XML 29 R16.htm IDEA: XBRL DOCUMENT v3.25.3
Derivative Instruments
 9 Months Ended
Sep. 30, 2025
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 clearing house 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 September 30, 2025 and December 31, 2024. 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 September 30, 2025 and December 31, 2024 is included in the following table (in thousands):

 September 30, 2025December 31, 2024
 Notional
Amount
Estimated Fair Value (1)
Notional
Amount
Estimated Fair Value (1)
Interest rate swap agreements:    
Assets$3,084,905 $43,224 $2,633,014 $62,494 
Liabilities3,084,905 (43,725)2,633,014 (63,225)
Total$6,169,810 $(501)$5,266,028 $(731)

(1) The variation margin payments for derivatives cleared through central clearing houses are characterized as settlements. At September 30, 2025 and December 31, 2024, 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 nine months ended September 30, 2025 and 2024 were as follows (in thousands):
Amount of Gain (Loss) Recognized in Income
Location of Gain (Loss) Recognized in IncomeThree Months Ended September 30,Nine Months Ended September 30,
2025202420252024
Interest rate swap agreementsOther noninterest income$(9)$414 $222 $223 

On June 28, 2024, Pinnacle Financial executed a credit default swap (CDS) with a counterparty with a notional amount of $86.5 million. At the execution date, the CDS notional amount was equal to 5% of a reference pool of $1.7 billion in first lien consumer real estate - mortgage loans whereby the counterparty assumed the first loss position for these loans up to approximately $86.5 million in aggregate losses. Pinnacle Financial pays 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 are recognized as a gain or loss in current period earnings in other noninterest income. A summary of Pinnacle Financial's CDS as of September 30, 2025 and December 31, 2024 is included in the following table (in thousands):

 September 30, 2025December 31, 2024
 Notional
Amount		Estimated Fair ValueNotional
Amount		Estimated Fair Value
Credit default swap$75,914 $(55)$81,993 $185 

The effects of Pinnacle Financial's CDS on the income statement during the three and nine months ended September 30, 2025 and 2024 were as follows (in thousands):
Amount of Gain (Loss) Recognized in Income
Location of Gain (Loss) Recognized in IncomeThree months ended September 30,Nine months ended September 30,
2025202420252024
Credit default swapOther noninterest income$155 $(137)$(240)$(137)

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. During the nine months ended September 30, 2025, Pinnacle Financial paid $31.2 million to purchase interest rate floors with notional amounts of $3.3 billion to mitigate the impact of changing interest rates on SOFR-based variable rate loans. The floors have effective start dates ranging from the third quarter of 2026 to the first quarter of 2027. Pinnacle Financial also paid $35.4 million during the nine
months ended September 30, 2025 to purchase interest rate caps with notional amounts totaling $3.8 billion to mitigate the impact of changing deposits rates on federal funds-based deposit accounts. The caps have effective start dates ranging from the first quarter of 2026 to the third quarter of 2026. A summary of the cash flow hedge relationships as of September 30, 2025 and December 31, 2024 is as follows (in thousands):
September 30, 2025December 31, 2024
Balance Sheet LocationWeighted Average Remaining Maturity (In Years)Receive RatePay RateNotional AmountEstimated Fair ValueNotional AmountEstimated Fair Value
Asset derivatives
Interest rate floors - loansOther assets3.922.00%-4.50% minus USD-Term SOFR 1MN/A$4,125,000 $40,970 $875,000 $15,566 
Interest rate collars - loansOther assets2.094.25%-4.75% minus USD-Term SOFR 1MUSD-Term SOFR 1M minus 6.75%-7.00%875,000 20,742 875,000 17,252 
Interest rate caps - depositsOther assets3.00N/A3.25%-4.00% minus USD-Federal Funds3,750,000 21,789 — — 
$8,750,000 $83,501 $1,750,000 $32,818 

The effects of Pinnacle Financial's cash flow hedge relationships on the statement of comprehensive income (loss) during the three and nine months ended September 30, 2025 and 2024 were as follows, net of tax (in thousands):
Amount of Gain (Loss) Recognized
in Other Comprehensive Income (Loss)
Three Months Ended September 30,Nine Months Ended September 30,
Asset derivatives2025202420252024
Interest rate floors, collars and caps$(9,970)$24,430 $229 $1,287 

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. No gains on cash flow hedges were reclassified from accumulated other comprehensive income (loss) into net income during the three and nine months ended September 30, 2025 compared to $2.4 million and $7.4 million, respectively, net of tax during the three and nine months ended September 30, 2024. There are no further amounts to be reclassified from accumulated other comprehensive income (loss) into net income 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 Federal Home Loan Bank of Cincinnati (FHLB) advances. During the third quarter of 2024, Pinnacle Financial entered into a portfolio layer method fair value hedge with a notional amount of $300 million. Under the portfolio layer method, the hedged item is designated as a hedged layer of a closed portfolio of available-for-sale securities that is anticipated to remain outstanding throughout the hedge period ending September 1, 2026.
A summary of Pinnacle Financial's fair value hedge relationships as of September 30, 2025 and December 31, 2024 is as follows (in thousands):
September 30, 2025December 31, 2024
Balance Sheet LocationWeighted Average Remaining Maturity (In Years)Weighted Average Pay RateReceive RateNotional Amount
Estimated Fair Value (1)
Notional Amount
Estimated Fair Value (1)
Asset derivatives
Interest rate swaps - securitiesOther assets10.023.37%Federal Funds/ SOFR$3,186,471 $43,663 $3,198,426 $67,064 
Liability derivatives
Interest rate swaps - borrowingsOther liabilities1.98SOFR3.44%1,175,000 (2,544)1,175,000 (21,428)
$4,361,471 $41,119 $4,373,426 $45,636 

(1) The variation margin payments for derivatives cleared through central clearing houses are characterized as settlements. At September 30, 2025 and December 31, 2024, the notional amount of fair value derivatives cleared through central clearing houses was $3.1 billion and $3.0 billion, respectively, with a fair value that approximates zero due to $22.8 million and $72.7 million in variation margin payments.

Notional amounts of $202.4 million as of September 30, 2025 receive a variable rate of interest based on the daily compounded federal funds rate and notional amounts totaling $4.2 billion as of September 30, 2025 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 nine months ended September 30, 2025 and 2024 were as follows (in thousands):
Location of Gain (Loss)Amount of Gain (Loss) Recognized in Income
Three Months Ended September 30,Nine Months Ended September 30,
Securities2025202420252024
Interest rate swaps - securitiesInterest income on securities$(2,060)$(59,423)$(23,401)$(22,515)
Securities available-for-saleInterest income on securities$2,060 $59,423 $23,401 $22,515 
FHLB advances
Interest rate swaps - FHLB advancesInterest expense on FHLB advances and other borrowings$1,560 $30,679 $18,884 $(1,003)
FHLB advancesInterest expense on FHLB advances and other borrowings$(1,560)$(30,679)$(18,884)$1,003 

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at September 30, 2025 and December 31, 2024 (in thousands):
Carrying Amount of the Hedged Assets/LiabilitiesCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/Liabilities
September 30, 2025December 31, 2024September 30, 2025December 31, 2024
Line item on the balance sheet
Securities available-for-sale$3,798,677 $3,905,016 $(43,663)$(67,064)
Federal Home Loan Bank advances$1,172,456 $1,196,428 $(2,544)$(21,428)

During the three and nine months ended September 30, 2025, amortization expense totaling $41,000 and $144,000, respectively, related to previously terminated fair value hedges was recognized as a reduction to interest income on loans compared to $67,000 and $264,000, respectively, for the three and nine months ended September 30, 2024.
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 $4.8 million of gains at September 30, 2025 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.