Premises and Equipment and Lease Commitments

6 Months Ended

Jun. 30, 2023

Premises and Equipment and Lease Commitments [Abstract]

Premises and Equipment and Lease Commitments

Note 5. Premises and Equipment and Lease Commitments

Premises and equipment at June 30, 2023 and December 31, 2022 are summarized as follows (in thousands):


	Range of Useful Lives			June 30, 2023		December 31, 2022
Land	Not applicable			$	31,598	$	71,741
Buildings	15 years	-	30 years	100,874		206,434
Leasehold improvements	15 years	-	20 years	67,065		62,209
Furniture and equipment	3 years	-	20 years	173,863		144,979
				373,400		485,363
Less: accumulated depreciation and amortization				128,547		157,478
				$	244,853	$	327,885

Depreciation and amortization expense was $7.5 million and $14.8 million, respectively, for the three and six months ended and June 30, 2023 compared to $6.4 million and $12.4 million, respectively, for the three and six months ended June 30, 2022.

Pinnacle Financial has entered into various operating leases, primarily for office space and branch facilities. The leases are classified as operating or finance leases at commencement. Right-of-use assets representing the right to use the underlying asset and lease liabilities representing the obligation to make future lease payments are recognized on the balance sheet within other assets and other liabilities. These assets and liabilities are estimated based on the present value of future lease payments discounted using Pinnacle Financial's incremental secured borrowing rates as of the commencement date of the lease. Certain lease agreements contain renewal options which are considered in the determination of the lease term if they are deemed reasonably certain to be exercised. Pinnacle Financial has elected not to recognize leases with an original term of less than 12 months on the balance sheet.

During the second quarter of 2023, Pinnacle Bank consummated a sale-leaseback transaction pursuant to which it sold a combined 49 properties to two unaffiliated entities, PNB TN Portfolio Owner LLC and PNB Portfolio Owner, LLC (each, a "Purchaser" and collectively, the "Purchasers"), each of whom is an affiliate of Oak Street Real Estate Capital, for an aggregate cash purchase price of $198.2 million and concurrently agreed to separately lease each of those properties for an initial term of 14.5 years, with two five (5) year renewal options that the Bank may exercise to extend the term of any of the leases. The pre-tax, net gain recorded associated with the sale of these 49 properties was $85.7 million, after deducting transaction-related expenses. The aggregate annual lease expense associated with these properties will be approximately $17.0 million for the first twelve months of the lease term, with each lease including a 1.9% annual rent escalation during the initial term, and a 2.0% annual rent escalation during each of the two five-year renewal terms, if exercised. The proceeds of this sale-leaseback transaction are expected to be initially retained in Pinnacle Bank's cash accounts at the Federal Reserve.

Right-of-use assets and lease liabilities relating to Pinnacle Financial's operating and finance leases are as follows at June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
Right-of-use assets:
Operating leases	$	236,689	$	126,767
Finance leases	1,205		1,318
Total right-of-use assets	$	237,894	$	128,085
Lease liabilities:
Operating leases	$	243,906	$	133,108
Finance leases	2,309		2,458
Total lease liabilities	$	246,215	$	135,566

The total lease cost related to operating leases and short term leases is recognized on a straight-line basis over the lease term. For finance leases, right-of-use assets are amortized on a straight-line basis over the lease term and interest imputed on the lease liability is recognized using the effective interest method. The components of Pinnacle Financial's total lease cost were as follows for the three and six months ended June 30, 2023 and 2022 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost	$	6,997	$	4,086	$	11,731	$	8,073
Short-term lease cost	89		98		174		211
Finance lease cost:
Interest on lease liabilities	42		48		86		96
Amortization of right-of-use asset	56		56		113		112
Sublease income	(323)		(337)		(666)		(660)
Net lease cost	$	6,861	$	3,951	$	11,438	$	7,832

The weighted average remaining lease term and weighted average discount rate for operating and finance leases at June 30, 2023 and December 31, 2022 are as follows:


	June 30, 2023		December 31, 2022
Weighted average remaining lease term
Operating leases	11.87 years		10.44 years
Finance leases	5.34 years		5.84 years
Weighted average discount rate
Operating leases	4.04	%	3.11	%
Finance leases	7.22	%	7.22	%

Cash flows related to operating and finance leases during the three and six months ended June 30, 2023 and 2022 were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Operating cash flows related to operating leases	$	6,399	$	3,835	$	10,858	$	7,669
Operating cash flows related to finance leases	42		48		86		96
Financing cash flows related to finance leases	74		70		149		139

Future undiscounted lease payments for operating and finance leases with initial terms of more than 12 months are as follows at June 30, 2023 (in thousands):


	Operating Leases		Finance Leases
2023	$	15,014	$	244
2024	30,478		527
2025	28,159		527
2026	25,724		527
2027	24,540		527
Thereafter	189,769		439
Total undiscounted lease payments	313,684		2,791
Less: imputed interest	(69,778)		(482)
Net lease liabilities	$	243,906	$	2,309