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Derivative Instruments | 6 Months Ended
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Jun. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities Disclosure [Text Block] | Note 9. Derivative Instruments Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship and classification as either a cash flow hedge or fair value hedge for those derivatives which are designated as part of a hedging relationship. Pinnacle Financial's derivative instruments with certain counterparties contain legally enforceable netting that allow multiple transactions to be settled into a single amount. The fair value hedge and interest rate swaps (swaps) assets and liabilities are presented at gross fair value before the application of bilateral collateral and master netting agreements, but after the initial margin posting and daily variation margin payments made with central clearinghouse organizations. Total fair value hedge and swaps assets and liabilities are adjusted to take into consideration the effects of legally enforceable master netting agreements and cash collateral received or paid as of June 30, 2024 and December 31, 2023. The resulting net fair value hedge and swaps asset and liability fair values are included in other assets and other liabilities, respectively, on the consolidated balance sheets. The daily settlement of the derivative exposure does not change or reset the contractual terms of the instrument. Non-hedge derivatives For derivatives not designated as hedges, the gain or loss is recognized in current period earnings. Pinnacle Financial enters into swaps to facilitate customer transactions and meet their financing needs. Upon entering into these instruments to meet customer needs, Pinnacle Financial enters into offsetting positions in order to minimize the risk to Pinnacle Financial. These swaps qualify as derivatives, but are not designated as hedging instruments. The income statement impact of the offsetting positions is limited to changes in the reserve for counterparty credit risk. A summary of Pinnacle Financial's interest rate swaps to facilitate customers' transactions as of June 30, 2024 and December 31, 2023 is included in the following table (in thousands):
|  | June 30, 2024 |  | December 31, 2023
|  | Notional Amount |  | Estimated Fair Value (1) |  | Notional Amount |  | Estimated Fair Value (1)
Interest rate swap agreements: |  |  |  |  |  |  |  |
Assets |  | $ | 2,284,745 |  |  | $ | 80,907 |  |  | $ | 2,037,740 |  |  | $ | 66,462 |
Liabilities |  | 2,284,745 |  |  | (81,837) |  |  | 2,037,740 |  |  | (67,206) |
Total |  | $ | 4,569,490 |  |  | $ | (930) |  |  | $ | 4,075,480 |  |  | $ | (744) |
(1) The variation margin payments for derivatives cleared through central clearing houses are characterized as settlements. At June 30, 2024 and December 31, 2023, there were no interest rate swap agreements designated as non-hedge derivatives cleared through clearing houses. The effects of Pinnacle Financial's interest rate swaps to facilitate customers' transactions on the income statement during the three and six months ended June 30, 2024 and 2023 were as follows (in thousands):
|  |  | Amount of Loss Recognized in Income
| Location of Loss Recognized in Income |  | Three Months Ended June 30, |  |  |  | Six Months Ended June 30,
|  | 2024 |  | 2023 |  |  |  |  |  | 2024 |  | 2023
Interest rate swap agreements | Other noninterest income |  | $ | (13) |  |  | $ | (519) |  |  |  |  |  |  | $ | (191) |  |  | $ | (582) |
On June 28, 2024, Pinnacle Financial executed a credit default swap (CDS) with a counterparty with a notional amount of $86.5 million. The CDS notional amount is equal to 5% of a reference pool of $1.7 billion in first lien consumer real estate - mortgage loans whereby the counterparty will assume the first loss position for these loans up to approximately $86.5 million in aggregate losses. Pinnacle Financial will pay to the counterparty an annual loss protection fee equal to 7.95% of the corresponding notional amount of the CDS for as long as the loans in the reference pool remain outstanding. The notional amount of the CDS will decline over time as the loans in the reference portfolio are paid down, mature or the counterparty absorbs the first loss portion of losses on those loans. The CDS qualifies as a derivative, but is not designated as a hedging instrument. Changes in the fair value of the CDS will be recognized as a gain or loss in current period earnings in other noninterest income. Derivatives designated as cash flow hedges For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income (loss), net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. Pinnacle Financial uses forward cash flow hedge relationships in an effort to manage future interest rate exposure. A summary of the cash flow hedge relationships as of June 30, 2024 and December 31, 2023 is as follows (in thousands):
|  |  |  |  | June 30, 2024 |  | December 31, 2023
| Balance Sheet Location | Weighted Average Remaining Maturity (In Years) | Receive Rate | Pay Rate | Notional Amount | Estimated Fair Value |  | Notional Amount | Estimated Fair Value
Asset derivatives |  |  |  |  |  |  |  |  |
Interest rate floor - loans | Other assets | 3.34 | 4.00%-4.50% minus USD-Term SOFR 1M | N/A | $ | 875,000 |  | $ | 18,387 |  |  | $ | 875,000 |  | $ | 36,483 |
Interest rate collars - loans | Other assets | 3.34 | 4.25%-4.75% minus USD-Term SOFR 1M | USD-Term SOFR 1M minus 6.75%-7.00% | 875,000 |  | 19,226 |  |  | 875,000 |  | 38,314 |
|  |  |  |  | $ | 1,750,000 |  | $ | 37,613 |  |  | $ | 1,750,000 |  | $ | 74,797 |
The effects of Pinnacle Financial's cash flow hedge relationships on the statement of comprehensive income (loss) during the three and six months ended June 30, 2024 and 2023 were as follows, net of tax (in thousands):
| Amount of Loss Recognized in Other Comprehensive Income (Loss)
| Three Months Ended June 30, |  | Six Months Ended June 30,
Asset derivatives | 2024 |  | 2023 |  | 2024 |  | 2023
Interest rate floors and collars - loans | $ | (3,497) |  |  | $ | (23,339) |  |  | $ | (23,143) |  |  | $ | (11,361) |
The cash flow hedges were determined to be highly effective during the periods presented and as a result qualify for hedge accounting treatment. If a hedge was deemed to be ineffective, the amount included in accumulated other comprehensive income (loss) would be reclassified into a line item within the statement of income that impacts operating results. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or Pinnacle Financial discontinues hedge accounting. Gains on cash flow hedges totaling $2.5 million and $4.9 million, net of tax, were reclassified from accumulated other comprehensive income (loss) into net income during the three and six months ended June 30, 2024, respectively, compared to $2.3 million and $4.7 million, net of tax, during the three and six months ended June 30, 2023, respectively. Approximately $4.1 million in unrealized gains, net of tax, are expected to be reclassified from accumulated other comprehensive income (loss) into net income over the next twelve months related to previously terminated cash flow hedges. Derivatives designated as fair value hedges For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. Pinnacle Financial utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable available-for-sale securities. The hedging strategy converts the fixed interest rates to variable interest rates based on federal funds rates or SOFR. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. Pinnacle Financial also utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on FHLB advances with payments beginning on various dates throughout 2024 and the first quarter of 2025. A summary of Pinnacle Financial's fair value hedge relationships as of June 30, 2024 and December 31, 2023 is as follows (in thousands):
|  |  |  |  |  |  |  |  |  | June 30, 2024 |  | December 31, 2023
|  | Balance Sheet Location |  | Weighted Average Remaining Maturity (In Years) |  | Weighted Average Pay Rate |  | Receive Rate |  | Notional Amount |  | Estimated Fair Value (1) |  | Notional Amount |  | Estimated Fair Value (1)
Asset derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - securities |  | Other assets |  | 11.78 |  | 3.12% |  | Federal Funds/ SOFR |  | $ | 2,834,186 |  |  | $ | 78,616 |  |  | $ | 543,061 |  |  | $ | 42,983 |
Interest rate swaps - borrowings |  | Other assets |  | N/A |  | N/A |  | N/A |  | — |  |  | — |  |  | 750,000 |  |  | 3,654 |
Liability derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - securities |  | Other liabilities |  | N/A |  | N/A |  | N/A |  | $ | — |  |  | $ | — |  |  | $ | 1,569,078 |  |  | $ | (1,275) |
Interest rate swaps - borrowings |  | Other liabilities |  | 3.23 |  | SOFR |  | 3.52% |  | 1,175,000 |  |  | (29,684) |  |  | 425,000 |  |  | (1,656) |
|  |  |  |  |  |  |  |  |  | $ | 4,009,186 |  |  | $ | 48,932 |  |  | $ | 3,287,139 |  |  | $ | 43,706 |
(1) The variation margin payments for derivatives cleared through central clearing houses are characterized as settlements. At June 30, 2024 and December 31, 2023, the notional amount of fair value derivatives cleared through central clearing houses was $2.7 billion and $2.0 billion with a fair value that approximates zero due to $46.8 million and $4.0 million in variation margin payments. Notional amounts of $363.9 million as of June 30, 2024 receive a variable rate of interest based on the daily compounded federal funds rate and notional amounts totaling $3.6 billion as of June 30, 2024 receive a variable rate of interest based on the daily compounded SOFR. The effects of Pinnacle Financial's fair value hedge relationships on the income statement during the three and six months ended June 30, 2024 and 2023 were as follows (in thousands):
| Location of Gain (Loss) |  | Amount of Gain (Loss) Recognized in Income
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
Securities |  | 2024 |  | 2023 |  | 2024 |  | 2023
Interest rate swaps - securities | Interest income on securities |  | $ | 10,096 |  |  | $ | 33,510 |  |  | $ | 36,908 |  |  | $ | 1,825 |
Securities available-for-sale | Interest income on securities |  | $ | (10,096) |  |  | $ | (33,510) |  |  | $ | (36,908) |  |  | $ | (1,825) |
FHLB advances |  |  |  |  |  |  |  |  |
Interest rate swaps - FHLB advances | Interest expense on FHLB advances and other borrowings |  | $ | (5,721) |  |  | $ | (15,780) |  |  | $ | (31,682) |  |  | $ | (13,897) |
FHLB advances | Interest expense on FHLB advances and other borrowings |  | $ | 5,721 |  |  | $ | 15,780 |  |  | $ | 31,682 |  |  | $ | 13,897 |
The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at June 30, 2024 and December 31, 2023 (in thousands):
| Carrying Amount of the Hedged Assets/Liabilities |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/Liabilities
| June 30, 2024 |  | December 31, 2023 |  | June 30, 2024 |  | December 31, 2023
Line item on the balance sheet |  |  |  |  |  |  |
Securities available-for-sale | $ | 2,777,707 |  |  | $ | 2,074,621 |  |  | $ | (78,616) |  |  | $ | (41,708) |
Federal Home Loan Bank advances | $ | 1,145,316 |  |  | $ | 1,173,002 |  |  | $ | (29,684) |  |  | $ | (1,998) |
During the three and six months ended June 30, 2024, amortization expense totaling $93,000 and $197,000, respectively, related to previously terminated fair value hedges was recognized as a reduction to interest income on loans compared to $168,000 and $378,000, respectively, for the three and six months ended June 30, 2023. In April 2022, interest rates swaps designated as fair value hedges with notional amounts totaling $164.3 million and market values totaling $14.3 million were terminated. Approximately $986,000 in gains were recognized at the time of termination and the remaining $5.9 million at June 30, 2024 will be accreted as additional interest income on the previously hedged available-for-sale mortgage backed and municipal securities over the same period as existing purchase discounts or premiums on these securities.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
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