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).

•Owner occupied commercial real estate mortgage loans - Owner occupied commercial real estate mortgage loans are secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. For such loans, repayment is largely dependent upon the operation of the borrower's business.

•Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily dependent on lease income generated from the underlying collateral.

•Construction and land development loans - Construction and land development loans include loans where the repayment is dependent on the successful completion and eventual sale, refinance or 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. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Loans totaling $10.7 million and $371.1 million granted under the Paycheck Protection Program are included in this category as of September 30, 2022, and December 31, 2021, respectively.

•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, consumer credit cards and loans to finance education, among others. Many consumer loans are unsecured. Repayment is primarily dependent on the personal cash flow of the borrower.


	September 30, 2022		December 31, 2021
Commercial real estate:
Owner occupied	$	3,426,271	$	3,048,822
Non-owner occupied	6,164,981		5,221,704
Consumer real estate – mortgage	4,271,913		3,680,684
Construction and land development	3,548,970		2,903,017
Commercial and industrial	9,748,994		8,074,546
Consumer and other	550,565		485,489
Subtotal	$	27,711,694	$	23,414,262
Allowance for credit losses	(288,088)		(263,233)
Loans, net	$	27,423,606	$	23,151,029

Commercial loans receive risk ratings assigned by a 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 multiple ratings categories representing varying degrees of risk attributes lesser than those of the other defined risk categories further described below. Pinnacle Financial believes its categories follow those used by Pinnacle Bank's primary regulators. At September 30, 2022, approximately 78.4% 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. Consumer loans that have been placed on nonaccrual but have not otherwise been assigned a risk rating are believed by management to share risk characteristics with loans rated substandard-nonaccrual and have been presented as such in Pinnacle Financial's risk rating disclosures.

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 every risk rated loan of $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 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 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.

•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.

(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 $59.3 million at September 30, 2022, compared to $109.6 million at December 31, 2021.


September 30, 2022	30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total loans
Commercial real estate:
Owner occupied	$	642	$	355	$	1,725	$	2,722	$	3,423,549	$	3,426,271
Non-owner occupied	307		632		1,244		2,183		6,162,798		6,164,981
Consumer real estate – mortgage	1,281		11,209		8,737		21,227		4,250,686		4,271,913
Construction and land development	67		—		—		67		3,548,903		3,548,970
Commercial and industrial	8,264		3,503		6,934		18,701		9,730,293		9,748,994
Consumer and other	2,965		1,629		785		5,379		545,186		550,565
Total	$	13,526	$	17,328	$	19,425	$	50,279	$	27,661,415	$	27,711,694

December 31, 2021
Commercial real estate:
Owner occupied	$	727	$	—	$	2,426	$	3,153	$	3,045,669	$	3,048,822
Non-owner occupied	1,434		—		645		2,079		5,219,625		5,221,704
Consumer real estate – mortgage	8,710		122		4,450		13,282		3,667,402		3,680,684
Construction and land development	61		—		127		188		2,902,829		2,903,017
Commercial and industrial	4,926		2,677		7,311		14,914		8,059,632		8,074,546
Consumer and other	1,715		568		372		2,655		482,834		485,489
Total	$	17,573	$	3,367	$	15,331	$	36,271	$	23,377,991	$	23,414,262

The following table details the changes in the allowance for credit losses for the three and nine months ended September 30, 2022 and 2021, respectively, by loan classification (in thousands):


	Commercial real estate - Owner occupied		Commercial real estate - Non-owner occupied		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
Three months ended September 30, 2022:
Balance at June 30, 2022	$	19,609	$	52,547	$	33,883	$	28,681	$	125,772	$	11,991	$	272,483
Charged-off loans	(447)		(99)		(155)		—		(13,029)		(3,969)		(17,699)
Recovery of previously charged-off loans	1,039		—		426		15		2,869		2,367		6,716
Provision for credit losses on loans	(132)		(1,884)		1,311		(75)		24,673		2,695		26,588
Balance at September 30, 2022	$	20,069	$	50,564	$	35,465	$	28,621	$	140,285	$	13,084	$	288,088

Three months ended September 30, 2021:
Balance at June 30, 2021	$	19,311	$	79,081	$	30,445	$	33,487	$	102,101	$	9,322	$	273,747
Charged-off loans	(543)		(201)		(94)		—		(10,167)		(1,284)		(12,289)
Recovery of previously charged-off loans	80		326		777		32		997		796		3,008
Provision for credit losses on loans	411		(5,180)		(103)		(659)		8,485		1,215		4,169
Balance at September 30, 2021	$	19,259	$	74,026	$	31,025	$	32,860	$	101,416	$	10,049	$	268,635


	Commercial real estate - Owner occupied		Commercial real estate - Non-owner occupied		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
Nine months ended September 30, 2022:
Balance at December 31, 2021	$	19,618	$	58,504	$	32,104	$	29,429	$	112,340	$	11,238	$	263,233
Charged-off loans	(1,412)		(284)		(409)		(150)		(22,684)		(8,445)		(33,384)
Recovery of previously charged-off loans	1,373		247		1,298		164		10,393		5,091		18,566
Provision for credit losses on loans	490		(7,903)		2,472		(822)		40,236		5,200		39,673
Balance at September 30, 2022	$	20,069	$	50,564	$	35,465	$	28,621	$	140,285	$	13,084	$	288,088
Nine months ended September 30, 2021:
Balance at December 31, 2020	$	23,298	$	79,132	$	33,304	$	42,408	$	98,423	$	8,485	$	285,050
Charged-off loans	(1,246)		(672)		(626)		(367)		(32,890)		(3,518)		(39,319)
Recovery of previously charged-off loans	1,158		486		1,690		269		2,848		2,222		8,673
Provision for credit losses on loans	(3,951)		(4,920)		(3,343)		(9,450)		33,035		2,860		14,231
Balance at September 30, 2021	$	19,259	$	74,026	$	31,025	$	32,860	$	101,416	$	10,049	$	268,635

The adequacy of the allowance for credit losses is reviewed by Pinnacle Financial's management on a quarterly basis. 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 historical default and loss experience, current and projected economic conditions, 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, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future 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.

Pinnacle Financial adopted ASU 2016-13 on January 1, 2020, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset. Under the CECL methodology the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis.

For commercial real estate, consumer real estate, construction and land development, and commercial and industrial loans, Pinnacle Financial primarily utilizes a probability of default and loss given default modeling approach. These models utilize historical correlations between default experience and certain macroeconomic factors as determined through a statistical regression analysis. All loan segments modeled using this approach consider changes in the national unemployment rate. In addition to the national unemployment rate, GDP and the three month treasury rate are considered for owner occupied commercial real estate, the commercial real estate price index and the five year treasury rate are considered for construction loans, and the three month treasury rate is considered for commercial and industrial loans. For the consumer and other loan segment, a non-statistical approach based on historical charge off rates is utilized.

Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by Pinnacle Financial and are dependent on the current economic environment among other factors. A reasonable and supportable period of 24 months was utilized for all loan segments at September 30, 2022 and December 31, 2021, followed by a 12 month straight line reversion to long term averages at each measurement date.

The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. These adjustments are based upon quarterly trend assessments in portfolio concentrations, policy exceptions, associate retention, independent loan review results, collateral considerations, risk ratings, competition and peer group credit quality trends. 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.

Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. Individual evaluations are generally performed for loans greater than $1.0 million which have experienced significant credit deterioration. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, as of September 30, 2022 and December 31, 2021 (in thousands):


	Real Estate		Business Assets		Other		Total
September 30, 2022
Commercial real estate:
Owner occupied	$	4,778	$	—	$	—	$	4,778
Non-owner occupied	3,773		—		—		3,773
Consumer real estate – mortgage	19,835		—		—		19,835
Construction and land development	879		—		—		879
Commercial and industrial	—		20,385		—		20,385
Consumer and other	—		—		—		—
Total	$	29,265	$	20,385	$	—	$	49,650
December 31, 2021
Commercial real estate:
Owner occupied	$	5,300	$	—	$	—	$	5,300
Non-owner occupied	5,631		—		—		5,631
Consumer real estate – mortgage	16,392		—		—		16,392
Construction and land development	1,208		—		—		1,208
Commercial and industrial	—		6,976		206		7,182
Consumer and other	—		—		—		—
Total	$	28,531	$	6,976	$	206	$	35,713

The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at September 30, 2022 and December 31, 2021. Also presented is the balance of loans on nonaccrual status at September 30, 2022 for which there was no related allowance for credit losses recorded (in thousands):


	September 30, 2022						December 31, 2021
	Total nonaccrual loans		Nonaccrual loans with no allowance for credit losses		Loans past due 90 or more days and still accruing		Total nonaccrual loans		Nonaccrual loans with no allowance for credit losses		Loans past due 90 or more days and still accruing
Commercial real estate:
Owner occupied	$	2,417	$	—	$	—	$	2,694	$	—	$	—
Non-owner occupied	1,244		1,040		—		1,404		—		—
Consumer real estate – mortgage	14,691		—		—		10,264		—		144
Construction and land development	103		—		—		356		—		—
Commercial and industrial	15,660		231		5,973		16,849		13,188		1,091
Consumer and other	—		—		784		2		—		372
Total	$	34,115	$	1,271	$	6,757	$	31,569	$	13,188	$	1,607

Pinnacle Financial's policy is 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 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 three and nine months ended September 30, 2022 and 2021, respectively. Had these loans been on accruing status, an additional $240,000 and $864,000 of interest income would have been recognized for the three and nine months ended September 30, 2022 compared to an additional $689,000 and $2.1 million for the three and nine months ended September 30, 2021, respectively. Approximately $18.4 million and $15.5 million of nonaccrual loans were performing pursuant to their contractual terms as of September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022 and December 31, 2021, there were $2.2 million and $2.4 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.

There were no troubled debt restructurings made during the three and nine months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022 and 2021, there were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring.

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, 2022 with the comparative exposures for December 31, 2021 (in thousands):


	September 30, 2022
	Outstanding Principal Balances		Unfunded Commitments		Total exposure		Total Exposure at December 31, 2021
Lessors of nonresidential buildings	$	4,737,130	$	2,133,341	$	6,870,471	$	5,368,638
Lessors of residential buildings	1,678,815		1,804,455		3,483,270		2,566,352

New housing for-sale builders	724,818		1,108,631		1,833,449		1,534,789

Among other data, 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, 2022 and December 31, 2021, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were 85.4% and 79.1%, 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 244.0% and 234.1% as of September 30, 2022 and December 31, 2021, 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. At September 30, 2022, 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 below the 100% and 300% thresholds.

At September 30, 2022, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $46.9 million to current directors, executive officers, and their related interests, of which $42.5 million had been drawn upon. At December 31, 2021, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $45.2 million to directors, executive officers, and their related interests, of which approximately $14.5 million had been drawn upon. All loans to directors, executive officers, and their related interests were performing in accordance with contractual terms at September 30, 2022 and December 31, 2021.

At September 30, 2022, Pinnacle Financial had approximately $15.4 million in commercial loans held for sale compared to $17.7 million at December 31, 2021, 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.

At September 30, 2022, Pinnacle Financial had approximately $17.7 million of mortgage loans held-for-sale compared to approximately $30.3 million at December 31, 2021. Total mortgage loan volumes sold during the nine months ended September 30, 2022 were approximately $691.7 million compared to approximately $1.3 billion for the nine months ended September 30, 2021. During the three and nine months ended September 30, 2022, Pinnacle Financial recognized $1.1 million and $7.3 million,

These residential 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 residential 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.