Note 5. Loans and Allowance for Loan Losses

For financial reporting purposes, Pinnacle Financial classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by Pinnacle Bank with the Federal Deposit Insurance Corporation (FDIC).

Pinnacle Financial uses five loan categories: commercial real estate mortgage, consumer real estate mortgage, construction and land development, commercial and industrial, and consumer and other.

•

Commercial real estate mortgage loans. Commercial real estate mortgage loans are categorized as such based on investor exposures where repayment is largely dependent upon the operation, refinance, or sale of the underlying real estate. Commercial real estate mortgage loans also includes owner occupied commercial real estate which Pinnacle Financial believes shares a similar risk profile to Pinnacle Financial's commercial and industrial products.


•	Consumer real estate mortgage loans. Consumer real estate mortgage consists primarily of loans secured by 1-4 family residential properties, including home equity lines of credit.

•

Construction and land development loans. Construction and land development loans include loans where the repayment is dependent on the successful operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development.


•	Commercial and industrial loans. Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes.


•	Consumer and other loans. Consumer and other loans include all loans issued to individuals not included in the consumer real estate mortgage classification. Examples of consumer and other loans are automobile loans, credit cards and loans to finance education, among others.

Commercial loans receive risk ratings assigned by a financial advisor and approved by a senior credit officer subject to validation by Pinnacle Financial's independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pinnacle Financial believes that its categories follow those used by Pinnacle Bank's primary regulators. At September 30, 2018, approximately 81.2% of Pinnacle Financial's loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating. Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans. However, certain consumer real estate mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature.

Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, Pinnacle Financial's credit procedures require that every risk rated loan of $1.0 million or more be subject to a formal credit risk review process by the assigned financial advisor. Each loan's risk rating is also subject to review by Pinnacle Financial's independent loan review department, which reviews a substantial portion of Pinnacle Financial's risk rated portfolio annually. Included in the coverage are independent loan reviews of loans in targeted higher-risk portfolio segments such as certain commercial and industrial loans, land loans and/or loan types in certain geographies.

The following table presents Pinnacle Financial's loan balances by primary loan classification and the amount within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard, substandard-nonaccrual and doubtful-nonaccrual which are defined as follows:


•	Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit position at some future date.

•

Substandard loans are inadequately protected by the current net worth and financial capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize collection of the debt. Substandard loans are characterized by the distinct possibility that Pinnacle Financial could sustain some loss if the deficiencies are not corrected.


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


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

The following table outlines the amount of each loan classification categorized into each risk rating category as of September 30, 2018 and December 31, 2017 (in thousands):



	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
September 30, 2018
Pass	$	7,058,133	$	2,766,126	$	2,046,299	$	4,866,409	$	366,723	$	17,103,690
Special Mention	30,291		10,534		3,002		31,213		724		75,764
Substandard ⁽¹⁾	96,729		13,234		6,313		90,345		66		206,687
Substandard-nonaccrual	29,966		25,266		3,395		18,280		961		77,868
Doubtful-nonaccrual	—		—		—		—		—		—
Total loans	$	7,215,119	$	2,815,160	$	2,059,009	$	5,006,247	$	368,474	$	17,464,009



December 31, 2017
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

(1)

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators for loans classified as substandard, excluding the impact of nonaccrual loans and troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $202.5 million at September 30, 2018, compared to $164.0 million at December 31, 2017.

Loans acquired with deteriorated credit quality are recorded pursuant to the provisions of ASC 310-30, and are referred to as purchase credit impaired loans. The following table provides a rollforward of purchase credit impaired loans from December 31, 2017 through September 30, 2018 (in thousands):



	Gross Carrying Value			Accretable Yield			Nonaccretable Yield			Net Carrying Value
December 31, 2017	$	74,324		$	(132	)	$	(31,537	)	$	42,655
Year-to-date settlements	(21,332		)	21			12,262			(9,049		)
September 30, 2018	$	52,992		$	(111	)	$	(19,275	)	$	33,606

Certain of these loans have been deemed to be collateral dependent and, as such, no accretable yield has been recorded for these loans. The carrying value is adjusted for additional draws, pursuant to contractual arrangements, offset by loan paydowns. Year-to-date settlements include both loans that were charged-off as well as loans that were paid off, typically as a result of refinancings at other institutions.

For the three and nine months ended September 30, 2018, the average balance of impaired loans was $82.3 million and $73.3 million, respectively, compared to $39.5 million and $36.3 million for the same periods in 2017. Pinnacle Financial's policy is that the accrual of interest income will be discontinued when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date the above mentioned loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Pinnacle Financial's policy is that once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized no interest income from cash payments received on nonaccrual loans during the nine months ended September 30, 2018 compared to no interest income from cash payments received on nonaccrual loans during the three months ended September 30, 2017 and approximately $65,000 during the nine months ended September 30, 2017. Had these nonaccruing loans been on accruing status, interest income would have been higher by $1.1 million and $2.8 million, respectively, for the three and nine months ended September 30, 2018 compared to $849,000 and $2.1 million, respectively, higher for the three and nine months ended September 30, 2017.

Impaired loans, as disclosed in the table below, include troubled debt restructurings, nonaccrual loans, and loans deemed to be impaired but that continue to accrue interest. The following tables detail the recorded investment, unpaid principal balance and related allowance of Pinnacle Financial's impaired loans at September 30, 2018 and December 31, 2017 by loan classification (in thousands):



	At September 30, 2018						At December 31, 2017
	Recorded investment		Unpaid principal balances		Related allowance		Recorded investment		Unpaid principal balances		Related allowance
Impaired loans with an allowance:
Commercial real estate – mortgage	$	10,282	$	10,305	$	461	$	1,850	$	1,863	$	95
Consumer real estate – mortgage	15,746		15,808		490		8,028		8,079		410
Construction and land development	563		564		15		2,522		2,528		66
Commercial and industrial	8,908		8,939		1,265		12,521		12,644		1,627
Consumer and other	961		980		147		—		—		—
Total	$	36,460	$	36,596	$	2,378	$	24,921	$	25,114	$	2,198

Impaired loans without an allowance:
Commercial real estate – mortgage	$	21,457	$	21,481	$	—	$	16,364	$	16,514	$	—
Consumer real estate – mortgage	6,382		6,419		—		4,144		4,174		—
Construction and land development	2,884		2,883		—		2,645		2,650		—
Commercial and industrial	16,678		16,662		—		10,905		10,902		—
Consumer and other	—		—		—		—		—		—
Total	$	47,401	$	47,445	$	—	$	34,058	$	34,240	$	—

Total impaired loans	$	83,861	$	84,041	$	2,378	$	58,979	$	59,354	$	2,198

The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three and nine months ended September 30, 2018 and 2017, respectively, of impaired loans by loan classification (in thousands):



	For the three months ended September 30,								For the nine months ended September 30,
	2018				2017				2018				2017
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Impaired loans with an allowance:
Commercial real estate – mortgage	$	13,474	$	—	$	264	$	—	$	9,297	$	—	$	350	$	—
Consumer real estate – mortgage	14,162		—		4,593		—		11,476		—		4,230		—
Construction and land development	1,150		—		81		—		1,301		—		78		—
Commercial and industrial	7,470		—		12,235		—		9,345		—		10,068		—
Consumer and other	912		—		362		—		651		—		532		—
Total	$	37,168	$	—	$	17,535	$	—	$	32,070	$	—	$	15,258	$	—

Impaired loans without an allowance:
Commercial real estate – mortgage	$	22,029	$	—	$	6,981	$	—	$	18,702	$	—	$	4,638	$	—
Consumer real estate – mortgage	5,699		—		7,003		—		5,034		—		6,122		—
Construction and land development	1,442		—		1,324		—		1,382		—		1,702		65
Commercial and industrial	16,008		—		6,673		—		16,096		—		8,573		—
Consumer and other	—		—		—		—		—		—		—		—
Total	$	45,178	$	—	$	21,981	$	—	$	41,214	$	—	$	21,035	$	65

Total impaired loans	$	82,346	$	—	$	39,516	$	—	$	73,284	$	—	$	36,293	$	65

At September 30, 2018 and December 31, 2017, there were $6.1 million and $6.6 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. Troubled commercial loans are restructured by specialists within Pinnacle Bank's Special Assets Group, and all restructurings are approved by committees and/or credit officers separate and apart from the normal loan approval process. These specialists are charged with reducing Pinnacle Financial's overall risk and exposure to loss in the event of a restructuring by obtaining some or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral release terms, additional collateral or other similar strategies.

The following table outlines the amount of each loan category where troubled debt restructurings were made during the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):



	Three months ended September 30,					Nine months ended September 30,
2018	Number of contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance		Number of contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance
Commercial real estate – mortgage	—	$	—	$	—	—	$	—	$	—
Consumer real estate – mortgage	1	169		169		2	206		206
Construction and land development	1	348		348		1	348		348
Commercial and industrial	—	—		—		—	—		—
Consumer and other	—	—		—		—	—		—
	2	$	517	$	517	3	$	554	$	554

2017
Commercial real estate – mortgage	—	$	—	$	—	—	$	—	$	—
Consumer real estate – mortgage	—	—		—		1	7		5
Construction and land development	—	—		—		—	—		—
Commercial and industrial	1	501		145		3	2,472		1,773
Consumer and other	—	—		—		—	—		—
	1	$	501	$	145	4	$	2,479	$	1,778

During the nine months ended September 30, 2018 and 2017, Pinnacle Financial did not have any troubled debt restructurings that subsequently defaulted within twelve months of the restructuring.

At both September 30, 2018 and December 31, 2017, the allowance for loan losses included no allowance specifically related to accruing troubled debt restructurings, which are classified as impaired loans pursuant to U.S. GAAP, but which loans continued to accrue interest at contractual rates at those dates.

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 September 30, 2018 with the comparative exposures for December 31, 2017 (in thousands):



	September 30, 2018
	Outstanding Principal Balances		Unfunded Commitments		Total exposure		Total Exposure at December 31, 2017
Lessors of nonresidential buildings	$	3,146,798	$	692,316	$	3,839,114	$	3,483,597
Lessors of residential buildings	983,084		269,344		1,252,428		1,151,676
Hotels (except Casino Hotels) and Motels	760,355		157,315		917,670		836,320
New Housing For-Sale Builders	459,501		567,914		1,027,415		780,137

Additionally, Pinnacle Financial monitors two ratios regarding construction and commercial real estate lending as part of its concentration management processes. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by Pinnacle Bank’s total risk-based capital. At September 30, 2018 and December 31, 2017, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were 87.8% and 89.4%, respectively. Non-owner occupied commercial real estate and multifamily loans (including construction and land development loans) as a percentage of total risk-based capital were 287.6% and 297.1% as of September 30, 2018 and December 31, 2017, respectively. Banking regulations have established guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-owner occupied ratio of less than 300% of total risk-based capital. When a bank’s ratios are in excess of one or both of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. While Pinnacle Bank was in excess of the 300% guideline for the first six months of 2018, at September 30, 2018, Pinnacle Bank was within the 100% and 300% guidelines and has established what it believes to be appropriate controls to monitor its lending in these areas as it aims to keep the level of these loans to below the 100% and 300% thresholds.

The table below presents past due balances by loan classification and segment at September 30, 2018 and December 31, 2017, allocated between accruing and nonaccrual status (in thousands):



	Accruing										Nonaccruing
September 30, 2018	30-89 days past due and accruing		90 days or more past due and accruing		Total past due and accruing		Current and accruing		Purchase credit impaired		Nonaccrual ⁽¹⁾		Nonaccruing purchase credit impaired		Total loans
Commercial real estate:
Owner-occupied	$	7,756	$	—	$	7,756	$	2,656,228	$	2,769	$	19,738	$	1,754	$	2,688,245
All other	2,633		—		2,633		4,504,385		11,382		5,591		2,883		4,526,874
Consumer real estate – mortgage	13,358		—		13,358		2,772,801		3,735		19,165		6,101		2,815,160
Construction and land development	3,368		—		3,368		2,049,468		2,778		2,024		1,371		2,059,009
Commercial and industrial	10,741		1,128		11,869		4,975,290		808		18,256		24		5,006,247
Consumer and other	4,361		645		5,006		362,507		—		961		—		368,474
Total	$	42,217	$	1,773	$	43,990	$	17,320,679	$	21,472	$	65,735	$	12,133	$	17,464,009



	Accruing										Nonaccruing
December 31, 2017	30-89 days past due and accruing		90 days or more past due and accruing		Total past due and accruing		Current and accruing		Purchase credit impaired		Nonaccrual ⁽¹⁾		Nonaccruing purchase credit impaired		Total loans
Commercial real estate:
Owner-occupied	$	6,772	$	104	$	6,876	$	2,435,819	$	4,820	$	11,395	$	1,105	$	2,460,015
All other	16,559		—		16,559		4,177,454		12,018		704		2,860		4,209,595
Consumer real estate – mortgage	14,835		1,265		16,100		2,521,748		5,249		9,320		8,797		2,561,214
Construction and land development	4,136		146		4,282		1,894,560		3,478		2,878		3,090		1,908,288
Commercial and industrial	7,406		1,348		8,754		4,114,127		1,154		17,222		84		4,141,341
Consumer and other	6,311		1,276		7,587		345,076		—		—		—		352,663
Total	$	56,019	$	4,139	$	60,158	$	15,488,784	$	26,719	$	41,519	$	15,936	$	15,633,116


(1)	Approximately $54.6 million and $45.8 million of nonaccrual loans as of September 30, 2018 and December 31, 2017, respectively, were performing pursuant to their contractual terms at those dates.

The following table details the changes in the allowance for loan losses for the three and nine months ended September 30, 2018 and 2017, respectively, by loan classification (in thousands):



	Commercial real estate - mortgage			Consumer real estate - mortgage			Construction and land development			Commercial and industrial			Consumer and other			Unallocated			Total
Three months ended September 30, 2018:
Balance at June 30, 2018	$	24,848		$	5,853		$	10,984		$	28,338		$	5,172		$	475		$	75,670
Charged-off loans	(1,968		)	(262		)	(24		)	(3,336		)	(1,359		)	—			(6,949		)
Recovery of previously charged-off loans	63			987			70			1,037			382			—			2,539
Provision for loan losses	3,574			149			(48		)	4,085			618			347			8,725
Balance at September 30, 2018	$	26,517		$	6,727		$	10,982		$	30,124		$	4,813		$	822		$	79,985

Three months ended September 30, 2017:
Balance at June 30, 2017	$	16,002		$	7,835		$	5,126		$	24,235		$	7,549		$	1,197		$	61,944
Charged-off loans	(572		)	(395		)	(99		)	(1,625		)	(3,296		)	—			(5,987		)
Recovery of previously charged-off loans	169			565			716			562			270			—			2,282
Provision for loan losses	5,191			(2,702		)	1,780			235			2,396			20			6,920
Balance at September 30, 2017	$	20,790		$	5,303		$	7,523		$	23,407		$	6,919		$	1,217		$	65,159

Nine months ended September 30, 2018:
Balance at December 31, 2017	$	21,188		$	5,031		$	8,962		$	24,863		$	5,874		$	1,322		$	67,240
Charged-off loans	(2,930		)	(1,533		)	(36		)	(7,600		)	(10,217		)	—			(22,316		)
Recovery of previously charged-off loans	1,517			2,190			1,645			2,492			2,159			—			10,003
Provision for loan losses	6,742			1,039			411			10,369			6,997			(500		)	25,058
Balance at September 30, 2018	$	26,517		$	6,727		$	10,982		$	30,124		$	4,813		$	822		$	79,985

Nine months ended September 30, 2017:
Balance at December 31, 2016	$	13,655		$	6,564		$	3,624		$	24,743		$	9,520		$	874		$	58,980
Charged-off loans	(581		)	(663		)	(99		)	(3,278		)	(11,687		)	—			(16,308		)
Recovery of previously charged-off loans	184			1,147			845			1,264			1,663			—			5,103
Provision for loan losses	7,532			(1,745		)	3,153			678			7,423			343			17,384
Balance at September 30, 2017	$	20,790		$	5,303		$	7,523		$	23,407		$	6,919		$	1,217		$	65,159

The following table details the allowance for loan losses and recorded investment in loans by loan classification and by impairment evaluation method as of September 30, 2018 and December 31, 2017, respectively (in thousands):



	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Unallocated		Total
September 30, 2018
Allowance for Loan Losses:
Collectively evaluated for impairment	$	26,047	$	6,235	$	10,967	$	28,859	$	4,666			$	76,774
Individually evaluated for impairment	461		490		15		1,265		147				2,378
Loans acquired with deteriorated credit quality ⁽¹⁾	9		2		—		—		—				11
Total allowance for loan losses	$	26,517	$	6,727	$	10,982	$	30,124	$	4,813	$	822	$	79,985

Loans:
Collectively evaluated for impairment	$	7,164,591	$	2,783,196	$	2,051,413	$	4,979,829	$	367,513			$	17,346,542
Individually evaluated for impairment	31,739		22,128		3,447		25,586		961				83,861
Loans acquired with deteriorated credit quality	18,789		9,836		4,149		832		—				33,606
Total loans	$	7,215,119	$	2,815,160	$	2,059,009	$	5,006,247	$	368,474			$	17,464,009

December 31, 2017
Allowance for Loan Losses:
Collectively evaluated for impairment	$	20,753	$	4,460	$	8,879	$	23,181	$	5,874			$	63,147
Individually evaluated for impairment	95		410		66		1,627		—				2,198
Loans acquired with deteriorated credit quality⁽¹⁾	340		161		17		55		—				573
Total allowance for loan losses	$	21,188	$	5,031	$	8,962	$	24,863	$	5,874	$	1,322	$	67,240

Loans:
Collectively evaluated for impairment	$	6,630,593	$	2,534,996	$	1,896,553	$	4,116,677	$	352,663			$	15,531,482
Individually evaluated for impairment	18,214		12,172		5,167		23,426		—				58,979
Loans acquired with deteriorated credit quality	20,803		14,046		6,568		1,238		—				42,655
Total loans	$	6,669,610	$	2,561,214	$	1,908,288	$	4,141,341	$	352,663			$	15,633,116

⁽¹⁾ Loans acquired with deteriorated credit quality are recorded at fair value at the time of acquisition. An allowance for loan losses is recorded resulting from subsequent credit deterioration.

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The allowance for loan losses for purchased loans is calculated similarly to the method utilized for legacy Pinnacle Bank loans. Pinnacle Financial's accounting policy is to compare the computed allowance for loan losses for purchased loans on a loan-by-loan basis to any remaining fair value adjustment. If the computed allowance is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a charge to the provision for loan losses.

At September 30, 2018, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $38.6 million to current directors, executive officers, and their related entities, of which $19.6 million had been drawn upon. At December 31, 2017, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $26.4 million to directors, executive officers, and their related entities, of which approximately $16.1 million had been drawn upon. None of these loans to directors, executive officers, and their related entities were impaired at September 30, 2018 or December 31, 2017.

At September 30, 2018, Pinnacle Financial had approximately $11.4 million in commercial loans held for sale compared to $25.5 million at December 31, 2017, which primarily included commercial real estate and apartment loans originated for sale to a third-party as part of a multi-family loan program. Such loans are closed under a pass-through commitment structure wherein Pinnacle Bank's loan commitment to the borrower is the same as the third party's take-out commitment to Pinnacle Bank and the third party purchase typically occurs within thirty days of Pinnacle Bank closing with the borrowers.

Residential Lending

At September 30, 2018, Pinnacle Financial had approximately $46.3 million of mortgage loans held-for-sale compared to approximately $102.7 million at December 31, 2017. Total loan volumes sold during the nine months ended September 30, 2018 were approximately $917.9 million compared to approximately $756.7 million for the nine months ended September 30, 2017. During the three and nine months ended September 30, 2018, Pinnacle Financial recognized $3.9 million and $11.4 million, respectively, in gains on the sale of these loans, net of commissions paid, compared to $6.0 million and $14.8 million, respectively, net of commissions paid, during the three and nine months ended September 30, 2017.

These mortgage loans held-for-sale are originated internally and are primarily to borrowers in Pinnacle Bank's geographic markets. These sales are typically on a mandatory basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines.

Each purchaser of a mortgage loan held-for-sale has specific guidelines and criteria for sellers of loans and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require Pinnacle Bank to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties, Pinnacle Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan. To date, Pinnacle Bank's liability pursuant to the terms of these representations and warranties has been insignificant to Pinnacle Bank.