SEC Info - Pinnacle Financial Partners Inc.

Report of Independent Registered Public Accounting Firm

Stockholders and the Board of Directors of

Pinnacle Financial Partners, Inc.

Nashville, Tennessee

Opinion on Internal Control over Financial Reporting

We have audited Pinnacle Financial Partners, Inc.’s and subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements") and our report dated February 28, 2022 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Crowe LLP

Denver, Colorado

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	(in thousands)
	December 31,
ASSETS	2021		2020
Cash and noninterest-bearing due from banks	$	i 188,287	$	i 203,296
Restricted cash	i 82,505		i 223,788
Interest-bearing due from banks	i 3,830,747		i 3,522,224
Federal funds sold and other	i —		i 12,141
Cash and cash equivalents	i 4,101,539		i 3,961,449

Securities purchased under agreements to resell	i 1,000,000		i —
Securities available-for-sale, at fair value	i 4,914,194		i 3,586,681
Securities held-to-maturity (fair value of $1.2 billion and $1.1 billion, net of allowance for credit losses of $161,000 and $191,000 at Dec. 31, 2021, and at Dec. 31, 2020, respectively)	i 1,155,958		i 1,028,359
Consumer loans held-for-sale	i 45,806		i 87,821
Commercial loans held-for-sale	i 17,685		i 31,200

Loans	i 23,414,262		i 22,424,501
Less allowance for credit losses	( i 263,233)		( i 285,050)
Loans, net	i 23,151,029		i 22,139,451

Premises and equipment, net	i 288,182		i 290,001
Equity method investment	i 360,833		i 308,556
Accrued interest receivable	i 98,813		i 104,078
Goodwill	i 1,819,811		i 1,819,811
Core deposits and other intangible assets	i 33,819		i 42,336
Other real estate owned	i 8,537		i 12,360
Other assets	i 1,473,193		i 1,520,757
Total assets	$	i 38,469,399	$	i 34,932,860

Deposits:
Non-interest-bearing	$	i 10,461,071	$	i 7,392,325
Interest-bearing	i 6,530,015		i 5,689,095
Savings and money market accounts	i 12,179,663		i 11,099,523
Time	i 2,133,784		i 3,524,632
Total deposits	i 31,304,533		i 27,705,575
Securities sold under agreements to repurchase	i 152,559		i 128,164
Federal Home Loan Bank advances	i 888,681		i 1,087,927
Subordinated debt and other borrowings	i 423,172		i 670,575
Accrued interest payable	i 12,504		i 24,934
Other liabilities	i 377,343		i 411,074
Total liabilities	i 33,158,792		i 30,028,249
Stockholders' equity:
Preferred stock, no par value; 10.0 million shares authorized; 225,000 shares non-cumulative perpetual preferred stock, Series B, liquidation preference $225.0 million, issued and outstanding at Dec. 31, 2021 and 2020, respectively	i 217,126		i 217,126
Common stock, par value $1.00; 180.0 million shares authorized; 76.1 million and 75.9 million shares issued and outstanding at Dec. 31, 2021 and 2020, respectively	i 76,143		i 75,850
Additional paid-in capital	i 3,045,802		i 3,028,063
Retained earnings	i 1,864,350		i 1,407,723
Accumulated other comprehensive income, net of taxes	i 107,186		i 175,849
Total stockholders' equity	i 5,310,607		i 4,904,611
Total liabilities and stockholders' equity	$	i 38,469,399	$	i 34,932,860

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share information)

For the years ended December 31,

2021

2020

2019

Interest income:

Loans, including fees

i 924,043

i 919,744

i 955,388

Securities:

Taxable

i 34,769

i 35,663

i 46,649

Tax-exempt

i 64,848

i 58,867

i 51,138

Federal funds sold and other

i 7,554

i 6,768

i 14,761

Total interest income

i 1,031,214

i 1,021,042

i 1,067,936

Interest expense:

Deposits

i 54,116

i 135,547

i 231,641

Securities sold under agreements to repurchase

i 239

i 350

i 570

Federal Home Loan Bank advances and other borrowings

i 44,458

i 63,357

i 69,583

Total interest expense

i 98,813

i 199,254

i 301,794

Net interest income

i 932,401

i 821,788

i 766,142

Provision for credit losses

i 16,126

i 203,815

i 27,283

Net interest income after provision for credit losses

i 916,275

i 617,973

i 738,859

Noninterest income:

Service charges on deposit accounts

i 41,311

i 34,282

i 36,769

Investment services

i 37,917

i 29,537

i 24,187

Insurance sales commissions

i 10,516

i 10,055

i 9,344

Gains on mortgage loans sold, net

i 32,424

i 60,042

i 24,335

Investment gains (losses) on sales, net

i 759

i 986

( i 5,941)

Trust fees

i 20,724

i 16,496

i 14,184

Income from equity method investment

i 122,274

i 83,539

i 90,111

Other noninterest income

i 129,809

i 82,903

i 70,837

Total noninterest income

i 395,734

i 317,840

i 263,826

Noninterest expense:

Salaries and employee benefits

i 436,006

i 334,483

i 313,359

Equipment and occupancy

i 95,250

i 88,475

i 84,582

Other real estate (benefit) expense, net

( i 712)

i 8,555

i 4,228

Marketing and other business development

i 12,888

i 10,693

i 13,251

Postage and supplies

i 8,195

i 7,819

i 8,144

Amortization of intangibles

i 8,518

i 9,793

i 9,908

Other noninterest expense

i 99,959

i 104,637

i 71,676

Total noninterest expense

i 660,104

i 564,455

i 505,148

Income before income taxes

i 651,905

i 371,358

i 497,537

Income tax expense

i 124,582

i 59,037

i 96,656

Net income

i 527,323

i 312,321

i 400,881

Preferred stock dividends

i 15,192

i 7,596

i —

Net income available to common shareholders

i 512,131

i 304,725

i 400,881

Per share information:

Basic net income per common share

i 6.79

i 4.04

i 5.25

Diluted net income per common share

i 6.75

i 4.03

i 5.22

Weighted average common shares outstanding:

Basic

i 75,468,339

i 75,376,489

i 76,364,303

Diluted

i 75,927,147

i 75,654,385

i 76,763,903

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year Ended December 31,

2021

2020

2019

Net income:

i 527,323

i 312,321

i 400,881

Other comprehensive income (loss), net of tax:

Changes in fair value on available-for-sale securities, net of tax

( i 32,509)

i 92,829

i 81,658

Changes in fair value of cash flow hedges, net of tax

( i 18,373)

i 52,798

( i 5,179)

Amortization (accretion) of net unrealized losses (gains) on securities transferred from available-for-sale to held-to-maturity, net of tax

( i 7,575)

( i 5,126)

i 184

Loss (gain) on cash flow hedges reclassified from other comprehensive income into net income, net of tax

( i 9,645)

i 5,542

i 1,588

Net loss (gain) on sale of investment securities reclassified from other comprehensive income into net income, net of tax

( i 561)

( i 728)

i 4,388

Total other comprehensive income (loss), net of tax

( i 68,663)

i 145,315

i 82,639

Total comprehensive income

i 458,660

i 457,636

i 483,520

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except per share information)

For the each of the years in the three-year period ended December 31, 2021

Preferred Stock

Common Stock

Additional
Paid-in
Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Total Stockholders'
Equity

Amount

December 31, 2018

—

i 77,484

i 3,107,431

i 833,130

( i 52,105)

i 3,965,940

Exercise of employee common stock options

—

i 59

i 1,210

—

i 1,269

Repurchase of common stock

—

( i 1,102)

( i 60,314)

—

( i 61,416)

Common dividends paid ($0.64 per share)

—

( i 49,828)

—

( i 49,828)

Issuance of restricted common shares, net of forfeitures

—

i 211

( i 211)

—

i —

Restricted shares withheld for taxes

—

( i 88)

( i 4,875)

—

( i 4,963)

Compensation expense for restricted shares & performance stock units

—

i 21,226

—

i 21,226

Net income

—

i 400,881

—

i 400,881

Other comprehensive income

—

i 82,639

December 31, 2019

—

i 76,564

i 3,064,467

i 1,184,183

i 30,534

i 4,355,748

Issuance of preferred stock, net of issuance costs

i 217,126

—

i 217,126

Exercise of employee common stock options

—

i 18

i 392

—

i 410

Repurchase of common stock

—

( i 1,015)

( i 49,775)

—

( i 50,790)

Preferred dividends paid ($16.88 per share)

—

( i 7,596)

—

( i 7,596)

Common dividends paid ($0.64 per share)

—

( i 49,389)

—

( i 49,389)

Issuance of restricted common shares, net of forfeitures

—

i 255

( i 255)

—

i —

Restricted shares withheld for taxes

—

( i 58)

( i 2,929)

—

( i 2,987)

Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes and related tax benefits

—

i 86

( i 2,574)

—

( i 2,488)

Compensation expense for restricted shares & performance stock units

—

i 18,737

—

i 18,737

Net income

—

i 312,321

—

i 312,321

Cumulative effect of change in accounting principle

—

( i 31,796)

—

( i 31,796)

Other comprehensive income

—

i 145,315

i 217,126

i 75,850

i 3,028,063

i 1,407,723

i 175,849

i 4,904,611

Exercise of employee common stock options

—

i 45

i 956

—

i 1,001

Preferred dividends paid ($16.88 per share)

—

( i 15,192)

—

( i 15,192)

Common dividends paid ($0.72 per share)

—

( i 55,504)

—

( i 55,504)

Issuance of restricted common shares, net of forfeitures

—

i 213

( i 213)

—

i —

Restricted shares withheld for taxes

—

( i 53)

( i 4,078)

—

( i 4,131)

Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes and related tax benefits

—

i 88

( i 3,878)

—

( i 3,790)

Compensation expense for restricted shares & restricted & performance stock units

—

i 24,952

—

i 24,952

Net income

—

i 527,323

—

i 527,323

Other comprehensive loss

—

( i 68,663)

i 217,126

i 76,143

i 3,045,802

i 1,864,350

i 107,186

i 5,310,607

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the years ended December 31,

2021

2020

2019

Operating activities:

Net income

i 527,323

i 312,321

i 400,881

Adjustments to reconcile net income to net cash provided by operating activities:

Net amortization/accretion of premium/discount on securities

i 59,066

i 38,051

i 20,294

Depreciation, amortization and accretion

i 53,256

i 45,203

i 8,342

Provision for credit losses

i 16,126

i 203,815

i 27,283

Gains on mortgage loans sold, net

( i 32,424)

( i 60,042)

( i 24,335)

Investment losses (gains) on sales, net

( i 759)

( i 986)

i 5,941

Gain on other equity investments, net

( i 23,109)

( i 1,071)

( i 2,789)

Stock-based compensation expense

i 24,952

i 18,737

i 21,226

Deferred tax expense (benefit)

( i 12,232)

( i 58,315)

i 14,696

Losses (gains) on disposition of other real estate and other investments

( i 1,168)

i 7,604

i 2,927

Income from equity method investment

( i 122,274)

( i 83,539)

( i 90,111)

Dividends received from equity method investment

i 69,996

i 53,020

i 51,312

Excess tax benefit from stock compensation

( i 2,475)

( i 417)

( i 1,011)

Gains on commercial loans sold, net

( i 4,143)

( i 2,620)

( i 3,624)

Commercial loans held for sale originated

( i 564,647)

( i 407,578)

( i 402,623)

Commercial loans held for sale sold

i 582,305

i 396,584

i 404,615

Consumer loans held for sale originated

( i 2,037,897)

( i 2,122,796)

( i 1,396,968)

Consumer loans held for sale sold

i 2,112,336

i 2,176,836

i 1,373,678

Decrease (increase) in other assets

i 73,527

( i 157,294)

( i 57,499)

Increase (decrease) in other liabilities

( i 60,315)

i 69,241

i 79,264

Net cash provided by operating activities

i 657,444

i 426,754

i 431,499

Investing activities:

Activities in securities available-for-sale:

Purchases

( i 2,107,794)

( i 1,412,210)

( i 1,455,073)

Sales

i 37,457

i 145,631

i 737,717

Maturities, prepayments and calls

i 617,054

i 469,337

i 372,300

Activities in securities held-to-maturity:

Purchases

( i 186,260)

i —

( i 3,822)

Maturities, prepayments and calls

i 40,442

i 20,473

i 8,300

Increase in securities purchased under agreements to resell

( i 1,000,000)

i —

Increase in loans, net

( i 1,027,185)

( i 2,661,316)

( i 1,927,811)

Purchases of premises and equipment and software

( i 23,178)

( i 38,761)

( i 42,153)

Purchase of bank owned life insurance

i —

( i 75,000)

( i 110,000)

Proceeds from bank owned life insurance settlement

i 1,656

i 6,486

i 321

Proceeds from sales of software, premises, and equipment

i 281

i —

i 66

Acquisitions, net of cash acquired

i —

( i 44,594)

Proceeds from sale of other real estate

i 6,090

i 13,272

i 8,446

Proceeds from (payments for) derivative instruments

i 99,710

i 35,680

( i 106,832)

Proceeds from sale of Federal Home Loan Bank stock

i 12,602

i —

Purchase of trade name

i —

( i 1,000)

i —

Increase in other investments

( i 83,830)

( i 70,183)

( i 53,137)

Net cash used in investing activities

( i 3,612,955)

( i 3,567,591)

( i 2,616,272)

Financing activities:

Net increase in deposits

i 3,599,084

i 7,524,867

i 1,332,491

Net increase in securities sold under agreements to repurchase

i 24,395

i 1,810

i 21,613

Federal Home Loan Bank: Advances

i —

i 762,473

i 2,672,500

Federal Home Loan Bank: Repayments/maturities

( i 200,001)

( i 1,737,521)

( i 2,053,555)

Proceeds from subordinated debt and other borrowings, net of issuance costs

i —

i 56,568

i 316,078

Repayment of other borrowings

( i 250,000)

( i 136,661)

( i 184,175)

Principal payments of finance lease obligation

( i 261)

( i 243)

( i 226)

Issuance of preferred stock, net of issuance costs

i —

i 217,126

i —

Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes

( i 3,790)

( i 2,488)

i —

Exercise of common stock options, net of shares surrendered for taxes

( i 3,130)

( i 2,577)

( i 3,694)

Repurchase of common stock

i —

( i 50,790)

( i 61,416)

Common stock dividends paid

( i 55,504)

( i 49,389)

( i 49,828)

Preferred stock dividends paid

( i 15,192)

( i 7,596)

i —

Net cash provided by financing activities

i 3,095,601

i 6,575,579

i 1,989,788

Net increase (decrease) in cash, cash equivalents, and restricted cash

i 140,090

i 3,434,742

( i 194,985)

Cash, cash equivalents and restricted cash, beginning of year

i 3,961,449

i 526,707

i 721,692

Cash, cash equivalents and restricted cash, end of year

i 4,101,539

i 3,961,449

i 526,707

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a financial holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle Bank (Pinnacle Bank). Pinnacle Bank is a Tennessee state-chartered commercial bank headquartered in Nashville, Tennessee. Pinnacle Financial completed its acquisitions of CapitalMark Bank & Trust (CapitalMark), Magna Bank (Magna), Avenue Financial Holdings, Inc. (Avenue), BNC Bancorp (BNC) and Advocate Capital, Inc. (Advocate Capital) on July 31, 2015, September 1, 2015, July 1, 2016, June 16, 2017 and July 2, 2019, respectively. Pinnacle Financial and Pinnacle Bank also collectively hold a i 49% interest in Bankers Healthcare Group, LLC (BHG), a company that primarily serves as a full-service commercial loan provider to healthcare and other professional practices. Pinnacle Bank provides a full range of banking services, including investment, mortgage, and insurance services, and comprehensive wealth management services, in its i 15 primarily urban markets across the Southeast.

i Basis of Presentation — These consolidated financial statements include the accounts of Pinnacle Financial and its direct and indirect wholly-owned subsidiaries. Certain statutory trust affiliates of Pinnacle Financial, as noted in Note 9. Other Borrowings are included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

i Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for credit losses and the determination of any impairment of goodwill or intangible assets.

Impairment — Long-lived assets, including purchased intangible assets subject to amortization, such as core deposit intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. Pinnacle Financial had $ i 33.8 million and $ i 42.3 million of long-lived intangibles at December 31, 2021 and 2020, respectively.

Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. Accounting Standards Codification (ASC) 350, Intangibles - Goodwill and Other, provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity performs a qualitative assessment and determines it is necessary, or if a qualitative assessment is not performed, the entity is required to perform a one-step test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If, based on a qualitative assessment, an entity determines that the fair value of a reporting unit is more than its carrying amount, the one-step goodwill impairment test is not required.

Pinnacle Financial performed a qualitative assessment as of September 30, 2021 by examining changes in macroeconomic conditions, industry and market conditions, overall financial performance, cost factors and other relevant entity-specific events, including changes in the share price of Pinnacle Financial's common stock. The results of the qualitative assessment indicated that it was more likely than not that the estimated fair value of Pinnacle Financial's sole reporting unit exceeded its carrying value amount at September 30, 2021 and, therefore, no goodwill impairment was recorded.

Should Pinnacle Financial's common stock price decline below book value per share and remain below book value per share for an extended duration or other impairment indicators become known, additional impairment testing of goodwill may be required. Should it be determined in a future period that the goodwill has become impaired, then a charge to earnings will be recorded in the period such determination is made. i The following table presents activity for goodwill and other intangible assets (in thousands):

Goodwill

Core deposit and
other intangible assets

Total

Balance at December 31, 2020

i 1,819,811

i 42,336

i 1,862,147

Amortization

—

( i 8,518)

Balance at December 31, 2021

i 1,819,811

i 33,819

i 1,853,630

/ /

i The following table presents the gross carrying amount and accumulated amortization for the core deposit and other intangible assets (in thousands):


	December 31, 2021		December 31, 2020
Gross carrying amount	$	i 108,665	$	i 108,665
Accumulated amortization	( i 74,846)		( i 66,329)
Net book value	$	i 33,819	$	i 42,336

i i

Cash Equivalents and Cash Flows — Cash on hand, cash items in process of collection, amounts due from banks, Federal funds sold, short-term discount notes and securities purchased under agreements to resell, with original maturities within i ninety days, are included in cash and cash equivalents. The following supplemental cash flow information addresses certain cash payments and noncash transactions for each of the years in the three-year period ended December 31, 2021 as follows (in thousands):

For the years ended December 31,

2021

2020

2019

Cash Payments:

Interest

i 110,119

i 215,888

i 287,272

Income taxes paid

i 108,304

i 110,798

i 86,960

Noncash Transactions:

Loans charged-off to the allowance for credit losses

i 54,996

i 49,333

i 28,467

Loans foreclosed upon with repossessions transferred to other real estate

i 1,098

i 3,436

i 17,937

Loans foreclosed upon with repossessions transferred to other repossessed assets

i —

i 25

i 93

Other real estate sales financed

i —

i 871

Fixed assets transferred to other real estate

i —

i 8,182

Available-for-sale securities transferred to held-to-maturity portfolio

i —

i 873,613

i —

Right-of-use assets recognized in the period in exchange for lease obligations(1)

i 17,642

i 15,820

i 90,927

(1) Includes $ i 79.9 million recognized upon initial adoption of ASU 2016-02 on January 1, 2019.

/ /

Securities — Securities are classified based on management's intention on the date of purchase. All debt securities classified as available-for-sale are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income (loss), net of the deferred income tax effects. Securities that Pinnacle Financial has both the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at historical cost and adjusted for amortization of premiums and accretion of discounts.

Interest and dividends on securities, including amortization of premiums and accretion of discounts calculated under the effective interest method, are included in interest income. For certain securities, amortization of premiums and accretion of discounts is computed based on the anticipated life of the security which may be shorter than the stated life of the security. Realized gains and losses from the sale of securities are determined using the specific identification method and are recorded on the trade date of the sale.

i Allowance for Credit Losses - Securities Held-to-Maturity - Expected credit losses on debt securities classified as held-to-maturity are measured on a collective basis by major security type. Pinnacle has a zero loss expectation for certain securities within the portfolio, including U.S government agency securities and residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, and accordingly, no allowance for credit losses is estimated for these securities. The remainder of the portfolio consists of municipal securities rated A or higher by the ratings agencies. The estimates of expected credit losses for the municipal securities are based on historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The credit models utilized rely on regression analyses to predict probability of default (PD) based on projected macroeconomic factors, including unemployment rates and gross domestic product (GDP), among others. A reasonable and supportable period of eighteen months and reversion period of twelve months is utilized to estimate credit losses on held-to-maturity municipal securities. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off.

i Allowance for Credit Losses - Securities Available-for-Sale - 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. If either criteria is met, the security's amortized cost basis is written down to fair value through net income. If neither criteria is met, Pinnacle Financial evaluates whether any portion of the decline in fair value is the result of credit deterioration. 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. If the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded through provisions for credit losses for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income.

i Loans held-for-sale — Loans originated and intended for sale are carried at the lower of cost or estimated fair value as determined on a loan-by-loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Realized gains and losses are recognized when legal title to the loans has been transferred to the purchaser and sales proceeds have been received and are reflected in the accompanying consolidated statement of income in gains on mortgage loans sold, net of related costs such as compensation expenses, for mortgage loans, and as a component of other noninterest income for commercial loans held-for-sale.

Loans — Pinnacle Financial uses the following loan segments for financial reporting purposes: owner occupied commercial real estate mortgage, non-owner occupied commercial real estate, consumer real estate mortgage, construction and land development, commercial and industrial and consumer and other. The appropriate classification is determined based on the underlying collateral utilized to secure each loan. These classifications are consistent with those utilized in the Quarterly Report of Condition and Income filed by Pinnacle Bank with the Federal Deposit Insurance Corporation (FDIC).

Loans are reported at their outstanding principal balances, net of applicable purchase accounting and any deferred fees or costs on originated loans. Interest income on loans is accrued based on the principal balance outstanding. Loan origination fees, net of certain loan origination costs, are deferred and recognized as an adjustment to the related loan yield using a method which approximates the interest method. At December 31, 2021 and 2020, net deferred loan fees of $ i 34.3 million and $ i 53.2 million respectively, were included as a reduction to loans on the accompanying consolidated balance sheets.

As part of our routine credit monitoring process, commercial loans receive risk ratings by the assigned financial advisor and are subject to validation by our independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pinnacle Financial believes that its categories follow those outlined by the FDIC, Pinnacle Bank's primary federal regulator. At December 31, 2021, approximately i 76.6% of Pinnacle Financial's loan portfolio was assigned a specifically assigned risk rating. Certain consumer loans and commercial relationships that possess certain qualifying characteristics, including individually smaller balances, are generally not assigned an individual risk rating but are evaluated collectively for credit risk as a homogeneous pool of loans and individually as either accrual or nonaccrual based on the performance of the loan. Additional substantial credit risk review procedures were performed during 2020 and 2021 to assess the impacts of the COVID-19 pandemic on the loan portfolio, and impacted loans have continued to be monitored throughout 2021 as part of the routine credit monitoring process. The results of these procedures are reflected in Pinnacle Financial's risk rating disclosures included in Note 5. Loans and Allowance for Credit Losses herein.

Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which generally is the case but is not limited to when the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual status is reversed against current interest income. Interest income is subsequently recognized only if certain cash payments are received while the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. A nonaccrual loan is returned to accruing status once the loan has been brought current as to principal and interest and collection is reasonably assured or the loan has been well-secured through other techniques.

Loans are charged off when management believes that the full collectability of the loan is unlikely. As such, a loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

i Purchased loans, including loans acquired through a merger, are initially recorded at fair value on the date of purchase. At the time of acquisition, management evaluates all purchased loans using a variety of factors such as current classification or risk rating, past due status and history as a component of the fair value determination. For purchased loans that have not experienced more-than-insignificant credit deterioration since origination, management evaluates each reviewed loan using an internal grading system with a grade assigned to each loan at the date of acquisition. To the extent that any purchased loan is not specifically reviewed, such loan is assumed to have characteristics similar to the characteristics of the specifically reviewed acquired portfolio of purchased loans. Purchased loans that have experienced more than insignificant credit deterioration since origination ("purchased credit deteriorated loans") are individually evaluated by management to determine the estimated fair value of each loan. In determining the estimated fair value of such loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received.

Allowance for Credit Losses - Loans - Pinnacle Financial adopted FASB ASC 326 effective January 1, 2020, which requires the estimation of an allowance for credit losses in accordance with the Current Expected Credit Losses (CECL) methodology. Pinnacle Financial's management assesses the adequacy of the allowance 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 a loan (including the timing of future payments), 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 through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off.

The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. Pinnacle Financial has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:

•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.

•Consumer real estate mortgage loans - Consumer real estate mortgage consists primarily of loans secured by 1-4 family residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower.

•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 granted under the PPP, which are fully guaranteed by the SBA, are included in this category.

•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.

For commercial real estate, consumer real estate, construction and land development, and commercial and industrial loans, Pinnacle Financial primarily utilizes a PD and loss given default (LGD) 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. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to predict quarterly rates of default based on the statistical PD models. Adjustments are made to predicted default rates as considered necessary for each loan segment based on other quantitative and qualitative information not utilized as a direct input into the statistical models. The predicted quarterly default rates are then applied to the estimated future exposure at default (EAD), as determined based on contractual amortization terms and estimated prepayments. An estimated LGD, determined based on historical loss experience, is applied to the quarterly defaulted balances for each loan segment to estimate future losses of the loan's amortized cost.

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. At December 31, 2021, a reasonable and supportable period of twenty-four months was utilized for all loan segments, followed by a twelve month straight line reversion to long term averages.

For the consumer and other loan segment, a loss rate approach is utilized. For these loans, historical charge off rates are applied to projected future balances, as determined in the same manner as EAD for the statistically modeled loan segments. For credit cards, which have no amortization terms or contractual maturities and are unconditionally cancellable, future balances are estimated based on expected payment volume applied to the current balance.

The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. 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. Additional qualitative considerations are made for any identified risk which did not exist within our portfolio historically and therefore may not be adequately addressed through evaluation of such risk factor based on historical portfolio trends as previously discussed.

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 $ i 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. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral, less selling costs. For loans for which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral, Pinnacle Financial has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, with selling costs considered in the event sale of the collateral is expected. Loans for which terms have been modified in a troubled-debt restructuring (TDR) are evaluated using these same individual evaluation methods. In the event the discounted cash flow method is used for a TDR, the original interest rate is used to discount expected cash flows.

In assessing the adequacy of the allowance for credit losses, Pinnacle Financial considers the results of Pinnacle Financial's ongoing independent loan review process. Pinnacle Financial undertakes this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in its overall evaluation of the risk characteristics of the entire loan portfolio. Its loan review process includes the judgment of management, independent internal loan reviewers and reviews that may have been conducted by third-party reviewers including regulatory examiners. Pinnacle Financial incorporates relevant loan review results in the allowance.

In accordance with CECL, losses are estimated over the remaining contractual terms of loans, adjusted for prepayments. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation at the reporting date that a TDR will be executed or such renewals, extensions or modifications are included in the original loan agreement and are not unconditionally cancellable by Pinnacle Financial.

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Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums, deferred loan fees and costs and accrued interest receivable. Accrued interest receivable is presented separately on the balance sheets and as allowed under ASU 2016-13 is excluded from the tabular loan disclosures in Note 5.

While policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond Pinnacle Financial's control, such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.

Allowance for Credit Losses on Off Balance Sheet Credit Exposures — Pinnacle Financial estimates expected credit losses over the contractual term of obligations to extend credit, unless the obligation is unconditionally cancellable. The allowance for off balance sheet exposures is adjusted through the provision for credit losses. The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions as used to estimate credit losses on existing funded loans.

i Transfers of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been surrendered or in the case of a loan participation, a portion of the asset has been surrendered and meets the definition of a "participating interest". Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from Pinnacle Financial, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) Pinnacle Financial does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

i Premises and Equipment and Leaseholds — Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the straight-line method over the estimated useful lives of the assets or the expected lease terms for leasehold improvements, whichever is shorter. Useful lives for all premises and equipment range between three and i thirty years. /

Pinnacle Financial, or a subsidiary of Pinnacle Financial, is the lessee with respect to multiple office locations. At December 31, 2021, all such leases were being accounted for as operating leases within the accompanying consolidated financial statements, with the exception of one lease agreement classified as a finance lease. Pinnacle Financial recognizes right-of-use assets and lease liabilities reflecting the present value of future minimum lease payments under its lease agreements in accordance with Accounting Standards Update 2016-02, Leases.

Other Real Estate Owned — Other real estate owned (OREO) represents real estate foreclosed upon or acquired by deed in lieu of foreclosure by Pinnacle Bank through loan defaults by customers as well as properties acquired in connection with the acquisition of BNC that had previously been held for future expansion but were transferred to OREO in 2019. Substantially all of these amounts relate to lots, homes and residential development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has adequately supported the value recorded. Upon its acquisition by Pinnacle Bank, the property is recorded at fair value, based on appraised value, less selling costs estimated as of the date acquired. The difference from the loan balance related to the property, if any, is recognized as a charge-off through the allowance for credit losses. Additional OREO losses for subsequent downward valuation adjustments and expenses to maintain OREO are determined on a specific property basis and are included as a component of noninterest expense. Net gains or losses realized at the time of disposal are reflected in noninterest expense.

Included in the accompanying consolidated balance sheet at December 31, 2021 and 2020 is $ i 8.5 million and $ i 12.4 million, respectively, of OREO with i no related property-specific valuation allowances in either period. During the year ended December 31, 2021, Pinnacle Financial had a net foreclosed real estate benefit of $ i 712,300 compared to net foreclosed real estate expense of $ i 8.6 million and $ i 4.2 million, respectively, during the years ended December 31, 2020 and 2019.

i Other Assets — Included in other assets as of December 31, 2021 and 2020, is approximately $ i 5.1 million and $ i 4.5 million, respectively, of computer software related assets, net of amortization. This software supports Pinnacle Financial's primary data systems and relates to amounts paid to vendors for installation and development of such systems. These amounts are amortized on a straight-line basis over periods of three to i seven years. For the years ended December 31, 2021, 2020, and 2019, Pinnacle Financial's amortization expense was approximately $ i 1.6 million, $ i 2.3 million and $ i 2.7 million, respectively. Software maintenance fees are capitalized in other assets and amortized over the term of the maintenance agreement. /

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Pinnacle Financial is required to maintain certain minimum levels of equity investments with certain regulatory and other entities in which Pinnacle Bank has outstanding borrowings, including the Federal Home Loan Bank of Cincinnati. At December 31, 2021 and 2020, the cost of these investments was $ i 67.8 million and $ i 80.4 million, respectively. Pinnacle Financial determined that cost approximates the fair value of these investments. Additionally, Pinnacle Financial has recorded certain investments in other non-public entities and funds at fair value, of $ i 101.0 million and $ i 47.8 million at December 31, 2021 and 2020, respectively. During 2021, 2020 and 2019, Pinnacle Financial recorded net gains of $ i 23.1 million, $ i 1.1 million and $ i 2.8 million, respectively, on these investments due to changes in their fair value. Pinnacle Financial has an investment in i twelve statutory business trusts valued at $ i 4.0 million as of December 31, 2021. The statutory business trusts were established to issue preferred securities, the dividends for which are paid with interest payments Pinnacle Financial makes on subordinated debentures it issued to the statutory business trusts.

Pinnacle Bank is the owner and beneficiary of various life insurance policies on certain key executives and certain current and former directors and associates, including policies that were acquired in mergers. Collectively, these policies are reflected in other assets in the accompanying consolidated balance sheets at their respective cash surrender values. At December 31, 2021 and 2020, the aggregate cash surrender value of these policies was approximately $ i 761.9 million and $ i 743.9 million, respectively. Noninterest income related to these policies was $ i 18.9 million, $ i 18.8 million, and $ i 17.4 million, during the years ended December 31, 2021, 2020 and 2019, respectively.

Also, as part of our compliance with the Community Reinvestment Act (CRA), we have investments in low income housing entities totaling $ i 189.6 million and $ i 143.2 million, net, as of December 31, 2021 and 2020, respectively. Included in our CRA investments are investments of $ i 116.2 million and $ i 90.2 million at December 31, 2021 and 2020, respectively, net of amortization, that qualify for federal low income housing tax credits. The investments are accounted for under the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received. The amortization and benefits are recognized as a component of income tax expense in the consolidated statements of income. The investments are recorded using the cost method.

Derivative Instruments — In accordance with ASC Topic 815, Derivatives and Hedging, all derivative instruments are recorded on the accompanying consolidated balance sheet at their respective fair values. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. If the derivative instrument is not designated as a hedge, changes in the fair value of the derivative instrument are recognized in earnings in the period of change.

Pinnacle Financial enters into interest rate swaps (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 with large U.S. financial institutions in order to minimize the risk to Pinnacle Financial. These swaps are derivatives, but are not designated as hedging instruments.

Pinnacle Financial enters into forward cash flow hedge relationships in the form of interest rate swap agreements to manage its future interest rate exposure. These derivative contracts have been designated as a hedge and, as such, changes in the fair value of the derivative instrument are recorded in other comprehensive income. Pinnacle Financial also enters into fair value hedge relationships to mitigate the effect of changing interest rates on the fair values of fixed rate securities and loans. 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 prepares written hedge documentation for all derivatives which are designated as hedges. The written hedge documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management's assertion that the hedge will be highly effective.

For designated hedging relationships, Pinnacle Financial performs retrospective and prospective effectiveness testing using quantitative methods where required by accounting standards. For certain hedging relationships, effectiveness is tested through the matching of critical terms. Assessments of hedge effectiveness and measurements of hedge ineffectiveness are performed at least quarterly. The portion of the changes in the fair value of a derivative that is highly effective and that has been designated and qualifies as a cash flow hedge is initially recorded in accumulated other comprehensive income (AOCI) and will be reclassified to earnings in the same period that the hedged item impacts earnings; any ineffective portion is recorded in current period earnings.

Hedge accounting ceases on transactions that are no longer deemed effective, or for which the derivative has been terminated or de-designated.

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i Securities Sold Under Agreements to Repurchase — Pinnacle Financial routinely sells securities to certain treasury management customers and then repurchases these securities the next day. Securities sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated balance sheets at the amount of cash received in connection with each transaction.

Income Taxes — ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. ASC 740 also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods.

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The net deferred tax asset is reflected as a component of other assets on the consolidated balance sheet. A valuation allowance is required for deferred tax assets if, based on available evidence, it is more likely than not that all or some portion of the asset may not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the deferred tax asset.

Income tax expense or benefit for the year is allocated among continuing operations and other comprehensive income (loss), as applicable. The amount allocated to continuing operations is the income tax effect of the pretax income or loss from continuing operations that occurred during the year, plus or minus income tax effects of (i) changes in certain circumstances that cause a change in judgment about the realization of deferred tax assets in future years, including the valuation of deferred tax assets due to changes in enacted income tax rates (ii) changes in income tax laws or rates, and (iii) changes in income tax status, subject to certain exceptions. The amount allocated to other comprehensive income (loss) is related solely to changes in the valuation allowance on items that are normally accounted for in other comprehensive income (loss) such as unrealized gains or losses on available-for-sale securities.

In accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes, uncertain tax positions are recognized if it is more likely than not, based on technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms realized or sustained upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances and information available at the reporting date.

Pinnacle Financial and its subsidiaries file consolidated U.S. Federal and state income tax returns. Each entity provides for income taxes based on its contribution to income or loss of the consolidated group. Pinnacle Financial has a Real Estate Investment Trust subsidiary that files a separate federal tax return, but its income is included in the consolidated group's return as required by the federal tax laws. Pinnacle Financial remains open to audit under the statute of limitations by the IRS and the states in which Pinnacle operates for the years ended December 31, i 2018 through i 2021.

Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. i No interest and penalties were recorded for the year ended December 31, 2021. Pinnacle Financial recognized $ i 571,000 in interest and penalties for the year ended December 31, 2020. i No interest and penalties were recorded for the year ended December 31, 2019.

Income Per Common Share — Basic net income per common share (EPS) is computed by dividing net income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average common shares outstanding is attributable to common stock options, restricted share awards, and restricted share unit awards, including those with performance-based vesting provisions. The dilutive effect of outstanding options, restricted share awards, and restricted share unit awards is reflected in diluted EPS by application of the treasury stock method.

As of December 31, 2021, there were i 56,147 stock options outstanding to purchase common shares. For the years ended December 31, 2021, 2020 and 2019, respectively, i 458,808, i 277,896 and i 399,600 of dilutive stock options, dilutive restricted shares and restricted share units were included in the diluted earnings per share calculation under the treasury stock method. For the years ended December 31, 2021, 2020 and 2019, there were i 32,684, i 394,593 and i 160,492 respectively, restricted shares excluded from the calculation because they were deemed to be antidilutive.

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The following is a summary of the basic and diluted earnings per share calculation for each of the years in the three-year period ended December 31, 2021 (dollars in thousands except earnings per share):

December 31, 2019

Basic earnings per common share calculation:

Numerator - Net income available to common shareholders

i 512,131

i 304,725

i 400,881

Denominator – Weighted average common shares outstanding

i 75,468,339

i 75,376,489

i 76,364,303

Basic net income per common share

i 6.79

i 4.04

i 5.25

Diluted earnings per common share calculation:

Numerator - Net income available to common shareholders

i 512,131

i 304,725

i 400,881

Denominator – Weighted average common shares outstanding

i 75,468,339

i 75,376,489

i 76,364,303

Dilutive shares contingently issuable

i 458,808

i 277,896

i 399,600

Weighted average diluted common shares outstanding

i 75,927,147

i 75,654,385

i 76,763,903

Diluted net income per common share

i 6.75

i 4.03

i 5.22

i Stock-Based Compensation — Stock-based compensation expense is recognized based on the fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for estimated forfeitures. ASC 718-20, Compensation – Stock Compensation Awards Classified as Equity, allows forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Service based awards with multiple vesting periods are expensed over the entire requisite period as if the award were a single award. For awards with performance vesting criteria, anticipated performance is projected to determine the number of awards expected to vest, and the corresponding aggregate expense is adjusted to reflect the elapsed portion of the applicable performance period.

i Comprehensive Income (Loss) — Comprehensive income (loss) consists of the total of all components of comprehensive income (loss) including net income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. GAAP are included in comprehensive income (loss) but excluded from net income (loss). As of December 31, 2021, 2020 and 2019, Pinnacle Financial's other comprehensive income (loss) consists primarily of unrealized gains and losses on securities available-for-sale, net of deferred tax expense (benefit) and unrealized gains (losses) on derivative hedging relationships.

Fair Value Measurement — ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP and established required disclosures about fair value measurements. ASC 820 applies only to fair value measurements that are already required or permitted by other accounting standards and increases the consistency of those measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, (i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date). The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.

Pinnacle Financial has an established process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models or processes that use primarily market-based or independently-sourced market data, including interest rate yield curves, option volatilities and third party information such as prices of similar assets or liabilities. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. Furthermore, while Pinnacle Financial believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

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Recently Adopted Accounting Pronouncements — In January 2020, the FASB issued Accounting Standards Update 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. These amendments, among other things, clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date. The amendments became effective for Pinnacle Financial on January 1, 2021 and had no impact on Pinnacle Financial's consolidated financial statements.

In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes to simplify various aspects of the current guidance to promote consistent application of the standard among reporting entities by moving certain exceptions to the general principles. The amendments are effective for fiscal years beginning after December 15, 2020. The amendments became effective for Pinnacle Financial on January 1, 2021 and had no impact on Pinnacle Financial's consolidated financial statements.

In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Pinnacle Financial is implementing a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. Pinnacle Financial is assessing ASU 2020-04 and its impact on the transition away from LIBOR for its loans and other financial instruments. Beginning in 2022, Pinnacle Financial no longer utilizes LIBOR as a reference rate for new or renewed loans with its borrowers.

i Newly Issued Not Yet Effective Accounting Standards — Other than those pronouncements discussed above which have been recently adopted, Pinnacle Financial does not believe there were any other recently issued accounting pronouncements that are expected to materially impact its consolidated financial statements.

i Reclassifications — Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or stockholders' equity.

i Subsequent Events — ASC Topic 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Pinnacle Financial evaluated all events or transactions that occurred after December 31, 2021 through the date of the issued financial statements. On January 1, 2022, Pinnacle Financial transferred, at fair value, $ i 1.1 billion of securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized after tax losses of $ i 1.5 million remained in accumulated other comprehensive income (loss) and will be amortized over the remaining lives of the securities, offsetting the related amortization of discount or accretion of premium on the transferred securities. No gains or losses were recognized at the time of the transfer. /

Note 2. Equity Method Investment

On February 1, 2015, Pinnacle Bank acquired a i 30% interest in Bankers Healthcare Group, LLC (BHG) for $ i 75 million in cash. On March 1, 2016, Pinnacle Bank and Pinnacle Financial increased their investment in BHG by a combined i 19%, for a total investment in BHG of i 49%. The additional i 19% interest was acquired pursuant to a purchase agreement whereby both Pinnacle Financial and Pinnacle Bank acquired i 8.55% and an additional i 10.45%, respectively, of the outstanding membership interests in BHG in exchange for $ i 74.1 million in cash and i 860,470 shares of Pinnacle Financial common stock valued at $ i 39.9 million.

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•co-sale rights for Pinnacle Financial and Pinnacle Bank in the event the other members of BHG decide to sell all or a portion of their ownership interests and are permitted to do so pursuant to the Limited Liability Company Agreement; and

•a right of first refusal for BHG and the other members of BHG in the event that Pinnacle Financial and/or Pinnacle Bank decide to sell all or a portion of their ownership interests and are permitted to do so pursuant to the Limited Liability Company Agreement, except in connection with a transfer of their ownership interests to an affiliate or in connection with the acquisition of Pinnacle Financial or Pinnacle Bank or a merger in which Pinnacle Financial or Pinnacle Bank is not the surviving entity.

Pinnacle Financial accounts for this investment pursuant to the equity method for unconsolidated subsidiaries and will recognize its interest in BHG's profits and losses in noninterest income with corresponding adjustments to the BHG investment account. Because BHG has been determined to be a voting interest entity of which Pinnacle Financial and Pinnacle Bank together control less than a majority of the board seats, this investment does not require consolidation and is accounted for pursuant to the equity method of accounting. Additionally, Pinnacle Financial did not recognize any goodwill or other intangible assets associated with these transactions as of the respective purchase dates, however, it will recognize accretion income and amortization expense associated with the fair value adjustments to the net assets acquired including the fair value of certain of BHG's liabilities which are recorded as a component of income from equity method investment, pursuant to the equity method of accounting.

At December 31, 2021, Pinnacle Financial has recorded technology, trade name and customer relationship intangibles, net of related amortization, of $ i 6.8 million compared to $ i 7.6 million as of December 31, 2020. Amortization expense of $ i 752,000 was included in Pinnacle Financial's results for the year ended December 31, 2021 compared to $ i 1.2 million for 2020 and $ i 1.9 million for 2019. Accretion income of $ i 1.5 million was included in Pinnacle Financial's results for the year ended December 31, 2021, while $ i 2.1 million of accretion income was recorded in 2020 and $ i 2.6 million was recorded in 2019. Additionally, at December 31, 2021, Pinnacle Financial had recorded accretable discounts associated with certain liabilities of BHG of $ i 1.2 million compared to $ i 2.7 million as of December 31, 2020.

During the year ended December 31, 2021, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $ i 70.0 million in the aggregate, compared to $ i 53.0 million during the year ended December 31, 2020 and $ i 51.3 million during the year ended December 31, 2019. Earnings from BHG are included in Pinnacle Financial's consolidated tax return. Profits from intercompany transactions are eliminated.

Pinnacle Bank has a participating interest in a $525.0 million revolving line of credit for the benefit of BHG in the amount of $ i 100.0 million. At December 31, 2021, there was a $ i 47.2 million outstanding balance on the line related to Pinnacle Bank's interest in the line. The line accrues interest at i SOFR plus 200 basis points and is secured by all assets of BHG. The credit agreement contains covenants requiring BHG to maintain certain financial ratios and satisfy certain other affirmative and negative covenants. At December 31, 2021, neither BHG nor the originating bank had represented to Pinnacle Bank that BHG was not in compliance, in all material respects, with these covenants.

BHG partners with third party lenders, including Pinnacle Bank, to facilitate loan originations as part of BHG’s alternative financing portfolio, whereby BHG acts as the marketing firm and refers loans to the third party lenders for funding. The third party lenders receive a fee for each loan funded and subsequently sold to BHG. These loans are ultimately sold through BHG's network of clients, which includes Pinnacle Bank. During the years ended December 31, 2021, 2020 and 2019, respectively, BHG purchased $ i 646.6 million, $ i 453.8 million and $ i 337.8 million of loans originated by Pinnacle Bank, respectively. During the years ended December 31, 2021 and 2020, Pinnacle Bank purchased $ i 276.7 million and $ i 100.0 million, respectively, of loans from BHG at par pursuant to BHG's joint venture loan program whereby BHG and Pinnacle Bank share proportionately in the credit risk of the acquired loans based on the rate on the loan and the rate of the purchase. The yield on this portfolio to Pinnacle Bank is anticipated to be between 4.75% and 5.00% per annum. Pinnacle Bank purchased i no loans from BHG during the year ended December 31, 2019. At December 31, 2021 and 2020, there were $ i 319.1 million and $ i 95.8 million, respectively, of BHG joint venture program loans held by Pinnacle Bank.

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The following summary of BHG's financial position and results of operations as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 are presented as unaudited due to BHG's fiscal year end being September 30 (in thousands):


Banker's Healthcare Group	December 31, 2021		December 31, 2020
Assets	$	i 2,724,542	$	i 1,330,317

Liabilities	$	i 2,355,256	$	i 1,088,135
Equity interests	i 369,286		i 242,182
Total liabilities and equity	$	i 2,724,542	$	i 1,330,317


	For the year ended December 31,
	2021		2020		2019
Revenues	$	i 735,506	$	i 457,928	$	i 366,500
Net income, pre-tax	$	i 241,051	$	i 171,964	$	i 182,462

Note 3. Restricted Cash Balances

Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. At its option, Pinnacle Financial maintains additional balances to compensate for clearing and other services. For the years ended December 31, 2021 and 2020, the average daily balance maintained at the Federal Reserve was approximately $ i 2.9 billion and $ i 2.2 billion, respectively.

Restricted cash included on the consolidated balance sheets was $ i 82.5 million and $ i 223.8 million at December 31, 2021 and 2020, respectively. This restricted cash is maintained at banks as collateral primarily for our derivative portfolio.

Pinnacle Financial maintains some of its cash in bank deposit accounts at financial institutions other than Pinnacle Bank that, at times, may exceed federally insured limits. Pinnacle Financial may lose all uninsured balances if one of the correspondent banks fails without warning. Pinnacle Financial has not experienced any losses in such accounts. Pinnacle Financial believes it is not exposed to any significant credit risk on cash and cash equivalents.

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Note 4. Securities

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

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Securities available-for-sale:

U.S Treasury securities

i 194,490

i —

i 881

i 193,609

U.S. Government agency securities

i 634,611

i 2,359

i 4,961

i 632,009

Mortgage-backed securities

i 1,908,675

i 29,874

i 18,310

i 1,920,239

State and municipal securities

i 1,774,119

i 52,961

i 3,243

i 1,823,837

Asset-backed securities

i 232,294

i 60

i 2,785

i 229,569

Corporate notes

i 114,355

i 3,082

i 2,506

i 114,931

i 4,858,544

i 88,336

i 32,686

i 4,914,194

Securities held-to-maturity:

U.S. Government agency securities

i 11,920

i —

i 37

i 11,883

Mortgage-backed securities

i 106,555

i 86

i 196

i 106,445

State and municipal securities

i 1,037,644

i 32,966

i 889

i 1,069,721

i 1,156,119

i 33,052

i 1,122

i 1,188,049

Allowance for credit losses - securities held-to-maturity

( i 161)

Securities held-to-maturity, net of allowance for credit losses

i 1,155,958

Securities available-for-sale:

U.S Treasury securities

i 82,199

i 10

i —

i 82,209

U.S. Government agency securities

i 74,916

i 1,547

i 60

i 76,403

Mortgage-backed securities

i 1,623,759

i 67,759

i 2,327

i 1,689,191

State and municipal securities

i 1,411,288

i 44,559

i 12,484

i 1,443,363

Asset-backed securities

i 177,878

i 715

i 657

i 177,936

Corporate notes

i 117,256

i 2,632

i 2,309

i 117,579

i 3,487,296

i 117,222

i 17,837

i 3,586,681

Securities held-to-maturity:

State and municipal securities

i 1,028,550

i 38,272

i 291

i 1,066,531

i 1,028,550

i 38,272

i 291

i 1,066,531

Allowance for credit losses - securities held-to-maturity

( i 191)

Securities held-to-maturity, net of allowance for credit losses

i 1,028,359

During the quarters ended March 31, 2020 and September 30, 2018, Pinnacle Financial transferred, at fair value, $ i 873.6 million and $ i 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 $ i 69.0 million and net unrealized after tax losses of $ i 2.2 million, respectively, remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of discount on the transferred securities. No gains or losses were recognized at the time of the transfer. At December 31, 2021, approximately $ i 671.7 million of Pinnacle Financial's investment portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase. At December 31, 2021, repurchase agreements comprised of secured borrowings totaled $ i 152.6 million and were secured by $ i 152.6 million of pledged U.S. government agency securities, mortgage-backed 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 for the counterparty to remain adequately secured.

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i The amortized cost and fair value of debt securities as of December 31, 2021 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages 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

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

Due in one year or less

i 103,578

i 103,533

i —

Due in one year to five years

i 320,844

i 321,710

i 13,330

i 13,342

Due in five years to ten years

i 507,968

i 513,643

i 5,648

i 5,728

Due after ten years

i 1,785,185

i 1,825,500

i 1,030,586

i 1,062,534

Mortgage-backed securities

i 1,908,675

i 1,920,239

i 106,555

i 106,445

Asset-backed securities

i 232,294

i 229,569

i —

i 4,858,544

i 4,914,194

i 1,156,119

i 1,188,049

i At December 31, 2021 and 2020, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized loss 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

U.S. Treasury securities

i 178,610

i 881

i —

i 178,610

i 881

U.S. Government agency securities

i 365,833

i 3,024

i 54,266

i 1,974

i 420,099

i 4,998

Mortgage-backed securities

i 825,664

i 11,859

i 178,956

i 6,647

i 1,004,620

i 18,506

State and municipal securities

i 363,102

i 2,665

i 57,270

i 1,045

i 420,372

i 3,710

Asset-backed securities

i 198,349

i 2,595

i 6,513

i 190

i 204,862

i 2,785

Corporate notes

i 14,991

i 554

i 20,270

i 1,952

i 35,261

i 2,506

Total temporarily-impaired securities

i 1,946,549

i 21,578

i 317,275

i 11,808

i 2,263,824

i 33,386

U.S. Treasury securities

i —

U.S. Government agency securities

i 9,962

i 38

i 6,091

i 22

i 16,053

i 60

Mortgage-backed securities

i 165,696

i 1,772

i 35,997

i 555

i 201,693

i 2,327

State and municipal securities

i 175,115

i 2,220

i 345,435

i 10,264

i 520,550

i 12,484

Asset-backed securities

i 46,399

i 207

i 52,840

i 450

i 99,239

i 657

Corporate notes

i 9,978

i 40

i 23,920

i 2,269

i 33,898

i 2,309

Total temporarily-impaired securities

i 407,150

i 4,277

i 464,283

i 13,560

i 871,433

i 17,837

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

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As shown in the tables above, at December 31, 2021 and 2020, Pinnacle Financial had unrealized losses of $33.4 million and $17.8 million on $2.3 billion and $871.4 million, respectively, of securities. The unrealized losses associated with $ i 873.6 million and $ i 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. As described in Note 1. Summary of Significant Accounting Policies, 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 December 31, 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 December 31, 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 December 31, 2021. These securities will continue to be monitored as a part of Pinnacle Financial's ongoing evaluation of credit quality.

The allowance for credit losses on held-to-maturity securities is measured on a collective basis by major security type as described in Note 1. Summary of Significant Accounting Policies. At December 31, 2021, Pinnacle Financial's held-to-maturity securities consists of U.S. government agency, mortgage-backed and municipal securities. Pinnacle Financial has a zero loss expectation for U.S government agency securities and mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, and accordingly, no allowance for credit losses is estimated for these securities. Credit losses on held-to-maturity municipal securities are estimated using probability of default and loss given default models driven primarily by macroeconomic factors over a reasonable and supportable period of eighteen months with a twelve month reversion to average loss factors. The allowance for credit losses on held-to-maturity securities totaled $161,000 and $191,000, at December 31, 2021 and 2020, respectively.

Pinnacle Financial utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt securities held-to-maturity. At December 31, 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. 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. Consistent with the investment policy, during the years ended December 31, 2021, 2020 and 2019, available-for-sale securities of approximately $ i 37.5 million, $ i 145.6 million and $ i 737.7 million, respectively, were sold, resulting in gross realized gains of $ i 769,000, $ i 2.2 million and $ i 1.0 million, and gross realized losses of $ i 10,000, $ i 1.2 million and $ i 6.9 million, respectively.

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 14. 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.

Note 5. Loans and Allowance for Credit Losses

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). Effective January 1, 2020, Pinnacle Financial adopted FASB ASU 2016-13 and related amendments, which introduced the CECL methodology for estimating credit losses. Accordingly, all information as of and for the years ended December 31, 2021 and 2020 is presented in accordance with ASU 2016-13 and all information prior to January 1, 2020 is presented in accordance with previously applicable GAAP.

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Pinnacle Financial uses the following loan categories for presentation of loan balances and the related allowance for credit losses on loans:

Loans at December 31, 2021 and 2020 were as follows (in thousands):

Commercial real estate:

Owner-occupied

i 3,048,822

i 2,802,227

Non-owner occupied

i 5,221,704

i 5,203,384

Consumer real estate – mortgage

i 3,680,684

i 3,099,172

Construction and land development

i 2,903,017

i 2,901,746

Commercial and industrial

i 8,074,546

i 8,038,457

Consumer and other

i 485,489

i 379,515

Subtotal

i 23,414,262

i 22,424,501

Allowance for credit losses

( i 263,233)

( i 285,050)

Loans, net

i 23,151,029

i 22,139,451

Commercial loans receive risk ratings by the assigned 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 December 31, 2021, approximately i 76.6% 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 $ i 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.

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Following are the definitions of the risk rating categories used by Pinnacle Financial. Pass rated loans include all credits other than those included within these categories:

•Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit position at some future date.

•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.

•Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.

•Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

i The table below presents loan balances classified within each risk rating category by primary loan type and based on year of origination or most recent renewal as of December 31, 2021 (in thousands):

2021

2020

2019

2018

2017

Prior

Revolving Loans

Total

Commercial real estate- owner occupied

Pass

i 951,693

i 732,232

i 390,068

i 327,933

i 190,395

i 294,150

i 72,222

i 2,958,693

Special Mention

i 9,462

i 21,875

i 21,633

i 2,246

i 6,952

i 3,806

i 5,885

i 71,859

Substandard (1)

i 3,976

i 1,349

i 5,823

i 219

i 3,626

i 582

i —

i 15,575

Substandard-nonaccrual

i 651

i 70

i 397

i 982

i 395

i 200

i —

i 2,695

Doubtful-nonaccrual

i —

Total Commercial real estate - owner occupied

i 965,782

i 755,526

i 417,921

i 331,380

i 201,368

i 298,738

i 78,107

i 3,048,822

Commercial real estate- Non-owner occupied

Pass

i 1,662,320

i 915,986

i 826,859

i 428,119

i 353,775

i 454,916

i 72,744

i 4,714,719

Special Mention

i 94,183

i 288,608

i 43,925

i 8,917

i 26,295

i 27,937

i —

i 489,865

Substandard (1)

i 1,676

i 8,050

i 1,353

i 2,939

i 1,698

i —

i 15,716

Substandard-nonaccrual

i —

i 501

i —

i 903

i —

i 1,404

Doubtful-nonaccrual

i —

Total Commercial real estate - Non-owner occupied

i 1,758,179

i 1,212,644

i 872,137

i 440,476

i 381,768

i 483,756

i 72,744

i 5,221,704

Consumer real estate – mortgage

Pass

i 1,231,491

i 576,608

i 306,762

i 189,715

i 110,420

i 284,642

i 964,902

i 3,664,540

Special Mention

i 120

i —

i 688

i —

i 752

i —

i 1,560

Substandard (1)

i —

i 864

i —

i 1,817

i 1,640

i 4,321

Substandard-nonaccrual

i 188

i 699

i 4,469

i 704

i 209

i 3,540

i 454

i 10,263

Doubtful-nonaccrual

i —

Total Consumer real estate – mortgage

i 1,231,799

i 578,171

i 311,231

i 191,107

i 110,629

i 290,751

i 966,996

i 3,680,684

Construction and land development

Pass

i 1,584,155

i 802,059

i 406,645

i 72,112

i 12,290

i 2,873

i 9,495

i 2,889,629

Special Mention

i 3,049

i 883

i 8,908

i —

i 12,840

Substandard (1)

i —

i 11

i 18

i —

i 163

i —

i 192

Substandard-nonaccrual

i —

i 229

i —

i 127

i —

i 356

Doubtful-nonaccrual

i —

Total Construction and land development

i 1,587,204

i 802,942

i 415,793

i 72,130

i 12,290

i 3,163

i 9,495

i 2,903,017

Commercial and industrial

Pass

i 3,321,855

i 811,693

i 559,902

i 265,516

i 105,454

i 127,880

i 2,694,814

i 7,887,114

Special Mention

i 14,447

i 4,428

i 37,496

i 7,043

i 1,197

i 383

i 31,794

i 96,788

Substandard (1)

i 18,752

i 447

i 5,222

i 11,997

i 3,444

i 17

i 33,916

i 73,795

Substandard-nonaccrual

i 298

i 11,831

i 353

i 403

i 95

i 349

i 3,520

i 16,849

Doubtful-nonaccrual

i —

Total Commercial and industrial

i 3,355,352

i 828,399

i 602,973

i 284,959

i 110,190

i 128,629

i 2,764,044

i 8,074,546

112

2021

2020

2019

2018

2017

Prior

Revolving Loans

Total

Consumer and other

Pass

i 196,605

i 82,103

i 5,977

i 2,235

i 2,099

i 1,534

i 194,934

i 485,487

Special Mention

i —

Substandard (1)

i —

Substandard-nonaccrual

i —

i 2

Doubtful-nonaccrual

i —

Total Consumer and other

i 196,605

i 82,103

i 5,977

i 2,235

i 2,099

i 1,534

i 194,936

i 485,489

Total loans

Pass

i 8,948,119

i 3,920,681

i 2,496,213

i 1,285,630

i 774,433

i 1,165,995

i 4,009,111

i 22,600,182

Special Mention

i 121,261

i 315,794

i 111,962

i 18,894

i 34,444

i 32,878

i 37,679

i 672,912

Substandard (1)

i 24,404

i 10,710

i 12,409

i 15,173

i 8,768

i 2,579

i 35,556

i 109,599

Substandard-nonaccrual

i 1,137

i 12,600

i 5,448

i 2,590

i 699

i 5,119

i 3,976

i 31,569

Doubtful-nonaccrual

i —

Total loans

i 9,094,921

i 4,259,785

i 2,626,032

i 1,322,287

i 818,344

i 1,206,571

i 4,086,322

i 23,414,262

(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 TDRs. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $ i 109.6 million at December 31, 2021, compared to $ i 173.5 million at December 31, 2020.

i The table below presents the aging of past due balances by loan segment at December 31, 2021 and December 31, 2020 (in thousands):

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

i 727

i —

i 2,426

i 3,153

i 3,045,669

i 3,048,822

Non-owner occupied

i 1,434

i —

i 645

i 2,079

i 5,219,625

i 5,221,704

Consumer real estate – mortgage

i 8,710

i 122

i 4,450

i 13,282

i 3,667,402

i 3,680,684

Construction and land development

i 61

i —

i 127

i 188

i 2,902,829

i 2,903,017

Commercial and industrial

i 4,926

i 2,677

i 7,311

i 14,914

i 8,059,632

i 8,074,546

Consumer and other

i 1,715

i 568

i 372

i 2,655

i 482,834

i 485,489

Total

i 17,573

i 3,367

i 15,331

i 36,271

i 23,377,991

i 23,414,262

Commercial real estate:

Owner-occupied

i 934

i 2,672

i 1,860

i 5,466

i 2,796,761

i 2,802,227

Non-owner occupied

i 726

i 6,220

i 3,861

i 10,807

i 5,192,577

i 5,203,384

Consumer real estate – mortgage

i 8,859

i 328

i 6,274

i 15,461

i 3,083,711

i 3,099,172

Construction and land development

i 278

i 418

i 736

i 1,432

i 2,900,314

i 2,901,746

Commercial and industrial

i 20,278

i 5,801

i 4,408

i 30,487

i 8,007,970

i 8,038,457

Consumer and other

i 806

i 282

i 304

i 1,392

i 378,123

i 379,515

Total

i 31,881

i 15,721

i 17,443

i 65,045

i 22,359,456

i 22,424,501

113

i The following table details the changes in the allowance for credit losses from December 31, 2018 to December 31, 2019 to December 31, 2020 to December 31, 2021 by loan classification and the allocation of allowance for credit losses (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

Unallocated

Total

Allowance for Credit Losses:

Balance at December 31, 2018

i 10,575

i 16,371

i 7,670

i 11,128

i 31,731

i 5,423

i 677

i 83,575

Charged-off loans

( i 1,625)

( i 75)

( i 1,335)

( i 18)

( i 19,208)

( i 6,206)

i —

( i 28,467)

Recovery of previously charged-off loans

i 1,252

i 980

i 1,827

i 682

i 6,473

i 1,172

i —

i 12,386

Provision for loan losses

i 3,204

i 2,687

( i 108)

i 870

i 17,116

i 3,206

i 308

i 27,283

Balance at December 31, 2019

i 13,406

i 19,963

i 8,054

i 12,662

i 36,112

i 3,595

i 985

i 94,777

Impact of adopting ASC 326

i 264

( i 4,740)

i 21,029

( i 3,144)

i 23,040

i 2,638

( i 985)

i 38,102

Charged-off loans

( i 2,598)

( i 546)

( i 3,478)

i —

( i 38,718)

( i 3,993)

i —

( i 49,333)

Recovery of previously charged-off loans

i 1,317

i 911

i 1,493

i 147

i 4,540

i 1,554

i —

i 9,962

Provision for loan losses

i 10,909

i 63,544

i 6,206

i 32,743

i 73,449

i 4,691

i —

i 191,542

Balance at December 31, 2020

i 23,298

i 79,132

i 33,304

i 42,408

i 98,423

i 8,485

i —

i 285,050

Charged-off loans

( i 1,420)

( i 786)

( i 632)

( i 367)

( i 46,213)

( i 5,578)

i —

( i 54,996)

Recovery of previously charged-off loans

i 1,609

i 969

i 2,288

i 372

i 7,485

i 3,550

i —

i 16,273

Provision for loan losses

( i 3,869)

( i 20,811)

( i 2,856)

( i 12,984)

i 52,645

i 4,781

i —

i 16,906

Balance at December 31, 2021

i 19,618

i 58,504

i 32,104

i 29,429

i 112,340

i 11,238

i —

i 263,233

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. Upon adoption of ASU 2016-13 in 2020, the opening balance of the allowance for credit losses was increased by $38.1 million through retained earnings.

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 December 31, 2021 and 18 months was utilized for all loan segments at December 31, 2020, followed by, in each case, a 12 month straight line reversion to long term averages at each measurement date.

114

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 in part on quarterly trend assessments compared to historical experience in portfolio concentrations, policy exceptions, associate retention, independent loan review results, collateral considerations, risk ratings, competition and peer group credit quality trends. Additional qualitative considerations are made for any identified risk factors which did not exist within our portfolio historically and therefore may not be adequately addressed through evaluation of such risks based on historical portfolio trends. At December 31, 2021 and 2020, additional qualitative considerations were made to address the uncertainties related to the potential impact of the COVID-19 pandemic on credit losses. 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.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, as of December 31, 2021 and December 31, 2020 i (in thousands):

Real Estate

Business Assets

Other

Total

Commercial real estate:

Owner-occupied

i 5,300

i —

i 5,300

Non-owner occupied

i 5,631

i —

i 5,631

Consumer real estate – mortgage

i 16,392

i —

i 16,392

Construction and land development

i 1,208

i —

i 1,208

Commercial and industrial

i —

i 6,976

i 206

i 7,182

Consumer and other

i —

Total

i 28,531

i 6,976

i 206

i 35,713

Commercial real estate:

Owner-occupied

i 15,681

i —

i 15,681

Non-owner occupied

i 7,000

i —

i 7,000

Consumer real estate – mortgage

i 27,082

i —

i 27,082

Construction and land development

i 2,049

i —

i 2,049

Commercial and industrial

i —

i 22,437

i 39

i 22,476

Consumer and other

i —

i 4

Total

i 51,812

i 22,437

i 43

i 74,292

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 December 31, 2021 and December 31, 2020. Also presented is the balance of loans on nonaccrual status at December 31, 2021 for which there was no related allowance for credit losses recorded (in thousands):

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

i 2,694

i —

i 10,231

i 5,985

i —

Non-owner occupied

i 1,404

i —

i 5,219

i 1,522

i —

Consumer real estate – mortgage

i 10,264

i —

i 144

i 22,191

i —

i 273

Construction and land development

i 356

i —

i 1,953

i —

Commercial and industrial

i 16,849

i 13,188

i 1,091

i 34,238

i 29,030

i 1,785

Consumer and other

i 2

i —

i 372

i 4

i —

i 304

Total

i 31,569

i 13,188

i 1,607

i 73,836

i 36,537

i 2,362

115

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 i no interest income through cash payments received on nonaccrual loans during the years ended December 31, 2021 and 2020 compared to $ i 176,000 in interest income from cash payments received on nonaccrual loans during the year ended December 31, 2019. Had these nonaccruing loans been on accruing status, interest income would have been higher by $ i 1.7 million, $ i 3.3 million and $ i 3.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Approximately $ i 15.5 million and $ i 51.7 million of nonaccrual loans as of December 31, 2021 and 2020, respectively, were performing pursuant to their contractual terms at those dates.

At December 31, 2021 and 2020, there were $ i 2.4 million and $ i 2.5 million, respectively, of TDRs that were performing as of their restructure date and which are 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 TDRs made during the year ended December 31, 2021. The following table outlines the amount of each TDR by loan classification made during the years ended December 31, 2020 and 2019 (dollars in thousands):

Number
of contracts

Pre Modification Outstanding Recorded Investment

Post Modification Outstanding Recorded Investment, net of related allowance

Commercial real estate:

Owner-occupied

i —

Non-owner occupied

i —

Consumer real estate – mortgage

i 1

i 807

Construction and land development

i —

Commercial and industrial

i —

Consumer and other

i —

i 1

i 807

December 31, 2019

Commercial real estate:

Owner-occupied

i 1

i 306

i 287

Non-owner occupied

i —

Consumer real estate – mortgage

i 1

i 683

Construction and land development

i 1

i 19

Commercial and industrial

i 1

i 1,318

i 777

Consumer and other

i —

i 4

i 2,326

i 1,766

During the years ended December 31, 2021, 2020 and 2019, Pinnacle Financial had i no TDRs that subsequently defaulted within twelve months of the restructuring. A default is defined as an occurrence which violates the terms of the receivable's contract.

116

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 had a credit exposure (loans outstanding plus unfunded lines of credit) exceeding i 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at December 31, 2021 with the comparative exposures for December 31, 2020 (in thousands):

At December 31, 2021

Outstanding Principal Balances

Unfunded Commitments

Total exposure

Total Exposure at December 31, 2020

Lessors of nonresidential buildings

i 3,779,463

i 1,589,175

i 5,368,638

i 4,442,712

Lessors of residential buildings

i 1,361,389

i 1,204,963

i 2,566,352

i 2,126,246

New housing for-sale builders

i 555,069

i 979,720

i 1,534,789

i 1,124,302

Hotels and motels

i 866,535

i 53,821

i 920,356

i 1,039,259

Total

i 6,562,456

i 3,827,679

i 10,390,135

i 8,732,519

Pinnacle Financial monitors two ratios regarding construction and commercial real estate lending as a part of its concentration management process. 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 December 31, 2021 and 2020, Pinnacle Bank's construction and land development loans as a percentage of total risk-based capital were i 79.1% and i 89.0%, 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 i 234.1% and i 264.0% as of December 31, 2021 and 2020, 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 commercial real estate and multifamily 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. Pinnacle Bank was within the 100% and 300% guidelines as of December 31, 2021 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 December 31, 2021, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $ i 45.2 million to current directors, executive officers, and their related interests, of which $ i 14.5 million had been drawn upon. At December 31, 2020, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $ i 10.7 million to directors, executive officers, and their related interests, of which approximately $ i 6.8 million had been drawn upon. All loans to directors, executive officers, and their related entities were performing in accordance with contractual terms at December 31, 2021 and 2020.

Loans Held for Sale

At December 31, 2021, Pinnacle Financial had approximately $ i 17.7 million in commercial loans held for sale compared to $ i 31.2 million at December 31, 2020, 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 December 31, 2021, Pinnacle Financial had approximately $ i 30.3 million of mortgage loans held-for-sale compared to approximately $ i 67.8 million at December 31, 2020. Total mortgage loan volumes sold during the year ended December 31, 2021 were approximately $ i 1.6 billion compared to approximately $ i 1.8 billion for the year ended December 31, 2020. During the year ended December 31, 2021, Pinnacle Financial recognized $ i 32.4 million in gains on the sale of these loans, net of commissions paid, compared to $ i 60.0 million and $ i 24.3 million, respectively, during the years ended December 31, 2020 and 2019.

These 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 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.

117

Note 6. Premises and Equipment and Lease Commitments

Premises and equipment at December 31, 2021 and 2020 are summarized as follows (in thousands):

Range of Useful Lives

2021

2020

Land

Not applicable

i 70,240

i 70,140

Buildings

i 15 years

i 30 years

i 202,255

i 194,432

Leasehold improvements

i 15 years

i 20 years

i 54,922

i 50,867

Furniture and equipment

i 3 years

i 20 years

i 138,766

i 126,678

i 466,183

i 442,117

Less: accumulated depreciation and amortization

i 178,001

i 152,116

i 288,182

i 290,001

Depreciation and amortization expense was approximately $ i 22.2 million, $ i 22.8 million, and $ i 22.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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.

i Right-of-use assets and lease liabilities relating to Pinnacle Financial's operating and finance leases are as follows at December 31, 2021 and 2020 (in thousands):


	December 31, 2021		December 31, 2020
Right-of-use assets:
Operating leases	$	i 92,819	$	i 83,647
Finance leases	i 1,544		i 1,770
Total right-of-use assets	$	i 94,363	$	i 85,417
Lease liabilities:
Operating leases	$	i 97,925	$	i 87,737
Finance leases	i 2,739		i 3,001
Total lease liabilities	$	i 100,664	$	i 90,738

i 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 years ended December 31, 2021, 2020 and 2019 (in thousands):

For the years ended December 31,

2021

2020

2019

Operating lease cost

i 15,696

i 13,963

i 13,992

Short-term lease cost

i 297

i 354

i 295

Finance lease cost:

Interest on lease liabilities

i 208

i 227

i 243

Amortization of right-of-use asset

i 226

Sublease income

( i 1,309)

( i 1,324)

( i 1,463)

Net lease cost

i 15,118

i 13,446

i 13,293

118

The weighted average remaining lease term and weighted average discount rate for operating and finance leases at December 31, 2021 and 2020 are as follows:


	December 31, 2021		December 31, 2020
Weighted average remaining lease term
Operating leases	i 10.00 years		i 10.37 years
Finance leases	i 6.84 years		i 7.84 years
Weighted average discount rate
Operating leases	i 2.71	%	i 2.91	%
Finance leases	i 7.22	%	i 7.22	%

Cash flows related to operating and finance leases during the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands):


	For the years ended December 31,
	2021		2020		2019
Operating cash flows related to operating leases	$	i 14,712	$	i 13,494	$	i 13,609
Operating cash flows related to finance leases	$	i 208	$	i 227	$	i 243
Financing cash flows related to finance leases	$	i 261	$	i 243	$	i 226

i i Future undiscounted lease payments for operating and finance leases with initial terms of more than 12 months are as follows at December 31, 2021 (in thousands):


	Operating Leases		Finance Leases
2022	$	i 14,557	$	i 470
2023	i 13,879		i 479
2024	i 13,908		i 527
2025	i 11,717		i 527
2026	i 9,580		i 527
Thereafter	i 50,498		i 967
Total undiscounted lease payments	i 114,139		i 3,497
Less: imputed interest	( i 16,214)		( i 758)
Net lease liabilities	$	i 97,925	$	i 2,739

/ /

Note 7. Deposits

i At December 31, 2021, the scheduled maturities of time deposits are as follows (in thousands):


2022	$	i 1,734,404
2023	i 319,857
2024	i 33,163
2025	i 18,187
2026	i 27,480
Thereafter	i 693
	$	i 2,133,784

At December 31, 2021 and 2020, approximately $ i 603.8 million and $ i 808.3 million, respectively, of time deposits had been issued in denominations of $250,000 or greater.

At December 31, 2021 and 2020, Pinnacle Financial had $ i 1.9 million and $ i 920,000, respectively, of deposit accounts in overdraft status that have been reclassified to loans on the accompanying consolidated balance sheets.

119

Note 8. Federal Home Loan Bank Advances

Pinnacle Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB) and as a result, is eligible for advances from the FHLB pursuant to the terms of various borrowing agreements, which assist Pinnacle Bank in the funding of its home mortgage and commercial real estate loan portfolios. Pinnacle Bank has pledged certain qualifying residential mortgage loans and, pursuant to a blanket lien, certain qualifying commercial mortgage loans with an aggregate carrying value of approximately $ i 7.2 billion as collateral under the borrowing agreements with the FHLB.

At December 31, 2021 and 2020, Pinnacle Bank had outstanding advances from the FHLB totaling approximately $ i 888.7 million and $ i 1.1 billion, respectively. The scheduled maturities of FHLB advances at December 31, 2021 and interest rates are as follows (in thousands):


	Scheduled maturities		Weighted average interest rates(1)
2022	$	i —	i —	%
2023	i —		i —	%
2024	i —		i —	%
2025	i 116,250		i 0.60	%
2026	i —		i —	%
Thereafter	i 775,013		i 2.15	%
	i 891,263
Deferred costs	i 2,582
Total Federal Home Loan Bank advances	$	i 888,681
Weighted average interest rate			i 1.94	%

(1)Some FHLB Cincinnati advances include variable interest rates and could increase in the future. The table reflects rates in effect as of December 31, 2021.

At December 31, 2021, Pinnacle Bank had accommodations which allow it to borrow from the Federal Reserve Bank of Atlanta's discount window and purchase Federal funds from several of its correspondent banks on an overnight basis at prevailing overnight market rates. These accommodations are subject to various restrictions as to their term and availability, and in most cases, must be repaid within less than a month. At December 31, 2021, Pinnacle Bank had approximately $ i 3.1 billion in borrowing availability with the FHLB, $ i 3.4 billion with the Federal Reserve Bank discount window, and approximately $ i 155.0 million with other correspondent banks with whom Pinnacle Bank has arranged lines of credit. At December 31, 2021, Pinnacle Bank was not carrying any balances with the Federal Reserve Bank discount window or correspondent banks under these arrangements.

120

Note 9. Other Borrowings

Pinnacle Financial has twelve wholly-owned subsidiaries that are statutory business trusts created for the exclusive purpose of issuing 30-year capital trust preferred securities, and Pinnacle Financial has entered into certain other subordinated debt agreements. These instruments are outlined below as of December 31, 2021 (in thousands):

Name

Date Established

Maturity

Total Debt Outstanding

Interest Rate at December 31, 2021

Coupon Structure

Trust preferred securities

Pinnacle Statutory Trust I

i December 29, 2003

i December 30, 2033

i 10,310

i 3.02

i 30-day LIBOR + 2.80%

Pinnacle Statutory Trust II

i September 15, 2005

i September 30, 2035

i 20,619

i 1.62

i 30-day LIBOR + 1.40%

Pinnacle Statutory Trust III

i September 07, 2006

i September 30, 2036

i 20,619

i 1.87

i 30-day LIBOR + 1.65%

Pinnacle Statutory Trust IV

i October 31, 2007

i September 30, 2037

i 30,928

i 3.05

i 30-day LIBOR + 2.85%

BNC Capital Trust I

i April 03, 2003

i April 15, 2033

i 5,155

i 3.37

i 30-day LIBOR + 3.25%

BNC Capital Trust II

i March 11, 2004

i April 07, 2034

i 6,186

i 2.97

i 30-day LIBOR + 2.85%

BNC Capital Trust III

i September 23, 2004

i September 23, 2034

i 5,155

i 2.52

i 30-day LIBOR + 2.40%

BNC Capital Trust IV

i September 27, 2006

i December 31, 2036

i 7,217

i 1.92

i 30-day LIBOR + 1.70%

Valley Financial Trust I

i June 26, 2003

i June 26, 2033

i 4,124

i 3.32

i 30-day LIBOR + 3.10%

Valley Financial Trust II

i September 26, 2005

i December 15, 2035

i 7,217

i 1.69

i 30-day LIBOR + 1.49%

Valley Financial Trust III

i December 15, 2006

i January 30, 2037

i 5,155

i 1.86

i 30-day LIBOR + 1.73%

Southcoast Capital Trust III

i August 05, 2005

i September 30, 2035

i 10,310

i 1.72

i 30-day LIBOR + 1.50%

Subordinated Debt

Pinnacle Financial Subordinated Notes

i September 11, 2019

i September 15, 2029

i 300,000

i 4.13

Fixed (1)

Debt issuance costs and fair value adjustment

( i 9,823)

Total subordinated debt and other borrowings

i 423,172

(1) Migrates to three month i LIBOR + 2.775% (or an alternative benchmark rate plus comparable spread in the event that three month LIBOR is no longer published on such adjustment date) beginning September 15, 2024 through the end of the term.

On April 22, 2020, Pinnacle Financial established a credit facility with the Federal Reserve Bank in conjunction with the SBA Paycheck Protection Program. There are i no amounts outstanding on this facility at December 31, 2021, and as of July 30, 2021, no new extensions of credit are allowed under the facility.

On July 30, 2021, Pinnacle Bank redeemed $ i 130.0 million aggregate principal amount of subordinated notes due July 30, 2025. Additionally on November 16, 2021, Pinnacle Financial redeemed $ i 120.0 million aggregate principal amount of subordinated notes due November 16, 2026. The redemptions were funded with existing cash on hand. Pursuant to regulatory guidelines, once the maturity date on subordinated notes is within five years, a portion of the notes will no longer be eligible to be included in regulatory capital, with an additional portion being excluded each year over the five year period approaching maturity.

Note 10. Income Taxes

i Income tax expense attributable to continuing operations for each of the years ended December 31 is as follows (in thousands):

2021

2020

2019

Current tax expense :

Federal

i 125,016

i 98,082

i 77,422

State

i 11,798

i 19,270

i 4,538

Total current tax expense

i 136,814

i 117,352

i 81,960

Deferred tax expense:

Federal

( i 12,149)

( i 45,450)

i 12,446

State

( i 83)

( i 12,865)

i 2,250

Total deferred tax (benefit) expense

( i 12,232)

( i 58,315)

i 14,696

Total income tax expense

i 124,582

i 59,037

i 96,656

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i Pinnacle Financial's income tax expense differs from the amounts computed by applying the Federal income tax statutory rate of i 21% to income before income taxes. A reconciliation of the differences for each of the years in the three-year period ended December 31, 2021 is as follows (in thousands):

2021

2020

2019

Income tax expense at statutory rate

i 136,900

i 77,985

i 104,483

State excise tax expense, net of federal tax effect

i 9,255

i 5,059

i 5,363

Tax-exempt securities

( i 15,243)

( i 13,706)

( i 11,078)

Federal tax credits

( i 4,712)

( i 3,717)

( i 1,704)

Bank owned life insurance

( i 4,413)

( i 4,759)

( i 3,646)

Insurance premiums

( i 273)

( i 272)

( i 238)

Excess tax benefits associated with equity compensation

( i 2,475)

( i 417)

( i 1,011)

Other items

i 5,543

( i 1,136)

i 4,487

Income tax expense

i 124,582

i 59,037

i 96,656

Pinnacle Financial's effective tax rate differs from the Federal income tax rates primarily due to state excise tax expense, investments in bank-qualified tax-exempt municipal securities, tax benefits from Pinnacle Bank's real estate investment trust and municipal investment subsidiaries, and tax benefits associated with share-based compensation, bank owned life insurance, and Pinnacle Financial's captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense, non-deductible FDIC insurance premiums and non-deductible executive compensation.

i The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at December 31, 2021 and 2020 are as follows (in thousands):


	2021		2020
Deferred tax assets:
Allowance for credit losses	$	i 66,785	$	i 72,316
Loans	i 14,778		i 14,694
Insurance	i 759		i 690
Accrued liability for supplemental retirement agreements	i 7,612		i 7,457
Restricted stock and stock options	i 9,148		i 9,181


Equity method investment	i —		i 171
Lease liability	i 26,476		i 23,894
Other real estate owned	i 1,540		i 2,287
Net federal operating loss carryforward and credits	i 1,271		i 1,796
Annual incentive compensation	i 23,095		i 8,712
Partnership interests	i 27,653		i 25,225
Allowance for off balance sheet credit exposures	i 5,873		i 6,069
Other deferred tax assets	i 1,941		i 2,559
Total deferred tax assets	i 186,931		i 175,051

Deferred tax liabilities:
Depreciation and amortization	i 14,520		i 14,418
Core deposit and other intangible assets	i 8,787		i 11,077
Securities	i 21,680		i 34,373
Cash flow hedge	i 9,890		i 19,627
REIT dividends	i 1,222		i 1,366
FHLB related liabilities	i 1,600		i 1,798
Equity method investment	i 23		i —
Right-of-use assets and other leasing transactions	i 24,315		i 22,232
Subordinated debt	i 1,791		i 1,920

Other deferred tax liabilities	i 1,831		i 1,630
Total deferred tax liabilities	i 85,659		i 108,441
Net deferred tax assets	$	i 101,272	$	i 66,610

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At December 31, 2021, the Company had federal and state loss carryforwards resulting from acquisitions of approximately $ i 5.7 million that expire at various dates from 2028 to 2034.

ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods.

i A reconciliation of the beginning and ending unrecognized tax benefit related to state uncertain tax positions is as follows (in thousands):

2021

2020

2019

Balance at January 1,

i 9,658

i 6,910

i 5,083

Increases due to tax positions taken during the current year

i 3,647

i 2,748

i 1,827

Increases due to tax positions taken during a prior year

i —

Decreases due to the lapse of the statute of limitations during the current year

( i 568)

i —

Decreases due to settlements with the taxing authorities during the current year

i —

Balance at December 31,

i 12,737

i 9,658

i 6,910

Note 11. Commitments and Contingent Liabilities

In the normal course of business, Pinnacle Financial has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2021, these commitments amounted to $ i 12.8 billion, of which approximately $ i 1.3 billion related to home equity lines of credit.

Standby letters of credit are generally issued on behalf of an applicant (customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of i two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from Pinnacle Financial under certain prescribed circumstances. Subsequently, Pinnacle Financial would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit. At December 31, 2021, these commitments amounted to $ i 278.0 million.

Pinnacle Financial follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer's creditworthiness is evaluated on a case-by-case basis and the amount of collateral obtained, if any, is based on management's credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should Pinnacle Bank's customers default on their resulting obligation to Pinnacle Bank, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments. At December 31, 2021 and 2020, Pinnacle Financial had accrued $ i 22.5 million and $ i 23.2 million, respectively, for the inherent risks associated with these off-balance sheet commitments.

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these routine claims outstanding at December 31, 2021 will not have a material impact on Pinnacle Financial's consolidated financial condition, operating results or cash flows.

123

Note 12. Salary Deferral Plans

Pinnacle Financial has a 401(k) retirement plan (the 401k Plan) covering all employees who elect to participate, subject to certain eligibility requirements. The 401(k) Plan allows employees to defer up to i 50% of their salary subject to regulatory limitations with Pinnacle Financial matching i 100% of the first i 4% of employee self-directed contributions during 2021, 2020, and 2019. Pinnacle Financial's expense associated with the matching component of the plan for each of the years in the three-year period ended December 31, 2021 was approximately $ i 11.1 million, $ i 9.4 million and $ i 8.1 million, respectively, and is included in the accompanying consolidated statements of operations in salaries and employee benefits expense.

Pinnacle Financial has assumed supplemental retirement plans for certain directors and executive officers of banks which we have acquired. At December 31, 2021 and 2020, respectively, Pinnacle Financial had recorded $ i 30.4 million and $ i 29.8 million of liabilities on its balance sheet associated with these supplemental executive retirement plans. A portion of these assumed plans were fully funded with Rabbi Trusts whose balances at December 31, 2021 totaled $ i 17.2 million. At December 31, 2021, the remaining amounts that are not yet funded are included in other liabilities in the accompanying consolidated balance sheets.

Note 13. Stock Options and Restricted Shares

Pinnacle Financial's Amended and Restated 2018 Omnibus Equity Incentive Plan (the "2018 Plan") permits Pinnacle Financial to reissue outstanding awards that are subsequently forfeited, settled in cash, withheld by Pinnacle Financial to cover withholding taxes or expire unexercised and returned to the 2018 Plan. At December 31, 2021, there were approximately i 1.9 million shares available for issuance under the 2018 Plan.

Upon the acquisition of CapitalMark, Pinnacle Financial assumed approximately i 858,000 stock options under the CapitalMark Option Plan. No further shares remain available for issuance under the CapitalMark Option Plan. At December 31, 2021, all of the remaining options outstanding under any equity incentive plan of Pinnacle Financial were granted under the CapitalMark Option Plan.

Common Stock Options

As of December 31, 2021, of the i 56,147 stock options outstanding, approximately i 21,443 options were granted with the intention to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment to the option holder while approximately i 34,704 options would be deemed non-qualified stock options and thus not subject to favorable tax treatment to the option holder. Favorable treatment generally refers to the recipient of the award not having to report ordinary income at the date of exercise assuming certain conditions are met. All stock options granted under the CapitalMark Plan were fully vested at the date of the CapitalMark merger.

i A summary of stock option activity within the equity incentive plans during each of the years in the three-year period ended December 31, 2021 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as follows:

Number

Weighted-Average Exercise Price

Weighted-Average Contractual Remaining Term (in years)

Aggregate Intrinsic Value (1)

(000's)

Outstanding at December 31, 2018

i 178,591

i 22.77

Granted

i —

Stock options exercised

( i 59,317)

i 21.40

Forfeited

i —

Outstanding at December 31, 2019

i 119,274

i 23.45

Granted

i —

Stock options exercised

( i 17,505)

i 23.40

Forfeited

i —

Outstanding at December 31, 2020

i 101,769

i 23.46

Granted

i —

Stock options exercised

( i 45,125)

i 22.18

Forfeited

( i 497)

i 20.00

Outstanding at December 31, 2021

i 56,147

i 24.51

i 1.19

i 3,985

Options exercisable at December 31, 2021

i 56,147

i 24.51

i 1.19

i 3,985

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(1)The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of Pinnacle Financial Common Stock of $ i 95.50 per common share at December 31, 2021 for the 56,147 options that were in-the-money at December 31, 2021.

During 2021, 2020 and 2019, the aggregate intrinsic value of stock options exercised under Pinnacle Financial's equity incentive plans was $ i 3.0 million, $ i 350,000 and $ i 2.3 million, respectively, determined as of the date of option exercise.

There have been no options granted by Pinnacle Financial since 2008. All stock option awards granted by Pinnacle Financial were fully vested during 2013. Stock options granted under the CapitalMark Plan were fully vested at the time of acquisition. As such, there was no impact on the results of operations for stock-based compensation related to stock options for any year in the three-year period ended December 31, 2021, except for the tax impact recorded as a component of income tax expense upon exercise.

Restricted Shares

A summary of activity for unvested restricted share awards for the years ended December 31, 2021, 2020, and 2019 follows:


	Number	Grant Date Weighted-Average Cost
Unvested at December 31, 2018	i 692,806	$	i 55.19
Shares awarded	i 245,845	i 55.25
Restrictions lapsed and shares released to associates/directors	( i 348,145)	i 40.47
Shares forfeited	( i 35,210)	i 58.22
Unvested at December 31, 2019	i 555,296	$	i 57.04
Shares awarded	i 284,904	i 55.91
Restrictions lapsed and shares released to associates/directors	( i 215,846)	i 55.39
Shares forfeited	( i 29,685)	i 59.64
Unvested at December 31, 2020	i 594,669	$	i 56.97
Shares awarded	i 249,641	i 77.00
Restrictions lapsed and shares released to associates/directors	( i 193,846)	i 56.47
Shares forfeited	( i 37,129)	i 62.79
Unvested at December 31, 2021	i 613,335	$	i 64.93

Pinnacle Financial grants restricted share awards to associates (including certain members of executive management) and outside directors with time-based vesting criteria. The following tables outline restricted stock grants that were made by grant year, grouped by similar vesting criteria, during the three-year period ended December 31, 2021. The table below reflects the life-to-date activity for these awards:

Grant
year

Group (1)

Vesting
period in years

Shares
awarded

Restrictions lapsed and shares released to participants

Shares withheld
for taxes by participants

Shares forfeited by participants (4)

Shares unvested

Time Based Awards

2019

Associates (2)

i 3

—

i 5

i 229,296

i 58,734

i 23,995

i 30,030

i 116,537

2020

Associates (2)

i 3

—

i 5

i 266,379

i 40,692

i 16,847

i 18,660

i 190,180

2021

Associates (2)

i 3

—

i 5

i 237,811

i 139

i 92

i 13,514

i 224,066

Outside Director Awards (3)

2019

Outside directors

i 1

i 16,549

i 14,582

i 1,967

i —

2020

Outside directors

i 1

i 18,525

i 16,327

i 2,198

i —

2021

Outside directors

i 1

i 11,830

i —

i 11,830

(1)Groups include employees (referred to as associates above) and outside directors. When the restricted shares are awarded, a participant receives voting rights and forfeitable dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. Once the restrictions lapse, the participant is taxed on the value of the award and may elect to sell some shares (or have Pinnacle Financial withhold some shares) to pay the applicable income taxes associated with the award. Alternatively, the recipient can pay the withholding taxes in cash. For time-based vesting restricted share awards, dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of termination. For awards to Pinnacle Financial's directors, dividends are placed into escrow until the forfeiture restrictions on such shares lapse.

(2)The forfeiture restrictions on these restricted share awards lapse in equal annual installments on the anniversary date of the grant.

(3)Restricted share awards are issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on March 1, 2022 based on each individual board member meeting attendance goals for the various board and board committee meetings to which each member

125

was scheduled to attend.

(4)These shares represent forfeitures resulting from recipients whose employment or board membership was terminated during the year-to-date period ended December 31, 2021. Any dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of termination or will not be distributed from escrow, as applicable.

Compensation expense associated with the time-based vesting restricted share awards is recognized over the time period that the restrictions associated with the awards lapse on a straight-line basis based on the total cost of the award.

Restricted Stock Unit Awards

In 2021, Pinnacle Financial granted restricted stock units to its Named Executive Officers (NEOs) and leadership team members with time-based vesting criteria. Compensation expense associated with time-based vesting restricted stock unit awards is recognized over the time period that the restrictions associated with the awards lapse on a straight-line basis based on the total cost of the award. The following table outlines restricted stock unit grants that were made, grouped by similar vesting criteria, during the year ended December 31, 2021. The table reflects the life-to-date activity for these awards:

Grant year

Vesting
period in years

Shares
awarded

Restrictions lapsed and shares released to participants

Shares withheld for taxes by participants

Shares forfeited by participants (1)

Shares unvested

2021

i 3

i 56,864

i 89

i 39

i 368

i 56,368

(1)These shares represent forfeitures resulting from recipients whose employment was terminated during the year-to-date period ended December 31, 2021. Dividend equivalents are held in escrow for award recipients for dividends paid prior to the forfeiture restrictions lapsing. Such dividend equivalents are not released from escrow if an award is forfeited.

Performance Stock Unit Awards

The following table details the performance stock unit awards outstanding at December 31, 2021:


	Units Awarded				Applicable performance periods associated with each tranche (fiscal year)	Service period per tranche (in years)	Subsequent holding period per tranche (in years)	Period in which units to be settled into shares of common stock (2)
Grant year	Named Executive Officers (NEOs) (1)			Leadership Team other than NEOs
2021(3)	i 89,234	—	i 214,155	i 45,240	2021-2023	i 0	i 0	2024
2020	i 136,137	—	i 204,220	i 59,648	2020	i 2	i 3	2025
					2021	i 2	i 2	2025
					2022	i 2	i 1	2025
2019	i 166,211	—	i 249,343	i 52,244	2019	i 2	i 3	2024
					2020	i 2	i 2	2024
					2021	i 2	i 1	2024
2018	i 96,878	—	i 145,339	i 25,990	2018	i 2	i 3	2023
					2019	i 2	i 2	2023
					2020	i 2	i 1	2023
2017	i 72,537	—	i 109,339	i 24,916	2017	i 2	i 3	2022
					2018	i 2	i 2	2022
					2019	i 2	i 1	2022

(1)The named executive officers are awarded a range of awards that may be earned based on attainment of goals between a target level of performance and a maximum level of performance.

(2)Performance stock unit awards granted prior to 2021, if earned, will be settled in shares of Pinnacle Financial Common Stock in the periods noted in the table, if Pinnacle Bank's ratio of non-performing assets to its loans plus ORE ("NPA Ratio") is less than amounts established in the applicable award agreement.

(3)Performance stock unit awards granted in 2021, if earned, will be settled in shares of Pinnacle Financial Common Stock in the period noted in the table, if the performance criterion included in the applicable performance unit award agreement, including the NPA Ratio, are met.

During the years ended December 31, 2021 and 2020, the restrictions associated with i 134,146 performance stock unit awards and i 129,723 performance stock unit awards, respectively, granted in prior years lapsed, based on the terms of the applicable award agreement and approval by Pinnacle Financial's Human Resources and Compensation Committee, and were settled into shares of Pinnacle Financial common stock with i 46,616 shares and i 43,996 shares, respectively, being withheld to pay the taxes associated with

126

the settlement of those shares.

A summary of stock compensation expense, net of the impact of income taxes, related to restricted share awards, restricted stock unit awards and performance stock unit awards for the three-year period ended December 31, 2021, follows (in thousands):


	2021		2020		2019

Restricted stock expense	$	i 24,952	$	i 18,737	$	i 21,226
Income tax benefit	i 6,522		i 4,898		i 5,548
Restricted stock expense, net of income tax benefit	$	i 18,430	$	i 13,839	$	i 15,678

As of December 31, 2021, compensation cost related to unvested restricted share awards, restricted stock unit awards and performance stock unit awards not yet recognized was $ i 51.7 million. This expense, if the underlying awards are earned, is expected to be recognized over a weighted-average period of i 1.96 years.

Note 14. 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. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

Non-hedge derivatives

For derivatives not designated as hedges, the gain or loss is recognized in current period earnings. Pinnacle Financial enters into interest rate swaps (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 customer transactions as of December 31, 2021 and 2020 is included in the following table (in thousands):

Notional
Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

Interest rate swap agreements:

Assets

i 1,540,992

i 39,770

i 1,565,916

i 101,602

Liabilities

i 1,540,992

( i 40,241)

i 1,565,916

( i 102,919)

Total

i 3,081,984

( i 471)

i 3,131,832

( i 1,317)

The effects of Pinnacle Financial's interest rate swaps to facilitate customers' transactions on the income statement during the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands):


		Amount of Gain (Loss) Recognized in Income
	Location of Gain (Loss) Recognized in Income	Year ended December 31,
		2021		2020		2019
Interest rate swap agreements	Other noninterest income	$	i 846	$	( i 1,109)	$	( i 80)

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, 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. The hedging strategy converts the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and is used in an effort to protect Pinnacle Financial from floating interest rate variability. A summary of Pinnacle Financial's cash flow hedge relationships as of December 31, 2021 and 2020 are as follows (in thousands):

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Balance Sheet Location

Weighted Average Remaining Maturity
(In Years)

Weighted Average Pay Rate

Receive Rate

Notional
Amount

Estimated
Fair Value

Notional
Amount

Estimated
Fair Value

Asset derivatives

Interest rate floor - loans

i Other assets

i 0.00

i —%

i 2.25% minus 1 month LIBOR

i —

i 1,500,000

i 124,585

The effects of Pinnacle Financial's cash flow hedge relationships on the statement of comprehensive income (loss) during the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands):


	Amount of Gain (Loss) Recognized in Other Comprehensive Income
	Years ended December 31,
	2021		2020		2019
Asset derivatives
Interest rate floor - loans	$	( i 15,034)	$	i 62,979	$	( i 1,432)
Liability derivatives
Interest rate swaps - borrowings	$	i —	$	i 2,447	$	( i 1,149)
	$	( i 15,034)	$	i 65,426	$	( i 2,581)

The cash flow hedges were determined to be highly effective during the periods presented and as a result qualified for hedge accounting treatment. If a hedge were 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. A hedging relationship is no longer considered to be 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 $ i 9.6 million, net of tax, were reclassified from accumulated other comprehensive income (loss) into net income during the year ended December 31, 2021. Losses on cash flow hedges totaling $ i 5.5 million and $ i 1.6 million, net of tax, were reclassified from other comprehensive income (loss) into net income during the years ended December 31, 2020 and 2019, respectively. Approximately $ i 10.0 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.

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 securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR or federal funds rates. 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.

A summary of Pinnacle Financial's fair value hedge relationships as of December 31, 2021 and 2020 are as follows (in thousands):

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

Asset derivatives

Interest rate swap agreements - securities

i Other assets

i 5.30

i 0.59%

i Federal funds

i 559,820

i 15,109

i 231,421

i 4,696

Liability derivatives

Interest rate swap agreements - securities

i Other liabilities

i 5.03

i 3.08%

i 3 month LIBOR

i 471,670

( i 39,781)

i 477,510

( i 72,010)

i 1,031,490

( i 24,672)

i 708,931

( i 67,314)

128

Notional amounts totaling $ i 471.7 million included in the table above receive a variable rate of interest based on three month LIBOR and notional amounts totaling $ i 559.8 million receive a variable rate of interest based on the daily compounded federal funds rate.

The effects of Pinnacle Financial's fair value hedge relationships on the income statement during the years end December 31, 2021, 2020 and 2019 were as follows (in thousands):

Location of Gain (Loss)

Amount of Gain (Loss) Recognized in Income

Year ended December 31,

Securities

2021

2020

2019

Interest rate swap agreements

Interest income on securities

i 42,642

( i 26,536)

( i 25,982)

Securities available-for-sale

Interest income on securities

( i 42,642)

i 26,536

i 25,982

Location of Gain (Loss)

Amount of Loss Recognized in Income

Years ended December 31,

Loans

2021

2020

2019

Interest rate swap agreements

Interest income on loans

i —

( i 6,915)

Loans

Interest income on loans

i —

i 6,915

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at December 31, 2021 and 2020 (in thousands):

Carrying Amount of the Hedged Assets

Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets

Line item on the balance sheet

Securities available-for-sale

i 1,165,773

i 841,543

i 24,672

i 67,314

During the years ended December 31, 2021, 2020 and 2019 amortization expense totaling $ i 3.5 million, $ i 4.3 million and $ i 2.7 million, respectively, related to previously terminated fair value hedges was recognized as a reduction to interest income on loans.

Note 15. Employment Contracts

Pinnacle Financial has entered into, and subsequently amended employment agreements with i five of its senior executives: the President and Chief Executive Officer, the Chairman of the Board, the Chairman of the Carolinas and Virginia, the Chief Administrative Officer and the Chief Financial Officer. These agreements, as amended, automatically renew each year on January 1 for an additional year unless any of the parties to the agreements gives notice of intent not to renew the agreement prior to November 30th of the preceding year, in which case the agreement terminates 30 days later. The agreements specify that in certain defined "Terminating Events," Pinnacle Financial will be obligated to pay each of the i five senior executives certain amounts, which vary according to the Terminating Event, which is based on their annual salaries and bonuses. These Terminating Events include termination for disability, cause, without cause and other events. The agreement with the Chairman of the Carolinas and Virginia also provides for the payment of certain deferred benefits under his prior employment agreement with BNC upon termination of his employment with Pinnacle Financial.

Note 16. Related Party Transactions

See Note 5 - "Loans and Allowance for Credit Losses", concerning loans and other extensions of credit to certain directors, officers, and their related entities and individuals, Note 12 – "Salary Deferral Plans" regarding supplemental retirement agreement obligations to certain directors who were formerly directors or employees of acquired banks and Note 2 - "Equity Method Investment" regarding related parties associated with the investment.

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Note 17. Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.

Valuation Hierarchy

FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Assets

Securities available-for-sale – Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.

Other investments – Included in other investments are investments recorded at fair value primarily in certain nonpublic investments and funds. The valuation of these nonpublic investments requires management judgment due to the absence of observable quoted market prices, inherent lack of liquidity and the long-term nature of such assets. These investments are valued initially based upon transaction price. The carrying values of other investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through financial reports provided by the portfolio managers of the investment. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies and changes in market outlook and the third-party financing environment over time. In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions. These investments are included in Level 3 of the valuation hierarchy if the entities and funds are not widely traded and the underlying investments are in privately-held and/or start-up companies for which market values are not readily available. Certain investments in funds for which the underlying assets of the fund represent publicly traded investments are included in Level 2 of the valuation hierarchy.

Other assets – Included in other assets are certain assets carried at fair value, including interest rate swap agreements to facilitate customer transactions, interest rate floors designated as cash flow hedges and interest rate locks associated with the mortgage loan pipeline. The carrying amount of interest rate swap agreements is based on Pinnacle Financial's pricing models that utilize observable market inputs. The fair value of the cash flow hedge agreements is determined by calculating the difference between the discounted fixed rate cash flows and the discounted variable rate cash flows. The fair value of the mortgage loan pipeline is based upon the projected sales price of the underlying loans, taking into account market interest rates and other market factors at the measurement date, net of the projected fallout rate. Pinnacle Financial reflects these assets within Level 2 of the valuation hierarchy as these assets are valued using similar transactions that occur in the market.

130

Collateral dependent loans – Collateral dependent loans are measured at the fair value of the collateral securing the loan less estimated selling costs. The fair value of real estate collateral is determined based on real estate appraisals which are generally based on recent sales of comparable properties which are then adjusted for property specific factors. Non-real estate collateral is valued based on various sources, including third party asset valuations and internally determined values based on cost adjusted for depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial condition.

Other real estate owned – Other real estate owned (OREO) represents real estate foreclosed upon by Pinnacle Bank through loan defaults by customers or acquired by deed in lieu of foreclosure. A significant portion of these amounts relate to lots, homes and development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has adequate collateral. Upon foreclosure, the property is recorded at the lower of cost or fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for credit losses. Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are also reflected in noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value as appraisal values are property-specific and sensitive to the changes in the overall economic environment.

Liabilities

Other liabilities – Pinnacle Financial has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions, interest rate swaps designated as fair value and cash flow hedges and interest rate locks associated with the funding for its mortgage loan originations. The fair value of these liabilities is based on Pinnacle Financial's pricing models that utilize observable market inputs and is reflected within Level 2 of the valuation hierarchy.

131

i The following tables present the financial instruments carried at fair value on a recurring basis as of December 31, 2021 and 2020, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):

Total carrying value in the consolidated balance sheet

Quoted market prices in an active market
(Level 1)

Models with significant observable market parameters
(Level 2)

Models with significant unobservable market parameters
(Level 3)

Investment securities available-for-sale:

U.S. treasury securities

i 193,609

i —

i 193,609

i —

U.S. government agency securities

i 632,009

i —

i 632,009

i —

Mortgage-backed securities

i 1,920,239

i —

i 1,920,239

i —

State and municipal securities

i 1,823,837

i —

i 1,823,009

i 828

Asset-backed securities

i 229,569

i —

i 229,569

i —

Corporate notes and other

i 114,931

i —

i 114,931

i —

Total investment securities available-for-sale

i 4,914,194

i —

i 4,913,366

i 828

Other investments

i 125,969

i —

i 24,973

i 100,996

Other assets

i 57,441

i —

i 57,441

i —

Total assets at fair value

i 5,097,604

i —

i 4,995,780

i 101,824

Other liabilities

i 80,106

i —

i 80,106

i —

Total liabilities at fair value

i 80,106

i —

i 80,106

i —

Investment securities available-for-sale:

U.S. treasury securities

i 82,209

i —

i 82,209

i —

U.S. government agency securities

i 76,403

i —

i 76,403

i —

Mortgage-backed securities

i 1,689,191

i —

i 1,689,191

i —

State and municipal securities

i 1,443,363

i —

i 1,427,866

i 15,497

Asset-backed securities

i 177,936

i —

i 177,936

i —

Corporate notes and other

i 117,579

i —

i 117,579

i —

Total investment securities available-for-sale

i 3,586,681

i —

i 3,571,184

i 15,497

Other investments

i 73,395

i —

i 25,636

i 47,759

Other assets

i 242,470

i —

i 242,470

i —

Total assets at fair value

i 3,902,546

i —

i 3,839,290

i 63,256

Other liabilities

i 177,025

i —

i 177,025

i —

Total liabilities at fair value

i 177,025

i —

i 177,025

i —

The following table presents assets measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020 (in thousands):

Total carrying value in the consolidated balance sheet

Quoted market prices in an active market
(Level 1)

Models with significant observable market parameters
(Level 2)

Models with significant unobservable market
parameters
(Level 3)

Other real estate owned

i 8,537

i —

i 8,537

Collateral dependent loans (1)

i 30,799

i —

i 30,799

Total

i 39,336

i —

i 39,336

Other real estate owned

i 12,360

i —

i 12,360

Collateral dependent loans (1)

i 43,795

i —

i 43,795

Total

i 56,155

i —

i 56,155

(1)The carrying values of collateral dependent loans at December 31, 2021 and 2020 are net of valuation allowances of $ i 1.7 million and $ i 3.5 million, respectively.

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In the case of the investment securities portfolio, Pinnacle Financial monitors the portfolio to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the year ended December 31, 2021, there were i no transfers between Levels 1, 2 or 3.

The table below includes a rollforward of the balance sheet amounts for the years ended December 31, 2021 and December 31, 2020, (including the change in fair value) for financial instruments classified by Pinnacle Financial within Level 3 of the valuation hierarchy measured at fair value on a recurring basis including changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands): i

For the year ended December 31,

2021

2020

Available-for-sale Securities

Other
investments

Other
liabilities

Available-for-sale Securities

Other
investments

Other
liabilities

Fair value, Jan. 1

i 15,497

i 47,759

i —

i 15,903

i 38,156

i —

Total net realized gains included in income

i 1,302

i 23,109

i —

i 110

i 1,067

i —

Change in unrealized gains/losses included in other comprehensive income

( i 3,184)

i —

i 627

i —

Purchases

i —

i 45,986

i —

i 11,663

i —

Issuances

i —

Settlements

( i 12,787)

( i 15,858)

i —

( i 1,143)

( i 3,127)

i —

Transfers out of Level 3

i —

Fair value, Dec. 31

i 828

i 100,996

i —

i 15,497

i 47,759

i —

Total realized gains included in income

i 1,302

i 23,109

i —

i 110

i 1,067

i —

i The following table presents the carrying amounts, estimated fair value and placement in the fair value hierarchy of Pinnacle Financial's financial instruments at December 31, 2021 and 2020. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash, cash equivalents, interest-bearing due from banks and restricted cash, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as non-interest bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity (in thousands).

Carrying/
Notional
Amount

Estimated

Fair Value (1)

Quoted market prices in an active market
(Level 1)

Models with significant observable market parameters
(Level 2)

Models with significant unobservable market
parameters
(Level 3)

Financial assets:

Securities purchased with agreement to resell

i 1,000,000

i 980,543

i —

i 980,543

Securities held-to-maturity

i 1,155,958

i 1,188,049

i —

i 1,188,049

i —

Loans, net

i 23,151,029

i 23,223,299

i —

i 23,223,299

Consumer loans held-for-sale

i 45,806

i 46,288

i —

i 46,288

i —

Commercial loans held-for-sale

i 17,685

i 17,871

i —

i 17,871

i —

Financial liabilities:

Deposits and securities sold under agreements to repurchase

i 31,457,092

i 30,812,222

i —

i 30,812,222

Federal Home Loan Bank advances

i 888,681

i 1,006,866

i —

i 1,006,866

Subordinated debt and other borrowings

i 423,172

i 479,879

i —

i 479,879

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Carrying/
Notional
Amount

Estimated

Fair Value (1)

Quoted market prices in an active market
(Level 1)

Models with significant observable market parameters
(Level 2)

Models with significant unobservable market
parameters
(Level 3)

Off-balance sheet instruments:

Commitments to extend credit (2)

i 13,063,942

i 24,351

i —

i 24,351

Financial assets:

Securities held-to-maturity

i 1,028,359

i 1,066,531

i —

i 1,066,531

i —

Loans, net

i 22,139,451

i 22,407,546

i —

i 22,407,546

Consumer loans held-for-sale

i 87,821

i 89,625

i —

i 89,625

i —

Commercial loans held-for-sale

i 31,200

i 31,841

i —

i 31,841

i —

Financial liabilities:

Deposits and securities sold under agreements to repurchase

i 27,833,739

i 26,929,142

i —

i 26,929,142

Federal Home Loan Bank advances

i 1,087,927

i 1,189,035

i —

i 1,189,035

Subordinated debt and other borrowings

i 670,575

i 677,521

i —

i 677,521

Off-balance sheet instruments:

Commitments to extend credit (2)

i 9,692,607

i 24,887

i —

i 24,887

(1)Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to approximate those that a market-participant would realize in a hypothetical orderly transaction.

(2)At the end of each period, Pinnacle Financial evaluates the inherent risks of the outstanding off-balance sheet commitments, including both commitments for unfunded loans and standby letters of credit. In making this evaluation, Pinnacle Financial utilizes credit loss expectations on funded loans from our allowance for credit losses methodology and evaluates the probability that the outstanding commitment will eventually become a funded loan. As a result, at December 31, 2021 and 2020, Pinnacle Financial included in other liabilities $22.5 million and $23.2 million, respectively, representing expected credit losses on off-balance sheet commitments, which are reflected in the estimated fair values of the related commitments. Also included in the fair values at December 31, 2021 and 2020, are unamortized fees related to these commitments of $1.9 million and $1.7 million, respectively.

Note 18. Variable Interest Entities

Under ASC 810, Pinnacle Financial is deemed to be the primary beneficiary and required to consolidate a variable interest entity (VIE) if it has a variable interest in the VIE that provides it with a controlling financial interest. For such purposes, the determination of whether a controlling financial interest exists is based on whether a single party has both the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. ASC 810 requires continual reconsideration of conclusions reached regarding which interest holder is a VIE's primary beneficiary and disclosures surrounding those VIE's which have not been consolidated. The consolidation methodology provided in this footnote as of December 31, 2021 and 2020 has been prepared in accordance with ASC 810.

Non-consolidated Variable Interest Entities

At December 31, 2021, Pinnacle Financial did not have any consolidated VIEs to disclose but did have the following non-consolidated VIEs: low income housing partnerships, trust preferred issuances, commercial loan TDRs, and managed discretionary trusts.

Since 2003, Pinnacle Financial has made equity investments as a limited partner in various partnerships that sponsor affordable housing projects. The purpose of these investments is to achieve a satisfactory return on capital and to support Pinnacle Financial's community reinvestment initiatives. The activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants generally within Pinnacle Financial's primary geographic region.

Pinnacle Financial has invested in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to assist Pinnacle Bank in achieving its strategic plan associated with the Community Reinvestment Act and to achieve a satisfactory return on capital. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.

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Pinnacle Financial is a limited partner in each LIHTC limited partnership. Each limited partnership is managed by an unrelated third party general partner who exercises full control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Except for limited rights granted to the limited partner(s), the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.

The partnerships related to affordable housing projects are considered VIEs because Pinnacle Financial, as the holder of the equity investment at risk, does not have the ability to direct the activities that most significantly affect the success of the entity through voting rights or similar rights. While Pinnacle Financial could absorb losses that are significant to these partnerships as it has a risk of loss for its initial capital contributions and funding commitments to each partnership, it is not considered the primary beneficiary of the partnerships as the general partners whose managerial functions give them the power to direct the activities that most significantly impact the partnerships' economic performance and who are exposed to all losses beyond Pinnacle Financial's initial capital contributions and funding commitments are considered the primary beneficiaries.

Pinnacle Financial (or companies it has acquired) has previously issued subordinated debt totaling $ i 133.0 million to certain statutory trusts which are considered VIEs because Pinnacle Financial's capital contributions to these trusts are not considered "at risk" in evaluating whether the holders of the equity investments at risk in the trusts have the power through voting rights or similar rights to direct the activities that most significantly impact the entities' economic performance. These trusts were not consolidated by Pinnacle Financial because the holders of the securities issued by the trusts absorb a majority of expected losses and residual returns.

For certain troubled commercial loans, Pinnacle Financial restructures the terms of the borrower's debt in an effort to increase the probability of receipt of amounts contractually due. However, Pinnacle Financial does not assume decision-making power or responsibility over the borrower's operations. Following a debt restructuring, the borrowing entity typically meets the definition of a VIE as the initial determination of whether the entity is a VIE must be reconsidered and economic events have proven that the entity's equity is not sufficient to permit it to finance its activities without additional subordinated financial support or a restructuring of the terms of its financing. As Pinnacle Financial does not have the power to direct the activities that most significantly impact such troubled commercial borrowers' operations, it is not considered the primary beneficiary even in situations where, based on the size of the financing provided, Pinnacle Financial is exposed to potentially significant benefits and losses of the borrowing entity. Pinnacle Financial has no contractual requirements to provide financial support to the borrowing entities beyond certain funding commitments established upon restructuring of the terms of the debt to allow for completion of activities which prepare the collateral related to the debt for sale.

Pinnacle Financial serves as manager over certain discretionary trusts, for which it makes investment decisions on behalf of the trusts' beneficiaries in return for a management fee. The trusts meet the definition of a VIE since the holders of the equity investments at risk do not have the power through voting rights or similar rights to direct the activities that most significantly impact the entities' economic performance. However, since the management fees Pinnacle Financial receives are not considered variable interests in the trusts as all of the requirements related to permitted levels of decision maker fees are met, such VIEs are not consolidated by Pinnacle Financial because it cannot be the trusts' primary beneficiary. Pinnacle Financial has no contractual requirements to provide financial support to the trusts.

The following table summarizes VIE's that are not consolidated by Pinnacle Financial as of December 31, 2021 and 2020 (in thousands): i

Type

Maximum
Loss Exposure

Liability
Recognized

Maximum
Loss Exposure

Liability
Recognized

Classification

Low Income Housing Partnerships

i 189,600

i —

i 143,190

i —

Other Assets

Trust Preferred Issuances

N/A

i 132,995

N/A

i 132,995

Subordinated Debt

Commercial TDRs

i 145

i —

i 180

i —

Loans

Managed Discretionary Trusts

N/A

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Note 19. Regulatory Matters

Pursuant to Tennessee banking law, Pinnacle Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (TDFI), pay any dividends to Pinnacle Financial in a calendar year in excess of the total of Pinnacle Bank's retained net income for that year plus the retained net income for the preceding two years. Under Tennessee corporate law, Pinnacle Financial is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, Pinnacle Financial's board of directors must consider its and Pinnacle Bank's current and prospective capital, liquidity, and other needs. In addition to state law limitations on Pinnacle Financial's ability to pay dividends, the Federal Reserve imposes limitations on Pinnacle Financial's ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if Pinnacle Financial's regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.

In addition, the Federal Reserve has issued supervisory guidance advising bank holding companies to eliminate, defer or reduce dividends paid on common stock and other forms of Tier 1 capital where the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, the company’s prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition or the company will not meet, or is in danger of not meeting, minimum regulatory capital adequacy ratios. Recent supplements to this guidance reiterate the need for bank holding companies to inform their applicable reserve bank sufficiently in advance of the proposed payment of a dividend in certain circumstances.

During the year ended December 31, 2021, Pinnacle Bank paid $ i 99.8 million in dividends to Pinnacle Financial. As of December 31, 2021, Pinnacle Bank could pay approximately $ i 876.2 million of additional dividends to Pinnacle Financial without prior approval of the Commissioner of the TDFI. Since the fourth quarter of 2013, Pinnacle Financial has paid a quarterly common stock dividend. The board of directors of Pinnacle Financial has increased the dividend amount per share over time. The most recent increase occurred on January 18, 2022, when the board of directors increased the dividend to $ i 0.22 per share from $ i 0.18 per share. During the second quarter of 2020, the firm successfully issued i 9.0 million depositary shares, each representing a 1/40th fractional interest in a share of Series B noncumulative, perpetual preferred stock (the "Series B Preferred Stock") in a registered public offering to both retail and institutional investors. Beginning in the third quarter of 2020, Pinnacle Financial began paying a quarterly dividend of $ i 16.88 per share (or $ i 0.422 per depositary share), on the Series B Preferred Stock. The amount and timing of all future dividend payments by Pinnacle Financial, if any, including dividends on Pinnacle Financial's Series B Preferred Stock, is subject to discretion of Pinnacle Financial's board of directors and will depend on Pinnacle Financial's receipt of dividends from Pinnacle Bank, earnings, capital position, financial condition and other factors, including regulatory capital requirements, as they become known to Pinnacle Financial and receipt of any regulatory approvals that may become required as a result of each of Pinnacle Financial's or Pinnacle Bank's financial results.

Pinnacle Financial and Pinnacle Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pinnacle Financial and Pinnacle Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pinnacle Financial's and Pinnacle Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and its banking subsidiary to maintain minimum amounts and ratios of common equity Tier 1 capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and Tier 1 capital to average assets.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, each of Pinnacle Bank and Pinnacle Financial has elected the option to delay the estimated impact on regulatory capital of Pinnacle Financial's and Pinnacle Bank's adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 (collectively the “transition adjustments”), was delayed through December 31, 2021. As of January 1, 2022, the cumulative amount of the transition adjustments of $ i 68.0 million became fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in 2022, 50% recognized in 2023, and 25% recognized in 2024. Beginning January 1, 2025, the temporary regulatory capital benefits will be fully reversed.

136

Management believes, as of December 31, 2021, that Pinnacle Financial and Pinnacle Bank met all capital adequacy requirements to which they are subject. To be categorized as well-capitalized under applicable banking regulations, Pinnacle Financial and Pinnacle Bank must maintain certain total, Tier 1, common equity Tier 1 and Tier 1 leverage capital ratios as set forth in the following table and not be subject to a written agreement, order or directive to maintain a higher capital level. The capital conservation buffer of 2.5% is not included in the required minimum ratios of the table presented below. Pinnacle Financial's and Pinnacle Bank's actual capital amounts and ratios are presented in the following table (in thousands):

Actual

Minimum Capital
Requirement

Minimum
To Be Well-Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total capital to risk weighted assets:

Pinnacle Financial

i 4,060,598

i 13.8

i 2,347,963

i 8.0

i 2,934,953

i 10.0

Pinnacle Bank

i 3,670,111

i 12.6

i 2,334,243

i 8.0

i 2,917,804

i 10.0

Tier 1 capital to risk weighted assets:

Pinnacle Financial

i 3,425,751

i 11.7

i 1,760,972

i 6.0

i 2,347,963

i 8.0

Pinnacle Bank

i 3,464,265

i 11.9

i 1,750,683

i 6.0

i 2,334,243

i 8.0

Common equity Tier 1 capital:

Pinnacle Financial

i 3,208,503

i 10.9

i 1,320,729

i 4.5

N/A

Pinnacle Bank

i 3,464,142

i 11.9

i 1,313,012

i 4.5

i 1,896,573

i 6.5

Tier 1 capital to average assets (*):

Pinnacle Financial

i 3,425,751

i 9.7

i 1,412,747

i 4.0

N/A

Pinnacle Bank

i 3,464,265

i 9.9

i 1,406,063

i 4.0

i 1,757,578

i 5.0

Total capital to risk weighted assets:

Pinnacle Financial

i 3,678,405

i 14.3

i 2,063,352

i 8.0

i 2,579,190

i 10.0

Pinnacle Bank

i 3,259,538

i 12.7

i 2,055,892

i 8.0

i 2,569,865

i 10.0

Tier 1 capital to risk weighted assets:

Pinnacle Financial

i 2,803,541

i 10.9

i 1,547,514

i 6.0

i 2,063,352

i 8.0

Pinnacle Bank

i 2,933,674

i 11.4

i 1,541,919

i 6.0

i 2,055,892

i 8.0

Common equity Tier 1 capital:

Pinnacle Financial

i 2,586,292

i 10.0

i 1,160,635

i 4.5

N/A

Pinnacle Bank

i 2,933,551

i 11.4

i 1,156,439

i 4.5

i 1,670,412

i 6.5

Tier 1 capital to average assets (*):

Pinnacle Financial

i 2,803,541

i 8.6

i 1,298,756

i 4.0

N/A

Pinnacle Bank

i 2,933,674

i 9.1

i 1,294,033

i 4.0

i 1,617,541

i 5.0

(*) Average assets for the above calculations were based on the most recent quarter.

As noted above, during the second quarter of 2020, Pinnacle Financial issued 9.0 million depositary shares, each representing a 1/40th interest in a share of Series B Preferred Stock in a registered public offering to both retail and institutional investors. Net proceeds from the transaction were approximately $ i 217.1 million after deducting the underwriting discounts and offering expenses payable by Pinnacle Financial. The net proceeds were initially retained by Pinnacle Financial and the remaining net proceeds are available to support the capital needs of Pinnacle Financial and Pinnacle Bank, to support Pinnacle Financial's obligations, including interest payments on its outstanding indebtedness and dividend payments on the Series B Preferred Stock, and for other general corporate purposes.

137

Note 20. Other Noninterest Income and Expense

Other noninterest income and expense totals are more fully detailed in the following tables (in thousands). Any components of these totals exceeding 1% of the aggregate of total net interest income and total noninterest income for any of the years presented, as well as amounts Pinnacle Financial elected to present, are stated separately. i

Years ended
December 31,

2021

2020

2019

Other noninterest income:

Interchange and other consumer fees

i 57,263

i 40,960

i 36,158

Bank-owned life insurance

i 18,942

i 18,784

i 17,361

Loan swap fees

i 5,414

i 4,568

i 4,758

SBA loan sales

i 12,242

i 5,579

i 4,933

Income from other equity investments

i 23,109

i 1,072

i 2,789

Other noninterest income

i 12,839

i 11,940

i 4,838

Total other noninterest income

i 129,809

i 82,903

i 70,837

Other noninterest expense:

Deposit related expenses

i 24,003

i 24,392

i 17,017

Lending related expenses

i 39,578

i 28,703

i 24,573

Wealth management related expenses

i 1,950

i 2,053

i 1,986

Audit, exam and insurance expense

i 11,259

i 10,596

i 9,194

FHLB restructuring charges

i —

i 15,168

i —

Administrative and other expenses

i 23,169

i 23,725

i 18,906

Total other noninterest expense

i 99,959

i 104,637

i 71,676

Note 21. Parent Company Only Financial Information

The following information presents the condensed balance sheets, statements of operations, and cash flows of Pinnacle Financial as of December 31, 2021 and 2020 and for each of the years in the three-year period ended December 31, 2021 (in thousands):

i CONDENSED BALANCE SHEETS


	2021		2020
Assets:
Cash and cash equivalents	$	i 184,654	$	i 275,888
Investments in bank subsidiaries	i 5,329,003		i 4,972,160
Investments in consolidated subsidiaries	i 11,133		i 9,322
Investment in unconsolidated subsidiaries:
Statutory Trusts	i 3,995		i 3,995
Other investments	i 156,292		i 113,445
Current income tax receivable	i 29,609		i 51,621
Other assets	i 24,930		i 25,747
	$	i 5,739,616	$	i 5,452,178
Liabilities and stockholders' equity:

Subordinated debt and other borrowings	i 423,172		i 541,286
Other liabilities	i 5,837		i 6,281
Stockholders' equity	i 5,310,607		i 4,904,611
	$	i 5,739,616	$	i 5,452,178

138

i CONDENSED STATEMENTS OF OPERATIONS

2021

2020

2019

Revenues:

Income from bank subsidiaries

i 99,766

i 119,065

i 113,982

Income from nonbank subsidiaries

i 89

i 119

i 178

Income from equity method investment

i 33,169

i 22,587

i 24,298

Other income

i 14,945

i 3,861

i 3,485

Expenses:

Interest expense

i 22,903

i 23,877

i 18,425

Personnel expense, including stock compensation

i 24,952

i 18,737

i 21,226

Other expense

i 2,697

i 2,905

i 1,496

Income before income taxes and equity in undistributed income of subsidiaries

i 97,417

i 100,113

i 100,796

Income tax benefit

( i 3,088)

( i 5,370)

( i 4,457)

Income before equity in undistributed income of subsidiaries

i 100,505

i 105,483

i 105,253

Equity in undistributed income of bank subsidiaries

i 424,978

i 205,327

i 294,354

Equity in undistributed income of nonbank subsidiaries

i 1,840

i 1,511

i 1,274

Net income

i 527,323

i 312,321

i 400,881

Preferred stock dividends

i 15,192

i 7,596

i —

Net income available to common shareholders

i 512,131

i 304,725

i 400,881

139

i CONDENSED STATEMENTS OF CASH FLOWS

2021

2020

2019

Operating activities:

Net income

i 527,323

i 312,321

i 400,881

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Amortization and accretion

i 1,886

i 1,122

( i 3,094)

Stock-based compensation expense

i 24,952

i 18,737

i 21,226

Increase (decrease) in income tax payable, net

i —

( i 2,467)

i 2,467

Deferred tax expense (benefit)

i 2,850

i 3,876

( i 2,857)

Income from equity method investments, net

( i 33,169)

( i 22,587)

( i 24,298)

Dividends received from equity method investment

i 12,214

i 9,251

i 8,953

Excess tax benefit from stock compensation

( i 2,475)

( i 417)

( i 1,011)

Gain on other investments, net

( i 10,223)

( i 195)

( i 1,057)

Decrease (increase) in other assets

i 19,478

( i 39,981)

i 7,295

Increase (decrease) in other liabilities

i 2,032

( i 764)

i 5,322

Equity in undistributed income of bank subsidiaries

( i 424,978)

( i 205,327)

( i 294,354)

Equity in undistributed income of nonbank subsidiaries

( i 1,840)

( i 1,511)

( i 1,274)

Net cash provided by operating activities

i 118,050

i 72,058

i 118,199

Investing activities:

Investment in consolidated banking subsidiaries

i —

( i 180,000)

Increase in other investments

( i 11,668)

( i 2,454)

( i 1,411)

Net cash used in investing activities

( i 11,668)

( i 2,454)

( i 181,411)

Financing activities:

Proceeds from subordinated debt and other borrowings, net of issuance costs

i —

( i 93)

i 316,078

Repayment of subordinated debt and other borrowings

( i 120,000)

( i 80,000)

( i 49,880)

Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes

( i 3,790)

( i 2,488)

i —

Exercise of common stock options, net of shares surrendered for taxes

( i 3,130)

( i 2,577)

( i 3,694)

Issuance of preferred stock, net of issuance costs

i —

i 217,126

i —

Repurchase of common stock

i —

( i 50,790)

( i 61,416)

Common dividends paid

( i 55,504)

( i 49,389)

( i 49,828)

Preferred stock dividends paid

( i 15,192)

( i 7,596)

i —

Net cash provided by (used in) financing activities

( i 197,616)

i 24,193

i 151,260

Net increase (decrease) in cash

( i 91,234)

i 93,797

i 88,048

Cash and cash equivalents, beginning of year

i 275,888

i 182,091

i 94,043

Cash and cash equivalents, end of year

i 184,654

i 275,888

i 182,091

Pinnacle Bank is subject to restrictions on the payment of dividends to Pinnacle Financial under Tennessee banking laws. Pinnacle Bank paid dividends of $ i 99.8 million, $ i 119.1 million and $ i 114.0 million, respectively, to Pinnacle Financial in each of the years ended December 31, 2021, 2020 and 2019.

140

Note 22. Quarterly Financial Results (unaudited)

i A summary of selected consolidated quarterly financial data for each of the years in the three-year period ended December 31, 2021 follows:

(in thousands, except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

2021

Interest income

i 251,917

i 259,236

i 260,868

i 259,193

Net interest income

i 222,870

i 233,225

i 237,543

i 238,763

Provision for credit losses

i 7,235

i 2,834

i 3,382

i 2,675

Net income before taxes

i 153,648

i 162,458

i 169,405

i 166,394

Net income

i 125,428

i 131,790

i 136,577

i 133,528

Net income available to common shareholders

i 121,630

i 127,992

i 132,779

i 129,730

Basic net income per common share

i 1.61

i 1.70

i 1.76

i 1.72

Diluted net income per common share

i 1.61

i 1.69

i 1.75

i 1.71

2020

Interest income

i 263,069

i 251,738

i 249,188

i 257,047

Net interest income

i 193,552

i 200,657

i 206,594

i 220,985

Provision for credit losses

i 105,045

i 72,832

i 16,758

i 9,180

Net income before taxes

i 26,691

i 73,674

i 137,049

i 133,944

Net income

i 28,356

i 62,444

i 110,645

i 110,876

Net income available to common shareholders

i 28,356

i 62,444

i 106,847

i 107,078

Basic net income per common share

i 0.37

i 0.83

i 1.42

Diluted net income per common share

i 0.37

i 0.83

i 1.42

2019

Interest income

i 257,883

i 265,851

i 275,749

i 268,453

Net interest income

i 187,246

i 188,918

i 195,806

i 194,172

Provision for credit losses

i 7,184

i 7,195

i 8,260

i 4,644

Net income before taxes

i 117,074

i 124,719

i 137,224

i 118,520

Net income available to common shareholders

i 93,960

i 100,321

i 110,521

i 96,079

Basic net income per common share

i 1.22

i 1.31

i 1.45

i 1.26

Diluted net income per common share

i 1.22

i 1.31

i 1.44

i 1.26

141

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Pinnacle Financial maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to Pinnacle Financial's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Pinnacle Financial carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that Pinnacle Financial's disclosure controls and procedures were effective.

Management Report on Internal Control Over Financial Reporting

The report of Pinnacle Financial's management on Pinnacle Financial's internal control over financial reporting begins on page 87 of this Annual Report on Form 10-K. The report of Pinnacle Financial's independent registered public accounting firm on Pinnacle Financial's internal control over financial reporting is set forth on page 89 of this Annual Report on Form 10-K.

Changes in Internal Controls

There were no changes in Pinnacle Financial's internal control over financial reporting during Pinnacle Financial's fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, Pinnacle Financial's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

142

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The responses to this Item will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2022 under the headings "Corporate Governance-Code of Conduct," "Proposal #1 Election of Directors-Audit Committee," "Proposal #1 Election of Directors," "Information About Our Executive Officers," and "Delinquent Section 16(a) Reports" and are incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The responses to this Item will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2022 under the headings "Proposal #1 Election of the Directors-Director Compensation" and "Executive Compensation" and are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The response to this Item regarding security ownership of certain beneficial owners and management will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2022 under the heading, "Security Ownership of Certain Beneficial Owners and Management" and are incorporated herein by reference.

The following table summarizes information concerning Pinnacle Financial's equity compensation plans at December 31, 2021:


Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (1)(2)	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (1)		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column)
Equity compensation plans approved by shareholders:
Amended and Restated 2018 Omnibus Equity Incentive Plan	1,172,888	—		1,922,294
Equity compensation plans not approved by shareholders	N/A	N/A		N/A
Total	1,172,888	$	—	1,922,294

(1)Includes 1,116,520 performance-based restricted stock units and 56,368 time-based restricted stock units under the Plan. These restricted stock units do not have an exercise price because their value is dependent upon continued employment over a period of time or the achievement of certain performance goals, and are to be settled in shares of common stock. Accordingly, they have been disregarded for purposes of computing the weighted-average exercise price.

(2)All of CapitalMark's outstanding stock options vested upon consummation of the CapitalMark merger and were converted into options to purchase shares of Pinnacle Financial's Common Stock. As of December 31, 2021, 56,147 shares of Pinnacle Financial's common stock remain subject to outstanding options issued to the CapitalMark option holders and the weighted average exercise price of those options is $24.51.

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The responses to this Item will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2022 under the headings, "Certain Relationships and Related Transactions," and "Corporate Governance-Director Independence" and are incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The responses to this Item will be included in Pinnacle Financial's Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2022 under the heading, "Independent Registered Public Accounting Firm" and are incorporated herein by reference.

143

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits


Exhibit No.						Description
2.1†						Agreement and Plan of Merger by and among Pinnacle Financial Partners, Inc., BNC Bancorp and Blue Merger Sub, Inc., dated as of January 22, 2017, incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 23, 2017.
3.1						Amended and Restated Charter, as amended (restated for SEC filing purposes only), incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 filed on August 7, 2020.
3.2						Second Amended and Restated Bylaws of Pinnacle Financial Partners, Inc., effective as of October 17, 2017, incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 20, 2017.
4.1.1						Specimen Common Stock Certificate, incorporated herein by reference to Exhibit 4.1 to Amendment No. 1 to the Company’s Registration Statement on Form SB-2 filed on July 12, 2000.
4.1.2						See Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining rights of holders of the Common Stock.
4.2						Description of the Company's Securities.*
4.3						Form of 4.875% Fixed-to-Floating Rate Subordinated Note due July 30, 2025, incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2015.
4.4						Form of 5.25% Fixed-to-Floating Rate Subordinated Note due November 16, 2026, incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 18, 2016.
4.5						Subordinated Indenture, dated as of September 11, 2019, between Pinnacle Financial Partners, Inc. and U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, filed on September 11, 2019.
4.6						First Supplemental Indenture, dated as of September 11, 2019 between Pinnacle Financial Partners, Inc. and U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K, filed on September 11, 2019.
4.7						Form of 4.125% Fixed-to-Floating Rate Subordinated Note due 2029 (included as Exhibit A in Exhibit 4.6 hereto).
4.8						Deposit Agreement, dated June 3, 2020, by and among the Company, Computershare Inc. and Computershare Trust Company, N.A. acting jointly as the depositary, and the holders from time to time of the depositary receipts described therein (incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement on Form 8-A, filed June 3, 2020)
4.9						Specimen of Certificate representing the Series B Preferred Stock (incorporated herein by reference to Exhibit 4.2 of the Company’s Registration Statement on Form 8-A, filed June 3, 2020)
4.10						Form of Depositary Receipt (included in Exhibit 4.8 hereto)
4.11						Pinnacle Financial is a party to certain agreements entered into in connection with the offering or assumption of its subordinated debentures and certain of its subordinated indebtedness, in each case as more fully described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(iii) of Regulation S-K and because no issuance of any such indebtedness is in excess of 10% of Pinnacle Financial’s total assets, Pinnacle Financial has not filed the various documents and agreements associated with such indebtedness herewith. Pinnacle Financial has, however, agreed to furnish copies of the various documents and agreements associated with such indebtedness to the Securities and Exchange Commission upon request.
10.1#						Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and M. Terry Turner, dated as of January 1, 2008, incorporated herein by reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on March 7, 2008.
10.2#						Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr., dated as of January 1, 2008, incorporated herein by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on March 7, 2008.
10.3#						Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Hugh M. Queener, dated as of January 1, 2008, incorporated herein by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on March 7, 2008.
10.4#						Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Harold R. Carpenter, dated as of January 1, 2008, incorporated herein by reference to Exhibit 10.51 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed on March 7, 2008.

144


10.5#						Amendment No. 1 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and M. Terry Turner, dated November 20, 2012, incorporated herein by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 22, 2013.
10.6#						Amendment No. 1 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr., dated November 20, 2012, incorporated herein by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 22, 2013.
10.7#						Amendment No. 1 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Hugh M. Queener, dated November 20, 2012, incorporated herein by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 22, 2013.
10.8#						Amendment No. 1 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Harold R. Carpenter, dated November 20, 2012, incorporated herein by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 22, 2013.
10.9#						Amendment No. 2 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and M. Terry Turner, incorporated herein by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on February 25, 2014.
10.10#						Amendment No. 2 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr., incorporated herein by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on February 25, 2014.
10.11#						Amendment No. 2 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Hugh M. Queener, incorporated herein by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on February 25, 2014.
10.12#						Amendment No. 2 to Amended Employment Agreement by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Harold R. Carpenter, incorporated herein by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on February 25, 2014.
10.13#						Pinnacle Financial Partners, Inc. 2014 Equity Incentive Plan, effective as of April 15, 2014, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 17, 2014.
10.14#						CapitalMark Bank & Trust Amended and Restated Stock Option Plan, effective as of July 31, 2015, incorporated herein by reference to Exhibit 4.4 to Post-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-8 filed August 10, 2015.
10.15#						Supplemental Executive Retirement Plan Agreement between Avenue Bank and Ronald Samuels, dated October 26, 2007, incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 7, 2016.
10.16#						Employment Agreement, effective as of June 16, 2017, by and among Pinnacle Bank, Pinnacle Financial Partners, Inc. and Richard D. Callicutt II, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 16, 2017.
10.17#						Salary Continuation Agreement dated as of December 12, 2016, between Richard D. Callicutt II and Bank of North Carolina, incorporated herein by reference to Exhibit 10.1 to BNC Bancorp’s Current Report on Form 8-K filed on December 16, 2016.
10.18#						BNC Bancorp 2013 Amended and Restated Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 16, 2017.
10.19#						Form of Pinnacle Financial Partners, Inc. Named Executive Officer Performance Award Agreement, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 26, 2018.
10.20#						Form of Directors Restricted Stock Agreement, incorporated herein by reference to Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 7, 2018.
10.21#						Form of Named Executive Officers Performance Unit Award Agreement, incorporated herein by reference to Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 7, 2018.
10.22#						Form of Associate Time-Vested Restricted Stock Agreement, incorporated herein by reference to Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 7, 2018.

145


10.23#						Form of Named Executive Officers 2019 Performance Unit Award Agreement, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 18, 2019.
10.24#						Form of Named Executive Officers 2020 Performance Unit Award Agreement, incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on January 24, 2020.
10.25#						Form of 2021 Restricted Share Unit Award Agreement, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 27, 2021
10.26#						Form of Named Executive Officers 2021 Performance Unit Award Agreement, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on January 27, 2021
10.27#						Form of Amendment to Named Executive Officers 2019 Performance Unit Award Agreement, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on January 27, 2021
10.28#						Form of Amendment to Named Executive Officers 2020 Performance Unit Award Agreement, incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on January 27, 2021
10.29#						Second Amended and Restated Limited Liability Company Agreement of Bankers Healthcare Group, LLC, dated February 2, 2021, incorporated herein by reference to Exhibit 10.34 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 26, 2021
10.30#						Pinnacle Financial Partners, Inc. 2021 Annual Cash Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 2, 2021.
10.31#						Pinnacle Financial Partners, Inc. 2022 Annual Cash Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 25, 2022.
10.32#						Pinnacle Financial Partners, Inc. Amended and Restated 2018 Omnibus Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 21, 2021.
10.33#						Form of 2022 Restricted Share Unit Agreement, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 21, 2022.
10.34#						Form of Named Executive Officers 2022 Performance Unit Award Agreement, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on January 21, 2022.
10.35#						Form of Named Executive Officers Special Performance Unit Award Agreement, incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on January 21, 2022.

21.1*						Subsidiaries of Pinnacle Financial Partners, Inc.
23.1*						Consent of Crowe LLP
31.1*						Certification pursuant to Rule 13a-14(a)/15d-14(a)
31.2*						Certification pursuant to Rule 13a-14(a)/15d-14(a)
32.1**						Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
32.2**						Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
101.INS*						Inline XBRL Instance Document
101.SCH*						Inline XBRL Schema Documents
101.CAL*						Inline XBRL Calculation Linkbase Document
101.LAB*						Inline XBRL Label Linkbase Document
101.PRE*						Inline XBRL Presentation Linkbase Document
101.DEF*						Inline XBRL Definition Linkbase Document
104						The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2019, formatted in Inline XBRL (included in Exhibit 101)

† As directed by Item 601(a)(5) of Regulation S-K, certain schedules and exhibits to this exhibit are omitted from this filing. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.

# Management contract or compensatory plan or arrangement.

* Filed herewith.

** Furnished herewith.

146

ITEM 16. FORM 10-K SUMMARY

Not applicable.

147

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		PINNACLE FINANCIAL PARTNERS, INC

	By:	/s/ *M. Terry Turner*
		M. Terry Turner
Date: February 28, 2022		President and Chief Executive Officer

148

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURES

TITLE

DATE

/s/ Robert A. McCabe, Jr.

Chairman of the Board

Robert A. McCabe, Jr.

/s/ M. Terry Turner

Director, President and Chief Executive Officer

M. Terry Turner

(Principal Executive Officer)

/s/ Harold R. Carpenter

Chief Financial Officer

Harold R. Carpenter

(Principal Financial and Accounting Officer)

/s/ Richard D. Callicutt

Director, Chairman of the Carolinas and Virginia

Richard D. Callicutt

/s/ Abney S. Boxley

Director

Abney S. Boxley

/s/ Charles E. Brock

Director

Charles E. Brock

/s/ Renda J. Burkhart

Director

Renda J. Burkhart

/s/ Gregory L. Burns

Director

Gregory L. Burns

/s/ Marty G. Dickens

Director

Marty G. Dickens

/s/ Thomas C. Farnsworth, III

Director

Thomas C. Farnsworth, III

/s/ Joseph Galante

Director

Joseph Galante

/s/ Glenda Baskin Glover

Director

Glenda Baskin Glover

/s/ David B. Ingram

Director

David B. Ingram

/s/ Decosta E. Jenkins

Director

Decosta E. Jenkins

/s/ Ronald L. Samuels

Director

Ronald L. Samuels

/s/ Reese L. Smith, III

Director

Reese L. Smith, III

/s/ G. Kennedy Thompson

Director