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held
April 16, 2019 under the headings, "Certain Relationships and Related Transactions," and "Corporate Governance-Director
Independence" and are incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The responses to this Item will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held
April 16, 2019 under the heading, "Independent Registered Public Accounting Firm" and are incorporated herein by reference.
138
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit No.
Description
Agreement and Plan of Merger by and among Pinnacle Financial Partners, Inc., BNC Bancorp and Blue
Merger Sub, Inc., dated as of January 22, 2017, incorporated herein by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed on January 23, 2017.
Amended and Restated Charter, as amended (restated for SEC filing purposes only), incorporated herein
by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 18, 2018.
Second Amended and Restated Bylaws of Pinnacle Financial Partners, Inc., effective as of October 17,
2017, incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
filed on October 20, 2017.
Specimen Common Stock Certificate, incorporated herein by reference to Exhibit 4.1 to Amendment
No. 1 to the Company’s Registration Statement on Form SB-2 filed on July 12, 2000.
See Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining rights of holders of the
Common Stock.
Form of 4.875% Fixed-to-Floating Rate Subordinated Note due July 30, 2025, incorporated herein by
reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2015.
Form of Certificate for Avenue Financial Holdings, Inc. Fixed/Floating Rate Subordinated Note due
December 29, 2024, incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed on July 7, 2016.
Form of 5.25% Fixed-to-Floating Rate Subordinated Note due November 16, 2026, incorporated herein
by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 18, 2016.
2.1†
3.1
3.2
4.1.1
4.1.2
4.2
4.3
4.4
Form of Subordinated Indenture, dated as of September 30, 2014, between BNC Bancorp and
Wilmington Trust, National Association, as Trustee, incorporated herein by reference to Exhibit
4.1 to BNC Bancorp’s Current Report on Form 8-K filed on September 26, 2014.
Form of First Supplemental Indenture, dated as of September 30, 2014, between BNC Bancorp
and Wilmington Trust, National Association, as Trustee, incorporated herein by reference to
Exhibit 4.2 to BNC Bancorp’s Current Report on Form 8-K filed on September 26, 2014.
BNC Bancorp Second Supplemental Indenture, dated as of June 16, 2017, between Pinnacle Financial
Partners, Inc. and Wilmington Trust, National Association, as Trustee, incorporated herein by reference
to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 16, 2017.
Form of Global Note to represent 5.5% Subordinated Notes, due October 1, 2024, of BNC Bancorp,
incorporated herein by reference to Exhibit 4.3 to BNC Bancorp’s Current Report on Form 8-K filed on
September 26, 2014.
Pinnacle Financial is a party to certain agreements entered into in connection with the offering or
assumption of its subordinated debentures and certain of its subordinated indebtedness, in each case as
more fully described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(iii) of
Regulation S-K and because no issuance of any such indebtedness is in excess of 10% of Pinnacle
Financial’s total assets, Pinnacle Financial has not filed the various documents and agreements
associated with such indebtedness herewith. Pinnacle Financial has, however, agreed to furnish copies
of the various documents and agreements associated with such indebtedness to the Securities and
Exchange Commission upon request.
Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and
M. Terry Turner, dated as of January 1, 2008, incorporated herein by reference to Exhibit 10.48 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on March
7, 2008.
Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and
Robert A. McCabe, Jr., dated as of January 1, 2008, incorporated herein by reference to Exhibit 10.49 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on
March 7, 2008.
Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and
Hugh M. Queener, dated as of January 1, 2008, incorporated herein by reference to Exhibit 10.50 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on March
7, 2008.
Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and
Harold R. Carpenter, dated as of January 1, 2008, incorporated herein by reference to Exhibit 10.51 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on
March 7, 2008.
4.5
4.6
4.7
4.8
4.9
10.1#
10.2#
10.3#
10.4#
139
Exhibit No.
Description
Form of 2011TARP CRP Executive Officer Time Vested Restricted Stock Agreement, incorporated
herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on August 19,
2011.
Pinnacle Financial Partners, Inc. Amended and Restated 2004 Equity Incentive Plan, effective as of
April 20, 2004, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on April 20, 2012.
Form of Named Executive Officers 2013 Restricted Stock Unit Award Agreement, incorporated herein
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 17, 2013.
Amendment No. 1 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and M. Terry Turner, dated November 20, 2012, incorporated herein by
reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2012, filed on February 22, 2013.
Amendment No. 1 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and Robert A. McCabe, Jr., dated November 20, 2012, incorporated herein by
reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2012, filed on February 22, 2013.
Amendment No. 1 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and Hugh M. Queener, dated November 20, 2012, incorporated herein by
reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2012, filed on February 22, 2013.
Amendment No. 1 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and Harold R. Carpenter, dated November 20, 2012, incorporated herein by
reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2012, filed on February 22, 2013.
Form of Named Executive Officers 2014 Performance Unit Award Agreement, incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 24, 2014.
Amendment No. 2 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and M. Terry Turner, incorporated herein by reference to Exhibit 10.40 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on
February 25, 2014.
Amendment No. 2 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and Robert A. McCabe, Jr., incorporated herein by reference to Exhibit 10.41 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on
February 25, 2014.
Amendment No. 2 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and Hugh M. Queener, incorporated herein by reference to Exhibit 10.42 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on
February 25, 2014.
Amendment No. 2 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and Harold R. Carpenter, incorporated herein by reference to Exhibit 10.43 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on
February 25, 2014.
Amendment No. 1 to Pinnacle Financial Partners, Inc. 2004 Amended and Restated Equity Incentive
Plan, incorporated herein by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2013, filed on February 25, 2014.
Pinnacle Financial Partners, Inc. 2014 Equity Incentive Plan, effective as of April 15, 2014,
incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
April 17, 2014.
Form of Named Executive Officers 2015 Performance Unit Award Agreement, incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 27, 2015.
CapitalMark Bank & Trust Amended and Restated Stock Option Plan, effective as of July 31,
2015, incorporated herein by reference to Exhibit 4.4 to Post-Effective Amendment No. 1 to the
Company’s Registration Statement on Form S-8 filed August 10, 2015.
Loan Agreement by and between Pinnacle Financial Partners, Inc., as Borrower, and U.S. Bank
National Association, as Lender, dated as of March 29, 2016, incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 31, 2016.
Employment Agreement, effective as of July 1, 2016, by and among Pinnacle Bank, Pinnacle Financial
Partners, Inc. and Ronald L. Samuels, incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on July 7, 2016.
10.5#
10.6#
10.7#
10.8#
10.9#
10.10#
10.11#
10.12#
10.13#
10.14#
10.15#
10.16#
10.17#
10.18#
10.19#
10.20#
10.21
10.22#
140
Exhibit No.
Description
10.23#
10.24#
10.25#
10.26
10.27
10.28#
10.29#
10.30#
10.31#
10.32#
10.33#
10.34
10.35
10.36#
10.37#
10.38#
10.39#
10.40#
Form of Pinnacle Financial Partners, Inc. 2016 Restricted Stock Award Agreement, incorporated herein
by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 7, 2016.
Supplemental Executive Retirement Plan Agreement between Avenue Bank and Ronald Samuels, dated
October 26, 2007, incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed on July 7, 2016.
Pinnacle Financial Partners, Inc. 2017 Annual Cash Incentive Plan, incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 20, 2017.
First Amendment to Loan Agreement by and between Pinnacle Financial Partners, Inc., as Borrower,
and U.S. Bank National Association, as Lender, dated as of March 27, 2017, incorporated herein by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2017, filed on May 5, 2017.
Second Amendment to Loan Agreement by and between Pinnacle Financial Partners, Inc., as Borrower,
and U.S. Bank National Association, as lender, dated as of April 26, 2017, incorporated herein by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2017, filed on May 5, 2017.
Employment Agreement, effective as of June 16, 2017, by and among Pinnacle Bank, Pinnacle
Financial Partners, Inc. and Richard D. Callicutt II, incorporated herein by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed June 16, 2017.
Salary Continuation Agreement dated as of December 12, 2016, between Richard D. Callicutt II and
Bank of North Carolina, incorporated herein by reference to Exhibit 10.1 to BNC Bancorp’s Current
Report on Form 8-K filed on December 16, 2016.
BNC Bancorp 2013 Amended and Restated Omnibus Stock Incentive Plan, incorporated herein by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 16, 2017.
Form of Pinnacle Financial Partners, Inc. Named Executive Officer Performance Award Agreement,
incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
February 26, 2018.
Pinnacle Financial Partners, Inc. 2018 Annual Cash Incentive Plan, incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K filed February 26, 2018.
Pinnacle Financial Partners, Inc. 2018 Omnibus Equity Incentive Plan, incorporated herein by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 18, 2018.
Third Amendment to Loan Agreement dated as of March 27, 2018 by and between U.S. Bank National
Association and Pinnacle Financial Partners, Inc., incorporated herein by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on May 1, 2018.
Fourth Amendment to Loan Agreement dated as of April 26, 2018 by and between U.S. Bank National
Association and Pinnacle Financial Partners, Inc., incorporated herein by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed on May 1, 2018.
Form of Directors Restricted Stock Agreement, incorporated herein by reference to Exhibit 10.40 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 7,
2018.
Form of Named Executive Officers Performance Unit Award Agreement, incorporated herein by
reference to Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2018, filed on May 7, 2018.
Form of Associate Time-Vested Restricted Stock Agreement, incorporated herein by reference to
Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018,
filed on May 7, 2018.
Form of Named Executive Officers 2019 Performance Unit Award Agreement, incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 18, 2019.
Pinnacle Financial Partners, Inc. 2019 Annual Cash Incentive Plan, incorporated herein by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 18, 2019.
21.1*
Subsidiaries of Pinnacle Financial Partners, Inc.
23.1* Consent of Crowe LLP
31.1* Certification pursuant to Rule 13a-14(a)/15d-14(a)
31.2* Certification pursuant to Rule 13a-14(a)/15d-14(a)
32.1** Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
32.2** Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Schema Documents
141
Exhibit No.
Description
101.CAL* XBRL Calculation Linkbase Document
101.LAB* XBRL Label Linkbase Document
101.PRE* XBRL Presentation Linkbase Document
101.DEF* XBRL Definition Linkbase Document
†
As directed by Item 601(b)(2) of Regulation S-K, certain schedules and exhibits to this exhibit are omitted from this filing.
The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.
Management contract or compensatory plan or arrangement.
Filed herewith.
Furnished herewith.
#
*
**
(c) Schedules to the consolidated financial statements are omitted, as the required information is not applicable.
142
ITEM 16. FORM 10-K SUMMARY
Not applicable.
143
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 28, 2019
PINNACLE FINANCIAL PARTNERS, INC
By:
/s/ M. Terry Turner
M. Terry Turner
President and Chief Executive Officer
144
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES
TITLE
DATE
/s/ Robert A. McCabe, Jr.
Robert A. McCabe, Jr.
/s/ M. Terry Turner
M. Terry Turner
/s/ Harold R. Carpenter
Harold R. Carpenter
/s/ Ronald L. Samuels
Ronald L. Samuels
/s/ Richard D. Callicutt
Richard D. Callicutt
/s/ Abney S. Boxley
Abney S. Boxley
/s/ Charles E. Brock
Charles E. Brock
/s/ Renda J. Burkhart
Renda J. Burkhart
/s/ Gregory L. Burns
Gregory L. Burns
/s/ Marty G. Dickens
Marty G. Dickens
/s/ Thomas C. Farnsworth, III
Thomas C. Farnsworth, III
/s/ Joseph Galante
Joseph Galante
/s/ Glenda Baskin Glover
Glenda Baskin Glover
/s/ David B. Ingram
David B. Ingram
/s/ Gary Scott
Gary Scott
/s/ Thomas R. Sloan
Thomas R. Sloan
/s/ Reese L. Smith, III
Reese L. Smith, III
/s/ G. Kennedy Thompson
G. Kennedy Thompson
Chairman of the Board
February 28, 2019
Director, President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 28, 2019
February 28, 2019
Vice Chairman of the Board
February 28, 2019
Director, Chairman of the Carolinas and Virginia
February 28, 2018
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2018
February 28, 2019
February 28, 2018
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
145
Subsidiaries
Pinnacle Bank (2)
PFP Title Company (3)
List of Subsidiaries
Exhibit 21.1
Jurisdiction or State of
Incorporation
Names Under Which
Subsidiary Does Business (1)
Tennessee
Tennessee
Pinnacle Community Development Corporation (3) Tennessee
PNFP Statutory Trust I (4)
PNFP Statutory Trust II (4)
PNFP Statutory Trust III (4)
PNFP Statutory Trust IV (4)
PNFP Holdings, Inc. (5)
PNFP Properties, Inc. (6)
Pinnacle Advisory Services, Inc. (7)
Connecticut
Delaware
Connecticut
Delaware
Nevada
Maryland
Tennessee
Pinnacle Credit Enhancement Holdings, Inc. (7)
Tennessee
Pinnacle Rutherford Real Estate, Inc. (3)
Pinnacle Nashville Real Estate, Inc. (3)
Pinnacle Rutherford Towers, Inc.(3)
Pinnacle Service Company, Inc.(3)
PNFP Insurance, Inc.(7)
Miller & Loughry, Inc. (2)
PNB Holding Co. 1, Inc. (3)
PNB Holding Co. 2, Inc. (3)
PNFP Capital Markets, Inc. (3)
PNFP Aviation, LLC (3)
Bank of North Carolina Capital Trust I (4)
Bank of North Carolina Capital Trust II (4)
Bank of North Carolina Capital Trust III (4)
Bank of North Carolina Capital Trust IV (4)
Valley Financial (VA) Statutory Trust I (4)
Valley Financial (VA) Statutory Trust II (4)
Valley Financial Statutory Trust III (4)
Southcoast Capital Trust III (4)
BFNM Building, LLC
HPB Insurance Group, Inc. (3)
Pinnacle NC Investments, Inc. (3)
Pinnacle Properties VA, LLC (3)
Tennessee
Tennessee
Tennessee
Tennessee
Nevada
Tennessee
Tennessee
Tennessee
Tennessee
Tennessee
Delaware
Delaware
Delaware
Delaware
Connecticut
Connecticut
Delaware
Delaware
South Carolina
North Carolina
North Carolina
Tennessee
Miller Loughry Beach
(1) Unless otherwise noted, each Subsidiary only does business under its legal name as set forth under the heading "Subsidiaries."
(2) Pinnacle Bank is organized under the laws of the State of Tennessee.
(3) PFP Title Company, Pinnacle Community Development Corporation, Pinnacle Rutherford Real Estate, Inc., Pinnacle Nashville Real Estate, Inc.,
Pinnacle Rutherford Towers, Inc., Pinnacle Service Company, Inc., Miller & Loughry, Inc., PNB Holding Co. 1, Inc., PNB Holding Co. 2, Inc.,
PNFP Capital Markets, Inc., PNFP Aviation, LLC, HPB Insurance Group, Inc., Pinnacle NC Investments, Inc., and Pinnacle Properties VA, LLC are
wholly-owned subsidiaries of Pinnacle Bank.
(4) These entities are statutory business trusts which were established to issue capital trust preferred securities.
(5) PNFP Holdings, Inc. is a wholly-owned subsidiary of PFP Title Company.
(6) PNFP Properties, Inc. is a wholly-owned subsidiary of PNFP Holdings, Inc.
(7) Pinnacle Advisory Services, Inc., Pinnacle Credit Enhancement Holdings, Inc. and PNFP Insurance, Inc. are wholly owned subsidiaries of Pinnacle
Financial Partners, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos. 333-49564, 333-68756, 333-114799, 333-124199,
333-132816, 333-135411, 333-147804, 333-148251, 333-158825, 333-180865, 333-195712, 333-206092, 333-218797 and
333-224839 on Form S-8 and Registration Statement No. 333-215654 on Form S-3 of Pinnacle Financial Partners, Inc. of our
report dated February 28, 2019 relating to the consolidated balance sheets of Pinnacle Financial Partners, Inc. and subsidiaries as
of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2018, and effectiveness of internal control over
financial reporting as of December 31, 2018, which appear in the December 31, 2018 Annual Report on Form 10-K of Pinnacle
Financial Partners, Inc.
Franklin, Tennessee
February 28, 2019
Crowe LLP
I, M. Terry Turner, certify that:
CERTIFICATIONS
Exhibit 31.1
1.) I have reviewed this annual report on Form 10-K of Pinnacle Financial Partners, Inc.;
2.) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.) Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f)) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 28, 2019
Signature:
/s/ M. Terry Turner
M. Terry Turner
President and Chief Executive Officer
I, Harold R. Carpenter, certify that:
CERTIFICATIONS
Exhibit 31.2
1.) I have reviewed this annual report on Form 10-K of Pinnacle Financial Partners, Inc.;
2.) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.) Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f)) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 28, 2019
Signature:
/s/ Harold R. Carpenter
Harold R. Carpenter
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Pinnacle Financial Partners (the "Company") on Form 10-K for the period ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, M. Terry
Turner, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934;
and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 28, 2019
By:
/s/ M. Terry Turner
M. Terry Turner
President and Chief Executive Officer
Pinnacle Financial Partners, Inc.
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Pinnacle Financial Partners (the "Company") on Form 10-K for the period ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Harold R.
Carpenter, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934;
and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 28, 2019
By:
/s/ Harold R. Carpenter
Harold R. Carpenter
Chief Financial Officer
Pinnacle Financial Partners, Inc.
STOCKHOLDER RETURN PERFORMANCE GROWTH
Set forth below is(cid:3)a line graph comparing the(cid:3)yearly percentage change in the cumulative total shareholder return on(cid:3)the(cid:3)Company’s(cid:3)
Common Stock against the cumulative total(cid:3)return of the NASDAQ(cid:3)Composite Index,(cid:3)the(cid:3)(cid:54)(cid:9)(cid:51)(cid:3)(cid:24)(cid:19)(cid:19)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:86)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:91)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)our peer(cid:3)group, for
the period commencing on December 31, 20(cid:20)(cid:22)(cid:3)and ending(cid:3)December 31, 201(cid:27)(cid:3)(the “Measuring(cid:3)Period”).(cid:3)(cid:44)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:49)(cid:47)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:7)(cid:24)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:7)(cid:20)(cid:19)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:91)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:3)(cid:83)(cid:72)(cid:72)(cid:85)(cid:3)(cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:82)(cid:88)(cid:87)(cid:75)(cid:72)(cid:68)(cid:86)(cid:87)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)
(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:7)(cid:22)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:20)(cid:19)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:72)(cid:83)(cid:87)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:19)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:17)(cid:3)(cid:36)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:10)(cid:86)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)
(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3)(cid:7)(cid:21)(cid:24)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:80)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:49)(cid:47)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:7)(cid:24)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:7)(cid:20)(cid:19)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:91)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:89)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:49)(cid:47)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)
(cid:74)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:7)(cid:20)(cid:19)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:91)(cid:17)(cid:3)(cid:54)(cid:76)(cid:80)(cid:76)(cid:79)(cid:68)(cid:85)(cid:79)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:80)(cid:82)(cid:71)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:72)(cid:85)(cid:3)(cid:74)(cid:85)(cid:82)(cid:88)(cid:83)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:81)(cid:82)(cid:90)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:82)(cid:88)(cid:87)(cid:75)(cid:72)(cid:68)(cid:86)(cid:87)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)
(cid:82)(cid:73)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:7)(cid:20)(cid:24)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:22)(cid:19)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:74)(cid:85)(cid:68)(cid:83)(cid:75)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)
(cid:76)(cid:81)(cid:71)(cid:72)(cid:91)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:7)(cid:20)(cid:19)(cid:19)(cid:3)(cid:82)(cid:81)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:22)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:88)(cid:80)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:15)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:48)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:51)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:48)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:51)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:17)(cid:3)(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:70)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)
Cumulative Total Returns(1)
Comparison of
PINNACLE FINANCIAL PARTNERS, INC.
NASDAQ COMPOSITE INDEX, PEER GROUP(2)(cid:15)
(cid:54)(cid:9)(cid:51)(cid:3)(cid:24)(cid:19)(cid:19)(cid:3)(cid:37)(cid:36)(cid:49)(cid:46)(cid:3)(cid:44)(cid:49)(cid:39)(cid:40)(cid:59)(cid:15)(cid:3)(cid:54)(cid:49)(cid:47)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:33)(cid:7)(cid:20)(cid:19)(cid:37)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:91)(cid:11)(cid:22)(cid:12)
(1)(cid:3) Assumes(cid:3)$100 invested on(cid:3)December 31, 20(cid:20)(cid:22)(cid:3)in Pinnacle Financial Partners, Inc. Common Stock (PNFP) and the(cid:3)(cid:73)(cid:82)(cid:88)(cid:85)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)
(cid:81)(cid:82)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:17)(cid:3)
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BOARD OF DIRECTORS
ABNEY S. BOXLEY, III
President, East Region
Summit Materials, Inc.
CHARLES E. BROCK
President
Brock Partnerships, LLC
RENDA BURKHART
Founder and President
Burkhart & Company, P.C.
GREGORY L. BURNS
President
Gregory Burns Consulting
Group, LLC
MARTY G. DICKENS
Retired Regional Executive
BellSouth/AT&T Tennessee
ROBERT A. MCCABE, JR.
Chairman
Pinnacle Financial Partners, Inc.
REESE L. SMITH, III
President
Haury & Smith Contractors, Inc.
THOMAS C. FARNSWORTH, III
President and Owner
Farnsworth Investment Company
RONALD L. SAMUELS
Vice Chairman
Pinnacle Financial Partners, Inc.
JOSEPH C. GALANTE
Retired Chairman
Sony Music, Nashville
GLENDA BASKIN GLOVER,
PH.D., JD, CPA
President
Tennessee State University
GARY L. SCOTT
Retired Chairman and
Chief Executive Officer
Mid-America Bancshares, Inc.
and PrimeTrust Bank
THOMAS R. SLOAN
Past Chairman
Bank of North Carolina
and BNC Bancorp
G. KENNEDY THOMPSON
Partner/Co-head,
Banking and Credit
Aquiline Capital Partners, LLC
M. TERRY TURNER
President and
Chief Executive Officer
Pinnacle Financial Partners, Inc.
RICHARD D. CALLICUTT, II
Chairman, Carolinas and Virginia
Pinnacle Financial Partners, Inc.
DAVID B. INGRAM
Chairman
Ingram Entertainment, Inc.
SENIOR LEADERSHIP TEAM
RICHARD A. ARTHUR
Executive Vice President,
Consumer Banking
RICHARD D. CALLICUTT, II
Chairman, Carolinas and Virginia
HAROLD R. CARPENTER
Chief Financial Officer
D. KIM JENNY
Chief Risk Officer
ROBERT A. MCCABE, JR.
Chairman
D. MICHAEL HAMMONTREE, JR.
Manager, Corporate Services
KEVIN P. MCDERMOTT
Chief Audit Executive
SARAE JANES LEWIS
Director, Associate and
Client Experience
HUGH M. QUEENER
Chief Administrative Officer
M. TERRY TURNER
President and
Chief Executive Officer
J. HARVEY WHITE
Chief Credit Officer/Knoxville
Regional Executive
RANDALL L. WITHROW
Chief Information Officer
LEADERSHIP TEAM
DAVID ALLEN
SUSAN ROGERS APPLE
KIRK BAILEY
GERRY BARBER
DAVE BAUKEMA
SAMMY BLACK
JOHN CANNON
MARK CARLTON
RON CARTER
KENT CLEAVER
GARY COLLIER
DOUG DAUGHERTY
MIKE DISTEFANO
KENNY DYER
KATIE ELDER
ROB ELLENBURG
DALE FLOYD
LISA FOLEY
DOUG FORD
MARY GARCIA
BRIAN GILBERT
ERICH HAMM
JERRY HAMPTON
KAREN HARGIS
PATTI HARRIS
CLAY HART
MIKE HENDREN
CHIP HIGGINS
CRAIG HOLLEY
DAVID HOPPENWORTH
TIM HUESTIS
DAVID JAMES
MAC JOHNSTON
BILL JONES
ROSS KINNEY
GLENN LAYNE
REID MARKS
PAUL NEIL
JACK NELSON
ROBERT NEWMAN
RANDY NICELY
ROGER OSBORNE
DIANNE PORTER
PAT PRITCHARD
LISA REID
ROBERT ROGERS
RON SAMUELS
DANA SANDERS
ERIK SANFORD
BOB SCARBOROUGH
MARY SCHNEIDER
LINDA SEIBER
GARY SHAFFER
FRANK STALLWORTH
SONJA STANLEY
ED STEIN
PHIL STEVENSON
HERMAN STRICKLAND
DAN STUBBLEFIELD
DAVID STURDIVANT
JAMIE SWEENEY
MICHELLE SWEENEY
SARAH TEAGUE
TOM VANCE
CINDY VOGLER
MISSY WALLEN
KEVIN WATSON
LARRY WHISENANT
ED WHITE
HEATHER MATKINS
MELANIE SHAFFER
DAVID WILLINGHAM
BLAIR MILLER
ANDY MOATS
RYAN MURPHY
RICK NEAL
TED SIMPSON
STANLEY SMITH
DAVID SPENCER
CATHERINE STALLINGS
JEREMY YEAGLE
SUMMER YEISER
Pinnacle Financial Partners
150 Third Avenue South, Suite 900
Nashville, TN 37201
615.744.3700
www.pnfp.com | annualreport.pnfp.com