Securities

6 Months Ended

Jun. 30, 2021

Investments, Debt and Equity Securities [Abstract]

Note 3. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2021 and December 31, 2020 are summarized as follows (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2021:
Securities available-for-sale:
U.S. Treasury securities	$	111,475	$	5	$	11	$	111,469
U.S. government agency securities	421,833		3,214		2,191		422,856
Mortgage-backed securities	1,854,519		50,747		6,018		1,899,248
State and municipal securities	1,535,461		48,999		3,747		1,580,713
Asset-backed securities	200,200		318		430		200,088
Corporate notes and other	114,878		3,422		1,604		116,696
	$	4,238,366	$	106,705	$	14,001	$	4,331,070
Securities held-to-maturity:
State and municipal securities	$	996,036	$	35,035	$	432	$	1,030,639
	$	996,036	$	35,035	$	432	$	1,030,639
Allowance for credit losses - securities held-to-maturity	(198)
Securities held-to-maturity, net of allowance for credit losses	$	995,838


December 31, 2020:
Securities available-for-sale:
U.S. Treasury securities	$	82,199	$	10	$	—	$	82,209
U.S. government agency securities	74,916		1,547		60		76,403
Mortgage-backed securities	1,623,759		67,759		2,327		1,689,191
State and municipal securities	1,411,288		44,559		12,484		1,443,363
Asset-backed securities	177,878		715		657		177,936
Corporate notes and other	117,256		2,632		2,309		117,579
	$	3,487,296	$	117,222	17,837		$	3,586,681
Securities held-to-maturity:
State and municipal securities	$	1,028,550	$	38,272	$	291	$	1,066,531
	$	1,028,550	$	38,272	$	291	$	1,066,531
Allowance for credit losses - securities held-to-maturity	(191)
Securities held-to-maturity, net of allowance for credit losses	$	1,028,359

During the quarters ended March 31, 2020 and September 30, 2018, Pinnacle Financial transferred, at fair value, $873.6 million and $179.8 million, respectively, of municipal securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized after tax gains of $69.0 million and net unrealized after tax losses of $2.2 million, respectively, remained in accumulated other comprehensive income (loss) and are being amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer. At June 30, 2021, approximately $676.5 million of securities within Pinnacle Financial's investment portfolio were pledged to secure either public funds and other deposits or securities sold under agreements to repurchase. At June 30, 2021, repurchase agreements comprised of secured borrowings totaled $177.7 million and were secured by $177.7 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 to remain adequately secured.

The amortized cost and fair value of debt securities as of June 30, 2021 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage- and asset-backed securities since the mortgages and assets 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
June 30, 2021:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	112,691	$	112,686	$	—	$	—
Due in one year to five years	33,685		33,706		1,409		1,470
Due in five years to ten years	496,477		508,583		6,609		6,704
Due after ten years	1,540,794		1,576,759		988,018		1,022,465
Mortgage-backed securities	1,854,519		1,899,248		—		—
Asset-backed securities	200,200		200,088		—		—
	$	4,238,366	$	4,331,070	$	996,036	$	1,030,639

At June 30, 2021 and December 31, 2020, the following investments had unrealized losses. The table below classifies these investments according to the term of the unrealized losses 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
At June 30, 2021
U.S. Treasury securities	$	59,973	$	11	$	—	$	—	$	59,973	$	11
U.S. government agency securities	111,928		2,172		5,497		19		117,425		2,191
Mortgage-backed securities	361,860		5,059		54,747		959		416,607		6,018
State and municipal securities	117,715		1,035		167,184		2,712		284,899		3,747
Asset-backed securities	85,178		285		6,859		145		92,037		430
Corporate notes	4,990		10		24,813		1,594		29,803		1,604
Total temporarily-impaired securities	$	741,644	$	8,572	$	259,100	$	5,429	$	1,000,744	$	14,001

At December 31, 2020
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
U.S. government agency securities	9,962		38		6,091		22		16,053		60
Mortgage-backed securities	165,696		1,772		35,997		555		201,693		2,327
State and municipal securities	175,115		2,220		345,435		10,264		520,550		12,484
Asset-backed securities	46,399		207		52,840		450		99,239		657
Corporate notes	9,978		40		23,920		2,269		33,898		2,309
Total temporarily-impaired securities	$	407,150	$	4,277	$	464,283	$	13,560	$	871,433	$	17,837

The applicable dates for determining when securities were in an unrealized loss position were June 30, 2021 and December 31, 2020. As such, it is possible that a security had a market value less than its amortized cost on other days during the past twelve-month periods ended June 30, 2021 and December 31, 2020, but is not in the "Investments with an Unrealized Loss of less than 12 months" category above.

As shown in the tables above, including both available-for-sale and held-to-maturity investment securities, at June 30, 2021, Pinnacle Financial had approximately $14.0 million in unrealized losses on approximately $1.0 billion of securities. The unrealized losses associated with $873.6 million and $179.8 million of municipal securities transferred from the available-for-sale portfolio to the held-to-maturity portfolio during the quarters ended March 31, 2020 and September 30, 2018, respectively, represent unrealized losses since the date of purchase, independent of the impact associated with changes in the cost basis upon transfer between portfolios. For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, Pinnacle Financial assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at June 30, 2021, and it is not more-likely-than-not that Pinnacle

Financial will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial has determined that no write-down is necessary. In addition, Pinnacle Financial evaluates whether any portion of the decline in fair value is the result of credit deterioration, which would require the recognition of an allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with securities at June 30, 2021 are driven by changes in interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at June 30, 2021. These securities will continue to be monitored as a part of Pinnacle Financial's ongoing evaluation of credit quality. 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.

The allowance for credit losses on held-to-maturity securities is measured on a collective basis by major security type. At June 30, 2021, Pinnacle Financial's held-to-maturity securities consist entirely of municipal securities. The estimates of expected credit losses are based on historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. A reasonable and supportable period of 18 months and reversion period of 12 months was utilized to estimate credit losses on held-to-maturity municipal securities at each of June 30, 2021 and 2020. At June 30, 2021 and December 31, 2020, the estimated allowance for credit losses on these securities was $198,000 and $191,000, respectively, with the change driven largely by changes in macroeconomic projections.

Pinnacle Financial utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt securities held-to-maturity. At June 30, 2021, all debt securities classified as held-to-maturity were rated A or higher by the ratings agencies. Updated credit ratings are obtained as they become available from the ratings agencies.

Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes or preparing for anticipated changes in market interest rates. 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. During the six months ended June 30, 2021, $2.2 million of available-for-sale securities were sold and $270,000 related to net gains on sales of available-for-sale securities were reclassified from accumulated other comprehensive income into net income.

Pinnacle Financial has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the fair values of available for sale securities. See Note 8. Derivative Instruments for disclosure of the gains and losses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities.