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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2018
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Note 10. Fair Value of Financial Instruments FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. Valuation Hierarchy FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
• | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
• | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. Assets Securities available-for-sale – Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy. Other investments – Included in other investments are investments recorded at fair value primarily in certain nonpublic investments and funds. The valuation of these nonpublic investments requires management judgment due to the absence of observable quoted market prices, inherent lack of liquidity and the long-term nature of such assets. These investments are valued initially based upon transaction price. The carrying values of other investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing reviews by senior investment managers. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies and changes in market outlook and the third-party financing environment over time. In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions. These investments are included in Level 3 of the valuation hierarchy if the entities and funds are not widely traded and the underlying investments are in privately-held and/or start-up companies for which market values are not readily available. Certain investments in funds for which the underlying assets of the fund represent publicly traded investments are included in Level 2 of the valuation hierarchy. Other assets – Included in other assets are certain assets carried at fair value, including interest rate swap agreements, cash flow hedge agreements and interest rate locks associated with the mortgage loan pipeline. The carrying amount of interest rate swap agreements is based on Pinnacle Financial's pricing models that utilize observable market inputs. The fair value of the cash flow hedge agreements is determined by calculating the difference between the discounted fixed rate cash flows and the discounted variable rate cash flows. The fair value of the mortgage loan pipeline is based upon the projected sales price of the underlying loans, taking into account market interest rates and other market factors at the measurement date, net of the projected fallout rate. Pinnacle Financial reflects these assets within Level 2 of the valuation hierarchy as these assets are valued using similar transactions that occur in the market. Impaired loans – A loan is classified as impaired when it is probable Pinnacle Financial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan's original effective rate as the discount rate, the loan's observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the difference may be recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial condition. Other real estate owned – Other real estate owned (OREO) represents real estate foreclosed upon by Pinnacle Bank through loan defaults by customers or acquired by deed in lieu of foreclosure. Substantially all of these amounts relate to lots, homes and development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has adequate collateral. Upon foreclosure, the property is recorded at the lower of cost or fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are also reflected in noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value as appraisal values are property-specific and sensitive to the changes in the overall economic environment. Liabilities Other liabilities – Pinnacle Financial has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions and the cash flow hedge and interest rate locks associated with the funding for its mortgage loan originations. The fair value of these liabilities is based on Pinnacle Financial's pricing models that utilize observable market inputs and is reflected within Level 2 of the valuation hierarchy. The following tables present financial instruments measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):
| Total carrying value in the consolidated balance sheet |  | Quoted market prices in an active market (Level 1) |  | Models with significant observable market parameters (Level 2) |  | Models with significant unobservable market parameters (Level 3)
September 30, 2018 |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |
U.S. Treasury securities | $ | 30,528 |  |  | $ | — |  |  | $ | 30,528 |  |  | $ | — |
U.S. government agency securities | 63,185 |  |  | — |  |  | 63,185 |  |  | — |
Mortgage-backed securities | 1,294,545 |  |  | — |  |  | 1,294,545 |  |  | — |
State and municipal securities | 1,212,271 |  |  | — |  |  | 1,196,917 |  |  | 15,354 |
Agency-backed securities | 334,658 |  |  | — |  |  | 334,658 |  |  | — |
Corporate notes and other | 69,395 |  |  | — |  |  | 69,395 |  |  | — |
Total investment securities available-for-sale | $ | 3,004,582 |  |  | $ | — |  |  | $ | 2,989,228 |  |  | $ | 15,354 |
Other investments | 49,351 |  |  | — |  |  | 24,169 |  |  | 25,182 |
Other assets | 34,700 |  |  | — |  |  | 34,700 |  |  | — |
Total assets at fair value | $ | 3,088,633 |  |  | $ | — |  |  | $ | 3,048,097 |  |  | $ | 40,536 |
Other liabilities | $ | 26,727 |  |  | $ | — |  |  | $ | 26,727 |  |  | $ | — |
Total liabilities at fair value | $ | 26,727 |  |  | $ | — |  |  | $ | 26,727 |  |  | $ | — |
December 31, 2017 |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 30,445 |  |  | $ | — |  |  | $ | 30,445 |  |  | $ | — |
U.S. government agency securities | 180,801 |  |  | — |  |  | 180,801 |  |  | — |
Mortgage-backed securities | 1,263,819 |  |  | — |  |  | 1,263,819 |  |  | — |
State and municipal securities | 784,612 |  |  | — |  |  | 767,583 |  |  | 17,029 |
Agency-backed securities | 173,292 |  |  | — |  |  | 173,292 |  |  | — |
Corporate notes and other | 82,314 |  |  | — |  |  | 82,314 |  |  | — |
Total investment securities available-for-sale | 2,515,283 |  |  | — |  |  | 2,498,254 |  |  | 17,029 |
Other investments | 53,796 |  |  | — |  |  | 24,922 |  |  | 28,874 |
Other assets | 11,812 |  |  | — |  |  | 11,812 |  |  | — |
Total assets at fair value | $ | 2,580,891 |  |  | $ | — |  |  | $ | 2,534,988 |  |  | $ | 45,903 |
Other liabilities | $ | 13,886 |  |  | $ | — |  |  | $ | 13,886 |  |  | $ | — |
Total liabilities at fair value | $ | 13,886 |  |  | $ | — |  |  | $ | 13,886 |  |  | $ | — |
The following table presents assets measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017 (in thousands):
September 30, 2018 | Total carrying value in the consolidated balance sheet |  | Quoted market prices in an active market (Level 1) |  | Models with significant observable market parameters (Level 2) |  | Models with significant unobservable market parameters (Level 3) |  | Total gains (losses) for the year-to-date period then ended
Other real estate owned | $ | 17,467 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,467 |  |  | $ | 259 |
Impaired loans, net (1) | 34,082 |  |  | — |  |  | — |  |  | 34,082 |  |  | (133 | )
Total | $ | 51,549 |  |  | $ | — |  |  | $ | — |  |  | $ | 51,549 |  |  | $ | 126 |
December 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other real estate owned | $ | 27,831 |  |  | $ | — |  |  | $ | — |  |  | $ | 27,831 |  |  | $ | 203 |
Impaired loans, net (1) | 22,723 |  |  | — |  |  | — |  |  | 22,723 |  |  | (4 | )
Total | $ | 50,554 |  |  | $ | — |  |  | $ | — |  |  | $ | 50,554 |  |  | $ | 199 |
(1) Amount is net of valuation allowance of $2.4 million and $2.2 million at September 30, 2018 and December 31, 2017, respectively, as required by ASC 310-10, "Receivables." In the case of the investment securities portfolio, Pinnacle Financial monitors the portfolio to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the nine months ended September 30, 2018, there were transfers between Levels 1, 2 or 3 of $12.2 million. Transfers out of Level 3 of the valuation hierarchy represent equity securities for which the fair values have been deemed to be not readily determinable and for which the securities are currently carried at cost and evaluated for impairment. The table below includes a rollforward of the balance sheet amounts for the three and nine months ended September 30, 2018 and September 30, 2017 (including the change in fair value) for financial instruments classified by Pinnacle Financial within Level 3 of the valuation hierarchy measured at fair value on a recurring basis including changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):
| For the three months ended September 30, |  | For the nine months ended September 30,
| 2018 | 2017 |  | 2018 | 2017
| Available-for-sale Securities | Other assets | Available-for-sale Securities | Other assets |  | Available-for-sale Securities | Other assets | Available-for-sale Securities | Other assets
Fair value, beginning of period | $ | 15,290 |  | $ | 23,578 |  | $ | — |  | $ | 27,850 |  |  | $ | 17,029 |  | $ | 28,874 |  | $ | — |  | $ | 10,478 |
Total realized gains included in income | 30 |  | 81 |  | — |  | 188 |  |  | 90 |  | 2,858 |  | — |  | 625 |
Changes in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30 | 34 |  | — |  | — |  | — |  |  | (597 | ) | — |  | — |  | — |
Acquired | — |  | — |  | — |  | — |  |  | — |  | — |  | — |  | 17,062 |
Purchases | — |  | 2,455 |  | — |  | 815 |  |  | — |  | 7,273 |  | — |  | 1,584 |
Issuances | — |  | — |  | — |  | — |  |  | — |  | — |  | — |  | — |
Settlements | — |  | (932 | ) | — |  | (376 | ) |  | (1,168 | ) | (1,657 | ) | — |  | (1,272 | )
Transfers out of Level 3 | — |  | — |  | — |  | — |  |  | — |  | (12,166 | ) | — |  | — |
Fair value, end of period | $ | 15,354 |  | $ | 25,182 |  | $ | — |  | $ | 28,477 |  |  | $ | 15,354 |  | $ | 25,182 |  | $ | — |  | $ | 28,477 |
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30 | $ | 30 |  | $ | 81 |  | $ | — |  | $ | 188 |  |  | $ | 90 |  | $ | 2,858 |  | $ | — |  | $ | 625 |
The following methods and assumptions were used by Pinnacle Financial in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2018 and December 31, 2017. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. Securities held-to-maturity - Estimated fair values for investment securities are based on quoted market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics. Loans - The fair value of Pinnacle Financial's loan portfolio includes a credit risk factor in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. Pinnacle Financial's loan portfolio is initially fair valued using a segmented approach. Pinnacle Financial divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk. The values derived from the discounted cash flow approach for our performing loan portfolio incorporate credit risk to determine the exit price. Fair values for impaired loans are estimated using discounted cash flow models or are based on the fair value of the underlying collateral. Purchased loans, including loans acquired through a merger, are initially recorded at fair value on the date of purchase. Purchased loans that contain evidence of post-origination credit deterioration as of the purchase date are carried at the net present value of expected future cash flows. All other purchased loans are recorded at their initial fair value, and adjusted for subsequent advances, pay downs, amortization or accretion of any fair value premium or discount on purchase, charge-offs and any other adjustment to carrying value. Loans held-for-sale - Loans held-for-sale are carried at the lower of cost or fair value. The estimate of fair value is based on pricing models and other information. Deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances, subordinated debt and other borrowings - The fair value of demand deposits, savings deposits and securities sold under agreements to repurchase are derived from a selection of market transactions reflecting our peer group. Fair values for certificates of deposit, FHLB advances and subordinated debt are estimated using discounted cash flow models, using current market interest rates offered on certificates, advances and other borrowings with similar remaining maturities. Off-balance sheet instruments - The fair values of Pinnacle Financial's off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to Pinnacle Financial until such commitments are funded. The following table presents the carrying amounts, estimated fair value and placement in the fair value hierarchy of Pinnacle Financial's financial instruments at September 30, 2018 and December 31, 2017. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as non-interest bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity (in thousands):
September 30, 2018 | Carrying/ Notional Amount |  | Estimated Fair Value (1) |  | Quoted market prices in an active market (Level 1) |  | Models with significant observable market parameters (Level 2) |  | Models with significant unobservable market parameters (Level 3)
Financial assets: |  |  |  |  |  |  |  |  |
Securities held-to-maturity | $ | 194,997 |  |  | $ | 192,500 |  |  | $ | — |  |  | $ | 192,500 |  |  | $ | — |
Loans, net | 17,384,024 |  |  | 17,201,694 |  |  | — |  |  | — |  |  | 17,201,694 |
Consumer loans held-for-sale | 47,417 |  |  | 47,957 |  |  | — |  |  | 47,957 |  |  | — |
Commercial loans held-for-sale | 11,402 |  |  | 11,532 |  |  | — |  |  | 11,532 |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |
Deposits and securities sold under |  |  |  |  |  |  |  |  |
agreements to repurchase | 18,537,732 |  |  | 17,935,256 |  |  | — |  |  | — |  |  | 17,935,256 |
Federal Home Loan Bank advances | 1,520,603 |  |  | 1,481,374 |  |  | — |  |  | — |  |  | 1,481,374 |
Subordinated debt and other borrowings | 465,487 |  |  | 439,369 |  |  | — |  |  | — |  |  | 439,369 |
Off-balance sheet instruments: |  |  |  |  |  |  |  |  |
Commitments to extend credit (2) | 6,455,039 |  |  | 1,673 |  |  | — |  |  | — |  |  | 1,673 |
Standby letters of credit (3) | 177,796 |  |  | 1,191 |  |  | — |  |  | — |  |  | 1,191 |
December 31, 2017 |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |
Securities held-to-maturity | $ | 20,762 |  |  | $ | 20,830 |  |  | $ | — |  |  | $ | 20,830 |  |  | $ | — |
Loans, net | 15,565,876 |  |  | 15,252,953 |  |  | — |  |  | — |  |  | 15,252,953 |
Consumer loans held-for-sale | 103,729 |  |  | 104,986 |  |  | — |  |  | 104,986 |  |  | — |
Commercial loans held-for-sale | 25,456 |  |  | 25,761 |  |  | — |  |  | 25,761 |  |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |
Deposits and securities sold under |  |  |  |  |  |  |  |  |
agreements to repurchase | 16,586,964 |  |  | 16,516,342 |  |  | — |  |  | — |  |  | 16,516,342 |
Federal Home Loan Bank advances | 1,319,909 |  |  | 1,313,311 |  |  | — |  |  | — |  |  | 1,313,311 |
Subordinated debt and other borrowings | 465,505 |  |  | 445,098 |  |  | — |  |  | — |  |  | 445,098 |
Off-balance sheet instruments: |  |  |  |  |  |  |  |  |
Commitments to extend credit (2) | 5,788,425 |  |  | 2,264 |  |  | — |  |  | — |  |  | 2,264 |
Standby letters of credit (3) | 143,684 |  |  | 800 |  |  | — |  |  | — |  |  | 800 |
(1) | Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to approximate those that a market-participant would realize in a hypothetical orderly transaction.
(2) | At the end of each quarter, Pinnacle Financial evaluates the inherent risks of the outstanding off-balance sheet commitments. In making this evaluation, Pinnacle Financial evaluates the credit worthiness of the borrower, the collateral supporting the commitments and any other factors similar to those used to evaluate the inherent risks of our loan portfolio. Additionally, Pinnacle Financial evaluates the probability that the outstanding commitment will eventually become a funded loan. As a result, at September 30, 2018 and December 31, 2017, Pinnacle Financial included in other liabilities $1.7 million and $2.3 million, respectively, representing the inherent risks associated with these off-balance sheet commitments.
(3) | At September 30, 2018 and December 31, 2017, the aggregate fair value of Pinnacle Financial's standby letters of credit was $1.2 million and $800,000, respectively. These amounts represent the unamortized fee associated with these standby letters of credit and are included in the consolidated balance sheets of Pinnacle Financial and are believed to approximate fair value. These fair values will decrease over time as the existing standby letters of credit approach their expiration dates.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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