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 or operating results could be materially and negatively impacted. These matters could cause the trading price of our common stock to decline in future periods.
We have a concentration of credit exposure to borrowers in certain industries, and we also target small to medium-sized businesses.
Our acquisitions and future expansion may result in additional risks.
If our allowance for loan losses is not sufficient to cover losses inherent in our loan portfolio, our earningsresults of operations and financial condition will decrease.be negatively impacted.
our estimate of the probable losses in our loan portfolio. In determining the size of this allowance, we utilize estimates based on analyses of volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, loss experience of various loan categories, national and local economic conditions, industry and peer bank loan quality indications, and other pertinent factors and information. Actual losses are difficult to forecast, especially if those losses stem from factors beyond our historical experience or are otherwise inconsistent with our credit quality assessments. If our assumptions are inaccurate, our current allowance may not be sufficient to cover potential loan losses, and additional provisions may be necessary which would decreasenegatively impact our earnings.results of operations and financial condition.
We may face risks with respect to future acquisitions.
Implementation of the various provisions of the Dodd-Frank Act may increase our operating costs or otherwise have a material adverse effect on our business, financial condition or results of operations.
Negative developments in the U.S. and local economy may adversely impact our results in the future.
Our ability to grow our loan portfolio may be limited by, among other things, economic conditions, competition within our market areas, the timing of loan repayments and seasonality.
been less negatively impacted by the challenging economic conditions of the last few years. We compete with both large regional and national financial institutions, who are sometimes able to offer more attractive interest rates and other financial terms than we choose to offer, and smaller community-based financial institutions who seek to offer a similar level of service to that which we offer. This competition can make loan growth challenging, particularly if we are unwilling to price loans at levels that would cause unacceptable levels of compression of our net interest margin or if we are unwilling to structure a loan in a manner that we believe results in a level of risk to us that we are not willing to accept. Moreover, loan growth throughout the year can fluctuate due in part to seasonality of the businesses of our borrowers and potential borrowers and the timing on loan repayments, particularly those of our borrowers with significant relationships with us, resulting from, among other things, excess levels of liquidity. In addition, the passage of the Tax Cuts and Jobs Act, which contains provisions limiting the mortgage interest tax deduction and eliminating the deduction for interest paid on home equity loans, may negatively affect our ability to originate residential real estate loans (including home equity lines of credit).
Our investment in BHG may not produce the contribution to our results of operations that we expect.
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.
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'sFinancial’s ability to continue to pay dividends on its common stock.stock or its ability to pay interest on its indebtedness.
Certain of our deposits and other funding sources may be volatile and impact our liquidity.
We utilize these noncore funding sources to fund the ongoing operations and growth of Pinnacle Bank. The availability of these noncore funding sources is subject to broad economic conditions, in some instances regulation, and to investor assessment of our financial strength and, as such, the cost of funds may fluctuate significantly and/or the availability of such funds may be restricted, thus impacting our net interest income, our immediate liquidity and/or our access to additional liquidity. We have somewhat similar risks to the extent high balance core deposits exceed the amount of deposit insurance coverage available.
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An ineffective risk management framework could have a material adverse effect on our strategic planning and our ability to mitigate risks and/or losses and could have adverse regulatory consequences.
We have implemented a risk management framework to identify and manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, operational, capital, compliance, strategic and, reputational risks. Our framework also includes financial, analytical, forecasting, or other modeling methodologies, which involves management assumptions and judgment. In addition, our board of directors, in consultation with management, has adopted a risk appetite statement, which sets forth certain thresholds and limits to govern our overall risk profile. However, there is no assurance that our risk management framework, including the risk metrics under our risk appetite statement, will be effective under all circumstances or that it will adequately identify, manage or mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and become subject to regulatory consequences, as a result of which our business, financial condition, results of operations or prospects could be materially adversely affected.
We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of operations.
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify these systems as circumstances warrant, the security of our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. We provide our customers the ability to bank remotely, including over the Internet or through their mobile device. The secure transmission of confidential information is a critical element of remote and mobile banking. Our network, and the systems of parties with whom we contract, could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. 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 customers involve the storage and transmission of confidential information, security breaches (including breaches of security of customer systems and networks) and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation, results of operations and ability to attract and maintain
customers and businesses. In addition, a security breach could also subject us to additional regulatory scrutiny, expose us to civil litigation and possible financial liability and cause reputational damage.
In addition, we outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
IfIn connection with our acquisition of BNC, we are ableconverted our core processing system in our Tennessee legacy markets to consummatethat of BNC. Any complications from the Merger,conversion could cause us to experience increased costs as we will face similar risksmanage through those complications or divert management’s and our associates’ attention from executing on our growth strategy. Moreover, such complications could negatively impact the experiences or satisfaction of our customers, which could cause those customers to terminate their relationship with respect to BNC's computer systems and networks. We will have to analyze those systems to determine what protective measures are necessary, if any, to strengthen their systems. We may incur significant costs to upgrade their systems and networks and these costs mayus or reduce the amount of business that they do with us, either of which could adversely affect our business, financial condition or 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, we, 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.
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 earnings.results of operations and financial condition. Changes in state or federal tax laws or regulations can have a similar impact. State and municipal governments, including the State of Tennessee, could seek to increase their tax revenues through increased tax levies which could have a meaningful impact on our results of operations. Furthermore, financial institution regulatory agencies are expected to continue to be aggressive in responding to concerns and trends identified in examinations, including the continued issuance of additional formal or informal enforcement or supervisory actions. These actions, whether formal or informal, could result in our agreeing to limitations or to take actions that limit our operational flexibility, restrict our growth or increase our capital or liquidity levels. Failure to comply with any formal or informal regulatory restrictions, including informal supervisory actions, could lead to further regulatory enforcement actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans.
Our business reputation and relationships are important and any damage to them could have a material adverse effect on our business.
Our reputation is very important in sustaining our business and we rely on our relationships with our current, former and potential clients and shareholders and other actors in the industries that we serve. Any damage to our reputation, whether arising from regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, the way in which we conduct our business or otherwise could strain our existing relationships and make it difficult for us to develop new relationships. Any such damage to our reputation and relationships could in turn lead to a material adverse effect on our business.
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, 2016,2017, our goodwill and other identifiable intangible assets totaled approximately $566.7 million, and on a pro forma basis after giving effect to the proposed BNC merger and our recent public offering of common stock, would have been approximately $1.75 billion. $1.9 billion. If we were to conclude that a write-down of our goodwill is necessary, then the appropriate charge would likely cause a material loss. Any significant loss would further adversely impact the capacity of Pinnacle Bank to pay dividends to us without seeking prior regulatory approval, which could adversely affect our ability to pay required interest payments on our outstanding indebtedness.
Competition with other banking institutions could adversely affect our profitability.
A number of banking institutions in our geographic markets have higher lending limits, more banking offices, and a larger market share of loans or deposits than we do. In addition, our asset management division competes with numerous brokerage firms and mutual fund companies which are also much larger. In some respects, this may place these competitors in a competitive advantage. This competition may limit or reduce our profitability (including as a result of compression to our net interest margin), reduce our growth and adversely affect our results of operations and financial condition.
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 the Nashville, Knoxville, Memphis and Chattanoogaour markets. Moreover, much of our organic loan growth in 2012 through 20162017 (like the growth that we are seeking going forward) was the result of our ability to attract experienced financial services professionals who have been able to attract customers from other financial institutions. We anticipate deploying a similar hiring strategy in the Carolinas and Virginia. Inability to retain these key personnel (including key personnel of the businesses we have acquired and BNC, if the Merger is consummated)acquired) or to continue to attract experienced lenders (including, in either case, as a result of competitive compensation and other hiring and retention pressures resulting from the passage of the Tax Cuts and Jobs Act) with established books of business could negatively impact our growth because of the loss of these individuals'individuals’ skills and customer relationships and/or the potential difficulty of promptly replacing them. Moreover, the higher costs we have to pay to hire and retain these experienced individuals could cause our noninterest expense levels to rise and negatively impact our results of operations.
We are subject to certain litigation, and our expenses related to this litigation may adversely affect our results.
We are from time to time subject to certain litigation in the ordinary course of our business. As we have aggressively hired new revenue producing associates over the last five years we, and the associates we have hired, have also periodically been the subject of litigation and threatened litigation with these associates’ former employers. We may also be subject to claims related to our loan servicing programs, particularly those involving servicing of commercial real estate loans. These and other claims and legal actions, as well as supervisory and enforcement actions by our regulators, including the Consumer Financial Protection Bureau ofCFPB or other regulatory agencies with which we deal, including those with oversight of our loan servicing programs, could involve large monetary claims, capital directives, agreements with federal regulators, cease and desist orders and significant defense costs. The outcome of theseany 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.
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.
In order to maintain our or Pinnacle Bank's capital at desired or regulatory-required levels, we may issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. We may sell these shares at prices below the current market price of shares, and the sale of these shares may significantly dilute shareholder ownership. We could also issue additional shares in connection with acquisitions of other financial institutions such as BNC or investments in fee-related businesses such as BHG, which would also dilute shareholder ownership.
Holders of Pinnacle Financial's and Pinnacle Bank's indebtedness and junior subordinated debentures have rights that are senior to those of Pinnacle Financial's shareholders.
At December 31, 2016, Pinnacle Financial had outstanding trust preferred securities and accompanying junior subordinated debentures totaling $82.5 million. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by Pinnacle Financial, and the accompanying subordinated debentures are senior to shares of Pinnacle Financial's common stock. As a result, Pinnacle Financial must make payments on the subordinated debentures (and the related trust preferred securities) before any dividends can be paid on common stock and, in the event of Pinnacle Financial's bankruptcy, dissolution or liquidation, the holders of the subordinated debentures must be satisfied before any distributions can be made on Pinnacle Financial's common stock. Pinnacle Financial has the right to defer distributions on its junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on its common stock. If our financial condition deteriorates or if we do not receive required regulatory approvals, we may be required to defer distributions on our junior subordinated debentures. Upon consummation of the Merger with BNC, Pinnacle Financial will assume $50.5 million in outstanding principal of junior subordinated debentures issued by certain of BNC's subsidiaries. Such subordinated debentures will similarly rank senior to shares of Pinnacle's common stock.
From time to time, Pinnacle Financial and Pinnacle Bank have issued, and in connection with the Avenue merger, assumed, subordinated notes. At December 31, 2016, we had an aggregate of $270.0 million of subordinated notes outstanding, not including the subordinated debentures issued in connection with our trust preferred securities. In addition, upon consummation of the Merger, we will assume $60.0 million of subordinated notes issued by BNC. The terms of these notes prohibit or will prohibit Pinnacle Financial or Pinnacle Bank, as applicable, from declaring or paying any dividends or distributions on its common stock at any time when payment of interest on these notes has not been timely made and while any such accrued and unpaid interest remains unpaid. Moreover, the notes we have issued or assumed, and the notes issued by BNC that we will assume in connection with the Merger, rank, or will rank, senior to shares of Pinnacle Financial's common stock. In the event of any bankruptcy, dissolution or liquidation of Pinnacle Financial, these notes, along with Pinnacle Financial's other indebtedness, would have to be repaid before Pinnacle Financial's shareholders would be entitled to receive any of the assets of Pinnacle Financial.
Pinnacle Financial or Pinnacle Bank may from time to time issue additional subordinated indebtedness that would have to be repaid before Pinnacle Financial's shareholders would be entitled to receive any of the assets of Pinnacle Financial or Pinnacle Bank.
Even though our common stock is currently traded on the Nasdaq Stock Market's Global Select Market, it has less liquidity than many other stocks quoted on a national securities exchange.
The trading volume in our common stock on the Nasdaq Global Select Market has been relatively low when compared with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. Although we have experienced increased liquidity in our stock, we cannot say with any certainty that a more active and liquid trading market for our common stock will continue to develop, even after we consummate the Merger. Because of this, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares.
We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.
The market price of our common stock has fluctuated significantly, and may fluctuate in the future. These fluctuations may be unrelated to our performance. General market or industry price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Our 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 products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. We have made significant investments in data processing, management information systems and internet banking accessibility. Our future success will depend in part upon our ability to create additional efficiencies in our operations through the use of technology. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot make assurances that our technological improvements will increase our operational efficiency or that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
We are subject to various statutes and regulations that may impose additional costs or limit our ability to take certain actions.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged on loans, interest rates paid on deposits and locations of offices. We are also subject to capital requirements established by our regulators, which require us to maintain specified levels of capital. It is possible that our FDIC assessments may increase in the future. Any future assessment increases could negatively impact our results of operations. Significant changes in laws and regulations applicable to the banking industry have been recently adopted and others are being considered in Congress. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.
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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 probable credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other measures of our financial condition and results of operations, depend upon the use of analytical and forecasting models and tools. These models and tools reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models and tools may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. Any such failure in our analytical or forecasting models and tools could have a material adverse effect on our business, financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and financial stability of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to various counterparties, including brokers and dealers, commercial and correspondent banks, and others. As a result, defaults by, or rumors or questions about, one or more financial services institutions, or the financial services industry generally, may result in market-wide liquidity problems and could lead to losses or defaults by such other institutions. Such occurrences could expose us to credit risk in the event of default of one or more counterparties and could have a material adverse effect on our financial position, results of operations and liquidity.
We depend on the accuracy and completeness of information about customers.
In deciding whether to extend credit or enter into certain transactions, we rely on information furnished by or on behalf of customers, including financial statements, credit reports, tax returns and other financial information. We may also rely on representations of those customers or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, tax returns or other financial information 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.
Natural disasters may adversely affect us.
Our operations and customer base are located in markets where natural disasters, including tornadoes, severe storms, fires, floods, hurricanes and earthquakes often occur. Such natural disasters could significantly impact the local population and economies and our business, and could pose physical risks to our properties. Although our banking offices are geographically dispersed throughout portions of the southeastern United States and we maintain insurance coverages for such events, a significant natural disaster in or near one or more of our markets could have a material adverse effect on our financial condition, results of operations or liquidity.
The price of our common stock may be volatile or may decline.
The trading price of our common stock may fluctuate as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
actual or anticipated quarterly fluctuations in our results of operations and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors;
actions by institutional shareholders;
fluctuations in the stock price and operating results of our competitors;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
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;
anticipated or pending investigations, proceedings or litigation that involve or affect us; and
domestic and international economic factors unrelated to our performance.
The trading price of the shares of our common stock and the value of our other securities will further depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, and future sales of our equity or equity-related securities. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. A significant decline in our stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation, as well as the loss of key employees.
Our ability to declare and pay dividends is limited.
While our board of directors has approved the payment of a quarterly cash dividend on our common stock since the fourth quarter of 2013, there can be no assurance of whether or when we may pay dividends on our common stock in the future. Future dividends, if any, will be declared and paid at the discretion of our board of directors and will depend on a number of factors. Our principal source of funds used to pay cash dividends on our common stock will be dividends that we receive from Pinnacle Bank. Although Pinnacle Bank’s asset quality, earnings performance, liquidity and capital requirements will be taken into account before we declare or pay any future dividends on our common stock, our board of directors will also consider our liquidity and capital requirements and our board of directors could determine to declare and pay dividends without relying on dividend payments from Pinnacle Bank.
Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends we may declare and pay and that Pinnacle Bank may declare and pay to us. For example, Federal Reserve regulations implementing the capital rules required under Basel III do not permit dividends unless capital levels exceed certain higher levels applying capital conservation buffers that began to apply on January 1, 2016 and are being phased in over three years.
In addition, the terms of (i) our subordinated debentures, (ii) the subordinated notes we assumed upon consummation of the Avenue merger, and (iii) the subordinated debentures and subordinated notes we assumed upon the consummation of the BNC merger, prohibit us from paying dividends on our common stock at times when we are deferring the payment of interest on such subordinated debentures or subordinated notes. Moreover, the terms of the loan agreement for Pinnacle Financial’s line of credit prohibits us from paying dividends when there is an event of default existing under the loan agreement, or the payment of a dividend would cause an event of default.
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.
In order to maintain our or Pinnacle Bank’s capital at desired or regulatory-required levels, we may issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. We may sell these shares at prices below the current market price of shares, and the sale of these shares may significantly dilute shareholder ownership. We could also issue additional shares in connection with acquisitions of other financial institutions (as we did in connection with our acquisition of BNC and our other recent acquisitions) or investments in fee-related businesses such as BHG, which could also dilute shareholder ownership.
Holders of Pinnacle Financial’s and Pinnacle Bank’s indebtedness and junior subordinated debentures have rights that are senior to those of Pinnacle Financial’s shareholders.
At December 31, 2017, Pinnacle Financial had outstanding trust preferred securities and accompanying junior subordinated debentures totaling $133.0. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by Pinnacle Financial, and the accompanying subordinated debentures are senior to shares of Pinnacle Financial’s common stock. As a result, Pinnacle Financial must make payments on the subordinated debentures (and the related trust preferred securities) before any dividends can be paid on common stock and, in the event of Pinnacle Financial’s bankruptcy, dissolution or liquidation, the holders of the subordinated debentures must be satisfied before any distributions can be made on Pinnacle Financial’s common stock. Pinnacle Financial has the right to defer distributions on its junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on its common stock. If our financial condition deteriorates or if we do not receive required regulatory approvals, we may be required to defer distributions on our junior subordinated debentures.
From time to time, Pinnacle Financial and Pinnacle Bank have issued, and in connection with the Avenue merger and BNC merger, assumed, subordinated notes. At December 31, 2017, we and Pinnacle Bank had an aggregate of $340.5 million of subordinated notes outstanding, not including the subordinated debentures issued in connection with our trust preferred securities. The terms of these notes prohibit or will prohibit Pinnacle Financial or Pinnacle Bank, as applicable, from declaring or paying any dividends or distributions on its common stock at any time when payment of interest on these notes has not been timely made and while any such accrued and unpaid interest remains unpaid. Moreover, the notes we have issued or assumed rank senior to shares of Pinnacle Financial’s common stock. In the event of any bankruptcy, dissolution or liquidation of Pinnacle Financial, these notes, along with Pinnacle Financial’s other indebtedness, would have to be repaid before Pinnacle Financial’s shareholders would be entitled to receive any of the assets of Pinnacle Financial.
Pinnacle Financial or Pinnacle Bank may from time to time issue additional subordinated indebtedness that would have to be repaid before Pinnacle Financial’s shareholders would be entitled to receive any of the assets of Pinnacle Financial or Pinnacle Bank.
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.
Our issuance of preferred stock could adversely affect holders of our common stock.
We have the ability under our current effective shelf registration statement to issue shares of preferred stock. Further, our shareholders authorized our board of directors to issue up to 10,000,000 shares of preferred stock without any further action on the part of our shareholders. Our board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up, and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution, or winding up, or if we issue debt securities, incur other borrowings or issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected.
We and/or the holders of certain classes of our securities could be adversely affected by unfavorable ratings from rating agencies.
The ratings agencies regularly evaluate Pinnacle Financial and Pinnacle Bank, and their ratings of our long-term debt are based on a number of factors, including our financial strength as well as factors not entirely within our control, including conditions affecting the financial services industry generally. There can be no assurance that we will not receive adverse changes in our ratings in the future, which could adversely affect the cost and other terms upon which we are able to obtain funding, and the way in which we are perceived in the capital markets. Actual or anticipated changes, or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade, could affect the market value and liquidity of our securities, increase our borrowing costs and negatively impact our profitability. Additionally, a downgrade of the credit rating of any particular security issued by us or our subsidiaries could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.
Even though our common stock is currently traded on the Nasdaq Stock Market’s Global Select Market, it has less liquidity than many other stocks quoted on a national securities exchange.
The trading volume in our common stock on the Nasdaq Global Select Market has been relatively low when compared with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. Although we have experienced increased liquidity in our stock, we cannot say with any certainty that a more active and liquid trading market for our common stock will continue to develop. Because of this, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares.
We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.
The market price of our common stock has fluctuated significantly, and may fluctuate in the future. These fluctuations may be unrelated to our performance. General market or industry price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Our corporate organizational documents and the provisions of Tennessee law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition of Pinnacle Financial that you may favor.
Our amended and restated charter, as amended, and bylaws, as amended, contain various provisions that could have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control of Pinnacle Financial. These provisions include:
a provision requiring our board of directors to take into account specific factors when considering an acquisition proposal;
a provision that all extraordinary corporate transactions to which we are a party must be approved by a majority of the directors and a majority of the shares entitled to vote;
a provision that any special meeting of our shareholders may be called only by our chairman, our chief executive officer, our president, our board of directors, or the holders of 25% of the outstanding shares of our voting stock that have held those shares for at least one year; and
a provision establishing certain advance notice procedures for nomination of candidates for election as directors at an annual or special meeting of shareholders at which directors are elected.
Additionally, our amended and restated charter, as amended, authorizes the board of directors to issue shares of our preferred stock without shareholder approval and upon such terms as the board of directors may determine. The issuance of our preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings, and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in us. In addition, certain provisions of Tennessee law, including a provision which restricts certain business combinations between a Tennessee corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of our company.
An investment in our common stock is not an insured deposit and is not guaranteed by the FDIC.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described herein and our shareholders will bear the risk of loss if the value or market price of our common stock is adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's executive offices are located at 150 Third Avenue South, Suite 900, Nashville, Tennessee. The Company operates 44At December 31, 2017, we conducted banking locations throughout our geographic market areas, of which for 20 locations the Company leases the land, the building or both. The Company has locationsoperations in the Tennessee municipalities of Nashville, Knoxville, Memphis, Chattanooga, Murfreesboro, Dickson, Ashland City, Mt. Juliet, Lebanon, Franklin, Brentwood, Hendersonville, Goodlettsville, Smyrna, Shelbyville, Cleveland114 offices in four states. These offices include both owned and Oak Ridge.leased facilities as follows:
|
| | | | | | |
| State | Owned | Leased | Total |
| Tennessee | 27 |
| 19 |
| 46 |
|
| North Carolina | 29 |
| 10 |
| 39 |
|
| South Carolina | 12 |
| 9 |
| 21 |
|
| Virginia | 6 |
| 2 |
| 8 |
|
| | 74 |
| 40 |
| 114 |
|
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings to which Pinnacle Financial or a subsidiary of Pinnacle Financial is party arise from time to time in the normal course of business. Except as described below, as of the date hereof, thereThere 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.
On May 9, 2016 a purported class action complaint was filed in the Chancery Court for the State of Tennessee, 20th Judicial District at Nashville, styled Stephen Bushansky, on behalf of himself and all others similarly situated, Plaintiff, versus Avenue Financial Holdings, Inc. Ronald L. Samuels, Kent Cleaver, David G. Anderson, Agenia Clark, James F. Deutsch, Marty Dickens, Patrick G. Emery, Nancy Falls, Joseph C. Galante, David Ingram. Stephen Moore, Ken Robold, Karen Saul and Pinnacle Financial Partners, Inc., Defendants (Case No. 16-489-IV). The complaint alleged that the individual defendants breached their fiduciary duties by, among other things, approving the sale of Avenue for an inadequate price as the result of a flawed sales process, agreeing to the inclusion of unreasonable deal protection devices in the Avenue Merger Agreement, approving the Avenue Merger in order to receive benefits not equally shared by all other shareholders of Avenue, and issuing materially misleading and incomplete disclosures to Avenue's shareholders. The lawsuit also alleged claims against Avenue and Pinnacle Financial for aiding and abetting the individual defendants' breaches of fiduciary duties. The plaintiff purported to seek class-wide relief, including but not limited to monetary damages and an award of interest, attorney's fees, and expenses. On May 18, 2016, the Bushansky litigation was transferred to the Davidson County, Tennessee Business Court Pilot Project (the "Business Court").On June 10, 2016, the parties entered into a memorandum of understanding with the plaintiff regarding a settlement of the Bushansky litigation and a release and dismissal of all claims which were or could have been asserted therein. Pursuant to the terms of the settlement, Avenue and Pinnacle Financial agreed to make certain supplemental disclosures to the definitive proxy statement/prospectus. Those supplemental disclosures were issued on June 13, 2016.
On October 18, 2016, the parties finalized a formal Stipulation of Settlement, which the parties submitted to the Business Court for approval along with a proposed Order Granting Preliminary Approval of Settlement, Approving Form of Notice to Class, and Setting Final Settlement Hearing ("Preliminary Approval Order"), a proposed Notice of Pendency and Proposed Settlement of Class Action ("Notice"), and a proposed Final Order and Judgment. Plaintiff also indicated that it would request from the Business Court an award of $300,000 in attorneys' fees and expenses, and defendants agreed not to object to a request in this amount. On October 25, 2016, the Business Court issued a Preliminary Approval Order preliminarily approving the settlement and certifying a class, and providing for mailing of the Notice to class members. On December 16, 2016, following mailing of the Notice to the class in accordance with the Preliminary Approval Order and a hearing on the proposed settlement, the Business Court entered the Final Order and Judgment approving the proposed settlement, awarding plaintiff $300,000 in attorneys' fees and expenses, and dismissing the action with prejudice.
The fact of the settlement and Pinnacle Financial's and Avenue's agreement to make the supplemental disclosures in connection therewith should not be construed as an admission of wrongdoing or liability by any defendant. The defendants have vigorously denied, and continue to vigorously deny, any wrongdoing or liability with respect to the facts and claims asserted, or which could have been asserted, in the Bushansky litigation, including that they have committed any violations of law or breach of fiduciary duty, aided and abetted any violations of law or breaches of fiduciary duty, acted improperly in any way or have any liability or owe any damages of any kind to the plaintiff or the purported class. Pinnacle Financial believes the claims asserted in the Bushansky action are without merit, but entered into the settlement to avoid the costs, risks and uncertainties inherent in litigation.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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. The following table shows the high and low sales price information for Pinnacle Financial's common stock for each quarter in 20162017 and 20152016 as reported on the Nasdaq Global Select Market.
| | | Price Per Share | |
| | | High | | | Low | |
| 2016: | | | | | | |
| First quarter | | $ | 52.82 | | | $ | 43.32 | |
| Second quarter | | | 52.54 | | | | 44.61 | |
| Third quarter | | | 57.39 | | | | 46.82 | |
| Fourth quarter | | | 71.85 | | | | 49.40 | |
| 2015: | | | | | | | | |
| First quarter | | $ | 45.31 | | | $ | 35.01 | |
| Second quarter | | | 55.43 | | | | 43.44 | |
| Third quarter | | | 56.00 | | | | 44.86 | |
| Fourth quarter | | | 57.99 | | | | 46.25 | |
|
| | | | | | | |
| | Price Per Share |
| | High | | Low |
| 2017: | | | |
| First quarter | $ | 71.55 |
| | $ | 61.07 |
|
| Second quarter | 70.30 |
| | 59.00 |
|
| Third quarter | 67.80 |
| | 58.40 |
|
| Fourth quarter | 69.95 |
| | 63.13 |
|
| 2016: | |
| | |
|
| First quarter | $ | 52.82 |
| | $ | 43.32 |
|
| Second quarter | 52.54 |
| | 44.61 |
|
| Third quarter | 57.39 |
| | 46.82 |
|
| Fourth quarter | 71.85 |
| | 49.40 |
|
As of February 24, 2017,23, 2018, Pinnacle Financial had approximately 2,4797,169 stockholders of record.
During the fourth quarter of 2013, we paid a quarterly dividend on our common stock for the first time. The amount of the initial dividend was $0.08 per share. During the first quarters of 2015 and 2016, the board of directors increased the dividend to $0.12 per share and $0.14 per share, respectively. During the first quarter of 2017,2018, our board of directors declared a dividend of $0.14 per share. See ITEM 1. "Business - Supervision and Regulation - Payment of Dividends" and ITEM 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information on dividend restrictions applicable to Pinnacle Financial and Pinnacle Bank.
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, 20162017 as follows:
| Period | | Total Number of Shares Repurchased(1) | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs | |
| October 1, 2016 to October 31, 2016 | | | 406 | | | $ | 53.49 | | | | - | | | | - | |
| November 1, 2016 to November 30, 2016 | | | 1,764 | | | | 60.54 | | | | - | | | | - | |
| December 1, 2016 to December 31, 2016 | | | 4 | | | | 70.00 | | | | - | | | | - | |
| Total | | | 2,174 | | | $ | 59.33 | | | | - | | | | - | |
|
| | | | | | | | | | | | |
| Period | Total Number of Shares Repurchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs |
| October 1, 2017 to October 31, 2017 | 917 |
| | $ | 66.06 |
| | — |
| | — |
|
| November 1, 2017 to November 30, 2017 | 719 |
| | 65.50 |
| | — |
| | — |
|
| December 1, 2017 to December 31, 2017 | 48 |
| | 67.75 |
| | — |
| | — |
|
| Total | 1,684 |
| | $ | 65.85 |
| | — |
| | — |
|
(1)During the quarter ended December 31, 2016, 7,8512017, 46,752 shares of restricted stock previously awarded to certain of our associates vested. We40,317 of these shares vested subject to 83(b) elections. For the remaining restricted share awards which vested during the quarter ended December 31, 2017, we withheld 2,1741,684 shares to satisfy tax withholding requirements associated with the vesting of these restricted share awards.
ITEM 6. SELECTED FINANCIAL DATA| (in thousands, except per share data) | | 2016 (1)(2) | | | 2015 (3)(4) | | | 2014 | | | 2013 | | | 2012 | |
| Total assets | | $ | 11,194,623 | | | $ | 8,714,544 | | | $ | 6,018,248 | | | $ | 5,563,776 | | | $ | 5,040,549 | |
| Loans, net of unearned income | | | 8,449,925 | | | | 6,543,235 | | | | 4,590,026 | | | | 4,144,493 | | | | 3,712,162 | |
| Allowance for loan losses | | | 58,980 | | | | 65,432 | | | | 67,359 | | | | 67,970 | | | | 69,417 | |
| Total securities | | | 1,323,797 | | | | 966,442 | | | | 770,730 | | | | 733,252 | | | | 707,153 | |
| Goodwill, core deposit and other intangible assets | | | 566,698 | | | | 442,773 | | | | 246,422 | | | | 247,492 | | | | 249,144 | |
| Deposits and securities sold under agreements to repurchase | | | 8,845,014 | | | | 7,050,498 | | | | 4,876,600 | | | | 4,603,938 | | | | 4,129,855 | |
| Advances from FHLB | | | 406,304 | | | | 300,305 | | | | 195,476 | | | | 90,637 | | | | 75,850 | |
| Subordinated debt and other borrowings | | | 350,768 | | | | 141,606 | | | | 96,158 | | | | 98,658 | | | | 106,158 | |
| Stockholders' equity | | | 1,496,696 | | | | 1,155,611 | | | | 802,693 | | | | 723,708 | | | | 679,071 | |
| | | | | | | | | | | | | | | | | | | | | |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 363,609 | | | $ | 255,169 | | | $ | 206,170 | | | $ | 191,282 | | | $ | 185,422 | |
| Interest expense | | | 38,615 | | | | 18,537 | | | | 13,185 | | | | 15,384 | | | | 22,558 | |
| Net interest income | | | 324,994 | | | | 236,632 | | | | 192,985 | | | | 175,898 | | | | 162,864 | |
| Provision for loan losses | | | 18,328 | | | | 9,188 | | | | 3,635 | | | | 7,856 | | | | 5,569 | |
| Net interest income after provision for loan losses | | | 306,666 | | | | 227,444 | | | | 189,350 | | | | 168,042 | | | | 157,296 | |
| Noninterest income | | | 121,003 | | | | 86,530 | | | | 52,602 | | | | 47,104 | | | | 43,397 | |
| Noninterest expense | | | 236,285 | | | | 170,877 | | | | 136,300 | | | | 129,261 | | | | 138,165 | |
| Income before income taxes | | | 191,383 | | | | 143,098 | | | | 105,653 | | | | 85,884 | | | | 62,527 | |
| Income tax expense | | | 64,159 | | | | 47,589 | | | | 35,182 | | | | 28,158 | | | | 20,643 | |
| Net income | | | 127,224 | | | | 95,509 | | | | 70,471 | | | | 57,726 | | | | 41,884 | |
| Preferred dividends and accretion on common stock warrants | | | - | | | | - | | | | - | | | | - | | | | 3,814 | |
| Net income available to common stockholders | | $ | 127,224 | | | $ | 95,509 | | | $ | 70,471 | | | $ | 57,726 | | | $ | 38,070 | |
| | | | | | | | | | | | | | | | | | | | | |
| Per Share Data: | | | | | | | | | | | | | | | | | | | | |
| Earnings per share available to common stockholders – basic | | $ | 2.96 | | | $ | 2.58 | | | $ | 2.03 | | | $ | 1.69 | | | $ | 1.12 | |
| Weighted average common shares outstanding – basic | | | 43,037,083 | | | | 37,015,468 | | | | 34,723,335 | | | | 34,200,770 | | | | 33,899,667 | |
| Earnings per common share available to common stockholders – diluted | | $ | 2.91 | | | $ | 2.52 | | | $ | 2.01 | | | $ | 1.67 | | | $ | 1.10 | |
| Weighted average common shares outstanding – diluted | | | 43,731,992 | | | | 37,973,788 | | | | 35,126,890 | | | | 34,509,261 | | | | 34,487,808 | |
| Common dividends per share | | $ | 0.56 | | | $ | 0.48 | | | | 0.32 | | | | 0.08 | | | | - | |
| Book value per common share | | $ | 32.28 | | | $ | 28.25 | | | $ | 22.45 | | | $ | 20.55 | | | $ | 19.57 | |
| Common shares outstanding at end of period | | | 46,359,377 | | | | 40,906,064 | | | | 35,732,483 | | | | 35,221,941 | | | | 34,696,597 | |
| Performance Ratios: | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | 1.27 | % | | | 1.36 | % | | | 1.27 | % | | | 1.11 | % | | | 0.78 | % |
| Return on average stockholders' equity | | | 9.47 | % | | | 10.06 | % | | | 9.33 | % | | | 8.22 | % | | | 5.46 | % |
Net interest margin (5) | | | 3.70 | % | | | 3.72 | % | | | 3.75 | % | | | 3.77 | % | | | 3.77 | % |
Net interest spread (6) | | | 3.46 | % | | | 3.55 | % | | | 3.65 | % | | | 3.65 | % | | | 3.61 | % |
| Noninterest income to average assets | | | 1.21 | % | | | 1.23 | % | | | 0.90 | % | | | 0.90 | % | | | 0.89 | % |
| Noninterest expense to average assets | | | 2.36 | % | | | 2.42 | % | | | 2.33 | % | | | 2.48 | % | | | 2.83 | % |
Efficiency ratio (7) | | | 52.98 | % | | | 52.88 | % | | | 55.50 | % | | | 57.96 | % | | | 66.99 | % |
| Average loan to average deposit ratio | | | 96.66 | % | | | 96.39 | % | | | 93.15 | % | | | 93.46 | % | | | 92.78 | % |
| Average interest-earning assets to average interest-bearing liabilities | | | 139.39 | % | | | 142.77 | % | | | 142.64 | % | | | 137.78 | % | | | 131.44 | % |
| Average equity to average total assets ratio | | | 13.40 | % | | | 13.47 | % | | | 13.46 | % | | | 13.47 | % | | | 14.30 | % |
| Annualized dividend payout ratio | | | 19.31 | % | | | 18.97 | % | | | 16.67 | % | | | 20.38 | % | | | 0.00 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses to nonaccrual loans | | | 213.90 | % | | | 222.90 | % | | | 403.20 | % | | | 373.80 | % | | | 304.20 | % |
| Allowance for loan losses to total loans | | | 0.70 | % | | | 1.00 | % | | | 1.47 | % | | | 1.64 | % | | | 1.87 | % |
| Nonperforming assets to total assets | | | 0.30 | % | | | 0.42 | % | | | 0.46 | % | | | 0.60 | % | | | 0.82 | % |
| Nonperforming assets to total loans and other real estate | | | 0.40 | % | | | 0.55 | % | | | 0.62 | % | | | 0.80 | % | | | 1.11 | % |
| Net loan charge-offs to average loans | | | 0.21 | % | | | 0.21 | % | | | 0.10 | % | | | 0.24 | % | | | 0.29 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Capital Ratios (Pinnacle Financial): | | | | | | | | | | | | | | | | | | | | |
| Common equity Tier I risk-based capital | | | 7.86 | % | | | 8.61 | % | | | 10.10 | % | | | 0.00 | % | | | 0.00 | % |
Leverage (8) | | | 8.55 | % | | | 9.37 | % | | | 11.30 | % | | | 10.90 | % | | | 10.60 | % |
| Tier 1 risk-based capital | | | 8.64 | % | | | 9.63 | % | | | 12.10 | % | | | 11.80 | % | | | 11.80 | % |
| Total risk-based capital | | | 11.86 | % | | | 11.24 | % | | | 13.40 | % | | | 13.00 | % | | | 13.00 | % |
|
| | | | | | | | | | | | | | | | | | | |
| (dollars in thousands, except per share data) | 2017 (1) | | 2016 (2)(3) | | 2015 (4)(5) | | 2014 | | 2013 |
| Total assets | $ | 22,205,700 |
| | $ | 11,194,623 |
| | $ | 8,714,544 |
| | $ | 6,018,248 |
| | $ | 5,563,776 |
|
| Loans, net of unearned income | 15,633,116 |
| | 8,449,925 |
| | 6,543,235 |
| | 4,590,026 |
| | 4,144,493 |
|
| Allowance for loan losses | 67,240 |
| | 58,980 |
| | 65,432 |
| | 67,359 |
| | 67,970 |
|
| Total securities | 2,536,046 |
| | 1,323,797 |
| | 966,442 |
| | 770,730 |
| | 733,252 |
|
| Goodwill, core deposit and other intangible assets | 1,864,712 |
| | 566,698 |
| | 442,773 |
| | 246,422 |
| | 247,492 |
|
| Deposits and securities sold under agreements to repurchase | 16,586,964 |
| | 8,845,014 |
| | 7,050,498 |
| | 4,876,600 |
| | 4,603,938 |
|
| Advances from FHLB | 1,319,909 |
| | 406,304 |
| | 300,305 |
| | 195,476 |
| | 90,637 |
|
| Subordinated debt and other borrowings | 465,505 |
| | 350,768 |
| | 141,606 |
| | 96,158 |
| | 98,658 |
|
| Stockholders' equity | 3,707,952 |
| | 1,496,696 |
| | 1,155,611 |
| | 802,693 |
| | 723,708 |
|
| Statement of Operations Data: | | | |
| | |
| | |
| | |
|
| Interest income | $ | 636,138 |
| | $ | 363,609 |
| | $ | 255,169 |
| | $ | 206,170 |
| | $ | 191,282 |
|
| Interest expense | 92,831 |
| | 38,615 |
| | 18,537 |
| | 13,185 |
| | 15,384 |
|
| Net interest income | 543,307 |
| | 324,994 |
| | 236,632 |
| | 192,985 |
| | 175,898 |
|
| Provision for loan losses | 23,664 |
| | 18,328 |
| | 9,188 |
| | 3,635 |
| | 7,856 |
|
| Net interest income after provision for loan losses | 519,643 |
| | 306,666 |
| | 227,444 |
| | 189,350 |
| | 168,042 |
|
| Noninterest income | 144,903 |
| | 121,003 |
| | 86,530 |
| | 52,602 |
| | 47,104 |
|
| Noninterest expense | 366,560 |
| | 236,285 |
| | 170,877 |
| | 136,300 |
| | 129,261 |
|
| Income before income taxes | 297,986 |
| | 191,383 |
| | 143,098 |
| | 105,653 |
| | 85,884 |
|
| Income tax expense | 124,007 |
| | 64,159 |
| | 47,589 |
| | 35,182 |
| | 28,158 |
|
| Net income | 173,979 |
| | 127,224 |
| | 95,509 |
| | 70,471 |
| | 57,726 |
|
| Per Share Data: | | | |
| | |
| | |
| | |
|
| Earnings per share available to common stockholders – basic | $ | 2.73 |
| | $ | 2.96 |
| | $ | 2.58 |
| | $ | 2.03 |
| | $ | 1.69 |
|
| Weighted average common shares outstanding – basic | 63,760,578 |
| | 43,037,083 |
| | 37,015,468 |
| | 34,723,335 |
| | 34,200,770 |
|
| Earnings per common share available to common stockholders – diluted | $ | 2.70 |
| | $ | 2.91 |
| | $ | 2.52 |
| | $ | 2.01 |
| | $ | 1.67 |
|
| Weighted average common shares outstanding – diluted | 64,328,189 |
| | 43,731,992 |
| | 37,973,788 |
| | 35,126,890 |
| | 34,509,261 |
|
| Common dividends per share | $ | 0.56 |
| | $ | 0.56 |
| | 0.48 |
| | 0.32 |
| | 0.08 |
|
| Book value per common share | $ | 47.70 |
| | $ | 32.28 |
| | $ | 28.25 |
| | $ | 22.45 |
| | $ | 20.55 |
|
| Common shares outstanding at end of period | 77,739,636 |
| | 46,359,377 |
| | 40,906,064 |
| | 35,732,483 |
| | 35,221,941 |
|
| Performance Ratios: | | | |
| | |
| | |
| | |
|
| Return on average assets | 1.02 | % | | 1.27 | % | | 1.36 | % | | 1.27 | % | | 1.11 | % |
| Return on average stockholders' equity | 6.26 | % | | 9.47 | % | | 10.06 | % | | 9.33 | % | | 8.22 | % |
| Net interest margin | 3.76 | % | | 3.70 | % | | 3.72 | % | | 3.75 | % | | 3.77 | % |
| Net interest spread | 3.53 | % | | 3.46 | % | | 3.55 | % | | 3.65 | % | | 3.65 | % |
| Noninterest income to average assets | 0.85 | % | | 1.21 | % | | 1.23 | % | | 0.90 | % | | 0.90 | % |
| Noninterest expense to average assets | 2.15 | % | | 2.36 | % | | 2.42 | % | | 2.33 | % | | 2.48 | % |
| Efficiency ratio | 53.26 | % | | 52.98 | % | | 52.88 | % | | 55.50 | % | | 57.96 | % |
| Average loan to average deposit ratio | 95.14 | % | | 96.66 | % | | 96.39 | % | | 93.15 | % | | 93.46 | % |
| Average interest-earning assets to average interest-bearing liabilities | 136.10 | % | | 139.39 | % | | 142.77 | % | | 142.64 | % | | 137.78 | % |
| Average equity to average total assets ratio | 16.32 | % | | 13.40 | % | | 13.47 | % | | 13.46 | % | | 13.47 | % |
| Dividend payout ratio | 20.00 | % | | 19.31 | % | | 18.97 | % | | 16.67 | % | | 20.38 | % |
| Asset Quality Ratios: | | | |
| | |
| | |
| | |
|
| Allowance for loan losses to nonaccrual loans | 117.00 | % | | 213.90 | % | | 222.90 | % | | 403.20 | % | | 373.80 | % |
| Allowance for loan losses to total loans | 0.43 | % | | 0.70 | % | | 1.00 | % | | 1.47 | % | | 1.64 | % |
| Nonperforming assets to total assets | 0.38 | % | | 0.30 | % | | 0.42 | % | | 0.46 | % | | 0.60 | % |
| Nonperforming assets to total loans and other real estate | 0.55 | % | | 0.40 | % | | 0.55 | % | | 0.62 | % | | 0.80 | % |
| Net loan charge-offs to average loans | 0.13 | % | | 0.21 | % | | 0.21 | % | | 0.10 | % | | 0.24 | % |
| Capital Ratios (Pinnacle Financial): | |
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| Common equity Tier I risk-based capital | 9.14 | % | | 7.86 | % | | 8.61 | % | | 10.10 | % | | N/A |
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| Leverage | 8.65 | % | | 8.55 | % | | 9.37 | % | | 11.30 | % | | 10.90 | % |
| Tier 1 risk-based capital | 9.14 | % | | 8.64 | % | | 9.63 | % | | 12.10 | % | | 11.80 | % |
| Total risk-based capital | 12.01 | % | | 11.86 | % | | 11.24 | % | | 13.40 | % | | 13.00 | % |
(1)
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| (1) | Information for the 2017 fiscal year includes the operation of BNC from its acquisition date of June 16, 2017 and reflects approximately 27.7 million shares of Pinnacle Common Stock issued in connection the BNC merger and approximately 3.2 million shares issued in connection with a public offering consummated in January 2017. |
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| (2) | Information for the 2016 fiscal year includes the operations of Avenue from its acquisition date of July 1, 2016 and reflects approximately 3.8 million shares of Pinnacle Common Stock issued in connection with the Avenue merger. |
(2)
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| (3) | Information for the 2016 fiscal year includes our additional 19% membership interest in BHG which we acquired in March 2016 and reflects approximately 861,000 shares of Pinnacle Common Stock issued in connection with the additional investment in BHG. |
(3)
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| (4) | Information for the 2015 fiscal year includes the operations of CapitalMark from its acquisition date of July 31, 2015 and Magna from its acquisition date of September 1, 2015 and reflects approximately 3.3 million shares and 1.4 million shares of Pinnacle Common Stock issued in connection with the CapitalMark merger and the Magna merger, respectively. |
(4)
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| (5) | Information for 2015 fiscal year includes our 30% membership interest in BHG which we acquired in February 2015. |
(5)
| Net interest margin is the result of net interest income for the period divided by average interest earning assets.
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(6)
| Net interest spread is the result of the difference between the interest earned on interest earning assets less the interest paid on interest bearing liabilities.
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(7)
| Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.
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(8)
| Leverage ratio is computed by dividing Tier 1 capital by average total assets for the fourth quarter of each year.
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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, 20162017 and 20152016 and our results of operations for each of the years in the three-year period ended December 31, 2016.2017. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.
Overview
General. Our fully diluted net income per common share for the year ended December 31, 20162017 was $2.91$2.70 compared to fully diluted net income per common share of $2.52$2.91 and $2.01$2.52 for the years ended December 31, 20152016 and 2014,2015, respectively. At December 31, 2016,2017, loans had increased by $1.907$7.18 billion as compared to December 31, 2015.2016. The comparability of our financial condition and performance has been impacted by the acquisitions we have completed in the last three years and passage of the Tax Cuts and Jobs Act in December 2017, in each case as discussed below.
Acquisitions.We acquired a 30% membership interest in Bankers Healthcare Group, LLC (BHG) on February 1, 2015 for $75.0 million in cash. Oncash and acquired an additional 19% membership interest in BHG on March 1, 2016 we increased our investmentfor $74.1 million in BHG by 19%, for a total investment in BHG of 49%. The additional 19% interest was acquired for an amount of cash equal to $74.1 million and 860,470 shares of Pinnacle Financial common stock.stock, with a fair value of $39.9 million on the date of the acquisition.
We acquired CapitalMark Bank and Trust (CapitalMark) on July 31, 2015 and Magna Bank (Magna) on September 1, 2015. We acquired Avenue Financial Holdings, Inc. (Avenue) and its wholly owned bank subsidiary, Avenue Bank (together, Avenue), on July 1, 2016. At the acquisition date, CapitalMark's net assets were fair valued at $73.2 million, including loans of $857.5 million and deposits valued at $953.2 million. At the acquisition date, Magna's net assets were fair valued at $49.1 million, including loans of $440.7 million and deposits valued at $452.7 million. At the acquisition date, Avenue's net assets were preliminarily fair valued at $81.7 million, including loans of $952.5 million and deposits valued at $966.7 million. These acquisitions further expanded our footprint intofranchise within our core Tennessee markets.market.
Our merger with Avenue was consummatedWe acquired BNC Bancorp and its wholly owned bank subsidiary, Bank of North Carolina (together, BNC), on July 1, 2016. June 16, 2017. At acquisition date, BNC's net assets were preliminarily fair valued at $601.8 million, including loans valued at $5.60 billion and deposits valued at $6.21 billion. This acquisition expanded our footprint into the Carolinas and Virginia.
Each holder of AvenueBNC common stock (including restricted shares) received 0.360.5235 shares of Pinnacle Financial's common stock plus $2.00 per share in cash for each share of AvenueBNC common stock held by each shareholder on the closing date. This acquisition increased our market share in the Nashville MSA. We issued approximately 3.76 million27,687,100 shares of our common stock and paid cash consideration of approximately $20.9 million (including payments$129,000, related to fractional shares)shares, to the Avenue shareholders and approximately $987,000 to holdersBNC shareholders. Included in the common stock issued were 136,890 assumed shares of 257,639 outstanding unexercisedunvested restricted stock options.
On January 22, 2016, we entered into the Merger Agreement to acquire BNC and its wholly owned bank subsidiary Bank of North Carolina. Pursuantthat will be released to the termsrecipients consistent with their original contractual terms. The fair value of these awards was $9.2 million, with $5.4 million attributable to precombination services provided by the Merger Agreement, each outstanding share of BNC's common stock will be converted into 0.5235 shares of Pinnacle Financial Common Stock and all of BNC's outstanding stock options that are not exercisedrecipients prior to the closing will be cashed out formerger, and is a payment equalcomponent of merger consideration.
Tax Cuts and Jobs Act. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other items, the Tax Cuts and Jobs Act reduced the corporate statutory tax rate from 35% to 21%. As a result of such decrease, we recognized a charge of $31.5 million in 2017 resulting from the productrevaluation of (i)our deferred tax assets.
Under the excess, if any, ofTax Cuts and Jobs Act, the average closing prices of Pinnacle Financial's Common Stockqualified performance-based compensation exception to Section 162(m) that generally provided for the ten (10) trading dayscontinued deductibility of performance-based compensation was repealed, effective for tax years commencing on or after January 1, 2018. Accordingly, commencing with our fiscal year ending onDecember 31, 2018, compensation to our named executive officers in excess of $1,000,000 not awarded as performance-based compensation prior to November 2, 2017 will generally not be deductible, which will likely partially offset the trading day immediately precedingexpected reduction in our income tax expense resulting from the closing date ofrate cut under the Merger (adjusted for the Exchange Ratio) over the exercise price of each such optionTax Cuts and (ii) the number of shares of BNC common stock subject to each such option. Upon consummation of the Merger, we will assume BNC's obligations under its outstanding $60.0 million subordinated notes issued in September 2014 that mature in October 2024. The $50.5 million in aggregate principal amount of subordinated debentures issued by trust affiliates of BNC in connection with the issuance of trust preferred securities will also be assumed in connection with the Merger.
Jobs Act.
Results of operations. Our net interest income increased to $543.3 million for 2017 compared to $325.0 million for 2016 compared toand $236.6 million for 2015 and $193.0 million for 2014.2015. The net interest margin (the ratio of net interest income to average earning assets) for 20162017 was 3.70%3.76% compared to 3.70% and 3.72% for 2016 and 3.75% for 2015, and 2014, respectively.
Our provision for loan losses was $23.7 million for 2017 compared to $18.3 million forin 2016 compared toand $9.2 million in 2015 and $3.6 million in 2014.2015. Provision expense for the year ended December 31, 20162017 when compared to the comparable periods in 20152016 and 20142015 was impacted by increasedorganic loan growth and by charge-offs realized in our consumer portfolio, primarily related to non-prime automobile loans. Our net charge-offs were $15.4 million during 2017 compared to $24.8 million duringin 2016 compared toand $11.1 million in 2015 and $4.2 million in 2014.2015.
Our allowance for loan losses as a percentage of total loans decreased from 1.00% at December 31, 2015 to 0.70% at December 31, 2016 largely because the loans we acquired in conjunction with the Avenue merger were reflectedto 0.43% at fair value at the acquisition date. Management believes theDecember 31, 2017. The decrease in the allowance for loan losses as a percentage of total loans was supported byis primarily attributable to the credit quality in ouracquired BNC loan portfolio despite increasing charge-offs related to automobile financing, which represents a small portionbeing accounted for at its fair value as of the total portfolio. The overall methodology used to estimatemerger date. For the allowanceBNC loan portfolio, a preliminary fair value discount of $181.4 million was determined
as of the acquisition date. At December 31, 2017, the remaining fair value discount for loan losses is consistent with the prior year.all acquired portfolios (inclusive of BNC) was $163.5 million. For purchased loans (including those acquired in connection with our mergers),acquisitions, the calculation of the allowance for loan losses subsequent to the acquisition date is consistent with that utilized for legacy Pinnacle Financial loans. Our accounting policy is to compare the computed allowance for loan losses on purchased loans to the remaining fair value adjustment at the individual loan level. IfGenerally the fair value adjustments are expected to accrete to interest income over the remaining expected life of the underlying loan agreements and decrease proportionately with the related loan balance. However, if the computed allowance is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a provision for loan losses. Additional provisioning for purchased portfolios results from credit deterioration on the individual loan or from increased borrowings on loans and lines that existed as of the acquisition date. Should a loan with a remaining fair value discount be paid off prior to maturity, the remaining fair value discount is recognized as interest income.
Noninterest income for 2017 compared to 2016 increased by $23.9 million, or 19.8%. The increase in noninterest income from 2016 to 2017 was partially due to an increase in income from our investment in BHG, which was $38.0 million for the year ended December 31, 2017 compared to $31.4 million for the year ended December 31, 2016 and also the result of our acquisition of BNC. These increases were partially offset by the $8.3 million pre-tax loss on the sale of investment securities we recognized in the fourth quarter of 2017. Noninterest income for 2016 compared to 2015 increased by $34.5 million, or 39.8%. The increase, which was primarily dueattributable to income from our investment in BHG, which was $31.4 million for the year ended December 31, 2016 compared to $20.6 million for the year ended December 31, 2015. Income from equity method investment represents our 30%increased equity method investment in BHG for the year ended December 31, 2015 and beginning on March 1, 2016 also includesBHG. The growth unrelated to our additional 19%BHG investment in BHG. The additional growthboth comparable periods was attributable to our overall increase in our geographic footprint in those periods as well as increased transaction accounts, increased production in our fee-based products such as investments, insurance and trust and net gains on the sale of mortgage loans. The year-over-year growth in net gains on the sale of mortgage loans in both periods was attributed to both an increase in the number of mortgage originators as well as the positive impact of the low interest rate environment on mortgage production.
Noninterest incomeexpense for 20152017 compared to 20142016 increased by $33.9$130.3 million, or 64.5%55.1%, which was primarily attributabledue to our 30% equity method investmentan increase in BHG. The remaining increase was attributable tosalaries and employee benefits expense. Salaries and employee benefits expense increased interchange revenues$68.8 million, resulting from annual merit increases awarded in the first quarter of 2017 as well as increased productionthe increase in our fee-based productsassociate base primarily as a result of our mergers with Avenue and BNC. We also realized increases in equipment and occupancy costs due to our merger with BNC. Additionally, merger expense accounted for approximately $31.8 million for the year ended December 31, 2017 compared to $11.7 million of merger-related expense during the same period in 2016. Merger expense for the years ended December 31, 2017 and 2016 also includes the costs of technical conversions which were completed in the third quarter of 2016 for Avenue and in the fourth quarter of 2017 for BNC. Associate related expenses such as investments, insuranceretention bonuses are also included in merger-related expenses. We expect merger-related charges to continue to be incurred in relation to our merger with BNC through the first part of 2018 as we finalize the cultural and trust.
technical integrations. Noninterest expense for 2016 compared to 2015 increased by $65.4 million, or 38.3%, primarily due to an increase in salaries and employee benefits expense. Salaries and employee benefits expense increased $34.9 million, resulting from annual merit increases awarded in the first quarter of 2016 and the increase in our associate base. We also realized increases in equipment and occupancy costs due to our mergers. Additionally, mergermerger-related expense accounted for approximately $11.7 million for the year ended December 31, 2016 compared to $4.8 million of merger-related expense during the same period in 2015. Merger expense during 2016 includes legal costs incurred associated with the Avenue merger to defend ourselves and Avenue's directors in a shareholder suit as well as investigation and other legal costs associated with a former director's alleged improper trading in Avenue common stock. Merger expense for the years ended December 31, 2016 and 2015 also includes the costs of technical conversions which were completed in the fourth quarter of 2015 for Magna, in the first quarter of 2016 for CapitalMark and in the third quarter of 2016 for Avenue. Associate related expenses such as retention bonuses are also included in thesemerger-related expenses. We do not expect any future merger-related charges due to the acquisitions of CapitalMark and Magna, and we do not expect future merger-related charges due to the acquisition of Avenue, if any, to be significant. However, merger-related charges are expected to be incurred with our proposed acquisition of BNC during 2017. Noninterest expense for 2015 compared to 2014 increased by $34.6 million, or 25.4%, Salaries and employee benefits expense increased $17.6 million, resulting from annual merit increases awarded in the first quarter of 2015, and the increase in our associate base as a result of both organic new hires and new hires resulting from our mergers with CapitalMark and Magna. We also realized increases in equipment and occupancy costs due to our mergers with CapitalMark and Magna. Additionally, merger expenses accounted for approximately $4.8 million of expense during 2015.
The number of full-time equivalent employees increased from 764.0 at December 31, 2014 to 1,058.5 at December 31, 2015 andto 1,179.5 at December 31, 2016.2016 and 2,132.0 at December 31, 2017.
During the three years ended December 31, 2017, 2016 2015 and 2014,2015, Pinnacle Financial recorded income tax expense of $124.0 million, $64.2 million and $47.6 million, respectively. The impact of the Tax Cuts and $35.2 million, respectively. Pinnacle'sJobs Act are included in income tax expense for the year ended December 31, 2017 pursuant to which our deferred tax assets were revalued at new enacted Federal tax rates resulting in a charge of $31.5 million.
Pinnacle Financial's effective tax rate for the three years ended December 31, 2017, 2016 and 2015, and 2014, was 33.5%41.6%, 33.3%33.5% and 33.3%, respectively, and differs from the combined federal and state income tax statutory rate primarily due to our investments in bank-qualified municipal securities, tax benefits from our real estate investment trust subsidiary, participation in Tennessee's Community Investment Tax Credit (CITC) program, tax benefits associated with bank-owned life insurance and tax savings from our captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense and certain merger-related expenses. Included in income tax expense for the quarter ended December 31, 2017 was a $31.5 million charge related to the revaluation of deferred tax assets resulting from the Tax Cuts and Jobs Act. We also recorded tax benefits associated with our equity-based compensation program pursuant to the adoption of ASU 2016-09 for the year ended December 31, 2017, resulting in the recognition of $5.4 million of tax benefits. Prior to the adoption of ASU 2016-09, these tax benefits were recorded in the statement of stockholders' equity directly to additional paid-in-capital.
Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 53.0%53.3%, 52.9%53.0% and 55.5%52.9% for the three years ended December 31, 2017, 2016 2015 and 2014,2015, respectively. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue.
Net income for 20162017 was $127.2$174.0 million compared to $95.5$127.2 million in net income in 20152016 and $70.5$95.5 million in 2014.2015. Fully-diluted net income per common share was $2.70 for 2017 compared to $2.91 for 2016 compared toand $2.52 for 20152015. Net income and $2.01 for 2014.fully-diluted net income per common share in 2017 were each significantly and negatively impacted by the $31.5 million charge resulting from the revaluation of our deferred tax assets following the passage of the Tax Cuts and Jobs Act.
Financial Condition. Our loan balances increased by $1.907$7.18 billion during 20162017 compared to an increase of $1.953$1.91 billion in 2015.2016. The increase in our outstanding loan balances during both periods is primarily the result of our acquisitions, as well as the continued economic growth in our other Tennesseecore markets, increases in the number of relationship advisors and increased focus on attracting new customers to our company.
Total deposits increased from $6.971$8.76 billion at December 31, 20152016 to $8.759$16.45 billion at December 31, 2016.2017. Within our deposits, the ratio of core funding to total deposits decreased slightly from 84.5% at December 31, 2015 to 81.6% at December 31, 2016.2016 to 77.6% at December 31, 2017.
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 as the economies in our principal markets continue to expand.
Capital and Liquidity. At December 31, 20162017 and 2015,2016, our capital ratios, including our bank's capital ratios, exceeded regulatory minimum capital requirements.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, 2016,2017, we had approximately $37.0$64.9 million of cash at the holding company which could be used to support our bank. We believe we have various capital raising techniques available to us to provide for the capital needs of our bank, including an established line of credit with another bank that can be utilized to provide up to $75 million of additional capital support to Pinnacle Bank, if necessary.needed. In January 2017, we completed a public offering of 3.22 million shares of our common stock in a transaction that resulted in net proceeds to us, after deducting underwriting discounts and commissions and estimated other expenses payable by us, of approximately $191.2 million. We have contributed $185.0 million of these net proceeds to our bank subsidiary.
Critical Accounting Estimates
The accounting principles we follow and our methods of applying these principles conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, the valuation of other real estate owned, the assessment of the valuation of deferred tax assets and the assessment of impairment of intangibles, has been critical to the determination of our financial position and results of operations.
Allowance for Loan Losses (allowance). Our management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of the loan portfolio, loan loss experience, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay the loan (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the loan portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, is deemed to be uncollectible.
Our allowance for loan loss assessment methodology was modified during the year ended December 31, 2017 to (i) extend the lookback period from 24 quarters to a period beginning January 1, 2006 to better capture the risk associated with this extended economic cycle, (ii) eliminate the use of risk ratings in the calculation of the loss rate and instead focus on loss rate by loan type and (iii) expand the economic variables used in the qualitative assessment to incorporate our expanded footprint. We also eliminated the use of a loss emergence period in light of the minimal population of losses available to evaluate that were previously being extrapolated to the full population of loans, and shifted the focus of our analysis to more of a quantitative model. There was no material impact on the adoption of the change in the allowance for loan loss assessment methodology.
Our allowance for loan losses is composed of the result of two independent analyses pursuant to the provisions of ASC 450-20, Loss Contingencies and ASC 310-10-35, Receivables.Receivables. The ASC 450-20 analysis is intended to quantify the inherent risks in our performing loan portfolio. The ASC 310-10-35 analysis includes a loan-by-loan analysis of impaired loans, bothincluding those reported as nonaccrual, troubled-debt restructurings and troubled-debt restructurings.purchase credit impaired.
In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, independent internal loan reviewers, and reviews that may have been conducted by third-party reviewers, primarily regulatory examiners. We incorporate relevant loan review results in the allowance.
The ASC 450-20 component of the allowance for loan losses begins with a migration analysis based on our internal system of risk rating, if applicable, and historical loss data in our portfolio, byrate calculation for each loan type.pool with similar risk characteristics. The migration analysis accumulates losses realized over a rolling four-quarter cycle and isare utilized to determine an annual loss rate for each categoryloan pool for each quarter-end in our look-back period. The look-back period in our migration analysis includes 24 quartersloss rate calculation begins with January 2006, as we believe thisthe period from January 1, 2006 to present is more representative of anthis economic cycle. The loss rates for each category are then averaged and applied to the end of period loan portfolio balances to determine estimated losses. The estimated losses by category are then adjusted by a specifically-determined loss emergence period for each type of loan in our portfolio. A loss emergence period represents the length of time from the initial event which triggered the loss to the recognition of the loss by Pinnacle Bank. Combined, the loss rates and loss emergence period provide a quantitative estimate of credit losses inherent in our end of period loan portfolio based on our actual loss experience.
The estimated loan loss allocation for all loan segments also considers management's estimate of probable losses for a number of qualitative factors that have not been considered in the loan migrationquantitative analysis. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting factor is applied to the non-impaired loan portfolio. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified either in our risk rating or impairment process, as of the balance sheet date, and is based upon quarterly trend assessments in portfolio concentrations, policy exceptions, economic conditions, staff performance,associate retention, independent loan review results, collateral considerations, credit quality, competition and regulatory requirements, enterprise wide risk assessments, and peer group credit quality. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors.
The allowance for loan losses for purchased loans is calculated similarsimilarly to that utilized for our legacy loans. Our accounting policy is to compare the computed allowance for loan losses for purchased loans to any remaining fair value adjustment on a loan-by-loan basis. If the computed allowance is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a provision for loan losses.
The ASC 450-20 portion of the allowance also includes a small unallocated component. We believe that the unallocated amount is warranted for inherent factors that cannot be practically assigned to individual loan categories, such as the imprecision in the overall loss allocation measurement process, the subjectivity risk of not considering all relevant environmental categories and related measurements and imprecision in our credit risk ratings process. The appropriateness of the unallocated component of the allowance is assessed each quarter end based upon changes in the overall business environment not otherwise captured.
The second component of theimpaired loan allowance for loan losses is determined pursuant to ASC 310-10-35. Loans are impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means collecting all interest and principal payments of a loan as scheduled in the loan agreement. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the provision for loan losses and is a component of the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan's effective interest rate, or if the loan is collateral dependent, at the fair value of the collateral, less estimated disposal costs. If the loan is collateral dependent, the principal balance of the loan is charged-off in an amount equal to the impairment measurement. The fair value of collateral dependent loans is derived primarily from collateral appraisals performed by independent third-party appraisers. Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans. This analysis is completed for all individual loans greater than $500,000. The resulting allowance percentage by segment adjusted for specific trends identified, if applicable, is then applied to the remaining population of impaired loans.
Pursuant to the guidance set forth in ASU No. 2011-02, A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, the above impairment methodology is also applied to those loans identified as troubled debt restructurings.
We then test the resulting allowance by comparing the balance in the allowance to historical trends and industry and peer information. Our management then evaluates the result of the procedures performed, including the results of our testing, and decides on the appropriateness of the balance of the allowance in its entirety. The audit committee of our board of directors approves the allowance for loan loss policy annually and reviews the methodology and approves the resultant allowance prior to the filing of quarterly and annual financial information.
While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management and are reviewed from time to time by our regulators, they are necessarily approximate and inherently imprecise. There are factors beyond our control, such as conditions in the local, national, and international economy, a local real estate market or particular industry conditions which may materially negatively impact materially our asset quality and the adequacy of our allowance for loan losses and thus the resulting provision for loan losses.
Other Real Estate Owned. Other real estate owned (OREO), which consists of properties obtained through foreclosure or through deed in lieu of foreclosure in satisfaction of loans, is reported at fair value based on appraised value less selling costs, estimated as of the date acquired, with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent downward valuation adjustments are determined on a specific property basis and are included as a component of other noninterest expense along with holding costs. The fair value of other real estate owned is derived primarily from independent appraisers. Our internal policies generally require OREO properties to be appraised every ninetwelve months. Any net gains or losses on disposal realized at the time of disposal are reflected, net, in noninterest income or noninterest expense, as applicable.expense. Significant judgments and complex estimates are required in estimating the fair value of other real estate owned, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility, as experienced during the last few years.volatility. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate owned.
Impairment of Intangible Assets. Long-lived assets, including purchased intangible assets subject to amortization, such as our core deposit intangible asset, 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. There are no such assets to be disposed of at December 31, 2016.
Goodwill is evaluated for impairment annually and more frequently if events and circumstances indicate that the asset might be impaired. Our annual assessment date is September 30. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.
ASC 350, Intangibles — Goodwill and Other, regarding testing goodwill for impairment provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity does a qualitative assessment and determines it is necessary, or if a qualitative assessment is not performed, it is required to perform a two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If, based on a qualitative assessment, an entity determines that the fair value of a reporting unit is more than its carrying amount, the two-step goodwill impairment test is not required. The results of our qualitative assessment as of September 30, 2017, our annual assessment date, indicated that the fair value of our reporting unit was more than its carrying value, and accordingly, the two-step goodwill impairment test was not performed.
Should our common stock price decline or other impairment indicators become known, additional impairment testing of goodwill may be required. Should it be determined in a future period that the goodwill has become impaired, then a charge to earnings will be recorded in the period such determination is made. While we believe that the assumptions utilized in our testing were appropriate, they may not reflect actual outcomes that could occur. Specific factors that could negatively impact the assumptions used include the following: a change in the control premium being realized in the market or a meaningful change in the number of mergers and acquisitions occurring; the amount of expense savings that may be realized in an acquisition scenario; significant fluctuations in our asset/liability balances or the composition of our balance sheet; a change in the overall valuation of the stock market, specifically bank stocks; performance of Southeast U.S. Banks; and Pinnacle Financial's performance relative to peers. Changing these assumptions, or any other key assumptions, could have a material impact on the amount of goodwill impairment, if any.
Results of Operations
The following is a summary of our results of operations for 2017, 2016 2015 and 20142015 (in thousands except per share data):
| | | Years ended December 31, | | | 2016-2015 Percent Increase | | | Year ended December 31, | | | 2015-2014 Percent Increase | |
| | | 2016 | | | 2015 | | | (Decrease) | | | 2014 | | | (Decrease) | |
| | | | | | | | | | | | | | | | |
| Interest income | | $ | 363,609 | | | $ | 255,169 | | | | 42.50 | % | | $ | 206,170 | | | | 23.77 | % |
| Interest expense | | | 38,615 | | | | 18,537 | | | | 108.31 | % | | | 13,185 | | | | 40.59 | % |
| Net interest income | | | 324,994 | | | | 236,632 | | | | 37.34 | % | | | 192,985 | | | | 22.62 | % |
| Provision for loan losses | | | 18,328 | | | | 9,188 | | | | 99.47 | % | | | 3,635 | | | | 152.80 | % |
| Net interest income after provision for loan losses | | | 306,666 | | | | 227,444 | | | | 34.83 | % | | | 189,350 | | | | 20.12 | % |
| Noninterest income | | | 121,003 | | | | 86,530 | | | | 39.84 | % | | | 52,602 | | | | 64.50 | % |
| Noninterest expense | | | 236,285 | | | | 170,877 | | | | 38.28 | % | | | 136,300 | | | | 25.37 | % |
| Net income before income taxes | | | 191,383 | | | | 143,098 | | | | 33.74 | % | | | 105,653 | | | | 35.44 | % |
| Income tax expense | | | 64,159 | | | | 47,589 | | | | 34.82 | % | | | 35,182 | | | | 35.27 | % |
| Net income | | | 127,224 | | | | 95,509 | | | | 33.21 | % | | | 70,471 | | | | 35.53 | % |
| Basic net income per common share | | $ | 2.96 | | | $ | 2.58 | | | | 14.73 | % | | $ | 2.03 | | | | 27.09 | % |
| Diluted net income per common share | | $ | 2.91 | | | $ | 2.52 | | | | 15.48 | % | | $ | 2.01 | | | | 25.37 | % |
|
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | 2017-2016
Percent
Increase | | Year ended December 31, | | 2016-2015
Percent
Increase |
| | 2017 | | 2016 | | (Decrease) | | 2015 | | (Decrease) |
| Interest income | $ | 636,138 |
| | $ | 363,609 |
| | 74.95 | % | | $ | 255,169 |
| | 42.50 | % |
| Interest expense | 92,831 |
| | 38,615 |
| | 140.40 | % | | 18,537 |
| | 108.31 | % |
| Net interest income | 543,307 |
| | 324,994 |
| | 67.17 | % | | 236,632 |
| | 37.34 | % |
| Provision for loan losses | 23,664 |
| | 18,328 |
| | 29.11 | % | | 9,188 |
| | 99.47 | % |
| Net interest income after provision for loan losses | 519,643 |
| | 306,666 |
| | 69.45 | % | | 227,444 |
| | 34.83 | % |
| Noninterest income | 144,903 |
| | 121,003 |
| | 19.75 | % | | 86,530 |
| | 39.84 | % |
| Noninterest expense | 366,560 |
| | 236,285 |
| | 55.13 | % | | 170,877 |
| | 38.28 | % |
| Net income before income taxes | 297,986 |
| | 191,383 |
| | 55.70 | % | | 143,098 |
| | 33.74 | % |
| Income tax expense | 124,007 |
| | 64,159 |
| | 93.28 | % | | 47,589 |
| | 34.82 | % |
| Net income | $ | 173,979 |
| | $ | 127,224 |
| | 36.75 | % | | $ | 95,509 |
| | 33.21 | % |
| Basic net income per common share | $ | 2.73 |
| | $ | 2.96 |
| | (7.77 | %) | | $ | 2.58 |
| | 14.73 | % |
| Diluted net income per common share | $ | 2.70 |
| | $ | 2.91 |
| | (7.22 | %) | | $ | 2.52 |
| | 15.48 | % |
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, 2017, we recorded net interest income of approximately $543.3 million, which resulted in a net interest margin of 3.76%. For the year ended December 31, 2016, we recorded net interest income of approximately $325.0 million, which resulted in a net interest margin of 3.70%. For the year ended December 31, 2015, we recorded net interest income of approximately $236.6 million, which resulted in a net interest margin of 3.72%. For the year ended December 31, 2014, we recorded net interest income of approximately $193.0 million, which resulted in a net interest margin of 3.75%.
45
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, 20162017 (in thousands):
| | 2016 | | 2015 | | 2014 | |
| | Average Balances | | Interest | | Rates/ Yields | | Average Balances | | Interest | | Rates/ Yields | | Average Balances | | Interest | | Rates/ Yields | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Loans (1) | $ | 7,586,346 | | $ | 335,735 | | 4.51 | % | $ | 5,394,775 | | $ | 232,847 | | 4.39 | % | $ | 4,295,283 | | $ | 184,649 | | 4.31 | % |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | 937,710 | | | 19,179 | | 2.05 | % | | 721,829 | | | 15,060 | | 2.09 | % | | 594,223 | | | 14,227 | | 2.39 | % |
Tax-exempt (2) | | 201,842 | | | 6,014 | | 4.00 | % | | 167,091 | | | 5,783 | | 4.63 | % | | 170,617 | | | 6,167 | | 4.83 | % |
| Federal funds sold and other | | 293,542 | | | 2,681 | | 0.91 | % | | 223,732 | | | 1,479 | | 0.66 | % | | 155,585 | | | 1,127 | | 0.86 | % |
| Total interest-earning assets | | 9,019,440 | | | 363,609 | | 4.06 | % | | 6,507,427 | | | 255,169 | | 3.96 | % | | 5,215,708 | | | 206,170 | | 4.01 | % |
| Nonearning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Intangible assets | | 509,899 | | | | | | | | 315,366 | | | | | | | | 246,956 | | | | | | |
| Other nonearning assets | | 495,554 | | | | | | | | 310,628 | | | | | | | | 237,383 | | | | | | |
| | $ | 10,024,893 | | | | | | | $ | 7,133,421 | | | | | | | $ | 5,700,047 | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest checking | $ | 1,464,671 | | $ | 4,140 | | 0.28 | % | $ | 1,149,772 | | $ | 2,487 | | 0.22 | % | $ | 901,442 | | $ | 1,566 | | 0.17 | % |
| Savings and money market | | 3,426,842 | | | 14,289 | | 0.42 | % | | 2,298,746 | | | 7,701 | | 0.34 | % | | 1,975,517 | | | 5,711 | | 0.29 | % |
| Time deposits | | 777,343 | | | 5,489 | | 0.71 | % | | 541,766 | | | 3,021 | | 0.56 | % | | 477,902 | | | 2,677 | | 0.56 | % |
| Total interest-bearing deposits | | 5,668,856 | | | 23,918 | | 0.42 | % | | 3,990,284 | | | 13,209 | | 0.33 | % | | 3,354,861 | | | 9,954 | | 0.30 | % |
| Securities sold under agreements to repurchase | | 75,981 | | | 185 | | 0.24 | % | | 68,037 | | | 138 | | 0.20 | % | | 67,999 | | | 141 | | 0.21 | % |
| Federal Home Loan Bank advances | | 481,711 | | | 4,136 | | 0.86 | % | | 362,668 | | | 1,175 | | 0.32 | % | | 134,874 | | | 594 | | 0.44 | % |
| Subordinated debt and other borrowing | | 243,905 | | | 10,376 | | 4.25 | % | | 136,888 | | | 4,015 | | 2.93 | % | | 98,698 | | | 2,496 | | 2.53 | % |
| Total interest-bearing liabilities | | 6,470,453 | | | 38,615 | | 0.60 | % | | 4,557,877 | | | 18,537 | | 0.41 | % | | 3,656,432 | | | 13,185 | | 0.36 | % |
| Noninterest-bearing deposits | | 2,179,398 | | | - | | 0.00 | % | | 1,606,432 | | | - | | 0.00 | % | | 1,256,420 | | | - | | 0.00 | % |
| Total deposits and interest- bearing liabilities | | 8,649,851 | | | 38,615 | | 0.45 | % | | 6,164,309 | | | 18,537 | | 0.30 | % | | 4,912,852 | | | 13,185 | | 0.27 | % |
| Other liabilities | | 31,349 | | | | | | | | 19,905 | | | | | | | | 19,971 | | | | | | |
| Stockholders' equity | | 1,343,693 | | | | | | | | 949,207 | | | | | | | | 767,224 | | | | | | |
| | $ | 10,024,893 | | | | | | | $ | 7,133,421 | | | | | | | $ | 5,700,047 | | | | | | |
| Net interest income | | | | $ | 324,994 | | | | | | | $ | 236,632 | | | | | | | $ | 192,985 | | | |
Net interest spread (3) | | | | | | | 3.46 | % | | | | | | | 3.55 | % | | | | | | | 3.65 | % |
Net interest margin (4) | | | | | | | 3.70 | % | | | | | | | 3.72 | % | | | | | | | 3.75 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Average Balances | Interest | Rates/ Yields | | Average Balances | Interest | Rates/ Yields | | Average Balances | Interest | Rates/ Yields |
| Interest-earning assets: | | | | | | | | | | | |
Loans (1) | $ | 12,254,790 |
| $ | 578,286 |
| 4.79 | % | | $ | 7,586,346 |
| $ | 335,735 |
| 4.51 | % | | $ | 5,394,775 |
| $ | 232,847 |
| 4.39 | % |
| Securities: | | | | | |
| |
| |
| | |
| |
| |
|
| Taxable | 1,724,612 |
| 39,060 |
| 2.26 | % | | 937,710 |
| 19,179 |
| 2.05 | % | | 721,829 |
| 15,060 |
| 2.09 | % |
Tax-exempt (2) | 488,478 |
| 13,712 |
| 3.76 | % | | 201,842 |
| 6,014 |
| 4.00 | % | | 167,091 |
| 5,783 |
| 4.63 | % |
| Federal funds sold and other | 335,491 |
| 5,080 |
| 1.51 | % | | 293,542 |
| 2,681 |
| 0.91 | % | | 223,732 |
| 1,479 |
| 0.66 | % |
| Total interest-earning assets | 14,803,371 |
| 636,138 |
| 4.38 | % | | 9,019,440 |
| 363,609 |
| 4.06 | % | | 6,507,427 |
| 255,169 |
| 3.96 | % |
| Nonearning assets: | | | | | |
| |
| |
| | |
| |
| |
|
| Intangible assets | 1,273,577 |
| | | | 509,899 |
| |
| |
| | 315,366 |
| |
| |
|
| Other nonearning assets | 939,269 |
| | | | 495,554 |
| |
| |
| | 310,628 |
| |
| |
|
| | $ | 17,016,217 |
| | | | $ | 10,024,893 |
| |
| |
| | $ | 7,133,421 |
| |
| |
|
| Interest-bearing liabilities: | | | | | |
| |
| |
| | |
| |
| |
|
| Interest-bearing deposits: | | | | | |
| |
| |
| | |
| |
| |
|
| Interest checking | $ | 2,328,350 |
| $ | 11,261 |
| 0.48 | % | | $ | 1,464,671 |
| $ | 4,140 |
| 0.28 | % | | $ | 1,149,772 |
| $ | 2,487 |
| 0.22 | % |
| Savings and money market | 5,455,607 |
| 32,844 |
| 0.60 | % | | 3,426,842 |
| 14,289 |
| 0.42 | % | | 2,298,746 |
| 7,701 |
| 0.34 | % |
| Time deposits | 1,765,089 |
| 15,479 |
| 0.88 | % | | 777,343 |
| 5,489 |
| 0.71 | % | | 541,766 |
| 3,021 |
| 0.56 | % |
| Total interest-bearing deposits | 9,549,046 |
| 59,584 |
| 0.62 | % | | 5,668,856 |
| 23,918 |
| 0.42 | % | | 3,990,284 |
| 13,209 |
| 0.33 | % |
| Securities sold under agreements to repurchase | 119,055 |
| 406 |
| 0.34 | % | | 75,981 |
| 185 |
| 0.24 | % | | 68,037 |
| 138 |
| 0.20 | % |
| Federal Home Loan Bank advances | 788,237 |
| 12,399 |
| 1.57 | % | | 481,711 |
| 4,136 |
| 0.86 | % | | 362,668 |
| 1,175 |
| 0.32 | % |
| Subordinated debt and other borrowings | 420,790 |
| 20,442 |
| 4.86 | % | | 243,905 |
| 10,376 |
| 4.25 | % | | 136,888 |
| 4,015 |
| 2.93 | % |
| Total interest-bearing liabilities | 10,877,128 |
| 92,831 |
| 0.85 | % | | 6,470,453 |
| 38,615 |
| 0.60 | % | | 4,557,877 |
| 18,537 |
| 0.41 | % |
| Noninterest-bearing deposits | 3,331,741 |
| — |
| 0.00 | % | | 2,179,398 |
| — |
| 0.00 | % | | 1,606,432 |
| — |
| 0.00 | % |
| Total deposits and interest- bearing liabilities | 14,208,869 |
| 92,831 |
| 0.65 | % | | 8,649,851 |
| 38,615 |
| 0.45 | % | | 6,164,309 |
| 18,537 |
| 0.30 | % |
| Other liabilities | 30,218 |
| | | | 31,349 |
| |
| |
| | 19,905 |
| |
| |
|
| Stockholders' equity | 2,777,130 |
| | | | 1,343,693 |
| |
| |
| | 949,207 |
| |
| |
|
| | $ | 17,016,217 |
| | | | $ | 10,024,893 |
| |
| |
| | $ | 7,133,421 |
| |
| |
|
| Net interest income | | $ | 543,307 |
| | | |
| $ | 324,994 |
| |
| | |
| $ | 236,632 |
| |
|
Net interest spread (3) | | | 3.53 | % | | |
| |
| 3.46 | % | | |
| |
| 3.55 | % |
Net interest margin (4) | | | 3.76 | % | | |
| |
| 3.70 | % | | |
| |
| 3.72 | % |
| |
| (1) | Average balances of nonperforming loans are included in average loan balances. |
| |
| (2) | Yields based on the carrying value of those tax exempt instruments are shown on a fully tax equivalent basis. |
| |
| (3) | Yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. The net interest spread calculation excludes the impact of demand deposits. Had the impact of demand deposits been included, the net interest spread for the year ended December 31, 20162017 would have been 3.61%3.73% compared to a net interest spread for the years ended December 31, 2016 and 2015 of 3.61% and 2014 of 3.66% and 3.74%, respectively. |
| |
| (4) | Net interest margin is the result of net interest income calculated on a tax-equivalent basis divided by average interest earning assets for the period. |
For the year ended December 31, 2016,2017, our net interest spread was 3.46%3.53%, while the net interest margin was 3.70%3.76% compared to a net interest spread of 3.46% for the year ended December 31, 2016 and 3.55% for the year ended December 31, 2015, and 3.65% for the year ended December 31, 2014, and a net interest margin of 3.72%3.70% and 3.75%3.72%, respectively. Our loan yields grew only slightly between 2016 and 2015 as the competition for quality loans is intense and the market dictates the rate necessary in order to grow volumes, but were furtherAlthough our net interest margin was positively impacted by the accretion of the fair value marks recordedincreases in conjunction withearning assets, these increases were partially offset by increases in our acquisitions.total funding costs. During the year ended December 31, 2016,2017, total funding rates were more than those rates for the year ended December 31, 20152016 by 1520 basis points and were more than those rates for the year ended December 31, 20142015 by 335 basis points. The net increase was impacted by our acquisitions as their deposit rates were higher, interest rate increases and increased FHLB borrowings,Cincinnati borrowings. Increased levels of on balance sheet liquidity also negatively impacted our net interest margin in 2017.
The expansion of our earning asset yields was driven in part by the impact of Federal funds rate increases throughout 2017, which positively impacted our floating and variable rate loan and investment portfolios. With our subordinated debt issuances during 2016.expected continued growth, we anticipate our net interest income will likely increase over the next several quarters. Our loan yields grew only slightly between 2017 and 2016 as the competition for quality loans continues to be intense and the market dictates the rate necessary in order to grow volumes. The subordinated debt instruments qualify as Tier 2 capital.application of fair value accounting on the BNC accounts we acquired also positively impacted our net interest margin in 2017, but this should lessen in future periods.
We continue to deploy various asset liability management strategies to manage our risk to interest rate fluctuations. We believe our net interest margin expansion over bothshould remain relatively stable in 2018. Although the short and the long term willanticipated rise in interest rates should be challenging duebeneficial to continued pressure on earning asset yields during this extended period of a low interest rates. Loanus, loan pricing for creditworthy borrowers is very competitive in our markets and has limited our ability to increase pricing on new and renewed loans over the last couple of years.years and the tax impact of purchase accounting on our net interest income should decrease in future periods. We anticipate that this challenging competitive environment will continue in 2017.2018 and it is unclear what impact the reduction in corporate tax rates under the Tax Cuts and Jobs Act will have on the interest rates we charge for loans or pay on deposits though we believe it will increase competition. However, we believe our net interest income should increase in 20172018 compared to 20162017 primarily due to an increase in average earning asset volumes, primarily loans, as well as the incremental amounts attributable for Avenue.BNC. We anticipate funding these increased earning assets by continuing to grow our core deposits, with wholesale and other forms of noncore funding limited to that required to fund the shortfall, if any.
Rate and Volume Analysis. Net interest income increased by $218.3 million between the years ended December 31, 2016 and 2017 and by $88.4 million between the years ended December 31, 2015 and 2016 and by $43.6 million between the years ended December 31, 2014 and 2015.2016. 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):
| | | 2016 Compared to 2015 Increase (decrease) due to | | 2015 Compared to 2014 Increase (decrease) due to | |
| | | Rate | | | Volume | | | Net | | Rate | | | Volume | | | Net | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | |
| Loans | | $ | 6,794 | | | $ | 96,093 | | | $ | 102,887 | | $ | 3,436 | | | $ | 47,388 | | | $ | 48,198 | |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | (341 | ) | | | 4,459 | | | | 4,118 | | | (1,783 | ) | | | 3,050 | | | | 833 | |
| Tax-exempt | | | (1,154 | ) | | | 1,385 | | | | 231 | | | (341 | ) | | | (170 | ) | | | (384 | ) |
| Federal funds sold | | | 660 | | | | 543 | | | | 1,203 | | | (311 | ) | | | 586 | | | | 352 | |
| Total interest-earning assets | | | 5,959 | | | | 102,480 | | | | 108,439 | | | 1,001 | | | | 50,854 | | | | 48,999 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | |
| Interest checking | | | 874 | | | | 779 | | | | 1,653 | | | 451 | | | | 422 | | | | 921 | |
| Savings and money market | | | 2,381 | | | | 4,207 | | | | 6,588 | | | 988 | | | | 937 | | | | 1,990 | |
| Time deposits | | | 993 | | | | 1,475 | | | | 2,468 | | | - | | | | 358 | | | | 344 | |
| Total deposits | | | 4,248 | | | | 6,461 | | | | 10,709 | | | 1,439 | | | | 1,717 | | | | 3,255 | |
| Securities sold under agreements to repurchase | | | 30 | | | | 17 | | | | 47 | | | (7 | ) | | | - | | | | (3 | ) |
| Federal Home Loan Bank advances | | | 2,296 | | | | 665 | | | | 2,961 | | | (162 | ) | | | 1,002 | | | | 581 | |
| Subordinated debt and other borrowings | | | 2,604 | | | | 3,757 | | | | 6,361 | | | 395 | | | | 966 | | | | 1,519 | |
| Total interest-bearing liabilities | | | 9,176 | | | | 10,900 | | | | 20,078 | | | 1,665 | | | | 3,685 | | | | 5,352 | |
| Net interest income | | $ | (3,218 | ) | | $ | 91,580 | | | $ | 88,361 | | $ | (664 | ) | | $ | 47,169 | | | $ | 43,647 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 Compared to 2016
Increase (decrease) due to | | 2016 Compared to 2015
Increase (decrease) due to |
| | Rate | | Volume | | Net | | Rate | | Volume | | Net |
| Interest-earning assets: | | | | | | | | | | | |
| Loans | $ | 26,745 |
| | $ | 215,806 |
| | $ | 242,551 |
| | $ | 6,794 |
| | $ | 96,093 |
| | $ | 102,887 |
|
| Securities: | | | | | | | |
| | |
| | |
|
| Taxable | 2,901 |
| | 16,980 |
| | 19,881 |
| | (341 | ) | | 4,459 |
| | 4,118 |
|
| Tax-exempt | (1,837 | ) | | 9,535 |
| | 7,698 |
| | (1,154 | ) | | 1,385 |
| | 231 |
|
| Federal funds sold | 1,896 |
| | 503 |
| | 2,399 |
| | 660 |
| | 543 |
| | 1,203 |
|
| Total interest-earning assets | 29,705 |
| | 242,824 |
| | 272,529 |
| | 5,959 |
| | 102,480 |
| | 108,439 |
|
| | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | |
| | |
| | |
|
| Interest-bearing deposits: | | | | | | | |
| | |
| | |
|
| Interest checking | 3,942 |
| | 3,179 |
| | 7,121 |
| | 874 |
| | 779 |
| | 1,653 |
|
| Savings and money market | 8,326 |
| | 10,229 |
| | 18,555 |
| | 2,381 |
| | 4,207 |
| | 6,588 |
|
| Time deposits | 2,225 |
| | 7,765 |
| | 9,990 |
| | 993 |
| | 1,475 |
| | 2,468 |
|
| Total deposits | 14,493 |
| | 21,173 |
| | 35,666 |
| | 4,248 |
| | 6,461 |
| | 10,709 |
|
| Securities sold under agreements to repurchase | 99 |
| | 122 |
| | 221 |
| | 30 |
| | 17 |
| | 47 |
|
| Federal Home Loan Bank advances | 4,693 |
| | 3,570 |
| | 8,263 |
| | 2,296 |
| | 665 |
| | 2,961 |
|
| Subordinated debt and other borrowings | 2,048 |
| | 8,018 |
| | 10,066 |
| | 2,604 |
| | 3,757 |
| | 6,361 |
|
| Total interest-bearing liabilities | 21,333 |
| | 32,883 |
| | 54,216 |
| | 9,176 |
| | 10,900 |
| | 20,078 |
|
| Net interest income | $ | 8,372 |
| | $ | 209,941 |
| | $ | 218,313 |
| | $ | (3,217 | ) | | $ | 91,580 |
| | $ | 88,361 |
|
Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. The change attributed to rates and volumes (change in rate times change in volume) is considered above as a change in volume.
Provision for Loan Losses. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management's evaluation, we believe to be adequate to provide coverage for the inherent losses on outstanding loans. The provision for loan losses amounted to approximately $23.7 million, $18.3 million, $9.2 million, and $3.6$9.2 million for the years ended December 31, 2017, 2016, and 2015, and 2014, respectively.
Impacting the provision for loan losses in any accounting period are several factors including the change in outstanding loan balances, the level of charge-offs and recoveries, the changes in the amount of impaired loans, changes in the risk ratings assigned to our loans, results of regulatory examinations, credit quality comparison to peer banks, the industry at large, economic conditions both in our market areas and more broadly, and, ultimately, the results of our quarterly assessment of the inherent risks of our loan portfolio including past loan loss experience.
Provision expense for the year ended December 31, 20162017 has increased as compared to 2016 and continued to be negatively impacted due to charge-offs realized in our consumer portfolio, primarily related to non-prime automobile loans. Provision expense for the year ended December 31, 2016 increased as compared to 2015, primarily due to increased charge-offs in our consumer portfolio, primarily related to non-prime automobile loans, although the overall amount of the allowance declined. Provision expense for the year endeddeclined. The balance of this portfolio was $10.7 at December 31, 2015 increased as2017 compared to 2014, primarily due$30.0 at December 31, 2016. We expect the percentage of our loan portfolio represented by automobile loans will continue to increased charge-offsdecrease in our consumer portfolio, although the overall amount of the allowance declined.2018.
Our allowance for loan losses is adjusted to an amount deemed appropriate to adequately cover probable losses in the loan portfolio based on our allowance for loan loss methodology. Our allowance for loan losses as a percentage of loans decreased from 1.00% at December 31, 2015 to 0.70% at December 31, 2016 primarily attributable to improvements in the credit quality of our legacy Pinnacle Bank portfolio and0.43% at December 31, 2017, primarily as a result of ourthe acquired BNC loan portfoliosportfolio being recorded at fair value uponat the acquisition date, thus no allowance for loan losses is assigned to these loans as of the date of acquisition. An allowance for loan losses is recorded for purchased loans that have experienced credit deterioration subsequent to acquisition or increases in balances outstanding. As of December 31, 2016,2017, net loans included a net fair value discount of $34.0$163.5 million. For the year ended December 31, 20162017 and 2015,2016, respectively, the net fair value discount changed as follows:
| | Accretable Yield | | Nonaccretable Yield | | | Total | |
| December 31, 2014 | | $ | - | | $ | - | | | $ | - | |
| Acquisitions / Day 1 adjustments | | | (28,289 | ) | | (5,703 | ) | | | (33,992 | ) |
| Year-to-date accretion/settlement | | | 5,077 | | | 1,560 | | | | 6,637 | |
| Other | | | - | | | - | | | | - | |
| December 31, 2015 | | $ | (23,212 | ) | $ | (4,143 | ) | | $ | (27,355 | ) |
| Acquisitions / Day 1 adjustments | | | (27,036 | ) | | (812 | ) | | | (27,848 | ) |
| Year-to-date accretion/settlement | | | 19,884 | | | 1,322 | | | | 21,206 | |
| Other | | | - | | | - | | | | - | |
December 31, 2016 | | $ | (30,364 | ) | $ | (3,633 | ) | | $ | (33,997 | ) |
|
| | | | | | | | | | | |
| | Accretable Yield(1) | | Nonaccretable Yield(2) | | Total |
| December 31, 2015 | $ | (23,212 | ) | | $ | (4,143 | ) | | $ | (27,355 | ) |
| Acquisitions | (27,036 | ) | | (812 | ) | | (27,848 | ) |
| Year-to-date accretion/settlement | 19,884 |
| | 1,322 |
| | 21,206 |
|
| December 31, 2016 | $ | (30,364 | ) | | $ | (3,633 | ) | | $ | (33,997 | ) |
| Acquisitions | (149,116 | ) | | (32,314 | ) | | (181,430 | ) |
| Year-to-date accretion/settlement | 47,478 |
| | 4,410 |
| | 51,888 |
|
| December 31, 2017 | $ | (132,002 | ) | | $ | (31,537 | ) | | $ | (163,539 | ) |
| |
(1) | The accretable yield will be recorded as a component of interest income using the level-yield method based on the life of the underlying loans. |
| |
(2) | The nonaccretable yield will be reduced as purchase credit impaired loans are settled. |
Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of inherent losses existing in the loan portfolio at December 31, 2016.2017. While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, local real estate market or a particular industry or borrower which may negatively impact, materially, our asset quality and the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.
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, 2017, 2016, 2015, and 20142015 (in thousands):
| | | Years ended December 31, | | 2016-2015 Percent Increase | | | Year ended December 31, | | 2015-2014 Percent Increase | |
| | | 2016 | | 2015 | | (Decrease) | | | 2014 | | (Decrease) | |
| Noninterest income: | | | | | | | | | | | | |
| Service charges on deposit accounts | | $ | 14,501 | | $ | 12,746 | | 13.77 | % | | $ | 11,707 | | 8.88 | % |
| Investment services | | | 10,757 | | | 9,971 | | 7.88 | % | | | 9,383 | | 6.27 | % |
| Insurance sales commissions | | | 5,309 | | | 4,824 | | 10.05 | % | | | 4,613 | | 4.57 | % |
| Gains on mortgage loans sold, net | | | 15,754 | | | 7,669 | | 105.42 | % | | | 5,630 | | 36.22 | % |
| Investment gains on sales and impairments, net | | | 395 | | | 552 | | (28.44 | %) | | | 29 | | NM | |
| Trust fees | | | 6,328 | | | 5,461 | | 15.88 | % | | | 4,601 | | 18.69 | % |
| Income from equity method investment | | | 31,403 | | | 20,591 | | 52.51 | % | | | - | | NM | |
| Other noninterest income: | | | | | | | | | | | | | | | |
| Interchange and other consumer fees | | | 24,221 | | | 18,214 | | 32.98 | % | | | 12,322 | | 47.82 | % |
| Bank-owned life insurance | | | 3,547 | | | 2,548 | | 39.21 | % | | | 2,426 | | 5.03 | % |
| Loan swap fees | | | 3,865 | | | 2,578 | | 49.92 | % | | | 235 | | NM | |
| Other noninterest income | | | 4,923 | | | 1,376 | | 257.78 | % | | | 1,656 | | (16.91 | %) |
| Total other noninterest income | | | 36,556 | | | 24,716 | | 47.90 | % | | | 16,639 | | 48.54 | % |
| Total noninterest income | | $ | 121,003 | | $ | 86,530 | | 39.84 | % | | $ | 52,602 | | 64.50 | % |
|
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | 2017-2016
Percent
Increase | | Year ended December 31, | | 2016-2015
Percent
Increase |
| | 2017 | | 2016 | | (Decrease) | | 2015 | | (Decrease) |
| Noninterest income: | | | | | | | | | |
| Service charges on deposit accounts | $ | 20,033 |
| | $ | 14,501 |
| | 38.15 | % | | $ | 12,746 |
| | 13.77 | % |
| Investment services | 14,315 |
| | 10,757 |
| | 33.08 | % | | 9,971 |
| | 7.88 | % |
| Insurance sales commissions | 7,405 |
| | 5,309 |
| | 39.48 | % | | 4,824 |
| | 10.05 | % |
| Gains on mortgage loans sold, net | 18,625 |
| | 15,754 |
| | 18.22 | % | | 7,669 |
| | 105.42 | % |
| Investment gains (losses) on sales and impairments, net | (8,265 | ) | | 395 |
| | NM |
| | 552 |
| | (28.44 | %) |
| Trust fees | 8,664 |
| | 6,328 |
| | 36.92 | % | | 5,461 |
| | 15.88 | % |
| Income from equity method investment | 37,958 |
| | 31,403 |
| | 20.87 | % | | 20,591 |
| | 52.51 | % |
| Other noninterest income: | | | |
| |
|
| | |
| | |
|
| Interchange and other consumer fees | 29,887 |
| | 24,221 |
| | 23.39 | % | | 18,214 |
| | 32.98 | % |
| Bank-owned life insurance | 7,945 |
| | 3,547 |
| | 123.99 | % | | 2,548 |
| | 39.21 | % |
| Loan swap fees | 1,795 |
| | 3,865 |
| | (53.56 | %) | | 2,578 |
| | 49.92 | % |
| Other noninterest income | 6,541 |
| | 4,923 |
| | 32.87 | % | | 1,376 |
| | 257.78 | % |
| Total other noninterest income | 46,168 |
| | 36,556 |
| | 26.29 | % | | 24,716 |
| | 47.90 | % |
| Total noninterest income | $ | 144,903 |
| | $ | 121,003 |
| | 19.75 | % | | $ | 86,530 |
| | 39.84 | % |
The increase in service charges on deposit accounts in 20162017 compared to 20152016 and 20142015 is primarily related to increased analysis fees on our commercial client accounts and for both periods presented,due to an increase in our deposit basethe volume and number of commercial checking accounts when compared the prior period,periods, respectively.
Income from our wealth management groups (investments, insurance and trust) is also included in noninterest income. For the year ended December 31, 2016,2017, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank were $10.8$14.3 million, compared to $10.0$10.8 million at December 31, 2015.2016, reflecting increases in brokerage assets and the increase in the value of the stock market. At December 31, 2016,2017, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $2.2$3.3 billion in brokerage assets held with Raymond James Financial Services, Inc. compared to $1.8$2.2 billion and $1.7$1.8 billion, respectively, at December 31, 20152016 and 2014.2015. Insurance commissions were approximately $7.4 million during 2017 and $5.3 million during 2016 and $4.8 million during 2015 and $4.6 million during 2014.2015. Additionally, at December 31, 2016,2017, our trust department was receiving fees on approximately $1.0$1.8 billion and $755 million$1.1 billion of managed and custodied assets, respectively, compared to approximately $1.0 billion and $755 million at December 31, 2016 and $916 million and $675 million at December 31, 2015 and $765 million and $861 million at2015.
For the year ended December 31, 2014.2017, investment gains (losses) on sales and impairments, net, represent an $8.3 million pre-tax loss we recognized in order to reposition approximately $300 million of investment securities to provide our balance sheet more protection from a potentially flatter yield curve in the future. This loss also allowed us to capture an increased tax deduction in 2017 due to the reduction in corporate tax rates beginning in 2018 as a result of the passage of the Tax Cuts and Jobs Act. We expect to fully recoup the losses from these transactions during 2018.
Gains on mortgage loans sold, net, consists of fees from the origination and sale of residential mortgage loans. These mortgage fees are for loans originated in our current markets that are subsequently sold to third-party investors. Substantially all of these loan sales transfer servicing rights to the buyer. Generally, mortgage origination fees increase in lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. Mortgage origination fees will fluctuate from quarter to quarter as the rate environment changes. Gains on mortgage loans sold, net, were $18.6 million, $15.8 million $7.7 million and $5.6$7.7 million, respectively, for the years ended December 31, 2017, 2016 2015 and 2014.2015. The increase between each of the periods is attributable to our completed acquisitions and the strong economy in our markets, the continued low interest rate environment and additional personnel in our production unit in 20162017 when compared to 20152016 and 2014.2015. We hedge a portion of our mortgage pipeline as part of a mandatory delivery program. There is a strong positive correlation between the size of the mortgage pipeline and the value of this hedge. The hedge is not designated as a hedge for GAAP purposes and, as such, changes in its fair value are recorded directly thruthrough the income statement. Therefore, the size of the outstanding mortgage pipeline at any reporting period will directly impact the amount of revenue recorded for mortgage loans held for sale in any one period.period and is cyclical in nature. During 2016,2017, we realized an overall increase in the volume of loans included in the mortgage pipeline as a result of our acquisitions, and therefore recognized a gain on the change in the fair market value of the hedge. Decreases in the volume of loans included in the mortgage pipeline are likely to negatively impact the gains we recognize as a result of this program.
Income from equity-method investment is comprised solely of income from our 49% equity-method investment in BHG. We acquired a 30% investment during the first quarter of 2015 and subsequently increased our investment by 19% in the first quarter of 2016. Income from this equity-method investment was $31.4$38.0 million for the year ended December 31, 20162017 compared to $31.4 million and $20.6 million for the yearyears ended December 31, 2015.2016 and 2015, respectively. Income from equity-method investment is recorded net of associated expenses, including amortization expense associated with customer lists and other intangible assets of $3.3 million, $3.4 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2016,2017, there were $16.8$13.4 million of these intangible assets which will be amortized in lesser amounts over the next 1918 years. Also included in income from equity-method investment, is accretion income associated with the fair valuation of certain of BHG's liabilities of $3.1 million and $2.5 million for the years ended December 31, 2017 and 2016, respectively. No accretion income was recorded during the year ended December 31, 2016, while no accretion income was recorded in 2015. At December 31, 2016,2017, there were $18.1$10.3 million of these liabilities which will be accreted into income in lesser amounts over the next 109 years.
During the years ended December 31, 2017, 2016 and 2015, respectively, Pinnacle Financial and Pinnacle Bank received $21.7 million, $29.0 million and $7.2 million in dividends in the aggregate from BHG, which reduced the carrying amount of our investment in BHG while earnings from BHG increase the carrying amount of our investment in BHG. Our proportionate share of earnings from BHG are included in our consolidated tax return. Profits from intercompany transactions are eliminated. Earnings from BHG may fluctuate from period-to-period.
As our ownership interest in BHG is 49%, 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, 2016,2017, BHG reported $136.7$160.2 million in gross revenues compared to $136.7 million and $144.8 million, respectively, for the yearyears ended December 31, 2016 and 2015. The following discussion considers BHG's results of operations for 2017, 2016 and 2015 prior to consideration of our ownership interest.
· | Approximately $95.6 million, or 69.9%, of these revenues for the year ended December 31, 2016Approximately $127.2 million, or 79.4%, of these revenues for the year ended December 31, 2017 related to gains on the sale of commercial loans BHG had previously issued to doctor, dentist and other medical practices compared to $95.6 million, or 69.9%, for the year ended December 31, 2016 and $71.0 million, or 49.0%, for the year ended December 31, 2015. BHG refers to this activity as its core product. BHG typically funds these loans from cash reserves on its balance sheet. Subsequently, these core product loans are sold with limited or no recourse to BHG to a network of community banks and other financial institutions at a premium to the par value of the loan. The purchaser may access a BHG cash reserve account of up to 3% of the loan balance to support loan payments. BHG retains no servicing or other responsibilities related to the core product loan once sold. As a result, this gain on sale premium represents BHG's compensation for absorbing the costs to originate the loan as well as marketing expenses associated with maintaining its business model. At December 31, 2017 and 2016, there were $1.5 billion and $1.2 billion, respectively, in core product loans previously sold by BHG that were actively serviced by BHG's bank network of purchasers. |
Traditionally, BHG, at its sole option, may also provide purchasers of these core product loans the ability to substitute the acquired loan with another more recently-issued BHG medical practice loan should the previously-acquired loan become at least 90-days past due as to its monthly payments. This substitution is subject to the purchaser having adhered to the standards of its purchase agreement with BHG. Additionally, all substitutions are subject to the approval by BHG's board of directors.managers. As a result, the reacquired loans are deemed purchase credit impaired and recorded on BHG's balance sheet at the net present value of the loan's anticipated cash flows. BHG will then initiate collection efforts and attempt to restore the reacquired loan to performing status. During 2017 and 2016, BHG's substitution losses related to these activities totaled approximately $42.5 million and $23.4 million.million, respectively. As a result, BHG maintained a liability as of December 31, 2017 and 2016 of $69.8 million and $45.9 million, respectively, that represents an estimate of the future inherent losses for the outstanding core portfolio that may be subject to future substitution.
· | BHG will maintain loans on its balance sheet for a period of time prior to sale or transfer to a purchaser. BHG also has an investment portfolio on which it earns interest and dividend income. Net interest income and fees associated with this activityBHG will maintain loans on its balance sheet for a period of time prior to sale or transfer to a purchaser. BHG also has an investment portfolio on which it earns interest and dividend income. Net interest income and fees associated with these activities amounted to $19.6 million, $20.3 million and $18.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. |
· | Additionally, BHG will also refer loans to other financial institutions and, based an agreement with the institution, earn a fee for doing so. Typically, these are loans that BHG believes would either be classified as consumer-type loans rather than commercial loans, the loans fail to meet the credit underwriting standards of BHG but another institution will accept the loans or these are loans to borrowers in certain geographic locations where BHG has elected not to do business. For the yearAdditionally, BHG will also refer loans to other financial institutions and, based an agreement with the institution, earn a fee for doing so. Typically, these are loans that BHG believes would either be classified as consumer-type loans rather than commercial loans, fail to meet the credit underwriting standards of BHG but another institution will accept the loans or are to borrowers in certain geographic locations where BHG has elected not to do business. For the years ended December 31, 2017, 2016 and 2015, BHG recognized fee income of $6.5 million, $10.0 million and $7.4 million, respectively, from these activities. |
Included in other noninterest income are interchange and other consumer fees, gains from bank-owned life insurance, swap fees earned for the facilitation of derivative transactions for our clients and other items. Interchange revenues increased as a result of increased debit and credit card transactions as compared to the comparable periods in 20152016 and 20142015 resulting from both acquired and organic growth. As our assets now exceed $10 billion, the interchange revenues we earn will begrowth, but was negatively impacted beginning in the third quarter of 2017 due to the limits on interchange fees permitted underby the Durbin Amendment ofwhich were applicable to us beginning on July 1, 2017. We estimate that the Dodd-Frank Act.Durbin Amendment negatively impacted our noninterest income by approximately $4.0 million in 2017. Other noninterest income included changes in the cash surrender value of bank-owned life insurance which was $7.9 million for the year ended December 31, 2017 compared to $3.5 million for the year ended December 31, 2016 compared to $2.5 million for the year ended December 31, 2015.2016. The increase in earnings on these bank-owned life insurance policies resulted primarily from the additional $66.7$202.3 million in bank-owned life insurance with terms similar to our existing policies which were added upon acquisition of Avenue.BNC. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies) on these policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support the policies. Earnings on these policies generally are not taxable. Loan swap fees are also included in other noninterest income and increaseddecreased by $1.3$2.1 million when compared to the year ended December 31, 20152016 and increased by $2.3$1.3 million between 20152016 and 20142015 as a result of increased market demand for these products in each of the currentrespective the rate environment.environments. Other items included in other noninterest income include $3.0 million and $1.3 million of income from the sale of Small Business Administration loans for the years ended December 31, 2017 and 2016, respectively, and $1.0 million and $925,000 of income from the sale of other loans for the years ended December 31, 2017 and 2016, respectively.
Noninterest Expense. The following is our noninterest expense for the years ended December 31, 2017, 2016, 2015, and 20142015 (in thousands):
| | | Years ended December 31, | | 2016-2015 Percent Increase | | | Year ended December 31, | | 2015-2014 Percent Increase | |
| | | 2016 | | 2015 | | (Decrease) | | | 2014 | | (Decrease) | |
| Noninterest expense: | | | | | | | | | | | | |
| Salaries and employee benefits: | | | | | | | | | | | | |
| Salaries | | $ | 83,164 | | $ | 60,980 | | 36.38 | % | | $ | 48,935 | | 24.61 | % |
| Commissions | | | 5,932 | | | 5,594 | | 6.04 | % | | | 5,397 | | 3.65 | % |
| Cash and equity incentives | | | 27,182 | | | 22,222 | | 22.32 | % | | | 20,534 | | 8.22 | % |
| Employee benefits and other | | | 24,541 | | | 17,133 | | 43.24 | % | | | 13,454 | | 27.35 | % |
| Total salaries and employee benefits | | | 140,819 | | | 105,929 | | 32.94 | % | | | 88,320 | | 19.94 | % |
| Equipment and occupancy | | | 35,073 | | | 27,242 | | 28.75 | % | | | 24,087 | | 13.10 | % |
| Other real estate expense | | | 395 | | | (306 | ) | NM | | | | 664 | | NM | |
| Marketing and business development | | | 6,536 | | | 4,863 | | 34.40 | % | | | 4,128 | | 17.81 | % |
| Postage and supplies | | | 3,929 | | | 3,228 | | 21.72 | % | | | 2,392 | | 34.95 | % |
| Amortization of intangibles | | | 4,281 | | | 1,974 | | 116.87 | % | | | 948 | | 108.23 | % |
| Merger-related charges | | | 11,747 | | | 4,797 | | 144.88 | % | | | - | | NM | |
| Other noninterest expense: | | | | | | | | | | | | | | | |
| Deposit related expenses | | | 8,315 | | | 5,173 | | 60.74 | % | | | 4,619 | | 11.99 | % |
| Lending related expenses | | | 11,938 | | | 7,635 | | 56.36 | % | | | 4,132 | | 84.78 | % |
| Investment sales expense | | | 478 | | | 403 | | 18.61 | % | | | 354 | | 13.84 | % |
| Trust expenses | | | 838 | | | 529 | | 58.41 | % | | | 529 | | 0.00 | % |
| FHLB restructuring | | | - | | | 481 | | (100.00 | %) | | | - | | NM | |
| Administrative and other expenses | | | 11,936 | | | 8,929 | | 33.68 | % | | | 6,127 | | 45.73 | % |
| Total other noninterest expense | | | 33,505 | | | 23,150 | | 44.73 | % | | | 15,761 | | 46.88 | % |
| Total noninterest expense | | $ | 236,285 | | $ | 170,877 | | 38.28 | % | | $ | 136,300 | | 25.37 | % |
|
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | 2017-2016
Percent
Increase | | Year ended December 31, | | 2016-2015
Percent
Increase |
| | 2017 | | 2016 | | (Decrease) | | 2015 | | (Decrease) |
| Noninterest expense: | | | | | | | | | |
| Salaries and employee benefits: | | | | | | | | | |
| Salaries | $ | 130,929 |
| | $ | 83,164 |
| | 57.43 | % | | $ | 60,980 |
| | 36.38 | % |
| Commissions | 7,573 |
| | 5,932 |
| | 27.66 | % | | 5,594 |
| | 6.04 | % |
| Cash and equity incentives | 40,693 |
| | 27,182 |
| | 49.71 | % | | 22,222 |
| | 22.32 | % |
| Employee benefits and other | 30,467 |
| | 24,541 |
| | 24.15 | % | | 17,133 |
| | 43.24 | % |
| Total salaries and employee benefits | 209,662 |
| | 140,819 |
| | 48.89 | % | | 105,929 |
| | 32.94 | % |
| Equipment and occupancy | 54,092 |
| | 35,073 |
| | 54.23 | % | | 27,242 |
| | 28.75 | % |
| Other real estate expense | 1,079 |
| | 395 |
| | 173.16 | % | | (306 | ) | | NM |
|
| Marketing and business development | 8,321 |
| | 6,536 |
| | 27.31 | % | | 4,863 |
| | 34.40 | % |
| Postage and supplies | 5,736 |
| | 3,929 |
| | 45.99 | % | | 3,228 |
| | 21.72 | % |
| Amortization of intangibles | 8,816 |
| | 4,281 |
| | 105.93 | % | | 1,974 |
| | 116.87 | % |
| Merger-related charges | 31,843 |
| | 11,747 |
| | 171.07 | % | | 4,797 |
| | 144.88 | % |
| Other noninterest expense: | | | |
| |
|
| | |
| |
|
|
| Deposit related expenses | 14,325 |
| | 8,315 |
| | 72.28 | % | | 5,173 |
| | 60.74 | % |
| Lending related expenses | 14,604 |
| | 11,938 |
| | 22.33 | % | | 7,635 |
| | 56.36 | % |
| Investment sales expense | 528 |
| | 478 |
| | 10.46 | % | | 403 |
| | 18.61 | % |
| Trust expenses | 743 |
| | 838 |
| | (11.34 | %) | | 529 |
| | 58.41 | % |
| FHLB restructuring | — |
| | — |
| | NM |
| | 481 |
| | (100.00 | %) |
| Administrative and other expenses | 16,811 |
| | 11,936 |
| | 40.84 | % | | 8,929 |
| | 33.68 | % |
| Total other noninterest expense | 47,011 |
| | 33,505 |
| | 40.31 | % | | 23,150 |
| | 44.73 | % |
| Total noninterest expense | $ | 366,560 |
| | $ | 236,285 |
| | 55.13 | % | | $ | 170,877 |
| | 38.28 | % |
The increase in total salaries and employee benefits expense in 2017 over 2016 overand 2015 and 2014 is primarily the result of an increase in the number of employees in 2017 over 2016 over 2015 and 2014.2015. At December 31, 2016,2017, our associate base had expanded to 1,179.52,132.0 full-time equivalent associates as compared to 1,058.51,179.5 and 764.01,058.5 at December 31, 20152016 and 2014,2015, respectively, primarily resulting from our acquisitions of CapitalMark, Magna and Avenue.in the respective periods. We expect salary and employee benefit expenses will continue to rise as we continue to hire more experienced bankers throughout our expanded footprintfootprint. We also expect salaries and if we are able to consummate our proposed acquisition of BNC. Moreover, as webenefits expense will increase in size and2018 when compared to 2017 due to our increased associate base. We expect to realize the impact of the synergy case on our personnel expenses on the BNC merger in the second quarter of 2018. In addition, as our total assets now exceed $10$20 billion, in total assets, we also expect our compliance costs and FDIC insurance assessment expense and salaries and benefits costswill continue to increase.
We believe that cash and equity incentives are a valuable tool in motivating an employee base that is focused on providing our clients effective financial advice and increasing shareholder value. As a result, and unlike many other financial institutions, all of our non-commissioned associates participate in our annual cash incentive plan with a minimum targeted bonus equal to 10% of each associate's annual salary, and all of our associates participate in our equity compensation plans. Under the annual cash incentive plan, the targeted level of incentive payments requires achievement of a certain soundness threshold and a targeted level of revenues and earnings (subject to certain adjustments). To the extent that the soundness threshold is met and revenues and earnings are above or below the targeted amount, the aggregate incentive payments are increased or decreased. Historically, we have paid between 0% and 125% of our targeted incentives. In 2016,2017, our cash incentives represented 90%105% of targeted incentive compensation compared to 90% in 2016 and 100% in 2015 and 123% in 2014.2015.
Employee benefits and other expenses include costs associated with our 401k plan, health insurance, and payroll taxes. Also, included in employee benefits and other expense for the years ended December 31, 2017, 2016 2015 and 2014,2015, were approximately $16.6 million, $11.0 million $7.3 million and $5.3$7.3 million, respectively, of compensation expenses related to equity-based awards, for restricted shares or restricted share units, including those with performance-based vesting criteria. We have not issued stock options since 2008. Under our equity incentive plans, we provide a broad-based equity incentive program for all associates. We believe that equity incentives provide a vehicle for all associates to become meaningful shareholders of Pinnacle Financial over an extended period of time and create a shareholder-centric culture throughout our organization. Our compensation expense associated with equity awards for 2017 increased when compared to 2016 as a result of the additional associates we hired in 2017, primarily in connection with our acquisition of BNC. We expect our compensation expense associated with equity awards to increase in 2018 when compared to 2017 as a result of our intention to hire additional experienced financial advisors in 2018. Employee benefits and other expenses include costs associated with our 401k plan, health insurance, and payroll taxes.
Equipment and occupancy expense for the year ended December 31, 20162017 was 28.7%54.2% greater than in 20152016 which was 13.1%28.8% greater than in 2014,2015, primarily due to the locations acquired upon our mergers with Avenue, CapitalMark and Magna. Additionally, one branch was addedoccurring in the Knoxville MSA in each of the years ended December 31, 2014, 2015 and 2016.respective periods. We intend to expand our footprint by one location in each of the Knoxville, Chattanooga, and Memphis MSAs annually. In future periods, these expansions may lead to higher equipment and occupancy expenses as well as related increases in salaries and benefits expense. There are no current plans to expand our branch distribution in the Carolinas and Virginia.
51
Other real estate expense for the year ended December 31, 2017 was $1.1 million compared to $395,000 in 2016 and a benefit of $306,000 in 2015. The increase in 2017 is primarily related to the acquisition of $20.7 million in other real estate due to our merger with BNC.
Marketing and business development expense for the year ended December 31, 2017 was 27.3% greater than in 2016 which was 34.4% greater than in 20152015. The primary source of the increase in 2017 as compared to 2016 is related to our acquisition of BNC and the associated marketing and business development expenses for the expanded footprint. Additionally, our relationship with a Memphis professional sports franchise, which began in the latter half of 2016, was 17.8% greater than in 2014. Theplace for the full year in 2017, representing a larger expense in 2017 when compared to 2016. This relationship is the primary source of the increase in 2016 as compared to 2015 is related to our advertising and banking sponsorships with a professional sports franchise in Memphis, which was entered into during 2016.2015.
Noninterest expense related to the amortization of intangibles was $4.3$8.8 million for the year ended December 31, 20162017 compared to $2.0$4.3 million and $948,000$2.0 million for the years ended December 31, 2016 and 2015, respectively. The increase in amortization expense is attributable to amortizing intangibles resulting from our acquisitions in 2017 and 2014,2016, respectively. The following table outlines our amortizing intangible assets and the related amortizable life of our acquired intangible assets:
| Year acquired | Initial Valuation
(in millions) | | Amortizable Life (in years) | |
| Core Deposit Intangible: | | | | | |
| Mid-America | 2007 | $ | 9.5 | | | 10 | |
| CapitalMark | 2015 | | 6.2 | | | 7 | |
| Magna Bank | 2015 | | 3.2 | | | 6 | |
| Avenue | 2016 | | 8.8 | | | 9 | |
| Book of Business Intangible: | | | | | | | |
| Miller Loughry Beach | 2008 | | 1.3 | | | 20 | |
| CapitalMark Trust | 2015 | | 0.3 | | | 16 | |
|
| | | | | | | | | | | | |
| | Year acquired | | Initial Valuation (in millions) | | Amortizable Life (in years) | | Remaining Value (in millions) |
| Core Deposit Intangible: | | | | | | | |
| Mid-America | 2007 | | $ | 9.5 |
| | 10 |
| | $ | — |
|
| CapitalMark | 2015 | | 6.2 |
| | 7 |
| | 2.7 |
|
| Magna Bank | 2015 | | 3.2 |
| | 6 |
| | 1.2 |
|
| Avenue | 2016 | | 8.8 |
| | 9 |
| | 6.2 |
|
| BNC | 2017 | | 48.1 |
| | 10 |
| | 43.9 |
|
| Book of Business Intangible: | | | |
| | |
| | |
| Miller Loughry Beach Insurance | 2008 | | 1.3 |
| | 20 |
| | 0.4 |
|
| CapitalMark | 2015 | | 0.3 |
| | 16 |
| | 0.2 |
|
| BNC Insurance | 2017 | | 0.4 |
| | 20 |
| | 0.4 |
|
| BNC Trust | 2017 | | 1.9 |
| | 10 |
| | 1.8 |
|
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 $4.3$10.5 million to $1.3$5.2 million per year over the next five years with lesser amounts for the remaining amortization period.
During the years ended December 31, 2017, 2016 and 2015, respectively, merger-related charges of $31.8 million, $11.7 million and $4.8 million were incurred associated with our acquisitions which occurred in those respective periods. Merger-related charges in 2017 primarily include the cost of Avenue, CapitalMarkthe technical and Magna. Merger expensecultural integration, lease termination fees, costs associated with the BNC branch rationalization plan we executed in 2017, the cost of certain assumed equity awards that vested upon the change in control, and retention bonuses paid to former BNC associates for their services during the conversion. Merger-related charges during 2016 includesinclude legal costs incurred associated with the Avenue merger to defend ourselves and Avenue's directors in a shareholder suit as well as investigation and other legal costs associated with a former director's alleged improper trading in Avenue common stock. Merger expenseMerger-related charges for the years ended December 31, 2017, 2016 and 2015, also includesinclude the costs of technical conversions which were completed in the fourth quarter of 2015 for Magna, in the first quarter of 2016 for CapitalMark and in the third quarter of 2016 for Avenue.during those periods. Associate related expenses such as retention bonuses are also included in these expenses. We do not expect any futureto continue to incur merger-related charges duein relation to the acquisitions of CapitalMark and Magna, and we do not expect future merger-related charges due to the acquisition of Avenue, if any, to be significant. However, merger-related charges are expected to be incurred related to our proposed acquisition of BNC during 2017.through the first quarter of 2018 as we finalize the cultural and technical integration.
Total other noninterest expenses increased by $13.5 million to $47.0 million during 2017 when compared to 2016. Included in other noninterest expenses are deposit and lending related expenses, investment and trust sales expenses, FHLB restructuring expense and administrative expenses. Deposit and lending expenses increased by $6.0 million and $2.7 million, respectively, in 2017 primarily as a result of our acquisition of BNC. Administrative and other expenses increased by $4.9 million to $16.8 million during 2017 when compared to 2016. Included in those expenses were increased legal fees, director fees and issuance costs as a result of our acquisition of BNC. Franchise tax expense increased $952,000 in connection with our expanded taxable basis. Total other noninterest expenses increased by $10.4 million to $33.5 million during 2016 when compared to 2015. Included in other noninterest expenses are deposit and lending related expenses, investment and trust sales expenses, FHLB restructuring expense and administrative expenses. Lending expenses increased by $4.3 million primarily as a result of our expanding credit card platform.platform. Administrative and other expenses increased by $3.0 million to $11.9 million during 2016 when compared to 2015. Included in those expenses was an increase of $893,000 in the loss on foreclosed other repossessed assets. Franchise tax expense increased approximately $2.0 million as compared to 2015 as a result of state income tax credits being applied to excise tax in 2016 as compared to franchise tax in 2015. Total other noninterest expenses increased by $7.4 million to $23.2 million during 2015 when compared to 2014. Included in other noninterest expenses are deposit and lending related expenses, investment and trust sales expenses, FHLB restructuring expense and administrative expenses. Lending expenses increased by $3.5 million primarily as a result of our expanding credit card platform and the resulting third-party processing expenses. Administrative and other expenses increased by $2.8 million to $8.9 million during 2015 when compared to 2014. We incurred increases of approximately $1.2 million in regulatory expenses, director fees, legal costs, data processing expenses and insurance expenses primarily as a result of our CapitalMark and Magna acquisitions. We also incurred increases in franchise tax expense of approximately $544,000 due to increased franchise and excise tax obligations resulting from the complete utilization of our state net operating loss. We also experienced an increase of $402,000 in losses on other repossessed assets.
Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and noninterest income) was 53.3% in fiscal year 2017 compared to 53.0% in fiscal year 2016 compared toand 52.9% in fiscal year 2015 and 55.5% in fiscal year 2014.2015. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue.
Income Taxes. During the year ended December 31, 2016,2017, Pinnacle Financial recorded income tax expense of $124.0 million compared to $64.2 million.million and $47.6 million in 2016 and 2015, respectively. Our effective income tax rate was 41.6%, 33.5% for the year ended December 31, 2016 and 33.3%, respectively, for the years ended December 31, 20152017, 2016 and 2014,2015, which is principally impacted by our investments in bank-qualified municipal securities, our real estate investment trust, participation in the Tennessee CITC program, and bank-owned life insurance, offset in part by the limitation on deductibility of meals and entertainment expense and certain merger-related expenses. InImpacting tax expense during the eventyear ended December 31, 2017, was our adoption on January 1, 2017 of FASB Accounting Standards Update (ASU) 2016-09 Stock Compensation Improvements to Employee Share-Based Payment Activity, which represented a change in accounting for the federal corporate tax rate decreases,effects related to vesting of common shares and the exercise of stock options previously granted to our employees through our various equity compensation plans. This change resulted in a reduction in tax expense of $5.4 million for the year ended December 31, 2017. Additionally, as is currently being discussed in Congress, we would be requireda result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, Pinnacle Financial recorded a non-cash charge of $31.5 million related to write down the valuerevaluation of our deferred tax asset, which would negatively impact income tax expense. Our net deferred tax assets were $49.8 million at December 31, 2016.
52due to statutory federal income tax rate for corporate entities decreasing from 35 percent to 21 percent for 2018 and the future.
Financial Condition
Our consolidated balance sheet at December 31, 20162017 reflects an increase of $1.907$7.2 billion in outstanding loans to $8.450$15.6 billion and an increase of $1.788$7.7 billion in total deposits to $8.759$16.5 billion from December 31, 2015.2016. Total assets were $11.195$22.2 billion at December 31, 20162017 as compared to $8.715$11.2 billion at December 31, 2015.2016. We acquired loans of $5.6 billion and deposits totaling $6.2 billion upon our acquisition of BNC in 2017. We acquired loans of $952.5 million and deposits totaling $966.7 million upon our acquisition of Avenue in 2016. Collectively, we acquired $1.298$1.3 billion in loans and $1.406$1.4 billion in deposits upon our acquisitions of CapitalMark and Magna in 2015.
Loans. The composition of loans at December 31 for each of the past five years and the percentage (%) of each segment to total loans are summarized as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | Amount | Percent | | Amount | Percent | | Amount | Percent | | Amount | Percent | | Amount | Percent |
| Commercial real estate - Mortgage | $ | 6,669,610 |
| 42.7 | % | | $ | 3,193,496 |
| 37.8 | % | | $ | 2,275,483 |
| 34.8 | % | | $ | 1,544,091 |
| 33.6 | % | | $ | 1,383,435 |
| 33.4 | % |
| Consumer real estate - Mortgage | 2,561,214 |
| 16.4 | % | | 1,185,917 |
| 14.0 | % | | 1,046,517 |
| 16.0 | % | | 721,158 |
| 15.7 | % | | 695,616 |
| 16.8 | % |
| Construction and land development | 1,908,288 |
| 12.2 | % | | 912,673 |
| 10.8 | % | | 747,697 |
| 11.4 | % | | 322,466 |
| 7.0 | % | | 316,191 |
| 7.6 | % |
| Commercial and industrial | 4,141,341 |
| 26.5 | % | | 2,891,710 |
| 34.2 | % | | 2,228,542 |
| 34.1 | % | | 1,784,729 |
| 38.9 | % | | 1,605,547 |
| 38.7 | % |
| Consumer and other | 352,663 |
| 2.2 | % | | 266,129 |
| 3.2 | % | | 244,996 |
| 3.7 | % | | 217,583 |
| 4.8 | % | | 143,704 |
| 3.5 | % |
| Total loans | $ | 15,633,116 |
| 100.0 | % | | $ | 8,449,925 |
| 100.0 | % | | $ | 6,543,235 |
| 100.0 | % | | $ | 4,590,027 |
| 100.0 | % | | $ | 4,144,493 |
| 100.0 | % |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | Amount | | Percent | | | Amount | | Percent | | | Amount | | Percent | | | Amount | | Percent | | | Amount | | Percent | |
| Commercial real estate - Mortgage | | $ | 3,193,496 | | 37.8 | % | | $ | 2,275,483 | | 34.8 | % | | $ | 1,544,091 | | 33.6 | % | | $ | 1,383,435 | | 33.4 | % | | $ | 1,178,196 | | 31.7 | % |
| Consumer real estate - Mortgage | | | 1,185,917 | | 14.0 | % | | | 1,046,517 | | 16.0 | % | | | 721,158 | | 15.7 | % | | | 695,616 | | 16.8 | % | | | 679,926 | | 18.3 | % |
| Construction and land development | | | 912,673 | | 10.8 | % | | | 747,697 | | 11.4 | % | | | 322,466 | | 7.0 | % | | | 316,191 | | 7.6 | % | | | 313,552 | | 8.4 | % |
| Commercial and industrial | | | 2,891,710 | | 34.2 | % | | | 2,228,542 | | 34.1 | % | | | 1,784,729 | | 38.9 | % | | | 1,605,547 | | 38.7 | % | | | 1,446,578 | | 39.0 | % |
| Consumer and other | | | 266,129 | | 3.2 | % | | | 244,996 | | 3.7 | % | | | 217,583 | | 4.8 | % | | | 143,704 | | 3.5 | % | | | 93,910 | | 2.6 | % |
| Total loans | | $ | 8,449,925 | | 100.0 | % | | $ | 6,543,235 | | 100.0 | % | | $ | 4,590,027 | | 100.0 | % | | $ | 4,144,493 | | 100.0 | % | | $ | 3,712,162 | | 100.0 | % |
We have experienced growth in all segmentsThe composition of our portfolio. At December 31, 2016, our loan portfolio composition remained relatively consistent with the composition at December 31, 2015. Despite the acquisitions that were completed during 2015 and 2016, we believe that loan growth in 2017 in thehas changed due to our acquisition of BNC, which had more of a commercial real estate – mortgage segment will outpace loan payoffsfocus, including construction, than we did in that segmentour legacy Tennessee markets. As we intend to focus on growth of the commercial and industrial segment in our expanded footprint during 2018, we believe our commercial and industrial portfolio resulting in an increase in the percentagewill become a more substantial portion of commercial real estate - mortgage loans as a percentage ofour total loans.loan portfolio going forward. The commercial real estate – mortgage category includes owner-occupied commercial real estate loans. At December 31, 2016,2017, approximately 42.4%36.9% of the outstanding principal balance of our commercial real estate - mortgage loans was secured by owner-occupied commercial real estate properties. Owner-occupied commercial real estate is similar in many ways to our commercial and industrial lending in that these loans are generally made to businesses on the basis of the cash flows of the business rather than on the valuation of the real estate. Growth in the construction and land development loan segment reflects the development growth of the local economies in which we operate and is diversified between commercial, residential and land.
The following table classifies our fixed and variable rate loans at December 31, 20162017 according to contractual maturities of (1) one year or less, (2) after one year through five years, and (3) after five years. The table also classifies our variable rate loans pursuant to the contractual repricing dates of the underlying loans (dollars in thousands):
| | | Amounts at December 31, 2016 | | | | | | | |
| | | Fixed Rates | | Variable Rates(*) | | Totals | | | At December 31, 2016 | | | At December 31, 2015 | |
| Based on contractual maturity: | | | | | | | | | | | | | |
| Due within one year | | $ | 382,387 | | $ | 1,389,574 | | $ | 1,771,961 | | | 21.0 | % | | 20.3 | % |
| Due in one year to five years | | | 2,051,012 | | | 1,904,829 | | | 3,955,841 | | | 46.8 | % | | 46.1 | % |
| Due after five years | | | 997,684 | | | 1,724,439 | | | 2,722,123 | | | 32.2 | % | | 33.6 | % |
| Totals | | $ | 3,431,083 | | $ | 5,018,842 | | $ | 8,449,925 | | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| Based on contractual repricing dates: | | | | | | | | | | | | | | | | |
| Daily floating rate | | $ | - | | $ | 2,008,804 | | $ | 2,008,804 | | | 23.8 | % | | 21.8 | % |
| Due within one year | | | 382,387 | | | 2,656,928 | | | 3,039,315 | | | 36.0 | % | | 33.9 | % |
| Due in one year to five years | | | 2,051,012 | | | 298,603 | | | 2,349,615 | | | 27.8 | % | | 29.3 | % |
| Due after five years | | | 997,684 | | | 54,507 | | | 1,052,191 | | | 12.4 | % | | 15.0 | % |
| Totals | | $ | 3,431,083 | | $ | 5,018,842 | | $ | 8,449,925 | | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | |
| | Amounts at December 31, 2017 | | | | |
| | Fixed Rates | | Variable Rates (*) | | Totals | | At December 31,
2017 | | At December 31,
2016 |
| Based on contractual maturity: | | | | | | | | | |
| Due within one year | $ | 881,566 |
| | $ | 1,972,983 |
| | $ | 2,854,549 |
| | 18.2 | % | | 21.0 | % |
| Due in one year to five years | 4,136,697 |
| | 3,395,025 |
| | 7,531,722 |
| | 48.2 | % | | 46.8 | % |
| Due after five years | 2,587,448 |
| | 2,659,397 |
| | 5,246,845 |
| | 33.6 | % | | 32.2 | % |
| Totals | $ | 7,605,711 |
| | $ | 8,027,405 |
| | $ | 15,633,116 |
| | 100.0 | % | | 100.0 | % |
| | | | | | | |
|
| | |
| Based on contractual repricing dates: | |
| | |
| | |
| |
|
| | |
|
| Daily floating rate | $ | — |
| | $ | 2,566,343 |
| | 2,566,343 |
| | 16.4 | % | | 23.8 | % |
| Due within one year | 881,566 |
| | 5,018,820 |
| | 5,900,386 |
| | 37.8 | % | | 36.0 | % |
| Due in one year to five years | 4,136,697 |
| | 305,982 |
| | 4,442,679 |
| | 28.4 | % | | 27.8 | % |
| Due after five years | 2,587,448 |
| | 136,260 |
| | 2,723,708 |
| | 17.4 | % | | 12.4 | % |
| Totals | $ | 7,605,711 |
| | $ | 8,027,405 |
| | $ | 15,633,116 |
| | 100.0 | % | | 100.0 | % |
The above information does not consider the impact of scheduled principal payments.
(*)Daily floating rate loans are tied to Pinnacle Bank's prime lending rate or a national interest rate index with the underlying loan rates changing in relation to changes in these indexes. Included in variable rate loans are $469$227 million of loans which are currently priced at their contractual floors with a weighted average rate of 4.55%4.38%. The weighted average contractual rate on these loans is 3.86%5.12% As a result, interest income on these loans will not change until the contractual rate on the underlying loan exceeds the interest rate floor.
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 loan production, loan quality, concentrations of credit, loan delinquencies and non-performing loans. Diversification in the loan portfolio is measured and monitored as a means of managing risk associated with fluctuations in economic conditions.
Underwriting standards are designed to promote relationship banking rather than transactional banking. Management examines current and projected cash flows to determine the expected ability of a borrower to repay its obligations as agreed. Commercial and industrial loans are primarily underwritten based on the identified cash flows of the borrower and generally are collateralized by business assets and may have a personal guaranty of business principals. Collateral pledged may include the assets being financed or other assets such as accounts receivable, inventory or equipment. Some short-term loans may be advanced on an unsecured basis.
Commercial real estate 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.
Given the positive economic outlook for our current geographic markets, we continue to make loans for commercial construction and development projects. Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and expectations of the permanent mortgage market, among other items. Construction loans are generally based upon estimates of costs and appraised value associated with the completed project, which may be inaccurate. Construction loans involve the disbursement of funds during construction with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be sales of developed property, refinancing in the permanent mortgage market, or an interim loan commitment from us until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans because their ultimate repayment depends on the satisfactory completion of construction and is sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
We also originate consumer loans, including consumer real-estate loans, where we typically use a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, seeks to minimize risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements.
We also maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the audit committee.and risk committees of our board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.
Lending Concentrations. We periodically analyze our commercial 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, 20162017 and 20152016 (in thousands):
|
| | | | | | | | | | | | | | | |
| | At December 31, 2017 | | |
| | Outstanding Principal Balances | | Unfunded Commitments | | Total exposure | | Total Exposure at December 31, 2016 |
| Lessors of nonresidential buildings | $ | 2,778,454 |
| | $ | 32,497 |
| | $ | 2,810,951 |
| | $ | 1,701,853 |
|
| Lessors of residential buildings | 870,777 |
| | 13,467 |
| | 884,244 |
| | 874,234 |
|
| Hotels and motels | 627,126 |
| | 1,865 |
| | 628,991 |
| | 291,865 |
|
| | | At December 31, 2016 | | | |
| | | Outstanding Principal Balances | | Unfunded Commitments | | Total exposure | | Total Exposure at December 31, 2015 | |
| | | | | | | | | | |
| Lessors of nonresidential buildings | | $ | 1,294,366 | | $ | 407,487 | | $ | 1,701,853 | | $ | 1,078,211 | |
| Lessors of residential buildings | | | 526,259 | | | 347,975 | | | 874,234 | | | 500,266 | |
| New housing operative builders | | | 229,035 | | | 157,370 | | | 386,405 | | | 206,538 | |
| Hotels and motels | | | 127,296 | | | 164,569 | | | 291,865 | | | 167,317 | |
Additionally, the Company monitors two ratios regarding construction and commercial real estate lending as part of its concentration management processes. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by Pinnacle Bank’s total risk-based capital. At December 31, 2017 and 2016, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital was 89.4% and 80.3%, respectively. Non-owner occupied commercial real estate and multifamily loans (including construction and loan development loans) was 297.1% and 256.0% for December 31, 2017 and 2016, 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 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. At both December 31, 2017 and 2016, the Bank’s computed ratios were below the applicable regulatory guidelines.
Performing Loans in Past Due Status. The following table is a summary of our accruing loans that were past due between 30 and 90 days and greater than 90 days as of December 31, 20162017 and 20152016 (dollars in thousands):
| Accruing loans past due 30 to 90 days: | | December 31, 2016 | | December 31, 2015 | |
| Commercial real estate – mortgage | | $ | 3,505 | | $ | - | |
| Consumer real estate – mortgage | | | 3,838 | | | 6,380 | |
| Construction and land development | | | 2,210 | | | 309 | |
| Commercial and industrial | | | 4,475 | | | 4,798 | |
| Consumer and other | | | 7,168 | | | 6,721 | |
| Total accruing loans past due 30 to 90 days | | $ | 21,196 | | $ | 18,208 | |
| | | | | | | | |
| Accruing loans past due 90 days or more: | | | | | | | |
| Commercial real estate – mortgage | | $ | - | | $ | - | |
| Consumer real estate – mortgage | | | 53 | | | 1,396 | |
| Construction and land development | | | - | | | - | |
| Commercial and industrial | | | - | | | - | |
| Consumer and other | | | 1,081 | | | 373 | |
| Total accruing loans past due 90 days or more | | $ | 1,134 | | $ | 1,769 | |
| | | | | | | | |
| Ratios: | | | | | | | |
| Accruing loans past due 30 to 90 days as a percentage of total loans | | | 0.25 | % | | 0.28 | % |
| Accruing loans past due 90 days or more as a percentage of total loans | | | 0.01 | % | | 0.03 | % |
| Total accruing loans in past due status as a percentage of total loans | | | 0.26 | % | | 0.31 | % |
|
| | | | | | | |
| Accruing loans past due 30 to 90 days: | December 31, 2017 | | December 31, 2016 |
| Commercial real estate – mortgage | $ | 23,331 |
| | $ | 3,505 |
|
| Consumer real estate – mortgage | 14,835 |
| | 3,838 |
|
| Construction and land development | 4,136 |
| | 2,210 |
|
| Commercial and industrial | 7,406 |
| | 4,475 |
|
| Consumer and other | 6,311 |
| | 7,168 |
|
| Total accruing loans past due 30 to 90 days | $ | 56,019 |
| | $ | 21,196 |
|
| | | | |
| Accruing loans past due 90 days or more: | |
| | |
|
| Commercial real estate – mortgage | $ | 104 |
| | $ | — |
|
| Consumer real estate – mortgage | 1,265 |
| | 53 |
|
| Construction and land development | 146 |
| | — |
|
| Commercial and industrial | 1,348 |
| | — |
|
| Consumer and other | 1,276 |
| | 1,081 |
|
| Total accruing loans past due 90 days or more | $ | 4,139 |
| | $ | 1,134 |
|
| | | | |
| Ratios: | |
| | |
|
| Accruing loans past due 30 to 90 days as a percentage of total loans | 0.36 | % | | 0.25 | % |
| Accruing loans past due 90 days or more as a percentage of total loans | 0.02 | % | | 0.01 | % |
| Total accruing loans in past due status as a percentage of total loans | 0.38 | % | | 0.26 | % |
Potential Problem Loans. Potential problem loans amounted to approximately $164.0 million, or 1.1% of total loans outstanding at December 31, 2017, compared to $114.6 million, or 1.4% of total loans outstanding at December 31, 2016, compared to $105.0 million, or 1.6% of total loans outstanding at December 31, 2015.2016. Potential problem loans, which are not included in nonperforming loans, represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators, for loans classified as substandard or worse, but not considered nonperforming loans. Approximately $4.5$14.6 million of potential problem loans were past due at least 30 but less than 90 days as of December 31, 2016.2017.
Non-Performing Assets and Troubled Debt Restructurings. At December 31, 2016,2017, we had $33.7$85.5 million in nonperforming assets compared to $36.3$33.7 million at December 31, 2015.2016. Included in nonperforming assets were $57.5 million in nonperforming loans and $28.0 million in other real estate owned and other nonperforming assets at December 31, 2017 and $27.6 million in nonperforming loans and $6.1 million in other real estate owned at December 31, 2016 and $29.3 million2016. The increase in nonperforming loans and $7.0 millionassets in other real estate owned at December 31, 2015.2017 is primarily a result of the acquisition of such assets related to our BNC merger. At December 31, 20162017 and 2015,2016, there were $15.0$6.6 million and $8.1$15.0 million, respectively, of troubled debt restructurings that were performing as of the restructured date and remain in a performing status.on accrual status but are considered impaired loans pursuant to U.S. GAAP.
All nonaccruing loans are reassigned to a special assets officer who was not responsible for originating the loan. The special assets officer is responsible for developing an action plan designed to minimize our future losses. Typically, these special assets officers review our loan files, interview prior officers assigned to the relationship, meet with borrowers, inspect collateral, reappraise collateral and/or consult with legal counsel. The special assets officer then recommends an action plan to a committee of senior associates including lenders and workout specialists, which could include foreclosing on collateral, restructuring the loan, issuing demand letters or other actions.
We discontinue the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. During 2017, 2016 2015 and 2014,2015, respectively, we recognized $95,000, $159,000 $308,000 and $256,000$308,000 of interest income from nonperforming loans, reflecting cash payments received from the borrower and our belief, at the time of payment, that the underlying collateral supported the carrying amount of the loans.
Due to the weakening credit status of a borrower, we may elect to formally restructure certain loans to facilitate a repayment plan that seeks to minimize the potential losses, if any, that we might incur. These loans are considered troubled debt restructurings.restructurings and are considered to be impaired loans pursuant to U.S. GAAP. If on nonaccruing status as of the date of restructuring, any restructured loan is included in the nonperforming loan balances as discussed above and is classified as an impaired loan. Loans that have been restructured that are on accrual status as of the restructure date are not included in nonperforming loans; however, such loans are still considered impaired.
At December 31, 2016,2017, we owned $6.1$27.8 million in other real estate which we had acquired, usually through foreclosure, from borrowers compared to $5.1$6.1 million at December 31, 2015;2016; the majority of this real estate is located within our principal markets. We categorize other real estate owned into three types: developed lots, undeveloped land, and other. IncludedOf the $27.8 million, $20.7 million was acquired in the "other" category are primarily condominiums, office buildings and residential homes that are not new construction. The following table shows the amounts ofconjunction with our other real estate owned in such categories (in thousands):merger with BNC.
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Developed lots | | $ | 1,656 | | | $ | 1,748 | |
| Undeveloped land | | | 1,912 | | | | 1,830 | |
| Other | | | 2,522 | | | | 1,505 | |
| | | $ | 6,090 | | | $ | 5,083 | |
The following table is a summary of our nonperforming assets and troubled debt restructurings at December 31, 20162017 and 20152016 (in thousands):
|
| | | | | | | |
| | At December 31, 2017 | | At December 31, 2016 |
| Nonperforming assets: | | | |
Nonperforming loans (1): | | | |
| Commercial real estate – mortgage | $ | 16,064 |
| | $ | 4,921 |
|
| Consumer real estate – mortgage | 18,117 |
| | 8,073 |
|
| Construction and land development | 5,968 |
| | 6,613 |
|
| Commercial and industrial | 17,306 |
| | 7,495 |
|
| Consumer and other | — |
| | 475 |
|
Total nonperforming loans (1) | 57,455 |
| | 27,577 |
|
| Other real estate owned | 27,831 |
| | 6,090 |
|
| Other reposessed assets | 197 |
| | — |
|
| Total nonperforming assets | 85,483 |
| | 33,667 |
|
| Accruing troubled debt restructurings: | |
| | |
|
| Commercial real estate – mortgage | 194 |
| | 213 |
|
| Consumer real estate – mortgage | 2,852 |
| | 3,388 |
|
| Construction and land development | — |
| | 7 |
|
| Commercial and industrial | 3,565 |
| | 11,359 |
|
| Consumer and other | — |
| | 41 |
|
| Total accruing troubled debt restructurings | 6,611 |
| | 15,008 |
|
| Total nonperforming assets and accruing troubled debt restructurings | $ | 92,094 |
| | $ | 48,675 |
|
| | | | |
| Ratios: | |
| | |
|
| Nonperforming loans to total loans | 0.37 | % | | 0.33 | % |
| Nonperforming assets to total loans plus other real estate owned | 0.55 | % | | 0.40 | % |
| Nonperforming assets plus troubled debt restructurings to total loans plus other real estate owned | 0.59 | % | | 0.58 | % |
| Nonperforming assets, potential problem loans and troubled debt restructurings to Pinnacle Bank Tier I capital and allowance for loan losses | 12.80 | % | | 16.20 | % |
Classified Asset Ratio (Pinnacle Bank) (2) | 12.90 | % | | 16.40 | % |
| Allowance for loan loss coverage ratio | 117.0 | % | | 213.9 | % |
| | | At December 31, 2016 | | | At December 31, 2015 | |
| Nonperforming assets: | | | | | | |
Nonperforming loans (1): | | | | | | |
| Commercial real estate – mortgage | | $ | 4,921 | | | $ | 5,821 | |
| Consumer real estate – mortgage | | | 8,073 | | | | 9,346 | |
| Construction and land development | | | 6,613 | | | | 7,607 | |
| Commercial and industrial | | | 7,495 | | | | 1,683 | |
| Consumer and other | | | 475 | | | | 4,902 | |
Total nonperforming loans (1) | | | 27,577 | | | | 29,359 | |
| Other real estate owned | | | 6,090 | | | | 5,083 | |
| Other reposessessed assets | | | - | | | | 1,906 | |
| Total nonperforming assets | | | 33,667 | | | | 36,348 | |
| Troubled debt restructurings: | | | | | | | | |
| Commercial real estate – mortgage | | | 213 | | | | 223 | |
| Consumer real estate – mortgage | | | 3,388 | | | | 3,692 | |
| Construction and land development | | | 7 | | | | - | |
| Commercial and industrial | | | 11,359 | | | | 4,145 | |
| Consumer and other | | | 41 | | | | 28 | |
| Total troubled debt restructurings | | | 15,008 | | | | 8,088 | |
| Total nonperforming assets and troubled debt restructurings | | $ | 48,675 | | | $ | 44,436 | |
| | | | | | | | | |
| Ratios: | | | | | | | | |
| Nonperforming loans to total loans | | | 0.33 | % | | | 0.45 | % |
| Nonperforming assets to total loans plus other real estate owned | | | 0.40 | % | | | 0.56 | % |
| Nonperforming assets plus troubled debt restructurings to total loans and other real estate owned | | | 0.58 | % | | | 0.68 | % |
| Nonperforming assets, potential problem loans and troubled debt restructurings to Pinnacle Bank Tier I capital and allowance for loan losses | | | 16.20 | % | | | 19.40 | % |
Classified Asset Ratio (Pinnacle Bank)(2) | | | 16.40 | % | | | 18.70 | % |
| Allowance for loan loss coverage ratio | | | 213.9 | % | | | 222.9 | % |
______________________
| |
| (1) | Approximately $16.7$45.8 million and $19.0$16.7 million as of December 31, 20162017 and 2015,2016, respectively, of nonperforming loans included above are currently paying pursuant to their contractual terms. |
| |
| (2) | Classified assets as a percentage of Tier 1 capital plus allowance for loan losses. |
Allowance for Loan Losses (allowance). We maintain the allowance at a level that our management deems appropriate to adequately cover the probable losses inherent in the loan portfolio. As of December 31, 2016,2017, and 2015,2016, our allowance for loan losses was $59.0$67.2 million and $65.4$59.0 million, respectively, which our management deemed to be adequate at each of the respective dates. The decrease in the allowance for loan losses in 2016 as compared to 2015 is primarily the result of improving credit metrics within our portfolio, including the reduction in net charge-offs and an increase in our coverage ratio. Our allowance for loan loss as a percentage of total loans has decreased from 1.00% at December 31, 2015 to 0.70% at December 31, 2016 to 0.43% at December 31, 2017, primarily as a result of recording acquired portfoliosthe BNC portfolio at fair value upon acquisition. TheAs a result of our acquired loan portfolios being recorded at fair value upon acquisition, no allowance for loan losses is assigned to purchase loans as of the date of acquisition. However, an allowance for loan losses is required for purchased loans is calculated similarthat have experienced credit deterioration subsequent to that utilized for legacy Pinnacle Bank loans.acquisition or increases in balances outstanding. Pinnacle Financial's accounting policy is to compare the computed allowance on a loan-by-loan basis for loan losses for purchased loans to the remaining fair value adjustment. IfHowever, if the computed allowance at the loan level is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a charge to the provision for loan losses. The judgments and estimates associated with our allowance determination are described under "Critical Accounting Estimates" above.
The following table sets forth, based on management's best estimate, the allocation of the allowance to types of loans as well as the unallocated portion as of December 31 for each of the past five years and the percentage of loans in each category to total loans (in thousands):
| | | At December 31, | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | Amount | Percent | | | Amount | Percent | | | Amount | Percent | | | Amount | Percent | | | Amount | Percent | |
| Commercial real estate – Mortgage | | $ | 13,655 | | 37.8 | % | | $ | 15,513 | | 34.8 | % | | $ | 22,202 | | 33.6 | % | | $ | 21,372 | | 33.4 | % | | $ | 19,634 | | 31.7 | % |
| Consumer real estate – Mortgage | | | 6,564 | | 14.0 | % | | | 7,220 | | 16.0 | % | | | 5,424 | | 15.7 | % | | | 8,355 | | 16.8 | % | | | 8,762 | | 18.3 | % |
| Construction and land development | | | 3,624 | | 10.8 | % | | | 2,903 | | 11.4 | % | | | 5,724 | | 7.0 | % | | | 7,235 | | 7.6 | % | | | 9,164 | | 8.5 | % |
| Commercial and industrial | | | 24,743 | | 34.2 | % | | | 23,643 | | 34.1 | % | | | 29,167 | | 38.9 | % | | | 25,134 | | 38.7 | % | | | 24,738 | | 39.0 | % |
| Consumer and other | | | 9,520 | | 3.2 | % | | | 15,616 | | 3.7 | % | | | 1,570 | | 4.8 | % | | | 1,632 | | 3.5 | % | | | 1,094 | | 2.5 | % |
| Unallocated | | | 874 | NA | | | | 537 | NA | | | | 3,272 | NA | | | | 4,242 | NA | | | | 6,025 | NA | |
| Total allowance for loan losses | | $ | 58,980 | | 100.0 | % | | $ | 65,432 | | 100.0 | % | | $ | 67,359 | | 100.0 | % | | $ | 67,970 | | 100.0 | % | | | 69,417 | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2017 | 2016 | 2015 | 2014 | 2013 |
| | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent |
| Commercial real estate –Mortgage | $ | 21,188 |
| 42.7 | % | $ | 13,655 |
| 37.8 | % | $ | 15,513 |
| 34.8 | % | $ | 22,202 |
| 33.6 | % | $ | 21,372 |
| 33.4 | % |
| Consumer real estate – Mortgage | 5,031 |
| 16.4 | % | 6,564 |
| 14.0 | % | 7,220 |
| 16.0 | % | 5,424 |
| 15.7 | % | 8,355 |
| 16.8 | % |
| Construction and land development | 8,962 |
| 12.2 | % | 3,624 |
| 10.8 | % | 2,903 |
| 11.4 | % | 5,724 |
| 7.0 | % | 7,235 |
| 7.6 | % |
| Commercial and industrial | 24,863 |
| 26.5 | % | 24,743 |
| 34.2 | % | 23,643 |
| 34.1 | % | 29,167 |
| 38.9 | % | 25,134 |
| 38.7 | % |
| Consumer and other | 5,874 |
| 2.2 | % | 9,520 |
| 3.2 | % | 15,616 |
| 3.7 | % | 1,570 |
| 4.8 | % | 1,632 |
| 3.5 | % |
| Unallocated | 1,322 |
| NA |
| 874 |
| NA |
| 537 |
| NA |
| 3,272 |
| NA |
| 4,242 |
| NA |
|
| Total allowance for loan losses | $ | 67,240 |
| 100.0 | % | $ | 58,980 |
| 100.0 | % | $ | 65,432 |
| 100.0 | % | $ | 67,359 |
| 100.0 | % | 67,970 |
| 100.0 | % |
The decrease in the overall allowance for loan lossesloss as a percentage of total loans at December 31, 2017 is due toprimarily as a result of recording the improvement in the larger segments of our loanBNC portfolio which is largely influenced by the overall improvement in the economy in our current geographic markets.at fair value upon acquisition. Net charge-offs in the consumer portfolio have remained elevated in 2016,2017, primarily due to the non-prime automobile portfolio. The balance of the non-prime automobile portfolio continues to decrease period over period. The allocation by category is determined based on the assigned risk rating, if applicable,historical loss experience for that category and qualitative factors applicable to each category of loans. For impaired loans, those loans are reviewed for a specific allowance allocation. Specific valuation allowances related to impaired loans were approximately $2.8 million at December 31, 2017 compared to $1.1 million at December 31, 2016 compared to $5.2 million at December 31, 2015. The decrease is primarily related to the resolution of impaired loans with a specific allowance in 2016. The unallocated category is intended to allow for losses that are inherent in our portfolio that we have not yet identified or attributable to a specific risk factor and for modeling imprecision. Additional information on the allocation of the allowance between performing and impaired loans is provided in Note 6 to the "Notes to the Consolidated Financial Statements."
The following is a summary of changes in the allowance for loan losses for each of the years in the five year period ended December 31, 20162017 and the ratio of the allowance for loan losses to total loans as of the end of each period (in thousands):
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Balance at beginning of period | | $ | 65,432 | | | $ | 67,359 | | | $ | 67,970 | | | $ | 69,417 | | | $ | 73,975 | |
| Provision for loan losses | | | 18,328 | | | | 9,188 | | | | 3,635 | | | | 7,857 | | | | 5,569 | |
| Charged-off loans: | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate - Mortgage | | | (276 | ) | | | (384 | ) | | | (875 | ) | | | (4,123 | ) | | | (4,667 | ) |
| Consumer real estate - Mortgage | | | (788 | ) | | | (365 | ) | | | (1,621 | ) | | | (2,250 | ) | | | (6,731 | ) |
| Construction and land development | | | (231 | ) | | | (190 | ) | | | (301 | ) | | | (1,351 | ) | | | (2,530 | ) |
| Commercial and industrial | | | (5,801 | ) | | | (2,207 | ) | | | (3,095 | ) | | | (8,159 | ) | | | (4,612 | ) |
| Consumer and other | | | (24,016 | ) | | | (18,002 | ) | | | (1,811 | ) | | | (1,369 | ) | | | (1,117 | ) |
| Total charged-off loans | | | (31,112 | ) | | | (21,148 | ) | | | (7,703 | ) | | | (17,252 | ) | | | (19,657 | ) |
| Recoveries of previously charged-off loans: | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate - Mortgage | | | 208 | | | | 85 | | | | 538 | | | | 500 | | | | 285 | |
| Consumer real estate - Mortgage | | | 546 | | | | 874 | | | | 671 | | | | 1,209 | | | | 818 | |
| Construction and land development | | | 545 | | | | 1,479 | | | | 277 | | | | 1,464 | | | | 1,155 | |
| Commercial and industrial | | | 2,138 | | | | 1,730 | | | | 1,484 | | | | 4,531 | | | | 7,175 | |
| Consumer and other loans | | | 2,895 | | | | 5,865 | | | | 487 | | | | 244 | | | | 97 | |
| Total recoveries of previously charged-off loans | | | 6,332 | | | | 10,033 | | | | 3,457 | | | | 7,948 | | | | 9,530 | |
| Net charge-offs | | | (24,780 | ) | | | (11,115 | ) | | | (4,246 | ) | | | (9,304 | ) | | | (10,127 | ) |
| Balance at end of period | | $ | 58,980 | | | $ | 65,432 | | | $ | 67,359 | | | $ | 67,970 | | | $ | 69,417 | |
| | | | | | | | | | | | | | | | | | | | | |
| Ratio of allowance for loan losses to total loans outstanding at end of period | | | 0.70 | % | | | 1.00 | % | | | 1.47 | % | | | 1.64 | % | | | 1.87 | % |
| Ratio of net charge-offs to average loans outstanding for the period | | | 0.33 | % | | | 0.21 | % | | | 0.10 | % | | | 0.24 | % | | | 0.29 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Balance at beginning of period | $ | 58,980 |
| | $ | 65,432 |
| | $ | 67,359 |
| | $ | 67,970 |
| | $ | 69,417 |
|
| Provision for loan losses | 23,664 |
| | 18,328 |
| | 9,188 |
| | 3,635 |
| | 7,857 |
|
| Charged-off loans: | | | |
| | |
| | |
| | |
|
| Commercial real estate - Mortgage | (633 | ) | | (276 | ) | | (384 | ) | | (875 | ) | | (4,123 | ) |
| Consumer real estate - Mortgage | (1,461 | ) | | (788 | ) | | (365 | ) | | (1,621 | ) | | (2,250 | ) |
| Construction and land development | (137 | ) | | (231 | ) | | (190 | ) | | (301 | ) | | (1,351 | ) |
| Commercial and industrial | (4,297 | ) | | (5,801 | ) | | (2,207 | ) | | (3,095 | ) | | (8,159 | ) |
| Consumer and other | (15,518 | ) | | (24,016 | ) | | (18,002 | ) | | (1,811 | ) | | (1,369 | ) |
| Total charged-off loans | (22,046 | ) | | (31,112 | ) | | (21,148 | ) | | (7,703 | ) | | (17,252 | ) |
| Recoveries of previously charged-off loans: | |
| | |
| | |
| | |
| | |
|
| Commercial real estate - Mortgage | 671 |
| | 208 |
| | 85 |
| | 538 |
| | 500 |
|
| Consumer real estate - Mortgage | 1,516 |
| | 546 |
| | 874 |
| | 671 |
| | 1,209 |
|
| Construction and land development | 1,136 |
| | 545 |
| | 1,479 |
| | 277 |
| | 1,464 |
|
| Commercial and industrial | 1,317 |
| | 2,138 |
| | 1,730 |
| | 1,484 |
| | 4,531 |
|
| Consumer and other loans | 2,002 |
| | 2,895 |
| | 5,865 |
| | 487 |
| | 244 |
|
| Total recoveries of previously charged-off loans | 6,642 |
| | 6,332 |
| | 10,033 |
| | 3,457 |
| | 7,948 |
|
| Net charge-offs | (15,404 | ) | | (24,780 | ) | | (11,115 | ) | | (4,246 | ) | | (9,304 | ) |
| Balance at end of period | $ | 67,240 |
| | $ | 58,980 |
| | $ | 65,432 |
| | $ | 67,359 |
| | $ | 67,970 |
|
| | | | | | | | | | |
| Ratio of allowance for loan losses to total loans outstanding at end of period | 0.43 | % | | 0.70 | % | | 1.00 | % | | 1.47 | % | | 1.64 | % |
| Ratio of net charge-offs to average loans outstanding for the period | 0.13 | % | | 0.33 | % | | 0.21 | % | | 0.10 | % | | 0.24 | % |
As noted in our critical accounting policies, management assesses the adequacy of the allowance at the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, the views of Pinnacle Bank's regulators, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
Investments. Our investment portfolio, consisting primarily of Federal agency bonds, state and municipal securities and mortgage-backed securities, amounted to $1.323$2.54 billion and $966.4 million$1.32 billion at December 31, 20162017 and 2015,2016, respectively. Our investment to asset ratio has increaseddecreased slightly from 11.1% at December 31, 2015 to 11.8% at December 31, 2016.2016 to 11.4% at December 31, 2017. 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 the fourth quarter of 2017, approximately $300 million of investment securities were sold at a pre-tax loss of $8.3 million in order to reposition our investment portfolio to provide our balance sheet more protection from a potentially flatter yield curve in the future. The timing of these sales also allowed us to capture an increased tax deduction in 2017 due to the reduction in corporate tax rates beginning in 2018 as a result of the passage of the Tax Cuts and Jobs Act.
A summary of certain aspects of our investment portfolio at December 31, 20162017 and 20152016 follows:
| | | December 31, | |
| | | 2016 | | | 2015 | |
| Weighted average life | | 5.26 years | | | 4.90 years | |
| Effective duration | | | 3.16 | % | | | 3.04 | % |
| Weighted average coupon | | | 2.85 | % | | | 3.04 | % |
| Tax equivalent yield | | | 2.42 | % | | | 2.45 | % |
|
| | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Weighted average life | 6.29 years |
| | 5.26 years |
|
| Effective duration | 3.49 | % | | 3.16 | % |
| Weighted average coupon | 2.99 | % | | 2.85 | % |
| Tax equivalent yield | 2.68 | % | | 2.42 | % |
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 securities because the mortgages 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, 20162017 and 20152016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Treasury securities | | U.S. government agency securities | | State and Municipal securities | | Corporate securities | | Totals |
| | Amount | Yield | | Amount | Yield | | Amount | Yield | | Amount | Yield | | Amount | Yield |
| At December 31, 2017: | | | | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | | | |
| Due in one year or less | $ | 30,196 |
| 1.20 | % | | $ | 248 |
| 1.25 | % | | 2,752 |
| 2.53 | % | | $ | — |
| 0.00 | % | | $ | 33,196 |
| 2.18 | % |
| Due in one year to five years | 249 |
| 1.75 | % | | 2,082 |
| 2.23 | % | | 53,611 |
| 3.82 | % | | 9,833 |
| 2.15 | % | | 65,775 |
| 3.64 | % |
| Due in five years to ten years | — |
| 0.00 | % | | 9,658 |
| 2.28 | % | | 118,784 |
| 3.79 | % | | 58,756 |
| 4.50 | % | | 187,198 |
| 3.80 | % |
| Due after ten years | — |
| 0.00 | % | | 168,813 |
| 2.41 | % | | 609,465 |
| 3.99 | % | | 13,725 |
| 2.81 | % | | 792,003 |
| 3.77 | % |
| | $ | 30,445 |
| 1.31 | % | | $ | 180,801 |
| 2.37 | % | | $ | 784,612 |
| 3.87 | % | | $ | 82,314 |
| 3.66 | % | | 1,078,172 |
| 3.72 | % |
| Mortgage-backed securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | 1,263,819 |
| 2.13 | % |
| Asset-backed securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | 173,292 |
| 2.49 | % |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | $ | 2,515,283 |
| 3.09 | % |
| | | | | | | | | | | | | | | |
| Securities held-to-maturity: | |
| |
| | |
| |
| | |
| |
| | |
| |
| | | |
| Due in one year or less | $ | — |
| 0.00 | % | | $ | — |
| 0.00 | % | | $ | 1,329 |
| 4.72 | % | | $ | — |
| 0.00 | % | | $ | 1,329 |
| 4.72 | % |
| Due in one year to five years | — |
| 0.00 | % | | — |
| 0.00 | % | | 6,210 |
| 2.72 | % | | — |
| 0.00 | % | | $ | 6,210 |
| 2.72 | % |
| Due in five years to ten years | — |
| 0.00 | % | | — |
| 0.00 | % | | 10,425 |
| 3.17 | % | | — |
| 0.00 | % | | $ | 10,425 |
| 3.17 | % |
| Due after ten years | — |
| 0.00 | % | | — |
| 0.00 | % | | 2,798 |
| 4.25 | % | | — |
| 0.00 | % | | $ | 2,798 |
| 4.25 | % |
| | $ | — |
| 0.00 | % | | $ | — |
| 0.00 | % | | $ | 20,762 |
| 3.35 | % | | $ | — |
| 0.00 | % | | $ | 20,762 |
| 3.35 | % |
| Mortgage-backed securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | — |
| 0.00 | % |
| Asset-backed securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | — |
| 0.00 | % |
| Total held-for-sale securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | $ | 20,762 |
| 3.35 | % |
| | | U.S. Treasury securities | | U.S. government agency securities | | State and Municipal securities | | Corporate securities | | Totals | |
| | | Amount | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | |
| At December 31, 2016: | | | | | | | | | | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | - | | 0.00 | % | $ | 700 | | 1.21 | % | $ | 1,355 | | 4.92 | % | $ | 501 | | 1.69 | % | $ | 2,556 | | 3.27 | % |
| Due in one year to five years | | | 250 | | 1.75 | % | | 250 | | 1.25 | % | | 60,052 | | 4.56 | % | | 1,039 | | 1.64 | % | | 61,591 | | 4.49 | % |
| Due in five years to ten years | | | - | | 0.00 | % | | 10,023 | | 1.62 | % | | 106,685 | | 4.41 | % | | 7,061 | | 4.83 | % | | 123,769 | | 4.21 | % |
| Due after ten years | | | - | | 0.00 | % | | 10,796 | | 1.39 | % | | 44,628 | | 3.67 | % | | - | | 0.00 | % | | 55,424 | | 3.22 | % |
| | | $ | 250 | | 0.00 | % | $ | 21,769 | | 1.49 | % | $ | 212,720 | | 4.30 | % | $ | 8,601 | | 4.27 | % | | 243,340 | | 4.04 | % |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | 976,626 | | 2.00 | % |
| Asset-backed securities | | | | | | | | | | | | | | | | | | | | | | | 78,580 | | 2.59 | % |
| | | | | | | | | | | | | | | | | | | | | | | $ | 1,298,546 | | 2.42 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | - | | 0.0 | % | $ | - | | 0.0 | % | $ | 594 | | 1.63 | % | $ | - | | 0.0 | % | $ | 594 | | 1.63 | % |
| Due in one year to five years | | | - | | 0.0 | % | | - | | 0.0 | % | | 10,186 | | 2.79 | % | | - | | 0.0 | % | | 10,186 | | 2.79 | % |
| Due in five years to ten years | | | - | | 0.0 | % | | - | | 0.0 | % | | 10,586 | | 3.01 | % | | - | | 0.0 | % | | 10,586 | | 3.01 | % |
| Due after ten years | | | - | | 0.0 | % | | - | | 0.0 | % | | 3,885 | | 3.72 | % | | - | | 0.0 | % | | 3,885 | | 3.72 | % |
| | | $ | - | | 0.0 | % | $ | - | | 0.0 | % | $ | 25,251 | | 3.00 | % | $ | - | | 0.0 | % | $ | 25,251 | | 3.00 | % |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | - | | 0.00 | % |
| Asset-backed securities | | | | | | | | | | | | | | | | | | | | | | | - | | 0.00 | % |
| Total held-for-sale securities | | | | | | | | | | | | | | | | | | | | | | $ | 25,251 | | 3.00 | % |
| | U.S. Treasury securities | | U.S. government agency securities | | State and Municipal securities | | Corporate securities | | Totals | |
| | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | |
| At December 31, 2015: | | | | | | | | | | | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | - | | 0.0 | % | $ | 1,001 | | 0.97 | % | $ | 3,694 | | 3.69 | % | $ | 1,475 | | 0.81 | % | $ | 6,170 | | 2.56 | % |
| Due in one year to five years | | | - | | 0.0 | % | | 1,664 | | 1.40 | % | | 25,260 | | 5.80 | % | | 7,650 | | 4.67 | % | | 34,574 | | 5.34 | % |
| Due in five years to ten years | | | - | | 0.0 | % | | 94,493 | | 2.33 | % | | 101,204 | | 4.95 | % | | 988 | | 1.29 | % | | 196,685 | | 3.67 | % |
| Due after ten years | | | - | | 0.0 | % | | 31,035 | | 2.43 | % | | 34,884 | | 4.50 | % | | - | | 0.00 | % | | 65,919 | | 3.53 | % |
| | | $ | - | | 0.0 | % | $ | 128,193 | | 2.33 | % | $ | 165,042 | | 4.96 | % | $ | 10,133 | | 3.78 | % | | 303,348 | | 3.81 | % |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | 582,916 | | 2.27 | % |
| Asset-backed securities | | | | | | | | | | | | | | | | | | | | | | | 48,801 | | 1.27 | % |
| | | | | | | | | | | | | | | | | | | | | | | $ | 935,065 | | 2.72 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | - | | 0.0 | % | $ | - | | 0.0 | % | $ | 1,072 | | 1.37 | % | $ | - | | 0.0 | % | $ | 1,074 | | 1.37 | % |
| Due in one year to five years | | | - | | 0.0 | % | | - | | 0.0 | % | | 8,643 | | 2.57 | % | | - | | 0.0 | % | | 8,686 | | 2.57 | % |
| Due in five years to ten years | | | - | | 0.0 | % | | - | | 0.0 | % | | 12,804 | | 2.85 | % | | - | | 0.0 | % | | 12,920 | | 2.85 | % |
| Due after ten years | | | - | | 0.0 | % | | - | | 0.0 | % | | 8,858 | | 3.83 | % | | - | | 0.0 | % | | 8,906 | | 3.83 | % |
| | | $ | - | | 0.0 | % | $ | - | | 0.0 | % | $ | 31,377 | | 3.00 | % | $ | - | | 0.0 | % | $ | 31,586 | | 3.00 | % |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | - | | 0.00 | % |
| Asset-backed securities | | | | | | | | | | | | | | | | | | | | | | | - | | 0.00 | % |
| Total held-for-sale securities | | | | | | | | | | | | | | | | | | | | | | $ | 31,586 | | 3.00 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Treasury securities | | U.S. government agency securities | | State and Municipal securities | | Corporate securities | | Totals |
| | Amount | Yield | | Amount | Yield | | Amount | Yield | | Amount | Yield | | Amount | Yield |
| At December 31, 2016: | | | | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | | | |
| Due in one year or less | $ | — |
| 0.00 | % | | $ | 700 |
| 1.21 | % | | $ | 1,355 |
| 4.92 | % | | $ | 501 |
| 1.69 | % | | $ | 2,556 |
| 3.27 | % |
| Due in one year to five years | 250 |
| 1.75 | % | | 250 |
| 1.25 | % | | 60,052 |
| 4.56 | % | | 1,039 |
| 1.64 | % | | 61,591 |
| 4.49 | % |
| Due in five years to ten years | — |
| 0.00 | % | | 10,023 |
| 1.62 | % | | 106,685 |
| 4.41 | % | | 7,061 |
| 4.83 | % | | 123,769 |
| 4.21 | % |
| Due after ten years | — |
| 0.00 | % | | 10,796 |
| 1.39 | % | | 44,628 |
| 3.67 | % | | — |
| 0.00 | % | | 55,424 |
| 3.22 | % |
| | $ | 250 |
| 1.75 | % | | $ | 21,769 |
| 1.49 | % | | $ | 212,720 |
| 4.30 | % | | $ | 8,601 |
| 4.27 | % | | 243,340 |
| 4.04 | % |
| Mortgage-backed securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | 976,626 |
| 2.00 | % |
| Asset-backed securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | 78,580 |
| 2.59 | % |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
| | $ | 1,298,546 |
| 2.42 | % |
| | | | | | | | | | | | | | | |
| Securities held-to-maturity: | |
| |
| | |
| |
| | |
| |
| | |
| |
| | |
| |
|
| Due in one year or less | $ | — |
| 0.00 | % | | $ | — |
| 0.00 | % | | $ | 594 |
| 1.63 | % | | $ | — |
| 0.00 | % | | $ | 594 |
| 1.63 | % |
| Due in one year to five years | — |
| 0.00 | % | | — |
| 0.00 | % | | 10,186 |
| 2.79 | % | | — |
| 0.00 | % | | 10,186 |
| 2.79 | % |
| Due in five years to ten years | — |
| 0.00 | % | | — |
| 0.00 | % | | 10,586 |
| 3.01 | % | | — |
| 0.00 | % | | 10,586 |
| 3.01 | % |
| Due after ten years | — |
| 0.00 | % | | — |
| 0.00 | % | | 3,885 |
| 3.72 | % | | — |
| 0.00 | % | | 3,885 |
| 3.72 | % |
| | $ | — |
| 0.00 | % | | $ | — |
| 0.00 | % | | $ | 25,251 |
| 3.00 | % | | $ | — |
| 0.00 | % | | $ | 25,251 |
| 3.00 | % |
| Mortgage-backed securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | — |
| 0.00 | % |
| Asset-backed securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | — |
| 0.00 | % |
| Total held-for-sale securities | |
| |
| | |
| |
| | |
| |
| | |
| |
| | $ | 25,251 |
| 3.00 | % |
We computed yields using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. We computed the weighted average yield for each maturity range using the acquisition price of each security in that range.
Deposits and Other Borrowings.We had approximately $6.971$16.5 billion of deposits at December 31, 20152017 compared to $8.759$8.76 billion at December 31, 2016. Our deposits consist of noninterest and interest-bearing demand accounts, savings accounts, money market accounts and time deposits. Additionally, we entered into agreements with certain customers to sell certain of our securities under agreements to repurchase the security the following day. These agreements (which are typically associated with comprehensive treasury management programs for our commercial clients and provide the client with short-term returns for their excess funds) amounted to $135.3 million at December 31, 2017 and $85.7 million at December 31, 2016 and $79.1 million at December 31, 2015.2016. Additionally, at December 31, 2016,2017, we had borrowed $406.3 million$1.3 billion in advances from the Federal Home Loan Bank of Cincinnati (FHLB Cincinnati) compared to $300.3$406.3 million at December 31, 2015.2016. At December 31, 2016,2017, we had an estimated $1.432$1.5 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 as core funding or non-core funding. Core funding consists of all deposits other than time deposits issued in denominations of $250,000 or greater. All other funding is deemed to be non-core. Non-core is further segmented between relationship based non-core funding and wholesale funding. The following table represents the balances of our deposits and other funding and the percentage of each type to the total at December 31, 20162017 and 20152016 (in thousands):
| | | December 31, 2016 | | Percent | | | December 31, 2015 | | Percent | |
| Core funding: | | | | | | | | | | |
| Noninterest-bearing deposit accounts | | $ | 2,399,191 | | 24.99 | % | | $ | 1,889,865 | | 25.22 | % |
| Interest-bearing demand accounts | | | 1,737,996 | | 18.10 | % | | | 1,355,404 | | 18.09 | % |
| Savings and money market accounts | | | 3,185,186 | | 33.17 | % | | | 2,683,045 | | 35.81 | % |
| Time deposit accounts less than $250,000 | | | 512,599 | | 5.34 | % | | | 403,293 | | 5.38 | % |
| Total core funding | | | 7,834,972 | | 81.60 | % | | | 6,331,607 | | 84.50 | % |
| Non-core funding: | | | | | | | | | | | | |
| Relationship based non-core funding: | | | | | | | | | | | | |
| Reciprocating NOW deposits | | | 30,328 | | 0.32 | % | | | 34,144 | | 0.46 | % |
| Reciprocating money market accounts | | | 519,769 | | 5.41 | % | | | 318,905 | | 4.26 | % |
| Reciprocating time deposits (1) | | | 58,838 | | 0.61 | % | | | 50,203 | | 0.67 | % |
| Other time deposits | | | 198,689 | | 2.07 | % | | | 229,265 | | 3.06 | % |
| Securities sold under agreements to repurchase | | | 85,707 | | 0.89 | % | | | 79,084 | | 1.06 | % |
| Total relationship based non-core funding | | | 893,331 | | 9.29 | % | | | 711,601 | | 9.50 | % |
| Wholesale funding: | | | | | | | | | | | | |
| Public funds | | | - | | 0.00 | % | | | - | | 0.00 | % |
| Brokered deposits | | | 116,710 | | 1.22 | % | | | 7,288 | | 0.10 | % |
| Federal Home Loan Bank advances | | | 406,304 | | 4.23 | % | | | 300,305 | | 4.01 | % |
| Subordinated debt – Pinnacle Bank | | | 127,486 | | 1.33 | % | | | 60,000 | | 0.80 | % |
| Subordinated debt – Pinnacle Financial | | | 223,282 | | 2.33 | % | | | 82,476 | | 1.10 | % |
| Total wholesale funding | | | 873,782 | | 9.10 | % | | | 450,069 | | 6.01 | % |
| Total non-core funding | | | 1,767,113 | | 18.40 | % | | | 1,161,670 | | 15.50 | % |
| Totals | | $ | 9,602,085 | | 100.00 | % | | $ | 7,493,277 | | 100.00 | % |
|
| | | | | | | | | | | | | |
| | December 31, 2017 | | Percent | | December 31,
2016 | | Percent |
| Core funding: | | | | | | | |
| Noninterest-bearing deposit accounts | $ | 4,381,386 |
| | 23.85 | % | | $ | 2,399,191 |
| | 24.99 | % |
| Interest-bearing demand accounts | 2,756,506 |
| | 15.00 | % | | 1,737,996 |
| | 18.10 | % |
| Savings and money market accounts | 5,847,650 |
| | 31.83 | % | | 3,185,186 |
| | 33.17 | % |
| Time deposit accounts less than $250,000 | 1,260,162 |
| | 6.86 | % | | 512,599 |
| | 5.34 | % |
| Total core funding | 14,245,704 |
| | 77.54 | % | | 7,834,972 |
| | 81.60 | % |
| Non-core funding: | | |
|
| | |
| | |
|
| Relationship based non-core funding: | | |
|
| | |
| | |
|
| Reciprocating NOW deposits | 77,472 |
| | 0.42 | % | | 30,328 |
| | 0.32 | % |
| Reciprocating money market accounts | 408,806 |
| | 2.23 | % | | 519,769 |
| | 5.41 | % |
| Reciprocating time deposits (1) | 106,227 |
| | 0.58 | % | | 58,838 |
| | 0.61 | % |
| Other time deposits | 444,951 |
| | 2.42 | % | | 198,689 |
| | 2.07 | % |
| Securities sold under agreements to repurchase | 135,262 |
| | 0.74 | % | | 85,707 |
| | 0.89 | % |
| Total relationship based non-core funding | 1,172,718 |
| | 6.39 | % | | 893,331 |
| | 9.29 | % |
| Wholesale funding: | | |
|
| | |
| | |
|
| Public funds | — |
| | 0.00 | % | | — |
| | 0.00 | % |
| Brokered deposits | 445,822 |
| | 2.43 | % | | 49,983 |
| | 0.53 | % |
| Brokered time deposits | 722,721 |
| | 3.93 | % | | 66,727 |
| | 0.69 | % |
| Federal Home Loan Bank advances | 1,319,909 |
| | 7.18 | % | | 406,304 |
| | 4.23 | % |
| Subordinated debt and other funding | 465,505 |
| | 2.53 | % | | 350,768 |
| | 3.65 | % |
| Total wholesale funding | 2,953,957 |
| | 16.07 | % | | 873,782 |
| | 9.10 | % |
| Total non-core funding | 4,126,675 |
| | 22.46 | % | | 1,767,113 |
| | 18.40 | % |
| Totals | $ | 18,372,379 |
| | 100.00 | % | | $ | 9,602,085 |
| | 100.00 | % |
| |
| (1) | The reciprocating time deposit category consists of deposits we receive from a bank network (the CDARS network) in connection with deposits of our customers in excess of our FDIC coverage limit that we place with the CDARS network. |
Our funding policies limit the amount of non-core funding we can utilize. Periodically, we may exceed our policy limitations, at which time management will develop plans to bring our core funding ratios back within compliance. As noted in the table above, our core funding as a percentage of total funding decreased from 84.5% at December 31, 2015 to 81.6% at December 31, 2016. Continuing2016 to grow77.5% at December 31, 2017. Growing our core deposit base is a key strategic objective of our firm. Our current growth plans contemplate that we may increase our non-core funding amounts from current levels, but we do not currently anticipate that such increases will exceed our internal policies.
When wholesale funding is necessary to complement the company's core deposit base, management determines which source is best suited to address both liquidity risk management and interest rate risk management objectives. We increased our exposure to brokered deposits in 20162017 as a measure to diversify wholesale funding sources. Thesources and in conjunction with our acquisitions. Our Asset Liability Management Policy institutes limitations on overall wholesale funding reliance and on brokered deposit exposure specifically. Both our overall reliance on wholesale funding and exposure to brokered deposits were well within those policy limitations as of December 31, 2016.2017.
The amount of time deposits as of December 31, 20162017 amounted to $836.9 million.$2.5 billion. The following table, which includes core, non-core and reciprocal deposits, shows our time deposits in denominations of under $100,000 and those of denominations of $100,000 and greater by category based on time remaining until maturity of (1) three months or less, (2) over three but less than six months, (3) over six but less than twelve months and (4) over twelve months and the weighted average rate for each category (in thousands):
| | | Balances | | Weighted Avg. Rate | |
| Denominations less than $100,000 | | | | | |
| Three months or less | | $ | 63,608 | | 0.73 | % |
| Over three but less than six months | | | 48,451 | | 0.72 | % |
| Over six but less than twelve months | | | 56,956 | | 0.75 | % |
| Over twelve months | | | 64,956 | | 1.20 | % |
| | | | 233,971 | | 0.86 | % |
| Denomination $100,000 and greater | | | | | | |
| Three months or less | | | 176,222 | | 0.64 | % |
| Over three but less than six months | | | 119,011 | | 0.76 | % |
| Over six but less than twelve months | | | 153,790 | | 0.83 | % |
| Over twelve months | | | 153,859 | | 1.35 | % |
| | | | 602,882 | | 0.89 | % |
| Totals | | $ | 836,853 | | 0.88 | % |
|
| | | | | | |
| | Balances | | Weighted Avg. Rate |
| Denominations less than $100,000 | | | |
| Three months or less | $ | 294,872 |
| | 0.91 | % |
| Over three but less than six months | 273,872 |
| | 1.05 | % |
| Over six but less than twelve months | 347,652 |
| | 1.19 | % |
| Over twelve months | 318,943 |
| | 1.51 | % |
| | 1,235,339 |
| | 1.17 | % |
| Denomination $100,000 and greater | | | |
| Three months or less | 281,188 |
| | 0.82 | % |
| Over three but less than six months | 275,306 |
| | 0.98 | % |
| Over six but less than twelve months | 377,633 |
| | 1.03 | % |
| Over twelve months | 364,595 |
| | 1.48 | % |
| | 1,298,722 |
| | 1.10 | % |
| Totals | $ | 2,534,061 |
| | 1.14 | % |
Subordinated debt and other borrowings. Pinnacle Bank receives advances from the FHLB Cincinnati, pursuant to the terms of various borrowing agreements, which assist it in the funding of its home mortgage and commercial real estate loan portfolios. Under the borrowing agreements with the FHLB Cincinnati, Pinnacle Bank has pledged certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral. At December 31, 2017 and 2016, Pinnacle BankFinancial had received advances from the FHLB Cincinnati totaling $406.3 million.$1.3 billion and $406.2 million, respectively. Additionally, Pinnacle Financial recognized a discount of $167,000 on FHLB Cincinnati advances in conjunction with previous acquisitions. The remaining discount was $92,000 at December 31,its acquisition of Avenue in July 2016. At December 31, 2017 and 2016, respectively, the remaining discount was $13,000 and $92,000. At December 31, 2017, the scheduled maturities of theseFHLB Cincinnati advances and interest rates are as follows (in thousands):
|
| | | | | | |
| | Scheduled Maturities | | Weighted average interest rates |
| 2018 | $ | 557,501 |
| | 1.46 | % |
| 2019 | 356,000 |
| | 1.64 | % |
| 2020 | 272,627 |
| | 1.74 | % |
| 2021 | 133,750 |
| | 1.87 | % |
| 2022 | — |
| | — |
|
| Thereafter | 17 |
| | 2.75 | % |
| | $ | 1,319,895 |
| | |
| Weighted average interest rate | |
| | 1.61 | % |
| | | Scheduled Maturities | Weighted Average Interest Rates(1) | |
| | | | | |
| 2017 | | $ | 392,000 | | 0.79 | % |
| 2018 | | | 14,003 | | 1.29 | % |
| 2019 | | | - | | 0.00 | % |
| 2020 | | | 182 | | 2.25 | % |
| 2021 | | | - | | 0.00 | % |
| Thereafter | | | 28 | | 2.75 | % |
| | | $ | 406,213 | | | |
| Weighted average interest rate | | | | | 0.81 | % |
| |
| (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, 2016. 2017. |
As part of our asset liability policy, to manage our interest rate risk, we utilize various strategies in order to achieve our goals. During 2015, Pinnacle Bank prepaid one of its previously restructured FHLB advances resulting in $481,000 in debt extinguishment expense. No prepayments occurred in 2016.
We have four wholly-owned subsidiaries that areentered into and acquired a number of statutory business trusts (the Trusts). We are the sole sponsor of the Trusts and acquired each Trust's common securities. The Trustswhich were created for the exclusive purpose of issuingestablished to issue 30-year capital trust preferred securities and used the proceeds to acquirerelated junior subordinated debentures (Subordinated Debentures) issued by Pinnacle Financial. The sole assetsdebt instruments and certain other subordinated debt agreements. We also have a $75.0 million revolving credit facility, which we have not drawn upon as of the Trusts are the Subordinated Debentures. At December 31, 2016, our approximate $2.5 million investment in the Trusts is included in other investments in the accompanying consolidated balance sheets2017 and our approximate $82.5 million obligation is reflected as subordinated debt.
| Date Established | Maturity | | Common Securities | | Trust Preferred Securities | | Floating Interest Rate | Interest Rate at December 31, 2016 | |
| Trust I | December 29, 2003 | December 30, 2033 | | $ | 310,000 | | $ | 10,000,000 | | Libor + 2.80% | | 3.76 | % |
| Trust II | September 15, 2005 | September 30, 2035 | | | 619,000 | | | 20,000,000 | | Libor + 1.40% | | 2.40 | % |
| Trust III | September 7, 2006 | September 30, 2036 | | | 619,000 | | | 20,000,000 | | Libor + 1.65% | | 2.65 | % |
| Trust IV | October 31, 2007 | September 30, 2037 | | | 928,000 | | | 30,000,000 | | Libor + 2.85% | | 3.81 | % |
which matures on March 27, 2018. These instruments are outlined below (in thousands):
The securities bear a floating interest rate based on a spread over 3-month LIBOR which is set each quarter. Distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. We guarantee the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trusts. Pinnacle Financial's obligations under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by Pinnacle Financial of the obligations of the Trusts under the Trust Preferred Securities. |
| | | | | | | | |
| Name | Date Established | Maturity | Total Debt Outstanding | Interest Rate at December 31, 2017 | Coupon Structure |
| Trust preferred securities | | | | | |
| Pinnacle Statutory Trust I | December 29, 2003 | December 30, 2033 | $ | 10,310 |
| 4.40 | % | 30-day LIBOR + 2.80% |
| Pinnacle Statutory Trust II | September 15, 2005 | September 30, 2035 | 20,619 |
| 3.09 | % | 30-day LIBOR + 1.40% |
| Pinnacle Statutory Trust III | September 7, 2006 | September 30, 2036 | 20,619 |
| 3.34 | % | 30-day LIBOR + 1.65% |
| Pinnacle Statutory Trust IV | October 31, 2007 | September 30, 2037 | 30,928 |
| 4.44 | % | 30-day LIBOR + 2.85% |
| BNC Capital Trust I | April 3, 2003 | April 15, 2033 | 5,155 |
| 4.61 | % | 30-day LIBOR + 3.25% |
| BNC Capital Trust II | March 11, 2004 | April 7, 2034 | 6,186 |
| 4.21 | % | 30-day LIBOR + 2.85% |
| BNC Capital Trust III | September 23, 2004 | September 23, 2034 | 5,155 |
| 3.76 | % | 30-day LIBOR + 2.40% |
| BNC Capital Trust IV | September 27, 2006 | December 31, 2036 | 7,217 |
| 3.39 | % | 30-day LIBOR + 1.70% |
| Valley Financial Trust I | August 5, 2005 | September 30, 2035 | 4,124 |
| 4.77 | % | 30-day LIBOR + 3.10% |
| Valley Financial Trust II | June 6, 2003 | June 26, 2033 | 7,217 |
| 3.08 | % | 30-day LIBOR + 1.49% |
| Valley Financial Trust III | September 26, 2005 | December 15, 2035 | 5,155 |
| 3.11 | % | 30-day LIBOR + 1.73% |
| Southcoast Capital Trust III | December 15, 2006 | January 30, 2037 | 10,310 |
| 3.19 | % | 30-day LIBOR + 1.50% |
| | | | | | |
| Subordinated Debt | | | | | |
| Pinnacle Bank Subordinated Notes | July 30, 2015 | July 30, 2025 | 60,000 |
| 4.88 | % | Fixed(1) |
| Pinnacle Bank Subordinated Notes | March 10, 2016 | July 30, 2025 | 70,000 |
| 4.88 | % | Fixed(1) |
| Avenue Subordinated Notes | December 29, 2014 | December 29, 2024 | 20,000 |
| 6.75 | % | Fixed(2) |
| Pinnacle Financial Subordinated Notes | November 16, 2016 | November 16, 2026 | 120,000 |
| 5.25 | % | Fixed(3) |
| BNC Subordinated Notes | September 25, 2014 | October 1, 2024 | 60,000 |
| 5.50 | % | Fixed(4) |
| BNC Subordinated Note | October 15, 2013 | October 15, 2023 | 10,500 |
| 6.35 | % | 30-day LIBOR + 5.0%(5) |
| | | | | | |
| Other Borrowings | | | | | |
Revolving credit facility(6) | March 29, 2016 | March 27, 2018 | — |
| | |
| Debt issuance costs and fair value adjustment | | (7,990 | ) | | |
| Total subordinated debt and other borrowings | | $ | 465,505 |
| | |
The Subordinated Debentures are unsecured, bear interest at a rate equal(1) Migrates to the rates paid by the Trusts on the Trust Preferred Securities and mature on the same dates as those noted above for the Trust Preferred Securities. Interest is payable quarterly. We may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and our ability to pay dividends on our common shares will be restricted.
The Trust Preferred Securities may be redeemed prior to maturity at our option. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) the Trust becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by the parent company on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for the Trust to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as "Tier I capital" under the Federal Reserve capital adequacy guidelines.
On July 30, 2015, Pinnacle Bank issued $60.0 million in aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes due 2025 (Pinnacle Bank Notes) in a private placement transaction to institutional investors. On March 10, 2016, Pinnacle Bank issued an additional $70.0 million in aggregate principal amount of the Pinnacle Bank Notes. The Pinnacle Bank Notes issued on March 10, 2016 were priced at 99.023% of the principal amount per note, for an effective interest rate of 5.125%. The maturity date of the Pinnacle Bank Notes is July 30, 2025, although Pinnacle Bank may redeem some or all of the Pinnacle Bank Notesthree month LIBOR + 3.128% beginning on the interest payment date of July 30, 2020 and on any interest payment date thereafter at a redemption price equal to 100% of the principal amount of the Pinnacle Bank Notes to be redeemed plus accrued and unpaid interest to the date of redemption, subject to the prior approval of the FDIC. Pinnacle Bank may redeem the Pinnacle Bank Notes at any time upon the occurrence of certain tax events, capital events or investment company events.
From the date of the issuance through July 29, 2020, the Pinnacle Bank Notes will bear interest at the rate of 4.875% per year and will be payable semi-annually in arrears on January 30 and July 30 of each year, beginning on January 30, 2016. From July 30, 2020, the Pinnacle Bank Notes will bear interest at a rate per annum equal to the three-month LIBOR rate plus 3.128%, payable quarterly in arrears on each January 30, April 30, July 30, and October 30, beginning on July 30, 2020 through the maturity date or the early redemption dateend of the Pinnacle Bank Notes.term.
The sale of the Pinnacle Bank Notes on July 30, 2015 yielded net proceeds of $59.0 million after deducting the placement agents' fees and expenses payable by Pinnacle Bank. Pinnacle Bank used the net proceeds from the July 30, 2015 offering, together with available cash,(2) Migrates to pay the cash portion of the merger consideration payable to the shareholders of CapitalMark and Magna in connection with those mergers, to pay the amounts necessary to redeem the preferred shares that each of CapitalMark and Magna had issued to the United States Department of the Treasury in connection with their participation in the Treasury's Small Business Lending Fund and for general corporate purposes. The sale of the Notes on March 10, 2016 yielded net proceeds of approximately $68.4 million after deducting the initial purchasers' discount and expenses payable by Pinnacle Bank. Pinnacle Bank used the net proceeds from the March 1, 2016 offering for general corporate purposes, (including the repayment of short term borrowings of Pinnacle Bank used to pay a portion of the cash portion of the purchase price for the additional equity interests of BHG acquired by Pinnacle Bank on March 1, 2016).
In addition, upon consummation of the Avenue Merger, Pinnacle Financial assumed Avenue's obligations under its outstanding $20.0 million subordinated notes issued in December 2014 that mature in December 2024. The Avenue Subordinated Notes bear interest at a rate of 6.75% per annum untilthree month LIBOR + 4.95% beginning January 1, 2020 and may not be redeemed prior to such date. Beginning on January 1, 2020, if not redeemed on such date,through the Avenue Subordinated Notes will bear interest at a floating rate equal to the three-month LIBOR determined on the determination dateend of the applicable interest period plus 4.95%. Interest on the Avenue Subordinated Notes is payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, through December 29, 2024 or the earlier date of redemption of all the Avenue Subordinated Notes. The Avenue Subordinated Notes are not subjectterm.
(3) Migrates to redemption at the option of the holders. These notes qualify as Tier 2 capital. These Avenue Subordinated Notes were recorded at fair value as of the acquisition date, and included a discount of $2.7 million, which will be accreted over the life of these notes.
On November 16, 2016, Pinnacle Financial completed the issuance, through a private placement, of $120.0 million aggregate principal amount of Fixed–to-Floating Rate Subordinated Notes due November 16, 2026 (the "Pinnacle Financial Notes") to certain institutional accredited investors. The Pinnacle Financial Notes bear a fixed interest rate of 5.25 percent per annum untilthree month LIBOR + 3.884% beginning November 16, 2021 subject to prior approvalthrough the end of the Federal Reserve, payable semi-annually in arrears. From November 16, 2021, the Pinnacle Financial Notes will bear a floating rate of interest equalterm.
(4) Migrates to 3-Monththree month LIBOR + 3.884 percent per annum until their maturity on November 16, 2026, or such earlier redemption date, payable quarterly in arrears. The Pinnacle Financial Notes will be redeemable by3.59% beginning October 1, 2019 through the Company, in whole or in part, on or after November 16, 2021 or, in whole but not in part, upon the occurrence of certain specified tax events, capital events or investment company events. The Pinnacle Financial Notes are not subject to redemption at the optionend of the holders. The sale of the Pinnacle Financial Notes yielded net proceeds of approximately $118.3 million, and the Pinnacle Financial Notes qualify initially as Tier 2 capital for regulatory purposes. The Company used approximately $57 million of the net proceeds to retire all of the outstanding debt under the Company's $75 million revolving credit facility entered into in March 2016. The Company has contributed $50.0 million of the net proceeds to Pinnacle Bank and has returned the remaining net proceeds for general corporate purposes. The foregoing description does not purport to be a complete description of the Pinnacle Financial Notes.
Upon consummation of our proposed merger with BNC, we will assume BNC's obligations under its outstanding $60.0 million subordinated notes issued in September 2014 that mature in October 2024. These notes bear interest at a rate of 5.5% per annum until September 30, 2019 and may not be repaid prior to that date. Beginning on October 1, 2019,term if not redeemed on that date, these notes will bear interest atdate.
(5) Coupon structure includes a floating rate equal to the three-month LIBOR determinedfloor of 5.0% and a cap of 9.5%.
(6) Borrowing capacity on the determination date of the applicable interest period plus 359 basis points. The $50.5 million in aggregate principal amount of subordinated debentures issued by trust affiliates of BNC in connection with the issuance of trust preferred securities will also be assumed in connection with our merger with BNC.
On March 29, 2016, Pinnacle Financial entered into a revolving credit facility with a bank for borrowings of up to $75 million under a loan agreement Pinnacle Financial entered into with the bank (the "Loan Agreement"). Borrowings under the revolving credit facility have been used to fund the cash portion of the purchase price of the Avenue merger and to make capital contributions to Pinnacle Bank. Future borrowings may be used for general corporate purposes including to fund capital contributions to Pinnacle Bank. Pinnacle Financial's borrowingsis $75.0 million. At December 31, 2017, there was no outstanding balance under the Loan Agreement bear interest at athis facility. The rate equal tounder this facility is 2.25% plus the greater of (i) zero percent (0%) and (ii) the one-month30-day LIBOR rate quoted by the lender. The Loan Agreement also requires Pinnacle Financial to paywith a quarterlymaturity date of March 27, 2018 and an unused fee equal toof 0.35% per annum on theof average daily unused amount of loan.
Following the revolving credit facility. AsMerger with BNC, Pinnacle Financial's total assets were in excess of December 31, 2016, there were$15.0 billion as a result of the acquisition of BNC, which caused the subordinated debentures Pinnacle Financial and BNC issued to cease to qualify as Tier 1 capital under applicable banking regulations. Though these securities no outstanding borrowings under this agreement.longer qualify as Tier 1 capital, Pinnacle Financial believes these subordinated debentures continue to qualify as Tier 2 capital.
In January 2017, we completed the public offering of 3.22 million shares of our common stock in a transaction that resulted in net proceeds to us, after deducing underwriting discounts and commissions and estimated other expenses payable by us, of $191.2 million. We have contributed $185.0 million of these net proceeds to our bank subsidiary.
Capital Resources. At December 31, 20162017 and 2015,2016, our stockholders' equity amounted to $1.497$3.7 billion and $1.156$1.5 billion, respectively. Approximately $222.2 million$1.8 billion of this increase is attributable to shares of Pinnacle Financial Common Stock issued upon our acquisition of Avenue and additional investment in BHG.BNC. At December 31, 2016,2017, Pinnacle Bank's common equity Tier 1 risk-based capital ratio was 9.3%10.3%, Tier 1 risk-based capital ratio was 9.3%10.3%, the total risk-based capital ratio was 11.2%11.3% and theTier 1 leverage ratio was 9.2%9.7%, compared to 9.0%9.3%, 9.0%9.3%, 10.6%11.2% and 8.8%9.2% at December 31, 2015,2016, respectively. At December 31, 2016,2017, Pinnacle Financial's common equity Tier 1 risk-based capital ratio was 7.9%9.1%, Tier 1 risk-based capital ratio was 8.6%9.1%, the total risk-based capital ratio was 11.9%12.0% and theTier 1 leverage ratio was 8.6%, compared to 7.9%, 8.6%, 9.6%, 11.2%11.9% and 9.4%8.6% at December 31, 2015,2016, respectively.
In July 2013, the Federal Reserve BoardWe and our bank subsidiary 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 our financial condition or results of operations. Under capital adequacy guidelines and the FDIC approved final rulesregulatory framework for prompt corrective action, we and our bank subsidiary must meet specific capital guidelines that substantially amendinvolve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our and Pinnacle Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require us and our bank subsidiary to maintain minimum amounts and ratios of common equity Tier 1 capital to risk-weighted assets, Tier I capital to risk-weighted assets, total risk-based capital rules applicable to Pinnacle Bankrisk-weighted assets and Pinnacle Financial. of Tier 1 capital to average assets.
The final rules which became effective on January 1, 2015, implement the regulatory capital reforms ofimplementing the Basel Committee on Banking Supervision reflectedSupervision's capital guidelines for U.S. banks (Basel III rules) became effective for us on January 1, 2015 with full compliance with all of the requirements being phased in "Basel III: A Global Regulatory Framework for More Resilient Banksover a multi-year schedule, and Banking Systems" (Basel III) and changes requiredfully phased in by the Dodd-Frank Act.
Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. These rules refined the definition of what constitutes "capital" for purposes of calculating those ratios, including the definitions of TierJanuary 1, capital and Tier 2 capital.2019. The minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 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 Basel III rules, also establish a "capitalcapital conservation buffer"buffer of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once theratios. The capital conservation buffer is fullywas phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The phase in of the capital conservation buffer beganbeginning in January 2016 at 0.625% of risk-weighted assets and increasesis increasing each year on January 1stby a like percentage until fully implemented in January 2019. An institution will be subjectThe net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes, as of December 31, 2017, that we had met all capital adequacy requirements to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Under these rules, Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Cumulative preferred stock and trust preferred securities issued after May 19, 2010, will no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including in the case of bank holding companies with less than $15.0 billion in total assets, trust preferred securities issued prior to that date, will continue to count as Tier 1 capital subject to certain limitations. Upon consummation of our proposed merger with BNC, our total assets will exceed $15 billion and as a result of our total assets exceeding $15 billion as a result of a merger, the subordinated debentureswhich we have issued in connection with our trust preferred securities (along with the subordinated debentures BNC has issued in connection with its trust preferred securities) will cease to qualify as Tier 1 capital. We believe these subordinated debentures will continue to qualify as Tier 2 capital. The definition of Tier 2 capital is generally unchanged for most banking organizations, subject to certain new eligibility criteria.
Common equity Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions.
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 chose to opt-out of this requirement.
In January 2017, we completed the public offering of 3.22 million shares of our common stock in a transaction that resulted in net proceeds to us, after deducing underwriting discounts and commissions and estimated other expenses payable by us, of $191.2 million. We have contributed $185.0 million of these net proceeds to our bank subsidiary.
are subject.
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, 2016,2017, Pinnacle Bank paid dividends of $27.7$63.1 million to us which was within the limits allowed by the TDFI.
During the year ended December 31, 2016,2017, we paid $24.7$35.9 million in dividends to common shareholders. On January 17, 201716, 2018 our board of directors declared a $0.14 quarterly cash dividend to common shareholders which should approximate $7.0of approximately $10.9 million in aggregate dividend payments that will bewas paid on February 24, 201723, 2018 to common shareholders of record as of the close of business on February 3, 2017.2, 2018. The amount and timing of all future dividend payments, if any, is subject to board discretion and will depend on our earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to us.
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 assumeassumes 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, longer time horizons are also modeled. All policy scenarios assume a static balance sheet, although other scenarios are modeled.
Earnings simulation model. We believe interest rate risk is best measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with forecasts of interest rates for the next 12 months and are combined with other factors in order to produce various earnings simulations. 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 changes up or down in rates from management's flat interest rate forecast over the next twelve months, management establishes policy limits in the decline in net interest income for the following scenarios:
· | -10.0% for gradual change of 400 points; -20.0% instantaneous change of 400 basis points |
· | -7.5% for gradual change of 300 points; -15.0% instantaneous change of 300 basis points |
· | -5.0% for gradual change of 200 points; -10.0% instantaneous change of 200 basis points |
· | -2.5% for gradual change of 100 points; -5.0% instantaneous change of 100 basis points |
At December 31, 2016,2017, our earnings simulation model indicated we were in compliance with our policies for both the gradual and instantaneous interest rate changes.
Economic value of equity. Our EVE model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change 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. To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, in the following scenarios:
· | +/- 400 basis point change in interest rates |
+/- 400 basis point change in interest rates; EVE shall not decrease by more than 40 percent· | +/- 300 basis point change in interest rates |
+/- 300 basis point change in interest rates; EVE shall not decrease by more than 30 percent· | +/- 200 basis point change in interest rates |
+/- 200 basis point change in interest rates; EVE shall not decrease by more than 20 percent· | +/- 100 basis point change in interest rates |
+/- 100 basis point change in interest rates; EVE shall not decrease by more than 10 percent
At December 31, 2016,2017, our EVE model indicated we were in compliance with our policies for the scenarios noted above. However, our policies provide that during certain interest rate cycles, the down basis point rate changes may not be particularly significant given the current slope of the yield curve. Accordingly, we have currently suspended the calculation of the down rate scenarios for EVE measurement for the down 300 and down 400 scenarios.
Another commonly analyzed scenario that weWe also analyze is 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 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.
We may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities and as one tool to manage our interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. 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.
Based on information gathered from these various modeling scenarios management believes that as ofat December 31, 2016,2017, our balance sheet would likely be modestly asset sensitive.
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 the firm's conclusions as to anticipated interest rate fluctuations in future periods. At present, ALCO has determined that its "most likely" rate scenario considers twothree additional increases in short-term interest rates in 2017 while the longer end of the rate curve will increase only slightly.2018. Our "most likely" rate forecast has been basically consistent for several quarters and is based primarily on information we acquire from a service which includes a consensus forecast of numerous benchmarks. As a result,Over the last several quarters we have taken steps to make our balance sheet more asset sensitive, which has favorably impacted us in the current rising rate environment and in preparing forshould continue to positively impact our results with additional rate increases unless we are unable to hold our funding costs at levels that don't eliminate the anticipated rise inpositive impact to interest rates,income of these rising rates. However, BNC’s balance sheet was less asset sensitive which neutralizes some, if not most, of the impact of those steps. Nonetheless we have implemented the following strategies:
· | Reduced our exposure to fixed rate investment securities in relation to total assets from approximately 23% as of December 31, 2010 to a current position of approximately 11.8% of total assets. This reduction should assist the firm in becoming more asset sensitive over time. |
· | Executed a series of cash flow hedges involving approximately $200 million in FHLB borrowings at pre-established fixed rates. Fixed rate liabilities also provide for a more asset sensitive balance sheet. |
· | Participated in interest rate swaps whereby our customers pay a fixed rate which we remit to our counter party while we receive in return a floating rate on these commercial loans. These loans amounted to approximately $667 million at December 31, 2016. Floating rate loans promote an asset sensitive balance sheet. |
· | Reduced the amount of variable rate loans with in-the-money rate floors from $637.8 million as of December 31, 2015 to $469.3 million as of December 31, 2016 |
· | Reduced the difference between the weighted average floor rate on floating and variable rate to the weighted average contract rate on these type of loans from 0.81% at December 31, 2015 to 0.69% at December 31, 2016. This reduction results in requiring a lesser increase in shorter-term rates for the floors to be overcome, thus making these loans with rate floors more asset sensitive over time. |
We believe current growth in our balance sheet will also assist us in achievement of increased asset sensitivity over time; however, we may also implement a series ofadditional actions designed to accelerateachieve our achievement of neutrality or assetdesired sensitivity as conditions warrant.position.
Liquidity Risk Management. The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.
To assist in determining the adequacy of our liquidity, we perform a variety of liquidity stress tests including idiosyncratic, systemic and combined scenarios for both moderate and severe events. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining our ability to meet the daily cash flow requirements of our customers, both depositors and borrowers. We seek to maintain a sufficiently liquid asset balance to ensure our ability to meet our obligations. The amount of the appropriate minimum liquid asset balance is determined through severe liquidity stress testing as measured by our liquidity coverage ratio calculation. At December 31, 2016,2017, 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, 2016,2017, we believe we had an estimated $1.432$1.5 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 $140.0$160.0 million. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month. There were no outstanding borrowings under these agreements at December 31, 2016,2017, or during the year then ended under such agreements, although we test the availability of these accommodations annually. Pinnacle Bank also has approximately $1.85$2.6 billion in available Federal Reserve discount window lines of credit.
At December 31, 2016,2017, we had $1.2 billion in brokered deposit compared to $116.7 million in brokered certificates of deposit compared to $7.3 million in brokered certificates of depositdeposits at December 31, 2015.2016. Historically, we have issued brokered certificates through several different brokerage houses based on competitive bid. Through the Avenue acquisition, we acquired non-reciprocal time deposits issued through the CDARS network. We also obtained $50 million in non-reciprocal insured cash sweep deposits under a two-year $200 million agreement. Through the BNC acquisition, we acquired $288 million in non-reciprocal insured cash sweep deposits under various multi-year agreements. Typically, these funds have been for varying maturities of up to two years and were issued at rates which were competitive to rates that we would be required to pay to attract similar deposits within our local markets as well as rates for FHLB advances of similar maturities. Although we consider these deposits to be a ready source of liquidity under current market conditions, we anticipate that these deposits will continue to represent a small percentage of our total funding in 2017 as we seek to continue maintaining a higher level of core deposits.
Industry regulators have defined additional liquidity guidelines, through the issuance of the Basel III Liquidity Coverage Ratio (LCR) and the Modified LCR, for banking institutions greater than $250 billion in assets, and $50 billion in assets respectively, in the United States. These regulatory guidelines became effective January 2015 with phase in over subsequent years and will require these large institutions to follow prescriptive guidance in determining an absolute level of a high quality liquid asset (HQLA) buffer that must be maintained on their balance sheets in order to withstand a potential liquidity crisis event. Although Pinnacle Financial follows the principles outlined in the Interagency Policy Statement on Liquidity Risk Management, issued March 2010, to determine its HQLA buffer, Pinnacle Financial is not currently subject to these regulations. However, these formulas could eventually be imposed on smaller banks, such as Pinnacle Bank, and require an increase in the absolute level of liquidity on our balance sheet, which could result in lower net interest margins for us in future periods.
At December 31, 2016,2017, we had no significant commitments for capital expenditures. However, we expect to expand our footprint by one location in each of the Knoxville, Chattanooga and Memphis MSAs annuallymarkets annually. In future periods, these expansions may lead to higher equipment and intendoccupancy expenses as well as related increases in salaries and benefits expense. There are no current plans to add toexpand our information technology platformbranch distribution in the Carolinas and will likely incur significant capital expenditures.Virginia.
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. Information concerning our short-term borrowings as of and for each of the years in the three-year period ended December 31, 20162017 is as follows (in thousands):
| | | At December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Amounts outstanding at year-end: | | | | | | | | | |
| Securities sold under agreements to repurchase | | $ | 85,706 | | | $ | 79,084 | | | $ | 93,995 | |
| Federal funds purchased | | | - | | | | - | | | | - | |
| Federal Home Loan Bank short-term advances | | | 392,000 | | | | 280,000 | | | | 180,000 | |
| | | | | | | | | | | | | |
| Weighted average interest rates at year-end: | | | | | | | | | | | | |
| Securities sold under agreements to repurchase | | | 0.22 | % | | | 0.21 | % | | | 0.18 | % |
| Federal funds purchased | | | - | | | | - | | | | - | |
| Federal Home Loan Bank short-term advances | | | 0.79 | % | | | 0.49 | % | | | 0.16 | % |
| | | | | | | | | | | | | |
| Maximum amount of borrowings at any month-end: | | | | | | | | | | | | |
| Securities sold under agreements to repurchase | | $ | 92,941 | | | $ | 81,246 | | | $ | 107,244 | |
| Federal funds purchased | | | 2,567 | | | | - | | | | - | |
| Federal Home Loan Bank short-term advances | | | 763,000 | | | | 620,000 | | | | 260,000 | |
| | | | | | | | | | | | | |
| Average balances for the year: | | | | | | | | | | | | |
| Securities sold under agreements to repurchase | | $ | 75,950 | | | $ | 68,037 | | | $ | 67,999 | |
| Federal funds purchased | | | 1,219 | | | | 606 | | | | 1,014 | |
| Federal Home Loan Bank short-term advances | | | 489,333 | | | | 224,583 | | | | 80,417 | |
| | | | | | | | | | | | | |
| Weighted average interest rates for the year: | | | | | | | | | | | | |
| Securities sold under agreements to repurchase | | | 0.24 | % | | | 0.20 | % | | | 0.21 | % |
| Federal funds purchased | | | 0.98 | % | | | 0.81 | % | | | 0.86 | % |
| Federal Home Loan Bank short-term advances | | | 0.62 | % | | | 0.23 | % | | | 0.17 | % |
|
| | | | | | | | | | | |
| | At December 31, |
| | 2017 | | 2016 | | 2015 |
| Amounts outstanding at year-end: | | | | | |
| Securities sold under agreements to repurchase | $ | 135,262 |
| | $ | 85,706 |
| | $ | 79,084 |
|
| Federal funds purchased | — |
| | — |
| | — |
|
| Federal Home Loan Bank short-term advances | 557,501 |
| | 392,000 |
| | 280,000 |
|
| | | | | | |
| Weighted average interest rates at year-end: | | | |
| | |
|
| Securities sold under agreements to repurchase | 0.35 | % | | 0.22 | % | | 0.21 | % |
| Federal funds purchased | — |
| | — |
| | — |
|
| Federal Home Loan Bank short-term advances | 1.46 | % | | 0.79 | % | | 0.49 | % |
| | | | | | |
| Maximum amount of borrowings at any month-end: | | | |
| | |
|
| Securities sold under agreements to repurchase | $ | 205,008 |
| | $ | 92,941 |
| | $ | 81,246 |
|
| Federal funds purchased | 50,000 |
| | 2,567 |
| | — |
|
| Federal Home Loan Bank short-term advances | 1,011,500 |
| | 763,000 |
| | 620,000 |
|
| | | | | | |
| Average balances for the year: | | | |
| | |
|
| Securities sold under agreements to repurchase | $ | 115,573 |
| | $ | 75,950 |
| | $ | 68,037 |
|
| Federal funds purchased | 1,189 |
| | 1,219 |
| | 606 |
|
| Federal Home Loan Bank short-term advances | 528,042 |
| | 489,333 |
| | 224,583 |
|
| | | | | | |
| Weighted average interest rates for the year: | | | |
| | |
|
| Securities sold under agreements to repurchase | 0.36 | % | | 0.24 | % | | 0.20 | % |
| Federal funds purchased | 1.02 | % | | 0.98 | % | | 0.81 | % |
| Federal Home Loan Bank short-term advances | 1.22 | % | | 0.62 | % | | 0.23 | % |
The following table presents additional information about our contractual obligations as of December 31, 2016,2017, which by their terms have contractual maturity and termination dates subsequent to December 31, 20162017 (in thousands):
| | | At December 31, 2016 | |
| | | Next 12 months | | 13-36 months | | 37-60 months | | More than 60 months | | Totals | |
| Contractual obligations: | | | | | | | | | | | |
| Certificates of deposit (1) | | $ | 595,122 | | $ | 162,304 | | $ | 85,719 | | $ | 6,036 | | $ | 849,181 | |
| Deposits without a stated maturity (2) | | | 7,922,826 | | | - | | | - | | | - | | | 7,922,826 | |
| Securities sold under agreements to repurchase (1) | | | 85,707 | | | - | | | - | | | - | | | 85,707 | |
| Federal Home Loan Bank advances (1) | | | 393,175 | | | 14,149 | | | 22 | | | 29 | | | 407,375 | |
| Junior subordinated debentures (3) | | | 2,593 | | | 5,263 | | | 5,264 | | | 121,212 | | | 134,332 | |
| Subordinated notes (4) | | | 14,048 | | | 28,097 | | | 26,629 | | | 321,728 | | | 390,502 | |
| Minimum operating lease commitments | | | 7,568 | | | 15,017 | | | 14,806 | | | 39,008 | | | 76,399 | |
| Capital lease obligations | | | 417 | | | 896 | | | 940 | | | 3,498 | | | 5,751 | |
| Totals | | $ | 9,021,456 | | $ | 225,726 | | $ | 133,380 | | $ | 491,511 | | $ | 9,872,073 | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | At December 31, 2017 |
| | Next 12 months | | 13-36 months | | 37-60 months | | More than 60 months | | Totals |
| Contractual obligations: | | | | | | | | | |
| Certificates of deposit (1) | $ | 1,850,523 |
| | $ | 568,198 |
| | $ | 112,998 |
| | $ | 2,342 |
| | $ | 2,534,061 |
|
| Deposits without a stated maturity (2) | 13,917,641 |
| | — |
| | — |
| | — |
| | 13,917,641 |
|
| Securities sold under agreements to repurchase (1) | 135,262 |
| | — |
| | — |
| | — |
| | 135,262 |
|
| Federal Home Loan Bank advances (1) | 557,501 |
| | 628,627 |
| | 133,750 |
| | 17 |
| | 1,319,895 |
|
| Junior subordinated debentures (3) | 5,059 |
| | 10,132 |
| | 10,118 |
| | 199,392 |
| | 224,701 |
|
| Subordinated notes (4) | 18,075 |
| | 36,184 |
| | 36,104 |
| | 389,770 |
| | 480,133 |
|
| Minimum operating lease commitments | 12,226 |
| | 22,484 |
| | 19,081 |
| | 48,106 |
| | 101,897 |
|
| Capital lease obligations | 426 |
| | 940 |
| | 940 |
| | 3,028 |
| | 5,334 |
|
| Totals | $ | 16,496,713 |
| | $ | 1,266,565 |
| | $ | 312,991 |
| | $ | 642,655 |
| | $ | 18,718,924 |
|
(1) Includes unpaid interest through the contractual maturity on both fixed and variable rate obligations. The interest included on variable rate obligations is based on interest rates in effect at December 31, 2016.2017.
(2) Including interest accrued and upaidunpaid through December 31, 2016.2017.
(3) Due to the uncertainty of future interest rates on borrowings under Pinnacle Financial's junior subordinated debentures issued in connection with trust preferred securities sold by affiliated trusts future interest payments on such obligations are not included in the above table. At December 31, 2016,2017, Pinnacle Financial had junior subordinated debentures of approximately $82.5$133.0 million outstanding. During the year ended December 31, 2016, the interest rate on the junior subordinated debentures issued in connection with trust preferred securities issued in 2003, 2005, 2006 and 2007, respectively, ranged from 3.33% to 3.79%, 2.00% to 2.40%, 2.26% to 2.65%, 3.36% to 3.81% , respectively. During the year ended December 31, 2016, Pinnacle Financial incurred interest expense of $365,000, $435,000, $488,000 and $1.1 million, respectively, on its junior subordinated debentures issued in 2003, 2005, 2006 and 2007, respectively. See Note 11 "Investments in Affiliated Companies and Subordinated Debt""Other Borrowings" to Pinnacle Financial's consolidated financial statements for further information.information on the amounts of interest paid on such debentures.
(4) Represents interest and principal payments at maturity on Pinnacle Financial's $140.0$340.5 million in aggregate principal amount of subordinated notes (including $20.0 million of subordinated notes assumed in connection with Pinnacle Financial's acquisition of Avenue) and Pinnacle Bank's $130.0 million in aggregate principal amount of subordinated notes. $120.0 million of Pinnacle Financial's subordinated notes bear interest at a fixed rate of 5.25% per annum through November 2021, while the $20.0 million of subordinated notes assumed in connection with the Avenue transaction, bear interest at a fixed rate of 6.75% per annun until June 2020. Pinnacle Bank's subordinated notes bear interest at a fixed rate of 4.875% per annum through July 2020. The amounts representing interest payments on the subordinated notes issued by both Pinnacle Financial and Pinnacle Bank for periods after the interest rates are no longer fixed were calculated using the current rates that would be applicable if the floating rate called for by the notes was currently in effect.outstanding. See Note 11 "Investments in Affiliated Companies and Subordinated Debt""Other Borrowings" to Pinnacle's consolidated financial statements for further information.information on the amounts of interest paid on such notes.
Our management believes that we have adequate liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months. Our operating lease commitments are primarily related to our branch and headquarters facilities. The terms of these leases expire at various points ranging from 20172018 through 2039.2048. At December 31, 2016,2017, our total minimum operating lease commitment was $76.4$101.9 million.
Off-Balance Sheet Arrangements. At December 31, 2016,2017, we had outstanding standby letters of credit of $131.4$143.7 million and unfunded loan commitments outstanding of $3.374$5.8 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. The following table presents additional information about our unfunded commitments as of December 31, 2016,2017, which by their terms, have contractual maturity dates subsequent to December 31, 20162017 (in thousands):
| | | At December 31, 2016 | |
| | | Next 12 months | | 13-36 months | | 37-60 months | | More than 60 months | | Totals | |
| Unfunded commitments: | | | | | | | | | | | |
| Lines of credit | | $ | 1,062,312 | | $ | 1,080,003 | | $ | 539,416 | | $ | 692,539 | | $ | 3,374,270 | |
| Letters of credit | | | 117,061 | | | 12,151 | | | 250 | | | 1,956 | | | 131,418 | |
| Totals | | $ | 1,179,373 | | $ | 1,092,154 | | $ | 539,666 | | $ | 694,495 | | $ | 3,505,688 | |
|
| | | | | | | | | | | | | | | | | | | |
| | At December 31, 2017 |
| | Next 12 months | | 13-36 months | | 37-60 months | | More than 60 months | | Totals |
| Unfunded commitments: | | | | | | | | | |
| Lines of credit | $ | 1,896,309 |
| | $ | 1,470,397 |
| | $ | 1,205,907 |
| | $ | 1,215,813 |
| | $ | 5,788,426 |
|
| Letters of credit | 132,138 |
| | 10,418 |
| | 1,029 |
| | 100 |
| | 143,685 |
|
| Totals | $ | 2,028,447 |
| | $ | 1,480,815 |
| | $ | 1,206,936 |
| | $ | 1,215,913 |
| | $ | 5,932,111 |
|
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, 2016,2017, we had accrued $1.1$3.1 million for the inherent risks associated with off balance sheet commitments.
69
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 IssuedAdopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update 2016-02 Leases guidance requiring the recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for most leases. The guidance becomes effective for us on January 1, 2019. Pinnacle Financial is currently evaluating the impact on its consolidated financial statements.
In March 2016, the FASB issued updated guidance to Accounting Standards Update, 2016-09 Stock Compensation Improvements to Employee Share-Based Payment Activity (ASU 2016-09) intended to simplify and improve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities and classification of such awards on the statement of cash flows. This ASU is expected to impactAccounting Standards Update (ASU) impacted Pinnacle Financial's consolidated financial statements by requiring that all income tax effects related to settlements of share-based payment awards be reported as increases (or decreases) to income tax expense. Previously, income tax benefits at settlement of an award were reported as an increase (or decrease) to additional paid-in capital. The ASU also requires that all income tax related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows whereas these cash flows were previously reported as a reduction to operating cash flows and an increase to financing cash flows. The guidance became effective for Pinnacle Financial on January 1, 2017. During the year ended December 31, 2017, the newly adopted standard resulted in a reduction in tax expense of $5.4 million.
Recently Issued Accounting Pronouncements
In February 2018, the FASB issued Accounting Standards Update 2018-02,Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU addressed the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the newly enacted federal corporate tax rate included in the Tax Cuts and Jobs Act issued December 22, 2017. These amendments allow an entity to make a reclassification from other comprehensive income to retained earnings for the difference between the historical corporate income tax rate and the newly enacted corporate income tax rate. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted with retrospective application. Pinnacle Financial is currently evaluating the impact of the new guidance on its consolidated financial statements, but does not expect it to have a material impact.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU makes more financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. Pinnacle Financial is currently evaluating the impact of the new guidance on its consolidated financial statements.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendment in this ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted with modified retrospective application. Pinnacle Financial is currently evaluating the impact of the new guidance on its consolidated financial statements, but does not expect it to have a material impact.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify how entities other than private companies, such as public business entities and not-for-profit entities, are required to test goodwill for impairment by eliminating the comparison of the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those periods. If this standard had been effective for the year ended December 31, 2017, there would have been no impact on Pinnacle Financial's consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendment in this ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) or assets or businesses. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. If this standard had been effective for the year ended December 31, 2017, there would have been no impact on Pinnacle Financial's consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases guidance requiring the recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for most leases. The guidance becomes effective for us on January 1, 2017.2019. If this standard was effective as of the date of the financial statements included in this report, Pinnacle Financial would have recorded a right of use asset and liability in an amount similar to its current future minimum lease obligations as shown in Note 8. Premises and Equipment and Lease Commitments.
In June 2016, the FASB issued ASUAccounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (the ASU), which introduces the current expected credit losses methodology. Among other things, the ASU requires the measurement of all expected credit losses for financial assets, including loans and available-for-sale debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new model will require institutions to calculate all probable and estimable losses that are expected to be incurred through the loan's entire life. ASU 2016-13 also requires the allowance for credit losses for purchased financial assets with credit deterioration since origination to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance will be added to the purchase price rather than recorded as credit loss expense. The disclosure of credit quality indicators related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Institutions are to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the standard is effective. The amendments are effective for fiscal years beginning after December 15, 2020.2019. Early application will be permitted for fiscal years beginning after December 15, 2018. Pinnacle Financial is currently assessing the impact of the new guidance on its consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update 2016-15,Statement of Cash Flows (Topic 230) intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. The guidance is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. Pinnacle Financial is currently evaluatingdoes not expect this standard will have a material impact on the impactfinancials, with the exception of dividends received from our equity method investments which will be reclassified as a cash flow from investments to operating cash flows beginning in the new guidance on its consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update 2014-09,Revenue from Contracts with Customers(Topic 606)) developed as a joint project with the International Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework for addressing revenue issues. The ASU's core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update 2015-14, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The ASU may be adopted using either a modified retrospective method or a full retrospective method. Pinnacle Financial intends to adoptadopted the ASU during the first quarter of 2018, as required, using a modified retrospective approach. Pinnacle Financial's preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material impact on the Company's consolidated financial statements as theThe majority of itsPinnacle Financial's revenue stream is generated from financial instruments which are not within the scope of this ASU. However, Pinnacle Financial is still evaluatinghas evaluated the impact for other fee-based income. The FASB continues to release new accounting guidance related to the adoption ofincome and has concluded that this ASU and the results of Pinnacle Financial's materiality analysis may change based on conclusions reached as to the application of this new guidance.standard will not materially impact its financial statements.
Other than those pronouncements discussed above and those which have been recently adopted, we do not believe there were noany other recently issued accounting pronouncements that are expected to materially impact Pinnacle Financial.
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 40 through 71 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS
Pinnacle Financial Partners, Inc. and Subsidiaries
Consolidated Financial Statements
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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. The Company's internal control system was designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair presentation of published financial statements. 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.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2016.2017. 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, 2016,2017, the Company's internal control over financial reporting is effective based on those criteria.
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 77XX of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
TheStockholders and the Board of Directors and Stockholdersof
Pinnacle Financial Partners, Inc.
Nashville, Tennessee
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Pinnacle Financial Partners, Inc. and subsidiaries (the Company)"Company") as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders'stockholders’ equity, and cash flows for each of the yeartwo years in the period ended December 31, 2016. 2017, 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, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, 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, 2017, 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, 2018 expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesethe Company's financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("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 auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).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. An audit includesmisstatement, 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 supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016, 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), the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2017 expressed an unqualified opinion thereon.
/s/ Crowe Horwath LLP
We have served as the Company's auditor since 2016.
Franklin, Tennessee
February 27, 2017
28, 2018Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Pinnacle Financial Partners, Inc.:
We have audited the accompanying consolidated balance sheet of Pinnacle Financial Partners, Inc. and subsidiaries (the Company) as of December 31, 2015, and the related consolidated statements of income, comprehensive income, stockholders'stockholders’ equity, and cash flows for each of the years in the two‑year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company'sPinnacle Financial Partners, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positionresults of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2015, and the results of their’s operations and their cash flows for each of the years in the two‑year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s//s/ KPMG LLP
Nashville, Tennessee
February 29, 2016
Report of Independent Registered Public Accounting Firm
TheStockholders and the Board of Directors and Stockholdersof
Pinnacle Financial Partners, Inc.:
Nashville, Tennessee
Opinion on Internal Control over Financial Reporting
We have audited Pinnacle Financial Partners, Inc.'s’s (the Company's)“Company”) internal control over financial reporting as of December 31, 2016,2017, based on criteria established in the 2013 Internal Control –- Integrated FrameworkFramework: (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, 2017, 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, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements") and our report dated February 28, 2018 expressed an unqualified opinion.
Basis for Opinion
The Company'sCompany’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.Reporting. Our responsibility is to express an opinion on the Company's Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("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 Public Company Accounting Oversight Board (United States).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, andrisk. 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'scompany’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'scompany’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'scompany’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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2016 and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the year ended December 31, 2016, and our report dated February 27, 2017 expressed and unqualified opinion on those consolidated financial statements.
/s/ Crowe Horwath LLP
Franklin, Tennessee
February 27, 2017
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | December 31, | |
| ASSETS | | 2016 | | | 2015 | |
| | | | | | | |
| Cash and noninterest-bearing due from banks | | $ | 84,732,291 | | | $ | 75,078,807 | |
| Interest-bearing due from banks | | | 97,529,713 | | | | 219,202,464 | |
| Federal funds sold and other | | | 1,383,416 | | | | 26,670,062 | |
| Cash and cash equivalents | | | 183,645,420 | | | | 320,951,333 | |
| | | | | | | | | |
| Securities available-for-sale, at fair value | | | 1,298,546,056 | | | | 935,064,745 | |
| Securities held-to-maturity (fair value of $25,233,254 and $31,585,303 at December 31, 2016 and December 31, 2015, respectively) | | | 25,251,316 | | | | 31,376,840 | |
| Mortgage loans held-for-sale | | | 47,710,120 | | | | 47,930,253 | |
| Commercial loans held-for-sale | | | 22,587,971 | | | | - | |
| | | | | | | | | |
| Loans | | | 8,449,924,736 | | | | 6,543,235,381 | |
| Less allowance for loan losses | | | (58,980,475 | ) | | | (65,432,354 | ) |
| Loans, net | | | 8,390,944,261 | | | | 6,477,803,027 | |
| | | | | | | | | |
| Premises and equipment, net | | | 88,904,145 | | | | 77,923,607 | |
| Equity method investment | | | 205,359,844 | | | | 88,880,014 | |
| Accrued interest receivable | | | 28,234,826 | | | | 21,574,096 | |
| Goodwill | | | 551,593,796 | | | | 432,232,255 | |
| Core deposits and other intangible assets | | | 15,104,038 | | | | 10,540,497 | |
| Other real estate owned | | | 6,089,804 | | | | 5,083,218 | |
| Other assets | | | 330,651,002 | | | | 265,183,799 | |
| Total assets | | $ | 11,194,622,599 | | | $ | 8,714,543,684 | |
| | | | | | | | | |
| | | | | | | | | |
| Deposits: | | | | | | | | |
| Non-interest-bearing | | $ | 2,399,191,152 | | | $ | 1,889,865,113 | |
| Interest-bearing | | | 1,808,331,784 | | | | 1,389,548,175 | |
| Savings and money market accounts | | | 3,714,930,351 | | | | 3,001,950,725 | |
| Time | | | 836,853,761 | | | | 690,049,795 | |
| Total deposits | | | 8,759,307,048 | | | | 6,971,413,808 | |
| Securities sold under agreements to repurchase | | | 85,706,558 | | | | 79,084,298 | |
| Federal Home Loan Bank advances | | | 406,304,187 | | | | 300,305,226 | |
| Subordinated debt and other borrowings | | | 350,768,050 | | | | 141,605,504 | |
| Accrued interest payable | | | 5,573,377 | | | | 2,593,209 | |
| Other liabilities | | | 90,267,267 | | | | 63,930,339 | |
| Total liabilities | | | 9,697,926,487 | | | | 7,558,932,384 | |
| Stockholders' equity: | | | | | | | | |
| Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | |
| Common stock, par value $1.00; 90,000,000 shares authorized; 46,359,377 and 40,906,064 issued and outstanding at December 31, 2016 and 2015 | | | 46,359,377 | | | | 40,906,064 | |
| Common stock warrants | | | - | | | | - | |
| Additional paid-in capital | | | 1,083,490,728 | | | | 839,617,050 | |
| Retained earnings | | | 381,072,505 | | | | 278,573,408 | |
| Accumulated other comprehensive loss, net of taxes | | | (14,226,498 | ) | | | (3,485,222 | ) |
| Total stockholders' equity | | | 1,496,696,112 | | | | 1,155,611,300 | |
| Total liabilities and stockholders' equity | | $ | 11,194,622,599 | | | $ | 8,714,543,684 | |
| | | | | | | | | |
|
| | | | | | | |
| | December 31, |
| ASSETS | 2017 | | 2016 |
| Cash and noninterest-bearing due from banks | $ | 176,553,466 |
| | $ | 84,732,291 |
|
| Interest-bearing due from banks | 496,911,376 |
| | 97,529,713 |
|
| Federal funds sold and other | 106,132,455 |
| | 1,383,416 |
|
| Cash and cash equivalents | 779,597,297 |
| | 183,645,420 |
|
| | | | |
| Securities available-for-sale, at fair value | 2,515,283,219 |
| | 1,298,546,056 |
|
| Securities held-to-maturity (fair value of $20,829,978 and $25,233,254 at December 31, 2017 and December 31, 2016, respectively) | 20,762,303 |
| | 25,251,316 |
|
| Mortgage loans held-for-sale | 103,728,658 |
| | 47,710,120 |
|
| Commercial loans held-for-sale | 25,456,141 |
| | 22,587,971 |
|
| | | | |
| Loans | 15,633,116,029 |
| | 8,449,924,736 |
|
| Less allowance for loan losses | (67,240,094 | ) | | (58,980,475 | ) |
| Loans, net | 15,565,875,935 |
| | 8,390,944,261 |
|
| | | | |
| Premises and equipment, net | 266,013,608 |
| | 88,904,145 |
|
| Equity method investment | 221,667,490 |
| | 205,359,844 |
|
| Accrued interest receivable | 57,439,656 |
| | 28,234,826 |
|
| Goodwill | 1,808,001,781 |
| | 551,593,796 |
|
| Core deposits and other intangible assets | 56,710,268 |
| | 15,104,038 |
|
| Other real estate owned | 27,830,824 |
| | 6,089,804 |
|
| Other assets | 757,332,667 |
| | 330,651,002 |
|
| Total assets | $ | 22,205,699,847 |
| | $ | 11,194,622,599 |
|
| | | | |
| | | | |
| Deposits: | |
| | |
|
| Non-interest-bearing | $ | 4,381,386,246 |
| | $ | 2,399,191,152 |
|
| Interest-bearing | 2,987,290,844 |
| | 1,808,331,784 |
|
| Savings and money market accounts | 6,548,964,272 |
| | 3,714,930,351 |
|
| Time | 2,534,060,910 |
| | 836,853,761 |
|
| Total deposits | 16,451,702,272 |
| | 8,759,307,048 |
|
| Securities sold under agreements to repurchase | 135,262,140 |
| | 85,706,558 |
|
| Federal Home Loan Bank advances | 1,319,908,629 |
| | 406,304,187 |
|
| Subordinated debt and other borrowings | 465,504,589 |
| | 350,768,050 |
|
| Accrued interest payable | 10,480,426 |
| | 5,573,377 |
|
| Other liabilities | 114,889,760 |
| | 90,267,267 |
|
| Total liabilities | 18,497,747,816 |
| | 9,697,926,487 |
|
| Stockholders' equity: | |
| | |
|
| Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding | — |
| | — |
|
| Common stock, par value $1.00; 90,000,000 shares authorized; 77,739,636 and 46,359,377 issued and outstanding at December 31, 2017 and 2016 | 77,739,636 |
| | 46,359,377 |
|
| Additional paid-in capital | 3,115,303,675 |
| | 1,083,490,728 |
|
| Retained earnings | 519,144,543 |
| | 381,072,505 |
|
| Accumulated other comprehensive loss, net of taxes | (4,235,823 | ) | | (14,226,498 | ) |
| Total stockholders' equity | 3,707,952,031 |
| | 1,496,696,112 |
|
| Total liabilities and stockholders' equity | $ | 22,205,699,847 |
| | $ | 11,194,622,599 |
|
See accompanying notes to consolidated financial statements.
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | For the years ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Interest income: | | | | | | | | | |
| Loans, including fees | | $ | 335,734,531 | | | $ | 232,847,334 | | | $ | 184,648,800 | |
| Securities: | | | | | | | | | | | | |
| Taxable | | | 19,179,012 | | | | 15,060,392 | | | | 14,227,172 | |
| Tax-exempt | | | 6,014,037 | | | | 5,783,443 | | | | 6,167,264 | |
| Federal funds sold and other | | | 2,681,348 | | | | 1,478,711 | | | | 1,126,726 | |
| Total interest income | | | 363,608,928 | | | | 255,169,880 | | | | 206,169,962 | |
| | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | |
| Deposits | | | 23,917,318 | | | | 13,209,425 | | | | 9,953,930 | |
| Securities sold under agreements to repurchase | | | 185,305 | | | | 138,347 | | | | 140,623 | |
| Federal Home Loan Bank advances and other borrowings | | | 14,512,024 | | | | 5,189,193 | | | | 3,090,860 | |
| Total interest expense | | | 38,614,647 | | | | 18,536,965 | | | | 13,185,413 | |
| Net interest income | | | 324,994,281 | | | | 236,632,915 | | | | 192,984,549 | |
| Provision for loan losses | | | 18,328,058 | | | | 9,188,497 | | | | 3,634,660 | |
| Net interest income after provision for loan losses | | | 306,666,223 | | | | 227,444,418 | | | | 189,349,889 | |
| | | | | | | | | | | | | |
| Noninterest income: | | | | | | | | | | | | |
| Service charges on deposit accounts | | | 14,500,679 | | | | 12,745,742 | | | | 11,707,274 | |
| Investment services | | | 10,757,348 | | | | 9,971,313 | | | | 9,382,670 | |
| Insurance sales commissions | | | 5,309,494 | | | | 4,824,007 | | | | 4,612,583 | |
| Gains on mortgage loans sold, net | | | 15,754,473 | | | | 7,668,960 | | | | 5,630,371 | |
| Investment gains on sales and impairments, net | | | 395,186 | | | | 552,063 | | | | 29,221 | |
| Trust fees | | | 6,328,021 | | | | 5,461,257 | | | | 4,601,036 | |
| Income from equity method investment | | | 31,402,923 | | | | 20,591,484 | | | | - | |
| Other noninterest income | | | 36,554,938 | | | | 24,715,442 | | | | 16,639,323 | |
| Total noninterest income | | | 121,003,062 | | | | 86,530,268 | | | | 52,602,478 | |
| | | | | | | | | | | | | |
| Noninterest expense: | | | | | | | | | | | | |
| Salaries and employee benefits | | | 140,818,772 | | | | 105,928,914 | | | | 88,319,567 | |
| Equipment and occupancy | | | 35,071,654 | | | | 27,241,477 | | | | 24,087,335 | |
| Other real estate expense (benefit), net | | | 395,561 | | | | (305,956 | ) | | | 664,289 | |
| Marketing and other business development | | | 6,536,484 | | | | 4,863,307 | | | | 4,127,949 | |
| Postage and supplies | | | 3,929,323 | | | | 3,228,300 | | | | 2,391,838 | |
| Amortization of intangibles | | | 4,281,459 | | | | 1,973,953 | | | | 947,678 | |
| Merger related expenses | | | 11,746,584 | | | | 4,797,018 | | | | - | |
| Other noninterest expense | | | 33,505,586 | | | | 23,149,743 | | | | 15,761,027 | |
| Total noninterest expense | | | 236,285,423 | | | | 170,876,756 | | | | 136,299,683 | |
| Income before income taxes | | | 191,383,862 | | | | 143,097,930 | | | | 105,652,684 | |
| Income tax expense | | | 64,159,167 | | | | 47,588,528 | | | | 35,181,517 | |
| Net income | | $ | 127,224,695 | | | $ | 95,509,402 | | | $ | 70,471,167 | |
| | | | | | | | | | | | | |
| Per share information: | | | | | | | | | | | | |
| Basic net income per common share | | $ | 2.96 | | | $ | 2.58 | | | $ | 2.03 | |
| Diluted net income per common share | | $ | 2.91 | | | $ | 2.52 | | | $ | 2.01 | |
| Weighted average common shares outstanding: | | | | | | | | | | | | |
| Basic | | | 43,037,083 | | | | 37,015,468 | | | | 34,723,335 | |
| Diluted | | | 43,731,992 | | | | 37,973,788 | | | | 35,126,890 | |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Interest income: | | | | | |
| Loans, including fees | $ | 578,286,155 |
| | $ | 335,734,531 |
| | $ | 232,847,334 |
|
| Securities: | |
| | |
| | |
|
| Taxable | 39,060,195 |
| | 19,179,012 |
| | 15,060,392 |
|
| Tax-exempt | 13,711,759 |
| | 6,014,037 |
| | 5,783,443 |
|
| Federal funds sold and other | 5,080,140 |
| | 2,681,348 |
| | 1,478,711 |
|
| Total interest income | 636,138,249 |
| | 363,608,928 |
| | 255,169,880 |
|
| | | | | | |
| Interest expense: | |
| | |
| | |
|
| Deposits | 59,583,527 |
| | 23,917,318 |
| | 13,209,425 |
|
| Securities sold under agreements to repurchase | 405,837 |
| | 185,305 |
| | 138,347 |
|
| Federal Home Loan Bank advances and other borrowings | 32,841,874 |
| | 14,512,024 |
| | 5,189,193 |
|
| Total interest expense | 92,831,238 |
| | 38,614,647 |
| | 18,536,965 |
|
| Net interest income | 543,307,011 |
| | 324,994,281 |
| | 236,632,915 |
|
| Provision for loan losses | 23,663,944 |
| | 18,328,058 |
| | 9,188,497 |
|
| Net interest income after provision for loan losses | 519,643,067 |
| | 306,666,223 |
| | 227,444,418 |
|
| | | | | | |
| Noninterest income: | |
| | |
| | |
|
| Service charges on deposit accounts | 20,032,979 |
| | 14,500,679 |
| | 12,745,742 |
|
| Investment services | 14,315,228 |
| | 10,757,348 |
| | 9,971,313 |
|
| Insurance sales commissions | 7,404,928 |
| | 5,309,494 |
| | 4,824,007 |
|
| Gains on mortgage loans sold, net | 18,624,621 |
| | 15,754,473 |
| | 7,668,960 |
|
| Investment gains (losses) on sales, net | (8,264,639 | ) | | 395,186 |
| | 552,063 |
|
| Trust fees | 8,663,590 |
| | 6,328,021 |
| | 5,461,257 |
|
| Income from equity method investment | 37,957,692 |
| | 31,402,923 |
| | 20,591,484 |
|
| Other noninterest income | 46,168,416 |
| | 36,554,938 |
| | 24,715,442 |
|
| Total noninterest income | 144,902,815 |
| | 121,003,062 |
| | 86,530,268 |
|
| | | | | | |
| Noninterest expense: | |
| | |
| | |
|
| Salaries and employee benefits | 209,661,812 |
| | 140,818,772 |
| | 105,928,914 |
|
| Equipment and occupancy | 54,091,964 |
| | 35,071,654 |
| | 27,241,477 |
|
| Other real estate expense (benefit), net | 1,079,193 |
| | 395,561 |
| | (305,956 | ) |
| Marketing and other business development | 8,321,073 |
| | 6,536,484 |
| | 4,863,307 |
|
| Postage and supplies | 5,735,716 |
| | 3,929,323 |
| | 3,228,300 |
|
| Amortization of intangibles | 8,815,609 |
| | 4,281,459 |
| | 1,973,953 |
|
| Merger related expenses | 31,843,413 |
| | 11,746,584 |
| | 4,797,018 |
|
| Other noninterest expense | 47,011,079 |
| | 33,505,586 |
| | 23,149,743 |
|
| Total noninterest expense | 366,559,859 |
| | 236,285,423 |
| | 170,876,756 |
|
| Income before income taxes | 297,986,023 |
| | 191,383,862 |
| | 143,097,930 |
|
| Income tax expense | 124,006,536 |
| | 64,159,167 |
| | 47,588,528 |
|
| Net income | $ | 173,979,487 |
| | $ | 127,224,695 |
| | $ | 95,509,402 |
|
| | | | | | |
| Per share information: | |
| | |
| | |
|
| Basic net income per common share | $ | 2.73 |
| | $ | 2.96 |
| | $ | 2.58 |
|
| Diluted net income per common share | $ | 2.70 |
| | $ | 2.91 |
| | $ | 2.52 |
|
| Weighted average common shares outstanding: | |
| | |
| | |
|
| Basic | 63,760,578 |
| | 43,037,083 |
| | 37,015,468 |
|
| Diluted | 64,328,189 |
| | 43,731,992 |
| | 37,973,788 |
|
See accompanying notes to consolidated financial statements.
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Net income: | | $ | 127,224,695 | | | $ | 95,509,402 | | | $ | 70,471,167 | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
| Changes in fair value on available-for-sale securities, net of tax | | | (9,700,933 | ) | | | (5,582,965 | ) | | | 11,900,309 | |
| Changes in fair value of cash flow hedges, net of tax | | | (800,188 | ) | | | (1,725,136 | ) | | | (3,699,569 | ) |
| Net gain on sale of investment securities reclassified from other comprehensive income into net income, net of tax | | | (240,155 | ) | | | (335,489 | ) | | | (17,758 | ) |
| Total other comprehensive income (loss), net of tax | | | (10,741,276 | ) | | | (7,643,590 | ) | | | 8,182,982 | |
| Total comprehensive income | | $ | 116,483,419 | | | $ | 87,865,812 | | | $ | 78,654,149 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income: | $ | 173,979,487 |
| | $ | 127,224,695 |
| | $ | 95,509,402 |
|
| Other comprehensive income (loss), net of tax: | |
| | |
| | |
|
| Changes in fair value on available-for-sale securities, net of tax | 2,828,551 |
| | (9,700,933 | ) | | (5,582,965 | ) |
| Changes in fair value of cash flow hedges, net of tax | 2,139,703 |
| | (800,188 | ) | | (1,725,136 | ) |
| Net loss (gain) on sale of investment securities reclassified from other comprehensive income into net income, net of tax | 5,022,421 |
| | (240,155 | ) | | (335,489 | ) |
| Total other comprehensive income (loss), net of tax | 9,990,675 |
| | (10,741,276 | ) | | (7,643,590 | ) |
| Total comprehensive income | $ | 183,970,162 |
| | $ | 116,483,419 |
| | $ | 87,865,812 |
|
See accompanying notes to consolidated financial statements.
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the each of the years in the three-year period ended December 31, 20162017
| | Common Stock | | | | | | | | | |
| | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | |
| December 31, 2013 | | | 35,221,941 | | $ | 35,221,941 | | $ | 550,212,135 | | $ | 142,298,199 | | $ | (4,024,614 | ) | $ | 723,707,661 | |
| Exercise of employee common stock options, stock appreciation rights and related tax benefits | | | 302,403 | | | 302,403 | | | 8,444,894 | | | - | | | - | | | 8,747,297 | |
| Issuance of restricted common shares, net of forfeitures | | | 277,187 | | | 277,187 | | | (277,187 | ) | | - | | | - | | | - | |
| Restricted shares withheld for taxes | | | (69,048 | ) | | (69,048 | ) | | (2,256,560 | ) | | - | | | - | | | (2,325,608 | ) |
| Compensation expense for restricted shares | | | - | | | - | | | 5,308,167 | | | - | | | - | | | 5,308,167 | |
| Common dividends paid | | | - | | | - | | | - | | | (11,398,285 | ) | | - | | | (11,398,285 | ) |
| Net income | | | - | | | - | | | - | | | 70,471,167 | | | - | | | 70,471,167 | |
| Other comprehensive income | | | - | | | - | | | - | | | - | | | 8,182,982 | | | 8,182,982 | |
| December 31, 2014 | | | 35,732,483 | | $ | 35,732,483 | | $ | 561,431,449 | | $ | 201,371,081 | | $ | 4,158,368 | | $ | 802,693,381 | |
| Exercise of employee common stock options, stock appreciation rights and related tax benefits | | | 304,313 | | | 304,313 | | | 7,187,629 | | | - | | | - | | | 7,491,942 | |
| Issuance of restricted common shares, net of forfeitures | | | 257,218 | | | 257,218 | | | (257,218 | ) | | - | | | - | | | - | |
| Common stock issued in conjunction with CapitalMark acquisition, net of issuance costs | | | 3,306,184 | | | 3,306,184 | | | 202,648,875 | | | - | | | - | | | 205,955,059 | |
| Common stock issued in conjunction with Magna acquisition, net of issuance costs | | | 1,371,717 | | | 1,371,717 | | | 62,166,214 | | | - | | | - | | | 63,537,931 | |
| Restricted shares withheld for taxes | | | (65,851 | ) | | (65,851 | ) | | (901,502 | ) | | - | | | - | | | (967,353 | ) |
| Compensation expense for restricted shares | | | - | | | - | | | 7,341,603 | | | - | | | - | | | 7,341,603 | |
| Common dividends paid | | | - | | | - | | | - | | | (18,307,075 | ) | | - | | | (18,307,075 | ) |
| Net income | | | - | | | - | | | - | | | 95,509,402 | | | - | | | 95,509,402 | |
| Other comprehensive loss | | | - | | | - | | | - | | | - | | | (7,643,590 | ) | | (7,643,590 | ) |
| December 31, 2015 | | | 40,906,064 | | $ | 40,906,064 | | $ | 839,617,050 | | $ | 278,573,408 | | $ | (3,485,222 | ) | $ | 1,155,611,300 | |
| Exercise of employee common stock options, stock appreciation rights and related tax benefits | | | 699,810 | | | 699,810 | | | 16,736,365 | | | - | | | - | | | 17,436,175 | |
| Issuance of restricted common shares, net of forfeitures | | | 200,098 | | | 200,098 | | | (200,098 | ) | | - | | | - | | | - | |
| Common stock issued in conjunction with BHG, net of issuance costs | | | 860,470 | | | 860,470 | | | 38,833,566 | | | - | | | - | | | 39,694,036 | |
| Common stock issued in conjunction with Avenue, net of acquisition costs | | | 3,760,326 | | | 3,760,326 | | | 178,708,278 | | | - | | | - | | | 182,468,604 | |
| Restricted shares withheld for taxes | | | (67,391 | ) | | (67,391 | ) | | (1,175,282 | ) | | - | | | - | | | (1,242,673 | ) |
| Compensation expense for restricted shares | | | - | | | - | | | 10,970,849 | | | - | | | - | | | 10,970,849 | |
| Common dividends paid | | | - | | | - | | | - | | | (24,725,598 | ) | | - | | | (24,725,598 | ) |
| Net income | | | - | | | - | | | - | | | 127,224,695 | | | - | | | 127,224,695 | |
| Other comprehensive loss | | | - | | | - | | | - | | | - | | | (10,741,276 | ) | | (10,741,276 | ) |
| December 31, 2016 | | | 46,359,377 | | $ | 46,359,377 | | $ | 1,083,490,728 | | $ | 381,072,505 | | $ | (14,226,498 | ) | $ | 1,496,696,112 | |
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Common Stock | | | | |
| | Shares | Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity |
| December 31, 2014 | 35,732,483 |
| $ | 35,732,483 |
| $ | 561,431,449 |
| $ | 201,371,081 |
| $ | 4,158,368 |
| $ | 802,693,381 |
|
| Exercise of employee common stock options, stock appreciation rights and related tax benefits | 304,313 |
| 304,313 |
| 7,187,629 |
| — |
| — |
| 7,491,942 |
|
| Common dividends paid | — |
| — |
| — |
| (18,307,075 | ) | — |
| (18,307,075 | ) |
| Issuance of restricted common shares, net of forfeitures | 257,218 |
| 257,218 |
| (257,218 | ) | — |
| — |
| — |
|
| Common stock issued in conjunction with CapitalMark acquisition, net of issuance costs | 3,306,184 |
| 3,306,184 |
| 202,648,875 |
| — |
| — |
| 205,955,059 |
|
| Common stock issued in conjunction with Magna acquisition, net of issuance costs | 1,371,717 |
| 1,371,717 |
| 62,166,214 |
| — |
| — |
| 63,537,931 |
|
| Restricted shares withheld for taxes | (65,851 | ) | (65,851 | ) | (901,502 | ) | — |
| — |
| (967,353 | ) |
| Compensation expense for restricted shares | — |
| — |
| 7,341,603 |
| — |
| — |
| 7,341,603 |
|
| Net income | — |
| — |
| — |
| 95,509,402 |
| — |
| 95,509,402 |
|
| Other comprehensive loss | — |
| — |
| — |
| — |
| (7,643,590 | ) | (7,643,590 | ) |
| December 31, 2015 | 40,906,064 |
| $ | 40,906,064 |
| $ | 839,617,050 |
| $ | 278,573,408 |
| $ | (3,485,222 | ) | $ | 1,155,611,300 |
|
| Exercise of employee common stock options, stock appreciation rights and related tax benefits | 699,810 |
| 699,810 |
| 16,736,365 |
| — |
| — |
| 17,436,175 |
|
| Common dividends paid | — |
| — |
| — |
| (24,725,598 | ) | — |
| (24,725,598 | ) |
| Issuance of restricted common shares, net of forfeitures | 200,098 |
| 200,098 |
| (200,098 | ) | — |
| — |
| — |
|
| Common stock issued in conjunction with BHG, net of issuance costs | 860,470 |
| 860,470 |
| 38,833,566 |
| — |
| — |
| 39,694,036 |
|
| Common stock issued in conjunction with Avenue acquisition, net of issuance costs | 3,760,326 |
| 3,760,326 |
| 178,708,278 |
| — |
| — |
| 182,468,604 |
|
| Restricted shares withheld for taxes | (67,391 | ) | (67,391 | ) | (1,175,282 | ) | — |
| — |
| (1,242,673 | ) |
| Compensation expense for restricted shares | — |
| — |
| 10,970,849 |
| — |
| — |
| 10,970,849 |
|
| Net income | — |
| — |
| — |
| 127,224,695 |
| — |
| 127,224,695 |
|
| Other comprehensive loss | — |
| — |
| — |
| — |
| (10,741,276 | ) | (10,741,276 | ) |
| December 31, 2016 | 46,359,377 |
| $ | 46,359,377 |
| $ | 1,083,490,728 |
| $ | 381,072,505 |
| $ | (14,226,498 | ) | $ | 1,496,696,112 |
|
| Exercise of employee common stock options, stock appreciation rights and related tax benefits | 275,431 |
| 275,431 |
| 5,209,191 |
| — |
| — |
| 5,484,622 |
|
| Common dividends paid | — |
| — |
| — |
| (35,907,449 | ) | — |
| (35,907,449 | ) |
| Issuance of restricted common shares, net of forfeitures | 271,602 |
| 271,602 |
| (271,602 | ) | — |
| — |
| — |
|
| Issuance of common equity | 3,220,000 |
| 3,220,000 |
| 188,973,750 |
| — |
| — |
| 192,193,750 |
|
| Common stock issued in conjunction with BNC acquisition, net of issuance costs | 27,687,100 |
| 27,687,100 |
| 1,823,280,926 |
| — |
| — |
| 1,850,968,026 |
|
| Restricted shares withheld for taxes | (73,874 | ) | (73,874 | ) | (4,917,401 | ) | — |
| — |
| (4,991,275 | ) |
| Compensation expense for restricted shares | — |
| — |
| 19,538,083 |
| — |
| — |
| 19,538,083 |
|
| Net income | — |
| — |
| — |
| 173,979,487 |
| — |
| 173,979,487 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 9,990,675 |
| 9,990,675 |
|
| December 31, 2017 | 77,739,636 |
| $ | 77,739,636 |
| $ | 3,115,303,675 |
| $ | 519,144,543 |
| $ | (4,235,823 | ) | $ | 3,707,952,031 |
|
See accompanying notes to consolidated financial statements.
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Operating activities: | | | | | |
| Net income | $ | 173,979,487 |
| | $ | 127,224,695 |
| | $ | 95,509,402 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| | |
|
| Net amortization/accretion of premium/discount on securities | 12,846,572 |
| | 8,630,048 |
| | 5,231,583 |
|
| Depreciation, amortization and accretion | (23,618,474 | ) | | 16,995,490 |
| | 10,268,576 |
|
| Provision for loan losses | 23,663,944 |
| | 18,328,058 |
| | 9,188,497 |
|
| Gains on mortgage loans sold, net | (18,624,621 | ) | | (15,754,473 | ) | | (7,668,960 | ) |
| Investment losses (gains) on sales, net | 8,264,639 |
| | (395,186 | ) | | (552,063 | ) |
| Stock-based compensation expense | 19,538,083 |
| | 10,970,849 |
| | 7,341,603 |
|
| Deferred tax expense | 28,164,871 |
| | 14,390,035 |
| | 5,819,463 |
|
| Revaluation of deferred tax assets and liabilities | 31,485,672 |
| | — |
| | — |
|
| Losses (gains) on disposition of other real estate and other investments | (202,980 | ) | | 140,992 |
| | (433,911 | ) |
| Income from equity method investment | (37,957,692 | ) | | (31,402,923 | ) | | (20,591,484 | ) |
| Excess tax benefit from stock compensation | (5,365,493 | ) | | (4,604,007 | ) | | (4,116,120 | ) |
| Gains on other loans sold, net | (1,488,140 | ) | | (885,320 | ) | | — |
|
| Other loans held for sale originated | (177,433,682 | ) | | (112,669,589 | ) | | — |
|
| Other loans held for sale sold | 176,062,619 |
| | 90,966,938 |
| | — |
|
| Mortgage loans held for sale originated | (1,100,866,370 | ) | | (784,213,817 | ) | | (524,679,767 | ) |
| Mortgage loans held for sale sold | 1,090,489,558 |
| | 803,498,453 |
| | 519,134,000 |
|
| Increase in other assets | (33,297,361 | ) | | (17,411,223 | ) | | (2,359,490 | ) |
| (Decrease) increase in other liabilities | (17,699,526 | ) | | 2,829,656 |
| | (7,487,499 | ) |
| Net cash provided by operating activities | 147,941,106 |
| | 126,638,676 |
| | 84,603,830 |
|
| Investing activities: | |
| | |
| | |
|
| Activities in securities available-for-sale: | |
| | |
| | |
|
| Purchases | (1,290,716,532 | ) | | (583,330,035 | ) | | (342,192,699 | ) |
| Sales | 363,898,141 |
| | 72,829,440 |
| | 189,029,458 |
|
| Maturities, prepayments and calls | 323,235,144 |
| | 280,805,769 |
| | 146,441,236 |
|
| Activities in securities held-to-maturity: | |
| | |
| | |
|
| Purchases | — |
| | (560,000 | ) | | (1,550,995 | ) |
| Maturities, prepayments and calls | 4,115,000 |
| | 6,200,000 |
| | 8,185,000 |
|
| Increase in loans, net | (1,558,646,425 | ) | | (966,207,993 | ) | | (668,297,036 | ) |
| Purchases of premises and equipment and software | (53,498,776 | ) | | (17,058,292 | ) | | (10,870,851 | ) |
| Purchase of BOLI | (55,000,000 | ) | | — |
| | — |
|
| Proceeds from sales of software, premises, and equipment | 23,038 |
| | 2,187,381 |
| | 782,482 |
|
| Proceeds from sale of mortgage servicing rights | — |
| | 6,747,626 |
| | — |
|
| Acquisitions, net of cash acquired | 155,141,674 |
| | 17,608,471 |
| | 5,876,592 |
|
| Increase in equity method investment | — |
| | (74,100,000 | ) | | (75,440,530 | ) |
| Dividends received from equity method investment | 21,650,046 |
| | 28,982,009 |
| | 7,152,000 |
|
| Increase in other investments | (7,804,237 | ) | | (27,508,882 | ) | | (1,712,685 | ) |
| Net cash used in investing activities | (2,097,602,927 | ) | | (1,253,404,506 | ) | | (742,598,028 | ) |
| Financing activities: | |
| | |
| | |
|
| Net increase in deposits | 1,488,273,894 |
| | 822,306,826 |
| | 783,352,902 |
|
| Net increase (decrease) in repurchase agreements | (12,754,500 | ) | | 6,622,260 |
| | (32,784,245 | ) |
| Advances from Federal Home Loan Bank: | |
| | |
| | |
|
| Issuances | 1,964,750,001 |
| | 1,934,000,000 |
| | 1,135,000,000 |
|
| Payments | (1,051,066,604 | ) | | (1,934,093,153 | ) | | (1,092,781,984 | ) |
| Proceeds from subordinated debt and other borrowings, net of issuance costs | — |
| | 243,226,783 |
| | 59,129,504 |
|
| Repayment of other borrowings | (220,100 | ) | | (74,000,302 | ) | | (50,290,006 | ) |
| Principal payments of capital lease obligation | (148,641 | ) | | (70,401 | ) | | — |
|
| Proceeds from common stock issuance | 192,193,750 |
| | — |
| | — |
|
| Exercise of common stock options and stock appreciation rights, net of shares surrendered for taxes | 493,347 |
| | 11,589,495 |
| | 3,602,805 |
|
| Excess tax benefit from stock compensation | — |
| | 4,604,007 |
| | 4,116,120 |
|
| Common dividends paid | (35,907,449 | ) | | (24,725,598 | ) | | (18,307,075 | ) |
Net cash provided by financing activities | 2,545,613,698 |
| | 989,459,917 |
| | 791,038,021 |
|
| Net increase (decrease) in cash and cash equivalents | 595,951,877 |
| | (137,305,913 | ) | | 133,043,823 |
|
| Cash and cash equivalents, beginning of year | 183,645,420 |
| | 320,951,333 |
| | 187,907,510 |
|
| Cash and cash equivalents, end of year | $ | 779,597,297 |
| | $ | 183,645,420 |
| | $ | 320,951,333 |
|
| | | For the years ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Operating activities: | | | | | | | | | |
| Net income | | $ | 127,224,695 | | | $ | 95,509,402 | | | $ | 70,471,167 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
| Net amortization/accretion of premium/discount on securities | | | 8,630,048 | | | | 5,231,583 | | | | 4,526,497 | |
| Depreciation and amortization | | | 16,995,490 | | | | 10,268,576 | | | | 9,282,197 | |
| Provision for loan losses | | | 18,328,058 | | | | 9,188,497 | | | | 3,634,660 | |
| Investment gains on sales and impairments, net | | | (395,186 | ) | | | (552,063 | ) | | | (29,221 | ) |
| Gain on mortgage loans sold, net | | | (15,754,473 | ) | | | (7,668,960 | ) | | | (5,630,371 | ) |
| Stock-based compensation expense | | | 10,970,849 | | | | 7,341,603 | | | | 5,308,167 | |
| Deferred tax expense | | | 14,390,035 | | | | 5,819,463 | | | | 394,452 | |
| Losses (gains) on disposition of other real estate and other investments | | | 140,992 | | | | (433,911 | ) | | | (74,807 | ) |
| Gains from equity method investment | | | (31,402,923 | ) | | | (20,591,484 | ) | | | - | |
| Excess tax benefit from stock compensation | | | (4,604,007 | ) | | | (4,116,120 | ) | | | (1,698,521 | ) |
| Gains on other loans sold, net | | | (885,320 | ) | | | - | | | | - | |
| Other loans held for sale: | | | | | | | | | | | | |
| Loans originated | | | (112,669,589 | ) | | | - | | | | - | |
| Loans sold | | | 90,966,938 | | | | - | | | | - | |
| Mortgage loans held for sale: | | | | | | | | | | | | |
| Loans originated | | | (784,213,817 | ) | | | (524,679,767 | ) | | | (331,135,205 | ) |
| Loans sold | | | 803,498,453 | | | | 519,134,000 | | | | 335,577,000 | |
| Decrease (increase) in other assets | | | (17,411,223 | ) | | | (2,359,490 | ) | | | 4,014,267 | |
| (Decrease) increase in other liabilities | | | 2,829,656 | | | | (7,487,499 | ) | | | 417,873 | |
| Net cash provided by operating activities | | | 126,638,676 | | | | 84,603,830 | | | | 95,058,155 | |
| | | | | | | | | | | | | |
| Investing activities: | | | | | | | | | | | | |
| Activities in securities available-for-sale: | | | | | | | | | | | | |
| Purchases | | | (583,330,035 | ) | | | (342,192,699 | ) | | | (149,051,923 | ) |
| Sales | | | 72,829,440 | | | | 189,029,458 | | | | 2,360,478 | |
| Maturities, prepayments and calls | | | 280,805,769 | | | | 146,441,236 | | | | 123,949,792 | |
| Activities in securities held-to-maturity: | | | | | | | | | | | | |
| Purchases | | | (560,000 | ) | | | (1,550,995 | ) | | | (923,652 | ) |
| Sales | | | - | | | | - | | | | - | |
| Maturities, prepayments and calls | | | 6,200,000 | | | | 8,185,000 | | | | 1,229,874 | |
| Increase in loans, net | | | (966,207,993 | ) | | | (668,297,036 | ) | | | (455,357,214 | ) |
| Purchases of premises and equipment and software | | | (17,058,292 | ) | | | (10,870,851 | ) | | | (5,878,562 | ) |
| Proceeds from sales of software, premises, and equipment | | | 2,187,381 | | | | 782,482 | | | | - | |
| Proceeds from sale of mortgage servicing rights | | | 6,747,626 | | | | - | | | | - | |
| Acquisitions, net of cash acquired | | | 17,608,471 | | | | 5,876,592 | | | | - | |
| Increase in equity method investment | | | (74,100,000 | ) | | | (75,440,530 | ) | | | - | |
| Dividends received from equity method investment | | | 28,982,009 | | | | 7,152,000 | | | | - | |
| Increase in other investments | | | (27,508,882 | ) | | | (1,712,685 | ) | | | (4,208,447 | ) |
| Net cash used in investing activities | | | (1,253,404,506 | ) | | | (742,598,028 | ) | | | (487,879,654 | ) |
| | | | | | | | | | | | | |
| Financing activities: | | | | | | | | | | | | |
| Net increase in deposits | | | 822,306,826 | | | | 783,352,902 | | | | 249,132,187 | |
| Net increase (decrease) in repurchase agreements | | | 6,622,260 | | | | (32,784,245 | ) | | | 23,529,404 | |
| Advances from Federal Home Loan Bank: | | | | | | | | | | | | |
| Issuances | | | 1,934,000,000 | | | | 1,135,000,000 | | | | 790,000,000 | |
| Payments | | | (1,934,093,153 | ) | | | (1,092,781,984 | ) | | | (685,093,244 | ) |
Proceeds from subordinated debt and other borrowings, net of issuance costs | | | 243,226,783 | | | | 59,129,504 | | | | - | |
| Repayment of other borrowings | | | (74,000,302 | ) | | | (50,290,006 | ) | | | (2,500,000 | ) |
| Principal payments of capital lease obligation | | | (70,401 | ) | | | - | | | | - | |
| Exercise of common stock options and stock appreciation rights, net of shares surrendered for taxes | | | 11,589,495 | | | | 3,602,805 | | | | 6,421,689 | |
| Excess tax benefit from stock compensation | | | 4,604,007 | | | | 4,116,120 | | | | 1,698,521 | |
| Common dividends paid | | | (24,725,598 | ) | | | (18,307,075 | ) | | | (11,398,285 | ) |
Net cash provided by financing activities | | | 989,459,917 | | | | 791,038,021 | | | | 371,790,272 | |
| Net increase (decrease) in cash and cash equivalents | | | (137,305,913 | ) | | | 133,043,823 | | | | (21,031,227 | ) |
| Cash and cash equivalents, beginning of year | | | 320,951,333 | | | | 187,907,510 | | | | 208,938,737 | |
| Cash and cash equivalents, end of year | | $ | 183,645,420 | | | $ | 320,951,333 | | | $ | 187,907,510 | |
See accompanying notes to consolidated financial statements.
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle Bank (Pinnacle Bank). Pinnacle Bank is a commercial bank headquartered in Nashville, Tennessee. Pinnacle Financial completed its acquisitions of CapitalMark Bank & Trust (CapitalMark), Magna Bank (Magna) and, Avenue Financial Holdings, Inc. (Avenue) and BNC Bancorp (BNC) on July 31, 2015, September 1, 2015, and July 1, 2016 and June 16, 2017, respectively. Pinnacle Financial and Pinnacle Bank also collectively hold a 49% interest in Bankers Healthcare Group, LLC (BHG), of which 30% was obtained in 2015 and an additional 19% in 2016. BHG is a full-service commercial loan provider to healthcare and other professionals.professional practices. Pinnacle Bank provides a full range of banking services, including investment, mortgage, and insurance services, and comprehensive wealth management services, in its primary market areas of11 primarily urban markets within Tennessee, the Nashville-Davidson-Murfreesboro-Franklin, TN, Knoxville, TN, Chattanooga, TN-GACarolinas and Memphis, TN-MS-AR Metropolitan Statistical Areas. Additionally, as noted in the Subsequent Events disclosure below, on January 22, 2017, Pinnacle Financial and a wholly owned subsidiary of Pinnacle Financial entered into an Agreement and Plan of Merger with BNC Bancorp, a North Carolina corporation.Virginia.
Basis of Presentation — These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust II, PNFP Statutory Trust III, and PNFP Statutory Trust IV areCertain statutory trust affiliates of Pinnacle Financial, andas noted in Note 11. Other Borrowings are included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, determination of any impairment of intangible assets and the valuation of deferred tax assets.
Impairment — Long-lived assets, including purchased intangible assets subject to amortization, such as core deposit intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Pinnacle Financial had $15.1$56.7 million and $10.5$15.1 million of long-lived amortizing intangibles at December 31, 2017 and 2016, and 2015, respectively.
Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. The Accounting Standards Codification (ASC) 350,Goodwill and Other, regarding testing goodwill for impairment provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity does a qualitative assessment and determines that this is the case, or if a qualitative assessment is not performed, it is required to perform additional goodwill impairment testing to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). Based on a qualitative assessment, if an entity determines that the fair value of a reporting unit is more than its carrying amount, the two-step goodwill impairment test is not required. Pinnacle Financial performed its annual assessment as of September 30, 2016.2017. The results of the qualitative assessment indicated that the fair value of Pinnacle Financial's sole reporting unit was more than its carrying value, and accordingly, the two-step goodwill impairment test was not performed.
Should Pinnacle Financial's common stock price decline or other impairment indicators become known, additional impairment testing of goodwill may be required. Should it be determined in a future period that the goodwill has become impaired, then a charge to earnings will be recorded in the period such determination is made. The following table presents activity for goodwill and other intangible assets:
| | | Goodwill | | | Core deposit and other intangible assets | | | Total | |
| Balance at December 31, 2015 | | $ | 432,232 | | | $ | 10,540 | | | $ | 442,772 | |
| Acquisitions | | | 122,672 | | | | 8,845 | | | | 131,517 | |
| Amortization | | | - | | | | (4,281 | ) | | | (4,281 | ) |
| Change in purchase price allocation of previous acquisitions | | | (3,125 | ) | | | - | | | | (3,125 | ) |
Other changes(1) | | | (185 | ) | | | - | | | | (185 | ) |
| Balance at December 31, 2016 | | $ | 551,594 | | | $ | 15,104 | | | $ | 566,698 | |
assets (in thousands):
|
| | | | | | | | | | | |
| | Goodwill | | Core deposit and other intangible assets | | Total |
| Balance at December 31, 2016 | $ | 551,594 |
| | $ | 15,104 |
| | $ | 566,698 |
|
| Acquisitions | 1,256,455 |
| | 50,422 |
| | 1,306,877 |
|
| Amortization | — |
| | (8,816 | ) | | (8,816 | ) |
| Change in purchase price allocation of previous acquisitions | — |
| | — |
| | — |
|
Other changes (1) | (47 | ) | | — |
| | (47 | ) |
| Balance at December 31, 2017 | $ | 1,808,002 |
| | $ | 56,710 |
| | $ | 1,864,712 |
|
| |
(1) | Represents options exercised related to acquisitions which occurred prior to the adoption of ASC 718-20Compensation. |
The following table presents the gross carrying amount and accumulated amortization for the core deposit and other intangible assets, which are subject to amortization:amortization (in thousands):
| | | December 31, 2016 | | | December 31, 2015 | |
| Gross carrying amount | | $ | 42,365 | | | $ | 33,520 | |
| Accumulated amortization | | | (27,261 | ) | | | (22,980 | ) |
| Net book value | | | 15,104 | | | | 10,540 | |
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Gross carrying amount | $ | 92,787 |
| | $ | 42,365 |
|
| Accumulated amortization | (36,077 | ) | | (27,261 | ) |
| Net book value | $ | 56,710 |
| | $ | 15,104 |
|
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, 20162017 as follows:
| | | For the years ended December 31, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Cash Payments: | | | |
| Interest | | $ | 37,002,870 | | | $ | 17,435,292 | | | $ | 13,414,134 | |
| Income taxes paid | | | 49,503,637 | | | | 45,715,968 | | | | 31,350,000 | |
| Noncash Transactions: | | | | | | | | | | | | |
| Loans charged-off to the allowance for loan losses | | | 31,112,118 | | | | 21,148,034 | | | | 7,702,661 | |
| Loans foreclosed upon with repossessions transferred to other real estate | | | 4,453,060 | | | | 341,342 | | | | 4,649,852 | |
| Loans foreclosed upon with repossessions transferred to other repossessed assets | | | 1,842,318 | | | | 8,259,368 | | | | 2,262,573 | |
| Common stock issued in connection with acquisitions | | | 222,162,640 | | | | 269,492,990 | | | | - | |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash Payments: | |
| Interest | $ | 91,628,041 |
| | $ | 37,002,870 |
| | $ | 17,435,292 |
|
| Income taxes paid | 81,538,510 |
| | 49,503,637 |
| | 45,715,968 |
|
| Noncash Transactions: | |
| | |
| | |
|
| Loans charged-off to the allowance for loan losses | 22,046,511 |
| | 31,112,118 |
| | 21,148,034 |
|
| Loans foreclosed upon with repossessions transferred to other real estate | 6,227,509 |
| | 4,453,060 |
| | 341,342 |
|
| Loans foreclosed upon with repossessions transferred to other repossessed assets | 645,737 |
| | 1,842,318 |
| | 8,259,368 |
|
| Other real estate sales financed | 907,931 |
| | — |
| | — |
|
| Common stock issued in connection with acquisitions | 1,850,968,026 |
| | 222,162,640 |
| | 269,492,990 |
|
Securities — Securities are classified based on management's intention on the date of purchase. All debt securities classified as available-for-sale are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income (loss), net of the deferred income tax effects. Securities that Pinnacle Financial has both the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at historical cost and adjusted for amortization of premiums and accretion of discounts.
Interest and dividends on securities, including amortization of premiums and accretion of discounts calculated under the effective interest method, are included in interest income. For certain securities, amortization of premiums and accretion of discounts is computed based on the anticipated life of the security which may be shorter than the stated life of the security. Realized gains and losses from the sale of securities are determined using the specific identification method, and are recorded on the trade date of the sale.
Other-than-temporary Impairment — A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of the security. To determine whether impairment is other-than-temporary, management considers whether the entity expects to recover the entire amortized cost basis of the security by reviewing the present value of the future cash flows associated with the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss and is deemed to be other-than-temporary impairment. If a credit loss is identified, the credit loss is recognized as a charge to earnings and a new cost basis for the security is established. If management concludes that a decline in fair value of a security is temporary and, a full recovery of principal and interest is expected and it is not more-likely-than-not that it will be required to sell the security before recovery of its amortized cost basis, then the security is not other-than-temporarily impaired and the shortfall is recorded as a component of equity.
Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes. Additionally, if an available-for-sale security loses its investment grade, tax-exempt status, the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, Pinnacle Financial will consider selling the security, but will review each security on a case-by-case basis as these factors become known. Resultantly, other-than-temporary charges may be incurred as management's intention related to a particular security changes.
The carrying values of Pinnacle Financial's investment securities could decline in the future if the financial condition of the securities' issuer deteriorates and management determines it is probable that Pinnacle Financial will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future. There is also a risk that other-than-temporary impairment charges may occur in the future if management's intention to hold these securities to maturity and or recovery changes.
Loans held-for-sale — LoansLoans originated and intended for sale are carried at the lower of cost or estimated fair value as determined on a loan-by-loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Realized gains and losses are recognized when legal title to the loans has been transferred to the purchaser and sales proceeds have been received and are reflected in the accompanying consolidated statement of income in gains on mortgage loans sold, net of related costs such as compensation expenses, for mortgage loans, and as a component of other noninterest income for commercial loans held-for-sale.
Loans — Pinnacle Financial has five loan segments for financial reporting purposes: commercial and industrial, commercial real estate mortgage, construction and land development, consumer and other and consumer real estate mortgage. The appropriate classification is determined based on the underlying collateral utilized to secure each loan. These classifications are consistent with those utilized in the Quarterly Report of Condition and Income filed by Pinnacle Bank with the Federal Deposit Insurance Corporation (FDIC).
Loans are reported at their outstanding principal balances, net of the allowance for loan losses 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, 20162017 and 2015,2016, net deferred loan fees of $7.6$7.8 million and $4.2$7.6 million respectively, were included in loans on the accompanying consolidated balance sheets.
As part of our routine credit monitoring process, commercial loans receive risk ratings by the assigned financial advisor and are subject to validation by our independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pinnacle Financial believes that its categories follow those outlined by Pinnacle Bank's primary federal regulator. At December 31, 2016,2017, approximately 79%81.4% of Pinnacle Financial's loan portfolio was assigned a specifically assigned risk rating in the allowance for loan loss assessment.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 homogenoushomogeneous pool of loans and individually as either accrual or nonaccrual based on the performance of the loan.
Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which generally is the case but is not limited to when the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual status is reversed against current interest income. Interest income is subsequently recognized only if certain cash payments are received while the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. A nonaccrual loan is returned to accruing status once the loan has been brought current as to principal and interest and collection is reasonably assured or the loan has been well-secured through other techniques.
All loans that are placed on nonaccrual status are further analyzed to determine if they should be classified as impaired loans. A loan is considered to be impaired when it is probable Pinnacle Financial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan. This determination is made using a variety of techniques, which include a review of the borrower's financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results of reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc.).
Loans are charged off when management believes that the full collectability of the loan is unlikely. As such, a loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.
Purchased Loans — Purchased loans, including loans acquired through a merger, are initially recorded at fair value on the date of purchase. Purchased loans that contain evidence of post-origination credit deterioration as of the purchase date are carried at the net present value of expected future cash flows. All other purchased loans are recorded at their initial fair value, and adjusted for subsequent advances, pay downs, amortization or accretion of any fair value premium or discount on purchase, charge-offs and any other adjustment to carrying value. Pursuant to U.S. generally accepted accounting principles (GAAP), management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities as of the acquisition date. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the day 1 fair values (Day 1 Fair Values).
At the time of acquisition, management evaluates all purchased loans using a variety of factors such as current classification or risk rating, past due status and history as a component of the fair value determination. For those purchased loans without evidence of credit deterioration, management evaluates each reviewed loan using an internal grading system with a grade assigned to each loan at the date of acquisition. To the extent that any purchased loan is not specifically reviewed, such loan is assumed to have characteristics similar to the characteristics of the specifically reviewed acquired portfolio of purchased loans. The grade for each purchased loan without evidence of credit deterioration is reviewed subsequent to the date of acquisition any time a loan is renewed or extended or at any time information becomes available to Pinnacle Financial that provides material insight regarding the loan's performance, the borrower's capacity to repay or the underlying collateral.
In determining the Day 1 Fair Values of purchased loans without evidence of post-origination credit deterioration at the date of acquisition, management includes (i) no carry over of any previously recorded ALLallowance for loan losses (ALL) and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest and expected loss, given the risk profile and grade assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.
Purchased loans that contain evidence of credit deterioration on the date of purchase are individually evaluated by management to determine the estimated fair value of each loan. This evaluation includes no carryover of any previously recorded ALL. In determining the estimated fair value of purchased loans with evidence of credit deterioration, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received.
In determining the Day 1 Fair Values of purchased loans with evidence of credit deterioration, management calculates a non-accretable difference (the credit risk component of the purchased loans) and an accretable difference (the yield component of the purchased loans). The non-accretable difference is the difference between the contractually required payments and the cash flows expected to be collected in accordance with management's determination of the Day 1 Fair Values. Subsequent increases in expected cash flows will result in an adjustment to accretable yield, which will have a positive impact on interest income. Subsequent decreases in expected cash flows will generally result in increased provision for loan losses. Subsequent increases in expected cash flows following any previous decrease will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield. The accretable difference on purchased loans with evidence of credit deterioration is the difference between the expected cash flows and the net present value of expected cash flows. Such difference is accreted into earnings using the effective yield method over the term of the loans. For purchased loans with evidence of credit deterioration for which the expected cash flows cannot be forecasted, these loans are deemed to be collateral dependent, are recorded at their fair value and are placed on nonaccrual.nonaccrual, with interest payments recorded on a cash basis, as appropriate.
Allowance for Loan Losses (allowance) — - Pinnacle Financial's management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of the loan portfolio, loan loss experience, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay the loan (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level of allowance maintained by management is believed adequate to absorb probable losses inherent in the loan portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, is deemed uncollectible.
Pinnacle Financial's allowance for loan loss assessment methodology was modified during the year ended December 31, 2017 to (i) extend the lookback period from 24 quarters to a period beginning January 1, 2006 to better capture the risk associated with this extended economic cycle, (ii) eliminate the use of risk ratings in the calculation of the loss rate and instead focus on loss rate by loan type and (iii) expand the economic variables used in the qualitative assessment to incorporate our expanded footprint. Pinnacle Financial also eliminated the use of a loss emergence period in light of the minimal population of losses available to evaluate that were previously being extrapolated to the full population of loans, and shifted the focus of its analysis to more of a quantitative model. There was no material impact on the adoption of the changes in the allowance for loan loss assessment methodology.
Pinnacle Financial's allowance for loan losses is composed of the result of two independent analyses pursuant to the provisions of ASC 450-20,Loss Contingenciesand ASC 310-10-35, Receivables. The ASC 450-20 analysis is intended to quantify the inherent risks in its performing loan portfolio. The ASC 310-10-35 analysis includes a loan-by-loan analysis of impaired loans, bothincluding those reported as nonaccrual, troubled-debt restructurings and troubled-debt restructurings.purchase credit impaired.
In assessing the adequacy of the allowance, Pinnacle Financial also considers the results of Pinnacle Financial's ongoing independent loan review process. Pinnacle Financial undertakes this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in its overall evaluation of the risk characteristics of the entire loan portfolio. Its loan review process includes the judgment of management, independent internal loan reviewers, and reviews that may have been conducted by third-party reviewers including regulatory examiners. Pinnacle Financial incorporates relevant loan review results in the allowance.
The ASC 450-20 component of the allowance for loan losses begins with a migration analysis based on Pinnacle Financial's internal system of risk rating, if applicable, and historical loss data in its portfolio, byrate calculation for each loan type.pool with similar risk characteristics. The migration analysis accumulates losses realized over a rolling four-quarter cycle and isare utilized to determine an annualizedannual loss rate for each categoryloan pool for each quarter-end in our look-back period. The look-back period in our migration analysis includes 24 quartersloss rate calculation begins with January 2006, as Pinnacle Financial believes thiswe believe the period from January 1, 2006 to present is more representative of anthis economic cycle. An average of theThe loss rates calculated withinfor each category is calculated for each quarter-end in the look-back period. Average loss rates by category are then averaged and applied to the end of period loan portfolio. Theportfolio balances to determine estimated losses by category are then adjusted by a loss emergence period for each type of loan in our portfolio. A loss emergence period represents the length of time from the initial event which triggered the loss to the recognition of the loss and is validated annually.losses. The loss emergence period was determined for the losses in each category of loans and then applied to the loss rates resulting from the migration analysis. Combined, this providesprovide a quantitative estimate of the results in credit losses inherent in Pinnacle Financial'sour end of period loan portfolio based on itsour actual loss experience.
The estimated loan loss allocation for all loan segments is then adjusted for management's estimate of probable losses for a number of qualitative factors that have not been considered in the loan migrationquantitative analysis. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting factor is applied to the non impairednon-impaired loan portfolio. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified either in its risk rating or impairment process, as of the balance sheet date, and is based upon quarterly trend assessments in portfolio concentrations, policy exceptions, economic conditions, lending staff performance,associate retention, independent loan review results, collateral considerations, credit quality, competition, and regulatory requirements, enterprise wide risk assessments, and peer group credit quality. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors.
The allowance for loan losses for purchased loans is calculated similar to that utilized for legacy Pinnacle Bank loans. Pinnacle Financial's accounting policy is to compare the computed allowance for loan losses for each purchased loansloan to the remaining fair value adjustment.adjustment at the individual loan level. If the computed allowance at the loan level is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a charge to the provision for loan losses.
The ASC 450-20 portion of the allowance includes a small unallocated component. Pinnacle Financial believes that the unallocated amount is warranted for inherent factors that cannot be practically assigned to individual loan categories, such as the imprecision in the overall loss allocation measurement process, the subjectivity risk of potentially not considering all relevant environmental categories and related measurements and imprecision in its credit risk ratings process. The appropriateness of the unallocated component of the allowance is assessed each quarter end based upon changes in the overall business environment not otherwise captured.
The impaired loan allowance is determined pursuant to ASC 310-10-35. Loans are impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means collecting all interest and principal payments of a loan as scheduled in the loan agreement. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the provision for loan losses and is a component of the allowance for loan losses. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan's effective interest rate, or if the loan is collateral dependent, at the fair value of the collateral, less estimated disposal costs. If the loan is cash flow dependent, a specific reserve is established as a component of the allowance. If the loan is collateral dependent, the principal balance of the loan is charged-off in an amount equal to the impairment measurement. The fair value of collateral dependent loans is derived primarily from collateral appraisals performed by independent third-party appraisers. Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans. This analysis is completed for all individual loans greater than $250,000.$500,000. The resulting allowance percentage by segment adjusted for specific trends identified, if applicable, is then applied to the remaining population of impaired loans.
Pursuant to the guidance set forth in ASU No. 2011-02, A Creditor's Determination of Whether a Restructuring is a Troubled
Debt Restructuring, the above impairment methodology is also applied to those loans identified as troubled debt restructurings.
Sufficiency of the computed allowance is then tested by comparison to historical trends and industry and peer information. Pinnacle Financial then evaluates the result of the procedures performed, including the results of ourits testing, and concludes on the appropriateness of the balance of the allowance in its entirety. The audit committee of thePinnacle Financial's board of directors reviews and approves the methodology and resultant allowance prior to the filing of quarterly and annual financial information.
While its policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to income, are considered adequate by management and are reviewed from time to time by regulators, they are necessarily approximate and imprecise. There are factors beyond itsPinnacle Financial's control, such as conditions in the local, national, and international economy, a local real estate market or particular industry conditions which may materially negatively impact materially asset quality and the adequacy of the allowance for loan losses and thus the resulting provision for loan losses.
Transfers of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been surrendered or in the case of a loan participation, a portion of the asset has been surrendered and meets the definition of a "participating interest". Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from Pinnacle Financial, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) Pinnacle Financial does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Premises and Equipment and Leaseholds —Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the straight-line method over the estimated useful lives of the assets or the expected lease terms for leasehold improvements, whichever is shorter. Useful lives for all premises and equipment range between three and thirty years.
Pinnacle Bank is the lessee with respect to several office locations. All such leases are being accounted for as operating leases within the accompanying consolidated financial statements, with the exception of the one capital lease agreement discussed below. Several of these leases include rent escalation clauses. Pinnacle Bank expenses the costs associated with these escalating payments over the life of the expected lease term using the straight-line method. At December 31, 2016,2017, the deferred liability associated with these escalating rentals was approximately $3.0$3.5 million and is included in other liabilities in the accompanying consolidated balance sheets.
Pinnacle Bank has one lease being accounted for as a capital lease within the accompanying consolidated financial statements. Amortization of property under the capital lease is expensed over the life of the expected lease term using the straight-line method and is included in depreciation expense.
Other Real Estate Owned —Other real estate owned (OREO) represents real estate foreclosed upon or acquired by deed in lieu of foreclosure by Pinnacle Bank through loan defaults by customers. Substantially all of these amounts relate to lots, homes and residential development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has adequately supported the value recorded. Upon its acquisition by Pinnacle Bank, the property is recorded at fair value, based on appraised value, less selling costs estimated as of the date acquired. The difference from the loan balance is recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent downward valuation adjustments and expenses to maintain OREO are determined on a specific property basis and are included as a component of noninterest expense. Net gains or losses realized at the time of disposal are reflected in noninterest income or noninterest expense, as applicable.expense.
Included in the accompanying consolidated balance sheet at December 31, 20162017 is $6.5$29.1 million of OREO with related property-specific valuation allowances of $381,000.$1.2 million. At December 31, 2015,2016, OREO totaled $6.6$6.5 million with related property-specific valuation allowances of $1.5 million.$381,000. During the years ended December 31, 2017, 2016 2015 and 2014,2015, Pinnacle Financial had expense of $1.1 million, expense of $396,000 and a benefit of $306,000, and expense of $664,000, respectively, of net foreclosed real estate expense. Of the net foreclosed real estate expenses, $141,000 were realized losses on the disposition and holding losses on valuations of OREO properties during the year ended December 31, 2016 compared to realized gains and holding losses on valuations of OREO properties of $434,000 and $552,000, respectively, during the years ended December 31, 2015 and 2014.
Other Assets —Included in other assets as of December 31, 20162017 and 2015,2016, is approximately $5.7$9.3 million and $6.6$5.7 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, 2017, 2016, 2015, and 2014,2015, Pinnacle Financial's amortization expense was approximately $2.5 million, $2.3 million, $1.3 million, and $1.1$1.3 million, respectively. Software maintenance fees are capitalized in other assets and amortized over the term of the maintenance agreement.
Pinnacle Financial is required to maintain certain minimum levels of equity investments with certain regulatory and other entities in which Pinnacle Bank has outstanding borrowings, including the Federal Home Loan Bank of Cincinnati. At December 31, 20162017 and 2015,2016, the cost of these investments was $31.4$46.4 million and $26.5$31.4 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 primarily non-public private equityand funds at fair value, of $8.3$24.4 million and $7.6$8.3 million at December 31, 20162017 and 2015,2016, respectively. During 20162017 and 2015,2016, Pinnacle Financial recorded net losses of $233,000$552,310 and $39,000,$233,000, respectively, due to changes in the fair value of these investments. As more fully described in footnoteNote 11, Pinnacle Financial has an investment in fourtwelve Trusts valued at $2,476,000$3,995,000 as of December 31, 2016 and 2015.2017. The Trusts were established to issue preferred securities, the dividends for which are paid with interest payments Pinnacle Financial makes on subordinated debentures it issued to the Trusts.
Pinnacle Bank is the owner and beneficiary of various life insurance policies on certain key executives and certain current and former directors and associates, including policies that were acquired in its mergers. Collectively, these policies are reflected in other assets in the accompanying consolidated balance sheets at their respective cash surrender values. At December 31, 20162017 and 2015,2016, the aggregate cash surrender value of these policies was approximately $150.6$415.9 million and $121.9$150.6 million, respectively. Noninterest income related to these policies was $7.9 million, $3.5 million, $2.5 million, and $2.4$2.5 million, during the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively.
Also, as part of our compliance with the Community Reinvestment Act, we hadhave investments in low income housing entities totaling $43.1$44.0 million and $17.1$43.1 million, net, as of December 31, 20162017 and 2015,2016, respectively. Included in our CRA investments are investments of $18.9$23.9 million and $3.2$18.9 million at December 31, 20162017 and 2015,2016, 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 also has forward cash flow hedge relationships in the form of interest rate swap agreements to manage ourits 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 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 and does not assume perfect effectiveness through the matching of critical terms. Assessments of hedge effectiveness and measurements of hedge ineffectiveness are performed at least quarterly. The effective portion of the changes in the fair value of a derivative that is highly effective and that has been designated and qualifies as a cash flow hedge are initially recorded in accumulated other comprehensive income (AOCI) and will be reclassified to earnings in the same period that the hedged item impacts earnings; any ineffective portion is recorded in current period earnings.
Hedge accounting ceases on transactions that are no longer deemed effective, or for which the derivative has been terminated or de-designated.
Securities Sold Under Agreements to Repurchase — Pinnacle Financial routinely sells securities to certain treasury management customers and then repurchases these securities the next day. Securities sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated balance sheets at the amount of cash received in connection with each transaction.
Income Taxes — ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. This sectionASU 740 also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods.
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. Accordingly, deferred tax assets that will be realized after December 31, 2017 were revalued using the tax rates enacted as a result of the 2017 Tax Cuts and Jobs Act resulting in a revaluation charge of $31.5 million. The net deferred tax asset is reflected as a component of other assets on the consolidated balance sheet. A valuation allowance is required for deferred tax assets if, based on available evidence, it is more likely than not that all or some portion of the asset may not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the deferred tax asset.
Income tax expense or benefit for the year is allocated among continuing operations and other comprehensive income (loss), as applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss from continuing operations that occurred during the year, plus or minus income tax effects of (i) changes in certain circumstances that cause a change in judgment about the realization of deferred tax assets in future years, including the valuation of deferred tax assets due to changes in enacted income tax rates (ii) changes in income tax laws or rates, and (iii) changes in income tax status, subject to certain exceptions. The amount allocated to other comprehensive income (loss) is related solely to changes in the valuation allowance on items that are normally accounted for in other comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities.
In accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes, uncertain tax positions are recognized if it is more likely than not, based on technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances and information available at the reporting date.
Pinnacle Financial and its subsidiaries file consolidated U.S. Federal and state of Tennessee 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 we do businessPinnacle operates for the years ended December 31, 20132014 through 2016.2017.
Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. No amounts were accrued for interest and/or penalties at December 31, 2017 or 2016. The amount accrued for interest and/or penalties related to Statestate uncertain tax positions at December 31, 2015 and 2014 were $96,000 and $140,000, respectively.was $96,000. Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense.
Income Per Common Share — Basic net income per common share (EPS) is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average shares outstanding is attributable to common stock options, common stock appreciation rights, restricted share awards, and restricted share unit awards. The dilutive effect of outstanding options, common stock appreciation rights, restricted share awards, and restricted share unit awards is reflected in diluted EPS by application of the treasury stock method.
As of December 31, 2016,2017, there were 550,490274,586 stock options outstanding to purchase common shares. For the years ended December 31, 2017, 2016 and 2015, respectively, 567,611, 694,909 and 2014, respectively, approximately 694,909, 958,320 and 403,555 of dilutive stock options, dilutive restricted shares, restricted share units and stock appreciation rights were included in the diluted earnings per share calculation under the treasury stock method. For the years ended December 31, 2017, 2016 2015 and 2014,2015, there were no stock options, restricted shares, restricted share units and stock appreciation rights excluded from the calculation because they were deemed to be antidilutive.
The following is a summary of the basic and diluted earnings per share calculation for each of the years in the three-year period ended December 31, 2016:2017:
| | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | |
| Basic earnings per share calculation: | | | | | | | | | |
Numerator - Net income | | $ | 127,224,695 | | | $ | 95,509,402 | | | $ | 70,471,167 | |
| | | | | | | | | | | | | |
Denominator – Weighted average common shares outstanding | | | 43,037,083 | | | | 37,015,468 | | | | 34,723,335 | |
| Basic net income per common share | | $ | 2.96 | | | $ | 2.58 | | | $ | 2.03 | |
| | | | | | | | | | | | | |
| Diluted earnings per share calculation: | | | | | | | | | | | | |
Numerator - Net income | | $ | 127,224,695 | | | $ | 95,509,402 | | | $ | 70,471,167 | |
| | | | | | | | | | | | | |
Denominator – Weighted average common shares outstanding | | | 43,037,083 | | | | 37,015,468 | | | | 34,723,335 | |
| Dilutive shares contingently issuable | | | 694,909 | | | | 958,320 | | | | 403,555 | |
| Weighted average diluted common shares outstanding | | | 43,731,992 | | | | 37,973,788 | | | | 35,126,890 | |
| Diluted net income per common share | | $ | 2.91 | | | $ | 2.52 | | | $ | 2.01 | |
|
| | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| Basic earnings per share calculation: | | | | | |
Numerator - Net income | $ | 173,979,487 |
| | $ | 127,224,695 |
| | $ | 95,509,402 |
|
| | | | | | |
Denominator – Weighted average common shares outstanding | 63,760,578 |
| | 43,037,083 |
| | 37,015,468 |
|
| Basic net income per common share | $ | 2.73 |
| | $ | 2.96 |
| | $ | 2.58 |
|
| | | | | | |
| Diluted earnings per share calculation: | |
| | |
| | |
|
Numerator - Net income | $ | 173,979,487 |
| | $ | 127,224,695 |
| | $ | 95,509,402 |
|
| | | | | | |
Denominator – Weighted average common shares outstanding | 63,760,578 |
| | 43,037,083 |
| | 37,015,468 |
|
| Dilutive shares contingently issuable | 567,611 |
| | 694,909 |
| | 958,320 |
|
| Weighted average diluted common shares outstanding | 64,328,189 |
| | 43,731,992 |
| | 37,973,788 |
|
| Diluted net income per common share | $ | 2.70 |
| | $ | 2.91 |
| | $ | 2.52 |
|
Stock-Based Compensation —Stock-based compensation expense is recognized based on the fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for estimated forfeitures. ASC 718-20, Compensation – Stock Compensation Awards Classified as Equity requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Service based awards with multiple vesting periods are expensed over the entire requisite period as if the award were a single award. For awards with performance vesting criteria, anticipated performance is projected to determine the number of awards expected to vest, and the corresponding aggregate expense is adjusted to reflect the elapsed portion of the applicable performance period.
Comprehensive Income (Loss) — Comprehensive income (loss) consists of the total of all components of comprehensive income (loss) including net income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. generally accepted accounting principlesGAAP are included in comprehensive income (loss) but excluded from net income (loss). Currently, Pinnacle Financial's other comprehensive income (loss) consists 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. generally accepted accounting principlesGAAP and established required disclosures about fair value measurements. ASC 820 applies only to fair-valuefair 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.
Mortgage Servicing Rights — In conjunction with the acquisition of Magna, Pinnacle Bank acquired a residential mortgage servicing portfolio which was recorded at fair value upon acquisition. The residential mortgage servicing portfolio was recorded at $6.4 million as of December 31, 2015, net of related amortization. During the first quarter of 2016, Pinnacle Bank sold the mortgage servicing rights associated with the $830 million Fannie Mae portfolio for $6.6 million, net of associated costs to sell. The purchase agreement related to the sale of these rights includes certain clawback provisions which require Pinnacle Bank to reimburse the acquirer in the event certain conditions are met. Approximately $241,000 was recorded as income during the year ended December 31, 2016 related to the sale.
Recently Adopted Accounting Pronouncements— In April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs requiring that debt issuance costs related to a debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the related debt liability. The guidance became effective on January 1, 2016. As a result of the adoption of this standard, Pinnacle Financial reclassified approximately $870,000 of deferred financing costs from Other Assets to Subordinated Debt and Other Borrowings in the consolidated balance sheet as of December 31, 2015.
Newly Issued not yet Effective Accounting Standards — In February 2016, the FASB issued Accounting Standards Update 2016-02 Leases guidance requiring the recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for most leases. The guidance becomes effective for us on January 1, 2019. Pinnacle Financial is currently evaluating the impact on its consolidated financial statements.
In March 2016, the FASB issued updated guidance to Accounting Standards Update, 2016-09 Stock Compensation Improvements to Employee Share-Based Payment Activity (ASU 2016-09) intended to simplify and improve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities and classification of such awards on the statement of cash flows. This ASU is expected to impactAccounting Standards Update (ASU) impacted Pinnacle Financial's consolidated financial statements by requiring that all income tax effects related to settlements of share-based payment awards be reported as increases (or decreases) to income tax expense. Previously, income tax benefits at settlement of an award were reported as an increase (or decrease) to additional paid-in capital. The ASU also requires that all income tax related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows whereas these cash flows were previously reported as a reduction to operating cash flows and an increase to financing cash flows. The guidance became effective for Pinnacle Financial on January 1, 2017. During the year ended December 31, 2017, the newly adopted standard resulted in a reduction in tax expense of $5.4 million.
Newly Issued not yet Effective Accounting Standards— In February 2018, the FASB issued Accounting Standards Update 2018-02,Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU addressed the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the newly enacted federal corporate tax rate included in the Tax Cuts and Jobs Act issued December 22, 2017. These amendments allow an entity to make a reclassification from other comprehensive income to retained earnings for the difference between the historical corporate income tax rate and the newly enacted corporate income tax rate. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted with retrospective application. Pinnacle Financial is currently evaluating the impact of the new guidance on its consolidated financial statements, but does not expect it to have a material impact.
In August 2017, the FASB issued Accounting Standards Update 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU makes more financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. Pinnacle Financial is currently evaluating the impact of the new guidance on its consolidated financial statements, but does not expect it to have a material impact.
In March 2017, the FASB issued Accounting Standards Update 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendment in this ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. The amendment does not require an
accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted with modified retrospective application. Pinnacle Financial is currently evaluating the impact of the new guidance on its consolidated financial statements, but does not expect it to have a material impact.
In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify how entities other than private companies, such as public business entities and not-for-profit entities, are required to test goodwill for impairment by eliminating the comparison of the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those periods. If this standard had been effective for the year ended December 31, 2017, there would have been no impact on Pinnacle Financial's consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendment in this ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) or assets or businesses. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. If this standard had been effective for the year ended December 31, 2017, there would have been no impact on Pinnacle Financial's consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02 Leases guidance requiring the recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for most leases. The guidance becomes effective for us on January 1, 2017.2019. If this standard was effective as of the date of these financial statements, Pinnacle Financial would have recorded a right of use asset and liability in an amount similar to its current future minimum lease obligations as shown in Note 8. Premises and Equipment and Lease Commitments.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments(the ASU), which introduces the current expected credit losses methodology. Among other things, thethis ASU requires the measurement of all expected credit losses for financial assets, including loans and available-for-sale debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new model will require institutions to calculate all probable and estimable losses that are expected to be incurred through the loan's entire life. ASU 2016-13 also requires the allowance for credit losses for purchased financial assets with credit deterioration since origination to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance will be added to the purchase price rather than recorded as credit loss expense. The disclosure of credit quality indicators related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Institutions are to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the standard is effective. The amendments are effective for fiscal years beginning after December 15, 2020.2019. Early application will be permitted for fiscal years beginning after December 15, 2018. Pinnacle Financial is currently assessing the impact of the new guidance on its consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update 2016-15Statement of Cash Flows (Topic 230) intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. The guidance is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. Pinnacle Financial is currently evaluating thedoes not expect this standard will have a material impact of the new guidance on itsPinnacle Financial's consolidated financial statements.
93statements, with the exception of dividends received from its equity method investments which will be reclassified as a cash flow from investments to operating cash flows beginning in the first quarter of 2018.
In May 2014, the FASB issued Accounting Standards Update 2014-09Revenue from Contracts with Customers(Topic 606)) developed as a joint project with the International Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework for addressing revenue issues. TheThis ASU's core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update 2015-14, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The ASU may be adopted using either a modified retrospective method or a full retrospective method. Pinnacle Financial intends to adoptadopted the ASU during the first quarter of 2018, as required, using a modified retrospective approach. Pinnacle Financial's preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material impact on the Company's consolidated financial statements as theThe majority of itsPinnacle Financial's revenue stream is generated from financial instruments which are not within the scope of this ASU. However, Pinnacle Financial is still evaluatinghas evaluated the impact for other fee-based income. The FASB continues to release new accounting guidance related to the adoptionincome, including our wealth management, mortgage and deposit services line of business, and has concluded that this ASU and the results of Pinnacle Financial's materiality analysis may change based on conclusions reached as to the application of this new guidance.standard will not materially impact its financial statements.
Other than those pronouncements discussed above and those which have been recently adopted, there were no other recently issued accounting pronouncements that are expected to materially impact Pinnacle Financial.
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, 20162017 through the date of the issued financial statements.
BNC Bancorp, a North Carolina corporation (BNC)
On January 22, 2017, Pinnacle Financial entered into an Agreement and Plan of Merger (the Merger Agreement), among BNC, and Blue Merger Sub, Inc., a North Carolina corporation and a direct, wholly owned subsidiary of Pinnacle Financial (Merger Sub), pursuant to which, on the terms and subject to the conditions set forth therein, Merger Sub will merge with and into BNC (the Merger), with BNC surviving the Merger (the Surviving Company). As soon as reasonably practicable following the Merger and as a part of a single integrated transaction, Pinnacle Financial will cause the Surviving Company to be merged with and into Pinnacle Financial (the Second Step Merger), with Pinnacle Financial as the surviving entity, on the terms and subject to the conditions set forth in the Merger Agreement. Immediately following the Second Step Merger, Bank of North Carolina, a North Carolina state bank and a wholly owned subsidiary of BNC, will merge with and into Pinnacle Bank, a Tennessee state bank and a wholly owned subsidiary of Pinnacle Financial. The Merger Agreement was unanimously approved and adopted by the board of directors of Pinnacle Financial and the board of directors of BNC.
Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the Effective Time), outstanding shares of common stock, no par value, of BNC (BNC Common Stock) will be converted into the right to receive 0.5235 shares (the Exchange Ratio) of Pinnacle's common stock, $1.00 per value per share (Pinnacle Financial Common Stock). As of January 13, 2017, BNC had 52,181,073 shares of BNC Common Stock outstanding, 901,726 shares of BNC Common Stock in respect of outstanding restricted stock awards and restricted stock unit awards, in the aggregate, and 66,443 outstanding stock options. The Merger Agreement also includes provisions that address the treatment of the outstanding equity awards of BNC in the Merger. Pursuant to the terms of the Merger Agreement, any outstanding options to purchase shares of BNC Common Stock that are not vested will be accelerated prior to, but conditioned on the occurrence of, the closing of the Merger and all options that are not exercised prior to the closing shall be cancelled and the holders of any such options shall receive an amount in cash equal to the product of (x) the excess, if any, of the average closing prices of Pinnacle Financial's Common Stock for the ten (10) trading days ending on the trading day immediately preceding the closing date of the Merger (adjusted for the Exchange Ratio) over the exercise price of each such option and (y) the number of shares of BNC Common Stock subject to each such option.
The completion of the Merger is subject to customary conditions, including (1) receipt of the approval of the issuance of the shares of Pinnacle Financial's Common Stock issuable in the Merger from Pinnacle Financial's shareholders and the approval of the Merger Agreement and the transactions contemplated therein, including the Merger, from BNC's shareholders, (2) authorization for listing on the Nasdaq Global Select Market of the shares of Pinnacle Financial Common Stock to be issued in the Merger, (3) the receipt of required regulatory approvals, including the approval of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Tennessee Department of Financial Institutions and the North Carolina Office of the Commissioner of Banks, (4) effectiveness of the registration statement on Form S-4 for the Pinnacle Financial's Common Stock to be issued in the Merger, and (5) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the Merger illegal. Each party's obligations to complete the Merger is also subject to certain additional customary conditions, including (1) subject to certain exceptions, the accuracy of the representations and warranties of Pinnacle Financial and Merger Sub, in the case of BNC, and BNC, in the case of Pinnacle Financial, (2) performance in all material respects by Pinnacle Financial and Merger Sub, in the case of BNC, and BNC, in the case of Pinnacle Financial, of its obligations under the Merger Agreement, and (3) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
The Merger Agreement provides certain termination rights for both BNC and Pinnacle Financial and further provides that a termination fee of $66.0 million will be payable by either BNC or Pinnacle Financial, as applicable, upon termination of the Merger Agreement under certain circumstances, including if the other party or its board of directors withdraws or modifies or qualifies in a manner adverse to the other party its recommendation that its shareholders vote in favor of the Merger Agreement and the transactions contemplated thereby, including the Merger, in the case of BNC's shareholders, and in favor of the issuance of the Pinnacle Financial Common Stock issuable in the Merger, in the case of Pinnacle Financial's shareholders.
The Merger Agreement provides that effective at or immediately following the Effective Time, Pinnacle Financial, Pinnacle Bank and their respective boards of directors will take all requisite action to cause the total number of members of their respective boards of directors as of the Effective Time to be eighteen (18) and elect Richard D. Callicutt II, BNC's President and Chief Executive Officer and three additional members of the board of directors of BNC to the boards of directors of Pinnacle Financial and Pinnacle Bank.
In connection with the execution of the Merger Agreement, Pinnacle Financial has also entered into an employment agreement with Richard D. Callicutt II and a change of control and severance agreement with David Spencer, BNC's Executive Vice President and Chief Financial Officer, that will become effective as of the Effective Time of the Merger and replace those individuals' existing employment agreements with BNC and Bank of North Carolina. In addition, upon consummation of the Merger, Pinnacle Financial will assume BNC's obligations under its outstanding $60.0 million subordinated notes issued in September 2014 that mature in October 2024. These notes bear interest at a rate of 5.5% per annum until September 30, 2019 and may not be repaid prior to that date. Beginning on October 1, 2019, if not redeemed on that date, these notes will bear interest at a floating rate equal to the three-month LIBOR determined on the determination date of the applicable interest period plus 359 basis points.
The $50.5 million in aggregate principal amount of subordinated debentures issued by trust affiliates of BNC in connection with the issuance of trust preferred securities will also be assumed in connection with the Merger. Upon consummation of the Merger, Pinnacle Financial expects that its total assets will exceed $15.0 billion, which as a result of exceeding that level as a result of the Merger, would cause the subordinated debentures Pinnacle Financial and BNC have issued in connection with prior trust preferred securities offerings to cease to qualify as Tier 1 capital under applicable banking regulations. Though these securities would no longer qualify as Tier 1 capital from and after the closing of the Merger, Pinnacle Financial believes these subordinated debentures would continue to qualify as Tier 2 capital.
2017 Public Offering
In January 2017, we completed a public offering of approximately 3.22 million shares of our common stock in a transaction that resulted in net proceeds to us, after deducting underwriting discounts and commissions and estimated other expenses payable by us, of $191.2 million. We have contributed $185.0 million of these net proceeds to our bank subsidiary.
Note 2. Acquisitions
Acquisition – CapitalMark Bank & Trust.BNC Bancorp.On July 31, 2015,June 16, 2017, Pinnacle Financial consummated its acquisition of CapitalMark.merger with BNC. Pursuant to the terms of the Agreement and Plan of Merger, dated as of April 7, 2015January 22, 2017, by and amongbetween Pinnacle Financial Pinnacle Bank, and CapitalMark (the CapitalMark Merger Agreement), CapitalMark merged with and into Pinnacle Bank, with Pinnacle Bank continuing as the surviving corporation (the CapitalMark Merger).
By virtue of the CapitalMark Merger, each holder of an issued and outstanding share of common stock of CapitalMark had the right to elect, for each share of CapitalMark Common Stock held by such holder, to receive either (i) 0.50 shares of Pinnacle Financial's Common Stock, (ii) an amount in cash equal to the value of 0.50 shares of Pinnacle Financial's Common Stock, based on the 10-day average closing price for Pinnacle Financial's common stock prior to July 31, 2015 (which such amount equaled $26.78), or (iii) a combination of stock and cash.
Approximately 90% and 10%, respectively, of CapitalMark's outstanding shares of Common Stock as of the effective time of the CapitalMark Merger were converted into shares of Pinnacle Financial Common Stock and cash, respectively. As a result, Pinnacle Financial issued approximately 3.3 million shares of Pinnacle Financial's Common Stock and paid approximately $19.7 million in cash (including payments related to fractional shares) to the CapitalMark shareholders. Fractional shares were converted to cash based on the 10-day average closing price for Pinnacle Financial's Common Stock prior to July 31, 2015. 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 at the common stock exchange rates. The fair market value of stock options assumed was $30.4 million.
With this acquisition, Pinnacle Financial expanded its presence in the East Tennessee region by expanding into the Chattanooga MSA. The following summarizes consideration paid and an allocation of purchase price to net assets acquired (dollars in thousands):
| | | Number of Shares | | | Amount | |
| Equity consideration | | | | | | |
| Common stock issued | | | 3,306,184 | | | $ | 175,525 | |
| Fair value of stock options assumed | | | | | | | 30,430 | |
| Total equity consideration | | | | | | $ | 205,955 | |
| | | | | | | | | |
| Non-equity consideration - Cash | | | | | | | 19,675 | |
| Total consideration paid | | | | | | $ | 225,630 | |
| | | | | | | | | |
| Allocation of total consideration paid: | | | | | | | | |
| Fair value of net assets assumed including estimated identifiable intangible assets | | | | | | $ | 73,186 | |
| Goodwill | | | | | | | 152,444 | |
| | | | | | | $ | 225,630 | |
Goodwill originating from the CapitalMark Merger resulted primarily from anticipated synergies arising from the combination of certain operational areas of the businesses as well as the purchase premium inherent in buying a complete and successful banking operation. Goodwill associated with the CapitalMark Merger is not amortizable for book or tax purposes.
Acquisition - Magna Bank. On September 1, 2015, Pinnacle Financial consummated its merger with Magna. Pursuant to the terms of the Agreement and Plan of Merger dated as of April 28, 2015 by and among Pinnacle Financial, Pinnacle Bank and Magna (the Magna Merger Agreement), Magna merged with and into Pinnacle Bank, with Pinnacle Bank continuing as the surviving corporation (the Magna Merger).
By virtue of the Magna Merger, each holder of an issued and outstanding share of common stock of Magna (including shares of Magna's common stock issued automatically upon conversion of Magna's Series D preferred stock immediately prior to the effective time of the Magna Merger) had the right to elect, for each share of Magna common stock held by such holder (including shares of Magna's common stock issued automatically upon conversion of Magna's Series D preferred stock immediately prior to the effective time of the Magna Merger), to receive either (i) 0.3369 shares of Pinnacle Financial's Common Stock, (ii) an amount in cash equal to $14.32, or (iii) a combination of stock and cash.
In total, Magna common shareholders (including holders of shares of Magna's common stock issued automatically upon conversion of Magna's Series D preferred stock immediately prior to the effective time of the Merger) had approximately 75% of their shares of Magna common stock as of the effective time of the Merger (including shares of Magna's common stock issued automatically upon conversion of Magna's Series D preferred stock immediately prior to the effective time of the Merger) converted into shares of Pinnacle Financial Common Stock and approximately 25% of their shares converted into cash. As a result, Pinnacle Financial issued approximately 1.4 million shares of Pinnacle Financial Common Stock and paid approximately $19.5 million in cash (including payments related to fractional shares) to the Magna shareholders. Additionally, at the time of the Magna Merger there were 139,417 unexercised stock options that were exchanged for cash equal to $14.32 less the respective exercise price. This consideration totaled approximately $847,000, including all applicable payroll taxes.
With this acquisition, Pinnacle Financial expanded its presence in the Memphis MSA. The following summarizes consideration paid and a allocation of purchase price to net assets acquired (dollars in thousands)
| | | Number of Shares | | | Amount | |
| Equity consideration | | | | | | |
| Common stock issued | | | 1,371,717 | | | $ | 63,538 | |
| Total equity consideration | | | | | | $ | 63,538 | |
| | | | | | | | | |
| Non-Equity Consideration: | | | | | | | | |
| Cash paid to common stockholders | | | | | | $ | 19,453 | |
| Cash paid to exchange outstanding stock options | | | | | | | 847 | |
| Total consideration paid | | | | | | $ | 83,838 | |
| | | | | | | | | |
| Allocation of total consideration paid: | | | | | | | | |
| Fair value of net assets assumed including estimated identifiable intangible assets | | | | | | $ | 49,050 | |
| Goodwill | | | | | | | 34,788 | |
| | | | | | | $ | 83,838 | |
Goodwill originating from the Magna Merger resulted primarily from anticipated synergies arising from the combination of certain operational areas of the businesses as well as the purchase premium inherent in buying a complete and successful banking operation. Goodwill associated with the Magna Merger is not amortizable for book or tax purposes.
Acquisition - Avenue Financial Holdings, Inc. On July 1, 2016, Pinnacle Financial consummated its previously announced acquisition of Avenue. Pursuant to the terms of the Agreement and Plan of Merger dated as of July 1, 2016 by and among Pinnacle Financial, Pinnacle Bank and Avenue (the Avenue Merger Agreement), AvenueBNC, BNC merged with and into Pinnacle Financial, with Pinnacle Financial continuing as the surviving corporation (the AvenueBNC Merger). At theOn that same time as the Avenue Merger, Avenue'sday, Pinnacle Bank and Bank of North Carolina, BNC's wholly-owned bank subsidiary, Avenue Bank merged, with and into Pinnacle Bank, with Pinnacle Bank continuing as the surviving corporation.entity.
The following summarizes the consideration paid and presents a preliminary allocation of purchase price to net assets acquired (dollars in thousands):
| | | Number of Shares | | | Amount | |
| Equity consideration: | | | | | | |
| Common stock issued | | | 3,760,326 | | | $ | 182,469 | |
| Total equity consideration | | | | | | $ | 182,469 | |
| | | | | | | | | |
| Non-equity consideration: | | | | | | | | |
| Cash paid to common stockholders | | | | | | $ | 20,910 | |
| Cash paid to exchange outstanding stock options | | | | | | | 987 | |
| Total consideration paid | | | | | | $ | 204,366 | |
| | | | | | | | | |
| Allocation of total consideration paid: | | | | | | | | |
| Fair value of net assets assumed including estimated identifiable intangible assets | | | | | | $ | 81,695 | |
| Goodwill | | | | | | | 122,671 | |
| | | | | | | $ | 204,366 | |
|
| | | | | | |
| | Number of Shares | | Amount |
| Equity consideration | | | |
| Common stock issued | 27,687,100 |
| | $ | 1,858,133 |
|
| Total equity consideration | |
| | $ | 1,858,133 |
|
| | | | |
| Non-Equity Consideration: | |
| | |
|
| Cash paid to redeem common stock | |
| | 129 |
|
| Total consideration paid | |
| | $ | 1,858,262 |
|
| | | | |
| Allocation of total consideration paid: | |
| | |
|
| Fair value of net assets assumed including estimated identifiable intangible assets | |
| | $ | 601,807 |
|
| Goodwill | |
| | 1,256,455 |
|
| | |
| | $ | 1,858,262 |
|
Pinnacle Financial recorded costs incurred in connection with the issuance of Pinnacle Financial common stock resulting from the BNC Merger of $7.2 million, net of related tax benefits, as a reduction to additional paid in capital. Certain merger-related charges resulting from cultural and systems integrations, as well as stock-based compensation expense incurred as a result of change-in-control provisions applicable to assumed equity-based awards were recorded as merger-related expense.
Goodwill originating from the BNC Merger resulted primarily from anticipated synergies arising from the combination of certain operational areas of the businesses of BNC and Pinnacle Financial as well as the purchase premium inherent in buying a complete and successful banking operation. Goodwill associated with the BNC Merger is not amortizable for book or tax purposes. Adjustments totaling $82.9 million were recorded to goodwill to appropriately reflect the valuation of the loan portfolio, OREO acquired, and certain assets acquired and liabilities assumed and have been included in the table below.
Pinnacle Financial accounted for the aforementioned completed mergersBNC Merger under the acquisition method in accordance with ASC Topic 805. Accordingly, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the date of merger. Purchase price allocations related to the acquisitions of CapitalMark and Magna have been completed.
The following purchase price allocations on the AvenueBNC Merger are preliminary and will be finalized upon the receipt of final valuations on certain assets and liabilities. Upon receipt of final fair value estimates, which must be received within one year of the AvenueBNC Merger date, Pinnacle Financial will make any final adjustments to the purchase price allocation and prospectively adjust any goodwill recorded. Information regarding Pinnacle Financial's loan discount and related deferred tax asset, core deposit intangible asset and related deferred tax liability, as well as income taxes payable and the related deferred tax balances recorded in the AvenueBNC Merger, may be adjusted as Pinnacle Financial refines its estimates. Determining the fair value of assets and liabilities, particularly illiquid assets and liabilities, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair value. Fair value adjustments based on updated estimates could materially affect the goodwill recorded on the AvenueBNC Merger. Pinnacle Financial may incur losses on the acquired loans that are materially different from losses Pinnacle Financial originally projected.
The acquired assets and liabilities, as well as the adjustments to record the assets and liabilities at their estimated fair values, are presented in the following tables (in thousands):
CapitalMark |
| | | | | | | | | | | |
| | As of June 16, 2017 |
| | BNC Historical Cost Basis | | Fair Value Adjustments (1) | | As Recorded by Pinnacle Financial |
| Assets | | | | | |
| Cash and cash equivalents | $ | 155,271 |
| | $ | — |
| | $ | 155,271 |
|
| Investment securities | 643,875 |
| | 1,667 |
| | 645,542 |
|
Loans, net of allowance for loan losses (2) | 5,782,720 |
| | (181,430 | ) | | 5,601,290 |
|
| Mortgage loans held for sale | 27,026 |
| | — |
| | 27,026 |
|
Other real estate owned (3) | 20,143 |
| | 600 |
| | 20,743 |
|
Core deposit and other intangible (4) | — |
| | 50,422 |
| | 50,422 |
|
Property, plant and equipment (5) | 156,805 |
| | (3,381 | ) | | 153,424 |
|
Other assets (6) | 320,988 |
| | 53,997 |
| | 374,985 |
|
| Total Assets | $ | 7,106,828 |
| | $ | (78,125 | ) | | $ | 7,028,703 |
|
| | | | | | |
| Liabilities | |
| | |
| | |
|
Interest-bearing deposits (7) | $ | 5,003,653 |
| | $ | 4,355 |
| | $ | 5,008,008 |
|
| Non-interest bearing deposits | 1,199,342 |
| | — |
| | 1,199,342 |
|
Borrowings (8) | 183,389 |
| | (6,412 | ) | | 176,977 |
|
Other liabilities (9) | 35,729 |
| | 6,840 |
| | 42,569 |
|
| Total Liabilities | $ | 6,422,113 |
| | $ | 4,783 |
| | $ | 6,426,896 |
|
| Net Assets Acquired | $ | 684,715 |
| | $ | (82,908 | ) | | $ | 601,807 |
|
| | | As of July 31, 2015 | |
| | | CapitalMark Historical Cost Basis | | Fair Value Adjustments | | As Recorded by Pinnacle Financial | |
| Assets | | | | | | | |
| Cash and cash equivalents | | $ | 28,021 | | $ | - | | $ | 28,021 | |
Investment securities(1) | | | 150,799 | | | (399 | ) | | 150,400 | |
Loans, net of allowance for loan losses(2) | | | 880,115 | | | (22,600 | ) | | 857,515 | |
| Mortgage loans held for sale | | | 1,791 | | | - | | | 1,791 | |
| Other real estate owned | | | 1,728 | | | - | | | 1,728 | |
Core deposit intangible(3) | | | - | | | 6,193 | | | 6,193 | |
Other assets(6) | | | 43,526 | | | 6,046 | | | 49,572 | |
| Total Assets | | $ | 1,105,980 | | $ | (10,760 | ) | $ | 1,095,220 | |
| | | | | | | | | | | |
| Liabilities | | | | | | | | | | |
Interest-bearing deposits(4) | | $ | 758,492 | | $ | 891 | | $ | 759,383 | |
| Non-interest bearing deposits | | | 193,798 | | | - | | | 193,798 | |
Borrowings(5) | | | 32,874 | | | 228 | | | 33,102 | |
| Other liabilities | | | 35,751 | | | - | | | 35,751 | |
| Total Liabilities | | $ | 1,020,915 | | $ | 1,119 | | $ | 1,022,034 | |
| Net Assets Acquired | | $ | 85,065 | | $ | (11,879 | ) | $ | 73,186 | |
Explanation of certain fair value adjustments:
| |
| (1) | The amount represents the adjustment of the book value of CapitalMark's investment securitiesBNC's assets and liabilities to their estimated fair value on the date of acquisition. Fair value adjustments are updated subsequent to the merger date based on the results of finalized valuation assessments. |
| |
(2) | The amount represents the adjustment of the net book value of CapitalMark'sBNC's loans to their estimated fair value based on current interest rates and expected cash flows as of the date of acquisition, which includes estimates of expected credit losses inherent in the portfolio of approximately 2.6% of the 3.1% mark on the acquired loan portfolio. |
| |
(3) | Although not complete, this adjustment reflects the Day 1 value of OREO properties subsequently sold. |
| |
| (4) | The amount represents the fair value of the core deposit intangible asset representing the intangible value of the deposit base acquired and the fair value of the customer relationship intangible assets representing the intangible value of customer relationships acquired. |
| |
(4)
(5) | The amount represents the adjustment of the net book value of BNC's property, plant and equipment to estimated fair value based on market values of similar assets. |
| |
| (6) | The amount represents the deferred tax asset recognized on the fair value adjustment of BNC's acquired assets and assumed liabilities. |
| |
| (7) | The amount represents the adjustment necessary because the weighted average interest rate of CapitalMark'sBNC's deposits exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio. |
(5)
| |
| (8) | The amount represents the combined adjustment necessary because the weighted average interest rate of CapitalMark's FHLB advances exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio. |
(6)
| The amount represents the deferred tax asset recognized on the fair value adjustment of CapitalMark's acquired assets and assumed liabilities as well as the fair value adjustment on premises and equipment. |
Magna
| | | As of September 1, 2015 | |
| | | Magna Historical Cost Basis | | Fair Value Adjustments | | | As Recorded by Pinnacle Financial | |
| Assets | | | | | �� | | | |
| Cash and cash equivalents | | $ | 17,832 | | $ | - | | | $ | 17,832 | |
Investment securities(1) | | | 60,018 | | | (280 | ) | | | 59,738 | |
Loans(2) | | | 453,108 | | | (12,429 | ) | | | 440,679 | |
| Mortgage loans held for sale | | | 18,886 | | | - | | | | 18,886 | |
Other real estate owned(3) | | | 1,471 | | | 139 | | | | 1,610 | |
Core deposit intangible(4) | | | - | | | 3,170 | | | | 3,170 | |
Other assets(5) | | | 31,057 | | | 4,922 | | | | 35,979 | |
| Total Assets | | $ | 582,372 | | $ | (4,478 | ) | | $ | 577,894 | |
| | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | |
Interest-bearing deposits(6) | | $ | 402,535 | | $ | 1,268 | | | $ | 403,803 | |
| Non-interest bearing deposits | | | 48,851 | | | - | | | | 48,851 | |
Borrowings(7) | | | 46,900 | | | 506 | | | | 47,406 | |
Other liabilities(8) | | | 28,043 | | | 741 | | | | 28,784 | |
| Total Liabilities | | $ | 526,329 | | $ | 2,515 | | | $ | 528,844 | |
| Net Assets Acquired | | $ | 56,043 | | $ | (6,993 | ) | | $ | 49,050 | |
Explanation of certain fair value adjustments:
(1)
| The amount represents the adjustment of the book value of Magna's investment securities to their estimated fair value on the date of acquisition. |
(2)
| The amount represents the adjustment of the net book value of Magna's loans to their estimated fair value based on interest rates and expected cash flows as of the date of acquisition, which includes estimates of expected credit losses inherent in the portfolio. |
(3)
| The amount represents the adjustment to the book value of Magna's OREO to fair value on the date of acquisition. |
(4)
| The amount represents the fair value of the core deposit intangible asset representing the intangible value of the deposit base acquired. |
(5)
| The amount represents the deferred tax asset recognized on the fair value adjustment of Magna's acquired assets and assumed liabilities as well as the fair value adjustment for the mortgage servicing right and property and equipment. The value of the deferred tax asset was decreased by $1.9 million as a result of the completion of the 2015 tax return. |
(6)
| The amount represents the adjustment necessary because the weighted average interest rate of Magna's deposits exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio. |
(7)
| The amount represents the adjustment necessary because the weighted average interest rate of Magna's FHLB advances exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio. |
(8) | The amount represents the adjustment to accrue two potential loss contingencies related to Magna's business operations that existed as of the acquisition date. |
Avenue
| | | As of July 1, 2016 | |
| | | Avenue Historical Cost Basis | | Preliminary Fair Value Adjustments | | | As Recorded by Pinnacle Financial | |
| Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 39,485 | | $ | - | | | $ | 39,485 | |
Investment securities(1) | | | 163,862 | | | (463 | ) | | | 163,399 | |
Loans(2) | | | 980,319 | | | (27,789 | ) | | | 952,530 | |
| Mortgage loans held for sale | | | 3,310 | | | - | | | | 3,310 | |
Core deposit intangible(3) | | | - | | | 8,845 | | | | 8,845 | |
Other assets(4) | | | 47,729 | | | 8,774 | | | | 56,503 | |
| Total Assets | | $ | 1,234,705 | | $ | (10,633 | ) | | $ | 1,224,072 | |
| | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | |
Interest-bearing deposits(5) | | $ | 741,635 | | $ | 1,400 | | | $ | 743,035 | |
| Non-interest bearing deposits | | | 223,685 | | | - | | | | 223,685 | |
Borrowings(6) | | | 142,639 | | | 3,240 | | | | 145,879 | |
| Other liabilities | | | 29,719 | | | 59 | | | | 29,778 | |
| Total Liabilities | | $ | 1,137,678 | | $ | 4,699 | | | $ | 1,142,377 | |
| Net Assets Acquired | | $ | 97,027 | | $ | (15,332 | ) | | $ | 81,695 | |
Explanation of certain fair value adjustments:
(1)
| The amount represents the adjustment of the book value of Avenue's investment securities to their estimated fair value on the date of acquisition. |
(2)
| The amount represents the adjustment of the net book value of Avenue's loans to their estimated fair value based on interest rates and expected cash flows as of the date of acquisition, which includes estimates of expected credit losses inherent in the portfolio. |
(3)
| The amount represents the fair value of the core deposit intangible asset representing the intangible value of the deposit base acquired. |
(4)
| The amount represents the deferred tax asset recognized on the fair value adjustment of Avenue's acquired assets and assumed liabilities as well as the fair value adjustment for property and equipment. |
(5)
| The amount represents the adjustment necessary because the weighted average interest rate of Avenue's deposits exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio. |
(6)
| The amount represents the adjustment necessary because the weighted average interest rate of Avenue's FHLB advances andBNC's subordinated debt issuance exceeded the cost of similar funding at the time of acquisition and because the weighted average interest rate of BNC's trust preferred securities issuances was lower than the cost of similar funding at the time of acquisition. The combined fair value adjustmentadjustments will be amortized to reduceincrease future interest expense over the lifelives of the portfolio.portfolios. |
| |
| (9) | The amount represents the adjustment to accrue obligations that existed but had not been recorded as of the acquisition date and the fair value of BNC lease obligations. |
Supplemental Pro Forma Combined Results of Operations
The supplemental proforma information below for the years ended December 31, 2017 and 2016 gives effect to the BNC acquisition as if it had occurred on January 1, 2016. These results combine the historical results of BNC into Pinnacle Financial's consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments, they are not indicative of what would have occurred had the BNC Merger taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of BNC's provision for credit losses for 2016 that may not have been necessary had the acquired loans been recorded at fair value as of the beginning of 2016. Additionally, these financials were not adjusted for non-recurring expenses, such as merger-related charges incurred by either Pinnacle Financial or BNC. Pinnacle Financial expects to achieve operating cost savings and other business synergies as a result of the acquisition which are also not reflected in the proforma amounts.
|
| | | | | | |
| (dollars in thousands) | Year ended December 31, |
| | 2017 | 2016 |
Revenue(1) | $ | 844,896 |
| $ | 707,126 |
|
| Income before income taxes | 347,983 |
| 275,635 |
|
(1) Net interest income plus noninterest income
Note 3. Equity method investment
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.
The 860,470 shares of Pinnacle Financial common stock issuedvalued at the closing of the investment were issued in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (Securities Act), and Rule 506 of Regulation D promulgated under the Securities Act. Subsequent to the placement of the 860,470 shares, Pinnacle Financial filed a registration statement on Form S-3 with the SEC covering the resale of such shares as a secondary offering to be made on a continuous basis pursuant to Rule 415 of the Securities Act.$39.9 million.
On March 1, 2016, Pinnacle Financial, Pinnacle Bank and the other members of BHG entered into an Amended and Restated Limited Liability Company Agreement of BHG that provides for, among other things, the following terms:
· | the inability of any member of BHG to transfer its ownership interest in BHG without the consent of the other members of BHG for five years, other than transfers to family members, trusts or affiliates of the transferring member, in connection with the acquisition of Pinnacle Financial or Pinnacle Bank or as a result of a change in applicable law that forces Pinnacle Financial and/or Pinnacle Bank to divest their ownership interests in BHG; |
100the inability of the board of managers of BHG (of which Pinnacle Financial and Pinnacle Bank have the right to designate two of the five members (the Pinnacle Managers) to approve a sale of BHG without the consent of one of the Pinnacle Managers for four years;
co-sale rights for Pinnacle Financial and Pinnacle Bank in the event the other members of BHG decide to sell all or a portion of their ownership interests after the above-described five-year limitation; and· | the inability of the board of managers of BHG (of which Pinnacle Financial and Pinnacle Bank have the right to designate two of the five members (the Pinnacle Managers) to approve a sale of BHG without the consent of one of the Pinnacle Managers for four years; |
· | co-sale rights for Pinnacle Financial and Pinnacle Bank in the event the other members of BHG decide to sell all or a portion of their ownership interests after the above-described five-year limitation; 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 after the above-described five-year limitation, except in connection with a transfer of their ownership interests to an affiliate or in connection with the acquisition of Pinnacle Financial or Pinnacle Bank. |
Pinnacle Financial accounts for this investment pursuant to the equity method for unconsolidated subsidiaries and will recognize its interest in BHG's profits and losses in noninterest income with corresponding adjustments to the BHG investment account. Because BHG has been determined to be a voting interest entity of which Pinnacle Financial and Pinnacle Bank together control less than a majority of the board seats following the closing of the additional investment in March 2016, this investment does not require consolidation and is accounted for pursuant to the equity method of accounting. Additionally, Pinnacle Financial did not recognize any goodwill or other intangible asset associated with these transactions as of the respective purchase dates, however, it will recognize accretion income and amortization expense associated with the fair value adjustments to the net assets acquired including the fair value of certain of BHG's liabilities which are recorded as a component of income from equity method investment, pursuant to the equity method of accounting.
Pinnacle Financial and Pinnacle Bank account for their consolidated interest in BHG's profits and losses in noninterest income with corresponding adjustments to the BHG investment account.
At December 31, 2016,2017, Pinnacle Financial has recorded technology, trade name and customer relationship intangibles, net of related amortization, of $16.8$13.4 million compared to $6.1$16.8 million as of December 31, 2015.2016. Amortization expense of $3.4$3.3 million was included in Pinnacle Financial's results for the year ended December 31, 20162017 compared to $1.3$3.4 million for the prior year.2016. Accretion income of $2.5$3.1 million was included in Pinnacle Financial's results for the year ended December 31, 2016,2017, while no$2.5 million accretion income was recorded in 2015.2016. Additionally, at December 31, 2016,2017, Pinnacle Financial had recorded accretable discounts associated with certain liabilities of BHG of $18.1$10.3 million compared to $8.0$13.4 million as of December 31, 2015.2016.
During the year ended December 31, 2016,2017, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $29.0$21.7 million in the aggregate, respectively, compared to $7.2$29.0 million in the year ended December 31, 2015.2016. Earnings from BHG are included in Pinnacle Financial's consolidated tax return. Profits from intercompany transactions are eliminated. As part of ongoing business transacted with BHG, Pinnacle Bank purchased loans totaling $2.2 million during the year ended December 31, 2015. No loans were purchased from BHG for the year ended December 31, 2016.
A summary of BHG's financial position and results of operations as of and for the years ended December 31, 20162017 and 2015,2016, respectively, were as follows (unaudited, in thousands):
Banker's Healthcare Group | | | | | | |
($ in thousands) | | | | | | |
| | | December 31, 2016 | | | December 31, 2015 | |
| | | | | | |
| Assets | | $ | 223,246 | | | $ | 220,578 | |
| | | | | | | | |
| | | | | | | | |
| Liabilities | | | 139,531 | | | | 137,147 | |
Equity interests | | | 83,715 | | | | 83,431 | |
Total liabilities and equity | | $ | 223,246 | | | $ | 220,578 | |
|
| | | | | | | |
| Banker's Healthcare Group | | | |
| ($ in thousands) | | | |
| | December 31, 2017 | | December 31, 2016 |
| Assets | $ | 330,030 |
| | $ | 223,246 |
|
| | | | |
| Liabilities | $ | 224,837 |
| | $ | 139,531 |
|
| Equity interests | 105,193 |
| | 83,715 |
|
| Total liabilities and equity | $ | 330,030 |
| | $ | 223,246 |
|
|
| | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 |
| Revenues | $ | 160,209 |
| | $ | 136,693 |
|
| Net income, pre-tax | $ | 77,941 |
| | $ | 67,135 |
|
| | | For the year ended December 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Revenues | | $ | 136,693 | | | $ | 144,772 | |
| Net income, pre-tax | | | 67,135 | | | | 77,748 | |
| | | | | | | | | |
Note 4. Restricted Cash Balances
Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. At our option, Pinnacle Financial maintains additional balances to compensate for clearing and other services. For the years ended December 31, 20162017 and 2015,2016, the average daily balance maintained at the Federal Reserve was approximately $183.1$229.9 million and $134.3$183.1 million, respectively.
Note 5. Securities
The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 20162017 and 20152016 are summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| December 31, 2017 | | | | | | | |
| Securities available-for-sale: | | | | | | | |
| U.S Treasury securities | $ | 30,505 |
| | $ | — |
| | $ | 60 |
| | $ | 30,445 |
|
| U.S. Government agency securities | 182,500 |
| | 67 |
| | 1,766 |
| | 180,801 |
|
| Mortgage-backed securities | 1,270,625 |
| | 5,318 |
| | 12,124 |
| | 1,263,819 |
|
| State and municipal securities | 774,949 |
| | 12,251 |
| | 2,588 |
| | 784,612 |
|
| Asset-backed securities | 173,346 |
| | 262 |
| | 316 |
| | 173,292 |
|
| Corporate notes | 81,615 |
| | 1,346 |
| | 647 |
| | 82,314 |
|
| | $ | 2,513,540 |
| | $ | 19,244 |
| | $ | 17,501 |
| | $ | 2,515,283 |
|
| Securities held-to-maturity: | |
| | |
| | |
| | |
|
| State and municipal securities | 20,762 |
| | 114 |
| | 46 |
| | 20,830 |
|
| | $ | 20,762 |
| | $ | 114 |
| | $ | 46 |
| | $ | 20,830 |
|
| | | | | | | | |
| December 31, 2016 | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| Securities available-for-sale: | | | | | | | | | | | | |
| U.S Treasury securities | | $ | 250 | | | $ | - | | | $ | - | | | $ | 250 | |
| U.S. Government agency securities | | | 22,306 | | | | - | | | | 537 | | | | 21,769 | |
| Mortgage-backed securities | | | 988,008 | | | | 4,304 | | | | 15,686 | | | | 976,626 | |
| State and municipal securities | | | 211,581 | | | | 4,103 | | | | 2,964 | | | | 212,720 | |
| Asset-backed securities | | | 79,318 | | | | 111 | | | | 849 | | | | 78,580 | |
| Corporate notes | | | 8,608 | | | | 39 | | | | 46 | | | | 8,601 | |
| | | $ | 1,310,071 | | | $ | 8,557 | | | $ | 20,082 | | | $ | 1,298,546 | |
| Securities held-to-maturity: | | | | | | | | | | | | | | | | |
| State and municipal securities | | | 25,251 | | | | 87 | | | | 105 | | | | 25,233 | |
| | | $ | 25,251 | | | $ | 87 | | | $ | 105 | | | $ | 25,233 | |
| December 31, 2015 | | | | | | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | | | | | |
| U.S Treasury securities | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| U.S. Government agency securities | | | 131,499 | | | | 3 | | | | 3,309 | | | | 128,193 | |
| Mortgage-backed securities | | | 581,998 | | | | 5,948 | | | | 5,030 | | | | 582,916 | |
| State and municipal securities | | | 158,072 | | | | 7,094 | | | | 124 | | | | 165,042 | |
| Asset-backed securities | | | 49,598 | | | | 8 | | | | 805 | | | | 48,801 | |
| Corporate notes | | | 9,541 | | | | 589 | | | | 17 | | | | 10,113 | |
| | | $ | 930,708 | | | $ | 13,642 | | | $ | 9,285 | | | $ | 935,065 | |
| Securities held-to-maturity: | | | | | | | | | | | | | | | | |
| State and municipal securities | | | 31,377 | | | | 257 | | | | 48 | | | | 31,586 | |
| | | $ | 31,377 | | | $ | 257 | | | $ | 48 | | | $ | 31,586 | |
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| December 31, 2016 | |
| | |
| | |
| | |
|
| Securities available-for-sale: | |
| | |
| | |
| | |
|
| U.S Treasury securities | $ | 250 |
| | $ | — |
| | $ | — |
| | $ | 250 |
|
| U.S. Government agency securities | 22,306 |
| | — |
| | 537 |
| | 21,769 |
|
| Mortgage-backed securities | 988,008 |
| | 4,304 |
| | 15,686 |
| | 976,626 |
|
| State and municipal securities | 211,581 |
| | 4,103 |
| | 2,964 |
| | 212,720 |
|
| Asset-backed securities | 79,318 |
| | 111 |
| | 849 |
| | 78,580 |
|
| Corporate notes | 8,608 |
| | 39 |
| | 46 |
| | 8,601 |
|
| | $ | 1,310,071 |
| | $ | 8,557 |
| | $ | 20,082 |
| | $ | 1,298,546 |
|
| Securities held-to-maturity: | |
| | |
| | |
| | |
|
| State and municipal securities | 25,251 |
| | 87 |
| | 105 |
| | 25,233 |
|
| | $ | 25,251 |
| | $ | 87 |
| | $ | 105 |
| | $ | 25,233 |
|
At December 31, 2016,2017, approximately $902.9 million$1.1 billion of Pinnacle Financial's investment portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase. At December 31, 2016,2017, repurchase agreements comprised of secured borrowings totaled $85.7$135.3 million and were secured by $85.7$135.3 million of pledged U.S. government agency securities, municipal securities, asset backed securities, and corporate debentures. As the fair value of securities pledged to secure repurchase agreements may decline, Pinnacle Financial regularly evaluates its need to pledge additional securities for the counterparty to remain adequately secured.
The amortized cost and fair value of debt securities as of December 31, 20162017 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):
| | | Available-for-sale | | | Held-to-maturity | |
| | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| Due in one year or less | | $ | 2,533 | | | $ | 2,556 | | | $ | 594 | | | $ | 594 | |
| Due in one year to five years | | | 60,311 | | | | 61,591 | | | | 10,186 | | | | 10,182 | |
| Due in five years to ten years | | | 122,753 | | | | 123,769 | | | | 10,586 | | | | 10,567 | |
| Due after ten years | | | 57,148 | | | | 55,424 | | | | 3,885 | | | | 3,890 | |
| Mortgage-backed securities | | | 988,008 | | | | 976,626 | | | | - | | | | - | |
| Asset-backed securities | | | 79,318 | | | | 78,580 | | | | - | | | | - | |
| | | $ | 1,310,071 | | | $ | 1,298,546 | | | $ | 25,251 | | | $ | 25,233 | |
|
| | | | | | | | | | | | | | | |
| | Available-for-sale | | Held-to-maturity |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Due in one year or less | $ | 33,251 |
| | $ | 33,196 |
| | $ | 1,329 |
| | $ | 1,330 |
|
| Due in one year to five years | 65,214 |
| | 65,775 |
| | 6,210 |
| | 6,200 |
|
| Due in five years to ten years | 185,337 |
| | 187,198 |
| | 10,425 |
| | 10,469 |
|
| Due after ten years | 785,767 |
| | 792,003 |
| | 2,798 |
| | 2,831 |
|
| Mortgage-backed securities | 1,270,625 |
| | 1,263,819 |
| | — |
| | — |
|
| Asset-backed securities | 173,346 |
| | 173,292 |
| | — |
| | — |
|
| | $ | 2,513,540 |
| | $ | 2,515,283 |
| | $ | 20,762 |
| | $ | 20,830 |
|
At December 31, 20162017 and 2015,2016, 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):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| December 31, 2017 | | | | | | | | | | | |
| U.S. Treasury securities | $ | 29,948 |
| | $ | 60 |
| | $ | — |
| | $ | — |
| | $ | 29,948 |
| | $ | 60 |
|
| U.S. government agency securities | 173,677 |
| | 1,766 |
| | — |
| | — |
| | 173,677 |
| | 1,766 |
|
| Mortgage-backed securities | 607,408 |
| | 5,042 |
| | 285,561 |
| | 7,082 |
| | 892,969 |
| | 12,124 |
|
| State and municipal securities | 115,403 |
| | 1,408 |
| | 50,083 |
| | 1,226 |
| | 165,486 |
| | 2,634 |
|
| Asset-backed securities | 68,742 |
| | 198 |
| | 14,136 |
| | 118 |
| | 82,878 |
| | 316 |
|
| Corporate notes | 22,168 |
| | 547 |
| | 11,944 |
| | 100 |
| | 34,112 |
| | 647 |
|
| | | 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 | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| U.S. government agency securities | | | - | | | | - | | | | 20,820 | | | | 537 | | | | 20,820 | | | | 537 | |
| Mortgage-backed securities | | | 801,213 | | | | 15,073 | | | | 43,148 | | | | 613 | | | | 844,361 | | | | 15,686 | |
| State and municipal securities | | | 87,277 | | | | 3,068 | | | | 312 | | | | 1 | | | | 87,589 | | | | 3,069 | |
| Asset-backed securities | | | 14,510 | | | | 32 | | | | 34,097 | | | | 817 | | | | 48,607 | | | | 849 | |
| Corporate notes | | | 4,810 | | | | 46 | | | | - | | | | - | | | | 4,810 | | | | 46 | |
| Total temporarily-impaired securities | | $ | 907,810 | | | $ | 18,219 | | | $ | 98,377 | | | $ | 1,968 | | | $ | 1,006,187 | | | $ | 20,187 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| U.S. government agency securities | | | 61,903 | | | | 1,702 | | | | 65,538 | | | | 1,607 | | | | 127,441 | | | | 3,309 | |
| Mortgage-backed securities | | | 338,230 | | | | 2,789 | | | | 103,003 | | | | 2,241 | | | | 441,233 | | | | 5,030 | |
| State and municipal securities | | | 6,509 | | | | 38 | | | | 6,135 | | | | 134 | | | | 12,644 | | | | 172 | |
| Asset-backed securities | | | 41,466 | | | | 798 | | | | 3,539 | | | | 7 | | | | 45,005 | | | | 805 | |
| Corporate notes | | | 2,554 | | | | 17 | | | | - | | | | - | | | | 2,554 | | | | 17 | |
| Total temporarily-impaired securities | | $ | 450,662 | | | $ | 5,344 | | | $ | 178,215 | | | $ | 3,989 | | | $ | 628,877 | | | $ | 9,333 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| Total temporarily-impaired securities | $ | 1,017,346 |
| | $ | 9,021 |
| | $ | 361,724 |
| | $ | 8,526 |
| | $ | 1,379,070 |
| | $ | 17,547 |
|
| | | | | | | | | | | | |
| December 31, 2016 | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. Treasury securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| U.S. government agency securities | — |
| | — |
| | 20,820 |
| | 537 |
| | 20,820 |
| | 537 |
|
| Mortgage-backed securities | 801,213 |
| | 15,073 |
| | 43,148 |
| | 613 |
| | 844,361 |
| | 15,686 |
|
| State and municipal securities | 87,277 |
| | 3,068 |
| | 312 |
| | 1 |
| | 87,589 |
| | 3,069 |
|
| Asset-backed securities | 14,510 |
| | 32 |
| | 34,097 |
| | 817 |
| | 48,607 |
| | 849 |
|
| Corporate notes | 4,810 |
| | 46 |
| | — |
| | — |
| | 4,810 |
| | 46 |
|
| Total temporarily-impaired securities | $ | 907,810 |
| | $ | 18,219 |
| | $ | 98,377 |
| | $ | 1,968 |
| | $ | 1,006,187 |
| | $ | 20,187 |
|
The applicable date for determining when securities are in an unrealized loss position is December 31, 20162017 and 2015.2016. 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, 20162017 and 2015,2016, but is not in the "Investments with an Unrealized Loss of less than 12 months" category above.
As shown in the table above, at December 31, 20162017 and 2015,2016, Pinnacle Financial had unrealized losses of $17.5 million and $20.2 million on $1.4 billion and $9.3 million on $1.0 billion, and $628.9 million, respectively, of available-for-sale and held-to-maturity securities. The unrealized losses associated with these investment securities are primarily driven by changes in interest rates and typically are not due to the credit quality of the securities. These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. Because Pinnacle Financial currently does not intend to sell these securities and it is not more-likely-than-not that Pinnacle Financial will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial does not consider these securities to be other-than-temporarily impaired at December 31, 2016.2017.
Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes. Additionally, if an available-for-sale security loses its investment grade or tax-exempt status, the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, Pinnacle Financial will consider selling the security, but will review each security on a case-by-case basis as these factors become known. Consistent with the investment policy, in 2017 available-for-sale securities of $72.8approximately $300.0 million were sold and net unrealized gainslosses of $395,000$8.3 million were reclassified from accumulated other comprehensive income into net income.
The carrying values of Pinnacle Financial's investment securities could decline in the future if the financial condition of the securities' issuers deteriorates and management determines it is probable that Pinnacle Financial will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future. Additionally, there is a risk that other-than-temporary impairment charges may occur in the future if management's intention to hold these securities to maturity and or recovery changes.
Note 6. Loans and Allowance for Loan Losses
For financial reporting purposes, Pinnacle Financial classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed with the Federal Deposit Insurance Corporation (FDIC).
Pinnacle Financial uses five loan categories: commercial real estate mortgage, consumer real estate mortgage, construction and land development, commercial and industrial, consumer and other.
· | Commercial real-estate mortgage loans. Commercial real-estate mortgage loans are categorized as such based on investor exposures where repayment is largely dependent upon the operation, refinance, or sale of the underlying real estate. Commercial real-estate mortgage also includes owner occupied commercial real estate which shares a similar risk profile to our commercial and industrial products. Consumer real-estate mortgage loans. Consumer real-estate mortgage consists primarily of loans secured by 1-4 residential properties including home equity lines of credit.
Construction and land development loans. Construction and land development loans include loans where the repayment is dependent on the successful operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development. Commercial and industrial loans. Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. Consumer and other loans. Consumer and other loans include all loans issued to individuals not included in the consumer real-estate mortgage classification. Examples of consumer and other loans are automobile loans, credit cards and loans to finance education, among others. |
· | Consumer real-estate mortgage loans. Consumer real-estate mortgage consists primarily of loans secured by 1-4 residential properties including home equity lines of credit.
|
· | Construction and land development loans. Construction and land development loans include loans where the repayment is dependent on the successful operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development.
|
· | Commercial and industrial loans. Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes.
|
· | Consumer and other loans. Consumer and other loans include all loans issued to individuals not included in the consumer real-estate mortgage classification. Examples of consumer and other loans are automobile loans, credit cards and loans to finance education, among others.
|
Commercial loans receive risk ratings by the assigned financial advisor subject to validation by Pinnacle Financial's independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pass-rated loans include five distinct ratings categories for loans that represent specific attributes. Pinnacle Financial believes that its categories follow those outlined by Pinnacle Bank's primary regulators. At December 31, 2016,2017, approximately 79%81.4% of our loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating in the allowance for loan loss assessment. Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans. However, certain consumer real estate-mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature.
Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, our credit policy requires that every risk rated loan of $500,000$1.0 million or more be subject to a formal credit risk review process. Each loan's risk rating is also subject to review by our independent loan review department, which reviews a substantial portion of our risk rated portfolio annually. Included in the coverage are independent loan reviews of loans in targeted higher-risk portfolio segments such as certain commercial and industrial loans, land loans and/or loan types in certain geographies.
The following table presents our loan balances by primary loan classification and the amount within each risk rating category. Pass-rated loans include all credits other than those included in special mention, substandard, substandard-nonaccrual and doubtful-nonaccrual which are defined as follows:
| | Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit position at some future date. |
| | Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize collection of the debt. Substandard loans are characterized by the distinct possibility that Pinnacle Financial will sustain some loss if the deficiencies are not corrected. |
| | Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status. |
| | Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. |
The following table outlines the amount of each loan classification categorized into each risk rating category as of December 31, 20162017 and 20152016 (in thousands):
| December 31, 2016 | | Commercial real estate - mortgage | | | Consumer real estate - mortgage | | | Construction and land development | | | Commercial and industrial | | | Consumer and other | | | Total | |
| Accruing loans: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 3,137,239 | | | $ | 1,159,003 | | | $ | 897,549 | | | $ | 2,782,000 | | | $ | 264,682 | | | $ | 8,240,473 | |
| Special Mention | | | 21,449 | | | | 1,620 | | | | 2,716 | | | | 25,641 | | | | 802 | | | | 52,228 | |
Substandard (1) | | | 29,674 | | | | 13,833 | | | | 5,788 | | | | 65,215 | | | | 129 | | | | 114,639 | |
| Total | | | 3,188,362 | | | | 1,174,456 | | | | 906,053 | | | | 2,872,856 | | | | 265,613 | | | | 8,407,340 | |
| Impaired loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccruing loans | | | | | | | | | | | | | | | | | | | | | | | | |
| Substandard-nonaccrual | | | 4,921 | | | | 8,073 | | | | 6,613 | | | | 7,492 | | | | 475 | | | | 27,574 | |
| Doubtful-nonaccrual | | | - | | | | - | | | | - | | | | 3 | | | | - | | | | 3 | |
Total nonaccruing loans(3) | | | 4,921 | | | | 8,073 | | | | 6,613 | | | | 7,495 | | | | 475 | | | | 27,577 | |
Troubled debt restructurings(2) | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | | 213 | | | | 1,358 | | | | 7 | | | | 713 | | | | 41 | | | | 2,332 | |
| Special Mention | | | - | | | | 236 | | | | - | | | | - | | | | - | | | | 236 | |
| Substandard | | | - | | | | 1,794 | | | | - | | | | 10,646 | | | | - | | | | 12,440 | |
| Total troubled debt restructurings | | | 213 | | | | 3,388 | | | | 7 | | | | 11,359 | | | | 41 | | | | 15,008 | |
| Total impaired loans | | | 5,134 | | | | 11,461 | | | | 6,620 | | | | 18,854 | | | | 516 | | | | 42,585 | |
| Total loans | | $ | 3,193,496 | | | $ | 1,185,917 | | | $ | 912,673 | | | $ | 2,891,710 | | | $ | 266,129 | | | $ | 8,449,925 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | Commercial real estate - mortgage | | Consumer real estate - mortgage | | Construction and land development | | Commercial and industrial | | Consumer and other | | Total |
| Pass | $ | 6,487,368 |
| | $ | 2,503,688 |
| | $ | 1,880,704 |
| | $ | 4,014,656 |
| | $ | 351,359 |
| | $ | 15,237,775 |
|
| Special Mention | 94,134 |
| | 18,356 |
| | 8,148 |
| | 46,898 |
| | 1,177 |
| | 168,713 |
|
Substandard (1) | 72,044 |
| | 21,053 |
| | 13,468 |
| | 62,529 |
| | 79 |
| | 169,173 |
|
| Substandard-nonaccrual | 16,064 |
| | 18,117 |
| | 5,968 |
| | 17,258 |
| | 48 |
| | 57,455 |
|
| Doubtful-nonaccrual | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total loans | $ | 6,669,610 |
| | $ | 2,561,214 |
| | $ | 1,908,288 |
| | $ | 4,141,341 |
| | $ | 352,663 |
| | $ | 15,633,116 |
|
| December 31, 2015 | | | | | | | | | | | | | | | | | | |
| Accruing loans: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 2,217,639 | | | $ | 1,020,239 | | | $ | 732,662 | | | $ | 2,143,006 | | | $ | 239,874 | | | $ | 6,353,420 | |
| Special Mention | | | 18,162 | | | | 1,894 | | | | 1,133 | | | | 26,037 | | | | 118 | | | | 47,344 | |
Substandard (1) | | | 33,638 | | | | 11,346 | | | | 6,295 | | | | 53,671 | | | | 74 | | | | 105,024 | |
| Total | | | 2,269,439 | | | | 1,033,479 | | | | 740,090 | | | | 2,222,714 | | | | 240,066 | | | | 6,505,788 | |
| Impaired loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccruing loans | | | | | | | | | | | | | | | | | | | | | | | | |
| Substandard-nonaccrual | | | 5,819 | | | | 9,344 | | | | 7,607 | | | | 1,591 | | | | 4,902 | | | | 29,263 | |
| Doubtful-nonaccrual | | | 2 | | | | 2 | | | | - | | | | 92 | | | | - | | | | 96 | |
Total nonaccruing loans(3) | | | 5,821 | | | | 9,346 | | | | 7,607 | | | | 1,683 | | | | 4,902 | | | | 29,359 | |
Troubled debt restructurings(2) | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | | 223 | | | | 409 | | | | - | | | | 553 | | | | 28 | | | | 1,213 | |
| Special Mention | | | - | | | | 422 | | | | - | | | | - | | | | - | | | | 422 | |
| Substandard | | | - | | | | 2,861 | | | | - | | | | 3,592 | | | | - | | | | 6,453 | |
| Total troubled debt restructurings | | | 223 | | | | 3,692 | | | | - | | | | 4,145 | | | | 28 | | | | 8,088 | |
| Total impaired loans | | | 6,044 | | | | 13,038 | | | | 7,607 | | | | 5,828 | | | | 4,930 | | | | 37,447 | |
| Total loans | | $ | 2,275,483 | | | $ | 1,046,517 | | | $ | 747,697 | | | $ | 2,228,542 | | | $ | 244,996 | | | $ | 6,543,235 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | Commercial real estate - mortgage | | Consumer real estate - mortgage | | Construction and land development | | Commercial and industrial | | Consumer
and other | | Total |
| Pass | $ | 3,137,452 |
| | $ | 1,160,361 |
| | $ | 897,556 |
| | $ | 2,782,713 |
| | $ | 264,723 |
| | $ | 8,242,805 |
|
| Special Mention | 21,449 |
| | 1,856 |
| | 2,716 |
| | 25,641 |
| | 802 |
| | 52,464 |
|
Substandard (1) | 29,674 |
| | 15,627 |
| | 5,788 |
| | 75,861 |
| | 129 |
| | 127,079 |
|
| Substandard-nonaccrual | 4,921 |
| | 8,073 |
| | 6,613 |
| | 7,492 |
| | 475 |
| | 27,574 |
|
| Doubtful-nonaccrual | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Total loans | $ | 3,193,496 |
| | $ | 1,185,917 |
| | $ | 912,673 |
| | $ | 2,891,710 |
| | $ | 266,129 |
| | $ | 8,449,925 |
|
| |
| (1) | Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators for loans classified as substandard, excluding the impact of substandard nonperforming loans and substandard troubled debt restructurings. Potential problem loans, which are not included in nonperforming assets, amounted to approximately $164.0 million at December 31, 2017, compared to $114.6 million at December 31, 2016, compared to $105.0 million at December 31, 2015. 2016. |
| (2) | Troubled debt restructurings are presented as an impaired loan; however, they continue to accrue interest at contractual rates.
|
| (3) | Included in nonaccrual loans at December 31, 2016 and 2015 are $8.8 million and $12.1 million, respectively, in loans acquired with deteriorated credit quality and accounted for as purchase credit impaired.
|
At December 31, 20162017 and 2015,2016, all loans classified as nonaccrual were deemed to be impaired. The principal balances of these nonaccrual loans amounted to $27.6$57.5 million and $29.4$27.6 million at December 31, 20162017 and 2015,2016, respectively, and are included in the table above. For the twelve months ended December 31, 2016,2017, the average balance of nonaccrual loans was $35.1$66.0 million as compared to $21.6$35.1 million for the twelve months ended December 31, 2015.2016. Pinnacle Financial's policy is that the discontinuation of the accrual of interest income will occur when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date the above mentioned loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had these nonaccruing loans been on accruing status, interest income would have been higher by $2.7 million, $2.1 million and $2.3 million and $636,000 for the years ended December 31, 2017, 2016 2015 and 2014,2015, respectively.
As discussed in Note 2, during 2016, the Company acquired loans of $952.5 million from Avenue. Of the $952.5 million of net loans acquired in 2016, $951.1 million were determined to have no evidence of deteriorated credit quality and are accounted for under ASC Topics 310-10 and 310-20. Our acquired loans were recorded at fair value upon acquisition. These loans are subject to additional allowance or provisioning charges in the event there is evidence of credit deterioration. The remaining acquired loans of $1.4 million were determined to have deteriorated credit quality under ASC Topic 310-30. The table below details these two subsections of the acquired loans by loan classification into each risk rating category as of December 31, 2016 (dollars in thousands):
| | | Commercial real estate - mortgage | | Consumer real estate - mortgage | | Construction and land development | | Commercial and industrial | | Consumer and other | | Fair Value Adjustment | | Net total acquired loans | |
| December 31, 2016 | | | | | | | | | | | | | | | |
| Gross contractual accruing loans | | | | | | | | | | | | | | | |
| Pass | | $ | 365,797 | | $ | 119,430 | | $ | 114,849 | | $ | 280,415 | | 11,897 | | $ | (18,893 | ) | $ | 873,495 | |
| Special Mention | | | 9,075 | | | - | | | - | | | 570 | | - | | | (142 | ) | | 9,503 | |
| Substandard | | | - | | | 3,382 | | | 1,835 | | | - | | - | | | (132 | ) | | 5,085 | |
| Total | | | 374,872 | | | 122,812 | | | 116,684 | | | 280,985 | | | 11,897 | | | (19,167 | ) | | 888,083 | |
Gross contractual impaired loans(1) | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual loans | | | | | | | | | | | | | | | | | | | | | | |
| Substandard-nonaccrual | | | - | | | 295 | | | 404 | | | 388 | | | 73 | | | (594 | ) | | 566 | |
| Doubtful-nonaccrual | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| Total nonaccrual loans | | | - | | | 295 | | | 404 | | | 388 | | | 73 | | | (594 | ) | | 566 | |
| Total gross contractual acquired impaired loans | | | - | | | 295 | | | 404 | | | 388 | | | 73 | | | (594 | ) | | 566 | |
| Total gross contractual acquired loans | | $ | 374,872 | | $ | 123,107 | | $ | 117,088 | | $ | 281,373 | | $ | 11,970 | | $ | (19,761 | ) | $ | 888,649 | |
(1) | All of the acquired impaired loans have been deemed to be collateral dependent and as such were placed on nonaccrual. As such, no accretable difference has been recorded on these loans. |
The following table provides a rollforward of purchase credit impaired loans from December 31, 20152016 through December 31, 20162017 (in thousands):
| | | Gross Contractual Receivable | | | Accretable Yield | | | Nonaccretable Yield | | | Carrying Value | |
| | | | | | | | | | | | | |
| Acquisition Date | | $ | 19,960 | | | $ | - | | | $ | (5,703 | ) | | $ | 14,257 | |
| Settlements | | | (3,803 | ) | | | - | | | | 1,560 | | | | (2,243 | ) |
| Additional fundings | | | 117 | | | | - | | | | - | | | | 117 | |
| December 31, 2015 | | | 16,274 | | | | - | | | | (4,143 | ) | | | 12,131 | |
| Acquisitions | | | 1,359 | | | | - | | | | (812 | ) | | | 547 | |
| Settlements | | | (6,017 | ) | | | - | | | | 1,322 | | | | (4,695 | ) |
| Additional fundings | | | 852 | | | | - | | | | - | | | | 852 | |
| December 31, 2016 | | $ | 12,468 | | | $ | - | | | $ | (3,633 | ) | | $ | 8,835 | |
|
| | | | | | | | | | | | | | | |
| | Gross Carrying Value | | Accretable Yield | | Nonaccretable Yield | | Carrying Value |
| | | | | | | | |
| December 31, 2015 | $ | 16,274 |
| | $ | — |
| | $ | (4,143 | ) | | $ | 12,131 |
|
| Acquisitions | 1,359 |
| | — |
| | (812 | ) | | 547 |
|
| Settlements, net | (5,165 | ) | | — |
| | 1,322 |
| | (3,843 | ) |
| December 31, 2016 | 12,468 |
| | — |
| | (3,633 | ) | | 8,835 |
|
| Acquisitions | 80,812 |
| | (196 | ) | | (32,314 | ) | | 48,302 |
|
| Settlements, net | (18,956 | ) | | 64 |
| | 4,410 |
| | (14,482 | ) |
| December 31, 2017 | $ | 74,324 |
| | $ | (132 | ) | | $ | (31,537 | ) | | $ | 42,655 |
|
These loans have beenwere deemed to be collateral dependent and as such, no accretable yield has been recorded for these loans. Atat the datetime of acquisition, the Day 1 Fair Value represents the carrying value. The carrying value is adjusted for additional draws, pursuant to contractual arrangements, offset by loan paydowns. Year-to-date settlementsacquisition. Settlements include both loans that were charged-off as well as loans that were paid off, typically as a result of refinancings at other institutions.
106
Purchase credit impaired loans purchased during the year ended December 31, 2017 for which it was probable at acquisition that all contractually required payments would not be collected are as follows (in thousands): |
| | | | | | | | | |
| | December 31, |
| | 2017 | 2016 | 2015 |
| Contractually required payments receivable | $ | 94,312 |
| $ | 1,359 |
| $ | 19,960 |
|
| Cash flows expected to be collected at acquisition | 48,498 |
| 547 |
| 14,257 |
|
| Fair value of acquired loans at acquisition | 48,302 |
| 547 |
| 14,257 |
|
The following tables detail the recorded investment, unpaid principal balance and related allowance and average recorded investment of our nonaccrual loans at December 31, 2017, 2016 2015 and 20142015 by loan classification and the amount of interest income recognized on a cash basis throughout the year-to-date period then ended, respectively, on these loans that remain on the balance sheets (in thousands):
| | | December 31, 2016 | | | For the year ended December 31, 2016 | |
| | | Recorded investment | | | Unpaid principal balance | | | Related allowance(1) | | | Average recorded investment | | | Cash basis interest income recognized | |
| Collateral dependent nonaccrual loans: | | | | | | | | | | | | | | | |
| Commercial real estate – mortgage | | $ | 2,308 | | | $ | 2,312 | | | $ | - | | | $ | 2,540 | | | $ | - | |
| Consumer real estate – mortgage | | | 2,880 | | | | 2,915 | | | | - | | | | 2,907 | | | | - | |
| Construction and land development | | | 3,128 | | | | 3,135 | | | | - | | | | 3,132 | | | | 159 | |
| Commercial and industrial | | | 6,373 | | | | 6,407 | | | | - | | | | 8,841 | | | | - | |
| Consumer and other | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 14,689 | | | $ | 14,769 | | | $ | - | | | $ | 17,420 | | | $ | 159 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash flow dependent nonaccrual loans: | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate – mortgage | | $ | 2,613 | | | $ | 3,349 | | | $ | 59 | | | $ | 2,688 | | | $ | - | |
| Consumer real estate – mortgage | | | 5,193 | | | | 5,775 | | | | 688 | | | | 5,966 | | | | - | |
| Construction and land development | | | 3,485 | | | | 4,154 | | | | 20 | | | | 3,476 | | | | - | |
| Commercial and industrial | | | 1,122 | | | | 2,714 | | | | 77 | | | | 2,884 | | | | - | |
| Consumer and other | | | 475 | | | | 851 | | | | 227 | | | | 2,624 | | | | - | |
| Total | | $ | 12,888 | | | $ | 16,843 | | | $ | 1,071 | | | $ | 17,638 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Nonaccrual Loans | | $ | 27,577 | | | $ | 31,612 | | | $ | 1,071 | | | $ | 35,058 | | | $ | 159 | |
| | | | | December 31, 2015 | | | For the year ended December 31, 2015 | | December 31, 2017 | | For the year ended
December 31, 2017 |
| | | Recorded investment | | | Unpaid principal balance | | | Related allowance(1) | | | Average recorded investment | | | Cash basis interest income recognized | | Recorded investment | | Unpaid principal balance | | Related allowance | | Average recorded investment | | Cash basis interest income recognized |
| Collateral dependent nonaccrual loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate – mortgage | | $ | 4,411 | | | $ | 5,659 | | | $ | - | | | $ | 2,253 | | | $ | - | | $ | 13,570 |
| | $ | 16,631 |
| | $ | 38 |
| | $ | 13,839 |
| | $ | — |
|
| Consumer real estate – mortgage | | | 5,596 | | | | 6,242 | | | | - | | | | 3,067 | | | | - | | 10,093 |
| | 14,309 |
| | 115 |
| | 11,216 |
| | — |
|
| Construction and land development | | | 7,531 | | | | 7,883 | | | | - | | | | 4,317 | | | | 308 | | 5,735 |
| | 10,273 |
| | 6 |
| | 5,935 |
| | 95 |
|
| Commercial and industrial | | | 1,420 | | | | 3,151 | | | | - | | | | 1,527 | | | | - | | 2,135 |
| | 3,533 |
| | 362 |
| | 2,980 |
| | — |
|
| Consumer and other | | | - | | | | - | | | | - | | | | - | | | | - | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 18,958 | | | $ | 22,935 | | | $ | - | | | $ | 11,164 | | | $ | 308 | | $ | 31,533 |
| | $ | 44,746 |
| | $ | 521 |
| | $ | 33,970 |
| | $ | 95 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flow dependent nonaccrual loans: | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
|
| Commercial real estate – mortgage | | $ | 1,410 | | | $ | 1,661 | | | $ | 20 | | | $ | 1,466 | | | $ | - | | $ | 2,494 |
| | $ | 2,505 |
| | $ | 95 |
| | $ | 3,463 |
| | $ | — |
|
| Consumer real estate – mortgage | | | 3,750 | | | | 4,098 | | | | 616 | | | | 3,815 | | | | - | | 8,024 |
| | 8,079 |
| | 411 |
| | 10,076 |
| | — |
|
| Construction and land development | | | 76 | | | | 125 | | | | 12 | | | | 87 | | | | - | | 233 |
| | 233 |
| | 12 |
| | 438 |
| | — |
|
| Commercial and industrial | | | 263 | | | | 281 | | | | 19 | | | | 168 | | | | - | | 15,171 |
| | 15,224 |
| | 1,278 |
| | 18,027 |
| | — |
|
| Consumer and other | | | 4,902 | | | | 5,341 | | | | 3,002 | | | | 4,913 | | | | - | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 10,401 | | | $ | 11,506 | | | $ | 3,669 | | | $ | 10,449 | | | $ | - | | $ | 25,922 |
| | $ | 26,041 |
| | $ | 1,796 |
| | $ | 32,004 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Nonaccrual Loans | | $ | 29,359 | | | $ | 34,441 | | | $ | 3,669 | | | $ | 21,613 | | | $ | 308 | | $ | 57,455 |
| | $ | 70,787 |
| | $ | 2,317 |
| | $ | 65,974 |
| | $ | 95 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | For the year ended
December 31, 2016 |
| | Recorded investment | | Unpaid principal balance | | Related allowance | | Average recorded investment | | Cash basis interest income recognized |
| Collateral dependent nonaccrual loans: | | | | | | | | | |
| Commercial real estate – mortgage | $ | 2,308 |
| | $ | 2,312 |
| | $ | — |
| | $ | 2,540 |
| | $ | — |
|
| Consumer real estate – mortgage | 2,880 |
| | 2,915 |
| | — |
| | 2,907 |
| | — |
|
| Construction and land development | 3,128 |
| | 3,135 |
| | — |
| | 3,132 |
| | 159 |
|
| Commercial and industrial | 6,373 |
| | 6,407 |
| | — |
| | 8,841 |
| | — |
|
| Consumer and other | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 14,689 |
| | $ | 14,769 |
| | $ | — |
| | $ | 17,420 |
| | $ | 159 |
|
| | | | �� | | | | | | |
| Cash flow dependent nonaccrual loans: | |
| | |
| | |
| | |
| | |
|
| Commercial real estate – mortgage | $ | 2,613 |
| | $ | 3,349 |
| | $ | 59 |
| | $ | 2,688 |
| | $ | — |
|
| Consumer real estate – mortgage | 5,193 |
| | 5,775 |
| | 688 |
| | 5,966 |
| | — |
|
| Construction and land development | 3,485 |
| | 4,154 |
| | 20 |
| | 3,476 |
| | — |
|
| Commercial and industrial | 1,122 |
| | 2,714 |
| | 77 |
| | 2,884 |
| | — |
|
| Consumer and other | 475 |
| | 851 |
| | 227 |
| | 2,624 |
| | — |
|
| Total | $ | 12,888 |
| | $ | 16,843 |
| | $ | 1,071 |
| | $ | 17,638 |
| | $ | — |
|
| | | | | | | | | | |
| Total Nonaccrual Loans | $ | 27,577 |
| | $ | 31,612 |
| | $ | 1,071 |
| | $ | 35,058 |
| | $ | 159 |
|
| | | December 31, 2014 | | | For the year ended December 31, 2014 | |
| | | Recorded investment | | | Unpaid principal balance | | | Related allowance(1) | | | Average recorded investment | | | Cash basis interest income recognized | |
| Collateral dependent nonaccrual loans: | | | | | | | | | | | | | | | |
| Commercial real estate – mortgage | | $ | 2,422 | | | $ | 2,641 | | | $ | - | | | $ | 2,624 | | | $ | - | |
| Consumer real estate – mortgage | | | 1,472 | | | | 1,901 | | | | - | | | | 1,552 | | | | - | |
| Construction and land development | | | 4,810 | | | | 4,810 | | | | - | | | | 5,016 | | | | 256 | |
| Commercial and industrial | | | 1,325 | | | | 1,804 | | | | - | | | | 1,561 | | | | - | |
| Consumer and other | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 10,029 | | | $ | 11,156 | | | $ | - | | | $ | 10,753 | | | $ | 256 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash flow dependent nonaccrual loans: | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate – mortgage | | $ | 1,891 | | | $ | 2,107 | | | $ | 108 | | | $ | 1,958 | | | $ | - | |
| Consumer real estate – mortgage | | | 2,986 | | | | 3,205 | | | | 654 | | | | 3,080 | | | | - | |
| Construction and land development | | | 363 | | | | 406 | | | | 79 | | | | 384 | | | | - | |
| Commercial and industrial | | | 284 | | | | 294 | | | | 62 | | | | 316 | | | | - | |
| Consumer and other | | | 1,152 | | | | 1,184 | | | | 252 | | | | 972 | | | | - | |
| Total | | $ | 6,676 | | | $ | 7,196 | | | $ | 1,155 | | | $ | 6,710 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Nonaccrual Loans | | $ | 16,705 | | | $ | 18,352 | | | $ | 1,155 | | | $ | 17,463 | | | $ | 256 | |
| (1) | Collateral dependent loans are typically charged-off to their net realizable value and no specific allowance is carried related to those loans.
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | For the year ended
December 31, 2015 |
| | Recorded investment | | Unpaid principal balance | | Related allowance | | Average recorded investment | | Cash basis interest income recognized |
| Collateral dependent nonaccrual loans: | | | | | | | | | |
| Commercial real estate – mortgage | $ | 4,411 |
| | $ | 5,659 |
| | $ | — |
| | $ | 2,253 |
| | $ | — |
|
| Consumer real estate – mortgage | 5,596 |
| | 6,242 |
| | — |
| | 3,067 |
| | — |
|
| Construction and land development | 7,531 |
| | 7,883 |
| | — |
| | 4,317 |
| | 308 |
|
| Commercial and industrial | 1,420 |
| | 3,151 |
| | — |
| | 1,527 |
| | — |
|
| Consumer and other | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 18,958 |
| | $ | 22,935 |
| | $ | — |
| | $ | 11,164 |
| | $ | 308 |
|
| | | | | | | | | | |
| Cash flow dependent nonaccrual loans: | |
| | |
| | |
| | |
| | |
|
| Commercial real estate – mortgage | $ | 1,410 |
| | $ | 1,661 |
| | $ | 20 |
| | $ | 1,466 |
| | $ | — |
|
| Consumer real estate – mortgage | 3,750 |
| | 4,098 |
| | 616 |
| | 3,815 |
| | — |
|
| Construction and land development | 76 |
| | 125 |
| | 12 |
| | 87 |
| | — |
|
| Commercial and industrial | 263 |
| | 281 |
| | 19 |
| | 168 |
| | — |
|
| Consumer and other | 4,902 |
| | 5,341 |
| | 3,002 |
| | 4,913 |
| | — |
|
| Total | $ | 10,401 |
| | $ | 11,506 |
| | $ | 3,669 |
| | $ | 10,449 |
| | $ | — |
|
| | | | | | | | | | |
| Total Nonaccrual Loans | $ | 29,359 |
| | $ | 34,441 |
| | $ | 3,669 |
| | $ | 21,613 |
| | $ | 308 |
|
Pinnacle Financial's policy is that once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized approximately $95,000, $159,000 $308,000 and $256,000$308,000 in interest income from cash payments received on nonaccrual loans during the years ended December 31, 2017, 2016, 2015, and 2014,2015, respectively.
At December 31, 20162017 and 2015,2016, there were $15.0$6.6 million and $8.1$15.0 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which are accruing interest. These troubled debt restructurings are considered impaired loans pursuant to U.S. GAAP. Troubled commercial loans are restructured by specialists within Pinnacle Bank's Special Assets Group, and all restructurings are approved by committees and credit officers separate and apart from the normal loan approval process. These specialists are charged with reducing Pinnacle Financial's overall risk and exposure to loss in the event of a restructuring by obtaining some or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral release terms, additional collateral or other similar strategies.
108
In addition to the loan metrics above, Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industries. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications. Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at December 31, 20162017 with the comparative exposures for December 31, 20152016 (in thousands):
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