2021 ANNUAL REPORT
Investing in Growth
Pinnacle’s attention to people and culture is
the reason for our consistent success in each
of the markets we serve.
PINNACLE NOW OPERATES IN 15 PRIMARILY URBAN MARKETS
ACROSS THE SOUTHEAST AND SERVES CLIENTS IN SEVERAL
SPECIALTY LENDING AREAS WITH A NATIONAL FOCUS.
In 2021 Pinnacle invested in the following areas by hiring
experienced teams to build out our presence.
2021 wins powered by people and culture
Pinnacle always has been and always will be powered by our people and our culture.
We are successful because of our people. Just look at what they accomplished in 2021.
+11.7%*
+13%
+16.5%
+67.5%
+14.2%
loans
$23.0 B*
Deposits
$31.3 B
Revenue
$1.3 B
eps
$6.75
TBV
per share
$42.55
Birmingham, Alabama
Huntsville, Alabama
National Capital Region
We are successful because of our culture.
Our people love their work, and it shows.
We are growing because of our people.
Growth is driven by adding happy and successful associates.
Four of Birmingham’s top financial professionals
joined Pinnacle in June to kick off commercial
banking in the market. Mark Imig, former regional
manager for corporate banking at First Horizon,
leads the team as Pinnacle’s regional president in
Birmingham. Pinnacle added associates focused
on investments, private banking and treasury
management to continue expanding the team.
Also in June, Pinnacle hired a team of nine
experienced financial professionals to serve clients
in Huntsville, one of the fastest growing MSAs in
the Southeast. Jason Baldwin, former market CEO
for North Alabama at BBVA, serves as Pinnacle’s
Huntsville regional president. The firm opened
a full-service office in September and added
investment and mortgage capabilities.
Pinnacle recruited six experienced financial
professionals to lead the firm’s expansion into
Washington, D.C. and the surrounding areas in
November. Carolyne Pelton, former director of
Aerospace, Defense and Government Contracting
at Truist, is Pinnacle’s National Capital regional
president. The team will open a permanent
location in 2022.
Equipment Finance
Restaurant Franchise
Pinnacle hired three veteran financial advisors
to spearhead an equipment finance effort with
a nationwide scope. Kris Foster joined the firm
in September to lead the initiative, with Greg
Pinchback and Jason Fronheiser on board as
financial advisors. The team’s industry knowledge
and experience allows financial advisors across
Pinnacle’s footprint to offer more solutions
to clients, and they will pursue new business
throughout the Southeast and across the country.
In September Pinnacle formed a team to provide
franchise financing for industry verticals, starting
by building out a national restaurant platform with
Kevin Combs at the helm. Prior to Pinnacle, Combs
led two distinct national teams for Fifth Third Bank:
the restaurant and franchise finance vertical,
which served restaurant and franchise fitness
operators, and the retail vertical that covered
retail, convenience store, consumer product
and apparel companies.
96%
“This is a great firm
where associates
want to work.”
96%
94%
“Our firm’s culture is
special, something
you don’t find just
anywhere.”
“Our firm’s policies
give me flexibility to
maintain balance
in my life.”
No.8
Best Workplaces in
Financial Services
and Insurance
No.26
100 Best Companies
to Work for in the U.S.
No.6
Best Workplace
for Women
No.4
Best Workplace
for Millennials
No.9
Best Bank to
Work For
REVENUE PRODUCERS ADDED
109
77
89
87
119
2017
2018
2019
2020
2021
our success is sustainable because of our people.
our success is sustainable because of our culture.
they are focused on doing what’s right for the long term.
we create lifelong raving fans among associates and clients.
2021
INCENTIVE
GOALS
EARNINGS
PER SHARE
$6.75
PRE-PROVISION
NET REVENUE
$666.6 MIL.*
CLASSIFIED
ASSET RATIO
4.1%
FORTRESS BALANCE SHEET
0.17%
0.17%
Non-performing Assets
Annualized Net Charge-offs
to Total Loans & ORE
to Average Loans
0.09%
Past Dues to
Total Loans
INCENTIVE PAYOUTS
RECURRING EQUITY GRANTS
$48 M
$36 M
$30 M
$22 M
$20 M
2019
2020
2021
2022
2019
2020
2021
2022
LEAD NET PROMOTER SCORES
90%
Nashville
70%
N. Carolina
93.2%
Associate
Retention
LEAD THE MARKET FOR OVERALL SATISFACTION
81%
Nashville
72%
Memphis
90%
Chatt.
85%
Knoxville
83%
Roanoke
$83 M
$31 M
$31 M
OVERALL SATISFACTION WITH RELATIONSHIP MANAGER
86%
Nash.
100%
Memp.
100%
Chatt.
86%
Knox.
100%
NC
80%
SC
100%
VA
* Excluding PPP
All figures as of Dec. 31, 2021
See all of our GAAP and non-GAAP financial measures with 5-year CAGRs at PNFP.com/Insights.
PINNACLE NOW OPERATES IN 15 PRIMARILY URBAN MARKETS
ACROSS THE SOUTHEAST AND SERVES CLIENTS IN SEVERAL
SPECIALTY LENDING AREAS WITH A NATIONAL FOCUS.
In 2021 Pinnacle invested in the following areas by hiring
experienced teams to build out our presence.
2021 wins powered by people and culture
Pinnacle always has been and always will be powered by our people and our culture.
We are successful because of our people. Just look at what they accomplished in 2021.
+11.7%*
+13%
+16.5%
+67.5%
+14.2%
loans
$23.0 B*
Deposits
$31.3 B
Revenue
$1.3 B
eps
$6.75
TBV
per share
$42.55
Birmingham, Alabama
Huntsville, Alabama
National Capital Region
We are successful because of our culture.
Our people love their work, and it shows.
We are growing because of our people.
Growth is driven by adding happy and successful associates.
Four of Birmingham’s top financial professionals
joined Pinnacle in June to kick off commercial
banking in the market. Mark Imig, former regional
manager for corporate banking at First Horizon,
leads the team as Pinnacle’s regional president in
Birmingham. Pinnacle added associates focused
on investments, private banking and treasury
management to continue expanding the team.
Also in June, Pinnacle hired a team of nine
experienced financial professionals to serve clients
in Huntsville, one of the fastest growing MSAs in
the Southeast. Jason Baldwin, former market CEO
for North Alabama at BBVA, serves as Pinnacle’s
Huntsville regional president. The firm opened
a full-service office in September and added
investment and mortgage capabilities.
Pinnacle recruited six experienced financial
professionals to lead the firm’s expansion into
Washington, D.C. and the surrounding areas in
November. Carolyne Pelton, former director of
Aerospace, Defense and Government Contracting
at Truist, is Pinnacle’s National Capital regional
president. The team will open a permanent
location in 2022.
Equipment Finance
Restaurant Franchise
Pinnacle hired three veteran financial advisors
to spearhead an equipment finance effort with
a nationwide scope. Kris Foster joined the firm
in September to lead the initiative, with Greg
Pinchback and Jason Fronheiser on board as
financial advisors. The team’s industry knowledge
and experience allows financial advisors across
Pinnacle’s footprint to offer more solutions
to clients, and they will pursue new business
throughout the Southeast and across the country.
In September Pinnacle formed a team to provide
franchise financing for industry verticals, starting
by building out a national restaurant platform with
Kevin Combs at the helm. Prior to Pinnacle, Combs
led two distinct national teams for Fifth Third Bank:
the restaurant and franchise finance vertical,
which served restaurant and franchise fitness
operators, and the retail vertical that covered
retail, convenience store, consumer product
and apparel companies.
96%
“This is a great firm
where associates
want to work.”
96%
94%
“Our firm’s culture is
special, something
you don’t find just
anywhere.”
“Our firm’s policies
give me flexibility to
maintain balance
in my life.”
No.8
Best Workplaces in
Financial Services
and Insurance
No.26
100 Best Companies
to Work for in the U.S.
No.6
Best Workplace
for Women
No.4
Best Workplace
for Millennials
No.9
Best Bank to
Work For
REVENUE PRODUCERS ADDED
109
77
89
87
119
2017
2018
2019
2020
2021
our success is sustainable because of our people.
they are focused on doing what’s right for the long term.
our success is sustainable because of our culture.
we create lifelong raving fans among associates and clients.
2021
INCENTIVE
GOALS
EARNINGS
PER SHARE
$6.75
PRE-PROVISION
NET REVENUE
$666.6 MIL.*
CLASSIFIED
ASSET RATIO
4.1%
FORTRESS BALANCE SHEET
0.17%
0.17%
Non-performing Assets
to Total Loans & ORE
Annualized Net Charge-offs
to Average Loans
0.09%
Past Dues to
Total Loans
INCENTIVE PAYOUTS
RECURRING EQUITY GRANTS
LEAD NET PROMOTER SCORES
90%
Nashville
70%
N. Carolina
93.2%
Associate
Retention
LEAD THE MARKET FOR OVERALL SATISFACTION
81%
Nashville
72%
Memphis
90%
Chatt.
85%
Knoxville
83%
Roanoke
$83 M
$31 M
$31 M
OVERALL SATISFACTION WITH RELATIONSHIP MANAGER
$48 M
$36 M
$30 M
$22 M
$20 M
2019
2020
2021
2022
2019
2020
2021
2022
86%
Nash.
100%
Memp.
100%
Chatt.
86%
Knox.
100%
NC
80%
SC
100%
VA
* Excluding PPP
All figures as of Dec. 31, 2021
See all of our GAAP and non-GAAP financial measures with 5-year CAGRs at PNFP.com/Insights.
DEAR FELLOW
SHAREHOLDERS,
2021 WAS A FABULOUS YEAR FOR PINNACLE. AFTER PLAYING DEFENSE FOR MUCH OF
2020, we entered 2021 with significant optimism. We believed
we had the opportunity to come out strong on offense and have
one of the best years in our franchise’s history. Despite a difficult
and often unpredictable environment, we did.
• Our associates were as excited as they’ve ever been,
giving their leaders and the firm high marks for
navigating an otherwise frustrating year filled with
pandemic protocols and political and social tensions.
o On internal surveys, 72.8% top box ratings on
average, up from 71.6% in 2020.
o Compared to 2020, increases in top box scores
on 21 out of 25 questions.
o More than a dozen national and local workplace
awards throughout out footprint.
• Our clients were incredibly engaged, rewarding us
with deeper relationships and still higher net promoter
and satisfaction scores, even as service deteriorated at
many of our competitors as they struggled to fill
positions and keep clients satisfied.
o Average net promoter score of 73.3% across all
markets measured by Coalition Greenwich.
o Average Overall Satisfaction of 77% across all
markets measured by Coalition Greenwich.
• And our shareholders were enriched by top-quartile
returns largely driven by rapid growth in loans, deposits,
fees, earnings and tangible book value per share.
o Share price: $95.50 at Dec. 31, 2021 –
48.3% growth YoY
o Diluted EPS: $6.75 – 67.5% growth YoY
o Loans: $23.0 billion* – 11.7% annual growth*
*Excluding PPP loans
o Core deposits: $29.3 billion – 24.7% annual growth
o Non-interest income: $395.0 million –
24.7% growth YoY
o Tangible book value per common share:
$42.55 – 14.2% growth YoY
The pace of growth across all of those metrics may surprise
some. But we believe difficult operating environments only
serve to showcase the competitive advantage we can offer to
associates, clients and shareholders. They give us a platform to
flex the power of our culture, our service experience and the
consistency of our shareholder returns.
As the challenges from 2020 lingered throughout 2021, never
was the power of our culture more evident.
While many are experiencing a “Great Resignation,” we attracted
new associates from vulnerable competitors at a record pace,
driving growth, and we retained roughly 93 percent of our
existing associates, making that growth sustainable.
While many companies battled against accelerating declines in
service quality thanks to concurrent crises, we continued to top
our markets in many of the service metrics that define client
loyalty and advocacy.
And while economic uncertainty has tested many areas of the
market and at times made the Fed’s response difficult to predict,
Pinnacle’s share price set records and hit a significant milestone
in the face of headwinds for the banking industry as a whole.
That combination of rapid organic growth, baked-in sustainability
and a track record for performance is the Pinnacle story in a
nutshell, all thanks to two crucial beliefs:
• People matter. They built our company and fuel its
rapid growth.
• “Culture eats strategy for lunch.” It makes our growth
sustainable—even in difficult times—by fostering
deep loyalty in our existing associates and clients,
as well as attracting more—even in a fiercely
competitive environment.
Since 2000, we have made significant, consistent and long-term
investments in both people and culture, leading to more than
two decades of rapid, reliable and sustainable growth.
And just as it did following crises in 2001 and 2008, we believe
the performance of our associates and our firm in 2021 proves
that Pinnacle is poised to continue and accelerate that trend
going forward.
THE NEW NORMAL FOR WORK AND SERVICE RELATIONSHIPS
For many, 2021 was a year of slow and tiresome implementation
of changes made in reaction to the crises that arose in 2020.
Suddenly more and more companies realized how much their
people matter and how treating them poorly can quickly turn
an upward trajectory into a race to the bottom.
Depending on which poll you look at, anywhere from half to
two-thirds of all American workers are thinking of changing jobs
or actively looking for a career change. Employees everywhere
have realized they can quit their jobs at any time and go almost
wherever they like, or they can choose to take a break from
work, with money often a secondary concern instead of the
primary driver.
That’s bad news for many banks, where clients are more loyal to
people than to bank logos. But at Pinnacle, we are not only ready
but eager to capitalize on that power shift. We’ve been prepared
for it since Day 1 because we have always believed that a happy
and successful workforce, and a bank’s ability to attract and
keep them, is the difference between growth and contraction,
between investment in the future and austerity.
All workers expect more of their employers. Customers,
particularly in financial services, are maybe more frustrated than
ever with poor service at a time when they have an increasing
number of options for new providers.
According to Coalition Greenwich, overall satisfaction scores at
America’s top 10 banks for both small and mid-size businesses
have averaged less than 50 percent over the last three years. To
us, that means clients are just as likely to leave as they are to
stay, which is a poor reflection on our nation’s most powerful
financial institutions.
For Pinnacle, it means compounding opportunities to move
bankers and business away from these firms.
While the world’s circumstances have changed a lot since we
opened our doors, we have always been driven by a belief that
workers want and deserve more from their jobs, and customers
won’t stand for poor service when they have an increasing
number of options.
Put another way, everyone deserves a great place to work and
a great place to do business. That’s never been truer than it is
right now, and in fact we believe everyone expects a great place
to work and will accept nothing less than a great place to
do business.
That belief has made us one of the strongest banking franchises
in the United States.
Because Pinnacle was prepared for this moment. We’ve always
put our associates front and center and sought to WOW our
clients. We saw the declines in work environment and service
quality 22 years ago and knew they would eventually reach a
tipping point.
Read more about Pinnacle’s founding
and history at PNFP.COM/ourstory.
coalition Greenwich Research
High marks and leading positions across many markets for indicators of client perception and loyalty
EASE OF DOING BUSINESS
BANK YOU CAN TRUST
VALUES LONG-TERM RELATIONSHIPS
NET PROMOTER SCORE
OVERALL DIGITAL EXPERIENCE
Nashville *
Memphis *
Chattanooga
Knoxville
North Carolina *
South Carolina
Western Virginia *
*
Leads the market
86%
85%
94%
82%
90%
86%
83%
Nashville *
Memphis *
Chattanooga *
Knoxville
North Carolina *
South Carolina
Western Virginia *
89%
100%
100%
97%
82%
72%
83%
Nashville *
Memphis
Chattanooga *
Knoxville
North Carolina *
South Carolina
Western Virginia *
89%
Nashville *
Memphis *
Chattanooga
100%
Knoxville
North Carolina
97%
70%
76%
72%
83%
South Carolina
58%
Western Virginia *
90%
90%
81%
82%
70%
71%
Nashville *
Memphis
Chattanooga *
Knoxville
North Carolina *
South Carolina
Western Virginia *
85%
61%
96%
82%
74%
80%
75%
INVESTING IN PEOPLE AND CULTURE
In our view, rapid and sustainable growth is the primary
ingredient for producing outsized shareholder returns.
If attracting top performing people is the primary driver for
rapid growth, and creating a best-in-class culture is the way
to make it sustainable, then nothing can be more important
than investing in both—especially now.
The fundamental thrust for why people work and how they
choose their employer has changed, and the companies that
can meet these needs will enjoy continued growth.
The drivers are no longer just a matter of paychecks and perks,
although that may be what brings some to the door. Now more
than ever, companies have to invest in balance, flexibility, care,
compassion and purpose to keep their associates happy.
Balance and flexibility aren’t that difficult to achieve anymore.
Hybrid work and creative scheduling became the norm in 2020,
primarily in response to the pandemic. So care, compassion and
purpose appear to be the holy grail of associate engagement
and retention. They speak directly to culture, which is something
that can’t be easily fixed by throwing resources at it.
Culture has to be part of the foundation and nurtured
deliberately over time. If it’s not authentic, baked into
everything a company does, and if it’s not permanent, aimed
at the long term, it just doesn’t work, and people will leave.
This is why we are so focused on our work environment, our
culture and our associates above all else, why our investments in
them are not just acceptable but strategically critical. Few banks
would plan for double-digit expense growth primarily centered
in people. But as a result of that kind of investment and the
reliable loan and deposit growth our model has produced, we
were able to budget for a strategically advantaged expense to
asset ratio near 1.85 percent in 2021.
Our investments in people and culture are the key. Every time
we get better, our competitors become more vulnerable to
losing their best associates and clients to us.
Attracting and retaining the very best financial professionals
ensures Pinnacle’s continued growth and success for the long
term. It’s right there in the model that is responsible for all of
our growth, both organic and acquisitive:
excited
associates
engaged
clients
enriched
shareholders
AN OBSESSION WITH WORK ENVIRONMENT AND WOWING CLIENTS
There’s no better word than “obsession” for our focus on the key
aspects of our business model. Every single associate has a laser
focus on work environment, culture and client service.
That’s what led us to become one of the largest, strongest banks
in the country with one of the best share price performances of
any publicly owned bank in the nation since our IPO.
Since IPO
10 Year
5 Year
3 Year
1 Year
PNFP
KRX
1,810%
176%
Out-Performance
1,634%
As of Dec. 31, 2021
491%
153%
338%
188%
13%
175%
107%
41%
66%
48%
33%
15%
Pinnacle’s investment in these vital areas is one of the central reasons
for such consistent success in each of our markets, regardless of
whether we entered de novo or through an acquisition.
The financial metrics show growth almost across the board over
2020. In third-party client surveys, the bank and our relationship
managers (we call them financial advisors) earn high marks
consistently in every market measured for categories directly
correlated to client satisfaction and loyalty.
Take a closer look at Pinnacle’s successes in
each of the markets we serve. PNFP.COM/map
See all of our GAAP
and non-GAAP financial
measures with 5-year CAGRs
at PNFP.com/Insights.
“I’ve never done a startup
like we’ve done here. I’ve
rehabilitated, restructured and
recapitalized many banks. From
a basis of building something,
starting from scratch, this has
been so much fun. It’s hard, but
fun, like having a great workout.
Where else in the world do you
get to work for such a rewarding
company, hire people who are
your best friends and family
and then call that work?”
Rob Garcia
ATLANTA PRESIDENT
2022 PRIORITIES: A REPEAT OF WHAT WORKED IN 2021
Our obsessions will keep driving us onward as we continue to invest meaningfully in our people
and our culture.
1. Engage every single associate.
Nothing is more important. This is the fuel that drives our engine. When associates love
their work, they give each other and their clients their “discretionary effort,” which is one
of the main drivers of our extraordinary performance over the last 22 years. Our 2022
initiatives specifically focused on diversity, equity and inclusion are intended to ensure
we excite and engage every single associate every single day.
2. Premium pricing for our premium service level.
What happens when we hit high levels of service quality and client satisfaction? Our
clients will gladly pay a premium for it. We know we often cost more than many of our
competitors, and we’re OK with that because we are worth it. Our associates work hard
to earn a premium price, and their clients agree. That’s always been our differentiator,
and we believe the gulf has never been wider between what a client gets from our
service and that of the nation’s dominant banks. We will seek to continue capitalizing on
our culture to drive that difference home so we can use our premium service to try
to hold loan yields and to minimize the deposit beta in an effort to widen our margins
in what we expect will be a rising rate environment.
3. Seize market share opportunities around the Southeast.
This happens on three fronts:
a. Continue to hire great bankers in our existing markets and enable them to move
their books of business.
b. Extend into new markets with local bankers capable of building a bank of consequence.
We have had fabulous de novo opportunities, like Atlanta in 2020 and Huntsville,
Birmingham and the Washington, D.C. area in 2021. We’ll continue to seize similar
market share take-away opportunities as they arise.
c. Attract industry specialists to add greater depth and sophistication to our offerings
for large clients.
4. Meet all of our clients’ needs.
We aim for outsized fee growth in wealth management, interchange, mortgage
and other areas because we seek to meet every need our clients have. We don’t push
products. We lead with advice and seek to have a deep understanding of our clients’
overall finances. You can see it in the Coalition Greenwich surveys, where the clients
consistently give us high marks for how well their financial advisors understand their
needs, and where we rank highly against our competitors for the number of financial
services our clients choose to purchase from us.
5. Maintain strong asset quality
Nothing can demolish earnings like credit losses, so we continue to invest in credit
infrastructure, including meaningful investment in system enhancements and
support personnel to match our rapid growth in revenue producers.
So 2021 was another phenomenal year of growth at Pinnacle, and we expect more of the same
in 2022. Thank you for joining us on this journey and celebrating the wins made possible by our
people and distinctive culture.
Onward!
M. Terry Turner
President and Chief
Executive Officer
Robert A. McCabe, Jr.
Chairman
FINANCIAL REVIEW
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 and preferred stocks of
Pinnacle Financial Partners, Inc. are
traded on the Nasdaq Global Select
market under the trading symbols
“PNFP” and “PNFPP”, respectively.
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 19,
2022. The meeting will be held
at Pinnacle Financial Partners,
Pinnacle at Symphony Place,
150 Third Ave. South, 8th Floor,
Nashville, TN. Further information
regarding this meeting can be
found in the firm’s proxy statement
for the 2022 Annual Meeting.
This page intentionally left blank.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
o 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
Pinnacle Financial Partners Inc.
(Exact name of registrant as specified in charter)
, Inc.
Tennessee
62-1812853
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
150 Third Avenue South, Suite 900,
Nashville,
TN
(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
Trading Symbol
PNFP
Name of Exchange on which Registered
The Nasdaq Stock Market LLC
Depositary Shares (each representing
1/40th interest in a share of 6.75% Fixed-
Rate Non-Cumulative Perpetual Preferred
Stock, Series B)
PNFPP
The Nasdaq Stock Market LLC
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 x No o
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 o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically, 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 x No o
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 ☐
(do not check if you are a smaller reporting company)
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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
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: $6,545,963,100 as of June 30, 2021.
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: 76,291,153 shares of common stock as of February 22, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held April 19, 2022 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
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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 of 1933 and Section
21E of the Securities Exchange Act of 1934. The words "expect," "anticipate," "intend," "may," "should," "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) further deterioration in the financial condition of borrowers of Pinnacle Bank and its subsidiaries or BHG
resulting in significant increases in loan losses and provisions for those losses and, in the case of BHG, substitutions; (ii) the further
effects of the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19
pandemic and its impact on general economic and financial market conditions and on Pinnacle Financial's and its customers' business,
results of operations, asset quality and financial condition; (iii) the speed with which the COVID-19 vaccines can be widely
distributed, those vaccines' efficacy against the virus and public acceptance of the vaccines; (iv) the ability to grow and retain low-cost
core deposits and retain large, uninsured deposits, including during times when Pinnacle Bank is seeking to lower rates it pays on
deposits; (v) the inability of Pinnacle Financial, or entities in which it has significant investments, like BHG, to maintain the long-term
historical growth rate of its, or such entities', loan portfolio; (vi) changes in loan underwriting, credit review or loss reserve policies
associated with economic conditions, examination conclusions, or regulatory developments; (vii) effectiveness of Pinnacle Financial's
asset management activities in improving, resolving or liquidating lower-quality assets; (viii) 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; (ix) adverse conditions in the national or local economies including in Pinnacle Financial's markets
throughout Tennessee, North Carolina, South Carolina, Georgia and Virginia, particularly in commercial and residential real estate
markets; (x) fluctuations or differences in interest rates on loans or deposits from those that Pinnacle Financial is modeling or
anticipating, including as a result of Pinnacle Bank's inability to better match deposit rates with the changes in the short-term rate
environment, or that affect the yield curve; (xi) the results of regulatory examinations; (xii) Pinnacle Financial's ability to identify
potential candidates for, consummate, and achieve synergies from, potential future acquisitions; (xiii) difficulties and delays in
integrating acquired businesses or fully realizing costs savings and other benefits from acquisitions; (xiv) BHG's ability to profitably
grow its business and successfully execute on its business plans; (xv) risks of expansion into new geographic or product markets; (xvi)
any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including goodwill or other
intangible assets; (xvii) the ineffectiveness of Pinnacle Bank's hedging strategies, or the unexpected counterparty failure or hedge
failure of the underlying hedges; (xviii) 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; (xix) deterioration in the valuation of other real estate owned and
increased expenses associated therewith; (xx) 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 Bank's level of applicable commercial real estate loans were to exceed percentage levels of total capital in guidelines
recommended by its regulators; (xxi) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xxii) the
vulnerability of Pinnacle Bank's network and online banking portals, and the systems of parties with whom Pinnacle Bank contracts, to
unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security
breaches; (xxiii) the possibility of increased compliance and operational costs as a result of increased regulatory oversight (including
by the Consumer Financial Protection Bureau), including oversight of companies in which Pinnacle Financial or Pinnacle Bank have
significant investments, like BHG, and the development of additional banking products for Pinnacle Bank's corporate and consumer
clients; (xxiv) 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; (xxv) changes in state and federal legislation, regulations or policies applicable to banks and other
financial service providers, like BHG, including regulatory or legislative developments; (xxvi) the availability of and access to capital;
(xxvii) 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, including as a result of Pinnacle
Bank's participation in and execution of government programs related to the COVID-19 pandemic; and (xxviii) 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 Annual Report on Form 10-K, 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 2019, 2020 and 2021 mean our fiscal years ended December 31, 2019, 2020 and 2021,
respectively.
ITEM 1. BUSINESS
OVERVIEW
Pinnacle Financial Partners is a financial holding company headquartered in Tennessee, with approximately $38.5 billion in total
assets as of December 31, 2021. 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 118 offices, including 49 in Tennessee, 37 in North
Carolina, 20 in South Carolina, nine in Virginia, two in Georgia and one in Alabama.
The firm operates as a community bank in 15 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 2021 FDIC Summary of Deposits data.
The FDIC Summary of Deposits data as of June 30, 2021 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-Cary, NC
Charleston-North Charleston, SC
Greenville-Anderson, SC
Roanoke, VA
Winston-Salem, NC
Atlanta, GA
COVID-19 PANDEMIC
1
4
4
5
4
8
13
6
12
3
7
51
16.4%
10.1%
9.8%
4.2%
11.0%
0.5%
1.5%
4.6%
1.5%
7.7%
5.0%
0.1%
The COVID-19 pandemic and related measures taken by governments, businesses and individuals as a result of the pandemic continue
to cause uncertainty, volatility and disruption in the economy, including the economies of the markets that we serve. Throughout 2020
and continuing into 2021 in response to the pandemic, we adjusted our business practices, including restricting employee travel,
encouraging employees to work from home where possible, offering drive-thru only service at certain of our locations with specific
needs facilitated by appointment, implementing social distancing guidelines within our offices, and continuing to hold regular
meetings of our pandemic response team. Certain of these measures remain in place due to the continued prevalence of the virus,
though, as of December 31, 2021, all of our customer locations are now open and the majority of our employees have returned to the
office.
We continue to believe our response to the pandemic has allowed and continues to allow us to appropriately support our associates and
clients and their communities. Though we believe the impact of COVID-19 appears to be lessening, we continue to monitor its impact
and the effect new variants or mutations may have, the administration, efficacy and public acceptance of COVID-19 vaccines and
boosters, the effects of the CARES Act, Coronavirus Relief Act, American Relief Act and the prospects for additional fiscal stimulus
programs closely. Our ability and the ability of our customers to recover from the pandemic continues to be subject to uncertainty and
will depend on continued decline in the severity of COVID-19 and emergence of other variants of the virus in our markets and
4
government responses thereto, as well as continued improvement in economic conditions in those markets.
For more information regarding the impact of the COVID-19 pandemic on our financial condition and results of operations as of and
for the fiscal year ended December 31, 2021 see “Risk Factors – Risks Related to Our Business – COVID-19 Risks” and throughout
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this Annual Report on Form
10-K.
ACQUISITIONS
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
continued to vest over their original contractual terms. The fair value of these awards at the effective time of the merger 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.
On July 2, 2019, Pinnacle Bank acquired all of the outstanding stock of Advocate Capital, Inc. (Advocate Capital) for a cash price of
$59.0 million. Advocate Capital is a finance firm headquartered in Nashville, TN which supports the financial needs of legal firms
through both case expense financing and working capital lines of credit. At the acquisition date, Advocate Capital's net assets were
recorded at a fair value of approximately $45.6 million, consisting mainly of loans receivable. Advocate Capital's $134.3 million of
indebtedness, which largely related to funding Advocate Capital's loans to its customers, was also paid off in connection with
consummation of the acquisition.
In February 2015, Pinnacle Bank acquired a 30% membership interest in Bankers Healthcare Group, LLC ("BHG"), a company which
at the time of our acquisitions was primarily engaged in the business of making term loans to healthcare practices, for $75.0 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 and have subsequently entered into a Second Amended and Restated Limited Liability
Company Agreement on February 2, 2021. The Second Amended and Restated Limited Liability Company Agreement, provides for,
among other things, the following terms: (i) 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 (ii) 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, 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 or a merger in which Pinnacle
Financial or Pinnacle Bank is not the surviving entity.
PRODUCTS AND SERVICES
Lending Services
We offer a full range of lending products, including commercial, real estate and consumer loans to individuals, businesses and
professional entities. We compete for these loans with competitors who are also well established in our geographic markets as well as
other non-depository institution lenders that are subject to less regulation than we are.
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.
5
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, 2021, we were able to loan any one borrower a maximum amount equal to approximately $550.5 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. Pinnacle Bank currently has 97 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, like those we have
experienced as a result of the COVID-19 endemic, or periods of increased inflation, like we are currently experiencing, 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 credit losses.
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
investment properties and business loans secured by real estate.
Pinnacle Bank also makes a variety of loans secured and unsecured to individuals for personal, family, investment and household
purposes, including installment and term loans, 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.
Through Advocate Capital we make loans to law firms to finance case expenses and the firms' working capital needs. These loans are
typically secured by the borrower's receivables and include guaranties by certain individual partners of the firm.
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 IntraFi
Network Deposit programs. While Pinnacle is focused on attracting operating accounts and other core deposits and lowering our cost
of funds, 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 reputation management 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 businesses, their owners and individuals interested in a comprehensive relationship with their financial institution located in those
geographic markets. Pinnacle Bank traditionally has obtained these deposits primarily through personal solicitation by its financial
advisors and leadership team, although its use of advertising has increased in recent years, primarily due to its partnerships 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 and 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 through associates who are employed by both Pinnacle Bank
and RJFS. RJFS is a subsidiary of Raymond James Financial, Inc.
6
Pinnacle Bank offers, through RJFS, non-FDIC insured investment products to help clients achieve their financial objectives within
their risk tolerances. 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, 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 associates 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 furnishings, equipment and promotional expenses and general
personnel costs, including commissions paid to licensed brokers.
Pinnacle Bank also provides fiduciary and investment services through its Trust & Investment Services department. Services offered
for individual and commercial clients include an array of accounts including personal trust, investment management, estate
administration, endowments, foundations, individual retirement accounts, escrow services and custody. Additionally, Trust &
Investment Services provides investment services for qualified plans, primarily through its Retirement Plan Services division.
Additionally, Pinnacle Wealth Advisors, a registered investment advisor, provides investment advisory services to its clients. 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. Advocap Insurance Agency, Inc., an
insurance agency subsidiary of Advocate Capital, sells insurance products, including professional liability, cyber protection, directors
and officers, errors and omissions and life insurance, to its clients consisting mainly of law firms and partners within those firms.
M&A Advisory and Securities Offering Services
PNFP Capital Markets, Inc. launched in 2015. As a broker-dealer, this team offers corporate clients merger and acquisition advisory
services, private debt, equity and mezzanine placement services and other selected middle-market advisory services.
Other Banking Services
Given client demand 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 businesses. Additionally, Pinnacle
Bank is associated with a nationwide network of automated teller machines of other financial institutions that clients are able to use
throughout our footprint. In many cases, Pinnacle Bank reimburses its clients for any fees that may be charged 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 whom 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 other 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
nonbank 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 be able to develop and offer a broader range of products
and services as well as better pricing for those products and services. Continued consolidation in the financial services industry, due in
part to the regulatory changes made under the Economic Growth, Regulatory Relief and Consumer Protection Act, including the
increased asset threshold for required stress testing, as discussed below under "Supervision and Regulation - The Dodd-Frank Act,"
has contributed to increases in the number of large competitors we face in our markets. Finally, our competitors may choose to offer
lower interest rates and pay higher deposit rates than we do.
7
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 service. Equally important is being able to enjoy convenient access to a broad array of financial products offered by a
financial institution with an ability to meet the changing needs of a sophisticated client base. 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 one where many important decisions regarding a client's financial affairs are made outside of the local community.
Employees and Human Capital
From our founding, we have focused on building an excellent work environment, because we believe excited associates lead to
engaged clients and that engaged clients contribute to enriched shareholders. Our hiring philosophy has always been to create the best
place to work in our markets. That started with our initial offices in our hometown of Nashville. From there we have branched out
across our home state of Tennessee and into some of the best markets in the Southeast. Our hiring philosophy is simple: We aim to
hire successful, experienced bankers in each of our markets that share our desire to build a team-oriented firm where our associates
win together. In our company, all non-commissioned associates have one set of performance goals under our annual cash incentive
plan and nearly every associate in our company is annually awarded equity-based compensation. We believe our unique culture and its
resulting high levels of associate engagement and retention rates allow us to be better than our competitors in meeting the needs of our
clients.
We are engaging with our associates on a regular basis to assess job satisfaction, and we use the information from internal and third-
party surveys to improve our ability to attract, develop, and retain talented associates who drive client engagement. All associates
joining Pinnacle, including those joining as a result of an acquisition, participate in a three-day orientation that focuses on culture.
Consulting firm Great Place to Work and FORTUNE magazine have recognized us as one of the nation's 100 Best Companies to
Work For in 2017, 2018, 2019, 2020, and 2021. 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 has also recognized Pinnacle
Bank as one of the top 20 "Best Banks to Work For" in the country every year from 2013 to 2021. 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, 2018,
2019, 2020, and 2021. And we were named a Top Workplace among mid-sized companies by the Knoxville News Sentinel in 2017,
2018, 2019, 2020, and 2021. Several of Pinnacle’s newer markets in the Carolinas, Virginia and Georgia began competing in (and
winning) “best workplace” awards in 2019 and continued to do so in 2020 and 2021. All of these honors place heavy emphasis on
anonymous surveys of associates in the judging criteria. We believe these awards illustrate that our culture is strong, and our financial
returns illustrate that the focus on culture is a winning business strategy. As of December 31, 2021, we employed 2,841.0 full-time
equivalent associates.
None of our associates 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 aim to create a great place to work for all of our
associates. We believe that a strong and diverse team is critical to our success and are committed to being more vocal and focused on
our efforts toward creating a great place to work for all. We are guided by the foundational elements of our diversity and inclusion
policy, namely that all people deserve a great place to work and do business and that every community deserves an equal opportunity
for economic prosperity. At December 31, 2021, more than 66% of our associates were women and approximately 15% identify
themselves as part of a minority group. Among the Company’s 139-person Leadership Team, women make up approximately 33% of
these associates, up from 13% in 2010 while minorities account for approximately 6% of the Leadership Team members, up from less
than 1% in 2010. Beginning in 2020, a senior leadership team made up of a subset of these Leadership Team members was formed.
Presently, the senior leadership team consists of 12 associates, two of whom are women, one of whom is also a minority and one man
who is a minority. Though we are proud of the work we have done in this area, we understand that more work remains to be done and
we have implemented many programs designed to achieve a more diverse and inclusive team, including enhanced training and
leadership pipeline programs and development of a multi-year strategy to focus on enhancing our associates’ diversity and inclusion
awareness. This diversity and inclusion awareness enhancement program includes a number of initiatives that are underway to build
broader networks with diverse agencies and community organizations as we look to locate and develop future diverse associates and
leaders. In 2020, we also named our first diversity and inclusion officer to lead our coordinated efforts on diversity and inclusion.
Serving the needs of all of the members of our communities also remains an important part of our strategy. For years, we have focused
our community investment efforts on giving within four categories that we believe improve the quality of life of the citizens in our
communities: education, health and human services, economic development and the arts. We also empower our associates to serve the
causes about which they are most passionate. In 2021, our associates volunteered more than 21,000 hours of their time to help
organizations across our footprint.
8
OTHER INFORMATION
Investment Securities
In addition to loans, Pinnacle Bank has investments primarily in United States treasury and agency securities, agency sponsored
mortgage-backed securities, corporate bonds 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.
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 in the Investor Relations 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 as well as many of their subsidiaries and entities in which they have made investments are
subject to extensive state and federal banking and other laws and regulations that impose restrictions on and provide for general
regulatory oversight of Pinnacle Financial's and Pinnacle Bank's and these subsidiaries’ 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.
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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.
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 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 rebuttably 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 securities 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:
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•
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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:
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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;
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• 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.
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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.
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, as discussed in the section captioned “Community Reinvestment Act” below. 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.
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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, for larger institutions, like Pinnacle Bank,
the FDIC uses a performance score and a loss-severity score that are used to calculate an initial assessment rate. In calculating these
scores, the FDIC uses a bank’s capital level and supervisory ratings and certain financial measures to assess an institution’s ability to
withstand asset-related stress and funding-related stress. The FDIC has the ability to make discretionary adjustments to the total score
based upon significant risk factors that are not adequately captured in the calculations. 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.
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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. Tier 2 capital generally consists of
perpetual preferred stock and related surplus not meeting the Tier 1 capital definition, qualifying trust preferred securities and
subordinated debt, qualifying mandatorily convertible debt securities, and a limited amount of the allowance for credit losses.
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) 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 any 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 investments in non-consolidated financial institutions be deducted from CET1 to the extent that any such category
exceeds 25% 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 depository 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 (“PCA”) 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" under PCA 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.
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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 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.
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:
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•
•
•
•
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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;
applying a 250% risk weight to any non-deducted mortgage servicing rights;
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 certain 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. Under the Basel framework, these standards will generally be effective on January 1, 2023,
with an aggregate output floor phasing in through January 1, 2028. Under the current U.S. capital rules, operational risk capital
requirements and a capital floor apply only to advanced approaches institutions, and not to Pinnacle Financial or Pinnacle Bank. The
impact of Basel IV on us will depend on the manner in which it is implemented by the federal bank regulators.
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In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital
regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that
allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting a new accounting standard
related to the measurement of current expected credit losses (“CECL”) on their regulatory capital ratios (three-year transition option).
In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the
2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement
CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the
incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). As
permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, each of Pinnacle Bank and
Pinnacle Financial has elected the option to delay the estimated impact on regulatory capital of Pinnacle Financial's and Pinnacle
Bank's adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments”, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly
increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 (collectively the “transition adjustments”), was
delayed through December 31, 2021. Beginning on January 1, 2022, the cumulative amount of the transition adjustments of $68.0
million became fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75%
recognized in 2022, 50% recognized in 2023, and 25% recognized in 2024. Beginning January 1, 2025, the temporary regulatory
capital benefits will be fully reversed.
At December 31, 2021, Pinnacle Bank's CET1 capital ratio was 11.9%, Tier 1 risk-based capital ratio was 11.9%, total risk-based
capital ratio was 12.6% and Tier 1 leverage ratio was 9.9%, compared to 11.4%, 11.4%, 12.7% and 9.1% at December 31, 2020,
respectively. At December 31, 2021, Pinnacle Financial's CET1 capital ratio was 10.9%, Tier 1 risk-based capital ratio was 11.7%,
total risk-based capital ratio was 13.8% and Tier 1 leverage ratio was 9.7%, compared to 10.0%, 10.9%, 14.3% and 8.6% at December
31, 2020, respectively. All of these ratios exceeded regulatory minimums and those required by Basel III and FDICIA (including after
application of any applicable capital conservation buffer) to be considered well capitalized. More information concerning Pinnacle
Financial's and Pinnacle Bank's regulatory ratios at December 31, 2021 is included in Note 19 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 January 2021, Pinnacle Financial announced that its board of directors had authorized a share repurchase program for up to $125.0
million of Pinnacle Financial’s outstanding common stock, which is scheduled to expire upon the earlier of Pinnacle Financial’s
repurchase of shares of its outstanding common stock having an aggregate purchase price of $125.0 million and March 31, 2022.
During 2021, no shares of its common stock were repurchased by Pinnacle Financial under such share repurchase program. In
addition, in January 2022, Pinnacle Financial announced that its board of directors approved a subsequent repurchase program for up
to $125.0 million. The new repurchase program will commence upon the expiration of the current program and is scheduled to expire
upon the earlier of Pinnacle Financial’s repurchase of shares of its outstanding common stock having an aggregate purchase price of
$125.0 million and March 31, 2023. 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.
Payment of Dividends
Pinnacle Financial is a legal entity separate and distinct from Pinnacle Bank. Though Pinnacle Financial had cash and cash equivalents
of $184.7 million as of December 31, 2021, 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 and holders of
its preferred stock, 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.
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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. Additionally, it is Federal Reserve policy that bank holding
companies generally should pay dividends on common stock only out of net income available to common shareholders over the past
year and only if the prospective rate of earnings retention appears consistent with the organization's current and expected future capital
needs, asset quality and overall financial condition. Federal Reserve policy also provides that a bank holding company should inform
the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the
dividend is being paid or that could result in a material adverse change to the bank holding company's capital structure. See "Capital
Adequacy" above.
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, 2021, Pinnacle Bank could pay
dividends to Pinnacle Financial of up to $876.2 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 $184.7 million at December 31, 2021.
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.
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 January 18, 2022, when the board of directors increased the dividend to $0.22 per share. During the year ended December 31,
2021, Pinnacle Financial paid $55.5 million in net dividends to its common shareholders. On January 18, 2022, our board of directors
declared a $0.22 per share quarterly cash dividend to common shareholders which approximated $16.6 million in aggregate dividend
payments and was paid on February 25, 2022 to common shareholders of record as of the close of business on February 4, 2022.
During the second quarter of 2020, Pinnacle Financial issued 9.0 million depositary shares, each representing a 1/40th interest in a
share of its 6.75% fixed rate non-cumulative, perpetual preferred stock, Series B (Series B Preferred Stock) in a registered public
offering to both retail and institutional investors. During the year ended December 31, 2021, Pinnacle Financial paid $15.2 million in
dividends on its Series B Preferred Stock. On January 18, 2022, our board of directors approved a quarterly dividend of approximately
$3.8 million, or $16.88 per share (or $0.422 per depositary share), on the Series B Preferred Stock payable on March 1, 2022 to
shareholders of record at the close of business on February 14, 2022. This dividend equates to a $0.422 per share dividend on our
depositary shares.
The amount and timing of all future dividend payments, if any, including on the Series B Preferred Stock, 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. If we fail to pay dividends on our Series B Preferred Stock, we will be prohibited from
paying dividends on our common stock.
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.
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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.
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 are subject to certain dollar value limitations, 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 a
satisfactory CRA rating from its primary federal regulator on its most recent regulatory examination.
In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would have
significantly changed existing CRA regulations. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020; however,
in December 2021, the OCC revoked the newly issued rule and largely reverted to its prior CRA rule. The FDIC and the Federal
Reserve Board have yet to publish any new final CRA rules and it remains uncertain whether either agency will do so in light of the
OCC’s revocation of its new rule. As such, we will continue to evaluate the impact of any changes to the regulations implementing the
CRA and their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.
Pinnacle Bank is also subject to 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. On November 18, 2021, the federal banking agencies issued a joint final
rule that requires a banking organization to notify their primary federal regulator within 36 hours of becoming aware that a significant
“computer-security incident” has occurred. In general, a banking organization must notify its primarily federal regulator for incidents
that have materially disrupted, degraded or impaired – or are reasonably likely to materially disrupt, degrade or impair – (i) the ability
of such banking organization to carry out banking operations and activities or deliver banking products and services, (ii) such banking
organization’s results of operations, or (iii) the financial stability of the financial sector. The final rule also requires a bank service
provider to notify each of its affected customers as soon as possible when it determines that it has experienced a computer-security
incident that has caused, or is reasonably likely to cause, a material service disruption for four or more hours. Compliance with the
final rule is required by May 1, 2022. This new rule and the earlier 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
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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. An
increasing number of state laws and regulations have been enacted in recent years to implement privacy and cybersecurity standards
and regulations, including data breach notification and data privacy requirements. Other nations in which our customers do business,
such as the European Union, have adopted similar requirements. This trend of state-level and international activity is expected to
continue to expand, requiring continual monitoring of developments in the states and nations in which our customers are located and
ongoing investments in our information systems and compliance capabilities.
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.
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:
•
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;
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; 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.
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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 (“BSA”) which governs how banks and other
firms report certain currency transactions and maintain appropriate safeguards against "money laundering" activities as discussed in
the section captioned “Anti-Terrorism Legislation and Anti-Money Laundering” below.
Examination and enforcement by the state and federal banking agencies, including the CFPB (as described in more detail below), and
other such enforcement authorities, for non-compliance with consumer protection laws and their implementing regulations have
increased and become more intense. Due to these heightened regulatory concerns, including increased enforcement of the CRA by the
federal banking agencies, and the 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.
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 has been aimed at combating money laundering and terrorist financing.
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, to
include risk-based procedures for conducting ongoing customer due diligence. We have implemented procedures designed to comply
with these requirements. In January 2021, the Anti-Money Laundering Act of 2020 ("AMLA"), which amends the BSA, was enacted
as part of the National Defense Authorization Act for Fiscal Year 2021. Among other things, the AMLA codifies a risk-based
approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating
technology and internal processes for BSA compliance; and expands enforcement and investigation-related authority, including
increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.
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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 and Pinnacle Financial's management is currently evaluating those changes that
it will need to make to these policies and procedures to comply with the AMLA and those regulations that are issued by the federal
banking regulators thereunder. Federal banking regulators are required, when reviewing bank holding company acquisition and bank
merger applications, to consider the effectiveness of the AML activities of the applicants. Material deficiencies in AML 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 financial, legal and
reputational consequences for Pinnacle Financial and Pinnacle Bank including causing applicable bank regulatory authorities not to
approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not
required.
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. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including
causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required
or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil
money penalties against institutions found to be violating these obligations.
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. Failure to comply with the
requirements of the Dodd-Frank Act 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.
Interchange Fees. 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 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.
The Volcker Rule Section 13 of the Bank Holding Company Act and its implementing regulations, commonly referred to as the
“Volcker Rule,” prohibit banking entities from engaging in proprietary trading, and prohibits certain interests in, or relationships with,
hedge funds or private equity funds. The Volcker Rule applies to Pinnacle Financial, Pinnacle Bank and their affiliates.
In October 2019, the federal banking agencies responsible for implementing the Volcker Rule finalized amendments to their
regulations to tailor the Volcker Rule’s compliance requirements to the size and scope of a banking entity’s trading activities, clarify
certain key provision in the Volcker Rule and modify the information that companies are required to provide these agencies. In June
2020, these agencies finalized additional modifications to their regulations expanding the ability of banking entities to make
investments in certain types of private equity funds. These amendments became effective on October 1, 2020.
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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
Service Members Civil Relief 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, and we expect the CFPB’s oversight and enforcement to increase over the next few years.
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 has increased, and will continue to 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.
Economic Growth, Regulatory Relief, and Consumer Protection Act. 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 though it has done so and expects it will continue to do so.
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 have continued to perform, and expect to continue to perform, stress tests from time to time in connection with
our capital planning process and to monitor our capital consistent with the safety and soundness expectations of the federal regulators.
While the Economic Growth Act provides some regulatory relief for mid-sized bank holding companies like us, most provisions of the
Dodd-Frank Act and its implementing regulations remain in place and will continue to result in additional operating and compliance
costs that could have a material adverse effect on our business, financial condition and results of operation.
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.
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Insurance Agencies
Each of Miller Loughry Beach, HPB Insurance Group and AdvoCap Insurance Agency 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. 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. 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 or change in applicable
rules or regulations. 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.
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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.
Summary Risk Factors
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may
adversely affect our business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully
below and include, but are not limited to, risks related to:
COVID-19 Risks
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The COVID-19 pandemic is continuing and our businesses and the businesses of some of our customers continue to face
challenges.
Interest Rate Risks
• Our net interest margin, and consequently our net earnings, are significantly affected by interest rate levels and movements in
•
•
short-term interest rates as well as competitive pressures we face.
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 to, and the pending elimation of, LIBOR may adversely affect the holders of, the market value of, and the interest
expense paid on our subordinated debt and may affect certain of our loans.
Credit and Lending Risks
• We have a concentration of credit exposure to borrowers in certain industries, and we also target small to medium-sized
businesses that may be less able to weather challenging economic circumstances.
• Our ability to grow our loan portfolio may be limited by, among other things, economic conditions, competition within our
•
•
market areas, and our ability to hire and retain experienced bankers.
Changes in accounting standards may change the way we calculate our Allowance for Credit Losses.
If our Allowance for Credit Losses is not sufficient to cover losses inherent in our loan or securities portfolios, our results of
operations and financial condition will be negatively impacted.
Environmental liability associated with commercial lending could result in losses.
• Our accounting estimates and risk management processes rely on analytical and forecasting models.
•
• We depend on the accuracy and completeness of information about customers.
• We may be subject to claims and litigation asserting lender liability.
Liquidity and Capital Risks
Liquidity risk could impair our ability to fund our operations and jeopardize our financial condition.
Excess levels of liquidity could negatively impact our earnings.
•
•
• 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.
Operational and Market Risks
• Negative developments in the U.S. and local economies in our primary markets may adversely impact our results in the
future.
• Our operations are principally geographically concentrated in certain markets in the southeastern United States, and changes
in local economic conditions could impact our profitability.
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• Our business may suffer if there are significant declines in the value of real estate.
•
BHG’s results of operations have become a larger portion of our results of operations, and challenges in BHG’s business that
negatively affect its results would now more significantly impact our results.
• 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.
• Our selection of accounting policies and methods may affect our reported financial results.
• We currently invest in bank owned life insurance and may continue to do so in the future.
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The fair values of our investments in private companies and venture capital funds are likely to fluctuate and the value that we
ultimately realize on those investments may vary materially.
• 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 are dependent on our IT and telecommunications systems and third-party servicers, and systems failures, interruptions or
breaches of security could have an adverse effect on our financial condition.
• Our business reputation and relationships are important and any damage to them could have a material adverse effect on our
business.
• We face substantial competition and are subject to certain regulatory constraints not applicable to some of our competitors,
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which may decrease our growth or profits.
Our operations, business and customers could be materially adversely affected by the impacts related to climate change.
The implementation of other new lines of business or new products and services may subject us to additional risk.
Inability to retain senior management and key employees or to attract new experienced financial services professionals could
adversely affect our business.
• We are subject to regulatory oversight and certain litigation, and our expenses related to this oversight and litigation may
adversely affect our results.
• Our business is dependent on technology, and an inability to invest in technological improvements may adversely affect our
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results of operations and financial condition.
The soundness of other financial institutions, including those with whom we have engaged in transactions, could adversely
affect us.
• We may be subject to claims and litigation pertaining to fiduciary responsibility.
• Natural disasters and the affects of a changing climate may adversely affect us and our customers.
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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results.
Regulatory and Compliance Risks
• National or state legislation or regulation may increase our expenses and reduce earnings.
• We are subject to various statutes and regulations that may impose additional costs or limit our ability to take certain actions.
• We must maintain adequate regulatory capital to support our business objectives.
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Pinnacle Financial is required to act as a source of financial and managerial strength for Pinnacle Bank in times of stress.
• Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines or
sanctions against us or restrict our ability to make acquisitions.
Risks Related to Acquisition Activity
• Our acquisitions and future expansion may result in additional risks.
• We may face risks with respect to future acquisitions.
Risks Relating to Our Securities
The price of our capital stock may be volatile or may decline.
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• Our ability to declare and pay dividends is limited.
• We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of
existing shareholders.
The Series B Preferred Stock constitutes an equity security and ranks junior to all of our and our subsidiaries’ existing
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indebtedness and will rank junior to our and our subsidiaries’ future indebtedness.
The Series B Preferred Stock and the depositary shares representing the Series B Preferred Stock effectively rank junior to
any existing and all future liabilities of our subsidiaries.
• Dividends on the Series B Preferred Stock are non-cumulative and discretionary.
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• Holders of Pinnacle Financial’s junior subordinated debentures have rights that are senior to those of Pinnacle Financial’s
The holders of the Series B Preferred Stock (and underlying depositary shares) have limited voting rights.
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shareholders.
Pinnacle Financial and Pinnacle Bank have issued subordinated indebtedness the holders of which have rights that are senior
to those of Pinnacle Financial’s shareholders.
• We and/or the holders of certain types of our securities could be adversely affected by unfavorable ratings from rating
agencies.
• Our common stock and the depositary shares underlying our Series B Preferred Stock have less liquidity than many other
stocks quoted on a national securities exchange.
• 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.
• An investment in our common stock or depositary shares is not an insured deposit and is not guaranteed by the FDIC.
Risks Related to Our Business
COVID-19 Risks
The COVID-19 pandemic is continuing and our businesses and the businesses of some of our customers continue to face
challenges.
The spread of COVID-19 has created a global public health crisis that has periodically resulted in uncertainty, volatility and
deterioration in financial markets and in governmental, commercial and consumer activity including in the United States, where we
conduct substantially all of our activity. At various times since the beginning of the COVID-19 pandemic, our businesses and the
businesses of some of our customers have been disrupted and adversely impacted.
While the current wave of COVID-19 related to the Omicron variant has begun to subside in the United States, and government
restrictions have been allowed to lapse and commercial and consumer activity has largely resumed, the pandemic is continuing and to
the extent cases were to once again surge, government restrictions could be reinstated, which, along with independent actions of
individuals and businesses aimed at slowing a new surge, may again negatively impact economic activity and disrupt our and our
customers’ businesses. Further, if new strains or variants of COVID-19 develop or boosters of the COVID-19 vaccines or other
treatments are not widely administered or available for a significant period of time or otherwise prove ineffective, the adverse impact
of COVID-19 on the economy, and, in turn, our financial condition, liquidity, and results of operations could be material.
Interest Rate Risks
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 other interest-earning assets 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 largest 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 or the elimination of 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
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liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses. Following changes
in the general level of interest rates, our ability to maintain a positive net interest spread is dependent on our ability to increase (in a
rising rate environment) or maintain or minimize the decline in (in a falling rate environment) our loan offering rates, minimize
increases on our deposit rates in a rising rate environment or promptly reduce the rates we pay on deposits in a falling rate
environment, and maintain an acceptable level and mix of funding. Although we have implemented strategies we believe will reduce
the potential effects of changes in interest rates on our net interest income, these strategies may not always be successful, and, in the
case of certain hedging strategies, could materially and adversely impact our results of operations if short term interest rates move in a
direction that is different than the direction we anticipated at the time we initiated the strategy. 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.
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. Short-term interest rates are expected to rise in 2022 and in a rising rate environment our ability
to increase the rates we charge on loans faster than the rates we pay on deposits will be critical to maintaining or expanding our net
interest margin. In addition, many of our variable rate loans have loan floors that will limit our ability to capture the full benefit of
initial increases in short-term rates.
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 our interest-earning assets and interest-bearing liabilities and by utilizing hedging strategies to reduce
the impact of changes in rates. Interest rate risk management techniques are not exact. From time to time we have repositioned a
portion of our investment securities portfolio in an effort to better position our balance sheet for potential changes in short-term rates.
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 and interest rate floors, which are designed to lessen
elements of our interest rate exposure. In addition, we have utilized fixed-to-floating rate cash flow hedges to manage interest rate
exposure for our wholesale borrowings portfolio. This hedging strategy converted the LIBOR-based variable interest rate on
forecasted borrowings to a fixed interest rate and was used in an effort to protect us from floating interest rate variability in a rising
rate environment. In the event that interest rates do not change in the manner that we anticipate at the times we institute our hedging
strategies or at the pace that we anticipated, such transactions may materially and adversely affect our results of operations.
Hedging creates certain risks for us, including the risk that the other party to the hedge transaction will fail to perform (counterparty
risk, which is a type of credit risk), and the risk that the hedge will not fully protect us from loss as intended (hedge failure risk).
Unexpected counterparty failure or hedge failure could have a significant adverse effect on our liquidity and earnings.
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, social and political issues, including trade disputes and global health pandemics, 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 issuers 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.
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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.
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 intended to stop persuading or
compelling banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. Beginning on January 1, 2022,
one-week and 2-month LIBOR are no longer being published, though overnight, 1-month, 3-month, 6-month and 12-month LIBOR
are expected to be published until at least the middle of 2023.
It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator
for those durations that weren’t terminated effective January 1, 2022, whether LIBOR will cease to be published or supported during
or after 2022 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere; however, we believe
it is highly likely that all durations of LIBOR will cease to be published at some point in 2023. Given consumer protection, litigation,
and reputation risks, the bank regulatory agencies have indicated that entering into new contracts that use LIBOR as a reference rate
after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Therefore,
the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in
any event by December 31, 2021. In light of this regulatory guidance, effective January 1, 2022, we no longer enter into new loans
with LIBOR-based pricing and will not renew loans that mature after that date using LIBOR-based pricing. Instead, we are using
other reference rates for our variable rate loans, including the Secured Overnight Funding Rate, AMERIBOR and the Bloomberg Short
Term Bank Yield Index.
Those existing loans that have not yet reached their renewal dates and which were originally priced based on LIBOR, will continue to
utilize LIBOR until the loan matures or is renewed. At December 31, 2021, approximately 31% of our total loan portfolio was indexed
to 1-month, 3-month, 6-month 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 that they, or our actions in this respect, will not be challenged by our borrowers.
Certain of our funding sources are also priced to LIBOR, like the subordinated notes we have issued and our trust preferred securities.
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. At this time, it is not possible to predict whether these specific recommendations and
proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the
markets for floating-rate financial instruments. 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.
Credit and Lending Risks
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 and hotel and motel owners and/or operators. Certain industries, particularly hotel and motel operators, experienced
adversity during 2020 and at various points in 2021 as a result of the COVID-19 pandemic, and, as a result, an increased level of
borrowers in these industries were unable to perform under the original terms of their loan agreements with us at certain times during
the pandemic, resulting in modifications of these loans. While the negative economic impact of the pandemic waned during the second
half of 2021, if adverse conditions akin to 2020 were to return due to the emergence of a new, more potent variant of the COVID-19
virus or otherwise, 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
credit 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, 2021, our commercial and industrial loans accounted for approximately 34.5% of our total loans. Additionally,
approximately 36.9% of our commercial real-estate loans at December 31, 2021 are owner-occupied commercial real estate loans,
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which are loans to businesses secured by the businesses’ real estate. We expect to seek to expand the amount of these two types of
loans in our portfolio during 2022. During periods of lower economic growth or challenging economic periods like those resulting
from the COVID-19 pandemic, small to medium-sized businesses may be impacted more severely and more quickly than larger
businesses. In addition, inflation rose sharply at the end of 2021 and has continued at heightened levels so far in 2022. Inflationary
pressures are currently expected to remain elevated throughout much of 2022. Small to medium-sized businesses may be impacted
more during periods of high inflation as they are not as able to leverage economics of scale to mitigate cost pressures compared to
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.
Real estate construction and development loans are also an important part of our business. 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 risk-based
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 credit 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.
We make loans to portfolio companies of private equity firms and other loans that qualify as highly leveraged transactions. In certain
instances these loans may deteriorate and that deterioration may occur quickly. If the private equity sponsor is unwilling or unable to
provide necessary support we may suffer losses on these loans that could materially and adversely affect our 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, our ability to grow our core deposits, our ability to hire experienced bankers and seasonality.
Our ability to improve our results of operations is dependent upon, among other things, growing our loan portfolio and increasing net
interest income. 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. 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.
Our ability to grow our loan portfolio is also dependent on our ability to fund loan growth. We primarily seek to fund our loan growth
through stable, core deposits, but at times our ability to attract core deposits in amounts sufficient to fund our loan growth has been
limited by competitive pressures in our markets and our business model that focuses principally on serving small to medium-sized
businesses and their owners rather than a broad retail distribution strategy. As a result, at times our funding sources have consisted of
greater amounts of non-core funding.
Larger banks, with a more developed retail footprint, and non-banks, who are able to operate with greater flexibility and lower cost
structures due to less regulatory oversight, are better able to attract lower-cost retail deposits than we can, which at times causes us to
utilize a larger percentage of noncore funding to fund our loan growth. Though we have grown our core deposits meaningfully during
the COVID-19 pandemic, if we are unable to retain or attract core deposits at sufficient levels as the economic disruption from the
pandemic continues to lessen and as interest rates rise as currently expected to fund our loan growth and our percentage of noncore
funding rises to levels that approach our policy limits, 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, particularly during periods of time when our
net interest margin is experiencing compression. 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.
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Much of our organic loan growth that we have experienced in recent years (and a key part of our loan growth strategy in 2022 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.
In our efforts to continue to grow our loan portfolio, we have expanded the types of loans that we offer to certain specialty areas, like
equipment financing and the financing of solar power generating projects, and these areas are an important focus of our loan growth
plans for 2022. Our ability to grow loans in these areas will be dependent on our ability to attract bankers with experience in these
areas and those bankers’ ability to win new deals and projects in these spaces. It will also be important for us to adequately underwrite
lending opportunities in these new specialty areas and price these transactions at levels that appropriately compensate us for the risks
that we assume in these transactions.
Changes in accounting standards may change the way we calculate our Allowance for Credit Losses.
The Financial Accounting Standards Board and the SEC may change the financial accounting and reporting standards, or the
interpretation of those standards, that govern the preparation of our external financial statements from time to time. The impact of
these changes or the application thereof on our financial condition and operations can be difficult to predict. For example, the FASB
adopted a new accounting standard that became effective for Pinnacle Bank beginning January 1, 2020. This standard, referred to as
current expected credit loss, or CECL, requires financial institutions to determine periodic estimates of lifetime expected credit losses
on financial assets, including loans, and recognize the expected credit losses through provision for credit losses. CECL changed the
current method of provisioning for loan losses, which required us to increase our allowance for credit losses in the first half of 2020,
and is increasing the types and amounts of data we need to collect and review to determine the appropriate level of our allowance for
credit losses. In addition, the adoption of CECL may result in more volatility in the level of our allowance for credit losses. An
increase, to the extent material, in our allowance for credit losses or expenses incurred to determine the appropriate level of the
allowance for credit losses could have a material adverse effect on our capital levels, financial condition and results of operations. 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.
If our Allowance for Credit Losses is not sufficient to cover losses inherent in our loan or securities portfolios, our results of
operations and financial condition will be negatively impacted.
We maintain allowances for credit losses on loans, securities and off-balance sheet credit exposures. If loan customers with significant
loan balances individually or in the aggregate fail to repay their loans, our results of operations, financial condition and capital levels
will suffer. We make various assumptions and judgments about the expected 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 credit losses, established through a provision for credit losses charged to expense, to cover our estimate of
the current expected credit losses in our loan and securities portfolios. 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,
including unemployment statistics, 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 credit 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 credit
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 credit 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 and forecasted conditions, new information regarding existing loans,
identification of additional problem loans, accounting rule changes (like those that contributed to increases levels of provision expense
in 2020 as a result of our adopting CECL) 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.
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Our accounting estimates and risk management processes rely on analytical and forecasting models and tools.
The processes we use to estimate expected credit losses, calculate our allowance for credit losses and 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.
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.
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.
Liquidity and Capital Risks
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,
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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, including subordinated indebtedness, 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's 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, increased levels of indebtedness, a reduction
in our published credit ratings, 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 (particularly as it
relates to brokered deposits and other noncore deposits), general interest rate levels, returns available to customers on alternative
investments, government programs, 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 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. An increase in
our reliance on noncore funding (particularly brokered time deposits), as occurred in 2019, would increase our liquidity risk.
These noncore funding sources can be more rate sensitive than core deposits, and 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.
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, or that we will be able to offer
competitive rates to retain these deposits upon their maturity (particularly in a down rate or low rate environment). 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 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 and brokered deposits 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, or
retain these funding sources upon maturity, we might be unable to meet our customers’ or creditors’ needs, which would adversely
affect our financial condition, results of operations, and liquidity.
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, 2021, 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.
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We may need to raise additional capital (including through the issuance of common or preferred stock or additional Tier 2 capital
instruments) in the future to provide us with sufficient capital resources (or replace expiring capital instruments) 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 capital stock or its ability to pay
interest on its indebtedness.
Unexpected changes in requirements for capital resulting from regulatory actions could require us to raise capital at a time, and at a
price, that might be unfavorable, or could require that we forego continuing growth or reduce our current loan portfolio. We cannot
assure you that access to capital will be available to us in needed amounts or 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. Factors that could adversely affect our ability to raise additional capital or
necessary funding include conditions in the capital markets, our financial performance, our credit ratings, regulatory actions and
general economic conditions. Increases in our cost of capital, including dilution and increased interest or dividend requirements, could
have a direct adverse impact on our operating performance and our ability to achieve our growth objectives.
Operational and Market Risks
Negative developments in the U.S. and local economies in our primary markets 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, international trade disputes and retaliatory tariffs, supply chain disruptions,
terrorist attacks, global pandemics, acts of war, or a combination of these or other factors. Economic conditions in certain industries in
the markets in which we operate deteriorated rapidly in 2020 as a result of the COVID-19 pandemic. These challenges manifested
themselves primarily within the hotel, restaurant, retail, commercial real estate and entertainment industries and contributed to
increased levels of provisions for credit losses. In addition, inflation rose sharply at the end of 2021 and has continued at heightened
levels so far in 2022, and is currently expected to remain elevated throughout much of 2022. A worsening of business and economic
conditions, or persistent inflationary pressures or supply chain disruptions, generally or specifically in the principal markets in which
we conduct business could have adverse effects, including the following:
•
•
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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 improved in most of our markets when compared to the first and second quarters of 2020 and we
have returned our focus to growing earning assets, we believe that it is possible we will continue to experience an uncertain and
volatile economic environment during 2022, including as a result of issues of national security, COVID-19 and other health crises
around the world, inflation and supply chain disruptions. 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, the federal government has shut down periodically, in some cases for prolonged periods. It is
possible that the federal government may shut down again in the future, particularly in light of the evenly divided United States
Senate. 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.
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Our operations are principally geographically concentrated in certain markets in the southeastern United States, and changes in
local economic conditions could 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. In December 2019, we also expanded our operations into Georgia, and in 2021 into Alabama and the Washington,
D.C. area. 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 remain challenged during 2022 or
thereafter, and as a result, 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, including 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
credit 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.
BHG’s results of operations have become a larger portion of our results of operations, and challenges in BHG’s business that
negatively affect its results would now more significantly impact our results.
Pinnacle Financial and Pinnacle Bank collectively hold a 49% interest in BHG. Our share of BHG’s earnings make up a significant
portion of our recurring noninterest income, and as a result, a meaningful portion of our net income. 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, the other managers and members of BHG may make most decisions regarding
BHG’s and its subsidiaries’ operations without our consent or approval. This includes a decision to sell the company. Any sale of all
or a portion of our interest in BHG would adversely affect our recurring noninterest income. In addition, any sale of all or a portion of
the other members' interest in BHG, including in connection with a capital raising transaction, could affect our governance rights in
BHG and 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, other than transfers in connection with an acquisition
of Pinnacle Financial or Pinnacle Bank.
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. BHG, and its subsidiaries, also retain loans that they originate on their balance sheet and earn
interest income on those loans. BHG currently intends to retain more of the loans that it originates on its balance sheet. This practice
requires more external funding of BHG’s business than the historical practice of routinely selling loans to other financial institutions
and will likely increase BHG’s funding costs and operating expenses. It also increases BHG’s exposure to credit losses in its portfolio,
which losses could materially and adversely impact BHG’s results of operations and Pinnacle Financial’s and Pinnacle Bank’s interest
in BHG’s net profits. If BHG is unable to secure the necessary funding for this change in its business model, it may be required to
return to a business model that focuses more on a gain on sale approach that could negatively impact BHG’s longer-term results and
our noninterest income contributed by our investment in BHG.
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Future contributions to our earnings from BHG and its subsidiaries will require that they continue to grow their business and increase
the amount of loans that they are able to originate and sell, if not retained on BHG’s or a subsidiary’s balance sheet. In the event that
BHG’s loan growth slows over historical levels, 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) or it experiences increased levels of loan losses or requests for
substitutions and loans it previously originated and sold, its results of operations and our noninterest income would be adversely
affected. BHG currently operates in most states without the need for a permit or any other license as its loans are principally
commercial, business purpose loans that don’t trigger the need for licensure. In the event that BHG or its subsidiaries were required to
register or become licensed in any state in which they operate, including as a result of their expanding into consumer lending or
expanding into other lending areas like patient financing, or regulations are adopted that seek to limit BHG’s or its subsidiaries’ 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.
Recently, BHG has expanded its operations to include commercial lending to other professional service firms like attorneys,
accountants and others. Through subsidiaries that it owns, it also has expanded into patient financing, which involves making loans to
individuals to finance medical expenses, particularly those where patients have high deductible health plans. BHG is also expanding
into point-of-sale lending and may further expand its business into other types of lending, which may not be as profitable as BHG’s
current lending products or successful at all. These new product lines may involve more risk than BHG’s historical business and
BHG’s loss rates may increase when compared to historical levels. Moreover, BHG and its subsidiaries will likely face greater
regulatory scrutiny in certain of these lines of business that may increase BHG’s compliance costs and its risk of regulatory scrutiny.
Failure to realize the expected revenue increases and/or other projected benefits from, and any increased compliance costs and
regulatory scrutiny 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.
BHG’s business is also subject to increased scrutiny by bank regulatory agencies 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 have increased since our investment and are likely to
continue to increase, including as a result of its new product lines, 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.
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.
The fair values of our investments in private companies and venture capital funds are likely to fluctuate and the value that we
ultimately realize on those investments may vary materially.
From time to time, we and our affiliates, including Pinnacle Bank, make investments in private companies and venture capital funds.
The fair value of these investments are reflected in our financial statements and are adjusted on a quarterly basis. Moreover, because
valuations of private companies are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our
determinations of fair value for private companies may differ materially from the values that would have been used if a ready market
for these securities existed. Therefore, fair value determinations may materially understate or overstate the value that we ultimately
realize upon the sale of one or more investments. We cannot predict future realized or unrealized gains or losses, and any such gains or
losses are likely to vary materially from period to period.
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, 2021, 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 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 common and preferred shareholders.
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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 credit 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.
We currently invest in bank owned life insurance (“BOLI”) and may continue to do so in the future.
We had $761.9 million in general, hybrid and separate account BOLI contracts at December 31, 2021. BOLI is an illiquid long-term
asset that provides tax savings because cash value growth and life insurance proceeds are not taxable, subject to certain exceptions.
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.
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, fraud, 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, as well as
cause legal or reputational harm.
We are dependent upon information technologies, computer systems and networks, including those we maintain 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 due to 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, misconduct or complications or failures
encountered as existing systems are maintained, replaced or upgraded. For example, our financial, accounting, data processing, or
other operating or security systems or infrastructure or those of third parties upon which we rely may fail to operate properly or
become disabled or damaged, which could adversely affect our ability to process transactions or provide services. In the event that
backup systems are utilized, they may not process data as quickly as our primary systems and we may experience data losses in the
course of such recovery. We continuously update the systems on which we rely to support our operations and growth and to remain
compliant with all applicable laws, rules and regulations globally. This updating entails significant costs and creates risks associated
with implementing new systems and integrating them with existing ones, including business interruptions that may occur in the course
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of such implementation challenges. 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, degradation or outage in service, or is uninsured against 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, proprietary, personal 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, ransomware 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 use 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 prevalent and 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.
Cloud technologies are also critical to the operation of our systems, and our reliance on cloud technologies is growing. Service
disruptions in cloud technologies may lead to delays in accessing, or the loss of, data that is important to our businesses and may
hinder our clients’ access to our products and services.
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 regulatory 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 retain customers and businesses. Further, a security breach could also subject us to additional regulatory scrutiny, expose us
to civil litigation and possible financial liability and cause reputational damage.
We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. The failure of these
systems as a result of cyber-attacks or otherwise, 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.
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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 a 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 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 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.
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,
including mobile payment platforms, 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 requires us to, among other things, 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.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes
and continued consolidation. For example, the Growth Act and certain implementing regulations significantly reduce the regulatory
burden of certain large bank holding companies and raise the asset thresholds at which more onerous requirements apply, which could
cause certain large bank holding companies to become more competitive, to more aggressively pursue expansion or to more readily
consolidate with similar sized financial institutions. Also, technology has lowered barriers to entry and made it possible for non-banks
to offer products and services traditionally provided by banks, such as mobile payment and other automatic transfer and payment
systems, and for banks that do not have a physical presence in our markets to compete for deposits. The absence of regulatory
requirements may give non-bank financial companies a competitive advantage over us.
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Our operations, businesses and customers could be materially adversely affected by the impacts related to climate change.
There is an increasing concern among individuals and governments over the risks of climate change and related environmental
sustainability matters that create additional risk for us as it relates to the operation of our business and our relationships with our
clients. The physical risks of climate change include rising average global temperatures, rising sea levels and an increase in the
frequency and severity of extreme weather events and natural disasters, including floods, wildfires, hurricanes and tornados. Such
disasters could disrupt our operations or the operations of customers or third parties on which we rely. Such disasters could result in
market volatility or negatively impact our customers’ ability to repay outstanding loans, result in rapid deposit outflows, cause supply
chain and/or distribution network disruptions, damage collateral or result in the deterioration of the value of collateral or insurance
shortfalls.
Additionally, climate change concerns could result in transition risk. Changes in consumer preferences or technology and additional
legislation, regulatory and legal requirements, including those associated with the transition to a low-carbon economy, could restrict
the scope of our or our clients’ existing businesses, amplify credit and market risks, disproportionately impact certain of our clients,
like those that own and/or operate trucking companies, negatively impact asset values, increase expenses, including as a result of
strategic planning and technology and market changes, and/or otherwise adversely impact us, our businesses or our customers.
Our response to climate change, our climate change strategies, policies and disclosure, and/or our ability to achieve our climate-related
goals and commitments (which are subject to risks and uncertainties, many of which are outside of our control) could result in
reputational harm as a result of negative public sentiment, regulatory scrutiny, litigation and reduced investor and stakeholder
confidence.
The implementation of other new lines of business or new products and services may subject us to additional risk.
We continuously evaluate our service offerings and may implement new lines of business or offer new products and services within
existing lines of business in the future. There are substantial risks and uncertainties associated with these efforts. In developing and
marketing new lines of business and/or new products and services, we undergo a new product process to assess the risks of the
initiative, and invest significant time and resources to build internal controls, policies and procedures to mitigate those risks, including
hiring experienced management to oversee the implementation of the initiative. Initial timetables for the introduction and
development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not
prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may
also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of
business and/or new product or service could require the establishment of new key and other controls and have a significant impact on
our existing system of internal controls. Failure to successfully manage these risks in the development and implementation of new
lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial
condition and results of operations.
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 during
2022) 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 continuing to deploy a similar hiring strategy in all of our
markets. 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 (which has seen increased pressure in the current inflationary and
competitive environment in which we are operating) could cause our noninterest expense levels to rise and negatively impact our
results of operations.
Many of our key associates, and those we seek to hire, are experienced bankers who have been engaged in the business of commercial
banking for a significant period of time. While we believe this model of hiring has contributed to our success, we face risks associated
with this older workforce. Our healthcare costs may exceed those of our peers on account of our older associate base. Additionally, as
a number of our long-term employees approach retirement age, our ability to successfully plan for the transition of those associates’
clients to other associates becomes more important to our future success. If we are unable to successfully manage such transitions, our
relationships with our clients may be negatively impacted and our results of operations may be negatively affected.
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We are subject to regulatory oversight and certain litigation, and our expenses related to this regulatory oversight and 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 penalties and 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.
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. The importance of technology
has been sharpened as a result of COVID-19, and appears likely to remain increasingly important as the pandemic wanes. 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.
The soundness of other financial institutions, including those with whom we have engaged in transactions, 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 including those
with whom we have implemented our hedging strategies. 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 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.
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Natural disasters and the affects of a changing climate may adversely affect us and our customers.
Our operations and customer base are located in markets where natural disasters, including tornadoes, severe storms, fires, wildfires,
floods, and hurricanes 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.
In addition to natural disasters, the impact of climate change, such as rising average global temperatures and rising sea levels, and the
increasing frequency and severity of extreme weather events and natural disasters such as droughts, floods, wildfires and hurricanes
could negatively impact our operations including our ability to provide financial products and services to our customers. Climate
change also has the potential to negatively affect the collateral we take to secure loans that we make, the valuations of home prices or
commercial real estate or our customers’ (particularly those that are engaged in industries that could be negatively affected by a shift
to a low-carbon economy) ability and/or willingness to pay fees, repay outstanding loans or afford new products. Climate change
could also cause insurability risk and/or increased insurance costs for us or our customers.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our
financial results. As a result, current and potential holders of our securities could lose confidence in our financial reporting, which
would harm our business and the trading price of our securities.
Maintaining and adapting our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, 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
implement effective 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. If we or our independent registered accounting firm identify material weaknesses in
our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to
implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of
our financial reports. We may also face regulatory enforcement or other actions, including the potential delisting of our securities from
the Nasdaq Global Select Market. This could have an adverse effect on our business, financial condition or results of operations, as
well as the trading price of our securities, and could potentially subject us to litigation.
Risks Related to Acquisition Activity
Our acquisitions and future expansion may result in additional risks.
From 2015 through 2017, we completed the acquisitions of CapitalMark, Magna, Avenue and BNC and made a significant investment
in BHG. In 2019, we acquired Advocate Capital. We expect to continue to consider and explore opportunities to expand in our current
markets and in select primarily high-growth markets in the southern 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 or other
financial services companies, including our recent de novo expansions into the Atlanta, Georgia, Huntsville and Birmingham,
Alabama and Washington, D.C. metro markets. These types of expansions, including the recent de novo 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;
recruit seasoned professionals with significant experience and established books of business;
• 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
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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.
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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 (particularly those in new markets), 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, including those we plan to establish in the markets to which we have recently expanded,
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, including as a result of
supply chain disruptions and labor challenges currently affecting the construction industry. 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 construction or 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.
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 other 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 recent expansions or in any other future market 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, 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 or merging with 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:
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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 an institution we acquire or with which we merge;
the time and costs of evaluating new markets, hiring experienced local management, including as a result of de novo
expansion into a market such as our expansions into the Atlanta, Georgia, Huntsville and Birmingham, Alabama and
Washington, D.C. metro markets, 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 (or increase capital levels in connection with) 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;
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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.
Though we expect to remain principally focused on organically growing our business in our existing markets (including our new
markets) during 2022, we nonetheless may have opportunities to evaluate merger and acquisition opportunities that are presented to us
in our current markets as well as other select markets throughout the southern 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.
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.
Regulatory and Compliance Risks
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, increase our operating expenses, 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.
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.
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 by our regulators and in Congress. We expect that the current Presidential administration will
continue to implement a regulatory reform agenda that is significantly different than that of the prior administration. This reform
agenda could include an increased level of attention and focus on consumer protection, fair lending, the regulation of loan portfolios
and credit concentrations to borrowers impacted by climate change or that operate in industries that would not be favored in a low-
carbon economy and heightened scrutiny of BSA and AML requirements among other areas. In addition mergers and acquisitions
could be hampered by increased regulatory scrutiny. 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.
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Additionally, we are subject to laws regarding our handling, disclosure and processing of personal and confidential information of
certain parties, such as our employees, customers, suppliers, counterparties and other third parties. The Gramm-Leach-Bliley Act
requires us to periodically disclose our privacy policies and practices relating to sharing such information and enables retail customers
to opt out of our ability to share information with unaffiliated third parties, under certain circumstances. Other laws and regulations
impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to
contact customers with marketing offers. We are subject to laws that require us to implement a comprehensive information security
program that includes administrative, technical and physical safeguards to provide the security and confidentiality of customer records
and information. Additionally, other legislative and regulatory activity continue to lend uncertainty to privacy compliance
requirements that impact our business. We also expect that there will continue to be new laws, regulations and industry standards
concerning privacy, data protection and information security proposed and enacted in various jurisdictions. The potential effects of
pending legislation are far-reaching and may require us to modify our data processing practices and policies and to incur substantial
costs and expenses in an effort to comply.
We must maintain adequate regulatory capital to support our business objectives.
Under regulatory capital adequacy guidelines and other regulatory requirements, we must satisfy capital requirements based upon
quantitative measures of assets, liabilities and certain off-balance sheet items. Our satisfaction of these requirements is subject to
qualitative judgments by regulators that may differ materially from management’s and that are subject to being determined
retroactively for prior periods. Additionally, regulators can make subjective assessments about the adequacy of capital levels, even if
Pinnacle Bank’s reported capital exceeds the “well-capitalized” requirements. Pinnacle Financial’s ability to maintain its status as a
financial holding company and to continue to operate Pinnacle Bank as it has in recent periods is dependent upon a number of factors,
including Pinnacle Bank qualifying as “well capitalized” and “well managed” under applicable prompt corrective action regulations
and upon Pinnacle Financial qualifying on an ongoing basis as “well capitalized” and “well managed” under applicable Federal
Reserve regulations.
Failure to meet regulatory capital standards could have a material adverse effect on our business, including damaging the confidence
of customers in us, adversely impacting our reputation and competitive position and retention of key personnel. Any of these
developments could limit our access to:
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brokered deposits;
the Federal Reserve discount window;
advances from the FHLB;
capital markets transactions; and
development of new financial services.
Failure to meet regulatory capital standards may also result in higher FDIC assessments. If we fall below guidelines for being deemed
“adequately capitalized” the FDIC or Federal Reserve could impose restrictions on our activities and a broad range of regulatory
requirements in order to effect “prompt corrective action.” The capital requirements applicable to us are in a process of continuous
evaluation and revision in connection with actions of the Basel Committee and our regulators. We cannot predict the final form, or the
effects, of these regulations on our business, but among the possible effects are requirements that we slow our rate of growth or obtain
additional capital which could reduce our earnings or dilute our existing shareholders.
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 or dilutive 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.
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Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines or
sanctions against us or restrict our ability to make acquisitions.
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 and maintain staffing levels that are sufficient
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.
Risks Relating to Our Securities
The price of our capital stock may be volatile or may decline.
The trading price of our capital 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 capital stock. Among the factors that could affect the
price of the shares of our common stock and the depositary shares representing fractional interests in our Series B Preferred Stock 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;
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• 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;
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• market reactions to social media messages or posts;
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anticipated or pending investigations, proceedings or litigation that involve or affect us; and
domestic and international economic and social factors unrelated to our performance.
The trading price of the shares of our common stock and the depositary shares representing fractional interests in our Series B
Preferred 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 and approved the payment of the quarterly dividends on our Series B Preferred Stock (and underlying depositary shares) since
issuance, there can be no assurance of whether or when we may pay dividends on our capital 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. Moreover, our ability to pay dividends on our common stock is limited by the terms of our Series B
Preferred Stock which provides that if we have not paid dividends on the Series B Preferred Stock for the most recently completed
dividend period, then no dividend or distribution shall be declared, paid, or set aside for payment on shares of our common stock.
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Our principal source of funds used to pay cash dividends on our common stock will be cash we may hold from time to time as well as
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 capital 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 Federal Reserve has issued supervisory guidance advising bank holding companies to eliminate, defer or reduce dividends paid on
common stock and other forms of capital, like the Series B Preferred Stock, where the company’s net income available to shareholders
for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, the
company’s prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and
prospective financial condition or the company will not meet, or is in danger of not meeting, minimum regulatory capital adequacy
ratios. Recent supplements to this guidance reiterate the need for bank holding companies to inform their applicable reserve bank
sufficiently in advance of the proposed payment of a dividend in certain circumstances.
In addition, subject to certain exceptions, the terms of our subordinated debentures prohibit us from paying dividends on shares of our
capital stock at times when we are deferring the payment of interest on such subordinated debentures.
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 then 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 certain of our
other recent acquisitions) or investments in fee-related or other businesses (as we did with BHG), which could also dilute shareholder
ownership.
We have the ability under our current effective 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, which is what we did when we issued the Series B Preferred Stock. We may determine that it is advisable, or we may
encounter circumstances where we determine it is necessary, to issue additional shares of preferred stock, securities convertible into,
exchangeable for, or that represent an interest in preferred stock, or preferred stock-equivalent securities to fund strategic initiatives or
other business needs or to build additional capital. Our board of directors is authorized to cause us to issue one or more classes or
series of preferred stock from time to time without any action on the part of our shareholders, including issuing additional shares of
our Series B Preferred Stock or additional underlying depositary shares. Our board of directors also has the power, without
shareholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights,
dividend rights, and preferences over the Series B Preferred Stock with respect to dividends or upon our dissolution, liquidation or
winding-up and other terms.
Although the affirmative vote or consent of the holders of at least two-thirds of all outstanding shares of the Series B Preferred Stock,
voting together as a single class with any parity stock having similar voting rights, is required to authorize or issue any shares of
capital stock senior in rights and preferences to the Series B Preferred Stock, if we issue preferred stock or depositary shares in the
future with voting rights that dilute the voting power of the Series B Preferred Stock or depositary shares, the rights of holders of the
depositary shares or the market price of the depositary shares could be adversely affected. The market price of the depositary shares
underlying the shares of Series B Preferred Stock could decline as a result of these other offerings, as well as other sales of a large
block of depositary shares, Series B Preferred Stock, or similar securities in the market thereafter, or the perception that such sales
could occur. Holders of the Series B Preferred Stock are not entitled to preemptive rights or other protections against dilution.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control,
we cannot predict or estimate the amount, timing or nature of our future offerings or the prices at which we may issue securities that
we offer. Thus, holders of the depositary shares underlying the shares of Series B Preferred Stock bear the risk of our future offerings
reducing the market price of the depositary shares and diluting their holdings in the depositary shares.
45
The Series B Preferred Stock constitutes an equity security and ranks junior to all of our indebtedness and will rank junior to our
and our subsidiaries’ future indebtedness.
Shares of the Series B Preferred Stock are equity interests in Pinnacle Financial and do not constitute indebtedness. Accordingly,
shares of the Series B Preferred Stock and the related depositary shares are and will be junior in right of payment to any existing and
all future indebtedness and other non-equity claims of Pinnacle Financial with respect to assets available to satisfy claims on us,
including in a liquidation of Pinnacle Financial. In the event of our bankruptcy, liquidation, dissolution or winding-up, our assets will
be available to pay obligations on the Series B Preferred Stock and any parity stock only after all of our liabilities have been paid and
any obligations we owe on any securities that rank senior to the Series B Preferred Stock then outstanding, if any, have been satisfied.
In case of such bankruptcy, liquidation, dissolution or winding-up, the Series B Preferred Stock will rank equally with any parity stock
in the distribution of our assets. Holders of the depositary shares may be fully subordinated to interests held by the U.S. government in
the event of a receivership, insolvency, liquidation or similar proceeding. In addition, our existing and future indebtedness may restrict
payment of dividends on the Series B Preferred Stock.
The Series B Preferred Stock and the depositary shares representing the Series B Preferred Stock effectively rank junior to any
existing and all future liabilities of our subsidiaries.
We are a financial holding company and conduct substantially all of our operations through our subsidiaries. Our right to participate in
any distribution of the assets of our subsidiaries upon any liquidation, reorganization, receivership or conservatorship of any
subsidiary (and thus the ability of the holder of the Series B Preferred Stock and the holders of the depositary shares to benefit
indirectly from such distribution) will rank junior to the prior claims of that subsidiary’s creditors. In the event of bankruptcy,
liquidation or winding-up, there may not be sufficient assets remaining, after paying our and our subsidiaries’ liabilities, to pay
amounts due on any or all of the Series B Preferred Stock and the depositary shares representing the Series B Preferred Stock then
outstanding.
We, together with Pinnacle Bank, own 49% of the outstanding equity interests of BHG. Our right to participate in any distribution of
the assets of BHG upon its liquidation, reorganization, receivership or conservatorship (and thus the ability of the holders of the Series
B Preferred Stock and the holders of the depositary shares to benefit indirectly from such distribution) will rank junior to the prior
claims of BHG’s creditors. Moreover, our 49% ownership interest in BHG and minority board representation on BHG’s board means
that we, and Pinnacle Bank, cannot on our own cause BHG to make distributions to us and Pinnacle Bank that could be used to pay
dividends on the Series B Preferred Stock. In addition, BHG is a party to various agreements related to its indebtedness pursuant to
which BHG’s ability to make distributions to us may be limited.
The Series B Preferred Stock and the depositary shares representing the Series B Preferred Stock places no restrictions on our business
or operations or on our ability to incur indebtedness or engage in any transactions, subject only to the limited voting rights of the
shares of Series B Preferred Stock.
Dividends on the Series B Preferred Stock are non-cumulative and discretionary. If we do not declare dividends on the Series B
Preferred Stock, holders of the depositary shares will not be entitled to receive related distributions on their depositary shares.
Dividends on the Series B Preferred Stock are non-cumulative and discretionary, not mandatory. Consequently, if our board of
directors does not authorize and declare a dividend for any dividend period, the holder of the Series B Preferred Stock, and therefore
the holders of the depositary shares, will not be entitled to receive a dividend for such period, and such undeclared dividend will not
accrue and be payable. We will have no obligation to pay dividends for such dividend period, whether or not dividends are authorized
and declared for any subsequent dividend period with respect to the Series B Preferred Stock. Our board of directors may determine
that it would be in our best interests to pay less than the full amount of the stated dividends on the Series B Preferred Stock or no
dividend for any dividend period even if funds are available. Factors that would be considered by our board of directors in making this
determination include our financial condition, liquidity and capital needs, the impact of current and pending legislation and
regulations, economic conditions, including worsening economic conditions resulting from the COVID-19 pandemic, our ability to
service any equity or debt obligations senior to the Series B Preferred Stock, any credit agreements to which we are a party, tax
considerations and such other factors as our board of directors may deem relevant.
Unlike indebtedness, where principal and interest would customarily be payable on specified due dates, in the case of preferred stock
like the Series B Preferred Stock dividends are payable only when, as and if authorized and declared by our board of directors or a
duly authorized committee of the board and, as a Tennessee corporation and financial holding company, we are subject to restrictions
on payments of dividends out of lawfully available funds as described elsewhere in this Annual Report on Form 10-K.
46
The holders of the Series B Preferred Stock, and therefore the holders of the depositary shares representing the Series B Preferred
Stock, have limited voting rights.
Until and unless we are in arrears on our dividend payments on the Series B Preferred Stock for six quarterly dividend periods,
whether consecutive or not, the holders of the Series B Preferred Stock, and therefore the holders of the depositary shares, have no
voting rights with respect to matters that generally require the approval of voting shareholders, except with respect to certain
fundamental changes in the terms of the Series B Preferred Stock, and except as may be required by the rules of any securities
exchange or quotation system on which the Series B Preferred Stock is listed, traded or quoted or by Tennessee law. If dividends on
the Series B Preferred Stock are not paid in full for six dividend periods, whether consecutive or not, the holders of Series B Preferred
Stock, voting together as a class with any other equally ranked series of preferred stock that have similar voting rights then
outstanding, if any, will have the right, at the first annual meeting or special meeting held thereafter and at subsequent annual
meetings, to elect two directors to our board. The terms of the additional directors so elected will end upon the payment or setting
aside for payment by us of continuous noncumulative dividends for at least four dividend periods on the Series B Preferred Stock and
any other equally ranked series of preferred stock then outstanding, if any.
Holders of the depositary shares must act through the depositary to exercise any voting rights of the Series B Preferred Stock.
Although each depositary share is entitled to 1/40th of a vote, the depositary can only vote whole shares of Series B Preferred Stock.
While the depositary will vote the maximum number of whole shares of Series B Preferred Stock in accordance with the instructions it
receives, any remaining fractional votes of holders of the depositary shares underlying such shares of Series B Preferred Stock will not
be voted.
Holders of Pinnacle Financial’s junior subordinated debentures have rights that are senior to those of Pinnacle Financial’s
shareholders.
At December 31, 2021, Pinnacle Financial had outstanding trust preferred securities and accompanying junior subordinated debentures
totaling approximately $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 and preferred 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 our common stock or preferred 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 preferred stock, and thereafter its 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 or preferred stock.
Pinnacle Financial and Pinnacle Bank have in the past issued subordinated indebtedness the holders of which have rights that are
senior to those of Pinnacle Financial’s shareholders.
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, 2021, Pinnacle Financial had an aggregate of $300.0 million of subordinated notes
outstanding, not including the subordinated debentures issued in connection with our trust preferred securities; Pinnacle Bank did not
have any subordinated notes outstanding at December 31, 2021. Moreover, the notes we have issued rank senior to shares of Pinnacle
Financial’s common and preferred stock and Pinnacle Bank’s subordinated indebtedness, if any be outstanding from time to time, is
structurally senior to the rights of the holders of Pinnacle Financial’s common and preferred 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, or assume in connection with an acquisition, 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.
47
We and/or the holders of certain types 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 company and certain of our debt
and equity securities 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 published 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
published 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
published 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 and the depositary shares underlying our Series B Preferred Stock are currently traded on the
Nasdaq Stock Market’s Global Select Market, these shares, particularly the depositary shares, have less liquidity than many other
stocks quoted on a national securities exchange.
The trading volume in our common stock and depositary shares 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 or
depositary shares 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 or additional depositary shares in the market, or the
availability of shares of common stock or depositary shares for sale in the market, will have on the market price of our common stock
and depositary shares. We can give no assurance that sales of substantial amounts of common stock or depositary shares in the market,
or the potential for large amounts of sales in the market, would not cause the price of our common stock or depositary shares to
decline or impair our future ability to raise capital through sales of our common stock or additional depositary shares.
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 or depositary shares, 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.
48
An investment in our common stock or depositary shares is not an insured deposit and is not guaranteed by the FDIC.
An investment in our common stock or depositary shares 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 or
depositary shares 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 or depositary shares is adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
49
ITEM 2. PROPERTIES
The Company's executive offices are located at 150 Third Avenue South, Suite 900, Nashville, Tennessee. At December 31, 2021, we
conducted branch banking operations in 118 offices in six states. These offices include both owned and leased facilities as follows:
State
Owned
Leased
Total
Alabama
Tennessee
Georgia
North Carolina
South Carolina
Virginia
—
31
—
28
10
7
76
1
18
2
9
10
2
42
1
49
2
37
20
9
118
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.
50
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, 2022, Pinnacle Financial had approximately 4,213 stockholders of record.
In connection with the settlement of income tax liabilities associated with the Company's equity compensation plans, Pinnacle
Financial repurchased shares of its common stock during the quarter ended December 31, 2021 as follows:
Period
October 1, 2021 to October 31, 2021
November 1, 2021 to November 30, 2021
December 1, 2021 to December 31, 2021
Total
Total Number of
Shares
Repurchased (1)
Average Price Paid
Per Share
3,839 $
—
11
3,850 $
100.21
—
95.96
100.19
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
Maximum Number
(or Approximate
Dollar Value) of
Shares That May
Yet Be Purchased
Under the Plans or
Programs(2)
—
—
—
—
125,000,000
125,000,000
125,000,000
125,000,000
(1) During the quarter ended December 31, 2021, 14,436 shares of restricted stock previously awarded to certain of our associates vested.
We withheld 3,850 shares to satisfy tax withholding requirements associated with their vesting.
(2) On January 19, 2021, the board of directors authorized a share repurchase program for up to $125.0 million of Pinnacle Financial's
outstanding common stock. The share repurchase program is set to expire on March 31, 2022 and the Board of Directors has authorized a
$125.0 million share repurchase program that will commence upon expiration of the current program. This new program will expire on
March 31, 2023. 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 programs do not obligate Pinnacle Financial to repurchase any dollar amount or number of shares, and the
programs 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. Pinnacle Financial did not repurchase any shares of its common stock under its current repurchase plan
during the year ended December 31, 2021.
ITEM 6. RESERVED
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, 2021 and 2020 and our results of operations for each of the
years in the three-year period ended December 31, 2021. 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.
51
Selected Financial Data
Set forth below is certain selected financial data related to the Company's operations for 2019, 2020 and 2021:
(dollars in thousands, except per share data)
Total assets
Loans, net of unearned income
Allowance for credit losses
Total securities
Goodwill, core deposit and other intangible assets
2021
2020(1)
2019 (2)
$
38,469,399
$
34,932,860
$
27,805,496
23,414,262
22,424,501
19,787,876
263,233
6,070,152
1,853,630
285,050
4,615,040
1,862,147
94,777
3,728,991
1,870,941
Deposits and securities sold under agreements to repurchase
31,457,092
27,833,739
20,307,382
Advances from FHLB
Subordinated debt and other borrowings
Stockholders' equity
Statement of Operations Data:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
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
Preferred dividends per share
Book value per common share
888,681
423,172
5,310,607
1,087,927
670,575
4,904,611
2,062,534
749,080
4,355,748
$
1,031,214
$
1,021,042
$
1,067,936
98,813
932,401
16,126
916,275
395,734
660,104
651,905
124,582
527,323
15,192
512,131
199,254
821,788
203,815
617,973
317,840
564,455
371,358
59,037
312,321
7,596
304,725
301,794
766,142
27,283
738,859
263,826
505,148
497,537
96,656
400,881
—
400,881
$
$
$
$
$
6.79
$
4.04
$
5.25
75,468,339
75,376,489
76,364,303
6.75
$
4.03
$
5.22
75,927,147
75,654,385
76,763,903
0.72
67.52
66.89
$
$
$
0.64
16.88
61.80
$
$
$
0.64
—
56.89
Common shares outstanding at end of period
76,142,726
75,850,323
76,563,811
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
Avg. interest-earning assets to avg. interest-bearing liabilities
Average equity to average total assets ratio
Dividend payout ratio
1.43 %
10.02 %
3.02 %
2.87 %
1.11 %
1.85 %
49.70 %
80.61 %
149.63 %
14.31 %
10.67 %
0.94 %
6.57 %
2.97 %
2.72 %
0.98 %
1.75 %
49.53 %
88.11 %
136.60 %
14.33 %
15.84 %
1.52 %
9.57 %
3.46 %
3.06 %
1.00 %
1.91 %
49.05 %
97.78 %
131.12 %
15.84 %
12.24 %
52
(dollars in thousands, except per share data)
Credit Quality Ratios:
Allowance for credit losses to nonaccrual loans
Allowance for credit 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(3):
Common equity Tier 1 capital
Leverage
Tier 1 capital
Total capital
2021
2020(1)
2019 (2)
833.83 %
386.06 %
153.85 %
1.12 %
0.10 %
0.17 %
0.17 %
10.93 %
9.70 %
11.67 %
13.84 %
1.27 %
0.25 %
0.38 %
0.18 %
10.03 %
8.63 %
10.87 %
14.26 %
0.48 %
0.33 %
0.46 %
0.09 %
9.70 %
9.08 %
9.70 %
13.21 %
(1)
(2)
(3)
Information for the 2020 fiscal year includes adoption of FASB ASU 2016-13 on January 1, 2020 which introduces the current expected credit losses methodology which requires us to
estimate all expected credit losses over the remaining life of our loan portfolio. The impact of the adoption of ASU 2016-13 is discussed throughout the remainder of this Annual Report
on Form 10-K.
Information for the 2019 fiscal year includes operations of Advocate Capital from its acquisition date of July 2, 2019.
Capital ratios are for Pinnacle Financial Partners, Inc.
Overview
General. Our fully diluted net income per common share for the year ended December 31, 2021 was $6.75 compared to fully diluted
net income per common share of $4.03 and $5.22 for the years ended December 31, 2020 and 2019, respectively. At December 31,
2021, loans had increased by $989.8 million as compared to December 31, 2020.
Impact of COVID-19. COVID-19 and related health and safety measures taken by governments, businesses and individuals continue to
cause uncertainty, volatility and disruption in the economy, including the economies of the markets that we serve. In the fourth quarter
of 2021, we began to treat COVID-19 as endemic and as such adjusted our protocols to align with that decision. The goal in this
decision is to prioritize our culture while responding to risks in real-time. As with any endemic situation, we believe there will be
times where extra precaution is necessary, including following quarantine guidance and masking, and we intend to implement that
precaution as needed. Additionally, we continue to strongly encourage and incentivize vaccination among our associates, with
vaccination or a recent negative test a prerequisite for attending company gatherings. We believe our response to COVID-19 allowed
and continues to allow us to appropriately support our associates, clients and their communities.
For more information regarding the impact of the COVID-19 pandemic on our financial condition and results of operations as of and
for the fiscal year ended December 31, 2021 see “Risk Factors – Risks Related to Our Business – COVID-19 Risks” and throughout
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this Annual Report on Form
10-K.
Results of operations. Our net interest income increased to $932.4 million for 2021 compared to $821.8 million for 2020 and $766.1
million for 2019. The increase in 2021 as compared to 2020 was largely the result of lower cost of funds and organic loan growth.The
increase in 2020 as compared to 2019 was largely the result of lower cost of funds, the impact of both interest and fees related to
Paycheck Protection Program (PPP) loans, our building of additional liquidity in response to the economic uncertainty resulting from
the COVID-19 pandemic and organic loan growth.
Net interest income in 2021, 2020 and 2019 was affected by fluctuations in our net interest spread and for 2021 and 2020 was
materially impacted by income on PPP loans. The net interest margin (the ratio of net interest income to average earning assets) for
2021 was 3.02% compared to 2.97% and 3.46% for 2020 and 2019, respectively.
Our provision for credit losses was $16.1 million for 2021 compared to $203.8 million in 2020 and $27.3 million in 2019. The
decrease in provision expense is primarily due to improvements in current and projected economic conditions as compared to the
economic deterioration that occurred or was anticipated during 2020 as a result of COVID-19, resulting in the recapture of previously
recorded reserves. Also contributing to provision expense in all periods were net charge-offs which were $38.7 million during 2021
compared to $39.4 million in 2020 and $16.1 million in 2019. The increase in net charge-offs in 2021 and 2020 was in part the result
of charge-offs related to credits to borrowers whose businesses are in sectors which have been more negatively impacted by the
COVID-19 pandemic.
At December 31, 2021, our allowance for credit losses as a percentage of total loans, inclusive of PPP loans, was 1.12% compared to
1.27% at December 31, 2020. The decrease in the allowance for credit losses is largely the result of improvements in the
macroeconomic forecasts utilized within our CECL models to estimate future credit losses.
53
Noninterest income for 2021 compared to 2020 increased by $77.9 million, or 24.5%. The growth in noninterest income for 2021
compared to 2020 was in large part attributable to an increase in income from our equity method investment in Bankers Healthcare
Group, LLC (BHG) of $38.7 million, or 46.4%, during the year ended December 31, 2021 compared to the same period in the prior
year. Additionally, positively impacting noninterest income were wealth management revenues of $69.2 million for the year ended
December 31, 2021 compared to $56.1 million for the same period in the prior year. Other noninterest income, which is the result of,
among other things, fee revenue lines of business other than those noted above, also increased during the year ended December 31,
2021 by $46.9 million when compared to the same period in the prior year primarily due to an increase of $22.0 million in income
from other equity investments and an increase of $16.3 million from interchange and other consumer fees when compared to 2020.
The above increases were offset by a decrease in gains on mortgage loans sold, net, which decreased by $27.6 million for the year
ended December 31, 2021 as compared to 2020 primarily due to the fluctuations in the interest rate environment and a decline in
inventory of homes available-for-sale in our markets in 2021.
Noninterest income for 2020 compared to 2019 increased by $54.0 million, or 20.5%. The growth in noninterest income for 2020
compared to 2019 was in large part attributable to gains on mortgage loans sold, net, which increased by $35.7 million for the year
ended December 31, 2020 as compared to 2019 primarily due to the favorable interest rate environment and housing markets in our
markets in 2020 as well as our increased number of mortgage originators in the respective periods. These gains on mortgage loans
sold, net, were offset in part by a decrease in income from our equity method investment in Bankers Healthcare Group, LLC (BHG) of
$6.6 million, or 7.3%, during the year ended December 31, 2020 compared to the same period in the prior year. Additionally,
positively impacting noninterest income was income from our wealth management groups (investments, insurance and trust) of $56.1
million for the year ended December 31, 2020 compared to $47.7 million for the same period in the prior year as well as $986,000 in
net gains on sales of securities during the year ended December 31, 2020 compared to $5.9 million in net losses on sales of securities
during 2019. Other noninterest income, which is the result of, among other things, fee revenue lines of business other than those noted
above, increased during the year ended December 31, 2020 by $12.1 million when compared to the same period in the prior year.
Noninterest expense for 2021 compared to 2020 increased by $95.6 million, or 16.9%. Impacting noninterest expense for the year
ended December 31, 2021 as compared to 2020 was the $101.5 million increase in salaries and employee benefits. The change in
salaries and employee benefits was primarily the result of an increase in our annual cash incentive plan accrual and an increase in
equity compensation expense both due to accruals associated with achievement of above-target level performance during 2021
compared to 2020 when our performance resulted in below-target level achievement for cash and forfeiture of a portion of the equity
awards we had issued with performance measures tied to 2020 performance equity incentives, as well as annual merit increases
awarded in the first quarter of 2021 and an increase in our associate base in 2021 versus 2020.Impacting the decrease in other
noninterest expense during the year ended December 31, 2021 were $15.2 million in FHLB restructuring charges and $4.7 million in
hedge termination charges recorded during the year ended December 31, 2020 and did not reoccur in 2021.
Noninterest expense for 2020 compared to 2019 increased by $59.3 million, or 11.7%. Impacting noninterest expense for the year
ended December 31, 2020 as compared to 2019 was the $21.1 million increase in salaries and employee benefits. The change in
salaries and employee benefits was primarily the result of annual merit increases awarded in the first quarter of 2020 and an increase
in our associate base in 2020 versus 2019 offset, in part, by the reduction of our annual cash incentive plan accrual due to the adverse
impact of COVID-19 and the adoption of CECL on diluted EPS, one of the performance metrics in our annual cash incentive plan,
during 2020. We also incurred reduced incentive expense associated with our performance-based equity awards we had previously
awarded, as the negative impact of COVID-19 and the adoption of CECL on our results negatively impacted our return on average
tangible assets, the performance metric then applicable to these equity awards. Also impacting noninterest expense during the year
ended December 31, 2020 were $15.2 million in FHLB restructuring charges and $4.7 million in hedge termination charges that
occurred as a part of the strategic initiatives of the Company.
The number of full-time equivalent employees increased from 2,487.0 at December 31, 2019, to 2,634.0 at December 31, 2020 and
2,841.0 at December 31, 2021.
During the three years ended December 31, 2021, 2020 and 2019, we recorded income tax expense of $124.6 million, $59.0 million
and $96.7 million, respectively. Our tax expense for the year ended December 31, 2020 was impacted by the adoption of CECL and
the provision for credit losses recorded in response to the COVID-19 pandemic. Our effective tax rate for the years ended December
31, 2021, 2020 and 2019, was 19.1%, 15.9%, and 19.4%, respectively.
Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 49.7%, 49.5%, and
49.0%, for the three years ended December 31, 2021, 2020 and 2019, respectively. The efficiency ratio measures the amount of
expense that is incurred to generate a dollar of revenue. The efficiency ratio for the year ended December 31, 2021 compared to the
same period in 2020 and in 2020 as compared to 2019 were both positively and negatively impacted by the changes to noninterest
expense, net interest income and noninterest income discussed above.
54
Net income for 2021 was $527.3 million compared to $312.3 million in 2020 and $400.9 million in 2019. Net income available to
common shareholders for 2021 was $512.1 million compared to $304.7 million in 2020 and $400.9 million in 2019. The presentation
of net income available to common shareholders (rather than net income available to shareholders) was required following the
issuance of 9.0 million depositary shares, each representing a 1/40th interest in a share of our 6.75% fixed rate non-cumulative,
perpetual preferred stock, Series B (Series B Preferred Stock) in the second quarter of 2020. Fully-diluted net income per common
share was $6.75 for 2021 compared to $4.03 for 2020 and $5.22 for 2019. Net income in 2021 was primarily impacted positively by
decreased provision expense incurred and lower cost of funds during 2021. Fully-diluted net income per common share in 2021 and
2020 was also impacted by the dividends paid on the Series B Preferred Stock. Additionally, positively impacting fully-diluted net
income per common share in each of the years ended 2021, 2020 and 2019 were organic growth and for 2020 and 2019 the share
repurchase programs effective during such periods.
Financial Condition. Our loan balances increased by $989.8 million, or 4.4%, during 2021 as compared to 2020. Increased loan
volumes during 2021 are primarily the result of loans made to borrowers that principally operate or are located in our core markets,
increases in the number of relationship advisors we employ and continued focus on attracting new customers to our company offset by
a decrease of $1.4 billion of loans issued through the SBA's PPP.
Total deposits increased from $27.7 billion at December 31, 2020 to $31.3 billion at December 31, 2021, an increase of $3.6 billion, or
13.0%. Deposit growth during the period was likely aided by our clients' desire to maintain elevated levels of on-balance sheet
liquidity in comparison to those historically maintained prior to the impact of COVID-19 on the economy as well as government
stiumulus programs initiated as a result of the COVID-19 pandemic, and our own increased levels of on-balance sheet liquidity
acquired at the beginning of the pandemic and for which we have not yet repurposed. Within our deposits, the ratio of core funding to
total deposits increased from 79.5% at December 31, 2020 to 89.5% at December 31, 2021.
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, 2021 and 2020, 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, 2021, we had approximately $184.2
million of cash at the holding company which could be used to support our bank.
During the second quarter of 2020, net proceeds from the offering of our 9.0 million depositary shares, each representing a 1/40th
interest in a share of our Series B Preferred Stock, after underwriting discounts and offering expenses payable by us were
approximately $217.1 million. The net proceeds were initially retained at Pinnacle Financial and the remaining net proceeds are
available to support our capital needs and other obligations, including payments related to our outstanding indebtedness, to support the
capital needs and other obligations of our bank and for other general corporate purposes. Additionally, we believe we have various
capital raising techniques available to us to provide for the capital needs of our company and bank, such as issuing subordinated debt
or entering into a new revolving credit facility with another financial institution. We also periodically evaluate capital markets
conditions to identify opportunities to access those markets if necessary or prudent to support our capital levels.
On November 13, 2018, we announced that our board of directors authorized a share repurchase program for up to $100.0 million of
our outstanding common stock and on October 15, 2019, the board approved an additional $100.0 million of repurchase authorization.
The initial repurchase program expired on March 31, 2020 and the additional $100.0 million authorization expired on December 31,
2020, though it had been suspended since the end of the first quarter of 2020 due to uncertainty surrounding the pandemic. Between
November 13, 2018 and December 31, 2019, we repurchased approximately 1.5 million shares of our common stock at an aggregate
cost of $82.1 million pursuant to these authorizations. During the quarter ended March 31, 2020, we repurchased approximately 1.0
million shares of our common stock at an aggregate cost of $50.8 million. Our last purchase of shares of our common stock occurred
on March 19, 2020. On January 19, 2021, our board of directors authorized a share repurchase program for up to $125.0 million of our
outstanding common stock. The authorization for this program will remain in effect through March 31, 2022. On January 18, 2022,
our board of directors authorized a share repurchase program for up to $125.0 million of our common stock to commence upon
expiration of our existing share repurchase program that is set to expire on March 31, 2022. This authorization is to remain in effect
through March 31, 2023.
55
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 credit losses and the assessment of
impairment of goodwill, has been critical to the determination of our financial position and results of operations.
Allowance for Credit Losses - Loans - The allowance for credit losses is estimated under the CECL methodology set forth in FASB
ASC 326. The allowance for credit losses reflects management’s estimate of the the amount of credit losses expected to be recognized
over the remaining life of the loans in our portfolio. This evaluation requires significant management judgment and is based upon
relevant available information related to historical default and loss experience, current and projected economic conditions, and other
portfolio-specific and environmental risk factors. Losses are predicted over a reasonable and supportable forecast period, and at the
end of the reasonable and supportable period losses revert to long term historical averages. The allowance for credit losses is measured
on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with
the collectively evaluated pools, evaluations are performed on an individual basis. There are factors beyond our control, such as
changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset
quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses. The allowance is adjusted
through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off. See “Allowance
for Credit Losses on Loans” elsewhere within this section as well as Note 1 - Summary of Significant Accounting Policies and Note 5
- Loans and Allowance for Credit Losses in the notes to consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data for additional information related to the allowance for credit losses.
Impairment of Goodwill - Goodwill is evaluated for impairment annually and more frequently if events and circumstances indicate that
the asset might be impaired as described in ASC 350. Accordingly, we performed a qualitative assessment by examining changes in
macroeconomic conditions, industry and market conditions, overall financial performance, cost factors and other relevant entity-
specific events, including changes in the share price of our common stock. While we believe that the assumptions utilized in our
testing are appropriate, they may not reflect actual outcomes that could occur. Specific factors that could negatively impact the
assumptions used include 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 our performance relative
to peers. Changes in these assumptions, or any other key assumptions, could have a material impact on our qualitative assessment,
resulting in the decision to perform additional procedures to identify and determine the amount of goodwill impairment, if any. Should
it be determined in a future period that goodwill has become impaired, then a charge to earnings would be recorded in the period such
determination is made. See Note 1 - Summary of Significant Accounting Policies in the notes to consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data for additional information related to goodwill.
Results of Operations
The following is a summary of certain financial information as of or for the years ended December 31, 2021, 2020 and 2019 (dollars
in thousands, except per share data):
Years ended
December 31,
2021
2020
2021- 2020
Percent
Increase
(Decrease)
Year ended
December 31,
2019
2020 - 2019
Percent
Increase
(Decrease)
Income Statement:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Net income before income taxes
Income tax expense
Net income
Preferred stock dividends
$ 1,031,214
$ 1,021,042
1.0 % $ 1,067,936
98,813
932,401
16,126
916,275
395,734
660,104
651,905
124,582
527,323
15,192
199,254
821,788
203,815
617,973
317,840
564,455
371,358
59,037
312,321
7,596
(50.4) %
13.5 %
(92.1) %
48.3 %
24.5 %
17.0 %
75.5 %
>100%
68.8 %
100.0 %
301,794
766,142
27,283
738,859
263,826
505,148
497,537
96,656
400,881
—
Net income available to common shareholders
$
512,131
$
304,725
68.1 % $
400,881
Per Share Data:
Basic net income per common share
Diluted net income per common share
$
$
6.79
6.75
$
$
4.04
4.03
68.1 % $
67.5 % $
5.25
5.22
56
(4.4) %
(34.0) %
7.3 %
>100%
(16.4) %
20.5 %
11.7 %
(25.4) %
(38.9) %
(22.1) %
NA
(24.0) %
(23.0) %
(22.8) %
Years ended
December 31,
2021
2020
2021- 2020
Percent
Increase
(Decrease)
Year ended
December 31,
2019
2020 - 2019
Percent
Increase
(Decrease)
Performance Ratios:
Return on average assets (1)
Return on average shareholders' equity (2)
Return on average common shareholders' equity (3)
Balance Sheet:
1.43 %
10.02 %
10.47 %
0.94 %
6.57 %
6.76 %
52.1 %
52.5 %
54.9 %
1.52 %
9.57 %
9.57 %
Loans, net of allowance for credit losses
$ 23,151,029
$ 22,139,451
4.6 % $ 19,693,099
Deposits
$ 31,304,533
$ 27,705,575
13.0 % $ 20,181,028
(38.2) %
(31.3) %
(29.4) %
12.4 %
37.3 %
(1) Return on average assets is the result of net income available to common shareholders for the reported period, divided by average
assets for the period.
(2) Return on average shareholders' equity is the result of net income available to common shareholders for the reported period, divided by
average shareholders' equity for the period.
(3) Return on average common shareholders' equity is the result of net income available to common shareholders for the reported period,
divided by average common shareholders' equity for the period.
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, 2021, we recorded net interest income of approximately $932.4 million, which resulted in a net interest margin of
3.02%. For the year ended December 31, 2020, we recorded net interest income of approximately $821.8 million, which resulted in a
net interest margin of 2.97%. For the year ended December 31, 2019, we recorded net interest income of approximately $766.1
million, which resulted in a net interest margin of 3.46%. The increase in net interest income in 2021 as compared to 2020 was largely
the result of lower cost of funds as short-term interest rates remain low and organic loan growth. The increase in net interest income in
2020 as compared to 2019 were largely the result of lower funding costs due to a decline in short-term interest rates, the impact of
both interest and fees from the PPP and our acquisition of additional on-balance sheet liquidity in response to the economic
uncertainty resulting from the COVID-19 pandemic as well as organic loan growth during the comparable period offset in part by
yield compression in our earning asset portfolio.
The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial
institutions, through changes to the federal funds rate. Our loan portfolio is affected by changes in the prime interest rate. The prime
rate began 2019 at 5.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and
September) and 25 basis points in October 2019 to end the year at 4.75%. During 2020, the prime rate decreased 150 basis points in
March to 3.25% where it remained through December 31, 2021. Our loan portfolio is also impacted by changes in the London
Interbank Offered Rate (“LIBOR”). At December 31, 2021, the one-month and three-month U.S. dollar LIBOR rates were 0.10% and
0.21%, respectively, while at December 31, 2020, the one-month and three-month U.S. dollar LIBOR rates were 0.14% and 0.24%
respectively, and at December 31, 2019, the one-month and three-month U.S. dollar LIBOR rates were 1.76% and 1.90% respectively.
We intend to discontinue originating LIBOR-based loans during 2022 and have begun negotiating loans primarily using our preferred
replacement index, the Secured Overnight Financing Rate (“SOFR”). For our currently outstanding LIBOR-based loans, the timing
and manner in which each customer’s contract transitions to SOFR will vary on a case-by-case basis. We expect to complete all loan
transitions by June 30, 2023.
57
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, 2021 (in
thousands):
Average
Balances
2021
Interest
Rates/
Yields
Average
Balances
2020
Interest
Rates/
Yields
Average
Balances
2019
Interest
Rates/
Yields
Interest-earning assets:
Loans (1) (2)
Securities:
Taxable
Tax-exempt (2)
$ 23,060,949 $ 924,043
4.09 % $ 21,824,841 $ 919,744
4.30 % $ 18,847,104 $ 955,388
5.17 %
2,711,044
34,769
1.28 %
2,136,437
35,663
1.67 %
1,791,663
46,649
2.60 %
2,534,653
64,848
3.09 %
2,114,277
58,867
3.35 %
1,680,758
51,138
3.62 %
Interest-bearing due from banks
3,056,555
3,853
0.13 %
2,410,611
4,038
0.17 %
461,474
9,346
2.03 %
Securities purchased under
agreements to resell
Federal funds sold
Other
426,027
1,440
0.34 %
—
9,964
—
— %
22,342
—
30
— %
0.14 %
—
22,606
—
381
— %
1.69 %
160,066
2,261
1.41 %
153,345
2,700
1.76 %
147,251
5,034
3.42 %
Total interest-earning assets
31,959,258 1,031,214
3.33 %
28,661,853 1,021,042
3.67 %
22,950,856 1,067,936
4.78 %
Nonearning assets:
Intangible assets
Other nonearning assets
Total assets
Interest-bearing liabilities:
Interest-bearing deposits:
1,858,119
1,875,255
$ 35,692,632
1,867,007
1,805,677
$ 32,334,537
1,859,548
1,624,750
$ 26,435,154
Interest checking
5,578,632
9,887
0.18 %
4,602,683
19,542
0.42 %
3,236,907
36,901
1.14 %
Savings and money market
11,437,779
22,823
0.20 %
9,623,790
45,364
0.47 %
7,557,265
104,138
1.38 %
Time deposits
2,682,315
21,406
0.80 %
4,162,523
70,641
1.70 %
3,978,688
90,602
2.28 %
Total interest-bearing deposits
19,698,726
54,116
0.27 %
18,388,996
135,547
0.74 %
14,772,860
231,641
1.57 %
Securities sold under agreements to
repurchase
155,888
239
0.15 %
150,118
350
0.23 %
117,518
570
0.49 %
Federal Home Loan Bank advances
899,785
18,111
2.01 %
1,750,578
33,135
1.89 %
2,055,365
43,675
2.12 %
Subordinated debt and other
borrowings
604,081
26,347
4.36 %
692,169
30,222
4.37 %
557,387
25,908
4.65 %
Total interest-bearing liabilities
21,358,480
98,813
0.46 %
20,981,861
199,254
0.95 %
17,503,130
301,794
1.72 %
Noninterest-bearing deposits
8,910,349
—
0.00 %
6,380,155
—
0.00 %
4,503,134
—
0.00 %
Total deposits and interest- bearing
liabilities
Other liabilities
Total liabilities
Shareholders' equity
30,268,829
98,813
0.33 %
27,362,016
199,254
0.73 %
22,006,264
301,794
1.37 %
314,650
30,583,479
5,109,153
337,855
27,699,871
4,634,666
241,935
22,248,199
4,186,955
Total liabilities and shareholders'
equity
$ 35,692,632
Net interest income
Net interest spread (3)
Net interest margin (4)
(1)
$ 32,334,537
$ 26,435,154
$ 932,401
$ 821,788
$ 766,142
2.87 %
3.02 %
2.72 %
2.97 %
3.06 %
3.46 %
(2)
(3)
(4)
Average balances of nonperforming loans, consumer loans held-for-sale and commercial loans held-for-sale are included in average loan balances.
Yields computed on tax-exempt instruments on a tax equivalent basis and include $33.8 million, $29.9 million and $29.0 million of taxable equivalent
income for the years ended December 31, 2021, 2020 and 2019, respectively. The tax-exempt benefit has been reduced by the projected impact of tax-
exempt income that will be disallowed pursuant to IRS Regulations as of and for the then current period presented.
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, 2021 would have been
3.01% compared to a net interest spread for the years ended December 31, 2020 and 2019 of 2.94% and 3.41%, respectively.
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, 2021, our net interest spread was 2.87%, while the net interest margin was 3.02% compared to a net
interest spread of 2.72% for the year ended December 31, 2020 and 3.06% for the year ended December 31, 2019, and a net interest
margin of 2.97% and 3.46%, respectively.
58
Our net interest margin for the year ended December 31, 2021 continued to reflect the impact of PPP loans and the firm's acquisition
of additional on-balance sheet liquidity in the early stages of the pandemic and subsequent paydown of this liquidity, the continuation
of the historically low short-term interest rate environment, declining levels of positive impact from purchase accounting and the
competitive rate environments for loans and deposits in our markets. More specifically, our net interest margin was negatively
impacted by yield compression in our earning asset portfolio due to a historically low macroeconomic interest rate environment, which
included a 150 basis points reduction in the federal funds rate in March 2020 and has remained at this historically low level.
During the year ended December 31, 2021, our earning asset yield decreased by 34 basis points and 145 basis points from the years
ended December 31, 2020 and 2019, respectively, while total funding rates decreased by 40 basis points and 104 basis points
compared to the years ended December 31, 2020 and 2019, respectively.
We continue to deploy various asset liability management strategies to manage our risk to interest rate fluctuations. Pricing for
creditworthy borrowers and meaningful depositors is very competitive in our markets. We believe this challenging competitive
environment will continue throughout 2022. The additional on-balance sheet liquidity that has accumulated primarily due to
government stimulus efforts in response to the COVID-19 pandemic has and will continue to negatively impact the net interest margin
until on-balance sheet liquidity returns to more normalized levels.
Our ‘most likely’ forecast has short-term interest rates moving higher during 2022 and 2023. In this scenario, our loan yields on
variable rate instruments will increase but at a somewhat slower pace than market rates due to our in-the-money rate floors. Once the
contract rate eclipses the rate floor strike level, the loan yields will increase more quickly following subsequent rate hikes. Floor strike
levels are, on average, 45 basis points above contract rates. Therefore, our ability to hold deposit rates low until the loan floor strike
levels are eclipsed by contract rates will be important in our ability to maintain, or potentially increase, our net interest margin during
the beginning of the monetary tightening cycle that we believe we will experience starting in 2022.
Rate and Volume Analysis. Net interest income increased by $110.6 million between the years ended December 31, 2021 and 2020
and by $55.6 million between the years ended December 31, 2020 and 2019. 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
Interest-bearing due from banks
Securities purchased under agreements to resell
Federal funds sold
Other
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing 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
Net interest income
2021 Compared to 2020
Increase (decrease) due to
2020 Compared to 2019
Increase (decrease) due to
Rate
Volume
Net
Rate
Volume
Net
$
(46,950) $
51,249 $
4,299 $ (183,970) $ 148,326 $
(35,644)
(9,226)
(6,566)
(1,149)
1,440
(24)
(548)
8,332
12,547
964
—
(6)
109
(894)
5,981
(185)
1,440
(30)
(439)
(18,595)
(5,940)
(13,891)
—
(348)
(2,494)
7,609
13,669
8,583
—
(3)
160
(63,023)
73,195
10,172
(225,238)
178,344
(12,621)
(28,848)
(31,569)
(73,038)
(122)
1,560
(47)
2,966
6,307
(17,666)
(9,655)
(22,541)
(49,235)
(29,963)
(79,763)
(23,629)
(8,393)
(81,431)
(133,355)
11
(111)
(16,584)
(15,024)
(3,828)
(3,875)
(351)
(4,412)
(1,749)
(71,647)
(28,794)
(100,441)
(139,867)
12,604
20,989
3,668
37,261
131
(6,128)
(10,540)
6,063
37,327
4,314
(102,540)
$
8,624 $ 101,989 $ 110,613 $
(85,371) $ 141,017 $
55,646
59
(10,986)
7,729
(5,308)
—
(351)
(2,334)
(46,894)
(17,359)
(58,774)
(19,961)
(96,094)
(220)
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 Credit Losses. The provision for credit losses represents a charge to earnings necessary to establish an allowance for
credit losses that, in management's evaluation, is adequate to provide coverage for all expected credit losses.The provision for credit
losses amounted to $16.1 million, $203.8 million and $27.3 million for the years ended December 31, 2021, 2020 and 2019,
respectively. Provision expense is impacted by organic loan growth in our loan portfolio, our internal assessment of the credit quality
of the loan portfolio, our expectations about future economic conditions and net charge-offs. The lower provision for credit losses
during 2021 as compared to 2020 is the result of improvements in the current and projected economic conditions as compared to the
economic deterioration which occurred or was anticipated during 2020 related to the COVID-19 pandemic. Also contributing to the
provision expense in the current year when compared to the 2020 and 2019 comparable periods were net charge-offs, which totaled
$38.7 million, $39.4 million and $16.1 million, respectively. Net charge-offs in 2021 and 2020 were in part the result of charge-offs
related to loans to borrowers who operate businesses in sectors which have been negatively impacted by the COVID-19 pandemic.
Provision expense in 2019 was calculated under the prior incurred loss accounting methodology. Furthermore, provision expense
related to off-balance sheet credit exposures was reported as a component of other noninterest expense prior to 2020.
Our allowance for credit losses reflects an amount deemed appropriate to adequately cover all expected future losses as of the date the
allowance is determined based on our allowance for credit losses assessment methodology. At December 31, 2021, our allowance for
credit losses as a percentage of total loans, inclusive of PPP loans, was 1.12%, down from 1.27% at December 31, 2020.
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, 2021, 2020, and 2019 (in thousands):
Years ended
December 31,
2021
2020
2021 - 2020
Percent
Increase
(Decrease)
Year ended
December 31,
2019
2020 - 2019
Percent
Increase
(Decrease)
Noninterest income:
Service charges on deposit accounts
$
41,311 $
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:
Interchange and other consumer fees
Bank-owned life insurance
Loan swap fees
SBA loan sales
Income from other equity investments
Other noninterest income
Total other noninterest income
37,917
10,516
32,424
759
20,724
122,274
57,263
18,942
5,414
12,242
23,109
12,839
129,809
34,282
29,537
10,055
60,042
986
16,496
83,539
40,960
18,784
4,568
5,579
1,072
11,940
82,903
20.5 % $
28.4 %
4.6 %
(46.0) %
(23.0) %
25.6 %
46.4 %
39.8 %
0.8 %
18.5 %
>100%
>100%
7.5 %
56.6 %
36,769
24,187
9,344
24,335
(5,941)
14,184
90,111
36,158
17,361
4,758
4,933
2,789
4,838
70,837
Total noninterest income
$
395,734 $
317,840
24.5 % $
263,826
(6.8) %
22.1 %
7.6 %
>100%
>100%
16.3 %
(7.3) %
13.3 %
8.2 %
(4.0) %
13.1 %
(61.6) %
>100%
17.0 %
20.5 %
The increase in service charges on deposit accounts in 2021 compared to 2020 is primarily related to increased analysis fees due to an
increase in the volume and number of commercial checking accounts resulting from organic growth in this product and an increase in
economic activity as the COVID-19 pandemic waned over 2021. The decrease in service charges on deposit accounts in 2020
compared to 2019 is primarily related to a reduction in analysis fees due to a decrease in the transaction volume of commercial
checking accounts which we believe was the result of the COVID-19 pandemic.
60
Income from our wealth management groups (investments, insurance and trust) is also included in noninterest income. For the year
ended December 31, 2021, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management,
a division of Pinnacle Bank, and fees from our wealth advisory group, PNFP Capital Markets, Inc., were $37.9 million for the year
ended December 31, 2021, compared to $29.5 million during 2020 and $24.2 million during 2019, reflecting increases in brokerage
assets and year-over-year increases in the value of the stock market. At December 31, 2021, Pinnacle Asset Management was
receiving commissions and fees in connection with approximately $7.2 billion in brokerage assets compared to $5.5 billion and $4.6
billion at December 31, 2020 and 2019, respectively. Revenues from the sale of insurance products by our insurance agency
subsidiaries were approximately $10.5 million during 2021 compared to $10.1 million and $9.3 million during 2020 and 2019,
respectively. Additionally, at December 31, 2021, our trust department was receiving fees on approximately $4.7 billion and $2.1
billion of managed and custodied assets, respectively, compared to approximately $3.3 billion and $1.7 billion at December 31, 2020
and $2.9 billion and $1.7 billion at December 31, 2019. We believe the improvement in the results of our wealth management
businesses in 2021 compared to 2020 is primarily attributable to increased market valuations reflective of a stabilizing economy
following the initial impact of the COVID-19 pandemic, while the improvement in 2020 compared to 2019 was largely attributable to
increased market valuations as well as additional revenue producers added to our wealth management groups in 2020.
Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. These mortgage fees are for loans
primarily 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 from period to period as the rate environment changes. Gains on mortgage loans sold, net, were $32.4 million, $60.0
million and $24.3 million, respectively, for the years ended December 31, 2021, 2020 and 2019. The decrease in 2021 compared to
2020 is the direct result of the fluctuations in the rate environment and the decrease in housing inventory in the markets where we
operate negatively impacting originations. The increase in 2020 compared to 2019 is the direct result of the then favorable interest rate
environment which impacted volumes specifically with refinancing activity during the respective periods, an increase in the number of
revenue producers in our mortgage group and the strong housing markets in which we operate. We hedge a portion of our mortgage
pipeline as part of a mandatory delivery program whereby the hedge protects against changes in the fair value of the pipeline. 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. The change in the fair value of the outstanding mortgage pipeline at the end of any reporting period will directly impact the
amount of gain recorded for mortgage loans held for sale during that reporting period. At December 31, 2021, the mortgage pipeline
included $136.7 million in loans expected to close in 2022 compared to $249.8 million in loans at December 31, 2020 expected to
close in 2021.
Investment gains and losses on sales, net, represent the net gains and losses on sales of investment securities in our available-for-sale
securities portfolio during the periods noted. For the year ended December 31, 2021, investment gains (losses) on sales, net, represent
a $759,000 net pre-tax gain we recognized upon the sale of $37.5 million of investment securities compared to a $986,000 net pre-tax
gain we recognized upon the sale of $145.6 million of investment securities in 2021 compared to a $5.9 million net pre-tax loss on the
sale of $737.7 million of investment securities in 2019.
Income from equity-method investment. Income from equity-method investment is comprised solely of income from our 49% equity-
method investment in BHG. BHG is engaged in the origination of commercial and consumer loans primarily to healthcare providers
and other skilled professionals throughout the United States. The loans originated by BHG are either financed by secured borrowings
or sold without recourse to independent financial institutions and investors.
Income from this equity-method investment was $122.3 million for the year ended December 31, 2021 compared to $83.5 million and
$90.1 million for the years ended December 31, 2020 and 2019, respectively. The increased level of contribution we experienced from
BHG in 2021 when compared to 2020 reflects the positive results BHG has experienced as a result of enhancements to its business
model, including its marketing efforts, along with a diminished impact from the COVID-19 pandemic and the resulting release of
reserves BHG built in 2020 as a result of the COVID-19 pandemic. The decrease in 2020 compared to 2019 is the result of BHG
recording increased allowance for loan losses for loans retained and recourse obligation reserves for loans sold through its network of
bank purchasers in response to the COVID-19 pandemic. Historically, BHG has sold the majority of the loans it originates to a
network of bank purchasers through a combination of online auctions, direct sales and its direct purchase option. In the second half of
2019, BHG began an effort to retain more loans on its balance sheet. However, as a result of the economic uncertainty resulting from
the COVID-19 pandemic, BHG sold more loans through its auction platform in 2020 than we had previously anticipated. During
2021, BHG returned to its strategy of retaining more of the loans it originates on its balance sheet. In the third quarter of 2020, second
quarter of 2021 and third quarter of 2021, BHG completed a total of three securitization issuances of approximately $160 million,
$375 million and $372 million, respectively, in notes backed by commercial and consumer loans on its balance sheet to provide
additional funding. We anticipate that BHG will complete additional securitizations in the future.
61
Income from equity-method investment is recorded net of amortization expense associated with customer lists and other intangible
assets of $752,000, $1.2 million and $1.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. At December
31, 2021, there were $6.8 million of these intangible assets that are expected to be amortized in lesser amounts over the next 14
years. Also included in income from equity-method investment, is accretion income associated with the fair value of certain of BHG's
liabilities of $1.5 million, $2.1 million and $2.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. At
December 31, 2021, there were $1.2 million of these liabilities that are expected to be accreted into income in lesser amounts over the
next five years.
During the years ended December 31, 2021, 2020 and 2019, respectively, Pinnacle Financial and Pinnacle Bank received $70.0
million, $53.0 million and $51.3 million in dividends in the aggregate from BHG. Dividends from BHG during such periods reduced
the carrying amount of our investment in BHG, while earnings from BHG during such periods increased the carrying amount of our
investment in BHG. Profits from intercompany transactions are eliminated. Our proportionate share of earnings from BHG is included
in our consolidated tax return. During the years ended December 31, 2021 and 2020, Pinnacle Bank purchased $276.7 million and
$100.0 million, respectively, of loans from BHG at par pursuant to BHG's joint venture loan program whereby BHG and Pinnacle
Bank share proportionately in the credit risk of the acquired loans based on the rate on the loan and the rate of the purchase. The yield
on this portfolio to Pinnacle Bank is anticipated to be between 4.75% and 5.00% per annum. Pinnacle Bank purchased no loans from
BHG during the year ended December 31, 2019.
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, 2021, BHG reported $735.5 million in gross revenues, net of substitution losses of $91.8 million, compared to $457.9 million and
$366.5 million in gross revenues, respectively, for the years ended December 31, 2020 and 2019, net of substitution losses of $90.6
million and $53.1 million, respectively. Earnings from BHG are likely to fluctuate from period-to-period. Approximately $507.5
million, or 69.0%, of BHG's revenues for the year ended December 31, 2021 related to gains on the sale of commercial loans BHG
had previously issued primarily to doctor, dentist and other professionals compared to $347.4 million, or 75.9%, for the year ended
December 31, 2020 and $291.1 million, or 79.4%, for the year ended December 31, 2019. These loans have typically been sold by
BHG with no recourse 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, 2021 and 2020, there were $4.1 billion and $3.7 billion, respectively, of these loans previously sold by BHG
that were being actively serviced by BHG's network of bank purchasers. BHG, at its sole option, may also provide purchasers of these
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. As a result, BHG maintained a liability as of December 31, 2021 and
2020 of $207.3 million and $280.2 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 5.0% and 7.6%, respectively, of core product loans
previously sold by BHG that remain outstanding as of December 31, 2021 and 2020, respectively. The decrease in this liability for the
year ended December 31, 2021 compared to the year ended December 31, 2020 was principally the result of a partial release of the
reserve BHG recorded in 2020 related to the economic disruption associated with the COVID-19 pandemic which adversely impacted
physician and dental practices in a material manner.
In addition to these loans that BHG sells into its auction market, at December 31, 2021, BHG reported balance sheet loans totaling
$2.2 billion compared to $1.0 billion as of December 31, 2020. A portion of these loans do not qualify for sale accounting and
accordingly an offsetting secured borrowing liability has been recorded. At December 31, 2021 and 2020, BHG had $1.6 billion and
$631.0 million, respectively, of secured borrowings associated with loans held for investment which did not qualify for sale
accounting. BHG currently expects to continue to increase the percentage of loans that it keeps on its balance sheet. At December 31,
2021 and 2020, BHG reported allowance for loan losses totaling $46.7 million and $20.7 million, respectively, with respect to the
loans on its balance sheet. Interest income and fees on loans held for investment amounted to $208.5 million, $92.5 million and $60.6
million for the years ended December 31, 2021, 2020 and 2019, respectively. BHG continues to account for its allowance for loan
losses using the incurred loss model that we utilized prior to the adoption of CECL on January 1, 2020. BHG is expected to adopt
CECL on January 1, 2023.
Pinnacle Bank has a participating interest in a $525.0 million revolving line of credit for the benefit of BHG in the amount of
$100.0 million. At December 31, 2021, there was a $47.2 million outstanding balance on the line related to Pinnacle Bank's interest in
the line. The line accrues interest at SOFR plus 200 basis points and is secured by all assets of BHG. The credit agreement contains
covenants requiring BHG to maintain certain financial ratios and satisfy certain other affirmative and negative covenants. At
December 31, 2021, neither BHG nor the originating bank had represented to Pinnacle Bank that BHG was not in compliance, in all
material respects, with these covenants.
62
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 39.8% during the year ended December 31, 2021 as compared to the
same period in 2020 due to increased debit and credit card transactions period-over-period and unused line fees during 2021 as
compared to 2020. Other noninterest income also included changes in the cash surrender value of bank-owned life insurance (BOLI)
which was $18.9 million for the year ended December 31, 2021 compared to $18.8 million and $17.4 million for the years ended
December 31, 2020 and 2019, respectively. We made no purchases of BOLI policies in 2021. In 2020 and 2019, we purchased $75.0
million and $110.0 million, respectively, of new BOLI policies. The assets that support these policies are administered by the life
insurance carriers and the income we recognize (i.e., increases or decreases in the cash surrender value of the policies) on these
policies is dependent upon the crediting rates applied by the insurance carriers, which are subject to change at the discretion of the
carriers, subject to any applicable floors. Earnings on these policies generally are not taxable. Loan swap fees increased by $846,000
and $656,000 during the year ended December 31, 2021 as compared to the same periods in 2020 and 2019, respectively, due
primarily to a change in the volume of activity resulting from the then current interest rate environment. SBA loan sales are also
included in other noninterest income and fluctuate based on the current market environment and therefore increased in both 2021 and
2020 due to historically high premiums on this product. Additionally, the carrying values of other equity 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 financial reports provided by the portfolio
managers of the investment. Income related to these investments increased $22.0 million during 2021 when compared to 2020 as a
result of several of our venture fund investments experiencing increased valuations in their underlying portfolios during the year ended
December 31, 2021. In 2020 as compared to 2019, these investments decreased by $1.7 million. The other components of other
noninterest income changed only slightly during the year ended December 31, 2021 as compared to the same period in 2020 and
includes all other noninterest income not included in the above noted categories. The other components of other noninterest income
fluctuated during the year ended December 31, 2020 as compared to the same periods in 2019 due in large part to $3.9 million in
policy benefits received during 2020 from our bank-owned life insurance policies as well as the $1.5 million loss on the sale of the
high-yield automobile portfolio in the second quarter of 2019.
Noninterest Expense. The following is our noninterest expense for the years ended December 31, 2021, 2020, and 2019 (in
thousands):
Years ended
December 31,
2021
2020
2021 - 2020
Percent
Increase
(Decrease)
Year ended
December 31,
2019
2020 - 2019
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 (benefit) expense, net
Marketing and business development
Postage and supplies
Amortization of intangibles
Other noninterest expense:
Deposit related expenses
Lending related expenses
Wealth management related expenses
Audit, exam and insurance expense
FHLB restructuring charges
Administrative and other expenses
Total other noninterest expense
$
241,775 $
215,542
12.2 % $
185,845
22,286
109,290
62,655
436,006
95,250
(712)
12,888
8,195
8,518
24,003
39,578
1,950
11,259
—
23,169
99,959
15,677
52,878
50,386
334,483
88,475
8,555
10,693
7,819
9,793
24,392
28,703
2,053
10,596
15,168
23,725
104,637
564,455
42.2 %
>100%
24.4 %
30.4 %
7.7 %
(<100%)
20.5 %
4.8 %
(13.0) %
(1.6) %
37.9 %
(5.0) %
6.3 %
(100.0) %
(2.3) %
(4.5) %
13,797
68,023
45,694
313,359
84,582
4,228
13,251
8,144
9,908
17,017
24,573
1,986
9,194
—
18,906
71,676
16.9 % $
505,148
16.0 %
13.6 %
(22.3) %
10.3 %
6.7 %
4.6 %
>100%
(19.3) %
(4.0) %
(1.2) %
43.3 %
16.8 %
3.4 %
15.2 %
NA
25.5 %
46.0 %
11.7 %
Total noninterest expense
$
660,104 $
63
The increase in total salaries and employee benefits expense in 2021 over 2020 is primarily the result of an increase in expenses
associated with our annual cash incentive plan as well as stock-based compensation expense due to our performance during 2021
compared to 2020. The increase in salaries and employee benefits expense in 2020 over 2019 is primarily the result of an increase in
the number of employees in 2020 over 2019 and annual merit increases to base salaries offset in part by the reduction in expenses
associated with our annual cash incentive plan as well as the reduction in stock-based compensation expense due to our performance
during 2020 compared to 2019. Our performance in 2020 was notably impacted by the effects of COVID-19 on our anticipated
earnings and performance for the year ended December 31, 2020.
At December 31, 2021, our associate base had expanded to 2,841.0 full-time equivalent associates as compared to 2,634.0 and 2,487.0
at December 31, 2020 and 2019, respectively, primarily resulting from our efforts to continue to hire experienced bankers and other
associates throughout our footprint. We expect salary and benefit expenses will rise in 2022 compared to 2021 as we continue our
focus on hiring experienced bankers in our markets, including the Atlanta, Huntsville, Birmingham and National Capital markets, as
well as due to our increased associate base and annual merit increases given in the first quarter of each fiscal year. We also expect to
continue to enhance the infrastructure around our operations to account for our increased size and geographic reach in 2022, which
should also contribute to increased salary and benefit expenses.
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, 2021 was 42.2% greater than in 2020 which
was 13.6% greater than in 2019. The increase in 2021 as compared to 2020 and in 2020 as compared to 2019 is primarily related to
growth in our investment portfolio commissions as a result of increased activity in our wealth management lines of business and an
increase in the number of wealth management associates. 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 associate 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 bank's
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 bank's associates participate in our equity compensation plans. Under the 2021 annual cash
incentive plan, the targeted level of incentive payments required achievement of a certain soundness threshold and a targeted level of
quarterly pre-tax, pre-provision net revenue (PPNR) and annual earnings per common share (subject to certain adjustments). To the
extent that the soundness threshold is met and PPNR and earnings per common share 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.
For 2021, maximum payouts under the plan could reach 160% of target as we sought to allow our associates to recoup a portion of the
2020 annual cash incentive plan award that had not been earned largely as a result of the COVID-19 pandemic and its impact on our
allowance for credit losses as a result of our adoption of CECL effective January 1, 2020. In 2021, our cash incentives represented
160% of targeted incentive compensation compared to 65% in 2020 and 120% in 2019. We intend to return to normalized targeted
cash incentive levels of 0% to 125% in 2022.
Cash incentives for 2021 totaled $84.1 million, compared to $33.9 million in 2020 and $46.8 million in 2019. The increase in 2021
when compared to 2020 was primarily the result of the increase in the percentage of target of the payout from 65% in 2020 to 160% in
2021. The decrease in 2020 when compared to 2019 is the result of the impact of the COVID-19 pandemic on our anticipated earnings
for the year ended December 31, 2020. As a result of our performance in 2020 the threshold for the plan's EPS target was not met,
which resulted in a reduction in incentives earned under the annual cash incentive plan. In the third quarter of 2020, due to the effects
of COVID-19 pandemic, the Human Resources and Compensation Committee of our board of directors approved an additional
performance metric under the annual cash incentive plan tied to our adjusted pre-tax, pre-provision net revenue for the year ending
December 31, 2020 (“PPNR”). Payouts for all participants based on the PPNR metric were between 15% and 25% of their targeted
payouts under the plan at target and maximum performance levels. As a result of the addition of the PPNR performance metric,
participants in the plan were able to earn a cash incentive payout under the plan based on the larger of the original plan metrics and the
new PPNR performance metric and the original deposit volume and rate goals under the plan. The PPNR metric and the original
deposit volume and rate goals were achieved at the maximum performance, resulting in payouts of 50% of the targeted payout;
however, due to our results for 2020 and in consideration of the considerable effort our associates put forth during unusually difficult
circumstances in 2020, the Human Resources and Compensation Committee approved an increase in the calculated award from 50
percent of target to 65 percent of target, which amounted to $6.8 million of additional expense in the fourth quarter of 2020.
Also included in cash and equity incentives for the years ended December 31, 2021, 2020 and 2019 were approximately $12.1 million,
$12.1 million and $11.9 million, respectively, of compensation expenses related to equity-based restricted share awards and
approximately $12.9 million, $6.6 million and $9.3 million, respectively, of compensation expenses related to equity-based restricted
share units with either time-based or 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 of our bank's 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.
64
Our compensation expense associated with equity awards for the year ended December 31, 2021 increased when compared to the
same period in 2020 primarily as a result of the fact that our performance in 2021 in regards to the return on average tangible common
equity and tangible book value per share accretion performance metrics relative to our peers provided for an above-target level payout.
Our compensation expense associated with equity awards for the year ended December 31, 2020 decreased when compared to the
same period in 2019 primarily as a result of the fact that our performance in 2020 was below the threshold level of return on average
tangible assets necessary for the recipients of those awards to earn that the portion of our performance-based awards with performance
periods linked to 2020 as a result of the pandemic. Though our return on average tangible assets for 2020 was below that level
necessary for any of the performance units granted with performance metrics tied to 2020 to be earned, the Human Resources and
Compensation Committee of our board of directors nonetheless approved the vesting of the target level of these awards for all of the
recipients of these awards other than our named executive officers, who forfeited their awards tied to the 2020 performance period. In
January 2021, the Human Resources and Compensation Committee of our board of directors approved modifications to the
performance metrics applicable to the 2021 and 2022 performance periods of our performance units previously awarded. These
modifications replaced the return on average tangible assets performance metrics with two equally weighted metrics – return on
average tangible common equity and tangible book value per share accretion including the impact of common dividends. Performance
awards granted in January 2021 also utilize these modified metrics, as well as a relative total shareholder return ("TSR") payout
modifier. In 2022, we again granted performance-based vesting equity awards with performance metrics tied to peer relative
performance for return on average tangible common equity and tangible book value per share accretion, together with a TSR modifier,
in each case over a three-year performance period. We also approved a special performance-based vesting restricted stock unit award
to each of our named executive officers and our chief credit officer in 2022 with performance metrics tied to the ratio of our price to
earnings and price to tangible book value per share relative to those measures for a peer group of companies. As a result, we expect
that our compensation expense associated with performance-based equity awards for 2022 will likely exceed those levels that we
recorded in 2021. Our compensation expense associated with equity awards with time-based vesting criteria has remained relatively
flat between 2021 when compared to 2020 and increased in 2020 compared to 2019. The change in this balance is a product of the
hiring and termination of the associates during the period and the number of equity grants given to associates during the respective
periods as well as the grant date fair value of these equity grants.
Employee benefits and other expenses include costs associated with our 401k plan, health insurance, payroll taxes and contract labor.
These expenses increased by $12.3 million, or 24.4%, in 2021 compared to 2020 which increased by $4.7 million, or 10.3%, in 2020
compared to 2019. The increase in 2021 as compared to 2020 and 2020 as compared to 2019 was primarily the result of the increase in
full-time equivalent associates in each respective period.
Our operating lease commitments are primarily related to our branch and headquarters facilities. The terms of these leases expire at
various points ranging from 2022 through 2058. At December 31, 2021, our total minimum operating lease commitment was $114.1
million. Equipment and occupancy expense for the year ended December 31, 2021 was 7.7% greater than in 2020 which was 4.6%
greater than in 2019. The increases are in part the result of the four new office locations that were opened, one in Georgia, one in
Alabama, one in the North Carolina market and the other in the Middle Tennessee market during the year ended December 31, 2021.
We expect to incur additional costs in future periods as we continue to enhance both our current locations and our technology
infrastructure. We believe that we can fund these costs primarily through operating income. Additionally, during the second quarter of
2021, we announced our intention to move our corporate headquarters to a newly announced office tower in Nashville, where we will
be a founding partner and sponsor of the project. This move is currently planned for 2025 and will impact equipment and occupancy
costs as we plan for this move.
Other real estate for the year ended December 31, 2021 was a benefit of $712,000 compared to expense of $8.6 million in 2020 and
$4.2 million in 2019. The decrease in 2021 as compared to 2020 and increase in 2020 as compared to 2019 was the result of write-
downs in 2020 of $8.4 million of previously foreclosed upon properties to market value based on updated appraisals.
Marketing and business development expense for the year ended December 31, 2021 was 20.5% greater than in 2020 which was
19.3% less than in 2019. The primary source of the increase in 2021 as compared to 2020 and decrease in 2020 as compared to 2019 is
related to the decrease of in-person business meetings and client meals and entertainment during 2020 as a result of the restrictions
resulting from COVID-19 and the lessening of these restrictions and subsequent uptick of in-person business meeting and client meals
and entertainment during 2021.
65
Noninterest expense related to the amortization of intangibles was $8.5 million for the year ended December 31, 2021 compared to
$9.8 million and $9.9 million for the years ended December 31, 2020 and 2019, respectively. The following table outlines our
amortizing intangible assets, their initial valuations and their intangible lives as of December 31, 2021:
Core Deposit Intangible:
CapitalMark
Magna Bank
Avenue
BNC
Book of Business Intangible:
Miller Loughry Beach Insurance
CapitalMark
BNC Insurance
BNC Trust
Advocate Capital
Year
acquired
Initial
Valuation
(in millions)
Amortizable
Life
(in years)
Remaining
Value
(in millions)
$
2015
2015
2016
2017
2008
2015
2017
2017
2019
6.2
3.2
8.8
48.1
1.3
0.3
0.4
1.9
13.6
7 $
6
9
10
20
16
20
10
13
0.1
—
1.4
20.6
0.1
0.1
0.2
1.0
8.1
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 $7.0 million per year to $4.4 million per year over the next five years with
lesser amounts for the remaining amortization period.
Total other noninterest expenses decreased by $4.7 million to $100.0 million during 2021 when compared to 2020 and increased by
$33.0 million to $104.6 million during 2020 when compared to 2019. 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 related expenses were relatively flat in 2021 and decreased by only $389,000 when compared to 2020. These same expenses
increased by $7.4 million in 2020 when compared to 2019. The increase in 2020 when compared to 2019 was largely the result of
increased FDIC assessment costs primarily due to the firm's increased asset base. Lending related expenses increased by $10.9 million
and $4.1 million, respectively, in 2021 when compared to 2020 and 2020 when compared to 2019. 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 2021 as compared to 2020 and 2019 is primarily related to increased
regulation of our operations as a result of our increased asset size in each of the respective periods. Also included in other noninterest
expense were $15.2 million in restructuring charges associated with our prepayment of $1.1 billion in FHLB advances during 2020.
No FHLB restructuring charges were incurred in either 2021 or 2019. Administrative and other expenses remained relatively flat
decreasing by $556,000 during 2021 when compared to 2020 and increasing by $4.8 million during 2020 when compared to 2019.
Included in the $4.8 million increase in 2020 was $4.7 million of unrealized losses reclassified out of other comprehensive income
(loss) into net income related to cash flow swaps with a notional amount of $99.0 million which were terminated on December 16,
2020.
Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 49.7%, 49.5%, and
49.0% for the three years ended December 31, 2021, 2020 and 2019, respectively. The efficiency ratio measures the amount of
expense that is incurred to generate a dollar of revenue. Increases in cash incentives in 2021 negatively impacted our efficiency ratio in
2021, while other real estate expense and net gains and losses on sales of securities impacted our efficiency ratios in each of 2020 and
2019. The efficiency ratio for the year ended December 31, 2020 compared to the same period in 2019 was negatively impacted by the
$15.2 million in FHLB restructuring charges and $4.7 million in hedge termination charges noted above. Net income for 2021 was
$527.3 million compared to $312.3 million in net income in 2020 and $400.9 million in 2019. Fully-diluted net income per common
share was $6.75 for 2021 compared to $4.03 for 2020 and $5.22 for 2019.
66
Income Taxes. During the year ended December 31, 2021, we recorded income tax expense of $124.6 million compared to $59.0
million and $96.7 million in 2020 and 2019, respectively. Our effective income tax rate was 19.1%, 15.9% and 19.4%, respectively,
for the years ended December 31, 2021, 2020 and 2019. Our effective tax rate differs from the combined federal and state income tax
statutory rate in effect of 26.14% primarily due to our investments in bank-qualified tax-exempt municipal securities, tax benefits from
our real estate investment trust and municipal investment subsidiaries, participation in Tennessee's Community Investment Tax Credit
(CITC) program, tax benefits associated with share-based compensation, 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, non-deductible FDIC
insurance premiums and non-deductible executive compensation. Our tax rate in each period was impacted by the vesting and exercise
of equity-based awards previously granted under our equity-based compensation program, resulting in a tax benefit of $2.5 million,
$417,000 and $1.0 million, respectively, for the years ended December 31, 2021, 2020 and 2019, respectively.
Financial Condition
Our consolidated balance sheet at December 31, 2021 reflects an increase of $989.8 million in outstanding loans to $23.4 billion and
an increase of $3.6 billion in total deposits to $31.3 billion from December 31, 2020. Total assets were $38.5 billion at December 31,
2021 as compared to $34.9 billion at December 31, 2020.
Loans. The composition of loans at December 31 for each of the past three years and the percentage (%) of each segment to total
loans are summarized as follows (dollars in thousands):
2021
2020
2019
Amount
Percent
Amount
Percent
Amount
Percent
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total loans
$
3,048,822
13.0 % $
2,802,227
12.5 % $
2,669,766
5,221,704
3,680,684
2,903,017
8,074,546
485,489
22.3 %
15.7 %
12.4 %
34.5 %
2.1 %
5,203,384
3,099,172
2,901,746
8,038,457
379,515
23.2 %
13.8 %
12.9 %
35.9 %
1.7 %
5,039,452
3,068,625
2,430,483
6,290,296
289,254
13.5 %
25.5 %
15.5 %
12.3 %
31.8 %
1.4 %
$
23,414,262
100.0 % $
22,424,501
100.0 %1 $
19,787,876
100.0 %
At December 31, 2021, our loan portfolio composition had changed modestly from the composition at December 31, 2020. At
December 31, 2021, approximately 36.9% of the outstanding principal balance of our commercial real estate loans was secured by
owner-occupied commercial real estate properties, compared to 35.0% at December 31, 2020. 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. Additionally, the construction and land development
segment 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.
67
The following table presents the maturity distribution of our loan portfolio by loan segment at December 31, 2021 according to
contractual maturities of (1) one year or less, (2) after one but within five years, (3) after five but within fifteen years and (4) after
fifteen years. The table also presents the portion of loans by loan segment that have fixed interest rates or variable interest rates that
fluctuate over the life of the loans in accordance with changes in an interest rate index (dollars in thousands):
Due in one year or
less
After one but within
five years
After five but within
fifteen years
After fifteen years
Total
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total loans
Loans with fixed interest rates:
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total loans
Loans with variable interest rates:
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total loans
$
201,913 $
1,237,098 $
1,280,271 $
329,540 $
1,030,965
81,820
784,862
2,245,163
128,935
3,334,949
458,502
1,854,346
4,305,578
156,602
801,482
373,998
207,834
1,310,761
184,744
54,308
2,766,364
55,975
213,044
15,208
3,048,822
5,221,704
3,680,684
2,903,017
8,074,546
485,489
4,473,658 $
11,347,075 $
4,159,090 $
3,434,439 $
23,414,262
172,658 $
1,007,375 $
963,287 $
238,468 $
603,178
60,578
632,772
1,770,069
95,223
2,330,460
376,293
1,337,228
2,597,753
110,325
573,003
294,682
173,969
963,367
183,390
40,361
2,102,315
54,002
157,860
15,190
2,381,788
3,547,002
2,833,868
2,197,971
5,489,049
404,128
3,334,478 $
7,759,434 $
3,151,698 $
2,608,196 $
16,853,806
29,255 $
229,723 $
316,984 $
91,072 $
427,787
21,242
152,090
475,094
33,712
1,004,489
82,209
517,118
1,707,825
46,277
228,479
79,316
33,865
347,394
1,354
13,947
664,049
1,973
55,184
18
$
1,139,180 $
3,587,641 $
1,007,392 $
826,243 $
667,034
1,674,702
846,816
705,046
2,585,497
81,361
6,560,456
$
$
$
$
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 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.
68
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 risk committee 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.
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, 2021 and 2020 (in thousands):
At December 31, 2021
Outstanding
Principal Balances
Unfunded
Commitments
Total exposure
Total Exposure at
December 31, 2020
Lessors of nonresidential buildings
$
3,779,463 $
1,589,175 $
5,368,638 $
Lessors of residential buildings
New housing for-sale builders
Hotels and motels
1,361,389
555,069
866,535
1,204,963
979,720
53,821
2,566,352
1,534,789
920,356
4,442,712
2,126,246
1,124,302
1,039,259
Banking regulations have established guidelines for the construction and land development 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,
2021 and 2020, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were 79.1% and
89.0%, respectively. Non-owner occupied commercial real estate and multifamily loans (including construction and development
loans) were 234.1% and 264.0% for December 31, 2021 and 2020, respectively. Pinnacle Bank was within the 100% and 300%
guidelines throughout 2021 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 though there may be periods where we exceed these
levels if loan growth is more heavily weighted to these types of loans.
69
Loans in Past Due Status. The following table is a summary of our 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, 2021 and 2020 (dollars in thousands):
December 31, 2021
December 31, 2020
Loans past due 30 to 89 days:
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total loans past due 30 to 89 days
Loans past due 90 days or more:
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total loans past due 90 days or more
Ratios:
Loans past due 30 to 89 days as a percentage of total loans
Loans past due 90 days or more as a percentage of total loans
Total loans in past due status as a percentage of total loans
$
$
$
727
$
1,434
8,832
61
7,603
2,283
20,940
$
2,426
$
645
4,450
127
7,311
372
3,606
6,946
9,187
696
26,079
1,088
47,602
1,860
3,861
6,274
736
4,408
304
$
15,331
$
17,443
0.09 %
0.06 %
0.15 %
0.21 %
0.08 %
0.29 %
Potential Problem Loans. Potential problem loans amounted to approximately $109.6 million, or 0.5% of total loans outstanding at
December 31, 2021, compared to $173.5 million, or 0.8% of total loans outstanding at December 31, 2020. 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. None of the potential problem loans
were past due at least 30 but less than 90 days as of December 31, 2021.
Non-Performing Assets and Troubled Debt Restructurings (TDR). At December 31, 2021, we had $40.1 million in nonperforming
assets compared to $86.2 million at December 31, 2020. Included in nonperforming assets were $31.6 million in nonaccruing loans, or
0.13% of total loans, and $8.5 million in other real estate owned and other nonperforming assets at December 31, 2021 and $73.8
million in nonaccruing loans, or 0.33% of total loans, and $12.4 million in other real estate owned and other nonperforming assets at
December 31, 2020. At December 31, 2021 and 2020, there were $2.4 million and $2.5 million, respectively, of TDRs that were
performing as of the restructured date and remain on accrual status. Nonaccruing loans totaled $61.6 million, or .31% of total loans, at
December 31, 2019.
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 2021 and 2020, we recognized no interest income related
to nonaccruing loans. In 2019, we recognized $176,000 of interest income from nonaccruing 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. At
December 31, 2021, 2020 and 2019, our allowance for credit losses as a percentage of nonaccruing loans totaled 833.8%, 386.1% and
153.8%, respectively.
70
Allowance for Credit Losses on Loans (allowance). On January 1, 2020, we adopted FASB ASU 2016-13, which introduced the
current expected credit losses ("CECL") methodology and required us to estimate all expected credit losses over the remaining life of
our loan portfolio. Accordingly, the allowance for credit losses represents an amount that, in management's evaluation, is adequate to
provide coverage for all expected future credit losses on outstanding loans. As of December 31, 2021 and 2020, our allowance for
credit losses was $263.2 million and $285.1 million, respectively, which our management deemed to be adequate at each of the
respective dates. Our allowance for credit losses as a percentage of total loans, inclusive of PPP, was 1.12% at December 31, 2021,
down from 1.27% at December 31, 2020. No allowance for credit losses has been recorded for PPP loans as they are fully guaranteed
by the SBA.
Our CECL models rely largely on recent historical and projected future macroeconomic conditions to estimate future credit losses.
Macroeconomic factors used in the model include the national unemployment rate, gross domestic product, the commercial real estate
price index and certain U.S. Treasury interest rates. Projections of these macroeconomic factors, obtained from an independent third
party, are utilized to predict quarterly rates of default. These macroeconomic factors experienced significant deterioration during 2020,
resulting in a significant increase in our allowance for credit losses during the same period. These factors reflected improvement
during 2021 resulting in the decrease in the overall allowance for credit losses.
Under the CECL methodology, the allowance for credit losses is measured on a collective basis for pools of loans with similar risk
characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are
performed on an individual basis. Losses are predicted over a period of time determined to be reasonable and supportable, and at the
end of the reasonable and supportable period losses are reverted to long term historical averages. At December 31, 2021, a reasonable
and supportable period of twenty-four months was utilized for all loan segments followed by a twelve month straight line reversion
period to long term averages.
The following table sets forth, based on management's best estimate, the allocation of the allowance for credit losses on loans to
categories of loans and loan balances by category and the percentage of loans in each category to total loans and allowance for credit
losses as a percentage of total loans within each loan category as of December 31 for each of the past two years (in thousands):
At December 31,
2021
2020
Allowance
Allocated
($)
Total
Loans ($)
Allowance
to Total
Loans (%)
Loans to
Total
Loans (%)
Allowance
Allocated
($)
Total
Loans ($)
Allowance
to Total
Loans (%)
Loans to
Total
Loans (%)
Balance at end of period applicable to:
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate – mortgage
$
19,618 $ 3,048,822
58,504
5,221,704
32,104
3,680,684
Construction and land development
29,429
2,903,017
Commercial and industrial
Consumer and other
Total
112,340
8,074,546
11,238
485,489
$ 263,233 $ 23,414,262
0.6 %
1.1 %
0.9 %
1.0 %
1.4 %
2.3 %
1.1 %
13.0 % $
23,298 $ 2,802,227
22.3 %
15.7 %
12.4 %
34.5 %
2.1 %
79,132
5,203,384
33,304
3,099,172
42,408
2,901,746
98,423
8,038,457
8,485
379,515
100.0 % $ 285,050 $ 22,424,501
0.8 %
1.5 %
1.1 %
1.5 %
1.2 %
2.2 %
1.3 %
12.5 %
23.2 %
13.8 %
12.9 %
35.9 %
1.7 %
100.0 %
The following table presents information related to credit losses on loans by loan segment for each of the years in the three-year period
ended December 31, 2021 (in thousands):
Provision for
credit losses
Net (charge-offs)
recoveries
Average loans
Ratio of net
(charge-offs)
recoveries to
average loans
For the year ended December 31, 2021:
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total loans
$
(3,869) $
189 $
(20,811)
(2,856)
(12,984)
52,645
4,781
183
1,656
5
(38,728)
(2,028)
2,891,798
5,358,828
3,320,083
2,845,957
8,154,391
403,624
$
16,906 $
(38,723) $
22,974,681
0.01 %
—
0.05
—
(0.47)
(0.50)
(0.17) %
71
Provision for
credit losses
Net (charge-offs)
recoveries
Average loans
Ratio of net
(charge-offs)
recoveries to
average loans
For the year ended December 31, 2020:
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer and other
$
10,909 $
(1,281) $
63,544
6,206
32,743
73,449
4,691
365
(1,985)
147
(34,178)
(2,439)
2,693,062
5,217,596
3,067,694
2,594,505
7,873,759
288,772
Total loans
For the year ended December 31, 2019:
$
191,542 $
(39,371) $
21,735,388
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer real estate - mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total loans
$
3,204 $
(373) $
2,687
(108)
870
17,116
3,514
905
492
664
(12,735)
(5,034)
2,637,188
4,940,203
2,961,031
2,161,235
5,806,427
266,851
$
27,283 $
(16,081) $
18,772,935
(0.05) %
0.01
(0.06)
0.01
(0.43)
(0.84)
(0.18) %
(0.01) %
0.02
0.02
0.03
(0.22)
(1.89)
(0.08) %
Pinnacle Financial's management assesses the adequacy of the allowance for credit losses on a quarterly basis. 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 historical default and loss experience, current and projected economic
conditions, 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 payments), the estimated value of any underlying collateral, composition of the loan
portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The
allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously
charged-off.
Based upon our evaluation of the loan portfolio, we believe the allowance for credit losses on loans to be adequate to absorb our
estimate of expected future credit losses on loans outstanding at December 31, 2021. While our policies and procedures used to
estimate the allowance for credit losses as well as the resultant provision for credit 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 credit losses and, thus, the resulting provision for credit losses.
Investments. Our investment portfolio, consisting primarily of Federal agency bonds, state and municipal securities and mortgage-
backed securities, amounted to $6.1 billion and $4.6 billion at December 31, 2021 and 2020, respectively. Our investment to asset
ratio increased from 13.2% at December 31, 2020 to 15.8% at December 31, 2021. 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 2021, we sold
$37.5 million of investment securities for a net pre-tax gain of $759,000 compared to $145.6 million of investment securities for a net
pre-tax gain of $986,000 during 2020 and $737.7 million of investment securities for a net pre-tax loss of $5.9 million during 2019.
These sales were implemented as part of our efforts to reposition our investment portfolio to provide our balance sheet more protection
from the then anticipated rate environment in each respective period.
During the first quarter of 2020 and the third quarter of 2018, we transferred, at fair value, $873.6 million and $179.8 million,
respectively, of municipal securities from the available-for-sale portfolio to the held-to-maturity portfolio to mitigate the impact of
changes in fair value on our common tangible book equity. The related net unrealized after tax gains of $69.0 million and losses of
$2.2 million, respectively, on such transferred securities remained in accumulated other comprehensive income (loss) at December 31,
2021 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. On January 1, 2022, we transferred, at fair value, $1.1 billion of
securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized after tax losses of $1.5
72
million remain in accumulated other comprehensive income (loss) and will be amortized over the remaining lives of the securities,
offsetting the related amortization of discount or accretion of premium on the transferred securities. No gains or losses were
recognized at the time of the transfer.
A summary of certain aspects of our investment portfolio at December 31, 2021 and 2020 follows:
Weighted average life
Effective duration (*)
Tax equivalent yield
December 31,
2021
2020
6.26 years
6.51 years
4.07 %
2.08 %
4.35 %
2.28 %
(*) 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, 2021 was 5.21%.
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, 2021 (in thousands):
U.S. Treasury
securities
U.S.
Government
agency
securities
State and
municipal
securities
Corporate notes
Mortgage-backed
securities
Asset-backed
securities
Totals
Amt.
Yield
Amt.
Yield
Amt.
Yield
Amt.
Yield
Amt.
Yield
Amt.
Yield
Amt.
Yield
At December 31, 2021:
Securities available-for-
sale:
Due in one year or less
$ 102,434
0.04 % $
58
2.16 % $
486
1.61 % $
554
0.30 % $ 14,083
2.41 % $ —
0.00 % $ 117,615
0.33 %
Due in one year through
five years
Due in five years
through ten years
Due after ten years
Securities held-to-
maturity:
91,175
0.74 % 222,385
1.02 %
5,711
4.17 % $
2,438
4.33 %
55,543
2.06 % 9,468
1.70 %
386,720
1.18 %
—
0.00 % 400,090
1.38 %
33,400
2.65 % $ 80,152
4.00 % 1,138,603
1.70 %
—
0.00 % 1,652,245
1.75 %
—
0.00 % 9,476
1.42 % 1,784,240
3.47 % $ 31,787
2.31 % 712,010
1.61 % 220,101
1.80 % 2,757,614
2.82 %
$ 193,609
0.37 % $ 632,009 1.25 % $ 1,823,837 3.46 % $ 114,931
3.50 % $ 1,920,239
1.68 % $ 229,569 1.80 % $ 4,914,194
2.26 %
Due in one year or less
$ —
0.00 % $ —
0.00 % $
—
0.00 % $
—
0.00 % $
—
0.00 % $ —
0.00 % $
—
0.00 %
Due in one year through
five years
Due in five years
through ten years
Due after ten years
—
0.00 % 11,920
1.00 %
1,410
3.33 %
—
0.00 %
—
0.00 %
—
0.00 %
13,330
1.25 %
—
0.00 %
—
0.00 %
5,648
1.89 %
—
0.00 %
—
0.00 %
—
0.00 %
5,648
1.89 %
—
0.00 %
—
0.00 % $ 1,030,586 2.96 %
—
0.00 % 106,555
1.27 %
—
0.00 % 1,137,141
2.80 %
$ —
0.00 % $ 11,920
1.00 % $ 1,037,644 2.95 % $
—
0.00 % $ 106,555
1.27 % $ —
0.00 % $ 1,156,119
2.78 %
Yields have been computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a
ratable basis over the life of each security. Weighted average yield for each maturity range has been computed on a fully taxable-
equivalent basis using the amortized cost of each security in that range.
Restricted Cash. Our restricted cash balances totaled approximately $82.5 million and $223.8 million at December 31, 2021 and 2020,
respectively. This restricted cash is maintained at other financial institutions as collateral primarily for our derivative portfolio. The
decrease in restricted cash is attributable primarily to a decrease in collateral requirements on certain derivative instruments for which
the fair value has increased. See Note 14. Derivative Instruments in the Notes to our Consolidated Financial Statements elsewhere in
this Form 10-K.
Securities Purchased with Agreement to Resell. At December 31, 2021 we had $1.0 billion in securities purchased with agreement to
resell. This balance is the result of repurchase agreement transactions with a financial institution counterparty. These investments
deploy some of our liquidity position into an instrument that improves the return on those funds in the current low rate environment.
Additionally, we believe it positions us more favorably for a potential rising interest rate environment in the future. All of these
securities were purchased in 2021. Prior to 2021, no securities were purchased with agreement to resell.
73
Deposits and Other Borrowings. We had approximately $31.3 billion of deposits at December 31, 2021 compared to $27.7 billion
billion at December 31, 2020. Our deposits consist of noninterest and interest-bearing demand accounts, savings accounts, money
market accounts and time deposits. At December 31, 2021 and 2020, we estimate that we had approximately $14.9 billion and $10.6
billion, respectively, in uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit.
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 $152.6 million at December
31, 2021 and $128.2 million at December 31, 2020. Average balances for these repurchase agreements were $155.9 million in 2021,
$150.1 million in 2020 and $117.5 million in 2019. Additionally, at December 31, 2021, we had borrowed $888.7 million in advances
from the Federal Home Loan Bank of Cincinnati (FHLB Cincinnati) compared to $1.1 billion billion at December 31, 2020. At
December 31, 2021, we had an estimated $3.1 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.
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, 2021 and
2020 (in thousands):
December 31,
2021
Average
Rate
Paid
Balance
Percent of
Total Deposits
Balance
December 31,
2020
Average
Rate
Paid
Percent of
Total Deposits
Core funding:
Noninterest-bearing deposit accounts
$ 10,461,071
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
Paycheck Protection Program liquidity facility
Subordinated debt and other funding
Total wholesale funding
Total non-core funding
Totals
(1)
4,936,735
9,792,104
998,586
1,075,774
1,885,806
166,836
29,316,912
565,184
152,559
717,743
1,019,259
403,178
888,681
—
423,172
2,734,290
3,452,033
$ 32,768,945
0.00 %
0.14 %
0.18 %
0.65 %
0.21 %
0.26 %
0.57 %
0.14 %
0.76 %
0.15 %
0.65 %
0.31 %
1.15 %
2.01 %
0.00 %
4.38 %
1.60 %
1.42 %
0.33 %
31.9 % $ 7,392,325
15.1 %
29.9 %
3.0 %
3.3 %
5.8 %
0.5 %
4,055,259
8,303,911
1,295,765
884,450
1,358,154
221,019
89.5 %
23,510,883
1.7 %
0.5 %
2.2 %
3.1 %
1.2 %
2.7 %
0.0 %
1.3 %
8.3 %
722,609
128,164
850,773
2,186,844
1,285,239
1,087,927
—
670,575
5,230,585
10.5 %
6,081,358
100.0 % $ 29,592,241
0.00 %
0.38 %
0.46 %
1.67 %
0.43 %
0.64 %
1.59 %
0.41 %
1.87 %
0.23 %
1.62 %
0.50 %
1.65 %
1.89 %
0.00 %
4.50 %
1.76 %
1.74 %
0.73 %
25.0 %
13.7 %
28.1 %
4.4 %
3.0 %
4.6 %
0.7 %
79.5 %
2.4 %
0.4 %
2.8 %
7.4 %
4.3 %
3.7 %
0.0 %
2.3 %
17.7 %
20.5 %
100.0 %
The reciprocating categories consists of deposits we receive from a bank network (the IntraFi network) in connection with deposits of
our customers in excess of our FDIC coverage limit that we place with the IntraFi network.
As noted in the table above, our core funding as a percentage of total funding increased from 79.5% at December 31, 2020 to 89.5% at
December 31, 2021 primarily as a result of the significant increase in deposits estimated to have been funded, in part, by PPP loans
and other government stimulus payments, and our release of wholesale funding that was intentionally acquired to build on-balance
sheet liquidity as we prepared for the initial impact of the COVID-19 pandemic but that we began releasing in the first quarter of 2021
and have continued releasing, where possible, through the end of 2021 based on our view of then current market conditions. On July
30, 2021, Pinnacle Bank redeemed $130.0 million aggregate principal amount of subordinated notes due July 30, 2025. Additionally
on November 16, 2021, Pinnacle Financial redeemed $120.0 million in aggregate principal amount of our subordinated notes due
November 16, 2026. Competition for core deposits in our markets remains very competitive and we continue to anticipate that our
percentage of non-core funding is likely to increase as PPP loan funds and stimulus monies are utilized.
74
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. 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, 2021.
The amount of time deposits as of December 31, 2021 amounted to $2.1 billion. The following table, which includes core, non-core
and reciprocal time deposits, shows our time deposits at December 31, 2021 in denominations of under $250,000 and those of
denominations of $250,000 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 $250,000
Three months or less
Over three but through six months
Over six but through twelve months
Over twelve months
Denomination $250,000 and greater
Three months or less
Over three but through six months
Over six but through twelve months
Over twelve months
$
374,151
480,851
401,373
273,581
1,529,956
207,167
125,752
145,109
125,800
603,828
Totals
$
2,133,784
0.34 %
0.63 %
0.38 %
0.55 %
0.48 %
0.54 %
0.69 %
0.37 %
0.45 %
0.51 %
0.49 %
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. During the year ended December 31, 2020, Pinnacle
Financial used a portion of its excess liquidity to prepay $1.1 billion in FHLB advances resulting in prepayment penalties of $15.2
million. At December 31, 2021 and 2020, Pinnacle Financial had received advances from the FHLB Cincinnati totaling $888.7 million
and $1.1 billion, respectively. At December 31, 2021, the scheduled maturities of FHLB Cincinnati advances and interest rates are as
follows (in thousands):
2022
2023
2024
2025
2026
Thereafter
Deferred costs
Total Federal Home Loan Bank advances
Weighted average interest rate
$
Scheduled
maturities
—
—
—
116,250
—
775,013
891,263
2,582
$
888,681
Weighted
average
interest rates (1)
— %
— %
— %
0.60 %
— %
2.15 %
1.94 %
(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, 2021.
75
We have established, or through acquisition acquired, twelve statutory business trusts which were established to issue 30-year trust
preferred securities and certain other subordinated debt agreements. These securities qualify as Tier 2 capital subject to annual phase
outs beginning five years from maturity. These instruments are outlined below (in thousands):
Name
Date Established
Maturity
Total Debt
Outstanding
Interest Rate at
December 31,
2021
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 07, 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
April 03, 2003
April 15, 2033
March 11, 2004
April 07, 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
Valley Financial Trust III
December 15, 2006
January 30, 2037
Southcoast Capital Trust III
August 05, 2005
September 30, 2035
Subordinated Debt
Pinnacle Financial Subordinated Notes
September 11, 2019
September 15, 2029
Debt issuance costs and fair value adjustment
Total subordinated debt and other borrowings
10,310
20,619
20,619
30,928
5,155
6,186
5,155
7,217
4,124
7,217
5,155
10,310
300,000
(9,823)
$
423,172
3.02 % 30-day LIBOR + 2.80%
1.62 % 30-day LIBOR + 1.40%
1.87 % 30-day LIBOR + 1.65%
3.05 % 30-day LIBOR + 2.85%
3.37 % 30-day LIBOR + 3.25%
2.97 % 30-day LIBOR + 2.85%
2.52 % 30-day LIBOR + 2.40%
1.92 % 30-day LIBOR + 1.70%
3.32 % 30-day LIBOR + 3.10%
1.69 % 30-day LIBOR + 1.49%
1.86 % 30-day LIBOR + 1.73%
1.72 % 30-day LIBOR + 1.50%
4.13 %
Fixed (1)
(1) Migrates to three month LIBOR + 2.775% (or an alternative benchmark rate plus a comparable spread in the event three month
LIBOR is no longer published on such adjustment date) beginning September 15, 2024 through the end of the term.
On April 22, 2020, we established a credit facility with the Federal Reserve Bank in conjunction with the PPP. There are no amounts
outstanding on this facility at December 31, 2021, and as of July 30, 2021, no new extensions of credit are allowed under the facility.
On July 30, 2021, Pinnacle Bank redeemed $130.0 million aggregate principal amount of subordinated notes due July 30, 2025.
Additionally, Pinnacle Financial redeemed $120.0 million aggregate principal amount of subordinated notes on November 16, 2021
due November 16, 2026. The redemptions were funded with existing cash on hand. Pursuant to regulatory guidelines, once the
maturity date on subordinated notes is within five years, a portion of the notes will no longer be eligible to be included in regulatory
capital, with an additional portion being excluded each year over the five year period approaching maturity.
Capital Resources. At December 31, 2021 and 2020, our stockholders' equity amounted to $5.3 billion and $4.9 billion, respectively.
During the second quarter of 2020, we issued 9.0 million depositary shares, each representing a 1/40th interest in a share of Series B
Preferred Stock with a liquidation preference of $1,000 per share of Series B Preferred Stock in a registered public offering to both
retail and institutional investors. Net proceeds from the transaction after underwriting discounts and offering costs were approximately
$217.1 million. The net proceeds were initially retained by Pinnacle Financial and the remaining net proceeds are available to support
our obligations including payments related to our outstanding indebtedness and dividend payments on the Series B Preferred Stock, to
support the capital needs of our company and our bank, and for other general corporate purposes. During 2020, the Tier 1 leverage
ratio was negatively impacted by our intentional building of liquidity to support us through the COVID-19 pandemic and it has
continued to be negatively impacted in 2021 by excess levels of liquidity on our balance sheet as customer deposit accounts have
remained at elevated levels.
76
Our and our bank subsidiary's capital ratios as of December 31, 2021 and 2020 are presented in the following table:
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,
2021
2020
13.8%
12.6%
11.7%
11.9%
10.9%
11.9%
9.7%
9.9%
14.3%
12.7%
10.9%
11.4%
10.0%
11.4%
8.6%
9.1%
(*) Average assets for the above calculations were based on the most recent quarter.
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.
As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, both we and our bank
subsidiary have elected the option to delay the estimated impact on regulatory capital resulting from the adoption of ASU 2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which was effective
January 1, 2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly increases in the allowance for credit
losses subsequent to adoption of ASU 2016-13 (collectively the “transition adjustments”), was delayed through December 31, 2021.
Beginning on January 1, 2022, the cumulative amount of the transition adjustments of $68.0 million became fixed and will be phased
out of the regulatory capital calculations evenly over a three year period, with 75% recognized in 2022, 50% recognized in 2023, and
25% recognized in 2024. Beginning January 1, 2025, the temporary regulatory capital benefits will be fully reversed. A CECL
transitional amount totaling $68.0 million has been added back to CET1 as of December 31, 2021. The CECL transitional amount
includes $31.8 million related to the cumulative effect of adopting CECL on January 1, 2020, and $36.2 million related to the
estimated incremental effect of CECL since adoption. The CECL transitional amount as of December 31, 2020 totaled $73.4 million.
Share Repurchase Program. On November 13, 2018, we announced that our board of directors authorized a share repurchase program
for up to $100.0 million of our outstanding common stock and on October 15, 2019, the board approved an additional $100.0 million
of repurchase authorization. The initial repurchase program expired on March 31, 2020 and the additional $100.0 million authorization
expired on December 31, 2020, though it had been suspended since the end of the first quarter of 2020 due to uncertainty surrounding
the pandemic. Between November 13, 2018 and December 31, 2019, we repurchased approximately 1.5 million shares of our common
stock at an aggregate cost of $82.1 million pursuant to these authorizations. During the quarter ended March 31, 2020, we repurchased
approximately 1.0 million shares of our common stock at an aggregate cost of $50.8 million. Our last purchase of shares of our
common stock occurred on March 19, 2020. On January 19, 2021, our board of directors authorized a share repurchase program for up
to $125.0 million of our outstanding common stock, pursuant to which we have acquired no shares of our common stock. The
authorization for this program will remain in effect through March 31, 2022. On January 18, 2022, our board of directors authorized a
share repurchase program for up to $125.0 million of our common stock to commence upon expiration of our existing share
repurchase program that is set to expire on March 31, 2022. This authorization is to remain in effect through March 31, 2023.
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, 2021, Pinnacle Bank paid dividends of $99.8 million to us which was within the limits
allowed by the TDFI.
77
During the year ended December 31, 2021, we paid $55.5 million in dividends to common shareholders. On January 18, 2022 our
board of directors declared a $0.22 quarterly cash dividend to common shareholders (approximately $16.6 million in aggregate) that
was paid on February 25, 2022 to common shareholders of record as of the close of business on February 4, 2022.
During the year ended December 31, 2021, we paid $15.2 million of dividends on our Series B Preferred Stock. On January 18, 2022
our board of directors declared a $16.88 quarterly cash dividend (approximately $3.8 million in aggregate) that will be paid on March
1, 2022 to preferred shareholders of record as of the close of business on February 14, 2022. This dividend equates to $0.422 per share
on our depositary shares.
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, if necessary, our receipt of dividends from Pinnacle Bank, regulatory capital
requirements, as they become known to us and receipt of any regulatory approvals that may become required as a result of our and our
bank subsidiary's financial results.
If we fail to pay dividends on our Series B Preferred Stock, we will be prohibited from paying dividends on our common stock.
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.
During the year ended December 31, 2021, there were several noteworthy factors when comparing the results of both the earnings
simulation and the economic value of equity modeling results as of December 31, 2021, to the modeling results at December 31, 2020:
The Federal Reserve maintained an accommodative monetary policy stance in response to the COVID-19 pandemic resulting
in high levels of on-balance-sheet liquidity.
•
• We deployed $1.0 billion of liquidity into reverse repo agreements with floating-rate structures.
• We unwound a $1.5 billion in-the-money interest rate floor derivative.
• We slowed growth in our portfolio of in-the-money client loan interest rate floors.
•
The fixed-rate PPP loan portfolio declined $1.4 billion with most proceeds transitioning to floating-rate assets.
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 estimated changes are calculated:
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Instantaneous Rate Change
300 bps increase
200 bps increase
100 bps increase
100 bps decrease
Estimated % Change in Net Interest Income Over 12 Months
December 31, 2021*
December 31, 2020*
10.3%
6.7%
2.8%
(2.5%)
2.9%
0.6%
(0.7%)
(0.3%)
*: Negative interest rates are not contemplated in these scenarios. The Treasury curve and all short-term rate indices, such as Fed Funds,
LIBOR, etc., are assumed to be zero bound.
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,
hedging activities we might take 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 the assumed benefit of those deposits. The projected impact on net interest income in the table above also
assumes a "through-the-cycle" non-maturity deposit beta which may not be an accurate predictor of actual deposit rate changes
realized in scenarios of smaller and/or non-parallel interest rate movements.
At December 31, 2021, 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.
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, 2021, our EVE modeling calculated the following estimated
changes in EVE due to instantaneous upward and downward changes in rates:
December 31, 2021*
December 31, 2020
Instantaneous Rate Change
300 bps increase
200 bps increase
100 bps increase
100 bps decrease
(12.4%)
(7.2%)
(1.0%)
(8.1%)
(16.2%)
(11.0%)
(4.1%)
(4.4%)
*: Negative interest rates are not contemplated in these scenarios. The Treasury curve and all short-term rate indices, such as Fed Funds,
LIBOR, etc., are assumed to be zero bound.Funds, LIBOR, etc., are assumed to be zed.
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, hedging activities we might take and
changing product spreads that could mitigate the adverse impact of changes in interest rates.
At December 31, 2021, 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.
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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. 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 industry and regulatory
practices. 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 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 our 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 assumes four 25 basis point increases in the Federal Funds Rate during 2022.
Our "most likely" rate forecast 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 in our mortgage lending program, while continuing to meet the credit and deposit needs of our customers. For
further details on the derivatives we currently use, see Note 14. Derivative Instruments in the Notes to our Consolidated Financial
Statements elsewhere in this Form 10-K.
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.
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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,
2021, 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,
2021, we believe we had an estimated $3.1 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
$155.0 million. These accommodations have various covenants related to their term and availability, and in most cases must be repaid
within less than one month. There were no outstanding borrowings under these agreements at December 31, 2021, or during the year
then ended, although we test the availability of these accommodations periodically. Pinnacle Bank also had approximately $3.4 billion
in available Federal Reserve discount window lines of credit at December 31, 2021.
At December 31, 2021 and 2020, excluding reciprocating time and money market deposits issued through the IntraFiNetwork, we had
approximately $1.4 billion and $3.5 billion, respectively, in brokered deposits. Historically, we have issued brokered certificates
through several different brokerage houses based on competitive bid. During 2020, and in response to the uncertainty resulting from
the COVID-19 pandemic, we intentionally increased our levels of on-balance sheet liquidity. During the first quarter of 2020, this
increase was funded by a combination of increased core deposits, increased borrowings from the FHLB Cincinnati and increases in
brokered time deposits. Core deposit growth during 2020 and 2021 increased such that we were able to prepay certain wholesale
maturities while maintaining an elevated level of on-balance sheet liquidity. We intend to prepay and/or let mature wholesale funding
as core deposit levels allows.
Banking regulators have defined additional liquidity guidelines, through the issuance of the Basel III Liquidity Coverage Ratio (LCR)
and the Modified LCR. These regulatory guidelines became effective January 2015 with phase in over subsequent years and 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, 2021, we had no individually significant commitments for capital expenditures. But, we believe the number of our
locations, including non-branch locations, will increase over an extended period of time across our footprint and that certain of our
locations will be in need of required renovations. In future periods, these expansions and renovation projects may lead to additional
equipment and occupancy expenses as well as related increases in salaries and benefits expense. Additionally, we expect we will
continue to incur costs associated with technology improvements to enhance the infrastructure of our firm.
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) and FHLB Cincinnati advances.
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We have certain contractual obligations as of December 31, 2021, which by their terms have a contractual maturity and termination
dates subsequent to December 31, 2021. Each of these commitments is noted throughout Item 7. Management's Discussion and
Analysis. 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 and that we will have adequate liquidity to meet our obligations over a longer-term as well.
Off-Balance Sheet Arrangements. At December 31, 2021, we had outstanding standby letters of credit of $278.0 million and unfunded
loan commitments outstanding of $12.8 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.
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, 2021, we had accrued $22.5 million related to expected
credit losses 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 reward, including return, which is critical to
optimizing shareholder value. 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 (including IT, Cyber and BSA/AML), compliance risk, asset liability management risk, capital
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. We are also
committed to understanding the impacts of climate change related to its activities and to partner with the communities in which it
operates, to do the same. We expect that climate change will be increasingly impactful over time, and we will monitor closely to
understand regulatory, environmental and business partner impacts that influence our business and the clients and communities we
serve. 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 Audit Executive, Chief Compliance Officer and Chief Credit Officer and including other key
leaders responsible for critical operation and support functions, 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 and direction of risk within each key
area, an assessment of critical factors that influence firm risks, emerging 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.
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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.
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 our 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 and control such risks, including designing appropriate testing plans to ensure the integrity of
information and cyber security controls. Additionally, we are committed to understanding the impacts of climate change related to its
activities and to partner with the communities in which it operates, to do the same. Further, our audit function (including our 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 within our risk appetite; 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.
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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 51 through 83 and is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS
Pinnacle Financial Partners, Inc. and Subsidiaries
Consolidated Financial Statements
Table of Contents
Management Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm – Financial Statements [PCAOB ID 173]
Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting [PCAOB ID 173]
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
173
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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, 2021. 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).
Based on our assessment we believe that, as of December 31, 2021, the Company's internal control over financial reporting is
effective based on the criteria set forth by COSO.
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 89 of this Annual Report on Form 10-K.
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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. and subsidiaries (the "Company")
as of December 31, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2021, 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, 2021, 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, 2022 expressed an unqualified opinion.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company changed its method for accounting for allowance for credit losses
effective January 1, 2020, due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No. 326,
Financial Instruments - Credit Losses (“ASC 326”). The Company adopted the new credit loss standard using the modified
retrospective method provided in Accounting Standards Update No. 2016-13 such that prior period amounts are not adjusted and
continue to be reported in accordance with previously applicable generally accepted accounting principles.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the
critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Allowance for Credit Losses on Loans – Qualitative Adjustments
As described in Note 1 Summary of Significant Accounting Policies and Note 5 Loans and Allowance for Credit Losses (“ACL”) to
the consolidated financial statements, the Company’s consolidated allowance for credit losses on loans was $263.2 million at
December 31, 2021 and provision for credit losses on loans was $16.9 million for the year then ended. The Company primarily
employed a probability of default (“PD”) and loss given default (“LGD”) modeling approach. The PD assumption of the Company’s
ACL model utilized historical correlations between default experience and certain macroeconomic factors as determined through a
statistical regression analysis. Losses are predicted over a period of time determined to be reasonable and supportable, and then
reverted to long term historical averages. The Company adjusted its calculated PD assumptions and overall ACL with qualitative
adjustments that are not inherently considered in the quantitative component of the methodology. These adjustments are based
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primarily upon quarterly trend assessments in portfolio concentrations, policy exceptions, associated retention, independent loan
review results, collateral considerations, risk ratings, competition, and peer group credit quality trends. Additional qualitative
considerations are made for any identified risk factors not present in the historical credit loss data, including potential impact of the
COVID-19 pandemic.
While the qualitative categories and the measurements utilized to quantify the risks associated with each of the qualitative adjustments
are built primarily upon objective measurements where applicable, they are subjectively developed and interpreted by management.
The audit procedures over the qualitative adjustments utilized in management’s methodology involved challenging and subjective
auditor judgment. Therefore, we identified auditing the qualitative adjustments applied as a critical audit matter.
The primary audit procedures we performed to address this critical audit matter included the following:
Tested the effectiveness of the Company’s controls over the qualitative adjustments including:
Relevance and reliability of the data used to support qualitative adjustments
Reasonableness of assumptions and judgments made for qualitative adjustments
Reasonableness of the output of the qualitative adjustments determined through the Company’s qualitative framework.
•
•
•
Performed substantive testing over the qualitative adjustments including:
•
•
•
Tested the relevance and reliability of the data used by management to support qualitative adjustments
Tested the reasonableness of assumptions and judgments used by management to determine qualitative adjustments
Assessed the appropriateness and reasonableness of the framework developed for qualitative adjustments, including
evaluating management’s judgments as to which factors impacted the qualitative adjustments for each portfolio segment.
/s/ Crowe LLP
We have served as the Company's auditor since 2016.
Denver, Colorado
February 28, 2022
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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 and subsidiaries (the “Company”) internal control over financial
reporting as of December 31, 2021, 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, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on
criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
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, 2021 and 2020, 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, 2021, and the related notes (collectively referred to as the "financial statements") and our report
dated February 28, 2022 expressed an unqualified opinion.
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.
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
Denver, Colorado
February 28, 2022
89
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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 purchased under agreements to resell
Securities available-for-sale, at fair value
Securities held-to-maturity (fair value of $1.2 billion and $1.1 billion, net of allowance for
credit losses of $161,000 and $191,000 at Dec. 31, 2021, and at Dec. 31, 2020, respectively)
Consumer loans held-for-sale
Commercial loans held-for-sale
Loans
Less allowance for credit 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:
(in thousands)
December 31,
2021
$
188,287 $
82,505
3,830,747
—
4,101,539
1,000,000
4,914,194
1,155,958
45,806
17,685
2020
203,296
223,788
3,522,224
12,141
3,961,449
—
3,586,681
1,028,359
87,821
31,200
23,414,262
(263,233)
23,151,029
22,424,501
(285,050)
22,139,451
288,182
360,833
98,813
1,819,811
33,819
8,537
1,473,193
$
38,469,399 $
$
10,461,071 $
6,530,015
12,179,663
2,133,784
31,304,533
152,559
888,681
423,172
12,504
377,343
33,158,792
290,001
308,556
104,078
1,819,811
42,336
12,360
1,520,757
34,932,860
7,392,325
5,689,095
11,099,523
3,524,632
27,705,575
128,164
1,087,927
670,575
24,934
411,074
30,028,249
Preferred stock, no par value; 10.0 million shares authorized; 225,000 shares non-
cumulative perpetual preferred stock, Series B, liquidation preference $225.0 million,
issued and outstanding at Dec. 31, 2021 and 2020, respectively
Common stock, par value $1.00; 180.0 million shares authorized; 76.1 million and 75.9
million shares issued and outstanding at Dec. 31, 2021 and 2020, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of taxes
Total stockholders' equity
Total liabilities and stockholders' equity
217,126
217,126
76,143
3,045,802
1,864,350
107,186
5,310,607
$
38,469,399 $
75,850
3,028,063
1,407,723
175,849
4,904,611
34,932,860
See accompanying notes to consolidated financial statements.
90
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share information)
For the years ended December 31,
2020
2021
2019
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 credit losses
Net interest income after provision for credit 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 (benefit) expense, net
Marketing and other business development
Postage and supplies
Amortization of intangibles
Other noninterest expense
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Per share information:
Basic net income per common share
Diluted net income per common share
Weighted average common shares outstanding:
Basic
Diluted
$
924,043 $
919,744 $
955,388
34,769
64,848
7,554
1,031,214
35,663
58,867
6,768
1,021,042
46,649
51,138
14,761
1,067,936
54,116
239
44,458
98,813
932,401
16,126
916,275
41,311
37,917
10,516
32,424
759
20,724
122,274
129,809
395,734
436,006
95,250
(712)
12,888
8,195
8,518
99,959
660,104
651,905
124,582
527,323 $
15,192
512,131 $
135,547
350
63,357
199,254
821,788
203,815
617,973
34,282
29,537
10,055
60,042
986
16,496
83,539
82,903
317,840
334,483
88,475
8,555
10,693
7,819
9,793
104,637
564,455
371,358
59,037
312,321 $
7,596
304,725 $
231,641
570
69,583
301,794
766,142
27,283
738,859
36,769
24,187
9,344
24,335
(5,941)
14,184
90,111
70,837
263,826
313,359
84,582
4,228
13,251
8,144
9,908
71,676
505,148
497,537
96,656
400,881
—
400,881
6.79 $
6.75 $
4.04 $
4.03 $
5.25
5.22
75,468,339
75,927,147
75,376,489
75,654,385
76,364,303
76,763,903
$
$
$
$
See accompanying notes to consolidated financial statements.
91
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 (accretion) of net unrealized losses (gains) on securities
transferred from available-for-sale to held-to-maturity, net of tax
Loss (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,
2021
2020
2019
$
527,323 $
312,321 $
400,881
(32,509)
(18,373)
92,829
52,798
(7,575)
(5,126)
(9,645)
5,542
(561)
(728)
(68,663)
145,315
81,658
(5,179)
184
1,588
4,388
82,639
$
458,660 $
457,636 $
483,520
See accompanying notes to consolidated financial statements.
92
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S
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities
Depreciation, amortization and accretion
Provision for credit losses
Gains on mortgage loans sold, net
Investment losses (gains) on sales, net
Gain on other equity investments, net
Stock-based compensation expense
Deferred tax expense (benefit)
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 commercial 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
Decrease (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 securities purchased under agreements to resell
Increase in loans, net
Purchases of premises and equipment and software
Purchase of bank owned life insurance
Proceeds from bank owned life insurance settlement
Proceeds from sales of software, premises, and equipment
Acquisitions, net of cash acquired
Proceeds from sale of other real estate
Proceeds from (payments for) derivative instruments
Proceeds from sale of Federal Home Loan Bank stock
Purchase of trade name
Increase in other investments
Net cash used in investing activities
Financing activities:
Net increase in deposits
Net increase in securities sold under agreements to repurchase
94
For the years ended December 31,
2021
2020
2019
$
527,323 $
312,321 $
400,881
59,066
53,256
16,126
(32,424)
(759)
(23,109)
24,952
(12,232)
(1,168)
(122,274)
69,996
(2,475)
(4,143)
38,051
45,203
203,815
(60,042)
(986)
(1,071)
18,737
(58,315)
7,604
(83,539)
53,020
(417)
(2,620)
20,294
8,342
27,283
(24,335)
5,941
(2,789)
21,226
14,696
2,927
(90,111)
51,312
(1,011)
(3,624)
(564,647)
(407,578)
(402,623)
582,305
396,584
404,615
(2,037,897)
(2,122,796)
(1,396,968)
2,112,336
2,176,836
1,373,678
73,527
(60,315)
657,444
(157,294)
69,241
426,754
(57,499)
79,264
431,499
(2,107,794)
(1,412,210)
(1,455,073)
37,457
617,054
145,631
469,337
737,717
372,300
(186,260)
40,442
(1,000,000)
—
20,473
—
(3,822)
8,300
—
(1,027,185)
(2,661,316)
(1,927,811)
(23,178)
—
1,656
281
—
6,090
99,710
12,602
—
(83,830)
(38,761)
(75,000)
6,486
—
—
13,272
35,680
—
(1,000)
(70,183)
(42,153)
(110,000)
321
66
(44,594)
8,446
(106,832)
—
—
(53,137)
(3,612,955)
(3,567,591)
(2,616,272)
3,599,084
7,524,867
1,332,491
24,395
1,810
21,613
—
762,473
2,672,500
(200,001)
(1,737,521)
(2,053,555)
—
56,568
316,078
(250,000)
(136,661)
(184,175)
(261)
—
(3,790)
(3,130)
—
(55,504)
(15,192)
(243)
217,126
(2,488)
(2,577)
(50,790)
(49,389)
(7,596)
(226)
—
—
(3,694)
(61,416)
(49,828)
—
1,989,788
(194,985)
721,692
526,707
Federal Home Loan Bank: Advances
Federal Home Loan Bank: Repayments/maturities
Proceeds from subordinated debt and other borrowings, net of issuance costs
Repayment of other borrowings
Principal payments of finance lease obligation
Issuance of preferred stock, net of issuance costs
Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld
for taxes
Exercise of common stock options, net of shares surrendered for taxes
Repurchase of common stock
Common stock dividends paid
Preferred stock 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
3,095,601
140,090
3,961,449
6,575,579
3,434,742
526,707
$
4,101,539 $
3,961,449 $
See accompanying notes to consolidated financial statements.
95
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 financial holding company whose primary
business is conducted by its wholly-owned subsidiary, Pinnacle Bank (Pinnacle Bank). Pinnacle Bank is a Tennessee state-chartered
commercial bank headquartered in Nashville, Tennessee. Pinnacle Financial completed its acquisitions of CapitalMark Bank & Trust
(CapitalMark), Magna Bank (Magna), Avenue Financial Holdings, Inc. (Avenue), BNC Bancorp (BNC) and Advocate Capital, Inc.
(Advocate Capital) on July 31, 2015, September 1, 2015, July 1, 2016, June 16, 2017 and July 2, 2019, 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 15 primarily urban markets across the Southeast.
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 9. 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 credit losses and the determination of any impairment of goodwill or
intangible 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 $33.8 million and $42.3 million
of long-lived intangibles at December 31, 2021 and 2020, respectively.
Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset
might be impaired. Accounting Standards Codification (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 performs a qualitative assessment and determines it is necessary, or if a qualitative assessment is not
performed, the entity is required to perform a one-step 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 one-step goodwill impairment test is not required.
Pinnacle Financial performed a qualitative assessment as of September 30, 2021 by examining changes in macroeconomic
conditions, industry and market conditions, overall financial performance, cost factors and other relevant entity-specific events,
including changes in the share price of Pinnacle Financial's common stock. The results of the qualitative assessment indicated that it
was more likely than not that the estimated fair value of Pinnacle Financial's sole reporting unit exceeded its carrying value amount at
September 30, 2021 and, therefore, no goodwill impairment was recorded.
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):
Balance at December 31, 2020
Amortization
Balance at December 31, 2021
Core deposit and
other intangible assets
Total
42,336 $
1,862,147
(8,518)
(8,518)
33,819 $
1,853,630
Goodwill
$
$
1,819,811 $
—
1,819,811 $
96
The following table presents the gross carrying amount and accumulated amortization for the core deposit and other intangible
assets (in thousands):
Gross carrying amount
Accumulated amortization
Net book value
December 31, 2021
December 31, 2020
$
$
108,665 $
(74,846)
33,819 $
108,665
(66,329)
42,336
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, 2021 as follows (in thousands):
For the years ended December 31,
2021
2020
2019
Cash Payments:
Interest
Income taxes paid
Noncash Transactions:
$
110,119 $
215,888 $
108,304
110,798
Loans charged-off to the allowance for credit 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
Fixed assets transferred to other real estate
Available-for-sale securities transferred to held-to-maturity portfolio
Right-of-use assets recognized in the period in exchange for lease obligations(1)
(1) Includes $79.9 million recognized upon initial adoption of ASU 2016-02 on January 1, 2019.
54,996
1,098
—
—
—
—
17,642
49,333
3,436
25
—
—
873,613
15,820
287,272
86,960
28,467
17,937
93
871
8,182
—
90,927
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.
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.
Allowance for Credit Losses - Securities Held-to-Maturity - Expected credit losses on debt securities classified as held-to-maturity
are measured on a collective basis by major security type. Pinnacle has a zero loss expectation for certain securities within the
portfolio, including U.S government agency securities and residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae,
and Freddie Mac, and accordingly, no allowance for credit losses is estimated for these securities. The remainder of the portfolio
consists of municipal securities rated A or higher by the ratings agencies. The estimates of expected credit losses for the municipal
securities are based on historical credit loss information that is adjusted for current conditions and reasonable and supportable
forecasts. The credit models utilized rely on regression analyses to predict probability of default (PD) based on projected
macroeconomic factors, including unemployment rates and gross domestic product (GDP), among others. A reasonable and
supportable period of eighteen months and reversion period of twelve months is utilized to estimate credit losses on held-to-maturity
municipal securities. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of
amounts previously charged-off.
97
Allowance for Credit Losses - Securities Available-for-Sale - For any securities classified as available-for-sale that are in an
unrealized loss position at the balance sheet date, Pinnacle Financial assesses whether or not it intends to sell the security, or more
likely than not will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's
amortized cost basis is written down to fair value through net income. If neither criteria is met, Pinnacle Financial evaluates whether
any portion of the decline in fair value is the result of credit deterioration. Such evaluations consider the extent to which the amortized
cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific
security. If the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded through provisions for credit
losses for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be
collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for
credit losses is recognized in other comprehensive income.
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 uses the following loan segments for financial reporting purposes: owner occupied commercial real
estate mortgage, non-owner occupied commercial real estate, consumer real estate mortgage, construction and land development,
commercial and industrial and consumer and other. 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, 2021 and 2020, net deferred loan fees of $34.3 million and $53.2 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 the FDIC,
Pinnacle Bank's primary federal regulator. At December 31, 2021, approximately 76.6% 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. Additional substantial credit risk review procedures were performed during 2020 and 2021 to assess the impacts of the
COVID-19 pandemic on the loan portfolio, and impacted loans have continued to be monitored throughout 2021 as part of the routine
credit monitoring process. The results of these procedures are reflected in Pinnacle Financial's risk rating disclosures included in Note
5. Loans and Allowance for Credit Losses herein.
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.
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.
98
Purchased loans, including loans acquired through a merger, are initially recorded at fair value on the date of purchase. 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 purchased loans that have not experienced more-
than-insignificant credit deterioration since origination, 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.
Purchased loans that have experienced more than insignificant credit deterioration since origination ("purchased credit deteriorated
loans") are individually evaluated by management to determine the estimated fair value of each loan. In determining the estimated fair
value of such loans, 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.
Allowance for Credit Losses - Loans - Pinnacle Financial adopted FASB ASC 326 effective January 1, 2020, which requires the
estimation of an allowance for credit losses in accordance with the Current Expected Credit Losses (CECL) methodology. Pinnacle
Financial's management assesses the adequacy of the allowance on a quarterly basis. 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 historical default and loss experience, current and projected economic conditions, asset quality trends,
known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan (including the timing
of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan
quality indications and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses
maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet
date. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts
previously charged-off.
The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. Pinnacle
Financial has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:
•
•
•
•
•
•
Owner occupied commercial real estate mortgage loans - Owner occupied commercial real estate mortgage loans are secured
by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies
the property. For such loans, repayment is largely dependent upon the operation of the borrower's business.
Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office
buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily
dependent on lease income generated from the underlying collateral.
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. Repayment is primarily dependent on the personal cash flow of
the borrower.
Construction and land development loans - Construction and land development loans include loans where the repayment is
dependent on the successful completion and eventual sale, refinance or 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. These loans are generally secured by equipment, inventory, and
accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Loans granted under the
PPP, which are fully guaranteed by the SBA, are included in this category.
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, consumer credit cards and
loans to finance education, among others. Many consumer loans are unsecured. Repayment is primarily dependent on the
personal cash flow of the borrower.
99
For commercial real estate, consumer real estate, construction and land development, and commercial and industrial loans,
Pinnacle Financial primarily utilizes a PD and loss given default (LGD) modeling approach. These models utilize historical
correlations between default experience and certain macroeconomic factors as determined through a statistical regression analysis. All
loan segments modeled using this approach consider changes in the national unemployment rate. In addition to the national
unemployment rate, GDP and the three month treasury rate are considered for owner occupied commercial real estate, the commercial
real estate price index and the five year treasury rate are considered for construction loans, and the three month treasury rate is
considered for commercial and industrial loans. Projections of these macroeconomic factors, obtained from an independent third party,
are utilized to predict quarterly rates of default based on the statistical PD models. Adjustments are made to predicted default rates as
considered necessary for each loan segment based on other quantitative and qualitative information not utilized as a direct input into
the statistical models. The predicted quarterly default rates are then applied to the estimated future exposure at default (EAD), as
determined based on contractual amortization terms and estimated prepayments. An estimated LGD, determined based on historical
loss experience, is applied to the quarterly defaulted balances for each loan segment to estimate future losses of the loan's amortized
cost.
Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and
supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are
re-evaluated each quarter by Pinnacle Financial and are dependent on the current economic environment among other factors. At
December 31, 2021, a reasonable and supportable period of twenty-four months was utilized for all loan segments, followed by a
twelve month straight line reversion to long term averages.
For the consumer and other loan segment, a loss rate approach is utilized. For these loans, historical charge off rates are applied to
projected future balances, as determined in the same manner as EAD for the statistically modeled loan segments. For credit cards,
which have no amortization terms or contractual maturities and are unconditionally cancellable, future balances are estimated based on
expected payment volume applied to the current balance.
The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the
quantitative analyses. 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 qualitative adjustments are applied
to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in portfolio
concentrations, policy exceptions, associate retention, independent loan review results, collateral considerations, risk ratings,
competition and peer group credit quality trends. 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. Additional qualitative
considerations are made for any identified risk which did not exist within our portfolio historically and therefore may not be
adequately addressed through evaluation of such risk factor based on historical portfolio trends as previously discussed.
Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and
are excluded from the collectively evaluated pools. Individual evaluations are generally performed for loans greater than $1.0 million
which have experienced significant credit deterioration. Such loans are evaluated for credit losses based on either discounted cash
flows or the fair value of collateral. When management determines that foreclosure is probable, expected credit losses are based on the
fair value of the collateral, less selling costs. For loans for which foreclosure is not probable, but for which repayment is expected to
be provided substantially through the operation or sale of the collateral, Pinnacle Financial has elected the practical expedient under
ASC 326 to estimate expected credit losses based on the fair value of collateral, with selling costs considered in the event sale of the
collateral is expected. Loans for which terms have been modified in a troubled-debt restructuring (TDR) are evaluated using these
same individual evaluation methods. In the event the discounted cash flow method is used for a TDR, the original interest rate is used
to discount expected cash flows.
In assessing the adequacy of the allowance for credit losses, Pinnacle Financial 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.
In accordance with CECL, losses are estimated over the remaining contractual terms of loans, adjusted for prepayments. The
contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation at the
reporting date that a TDR will be executed or such renewals, extensions or modifications are included in the original loan agreement
and are not unconditionally cancellable by Pinnacle Financial.
100
Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase
discounts and premiums, deferred loan fees and costs and accrued interest receivable. Accrued interest receivable is presented
separately on the balance sheets and as allowed under ASU 2016-13 is excluded from the tabular loan disclosures in Note 5.
While policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses
charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal
audit, they are necessarily approximate and imprecise. There are factors beyond Pinnacle Financial's control, such as changes in
projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the
adequacy of the allowance for credit losses and thus the resulting provision for credit losses.
Allowance for Credit Losses on Off Balance Sheet Credit Exposures — Pinnacle Financial estimates expected credit losses over
the contractual term of obligations to extend credit, unless the obligation is unconditionally cancellable. The allowance for off balance
sheet exposures is adjusted through the provision for credit losses. The estimates are determined based on the likelihood of funding
during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded
balances are based on the same assumptions as used to estimate credit losses on existing funded loans.
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 Financial, or a subsidiary of Pinnacle Financial, is the lessee with respect to multiple office locations. At December 31,
2021, all such leases were being accounted for as operating leases within the accompanying consolidated financial statements, with the
exception of one lease agreement classified as a finance lease. Pinnacle Financial recognizes right-of-use assets and lease liabilities
reflecting the present value of future minimum lease payments under its lease agreements in accordance with Accounting Standards
Update 2016-02, Leases.
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 as well as properties acquired in connection with the acquisition of
BNC that had previously been held for future expansion but were transferred to OREO in 2019. 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 related to the property, if any, is recognized as a charge-off through the allowance for credit 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.
Included in the accompanying consolidated balance sheet at December 31, 2021 and 2020 is $8.5 million and $12.4 million,
respectively, of OREO with no related property-specific valuation allowances in either period. During the year ended December 31,
2021, Pinnacle Financial had a net foreclosed real estate benefit of approximately $712,000 compared to net foreclosed real estate
expense of $8.6 million and $4.2 million, respectively, during the years ended December 31, 2020 and 2019.
Other Assets — Included in other assets as of December 31, 2021 and 2020, is approximately $5.1 million and $4.5 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, 2021, 2020, and 2019, Pinnacle Financial's
amortization expense was approximately $1.6 million, $2.3 million and $2.7 million, respectively. Software maintenance fees are
capitalized in other assets and amortized over the term of the maintenance agreement.
101
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, 2021 and
2020, the cost of these investments was $67.8 million and $80.4 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 $101.0 million and $47.8 million at December 31, 2021 and 2020, respectively. During 2021, 2020
and 2019, Pinnacle Financial recorded net gains of $23.1 million, $1.1 million and $2.8 million, respectively, on these investments due
to changes in their fair value. Pinnacle Financial has an investment in twelve statutory business trusts valued at $4.0 million as of
December 31, 2021. The statutory business 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 statutory business 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 mergers. Collectively, these policies are reflected in other
assets in the accompanying consolidated balance sheets at their respective cash surrender values. At December 31, 2021 and 2020, the
aggregate cash surrender value of these policies was approximately $761.9 million and $743.9 million, respectively. Noninterest
income related to these policies was $18.9 million, $18.8 million, and $17.4 million, during the years ended December 31, 2021, 2020
and 2019, respectively.
Also, as part of our compliance with the Community Reinvestment Act (CRA), we have investments in low income housing
entities totaling $189.6 million and $143.2 million, net, as of December 31, 2021 and 2020, respectively. Included in our CRA
investments are investments of $116.2 million and $90.2 million at December 31, 2021 and 2020, 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.
For designated hedging relationships, Pinnacle Financial performs retrospective and prospective effectiveness testing using
quantitative methods where required by accounting standards. For certain hedging relationships, effectiveness is tested through the
matching of critical terms. Assessments of hedge effectiveness and measurements of hedge ineffectiveness are performed at least
quarterly. The 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 is 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.
102
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. 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 or sustained 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, 2018 through 2021.
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, 2021. Pinnacle Financial recognized $571,000 in interest and
penalties for the year ended December 31, 2020. No interest and penalties were recorded for the year ended December 31, 2019.
Income Per Common Share — Basic net income per common share (EPS) is computed by dividing net income available to
common shareholders 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 common shares outstanding is attributable to common stock options, restricted share awards, and restricted share
unit awards, including those with performance-based vesting provisions. The dilutive effect of outstanding options, restricted share
awards, and restricted share unit awards is reflected in diluted EPS by application of the treasury stock method.
As of December 31, 2021, there were 56,147 stock options outstanding to purchase common shares. For the years ended
December 31, 2021, 2020 and 2019, respectively, 458,808, 277,896 and 399,600 of dilutive stock options, dilutive restricted shares
and restricted share units were included in the diluted earnings per share calculation under the treasury stock method. For the years
ended December 31, 2021, 2020 and 2019, there were 32,684, 394,593 and 160,492 respectively, restricted shares excluded from the
calculation because they were deemed to be antidilutive.
103
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, 2021 (dollars in thousands except earnings per share):
Basic earnings per common share calculation:
Numerator - Net income available to common shareholders
Denominator – Weighted average common shares outstanding
Basic net income per common share
Diluted earnings per common share calculation:
Numerator - Net income available to common shareholders
Denominator – Weighted average common shares outstanding
Dilutive shares contingently issuable
Weighted average diluted common shares outstanding
Diluted net income per common share
December 31, 2021
December 31, 2020
December 31, 2019
$
$
$
$
512,131 $
304,725 $
400,881
75,468,339
75,376,489
76,364,303
6.79 $
4.04 $
5.25
512,131 $
304,725 $
400,881
75,468,339
458,808
75,927,147
75,376,489
277,896
75,654,385
6.75 $
4.03 $
76,364,303
399,600
76,763,903
5.22
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, allows 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). As of December 31, 2021, 2020 and 2019,
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.
104
Recently Adopted Accounting Pronouncements — In January 2020, the FASB issued Accounting Standards Update 2020-01,
Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging
(Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. These amendments, among other things,
clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method
of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement
alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also
clarify that when determining the accounting for certain forward contracts and purchased options a company should not consider,
whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.
The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2020. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the
adoption date. The amendments became effective for Pinnacle Financial on January 1, 2021 and had no impact on Pinnacle Financial's
consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes to simplify various aspects of the current guidance to promote consistent application of the standard
among reporting entities by moving certain exceptions to the general principles. The amendments are effective for fiscal years
beginning after December 15, 2020. The amendments became effective for Pinnacle Financial on January 1, 2021 and had no impact
on Pinnacle Financial's consolidated financial statements.
In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary
optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and
exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to
meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders
during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through
December 31, 2022. Pinnacle Financial is implementing a transition plan to identify and modify its loans and other financial
instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. Pinnacle
Financial is assessing ASU 2020-04 and its impact on the transition away from LIBOR for its loans and other financial instruments.
Beginning in 2022, Pinnacle Financial no longer utilizes LIBOR as a reference rate for new or renewed loans with its borrowers.
Newly Issued Not Yet Effective Accounting Standards — Other than those pronouncements discussed above which have been
recently adopted, Pinnacle Financial does not believe there were any other recently issued accounting pronouncements that are
expected to materially impact its consolidated financial statements.
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 stockholders' 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, 2021 through the date of the issued financial statements. On January 1, 2022, Pinnacle
Financial transferred, at fair value, $1.1 billion of securities from the available-for-sale portfolio to the held-to-maturity portfolio. The
related net unrealized after tax losses of $1.5 million remained in accumulated other comprehensive income (loss) and will be
amortized over the remaining lives of the securities, offsetting the related amortization of discount or accretion of premium on the
transferred securities. No gains or losses were recognized at the time of the transfer.
Note 2. Equity Method Investment
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.
105
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 and have subsequently entered into a Second Amended and Restated Limited Liability
Company Agreement on February 2, 2021. The Second Amended and Restated Limited Liability Company Agreement, provides for,
among other things, the following terms:
•
•
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 or a merger in which Pinnacle Financial or Pinnacle Bank is not the
surviving entity.
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, 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 assets 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, 2021, Pinnacle Financial has recorded technology, trade name and customer relationship intangibles, net of
related amortization, of $6.8 million compared to $7.6 million as of December 31, 2020. Amortization expense of $752,000 was
included in Pinnacle Financial's results for the year ended December 31, 2021 compared to $1.2 million for 2020 and $1.9 million for
2019. Accretion income of $1.5 million was included in Pinnacle Financial's results for the year ended December 31, 2021, while $2.1
million of accretion income was recorded in 2020 and $2.6 million was recorded in 2019. Additionally, at December 31, 2021,
Pinnacle Financial had recorded accretable discounts associated with certain liabilities of BHG of $1.2 million compared to $2.7
million as of December 31, 2020.
During the year ended December 31, 2021, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $70.0 million
in the aggregate, compared to $53.0 million during the year ended December 31, 2020 and $51.3 million during the year ended
December 31, 2019. Earnings from BHG are included in Pinnacle Financial's consolidated tax return. Profits from intercompany
transactions are eliminated.
Pinnacle Bank has a participating interest in a $525.0 million revolving line of credit for the benefit of BHG in the amount of
$100.0 million. At December 31, 2021, there was a $47.2 million outstanding balance on the line related to Pinnacle Bank's interest in
the line. The line accrues interest at SOFR plus 200 basis points and is secured by all assets of BHG. The credit agreement contains
covenants requiring BHG to maintain certain financial ratios and satisfy certain other affirmative and negative covenants. At
December 31, 2021, neither BHG nor the originating bank had represented to Pinnacle Bank that BHG was not in compliance, in all
material respects, with these covenants.
BHG partners with third party lenders, including Pinnacle Bank, to facilitate loan originations as part of BHG’s alternative
financing portfolio, whereby BHG acts as the marketing firm and refers loans to the third party lenders for funding. The third party
lenders receive a fee for each loan funded and subsequently sold to BHG. These loans are ultimately sold through BHG's network of
clients, which includes Pinnacle Bank. During the years ended December 31, 2021, 2020 and 2019, respectively, BHG purchased
$646.6 million, $453.8 million and $337.8 million of loans originated by Pinnacle Bank, respectively. During the years ended
December 31, 2021 and 2020, Pinnacle Bank purchased $276.7 million and $100.0 million, respectively, of loans from BHG at par
pursuant to BHG's joint venture loan program whereby BHG and Pinnacle Bank share proportionately in the credit risk of the acquired
loans based on the rate on the loan and the rate of the purchase. The yield on this portfolio to Pinnacle Bank is anticipated to be
between 4.75% and 5.00% per annum. Pinnacle Bank purchased no loans from BHG during the year ended December 31, 2019. At
December 31, 2021 and 2020, there were $319.1 million and $95.8 million, respectively, of BHG joint venture program loans held by
Pinnacle Bank.
106
The following summary of BHG's financial position and results of operations as of December 31, 2021 and 2020 and for the years
ended December 31, 2021, 2020 and 2019 are presented as unaudited due to BHG's fiscal year end being September 30 (in thousands):
Banker's Healthcare Group
Assets
Liabilities
Equity interests
Total liabilities and equity
Revenues
Net income, pre-tax
Note 3. Restricted Cash Balances
December 31,
2021
December 31,
2020
$
$
$
2,724,542 $
1,330,317
2,355,256 $
1,088,135
369,286
242,182
2,724,542 $
1,330,317
For the year ended December 31,
2021
2020
2019
$
$
735,506 $
457,928 $
366,500
241,051 $
171,964 $
182,462
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 its option, Pinnacle Financial maintains additional balances to compensate for
clearing and other services. For the years ended December 31, 2021 and 2020, the average daily balance maintained at the Federal
Reserve was approximately $2.9 billion and $2.2 billion, respectively.
Restricted cash included on the consolidated balance sheets was $82.5 million and $223.8 million at December 31, 2021 and
2020, respectively. This restricted cash is maintained at banks 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.
107
Note 4. Securities
The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2021 and 2020 are
summarized as follows (in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2021
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:
U.S. Government agency securities
Mortgage-backed securities
State and municipal securities
Allowance for credit losses - securities held-to-maturity
Securities held-to-maturity, net of allowance for credit losses
December 31, 2020
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
Allowance for credit losses - securities held-to-maturity
Securities held-to-maturity, net of allowance for credit losses
$
$
$
$
$
$
$
$
194,490 $
634,611
1,908,675
1,774,119
232,294
114,355
4,858,544 $
11,920
106,555
1,037,644
1,156,119 $
(161)
1,155,958
82,199 $
74,916
1,623,759
1,411,288
177,878
117,256
3,487,296 $
1,028,550
1,028,550 $
(191)
1,028,359
— $
2,359
29,874
52,961
60
3,082
88,336 $
—
86
32,966
33,052 $
881 $
4,961
18,310
3,243
2,785
2,506
32,686 $
37
196
889
1,122 $
193,609
632,009
1,920,239
1,823,837
229,569
114,931
4,914,194
11,883
106,445
1,069,721
1,188,049
10 $
1,547
67,759
44,559
715
2,632
117,222 $
— $
60
2,327
12,484
657
2,309
17,837 $
82,209
76,403
1,689,191
1,443,363
177,936
117,579
3,586,681
38,272
38,272 $
291
291 $
1,066,531
1,066,531
During the quarters ended March 31, 2020 and September 30, 2018, Pinnacle Financial transferred, at fair value, $873.6 million
and $179.8 million, respectively, of municipal securities from the available-for-sale portfolio to the held-to-maturity portfolio. The
related net unrealized after tax gains of $69.0 million and net unrealized after tax losses of $2.2 million, respectively, 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,
2021, approximately $671.7 million 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, 2021, repurchase agreements comprised of secured borrowings
totaled $152.6 million and were secured by $152.6 million of pledged U.S. government agency securities, mortgage-backed 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.
108
The amortized cost and fair value of debt securities as of December 31, 2021 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
$
103,578 $
103,533 $
— $
320,844
507,968
1,785,185
1,908,675
232,294
321,710
513,643
1,825,500
1,920,239
229,569
13,330
5,648
1,030,586
106,555
—
—
13,342
5,728
1,062,534
106,445
—
$
4,858,544 $
4,914,194 $
1,156,119 $
1,188,049
At December 31, 2021 and 2020, 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, 2021
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
$
178,610 $
881 $
— $
— $
178,610 $
365,833
825,664
363,102
198,349
14,991
3,024
11,859
2,665
2,595
554
54,266
178,956
57,270
6,513
20,270
1,974
6,647
1,045
190
1,952
420,099
1,004,620
420,372
204,862
35,261
881
4,998
18,506
3,710
2,785
2,506
Total temporarily-impaired securities
$ 1,946,549 $
21,578 $
317,275 $
11,808 $ 2,263,824 $
33,386
December 31, 2020
U.S. Treasury securities
U.S. Government agency securities
Mortgage-backed securities
State and municipal securities
Asset-backed securities
Corporate notes
$
— $
— $
— $
— $
— $
9,962
165,696
175,115
46,399
9,978
38
1,772
2,220
207
40
6,091
35,997
345,435
52,840
23,920
22
555
10,264
450
2,269
16,053
201,693
520,550
99,239
33,898
—
60
2,327
12,484
657
2,309
Total temporarily-impaired securities
$
407,150 $
4,277 $
464,283 $
13,560 $
871,433 $
17,837
The applicable date for determining when securities are in an unrealized loss position is December 31, 2021 and 2020. 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, 2021 and 2020, but is not in the "Investments with an Unrealized Loss of less than 12 months" category above.
109
As shown in the tables above, at December 31, 2021 and 2020, Pinnacle Financial had unrealized losses of $33.4 million and
$17.8 million on $2.3 billion and $871.4 million, respectively, of securities. The unrealized losses associated with $873.6 million and
$179.8 million of municipal securities transferred from the available-for-sale portfolio to the held-to-maturity portfolio during the
quarters ended March 31, 2020 and September 30, 2018, respectively, represent unrealized losses since the date of purchase,
independent of the impact associated with changes in the cost basis upon transfer between portfolios. As described in Note 1.
Summary of Significant Accounting Policies, for any securities classified as available-for-sale that are in an unrealized loss position at
the balance sheet date, Pinnacle Financial assesses whether or not it intends to sell the security, or more-likely-than-not will be
required to sell the security, before recovery of its amortized cost basis which would require a write-down to fair value through net
income. Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at December 31,
2021, and it is not more-likely-than-not that Pinnacle Financial will be required to sell the securities before recovery of their amortized
cost bases, which may be maturity, Pinnacle Financial has determined that no write-down is necessary. In addition, Pinnacle Financial
evaluates whether any portion of the decline in fair value is the result of credit deterioration, which would require the recognition of an
allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value,
changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with
securities at December 31, 2021 are driven by changes in interest rates and are not due to the credit quality of the securities, and
accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at December 31, 2021. These
securities will continue to be monitored as a part of Pinnacle Financial's ongoing evaluation of credit quality.
The allowance for credit losses on held-to-maturity securities is measured on a collective basis by major security type as described
in Note 1. Summary of Significant Accounting Policies. At December 31, 2021, Pinnacle Financial's held-to-maturity securities
consists of U.S. government agency, mortgage-backed and municipal securities. Pinnacle Financial has a zero loss expectation for U.S
government agency securities and mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, and accordingly,
no allowance for credit losses is estimated for these securities. Credit losses on held-to-maturity municipal securities are estimated
using probability of default and loss given default models driven primarily by macroeconomic factors over a reasonable and
supportable period of eighteen months with a twelve month reversion to average loss factors. The allowance for credit losses on held-
to-maturity securities totaled $161,000 and $191,000, at December 31, 2021 and 2020, respectively.
Pinnacle Financial utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt
securities held-to-maturity. At December 31, 2021, all debt securities classified as held-to-maturity were rated A or higher by the
ratings agencies. Updated credit ratings are obtained as they become available from the ratings agencies.
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, during the years ended December 31, 2021, 2020 and 2019, available-for-sale securities
of approximately $37.5 million, $145.6 million and $737.7 million, respectively, were sold, resulting in gross realized gains of
$769,000, $2.2 million and $1.0 million, and gross realized losses of $10,000, $1.2 million and $6.9 million, respectively.
Pinnacle Financial has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the
fair values of available for sale securities. See Note 14. Derivative Instruments for disclosure of the gains and losses recognized on
derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities.
Note 5. Loans and Allowance for Credit 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). Effective January 1, 2020, Pinnacle Financial adopted FASB
ASU 2016-13 and related amendments, which introduced the CECL methodology for estimating credit losses. Accordingly, all
information as of and for the years ended December 31, 2021 and 2020 is presented in accordance with ASU 2016-13 and all
information prior to January 1, 2020 is presented in accordance with previously applicable GAAP.
110
Pinnacle Financial uses the following loan categories for presentation of loan balances and the related allowance for credit losses
on loans:
•
•
•
•
•
•
Owner occupied commercial real estate mortgage loans - Owner occupied commercial real estate mortgage loans are secured
by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies
the property. For such loans, repayment is largely dependent upon the operation of the borrower's business.
Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office
buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily
dependent on lease income generated from the underlying collateral.
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. Repayment is primarily dependent on the personal cash flow of
the borrower.
Construction and land development loans - Construction and land development loans include loans where the repayment is
dependent on the successful completion and eventual sale, refinance or 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. These loans are generally secured by equipment, inventory, and
accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Loans granted under the
PPP, which are fully guaranteed by the SBA, are included in this category. Such loans totaled $371.1 million and $1.8 billion
at December 31, 2021 and 2020, respectively.
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, consumer credit cards and
loans to finance education, among others. Many consumer loans are unsecured. Repayment is primarily dependent on the
personal cash flow of the borrower.
Loans at December 31, 2021 and 2020 were as follows (in thousands):
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Subtotal
Allowance for credit losses
Loans, net
December 31, 2021
December 31, 2020
$
$
$
3,048,822
5,221,704
3,680,684
2,903,017
8,074,546
485,489
23,414,262
(263,233)
23,151,029
$
$
$
2,802,227
5,203,384
3,099,172
2,901,746
8,038,457
379,515
22,424,501
(285,050)
22,139,451
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 multiple ratings categories representing varying degrees of risk attributes lesser than those of the
other defined risk categories further described below. Pinnacle Financial believes its categories follow those used by Pinnacle Bank's
primary regulators. At December 31, 2021, approximately 76.6% of Pinnacle Financial's loan portfolio was analyzed as a commercial
loan type with a specifically assigned risk rating. Consumer loans and small business loans are generally not assigned an individual
risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans. However, certain
consumer real estate-mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being
used for commercial purposes even though the collateral may be of a consumer loan nature. Consumer loans that have been placed on
nonaccrual but have not otherwise been assigned a risk rating are believed by management to share risk characteristics with loans rated
substandard-nonaccrual and have been presented as such in Pinnacle Financial's risk rating disclosures.
Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, Pinnacle
Financial's credit procedures require 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 Pinnacle Financial's independent loan review department, which reviews a
substantial portion of Pinnacle Financial's risk rated portfolio annually. Included in the coverage are independent 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.
111
Following are the definitions of the risk rating categories used by Pinnacle Financial. Pass rated loans include all credits other
than those included within these categories:
•
•
•
•
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 net worth and financial capacity of the obligor or of the
collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize
collection of the debt. Substandard loans are characterized by the distinct possibility that Pinnacle Financial could sustain
some loss if the deficiencies are not corrected.
Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.
Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values,
highly questionable and improbable.
The table below presents loan balances classified within each risk rating category by primary loan type and based on year of
origination or most recent renewal as of December 31, 2021 (in thousands):
December 31, 2021
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Total
Commercial real estate- owner occupied
Pass
Special Mention
Substandard (1)
Substandard-nonaccrual
Doubtful-nonaccrual
$ 951,693 $ 732,232 $ 390,068 $ 327,933 $ 190,395 $ 294,150 $ 72,222 $ 2,958,693
71,859
21,875
21,633
5,885
2,246
6,952
3,806
9,462
3,976
1,349
5,823
651
—
70
—
397
—
219
982
—
3,626
395
—
582
200
—
—
—
—
15,575
2,695
—
Total Commercial real estate - owner occupied
$ 965,782 $ 755,526 $ 417,921 $ 331,380 $ 201,368 $ 298,738 $ 78,107 $ 3,048,822
Commercial real estate- Non-owner occupied
Pass
Special Mention
Substandard (1)
Substandard-nonaccrual
Doubtful-nonaccrual
Total Commercial real estate - Non-owner
occupied
Consumer real estate – mortgage
$ 1,662,320 $ 915,986 $ 826,859 $ 428,119 $ 353,775 $ 454,916 $ 72,744 $ 4,714,719
94,183
288,608
1,676
8,050
43,925
1,353
—
—
—
—
—
—
8,917
2,939
501
—
26,295
1,698
—
—
27,937
—
903
—
—
—
—
—
489,865
15,716
1,404
—
$ 1,758,179 $ 1,212,644 $ 872,137 $ 440,476 $ 381,768 $ 483,756 $ 72,744 $ 5,221,704
Pass
Special Mention
Substandard (1)
Substandard-nonaccrual
Doubtful-nonaccrual
$ 1,231,491 $ 576,608 $ 306,762 $ 189,715 $ 110,420 $ 284,642 $ 964,902 $ 3,664,540
120
—
188
—
—
864
699
—
—
—
4,469
—
688
—
704
—
—
—
209
—
752
1,817
3,540
—
—
1,640
454
—
1,560
4,321
10,263
—
Total Consumer real estate – mortgage
$ 1,231,799 $ 578,171 $ 311,231 $ 191,107 $ 110,629 $ 290,751 $ 966,996 $ 3,680,684
Construction and land development
Pass
Special Mention
Substandard (1)
Substandard-nonaccrual
Doubtful-nonaccrual
$ 1,584,155 $ 802,059 $ 406,645 $ 72,112 $ 12,290 $
2,873 $
9,495 $ 2,889,629
3,049
883
8,908
—
—
—
—
—
—
11
229
—
—
18
—
—
—
—
—
—
—
163
127
—
—
—
—
—
12,840
192
356
—
Total Construction and land development
$ 1,587,204 $ 802,942 $ 415,793 $ 72,130 $ 12,290 $
3,163 $
9,495 $ 2,903,017
Commercial and industrial
Pass
Special Mention
Substandard (1)
Substandard-nonaccrual
Doubtful-nonaccrual
$ 3,321,855 $ 811,693 $ 559,902 $ 265,516 $ 105,454 $ 127,880 $ 2,694,814 $ 7,887,114
14,447
18,752
298
—
4,428
447
11,831
—
37,496
5,222
353
—
7,043
11,997
403
—
1,197
3,444
95
—
383
17
349
—
31,794
33,916
3,520
—
96,788
73,795
16,849
—
Total Commercial and industrial
$ 3,355,352 $ 828,399 $ 602,973 $ 284,959 $ 110,190 $ 128,629 $ 2,764,044 $ 8,074,546
112
December 31, 2021
Consumer and other
Pass
Special Mention
Substandard (1)
Substandard-nonaccrual
Doubtful-nonaccrual
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Total
$ 196,605 $ 82,103 $
5,977 $
2,235 $
2,099 $
1,534 $ 194,934 $
485,487
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
—
2
—
Total Consumer and other
$ 196,605 $ 82,103 $
5,977 $
2,235 $
2,099 $
1,534 $ 194,936 $
485,489
Total loans
Pass
Special Mention
Substandard (1)
Substandard-nonaccrual
Doubtful-nonaccrual
$ 8,948,119 $ 3,920,681 $ 2,496,213 $ 1,285,630 $ 774,433 $ 1,165,995 $ 4,009,111 $ 22,600,182
121,261
315,794
111,962
24,404
1,137
—
10,710
12,600
—
12,409
5,448
—
18,894
15,173
2,590
—
34,444
32,878
8,768
699
—
2,579
5,119
—
37,679
35,556
3,976
—
672,912
109,599
31,569
—
Total loans
$ 9,094,921 $ 4,259,785 $ 2,626,032 $ 1,322,287 $ 818,344 $ 1,206,571 $ 4,086,322 $ 23,414,262
(1) Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has
caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially
consistent with the standards established by Pinnacle Bank's primary regulators for loans classified as substandard, excluding TDRs. Potential problem
loans, which are not included in nonaccrual loans, amounted to approximately $109.6 million at December 31, 2021, compared to $173.5 million at
December 31, 2020.
The table below presents the aging of past due balances by loan segment at December 31, 2021 and December 31, 2020 (in thousands):
December 31, 2021
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
December 31, 2020
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
30-59 days
past due
60-89 days
past due
90 days or
more past
due
Total past
due
Current
Total loans
$
727 $
— $
2,426 $
3,153 $
3,045,669 $
3,048,822
1,434
8,710
61
4,926
1,715
—
122
—
2,677
568
645
4,450
127
7,311
372
2,079
13,282
188
14,914
2,655
5,219,625
3,667,402
2,902,829
8,059,632
482,834
5,221,704
3,680,684
2,903,017
8,074,546
485,489
$
17,573 $
3,367 $
15,331 $
36,271 $
23,377,991 $
23,414,262
$
934 $
2,672 $
1,860 $
5,466 $
2,796,761 $
2,802,227
726
8,859
278
20,278
806
6,220
328
418
5,801
282
3,861
6,274
736
4,408
304
10,807
15,461
1,432
30,487
1,392
5,192,577
3,083,711
2,900,314
8,007,970
378,123
5,203,384
3,099,172
2,901,746
8,038,457
379,515
$
31,881 $
15,721 $
17,443 $
65,045 $
22,359,456 $
22,424,501
113
The following table details the changes in the allowance for credit losses from December 31, 2018 to December 31, 2019 to
December 31, 2020 to December 31, 2021 by loan classification and the allocation of allowance for credit losses (in thousands):
Commercial
real estate -
owner
occupied
Commercial
real estate -
non-owner
occupied
Consumer
real estate -
mortgage
Construction
and land
development
Commercial
and
industrial
Consumer
and other
Unallocated
Total
Allowance for Credit Losses:
Balance at December 31, 2018
$
10,575 $
16,371 $
7,670 $
11,128 $
31,731 $
5,423 $
677 $
83,575
Charged-off loans
Recovery of previously charged-off loans
Provision for loan losses
(1,625)
1,252
3,204
(75)
980
2,687
(1,335)
1,827
(108)
(18)
682
870
(19,208)
6,473
17,116
(6,206)
1,172
3,206
—
—
308
Balance at December 31, 2019
$
13,406 $
19,963 $
8,054 $
12,662 $
36,112 $
3,595 $
985 $
Impact of adopting ASC 326
264
(4,740)
Charged-off loans
Recovery of previously charged-off loans
Provision for loan losses
(2,598)
1,317
10,909
(546)
911
63,544
21,029
(3,478)
1,493
6,206
(3,144)
—
147
32,743
23,040
(38,718)
4,540
73,449
2,638
(3,993)
1,554
4,691
(985)
—
—
—
(28,467)
12,386
27,283
94,777
38,102
(49,333)
9,962
191,542
Balance at December 31, 2020
$
23,298 $
79,132 $
33,304 $
42,408 $
98,423 $
8,485 $
— $
285,050
Charged-off loans
Recovery of previously charged-off loans
Provision for loan losses
(1,420)
1,609
(3,869)
(786)
969
(632)
2,288
(367)
372
(20,811)
(2,856)
(12,984)
(46,213)
7,485
52,645
(5,578)
3,550
4,781
—
—
—
(54,996)
16,273
16,906
Balance at December 31, 2021
$
19,618 $
58,504 $
32,104 $
29,429 $
112,340 $
11,238 $
— $
263,233
The adequacy of the allowance for credit losses is reviewed by Pinnacle Financial's management on a quarterly basis. 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 historical default and loss experience, current and projected economic
conditions, 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, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level
of the allowance for credit losses maintained by management is believed adequate to absorb all expected future 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.
Pinnacle Financial adopted ASU 2016-13 on January 1, 2020, which introduced the CECL methodology for estimating all
expected losses over the life of a financial asset. Under the CECL methodology the allowance for credit losses is measured on a
collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the
collectively evaluated pools, evaluations are performed on an individual basis. Upon adoption of ASU 2016-13 in 2020, the opening
balance of the allowance for credit losses was increased by $38.1 million through retained earnings.
For commercial real estate, consumer real estate, construction and land development, and commercial and industrial loans,
Pinnacle Financial primarily utilizes a probability of default and loss given default modeling approach. These models utilize historical
correlations between default experience and certain macroeconomic factors as determined through a statistical regression analysis. All
loan segments modeled using this approach consider changes in the national unemployment rate. In addition to the national
unemployment rate, GDP and the three month treasury rate are considered for owner occupied commercial real estate, the commercial
real estate price index and the five year treasury rate are considered for construction loans, and the three month treasury rate is
considered for commercial and industrial loans. For the consumer and other loan segment, a non-statistical approach based on
historical charge off rates is utilized.
Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and
supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are
re-evaluated each quarter by Pinnacle Financial and are dependent on the current economic environment among other factors. A
reasonable and supportable period of 24 months was utilized for all loan segments at December 31, 2021 and 18 months was utilized
for all loan segments at December 31, 2020, followed by, in each case, a 12 month straight line reversion to long term averages at each
measurement date.
114
The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the
quantitative analyses. These adjustments are based in part on quarterly trend assessments compared to historical experience in
portfolio concentrations, policy exceptions, associate retention, independent loan review results, collateral considerations, risk ratings,
competition and peer group credit quality trends. Additional qualitative considerations are made for any identified risk factors which
did not exist within our portfolio historically and therefore may not be adequately addressed through evaluation of such risks based on
historical portfolio trends. At December 31, 2021 and 2020, additional qualitative considerations were made to address the
uncertainties related to the potential impact of the COVID-19 pandemic on credit losses. 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 following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine
expected credit losses, as of December 31, 2021 and December 31, 2020 (in thousands):
Real Estate
Business Assets
Other
Total
December 31, 2021
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
December 31, 2020
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
Total
$
5,300 $
$
$
5,631
16,392
1,208
—
—
28,531 $
15,681 $
7,000
27,082
2,049
—
—
$
51,812 $
— $
—
—
—
6,976
—
6,976 $
— $
—
—
—
22,437
—
22,437 $
— $
—
—
—
206
—
206 $
— $
—
—
—
39
4
43 $
5,300
5,631
16,392
1,208
7,182
—
35,713
15,681
7,000
27,082
2,049
22,476
4
74,292
The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still
accruing interest at December 31, 2021 and December 31, 2020. Also presented is the balance of loans on nonaccrual status at
December 31, 2021 for which there was no related allowance for credit losses recorded (in thousands):
December 31, 2021
December 31, 2020
Total
nonaccrual
loans
Nonaccrual loans
with no allowance
for credit losses
Loans past due
90 or more days
and still accruing
Total
nonaccrual
loans
Nonaccrual loans
with no allowance
for credit losses
Loans past due
90 or more days
and still accruing
Commercial real estate:
Owner-occupied
$
2,694 $
— $
— $
10,231 $
5,985 $
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
1,404
10,264
356
16,849
2
—
—
—
13,188
—
—
144
—
1,091
372
5,219
22,191
1,953
34,238
4
1,522
—
—
29,030
—
Total
$
31,569 $
13,188 $
1,607 $
73,836 $
36,537 $
—
—
273
—
1,785
304
2,362
115
Pinnacle Financial's policy is the accrual of interest income will be discontinued when (1) there is a significant deterioration in the
financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more
than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date loans are placed on
nonaccrual status, Pinnacle Financial reverses all previously accrued interest income against current year earnings. Pinnacle
Financial's policy is once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to
determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized no
interest income through cash payments received on nonaccrual loans during the years ended December 31, 2021 and 2020 compared
to $176,000 in interest income from cash payments received on nonaccrual loans during the year ended December 31, 2019. Had these
nonaccruing loans been on accruing status, interest income would have been higher by $1.7 million, $3.3 million and $3.0 million for
the years ended December 31, 2021, 2020 and 2019, respectively. Approximately $15.5 million and $51.7 million of nonaccrual loans
as of December 31, 2021 and 2020, respectively, were performing pursuant to their contractual terms at those dates.
At December 31, 2021 and 2020, there were $2.4 million and $2.5 million, respectively, of TDRs that were performing as of their
restructure date and which are accruing interest. Troubled commercial loans are restructured by specialists within Pinnacle Bank's
Special Assets Group, and all restructurings are approved by committees and/or 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.
There were no TDRs made during the year ended December 31, 2021. The following table outlines the amount of each TDR by
loan classification made during the years ended December 31, 2020 and 2019 (dollars in thousands):
Number
of contracts
Pre Modification
Outstanding
Recorded Investment
Post Modification Outstanding
Recorded Investment, net of
related allowance
December 31, 2020
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
December 31, 2019
Commercial real estate:
Owner-occupied
Non-owner occupied
Consumer real estate – mortgage
Construction and land development
Commercial and industrial
Consumer and other
— $
—
1
—
—
—
1 $
1 $
—
1
1
1
—
4 $
— $
—
807
—
—
—
807 $
306 $
—
683
19
1,318
—
2,326 $
—
—
807
—
—
—
807
287
—
683
19
777
—
1,766
During the years ended December 31, 2021, 2020 and 2019, Pinnacle Financial had no TDRs 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.
116
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 had 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, 2021 with the comparative exposures for
December 31, 2020 (in thousands):
Lessors of nonresidential buildings
Lessors of residential buildings
New housing for-sale builders
Hotels and motels
Total
At December 31, 2021
Outstanding
Principal Balances
Unfunded
Commitments
Total exposure
Total Exposure at
December 31, 2020
$
$
3,779,463 $
1,589,175 $
5,368,638 $
1,361,389
555,069
866,535
1,204,963
979,720
53,821
2,566,352
1,534,789
920,356
6,562,456 $
3,827,679 $
10,390,135 $
4,442,712
2,126,246
1,124,302
1,039,259
8,732,519
Pinnacle Financial monitors two ratios regarding construction and commercial real estate lending as a part of its concentration
management process. 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, 2021 and 2020, Pinnacle Bank's construction and land development loans as a
percentage of total risk-based capital were 79.1% and 89.0%, 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 234.1% and
264.0% as of December 31, 2021 and 2020, 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, 2021 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 below the 100% and 300% thresholds.
At December 31, 2021, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $45.2
million to current directors, executive officers, and their related interests, of which $14.5 million had been drawn upon. At December
31, 2020, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $10.7 million to directors,
executive officers, and their related interests, of which approximately $6.8 million had been drawn upon. All loans to directors,
executive officers, and their related entities were performing in accordance with contractual terms at December 31, 2021 and 2020.
Loans Held for Sale
At December 31, 2021, Pinnacle Financial had approximately $17.7 million in commercial loans held for sale compared to $31.2
million at December 31, 2020, 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.
At December 31, 2021, Pinnacle Financial had approximately $30.3 million of mortgage loans held-for-sale compared to
approximately $67.8 million at December 31, 2020. Total mortgage loan volumes sold during the year ended December 31, 2021 were
approximately $1.6 billion compared to approximately $1.8 billion for the year ended December 31, 2020. During the year ended
December 31, 2021, Pinnacle Financial recognized $32.4 million in gains on the sale of these loans, net of commissions paid,
compared to $60.0 million and $24.3 million, respectively, during the years ended December 31, 2020 and 2019.
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
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.
117
Note 6. Premises and Equipment and Lease Commitments
Premises and equipment at December 31, 2021 and 2020 are summarized as follows (in thousands):
Land
Buildings
Leasehold improvements
Furniture and equipment
Less: accumulated depreciation and amortization
Range of Useful Lives
2021
2020
Not applicable
$
70,240 $
15 years
15 years
3 years
-
-
-
30 years
20 years
20 years
202,255
54,922
138,766
466,183
178,001
$
288,182 $
70,140
194,432
50,867
126,678
442,117
152,116
290,001
Depreciation and amortization expense was approximately $22.2 million, $22.8 million, and $22.1 million for the years ended
December 31, 2021, 2020 and 2019, respectively.
Pinnacle Financial has entered into various operating leases, primarily for office space and branch facilities. The leases are
classified as operating or finance leases at commencement. Right-of-use assets representing the right to use the underlying asset and
lease liabilities representing the obligation to make future lease payments are recognized on the balance sheet within other assets and
other liabilities. These assets and liabilities are estimated based on the present value of future lease payments discounted using
Pinnacle Financial's incremental secured borrowing rates as of the commencement date of the lease. Certain lease agreements contain
renewal options which are considered in the determination of the lease term if they are deemed reasonably certain to be exercised.
Pinnacle Financial has elected not to recognize leases with an original term of less than 12 months on the balance sheet.
Right-of-use assets and lease liabilities relating to Pinnacle Financial's operating and finance leases are as follows at December
31, 2021 and 2020 (in thousands):
December 31, 2021
December 31, 2020
Right-of-use assets:
Operating leases
Finance leases
Total right-of-use assets
Lease liabilities:
Operating leases
Finance leases
Total lease liabilities
$
$
$
$
92,819 $
1,544
94,363 $
97,925 $
2,739
100,664 $
83,647
1,770
85,417
87,737
3,001
90,738
The total lease cost related to operating leases and short term leases is recognized on a straight-line basis over the lease term. For
finance leases, right-of-use assets are amortized on a straight-line basis over the lease term and interest imputed on the lease liability is
recognized using the effective interest method. The components of Pinnacle Financial's total lease cost were as follows for the years
ended December 31, 2021, 2020 and 2019 (in thousands):
For the years ended December 31,
2020
2021
2019
Operating lease cost
Short-term lease cost
Finance lease cost:
Interest on lease liabilities
Amortization of right-of-use asset
Sublease income
Net lease cost
$
15,696 $
13,963 $
297
354
208
226
(1,309)
15,118 $
227
226
(1,324)
13,446 $
$
13,992
295
243
226
(1,463)
13,293
118
The weighted average remaining lease term and weighted average discount rate for operating and finance leases at December 31,
2021 and 2020 are as follows:
Weighted average remaining lease term
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
December 31,
2021
December 31,
2020
10.00 years
6.84 years
10.37 years
7.84 years
2.71 %
7.22 %
2.91 %
7.22 %
Cash flows related to operating and finance leases during the years ended December 31, 2021, 2020 and 2019 were as follows (in
thousands):
For the years ended December 31,
2020
2021
2019
Operating cash flows related to operating leases
Operating cash flows related to finance leases
Financing cash flows related to finance leases
$
$
$
14,712 $
13,494 $
13,609
208 $
261 $
227 $
243 $
243
226
Future undiscounted lease payments for operating and finance leases with initial terms of more than 12 months are as follows at
December 31, 2021 (in thousands):
2022
2023
2024
2025
2026
Thereafter
Total undiscounted lease payments
Less: imputed interest
Net lease liabilities
Note 7. Deposits
$
$
Operating
Leases
14,557 $
13,879
13,908
11,717
9,580
50,498
114,139
(16,214)
97,925 $
Finance Leases
470
479
527
527
527
967
3,497
(758)
2,739
At December 31, 2021, the scheduled maturities of time deposits are as follows (in thousands):
2022
2023
2024
2025
2026
Thereafter
$
$
1,734,404
319,857
33,163
18,187
27,480
693
2,133,784
At December 31, 2021 and 2020, approximately $603.8 million and $808.3 million, respectively, of time deposits had been issued
in denominations of $250,000 or greater.
At December 31, 2021 and 2020, Pinnacle Financial had $1.9 million and $920,000, respectively, of deposit accounts in overdraft
status that have been reclassified to loans on the accompanying consolidated balance sheets.
119
Note 8. 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 $7.2 billion as collateral
under the borrowing agreements with the FHLB.
At December 31, 2021 and 2020, Pinnacle Bank had outstanding advances from the FHLB totaling approximately $888.7 million
and $1.1 billion, respectively. The scheduled maturities of FHLB advances at December 31, 2021 and interest rates are as follows (in
thousands):
2022
2023
2024
2025
2026
Thereafter
Deferred costs
Total Federal Home Loan Bank advances
Weighted average interest rate
$
Scheduled
maturities
—
—
—
116,250
—
775,013
891,263
2,582
$
888,681
Weighted
average
interest rates(1)
— %
— %
— %
0.60 %
— %
2.15 %
1.94 %
(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, 2021.
At December 31, 2021, 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, 2021, Pinnacle Bank had approximately $3.1 billion in borrowing availability with
the FHLB, $3.4 billion with the Federal Reserve Bank discount window, and approximately $155.0 million with other correspondent
banks with whom Pinnacle Bank has arranged lines of credit. At December 31, 2021, Pinnacle Bank was not carrying any balances
with the Federal Reserve Bank discount window or correspondent banks under these arrangements.
120
Note 9. 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, and Pinnacle Financial has entered into certain other subordinated debt agreements.
These instruments are outlined below as of December 31, 2021 (in thousands):
Name
Date Established
Maturity
Total Debt
Outstanding
Interest Rate at
December 31, 2021
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 07, 2006
September 30, 2036
October 31, 2007
September 30, 2037
April 03, 2003
April 15, 2033
March 11, 2004
April 07, 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 05, 2005
September 30, 2035
10,310
Subordinated Debt
Pinnacle Financial Subordinated
Notes
September 11, 2019
September 15, 2029
Debt issuance costs and fair value adjustment
Total subordinated debt and other borrowings
300,000
(9,823)
$
423,172
3.02 % 30-day LIBOR + 2.80%
1.62 % 30-day LIBOR + 1.40%
1.87 % 30-day LIBOR + 1.65%
3.05 % 30-day LIBOR + 2.85%
3.37 % 30-day LIBOR + 3.25%
2.97 % 30-day LIBOR + 2.85%
2.52 % 30-day LIBOR + 2.40%
1.92 % 30-day LIBOR + 1.70%
3.32 % 30-day LIBOR + 3.10%
1.69 % 30-day LIBOR + 1.49%
1.86 % 30-day LIBOR + 1.73%
1.72 % 30-day LIBOR + 1.50%
4.13 %
Fixed (1)
(1) Migrates to three month LIBOR + 2.775% (or an alternative benchmark rate plus comparable spread in the event that three month
LIBOR is no longer published on such adjustment date) beginning September 15, 2024 through the end of the term.
On April 22, 2020, Pinnacle Financial established a credit facility with the Federal Reserve Bank in conjunction with the SBA
Paycheck Protection Program. There are no amounts outstanding on this facility at December 31, 2021, and as of July 30, 2021, no
new extensions of credit are allowed under the facility.
On July 30, 2021, Pinnacle Bank redeemed $130.0 million aggregate principal amount of subordinated notes due July 30, 2025.
Additionally on November 16, 2021, Pinnacle Financial redeemed $120.0 million aggregate principal amount of subordinated notes
due November 16, 2026. The redemptions were funded with existing cash on hand. Pursuant to regulatory guidelines, once the
maturity date on subordinated notes is within five years, a portion of the notes will no longer be eligible to be included in regulatory
capital, with an additional portion being excluded each year over the five year period approaching maturity.
Note 10. 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
Total deferred tax (benefit) expense
Total income tax expense
2021
2020
2019
$
125,016 $
98,082 $
11,798
136,814
(12,149)
(83)
(12,232)
19,270
117,352
(45,450)
(12,865)
(58,315)
$
124,582 $
59,037 $
77,422
4,538
81,960
12,446
2,250
14,696
96,656
121
Pinnacle Financial's income tax expense differs from the amounts computed by applying the Federal income tax statutory rate of
21% to income before income taxes. A reconciliation of the differences for each of the years in the three-year period ended December
31, 2021 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
Excess tax benefits associated with equity compensation
Other items
Income tax expense
2021
2020
2019
$
$
136,900 $
9,255
(15,243)
(4,712)
(4,413)
(273)
(2,475)
5,543
124,582 $
77,985 $
5,059
(13,706)
(3,717)
(4,759)
(272)
(417)
(1,136)
59,037 $
104,483
5,363
(11,078)
(1,704)
(3,646)
(238)
(1,011)
4,487
96,656
Pinnacle Financial's effective tax rate differs from the Federal income tax rates primarily due to state excise tax expense,
investments in bank-qualified tax-exempt municipal securities, tax benefits from Pinnacle Bank's real estate investment trust and
municipal investment subsidiaries, and tax benefits associated with share-based compensation, bank owned life insurance, and
Pinnacle Financial's captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense,
non-deductible FDIC insurance premiums and non-deductible executive compensation.
The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at December
31, 2021 and 2020 are as follows (in thousands):
2021
2020
Deferred tax assets:
Allowance for credit losses
Loans
Insurance
Accrued liability for supplemental retirement agreements
Restricted stock and stock options
Equity method investment
Lease liability
Other real estate owned
Net federal operating loss carryforward and credits
Annual incentive compensation
Partnership interests
Allowance for off balance sheet credit exposures
Other deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Core deposit and other intangible assets
Securities
Cash flow hedge
REIT dividends
FHLB related liabilities
Equity method investment
Right-of-use assets and other leasing transactions
Subordinated debt
Other deferred tax liabilities
Total deferred tax liabilities
Net deferred tax assets
122
$
66,785 $
14,778
759
7,612
9,148
—
26,476
1,540
1,271
23,095
27,653
5,873
1,941
72,316
14,694
690
7,457
9,181
171
23,894
2,287
1,796
8,712
25,225
6,069
2,559
186,931
175,051
14,520
8,787
21,680
9,890
1,222
1,600
23
24,315
1,791
1,831
85,659
$
101,272 $
14,418
11,077
34,373
19,627
1,366
1,798
—
22,232
1,920
1,630
108,441
66,610
At December 31, 2021, the Company had federal and state loss carryforwards resulting from acquisitions of approximately $5.7
million that expire at various dates from 2028 to 2034.
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.
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
2021
2020
2019
$
9,658 $
6,910 $
3,647
—
(568)
—
2,748
—
—
—
5,083
1,827
—
—
—
Balance at December 31,
$
12,737 $
9,658 $
6,910
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, 2021. Pinnacle Financial recognized $571,000 in interest and penalties
for the year ended December 31, 2020. No interest and penalties were recorded for the year ended December 31, 2019.
Note 11. 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, 2021, these commitments amounted to $12.8 billion, of which approximately $1.3 billion
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, 2021, these
commitments amounted to $278.0 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 Pinnacle Bank's
customers default on their resulting obligation to Pinnacle Bank, the maximum exposure to credit loss, without consideration of
collateral, is represented by the contractual amount of those commitments. At December 31, 2021 and 2020, Pinnacle Financial had
accrued $22.5 million and $23.2 million, respectively, for the inherent risks associated with these 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, 2021 will not have a material impact on Pinnacle Financial's consolidated
financial condition, operating results or cash flows.
123
Note 12. 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 2021, 2020, and 2019. 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, 2021 was approximately $11.1 million, $9.4 million and $8.1 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, 2021 and 2020, respectively, Pinnacle Financial had recorded $30.4 million and $29.8 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 Trusts whose balances at December 31, 2021 totaled $17.2 million. At December 31, 2021, the remaining amounts that are
not yet funded are included in other liabilities in the accompanying consolidated balance sheets.
Note 13. Stock Options and Restricted Shares
Pinnacle Financial's Amended and Restated 2018 Omnibus Equity Incentive Plan (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 expire unexercised and returned to the 2018 Plan. At December 31, 2021, there were approximately 1.9 million shares available for
issuance under the 2018 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, 2021, all of the
remaining options outstanding under any equity incentive plan of Pinnacle Financial were granted under the CapitalMark Option Plan.
Common Stock Options
As of December 31, 2021, of the 56,147 stock options outstanding, approximately 21,443 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 34,704 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 CapitalMark Plan were fully vested at
the date of the CapitalMark merger.
A summary of stock option activity within the equity incentive plans during each of the years in the three-year period ended
December 31, 2021 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as
follows:
Number
Weighted-Average
Exercise Price
Weighted-Average
Contractual Remaining
Term (in years)
Aggregate
Intrinsic Value (1)
(000's)
Outstanding at December 31, 2018
Granted
Stock options exercised
Forfeited
Outstanding at December 31, 2019
Granted
Stock options exercised
Forfeited
Outstanding at December 31, 2020
Granted
Stock options exercised
Forfeited
Outstanding at December 31, 2021
Options exercisable at December 31, 2021
22.77
—
21.40
—
23.45
—
23.40
—
23.46
—
22.18
20.00
24.51
24.51
178,591 $
—
(59,317)
—
119,274 $
—
(17,505)
—
101,769 $
—
(45,125)
(497)
56,147 $
56,147 $
124
1.19
1.19
$
$
3,985
3,985
(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 $95.50 per common share at December 31, 2021 for the 56,147 options that were in-the-money at
December 31, 2021.
During 2021, 2020 and 2019, the aggregate intrinsic value of stock options exercised under Pinnacle Financial's equity incentive
plans was $3.0 million, $350,000 and $2.3 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 any year in the three-year period
ended December 31, 2021, except for the tax impact recorded as a component of income tax expense upon exercise.
Restricted Shares
A summary of activity for unvested restricted share awards for the years ended December 31, 2021, 2020, and 2019 follows:
Number
Grant Date Weighted-
Average Cost
Unvested at December 31, 2018
Shares awarded
Restrictions lapsed and shares released to associates/directors
Shares forfeited
Unvested at December 31, 2019
Shares awarded
Restrictions lapsed and shares released to associates/directors
Shares forfeited
Unvested at December 31, 2020
Shares awarded
Restrictions lapsed and shares released to associates/directors
Shares forfeited
Unvested at December 31, 2021
692,806 $
245,845
(348,145)
(35,210)
555,296 $
284,904
(215,846)
(29,685)
594,669 $
249,641
(193,846)
(37,129)
613,335 $
55.19
55.25
40.47
58.22
57.04
55.91
55.39
59.64
56.97
77.00
56.47
62.79
64.93
Pinnacle Financial grants restricted share awards to associates (including certain members of executive management) and outside
directors with time-based 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, 2021. The table below reflects the life-to-date activity for
these awards:
Grant
year
Group (1)
Time Based Awards
2019
2020
2021
Associates (2)
Associates (2)
Associates (2)
Outside Director Awards (3)
2019
2020
2021
Outside directors
Outside directors
Outside directors
Vesting
period
in years
3 —5
3 —5
3 —5
1
1
1
Shares
awarded
Restrictions
lapsed and
shares released
to participants
Shares
withheld
for taxes by
participants
Shares forfeited
by participants
(4)
Shares
unvested
229,296
266,379
237,811
16,549
18,525
11,830
58,734
40,692
139
14,582
16,327
—
23,995
16,847
92
1,967
2,198
—
30,030
18,660
13,514
—
—
—
116,537
190,180
224,066
—
—
11,830
(1) Groups include employees (referred to as associates above) 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 award. Alternatively, the recipient can pay the withholding taxes in cash. For time-based vesting restricted share awards,
dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of termination. For awards to
Pinnacle Financial's directors, 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 are issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on
March 1, 2022 based on each individual board member meeting attendance goals for the various board and board committee meetings to which each member
125
was scheduled to attend.
(4) These shares represent forfeitures resulting from recipients whose employment or board membership was terminated during the year-to-date period ended
December 31, 2021. 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 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 Stock Unit Awards
In 2021, Pinnacle Financial granted restricted stock units to its Named Executive Officers (NEOs) and leadership team members
with time-based vesting criteria. Compensation expense associated with time-based vesting restricted stock unit 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.
The following table outlines restricted stock unit grants that were made, grouped by similar vesting criteria, during the year ended
December 31, 2021. The table reflects the life-to-date activity for these awards:
Grant year
2021
Vesting
period in years
Shares
awarded
Restrictions lapsed
and shares released
to participants
Shares withheld for
taxes by participants
Shares forfeited by
participants (1)
Shares unvested
3
56,864
89
39
368
56,368
(1) These shares represent forfeitures resulting from recipients whose employment was terminated during the year-to-date period ended December 31, 2021.
Dividend equivalents are held in escrow for award recipients for dividends paid prior to the forfeiture restrictions lapsing. Such dividend equivalents are not
released from escrow if an award is forfeited.
Performance Stock Unit Awards
The following table details the performance stock unit awards outstanding at December 31, 2021:
Units Awarded
Grant
year
2021(3)
2020
Named Executive Officers
(NEOs) (1)
89,234 —
136,137 —
214,155
204,220
Leadership Team
other than NEOs
45,240
59,648
2019
166,211 —
249,343
52,244
2018
96,878 —
145,339
25,990
2017
72,537 —
109,339
24,916
Applicable
performance
periods associated
with each tranche
(fiscal year)
Service period per
tranche
(in years)
Subsequent
holding period per
tranche
(in years)
2021-2023
2020
2021
2022
2019
2020
2021
2018
2019
2020
2017
2018
2019
0
2
2
2
2
2
2
2
2
2
2
2
2
0
3
2
1
3
2
1
3
2
1
3
2
1
Period in which
units to be settled
into shares of
common stock (2)
2024
2025
2025
2025
2024
2024
2024
2023
2023
2023
2022
2022
2022
(1) The named executive officers are awarded a range of awards that may be earned based on attainment of goals between a target level of performance and a
maximum level of performance.
(2) Performance stock unit awards granted prior to 2021, 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 its loans plus ORE ("NPA Ratio") is less than amounts established in the applicable award
agreement.
(3) Performance stock unit awards granted in 2021, if earned, will be settled in shares of Pinnacle Financial Common Stock in the period noted in the table, if
the performance criterion included in the applicable performance unit award agreement, including the NPA Ratio, are met.
During the years ended December 31, 2021 and 2020, the restrictions associated with 134,146 performance stock unit awards and
129,723 performance stock unit awards, respectively, granted in prior years lapsed, based on the terms of the applicable award
agreement and approval by Pinnacle Financial's Human Resources and Compensation Committee, and were settled into shares of
Pinnacle Financial common stock with 46,616 shares and 43,996 shares, respectively, being withheld to pay the taxes associated with
126
the settlement of those shares.
A summary of stock compensation expense, net of the impact of income taxes, related to restricted share awards, restricted stock
unit awards and performance stock unit awards for the three-year period ended December 31, 2021, follows (in thousands):
Restricted stock expense
Income tax benefit
Restricted stock expense, net of income tax benefit
2021
2020
2019
$
$
24,952 $
18,737 $
6,522
4,898
18,430 $
13,839 $
21,226
5,548
15,678
As of December 31, 2021, compensation cost related to unvested restricted share awards, restricted stock unit awards and
performance stock unit awards not yet recognized was $51.7 million. This expense, if the underlying awards are earned, is expected to
be recognized over a weighted-average period of 1.96 years.
Note 14. 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
For derivatives not designated as hedges, the gain or loss is recognized in current period earnings. 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. The income statement impact of the offsetting positions is
limited to changes in the reserve for counterparty credit risk. A summary of Pinnacle Financial's interest rate swaps to facilitate
customer transactions as of December 31, 2021 and 2020 is included in the following table (in thousands):
Interest rate swap agreements:
Assets
Liabilities
Total
December 31, 2021
December 31, 2020
Notional
Amount
Estimated Fair
Value
Notional
Amount
Estimated Fair
Value
$
$
1,540,992 $
39,770
$
1,565,916 $
101,602
1,540,992
(40,241)
1,565,916
3,081,984 $
(471) $
3,131,832 $
(102,919)
(1,317)
The effects of Pinnacle Financial's interest rate swaps to facilitate customers' transactions on the income statement during the
years ended December 31, 2021, 2020 and 2019 were as follows (in thousands):
Interest rate swap agreements
Other noninterest income
$
846 $
(1,109) $
(80)
Location of Gain (Loss)
Recognized in Income
Amount of Gain (Loss) Recognized in Income
Year ended December 31,
2021
2020
2019
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, 2021 and 2020 are as follows (in thousands):
127
Balance Sheet
Location
Weighted Average
Remaining
Maturity
(In Years)
Weighted
Average
Pay Rate
Receive Rate
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
December 31, 2021
December 31, 2020
Asset derivatives
Interest rate floor - loans
Other assets
0.00
—%
2.25% minus 1
month LIBOR
$
— $
— $ 1,500,000 $ 124,585
The effects of Pinnacle Financial's cash flow hedge relationships on the statement of comprehensive income (loss) during the
years ended December 31, 2021, 2020 and 2019 were as follows (in thousands):
Asset derivatives
Interest rate floor - loans
Liability derivatives
Interest rate swaps - borrowings
Amount of Gain (Loss) Recognized in Other Comprehensive Income
Years ended December 31,
2021
2020
2019
$
$
$
(15,034) $
62,979 $
(1,432)
— $
(15,034) $
2,447 $
65,426 $
(1,149)
(2,581)
The cash flow hedges were determined to be highly effective during the periods presented and as a result qualified for hedge
accounting treatment. If a hedge were deemed to be ineffective, the amount included in accumulated other comprehensive income
(loss) would be reclassified into a line item within the statement of income that impacts operating results. A hedging relationship is no
longer considered to be effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or Pinnacle
Financial discontinues hedge accounting. Gains on cash flow hedges totaling $9.6 million, net of tax, were reclassified from
accumulated other comprehensive income (loss) into net income during the year ended December 31, 2021. Losses on cash flow
hedges totaling $5.5 million and $1.6 million, net of tax, were reclassified from other comprehensive income (loss) into net income
during the years ended December 31, 2020 and 2019, respectively. Approximately $10.0 million in unrealized gains, net of tax, are
expected to be reclassified from accumulated other comprehensive income (loss) into net income over the next twelve months.
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. The hedging strategy on securities converts the fixed interest rates to
LIBOR or federal funds 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.
A summary of Pinnacle Financial's fair value hedge relationships as of December 31, 2021 and 2020 are as follows (in
thousands):
December 31, 2021
December 31, 2020
Weighted
Average
Remaining
Maturity
(In Years)
Weighted
Average
Pay Rate
Balance Sheet
Location
Other assets
5.30
0.59%
Asset derivatives
Interest rate swap
agreements - securities
Liability derivatives
Interest rate swap
agreements - securities
Other liabilities
5.03
3.08%
Receive
Rate
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
$
559,820 $
15,109 $
231,421 $
4,696
471,670
(39,781)
477,510
(72,010)
$ 1,031,490 $
(24,672) $
708,931 $
(67,314)
Federal
funds
3 month
LIBOR
128
Notional amounts totaling $471.7 million included in the table above receive a variable rate of interest based on three month
LIBOR and notional amounts totaling $559.8 million receive a variable rate of interest based on the daily compounded federal funds
rate.
The effects of Pinnacle Financial's fair value hedge relationships on the income statement during the years end December 31,
2021, 2020 and 2019 were as follows (in thousands):
Amount of Gain (Loss) Recognized in Income
Year ended December 31,
Securities
Location of Gain (Loss)
2021
2020
2019
Interest rate swap agreements
Interest income on securities
Securities available-for-sale
Interest income on securities
Loans
Interest rate swap agreements
Loans
Location of Gain (Loss)
Interest income on loans
Interest income on loans
$
$
$
$
42,642 $
(42,642) $
(26,536) $
26,536 $
(25,982)
25,982
Amount of Loss Recognized in Income
Years ended December 31,
2021
2020
2019
— $
— $
— $
— $
(6,915)
6,915
The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at
December 31, 2021 and 2020 (in thousands):
Line item on the balance sheet
Securities available-for-sale
Carrying Amount of the Hedged Assets
Cumulative Amount of Fair Value Hedging
Adjustment Included in the Carrying Amount
of the Hedged Assets
December 31, 2021
December 31, 2020
December 31, 2021
December 31, 2020
$
1,165,773 $
841,543 $
24,672 $
67,314
During the years ended December 31, 2021, 2020 and 2019 amortization expense totaling $3.5 million, $4.3 million and
$2.7 million, respectively, related to previously terminated fair value hedges was recognized as a reduction to interest income on
loans.
Note 15. 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. 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 agreements specify that in certain defined
"Terminating Events," Pinnacle Financial will be obligated to pay each of the five 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.
Note 16. Related Party Transactions
See Note 5 - "Loans and Allowance for Credit Losses", concerning loans and other extensions of credit to certain directors,
officers, and their related entities and individuals, Note 12 – "Salary Deferral Plans" regarding supplemental retirement agreement
obligations to certain directors who were formerly directors or employees of acquired banks and Note 2 - "Equity Method Investment"
regarding related parties associated with the investment.
129
Note 17. 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 financial reports provided by the portfolio managers of the investment. 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 to facilitate
customer transactions, interest rate floors designated as cash flow hedges 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 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.
130
Collateral dependent loans – Collateral dependent loans are measured at the fair value of the collateral securing the loan less
estimated selling costs. The fair value of real estate collateral is determined based on real estate appraisals which are generally based
on recent sales of comparable properties which are then adjusted for property specific factors. Non-real estate collateral is valued
based on various sources, including third party asset valuations and internally determined values based on cost adjusted for
depreciation and other judgmentally determined discount factors. Collateral dependent 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. A significant portion 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 credit 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, interest rate swaps designated as fair value and cash flow hedges 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.
131
The following tables present the financial instruments carried at fair value on a recurring basis as of December 31, 2021 and 2020,
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, 2021
Investment securities available-for-sale:
U.S. treasury securities
$
193,609 $
— $
193,609 $
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
December 31, 2020
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
$
$
$
$
$
$
$
632,009
1,920,239
1,823,837
229,569
114,931
4,914,194
125,969
57,441
5,097,604 $
80,106 $
80,106 $
—
—
—
—
—
—
—
—
632,009
1,920,239
1,823,009
229,569
114,931
4,913,366
24,973
57,441
— $
— $
— $
4,995,780 $
80,106 $
80,106 $
82,209 $
— $
82,209 $
76,403
1,689,191
1,443,363
177,936
117,579
3,586,681
73,395
242,470
3,902,546 $
177,025 $
177,025 $
—
—
—
—
—
—
—
—
76,403
1,689,191
1,427,866
177,936
117,579
3,571,184
25,636
242,470
— $
— $
— $
3,839,290 $
177,025 $
177,025 $
—
—
—
828
—
—
828
100,996
—
101,824
—
—
—
—
—
15,497
—
—
15,497
47,759
—
63,256
—
—
The following table presents assets measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020 (in
thousands):
December 31, 2021
Other real estate owned
Collateral dependent loans (1)
Total
December 31, 2020
Other real estate owned
Collateral dependent loans (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)
$
$
$
$
8,537 $
30,799
39,336 $
12,360 $
43,795
56,155 $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
8,537
30,799
39,336
12,360
43,795
56,155
(1)
The carrying values of collateral dependent loans at December 31, 2021 and 2020 are net of valuation allowances of $1.7 million and $3.5
million, respectively.
132
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, 2021, there were no transfers between Levels 1, 2 or 3.
The table below includes a rollforward of the balance sheet amounts for the years ended December 31, 2021 and December 31,
2020, (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):
For the year ended December 31,
2021
2020
Available-for-sale
Securities
Other
investments
Other
liabilities
Available-for-sale
Securities
Other
investments
Other
liabilities
Fair value, Jan. 1
$
15,497 $
47,759 $
— $
15,903 $
38,156 $
Total net realized gains included in income
1,302
23,109
Change in unrealized gains/losses included
in other comprehensive income
Purchases
Issuances
Settlements
Transfers out of Level 3
Fair value, Dec. 31
Total realized gains included in income
(3,184)
—
—
—
45,986
—
(12,787)
(15,858)
—
—
—
—
—
—
—
—
$
$
828 $
100,996 $
1,302 $
23,109 $
— $
— $
110
627
—
—
1,067
—
11,663
—
(1,143)
(3,127)
—
—
15,497 $
47,759 $
110 $
1,067 $
—
—
—
—
—
—
—
—
—
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, 2021 and 2020. This table excludes financial instruments for which the carrying
amount approximates fair value. For short-term financial assets such as cash, cash equivalents, interest-bearing due from banks and
restricted cash, 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 (in
thousands).
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)
December 31, 2021
Financial assets:
Securities purchased with agreement to resell
$ 1,000,000 $
980,543 $
— $
— $
980,543
Securities held-to-maturity
Loans, net
Consumer loans held-for-sale
Commercial loans held-for-sale
Financial liabilities:
1,155,958
1,188,049
23,151,029
23,223,299
45,806
17,685
46,288
17,871
Deposits and securities sold under agreements to repurchase
31,457,092
30,812,222
Federal Home Loan Bank advances
Subordinated debt and other borrowings
888,681
423,172
1,006,866
479,879
—
—
—
—
—
—
—
1,188,049
—
—
23,223,299
46,288
17,871
—
—
—
—
—
30,812,222
1,006,866
479,879
133
Off-balance sheet instruments:
Commitments to extend credit (2)
December 31, 2020
Financial assets:
Securities held-to-maturity
Loans, net
Consumer loans held-for-sale
Commercial loans held-for-sale
Financial liabilities:
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)
13,063,942
24,351
—
—
24,351
$ 1,028,359 $ 1,066,531 $
— $ 1,066,531 $
—
22,139,451
22,407,546
87,821
31,200
89,625
31,841
—
—
—
—
—
—
—
—
22,407,546
89,625
31,841
—
—
—
—
—
—
26,929,142
1,189,035
677,521
24,887
Deposits and securities sold under agreements to repurchase
27,833,739
26,929,142
Federal Home Loan Bank advances
Subordinated debt and other borrowings
Off-balance sheet instruments:
Commitments to extend credit (2)
1,087,927
1,189,035
670,575
677,521
9,692,607
24,887
(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, including both
commitments for unfunded loans and standby letters of credit. In making this evaluation, Pinnacle Financial utilizes credit loss expectations
on funded loans from our allowance for credit losses methodology and evaluates the probability that the outstanding commitment will
eventually become a funded loan. As a result, at December 31, 2021 and 2020, Pinnacle Financial included in other liabilities $22.5 million
and $23.2 million, respectively, representing expected credit losses on off-balance sheet commitments, which are reflected in the estimated
fair values of the related commitments. Also included in the fair values at December 31, 2021 and 2020, are unamortized fees related to
these commitments of $1.9 million and $1.7 million, respectively.
Note 18. 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, 2021 and 2020 has been
prepared in accordance with ASC 810.
Non-consolidated Variable Interest Entities
At December 31, 2021, 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, commercial loan TDRs, 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.
Pinnacle Financial has invested in various limited partnerships that sponsor affordable housing projects utilizing the Low Income
Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to assist
Pinnacle Bank in achieving its strategic plan associated with the Community Reinvestment Act and to achieve a satisfactory return on
capital. The primary activities of the limited partnerships include the identification, development, and operation of multi-family
housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt
and equity.
134
Pinnacle Financial is a limited partner in each LIHTC limited partnership. Each limited partnership is managed by an unrelated
third party general partner who exercises full control over the affairs of the limited partnership. The general partner has all the rights,
powers and authority granted or permitted to be granted to a general partner of a limited partnership. Except for limited rights granted
to the limited partner(s), the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s
business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the
limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails
to comply with the terms of the agreement or is negligent in performing its duties.
The partnerships related to affordable housing projects 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.
The following table summarizes VIE's that are not consolidated by Pinnacle Financial as of December 31, 2021 and 2020 (in
thousands):
Type
December 31, 2021
December 31, 2020
Maximum
Loss Exposure
Liability
Recognized
Maximum
Loss Exposure
Liability
Recognized
Classification
Low Income Housing Partnerships
$
189,600 $
— $
143,190 $
—
Other Assets
Trust Preferred Issuances
Commercial TDRs
Managed Discretionary Trusts
N/A
145
N/A
132,995
—
N/A
N/A
180
N/A
132,995
Subordinated Debt
—
N/A
Loans
N/A
135
Note 19. Regulatory Matters
Pursuant to Tennessee banking law, Pinnacle Bank may not, without the prior consent of the Commissioner of the Tennessee
Department of Financial Institutions (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.
In addition, the Federal Reserve has issued supervisory guidance advising bank holding companies to eliminate, defer or reduce
dividends paid on common stock and other forms of Tier 1 capital where the company’s net income available to shareholders for the
past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, the company’s
prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial
condition or the company will not meet, or is in danger of not meeting, minimum regulatory capital adequacy ratios. Recent
supplements to this guidance reiterate the need for bank holding companies to inform their applicable reserve bank sufficiently in
advance of the proposed payment of a dividend in certain circumstances.
During the year ended December 31, 2021, Pinnacle Bank paid $99.8 million in dividends to Pinnacle Financial. As of December
31, 2021, Pinnacle Bank could pay approximately $876.2 million of additional dividends to Pinnacle Financial without prior approval
of the Commissioner of the TDFI. Since the fourth quarter of 2013, Pinnacle Financial has paid a quarterly common stock dividend.
The board of directors of Pinnacle Financial has increased the dividend amount per share over time. The most recent increase occurred
on January 18, 2022, when the board of directors increased the dividend to $0.22 per share from $0.18 per share. During the second
quarter of 2020, the firm successfully issued 9.0 million depositary shares, each representing a 1/40th fractional interest in a share of
Series B noncumulative, perpetual preferred stock (the "Series B Preferred Stock") in a registered public offering to both retail and
institutional investors. Beginning in the third quarter of 2020, Pinnacle Financial began paying a quarterly dividend of $16.88 per
share (or $0.422 per depositary share), on the Series B Preferred Stock. The amount and timing of all future dividend payments by
Pinnacle Financial, if any, including dividends on Pinnacle Financial's Series B Preferred Stock, is subject to discretion of Pinnacle
Financial's board of directors and will depend on Pinnacle Financial's receipt of dividends from Pinnacle Bank, earnings, capital
position, financial condition and other factors, including regulatory capital requirements, as they become known to Pinnacle Financial
and receipt of any regulatory approvals that may become required as a result of each of Pinnacle Financial's or Pinnacle Bank's
financial results.
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 Tier 1 capital to average assets.
As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, each of Pinnacle
Bank and Pinnacle Financial has elected the option to delay the estimated impact on regulatory capital of Pinnacle Financial's and
Pinnacle Bank's adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments”, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the
quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 (collectively the “transition
adjustments”), was delayed through December 31, 2021. As of January 1, 2022, the cumulative amount of the transition adjustments
of $68.0 million became fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75%
recognized in 2022, 50% recognized in 2023, and 25% recognized in 2024. Beginning January 1, 2025, the temporary regulatory
capital benefits will be fully reversed.
136
Management believes, as of December 31, 2021, 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 of 2.5% is
not included in the required minimum 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, 2021
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, 2020
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,060,598
3,670,111
3,425,751
3,464,265
3,208,503
3,464,142
3,425,751
3,464,265
3,678,405
3,259,538
2,803,541
2,933,674
2,586,292
2,933,551
2,803,541
2,933,674
13.8 % $
2,347,963
8.0 % $
2,934,953
12.6 % $
2,334,243
8.0 % $
2,917,804
11.7 % $
1,760,972
6.0 % $
2,347,963
11.9 % $
1,750,683
6.0 % $
2,334,243
10.9 % $
1,320,729
4.5 %
N/A
11.9 % $
1,313,012
4.5 % $
1,896,573
9.7 % $
1,412,747
4.0 %
N/A
9.9 % $
1,406,063
4.0 % $
1,757,578
14.3 % $
2,063,352
8.0 % $
2,579,190
12.7 % $
2,055,892
8.0 % $
2,569,865
10.9 % $
1,547,514
6.0 % $
2,063,352
11.4 % $
1,541,919
6.0 % $
2,055,892
10.0 % $
1,160,635
4.5 %
N/A
11.4 % $
1,156,439
4.5 % $
1,670,412
8.6 % $
1,298,756
4.0 %
N/A
9.1 % $
1,294,033
4.0 % $
1,617,541
10.0 %
10.0 %
8.0 %
8.0 %
N/A
6.5 %
N/A
5.0 %
10.0 %
10.0 %
8.0 %
8.0 %
N/A
6.5 %
N/A
5.0 %
(*) Average assets for the above calculations were based on the most recent quarter.
As noted above, during the second quarter of 2020, Pinnacle Financial issued 9.0 million depositary shares, each representing a
1/40th interest in a share of Series B Preferred Stock in a registered public offering to both retail and institutional investors. Net
proceeds from the transaction were approximately $217.1 million after deducting the underwriting discounts and offering expenses
payable by Pinnacle Financial. The net proceeds were initially retained by Pinnacle Financial and the remaining net proceeds are
available to support the capital needs of Pinnacle Financial and Pinnacle Bank, to support Pinnacle Financial's obligations, including
interest payments on its outstanding indebtedness and dividend payments on the Series B Preferred Stock, and for other general
corporate purposes.
137
Note 20. Other Noninterest Income and Expense
Other noninterest income and expense totals are more fully detailed in the following tables (in thousands). Any components of
these totals exceeding 1% of the aggregate of total net interest income and total noninterest income for any of the years presented, as
well as amounts Pinnacle Financial elected to present, are stated separately.
Other noninterest income:
Interchange and other consumer fees
Bank-owned life insurance
Loan swap fees
SBA loan sales
Income from other equity investments
Other noninterest income
Total other noninterest income
Other noninterest expense:
Deposit related expenses
Lending related expenses
Wealth management related expenses
Audit, exam and insurance expense
FHLB restructuring charges
Administrative and other expenses
Total other noninterest expense
2021
Years ended
December 31,
2020
2019
57,263 $
40,960 $
18,942
5,414
12,242
23,109
12,839
18,784
4,568
5,579
1,072
11,940
129,809 $
82,903 $
24,003 $
24,392 $
39,578
1,950
11,259
—
23,169
28,703
2,053
10,596
15,168
23,725
99,959 $
104,637 $
36,158
17,361
4,758
4,933
2,789
4,838
70,837
17,017
24,573
1,986
9,194
—
18,906
71,676
$
$
$
$
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, 2021 and 2020 and for each of the years in the three-year period ended December 31, 2021 (in thousands):
CONDENSED BALANCE SHEETS
Assets:
Cash and cash equivalents
Investments in bank subsidiaries
Investments in consolidated subsidiaries
Investment in unconsolidated subsidiaries:
Statutory Trusts
Other investments
Current income tax receivable
Other assets
Liabilities and stockholders' equity:
Subordinated debt and other borrowings
Other liabilities
Stockholders' equity
138
2021
2020
$
184,654 $
275,888
5,329,003
11,133
4,972,160
9,322
3,995
156,292
29,609
24,930
3,995
113,445
51,621
25,747
$
5,739,616 $
5,452,178
423,172
5,837
541,286
6,281
5,310,607
4,904,611
$
5,739,616 $
5,452,178
CONDENSED STATEMENTS OF OPERATIONS
Revenues:
Income from bank subsidiaries
Income from nonbank subsidiaries
Income from equity method investment
Other income
Expenses:
Interest expense
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 of nonbank subsidiaries
Net income
Preferred stock dividends
Net income available to common shareholders
2021
2020
2019
$
99,766 $
119,065 $
113,982
89
33,169
14,945
22,903
24,952
2,697
97,417
(3,088)
100,505
424,978
1,840
119
22,587
3,861
23,877
18,737
2,905
100,113
(5,370)
105,483
205,327
1,511
527,323 $
312,321 $
15,192
7,596
178
24,298
3,485
18,425
21,226
1,496
100,796
(4,457)
105,253
294,354
1,274
400,881
—
512,131 $
304,725 $
400,881
$
$
139
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization and accretion
Stock-based compensation expense
Increase (decrease) in income tax payable, net
Deferred tax expense (benefit)
Income from equity method investments, net
Dividends received from equity method investment
Excess tax benefit from stock compensation
Gain on other investments, net
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Equity in undistributed income of bank subsidiaries
Equity in undistributed income of nonbank subsidiaries
Net cash provided by operating activities
Investing activities:
Investment in consolidated banking subsidiaries
Increase in other investments
Net cash used in investing activities
Financing activities:
Proceeds from subordinated debt and other borrowings, net of issuance costs
Repayment of subordinated debt and other borrowings
Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes
Exercise of common stock options, net of shares surrendered for taxes
Issuance of preferred stock, net of issuance costs
Repurchase of common stock
Common dividends paid
Preferred stock dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2021
2020
2019
$ 527,323 $ 312,321 $ 400,881
1,886
24,952
—
2,850
1,122
18,737
(2,467)
3,876
(3,094)
21,226
2,467
(2,857)
(33,169)
(22,587)
(24,298)
12,214
(2,475)
(10,223)
19,478
2,032
9,251
(417)
(195)
(39,981)
(764)
8,953
(1,011)
(1,057)
7,295
5,322
(424,978)
(205,327)
(294,354)
(1,840)
118,050
(1,511)
72,058
(1,274)
118,199
—
(11,668)
(11,668)
—
(180,000)
(2,454)
(1,411)
(2,454)
(181,411)
—
(93)
316,078
(120,000)
(80,000)
(49,880)
(3,790)
(3,130)
—
—
(55,504)
(15,192)
(197,616)
(91,234)
(2,488)
(2,577)
217,126
(50,790)
(49,389)
(7,596)
24,193
93,797
275,888
182,091
—
(3,694)
—
(61,416)
(49,828)
—
151,260
88,048
94,043
$ 184,654 $ 275,888 $ 182,091
Pinnacle Bank is subject to restrictions on the payment of dividends to Pinnacle Financial under Tennessee banking laws. Pinnacle
Bank paid dividends of $99.8 million, $119.1 million and $114.0 million, respectively, to Pinnacle Financial in each of the years
ended December 31, 2021, 2020 and 2019.
140
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,
2021 follows:
(in thousands, except per share data)
2021
Interest income
Net interest income
Provision for credit losses
Net income before taxes
Net income
Net income available to common shareholders
Basic net income per common share
Diluted net income per common share
2020
Interest income
Net interest income
Provision for credit losses
Net income before taxes
Net income
Net income available to common shareholders
Basic net income per common share
Diluted net income per common share
2019
Interest income
Net interest income
Provision for credit losses
Net income before taxes
Net income available to common shareholders
Basic net income per common share
Diluted net income per common share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
259,193
238,763
2,675
166,394
133,528
129,730
1.72
1.71
257,047
220,985
9,180
133,944
110,876
107,078
1.42
1.42
268,453
194,172
4,644
118,520
96,079
1.26
1.26
$
251,917 $
259,236 $
260,868 $
222,870
7,235
153,648
125,428
121,630
233,225
2,834
162,458
131,790
127,992
237,543
3,382
169,405
136,577
132,779
1.61 $
1.61 $
1.70 $
1.69 $
1.76 $
1.75 $
263,069 $
251,738 $
249,188 $
193,552
105,045
26,691
28,356
28,356
200,657
72,832
73,674
62,444
62,444
206,594
16,758
137,049
110,645
106,847
0.37 $
0.37 $
0.83 $
0.83 $
1.42 $
1.42 $
257,883 $
265,851 $
275,749 $
187,246
7,184
117,074
93,960
188,918
7,195
124,719
100,321
195,806
8,260
137,224
110,521
1.22 $
1.22 $
1.31 $
1.31 $
1.45 $
1.44 $
$
$
$
$
$
$
$
$
141
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
Pinnacle Financial maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed
by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to Pinnacle
Financial's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Pinnacle Financial carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the
evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded
that Pinnacle Financial's disclosure controls and procedures were effective.
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 87 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 89 of this Annual Report on Form
10-K.
Changes in Internal Controls
There were no changes in Pinnacle Financial's internal control over financial reporting during Pinnacle Financial's fiscal
quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, Pinnacle
Financial's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
142
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 19, 2022 under the headings "Corporate Governance-Code of Conduct," "Proposal #1 Election of Directors-Audit Committee,"
"Proposal #1 Election of Directors," "Information About Our Executive Officers," and "Delinquent Section 16(a) Reports" 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 19, 2022 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 19, 2022 under the heading, "Security Ownership
of Certain Beneficial Owners and Management" and are incorporated herein by reference.
The following table summarizes information concerning Pinnacle Financial's equity compensation plans at December 31, 2021:
Plan Category
Equity compensation plans approved by shareholders:
Amended and Restated 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)
1,172,888
N/A
1,172,888 $
—
N/A
—
1,922,294
N/A
1,922,294
(1)
(2)
Includes 1,116,520 performance-based restricted stock units and 56,368 time-based restricted stock units under the Plan. These 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 in shares of common stock. Accordingly, they have been disregarded for purposes of computing the weighted-
average exercise price.
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. As of December 31, 2021, 56,147 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 $24.51.
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 19, 2022 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 19, 2022 under the heading, "Independent Registered Public Accounting Firm" and are incorporated herein by reference.
143
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Exhibit No.
Description
Exhibits
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 Quarterly Report on Form 10-Q for the quarter ended June
30, 2020 filed on August 7, 2020.
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.
Description of the Company's Securities.*
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 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.
Subordinated Indenture, dated as of September 11, 2019, between Pinnacle Financial Partners, Inc. and
U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, filed on September 11, 2019.
First Supplemental Indenture, dated as of September 11, 2019 between Pinnacle Financial Partners, Inc.
and U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K, filed on September 11, 2019.
Form of 4.125% Fixed-to-Floating Rate Subordinated Note due 2029 (included as Exhibit A in Exhibit
4.6 hereto).
Deposit Agreement, dated June 3, 2020, by and among the Company, Computershare Inc. and
Computershare Trust Company, N.A. acting jointly as the depositary, and the holders from time to time
of the depositary receipts described therein (incorporated herein by reference to Exhibit 4.3 of the
Company’s Registration Statement on Form 8-A, filed June 3, 2020)
Specimen of Certificate representing the Series B Preferred Stock (incorporated herein by reference to
Exhibit 4.2 of the Company’s Registration Statement on Form 8-A, filed June 3, 2020)
Form of Depositary Receipt (included in Exhibit 4.8 hereto)
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.
2.1†
3.1
3.2
4.1.1
4.1.2
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
10.1#
10.2#
10.3#
10.4#
144
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.
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.
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.
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.
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.
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.
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.
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#
145
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#
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
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.
Form of Named Executive Officers 2020 Performance Unit Award Agreement, incorporated herein by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on January 24, 2020.
Form of 2021 Restricted Share Unit Award Agreement, incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed on January 27, 2021
Form of Named Executive Officers 2021 Performance Unit Award Agreement, incorporated by
reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on January 27, 2021
Form of Amendment to Named Executive Officers 2019 Performance Unit Award Agreement,
incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on
January 27, 2021
Form of Amendment to Named Executive Officers 2020 Performance Unit Award Agreement,
incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on
January 27, 2021
Second Amended and Restated Limited Liability Company Agreement of Bankers Healthcare Group,
LLC, dated February 2, 2021, incorporated herein by reference to Exhibit 10.34 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 26, 2021
Pinnacle Financial Partners, Inc. 2021 Annual Cash Incentive Plan, incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 2, 2021.
Pinnacle Financial Partners, Inc. 2022 Annual Cash Incentive Plan, incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 25, 2022.
Pinnacle Financial Partners, Inc. Amended and Restated 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 21, 2021.
Form of 2022 Restricted Share Unit Agreement, incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on January 21, 2022.
Form of Named Executive Officers 2022 Performance Unit Award Agreement, incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on January 21, 2022.
Form of Named Executive Officers Special Performance Unit Award Agreement, incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on January 21, 2022.
Subsidiaries of Pinnacle Financial Partners, Inc.
Consent of Crowe LLP
Certification pursuant to Rule 13a-14(a)/15d-14(a)
Certification pursuant to Rule 13a-14(a)/15d-14(a)
Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of Certification pursuant to 18
USC Section 1350 - Sarbanes-Oxley Act of 2002
Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
101.INS*
101.SCH*
Inline XBRL Instance Document
Inline XBRL Schema Documents
101.CAL*
Inline XBRL Calculation Linkbase Document
101.LAB*
Inline XBRL Label Linkbase Document
101.PRE*
Inline XBRL Presentation Linkbase Document
101.DEF*
104
Inline XBRL Definition Linkbase Document
The cover page from the Company's Annual Report on Form 10-K for the year ended December 31,
2019, formatted in Inline XBRL (included in Exhibit 101)
†
As directed by Item 601(a)(5) 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.
146
ITEM 16. FORM 10-K SUMMARY
Not applicable.
147
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, 2022
PINNACLE FINANCIAL PARTNERS, INC
By: /s/ M. Terry Turner
M. Terry Turner
President and Chief Executive Officer
148
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
/s/ Robert A. McCabe, Jr.
Robert A. McCabe, Jr.
/s/ M. Terry Turner
M. Terry Turner
/s/ Harold R. Carpenter
Harold R. Carpenter
/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/ Decosta E. Jenkins
Decosta E. Jenkins
/s/ Ronald L. Samuels
Ronald L. Samuels
/s/ Reese L. Smith, III
Reese L. Smith, III
/s/ G. Kennedy Thompson
G. Kennedy Thompson
TITLE
Chairman of the Board
DATE
February 28, 2022
Director, President and Chief Executive Officer
(Principal Executive Officer)
February 28, 2022
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 28, 2022
Director, Chairman of the Carolinas and Virginia
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
February 28, 2022
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
149
STOCKHOLDER RETURN PERFORMANCE GROWTH
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Company’s
Common Stock against the cumulative total return of the NASDAQ Composite Index, the S&P 500 Banks Index, a peer group
consisting of U.S. banks with an asset size between $15 billion and $40 billion as of September 30, 2021, and the S&P U.S.
LargeCap Banks index for the period commencing on December 31, 2016 and ending December 31, 2021 (the “Measuring
Period”). In the 2020 annual report, the Company included the performance of a peer group consisting of U.S. banks with an asset
size between $15 billion and $35 billion as of September 30, 2020 and the SNL Bank greater than $10 billion index. As the
Company’s total assets at December 31, 2021 were approximately $38.5 billion, the Company has modified the peer group, which
now consists of U.S. banks with an asset size between $15 billion and $40 billion as of September 30, 2021. The Company has also
removed the SNL Bank greater than $10 billion index given that it is no longer an active index and replaced it with the S&P U.S.
Large Cap Bank index. The graph assumes that the value of the investment in the Company’s Common Stock and each index was
$100 on December 31, 2016. The change in cumulative total return is measured by dividing the (cid:86)(cid:88)(cid:80)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72) cumulative amount of
dividends for the Measuring Period, assuming dividend reinvestment, and the change in share price between the beginning and end
of the Measuring Period by the share price at the beginning of the Measuring Period. Cash dividends may impact the cumulative
returns of the indices.
Cumulative Total Returns(1)
Comparison of
PINNACLE FINANCIAL PARTNERS, INC.
NASDAQ COMPOSITE INDEX, PEER GROUP(2),
S&P 500 BANK INDEX, S&P U.S. LargeCap Banks Index(3)
(1) Assumes $100 invested on December 31, 2016 in Pinnacle Financial Partners, Inc. Common Stock (PNFP) and the five
indices noted above.
(2) The peer group consists of U.S. Banks between $15 billion and $40 billion as of September 30, 2021. The peer group was
developed by S&P Global Market Intelligence and is a composite of 15 banking institutions headquartered in the United States.
(3) S&P U.S. LargeCap Banks Index includes all major exchange banks in S&P's coverage universe with assets greater than $10
billion as of September 30, 2021.
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board of directors
Abney S. Boxley, III
Manager, Boxley Family, LLC
Chairman, Boxley Ready Mix
Charles E. Brock
President, Brock Partnerships, LLC
Renda Burkhart, CPA
Managing Partner, DHG Family Office
Dixon Hughes Goodman LLP
Gregory L. Burns
President
Gregory Burns Consulting Group, LLC
Richard D. Callicutt, II
Chairman, Carolinas and Virginia
Pinnacle Financial Partners, Inc.
senior leadership team
Richard A. Arthur
Executive Vice President
Consumer and Small Business
Richard D. Callicutt, II
Chairman, Carolinas and Virginia
Harold R. Carpenter
Chief Financial Officer
Robert Garcia, Jr.
Atlanta President
leadership team
Martin Akin
Eddie Alford
David Allen
Susan Rogers Apple
Connie Arrington
Kirk Bailey
Jason Baldwin
Sammy Ballesteros
Dave Baukema
Bryan Bean
Sam Belk
Tammy Bowling
Mary Beth Brackman
Aaron Butner
Lee Campbell
John Cannon
Mark Carlton
Ron Carter
Natanya Chadwick
Kim Ciukowski
Kent Cleaver
Gary Collier
Paige Collier
Kevin Combs
Jeanine Comment
Frank Conley
Bill Cox
Doug Daugherty
Keith Davis
Tracy Dawson
Mike DiStefano
Jessica Dozier
Brad Dunn
Marty G. Dickens
Retired Regional Executive
BellSouth/AT&T Tennessee
Thomas C. Farnsworth, III
President and Owner
Farnsworth Investment Company
Joseph C. Galante
Retired Chairman, Sony Music, Nashville
Glenda Baskin Glover, Ph.D., JD, CPA
President, Tennessee State University
David B. Ingram
Chairman, Ingram Entertainment, Inc.
Decosta E. Jenkins
President and CEO, Nashville Electric Service
Robert A. McCabe, Jr.
Chairman, Pinnacle Financial Partners, Inc.
Ronald L. Samuels
Retired Vice Chairman
Pinnacle Financial Partners, Inc.
Reese L. Smith, III
President, Haury & Smith Contractors, Inc.
G. Kennedy Thompson
Retired Partner/Co-head, Banking and Credit
Aquiline Capital Partners, LLC
M. Terry Turner
President and Chief Executive Officer
Pinnacle Financial Partners, Inc.
Timothy H. Huestis
Chief Credit Officer
Sarae Janes Lewis
Director, Associate and Client Experience
Hugh M. Queener
Chief Administrative Officer
Dana M. Sanders
Chief Audit Executive
D. Kim Jenny
Chief Risk Officer
Robert A. McCabe, Jr.
Chairman
M. Terry Turner
President and Chief Executive Officer
Randall L. Withrow
Chief Information Officer
Kenny Dyer
Katie Elder
Rob Ellenburg
Mark Feemster
Debbie Flack
Dale Floyd
Lisa Foley
Kris Foster
Mary Garcia
Brian Gilbert
Jim Going
Kim Graham
Erich Hamm
Mike Hammontree
Jerry Hampton
Susan Hampton
Karen Hargis
Patti Harris
Clay Hart
Justin Hayden
Mike Hendren
Beth Hobbs
Craig Holley
Stewart Holmes
David Hoppenworth
Mark Imig
David James
Carla Jarrell
Mac Johnston
Allison Jones
Bill Jones
Donna Jones
Ross Kinney
Stephanie Kusch
Glenn Layne
Julie Lewis
Morgan Lyons
Vickie Manning
Reid Marks
Phillip May
Tim McAuley
LeeAnn McCoy-Tomlin
Blair Miller
Andy Moats
Ashley Morgan
Fredericka Morrison
Ryan Murphy
Paul Myers
Rick Neal
Paul Neil
Jack Nelson
Randy Nicely
Roger Osborne
David Pannill
Carolyne Pelton
Dianne Porter
Pat Pritchard
Jason Renfrow
Caroline Riggsbee
Robert Rogers
Anne Rolman
Chad Rounder
Bob Scarborough
Mike Scheidt
Mary Schneider
Alan Scrimager
Brad Sears
Gary Shaffer
Ted Simpson
Deanna Snow
David Spencer
Catherine Stallings
Shelly Stark
Ed Stein
Phil Stevenson
Linda Stewart
Dan Stubblefield
Charissa Sumerlin
Steve Swain
Jamie Sweeney
Michelle Sweeney
Sarah Sanders Teague
Deborah Hennessee Thomas
Tony Thompson
Casey Toops
Maria Trapp
Missy Wallen
Joseph Watkins
Kevin Watson
Larry Whisenant
Ed White
Harvey White
Alanna Williams
David Willingham
Greg Winkler
Summer Yeiser
Pinnacle Financial Partners
150 Third Avenue South, Suite 900
Nashville, TN 37201
615.744.3700
www.pnfp.com | annualreport.pnfp.com