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Loans and Allowance for Loan Losses (Tables)

6 Months Ended

Jun. 30, 2019

Loan Classification Categorized by Risk Rating Category

The following table outlines the amount of each loan classification categorized into each risk rating category as of June 30, 2019 and December 31, 2018 (in thousands):



	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
June 30, 2019
Pass	$	7,380,522	$	2,900,661	$	2,102,602	$	5,597,038	$	364,773	$	18,345,596
Special Mention	96,283		7,816		7,015		47,930		1,145		160,189
Substandard ⁽¹⁾	84,797		11,381		5,957		130,256		65		232,456
Substandard-nonaccrual	23,790		29,896		2,395		19,883		111		76,075
Doubtful-nonaccrual	1		1		—		—		—		2
Total loans	$	7,585,393	$	2,949,755	$	2,117,969	$	5,795,107	$	366,094	$	18,814,318



	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
December 31, 2018
Pass	$	6,998,485	$	2,787,570	$	2,059,376	$	5,148,726	$	352,516	$	17,346,673
Special Mention	55,932		7,902		4,334		24,284		711		93,163
Substandard ⁽¹⁾	78,202		20,906		5,358		75,351		62		179,879
Substandard-nonaccrual	32,335		28,069		3,387		23,060		983		87,834
Doubtful-nonaccrual	—		—		—		—		—		—
Total loans	$	7,164,954	$	2,844,447	$	2,072,455	$	5,271,421	$	354,272	$	17,707,549

(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 troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $227.5 million at June 30, 2019, compared to $176.3 million at December 31, 2018.

Purchase Credit Impaired Loans

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, 2018 through June 30, 2019 (in thousands):



	Gross Carrying Value			Accretable Yield			Nonaccretable Yield			Net Carrying Value
December 31, 2018	$	42,837		$	(114	)	$	(17,394	)	$	25,329
Acquisition	—			—			—			—
Year-to-date settlements	(8,878		)	197			3,157			(5,524		)
June 30, 2019	$	33,959		$	83		$	(14,237	)	$	19,805

Summary of Recorded Investment, Unpaid Principal Balance and Related Allowance and Average Recorded Investment of Impaired Loans

Impaired loans include nonaccrual loans, troubled debt restructurings, and other 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 June 30, 2019 and December 31, 2018 by loan classification (in thousands):



	At June 30, 2019						At December 31, 2018
	Recorded investment		Unpaid principal balances		Related allowance		Recorded investment		Unpaid principal balances		Related allowance
Impaired loans with an allowance:
Commercial real estate – mortgage	$	12,639	$	12,640	$	778	$	14,114	$	14,124	$	724
Consumer real estate – mortgage	19,770		19,879		2,148		19,864		19,991		1,443
Construction and land development	626		621		43		581		579		28
Commercial and industrial	10,634		10,601		2,560		9,252		9,215		1,441
Consumer and other	111		134		—		983		1,005		328
Total	$	43,780	$	43,875	$	5,529	$	44,794	$	44,914	$	3,964

Impaired loans without an allowance:
Commercial real estate – mortgage	$	10,332	$	10,341	$	—	$	14,724	$	14,739	$	—
Consumer real estate – mortgage	10,885		10,909		—		7,247		7,271		—
Construction and land development	—		—		—		1,786		1,786		—
Commercial and industrial	11,318		11,317		—		14,595		14,627		—
Consumer and other	—		—		—		—		—		—
Total	$	32,535	$	32,567	$	—	$	38,352	$	38,423	$	—

Total impaired loans	$	76,315	$	76,442	$	5,529	$	83,146	$	83,337	$	3,964

For the three and six months ended June 30, 2019, the average balance of impaired loans, was $86.2 million and $85.2 million, respectively, compared to $75.1 million and $69.8 million, respectively, for the same periods in 2018. 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 loans are placed on nonaccrual status, Pinnacle Financial reverses 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. As detailed in the following table, Pinnacle Financial recognized $89,000 and $176,000, respectively, in interest income from cash payments received on nonaccrual loans during the three and six months ended June 30, 2019 compared to $153,000 and $253,000, respectively, during the three and six months ended June 30, 2018. Had these nonaccruing loans been on accruing status, interest income would have been higher by $1.4 million and $2.6 million, respectively, for the three and six months ended June 30, 2019 compared to $1.2 million and $2.2 million, respectively, higher for the three and six months ended June 30, 2018.

The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three and six months ended June 30, 2019 and 2018, respectively, of impaired loans by loan classification (in thousands):



	For the three months ended June 30,								For the six months ended June 30,
	2019				2018				2019				2018
	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	$	15,589	$	—	$	12,527	$	—	$	15,097	$	—	$	8,968	$	—
Consumer real estate – mortgage	22,219		—		11,066		—		21,434		—		10,053		—
Construction and land development	747		—		1,059		—		692		—		1,547		—
Commercial and industrial	9,718		—		7,976		—		9,563		—		9,491		—
Consumer and other	221		—		822		—		475		—		548		—
Total	$	48,494	$	—	$	33,450	$	—	$	47,261	$	—	$	30,607	$	—

Impaired loans without an allowance:
Commercial real estate – mortgage	$	13,503	$	89	$	18,493	$	153	$	13,910	$	176	$	17,783	$	253
Consumer real estate – mortgage	10,658		—		4,805		—		9,521		—		4,585		—
Construction and land development	—		—		—		—		595		—		882		—
Commercial and industrial	13,505		—		18,401		—		13,868		—		15,902		—
Consumer and other	—		—		—		—		—		—		—		—
Total	$	37,666	$	89	$	41,699	$	153	$	37,894	$	176	$	39,152	$	253

Total impaired loans	$	86,160	$	89	$	75,149	$	153	$	85,155	$	176	$	69,759	$	253

Troubled Debt Restructurings

The following table outlines the amount of each loan category where troubled debt restructurings were made during the three and six months ended June 30, 2019 and 2018 (dollars in thousands):



	Three Months Ended June 30,					Six Months Ended June 30,
2019	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	712		626		1	712		626
Construction and land development	1	21		19		1	21		19
Commercial and industrial	1	1,397		796		1	1,397		796
Consumer and other	—	—		—		—	—		—
	3	$	2,130	$	1,441	3	$	2,130	$	1,441

2018
Commercial real estate – mortgage	—	$	—	$	—	—	$	—	$	—
Consumer real estate – mortgage	1	38		38		1	38		38
Construction and land development	—	—		—		—	—		—
Commercial and industrial	—	—		—		—	—		—
Consumer and other	—	—		—		—	—		—
	1	$	38	$	38	1	$	38	$	38

Summary of Loan Portfolio Credit Risk Exposure

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 June 30, 2019 with the comparative exposures for December 31, 2018 (in thousands):



	June 30, 2019
	Outstanding Principal Balances		Unfunded Commitments		Total exposure		Total Exposure at December 31, 2018
Lessors of nonresidential buildings	$	3,375,085	$	871,369	$	4,246,454	$	3,932,059
Lessors of residential buildings	1,003,666		398,766		1,402,432		1,484,697
New Housing For-Sale Builders	508,964		575,435		1,084,399		1,100,989
Hotels (except Casino Hotels) and Motels	847,103		154,986		1,002,089		920,001

Past Due Balances by Loan Classification

The table below presents past due balances by loan classification and segment at June 30, 2019 and December 31, 2018, allocated between accruing and nonaccrual status (in thousands):



	Accruing										Nonaccruing
June 30, 2019	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 ⁽¹⁾		Total loans
Commercial real estate:
Owner-occupied	$	2,373	$	70	$	2,443	$	2,606,321	$	2,450	$	11,976	$	970	$	2,624,160
All other	4,731		—		4,731		4,940,587		5,070		10,828		17		4,961,233
Consumer real estate – mortgage	10,603		220		10,823		2,905,629		3,406		25,501		4,396		2,949,755
Construction and land development	3,469		—		3,469		2,110,684		1,421		605		1,790		2,117,969
Commercial and industrial	11,420		1,537		12,957		5,761,982		285		19,883		—		5,795,107
Consumer and other	4,658		906		5,564		360,419		—		111		—		366,094
Total	$	37,254	$	2,733	$	39,987	$	18,685,622	$	12,632	$	68,904	$	7,173	$	18,814,318



	Accruing										Nonaccruing
December 31, 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 ⁽¹⁾		Total loans
Commercial real estate:
Owner-occupied	$	10,170	$	—	$	10,170	$	2,623,700	$	2,664	$	16,025	$	874	$	2,653,433
All other	1,586		—		1,586		4,488,840		5,659		12,634		2,802		4,511,521
Consumer real estate – mortgage	18,059		—		18,059		2,794,630		3,689		22,564		5,505		2,844,447
Construction and land development	3,759		—		3,759		2,063,201		2,108		2,020		1,367		2,072,455
Commercial and industrial	21,451		1,082		22,533		5,225,205		623		23,022		38		5,271,421
Consumer and other	3,276		476		3,752		349,537		—		983		—		354,272
Total	$	58,301	$	1,558	$	59,859	$	17,545,113	$	14,743	$	77,248	$	10,586	$	17,707,549

(1)

Approximately $34.8 million and $52.5 million of nonaccrual loans as of June 30, 2019 and December 31, 2018, respectively, were performing pursuant to their contractual terms at those dates.

Details of Changes in the Allowance for Loan Losses

The following table details the changes in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018, 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 June 30, 2019:
Balance at March 31, 2019	$	30,167		$	8,369		$	10,915		$	32,699		$	4,803		$	241		$	87,194
Charged-off loans	(1,065		)	(580		)	(4		)	(5,408		)	(1,423		)	—			(8,480		)
Recovery of previously charged-off loans	892			372			19			2,744			317			—			4,344
Provision for loan losses	832			328			276			7,401			(1,583		)	(59		)	7,195
Balance at June 30, 2019	$	30,826		$	8,489		$	11,206		$	37,436		$	2,114		$	182		$	90,253

Three months ended June 30, 2018:
Balance at March 31, 2018	$	22,688		$	5,100		$	10,116		$	26,648		$	5,476		$	176		$	70,204
Charged-off loans	(234		)	(935		)	(10		)	(1,724		)	(3,795		)	—			(6,698		)
Recovery of previously charged-off loans	58			537			1,010			567			590			—			2,762
Provision for loan losses	2,336			1,151			(132		)	2,847			2,901			299			9,402
Balance at June 30, 2018	$	24,848		$	5,853		$	10,984		$	28,338		$	5,172		$	475		$	75,670

Six months ended June 30, 2019:
Balance at December 31, 2018	$	26,946		$	7,670		$	11,128		$	31,731		$	5,423		$	677		$	83,575
Charged-off loans	(1,599		)	(930		)	(4		)	(8,760		)	(3,255		)	—			(14,548		)
Recovery of previously charged-off loans	964			741			141			4,342			659			—			6,847
Provision for loan losses	4,515			1,008			(59		)	10,123			(713		)	(495		)	14,379
Balance at June 30, 2019	$	30,826		$	8,489		$	11,206		$	37,436		$	2,114		$	182		$	90,253

Six months ended June 30, 2018:
Balance at December 31, 2017	$	21,188		$	5,031		$	8,962		$	24,863		$	5,874		$	1,322		$	67,240
Charged-off loans	(962		)	(1,271		)	(12		)	(4,264		)	(8,858		)	—			(15,367		)
Recovery of previously charged-off loans	1,454			1,203			1,575			1,455			1,777			—			7,464
Provision for loan losses	3,168			890			459			6,284			6,379			(847		)	16,333
Balance at June 30, 2018	$	24,848		$	5,853		$	10,984		$	28,338		$	5,172		$	475		$	75,670

The following table details the allowance for loan losses and recorded investment in loans by loan classification and by impairment evaluation method as of June 30, 2019 and December 31, 2018, respectively (in thousands):



	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Unallocated		Total
June 30, 2019
Allowance for Loan Losses:
Collectively evaluated for impairment	$	30,048	$	6,341	$	11,163	$	34,876	$	2,114			$	84,542
Individually evaluated for impairment	778		2,148		43		2,560		—				5,529
Loans acquired with deteriorated credit quality⁽¹⁾	—		—		—		—		—				—
Total allowance for loan losses	$	30,826	$	8,489	$	11,206	$	37,436	$	2,114	$	182	$	90,253

Loans:
Collectively evaluated for impairment	$	7,553,915	$	2,911,298	$	2,114,132	$	5,772,870	$	365,983			$	18,718,198
Individually evaluated for impairment	22,971		30,655		626		21,952		111				76,315
Loans acquired with deteriorated credit quality	8,507		7,802		3,211		285		—				19,805
Total loans	$	7,585,393	$	2,949,755	$	2,117,969	$	5,795,107	$	366,094			$	18,814,318

December 31, 2018
Allowance for Loan Losses:
Collectively evaluated for impairment	$	26,222	$	6,227	$	11,100	$	30,290	$	5,095			$	78,934
Individually evaluated for impairment	724		1,443		28		1,441		328				3,964
Loans acquired with deteriorated credit quality⁽¹⁾	—		—		—		—		—				—
Total allowance for loan losses	$	26,946	$	7,670	$	11,128	$	31,731	$	5,423	$	677	$	83,575

Loans:
Collectively evaluated for impairment	$	7,124,117	$	2,808,142	$	2,066,613	$	5,246,913	$	353,289			$	17,599,074
Individually evaluated for impairment	28,838		27,111		2,367		23,847		983				83,146
Loans acquired with deteriorated credit quality	11,999		9,194		3,475		661		—				25,329
Total loans	$	7,164,954	$	2,844,447	$	2,072,455	$	5,271,421	$	354,272			$	17,707,549

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