PINNACLE FINANCIAL PARTNERS INC - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d)

OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number: 000-31225

, Inc.

(Exact name of registrant as specified in its charter)

Tennessee		62-1812853
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

150 Third Avenue South, Suite 900, Nashville, Tennessee		37201
(Address of principal executive offices)		(Zip Code)

(615) 744-3700

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changes since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).

Yes x

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x	Accelerated Filer o
Non-accelerated Filer o (do not check if you are a smaller reporting company)	Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

As of November 6, 2014 there were 35,660,470 shares of common stock, $1.00 par value per share, issued and outstanding.

Pinnacle Financial Partners, Inc.

Report on Form 10-Q

September 30, 2014

TABLE OF CONTENTS	Page No.

PART I – Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)	4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3. Quantitative and Qualitative Disclosures about Market Risk	61
Item 4. Controls and Procedures	61

PART II – Other Information:
Item 1. Legal Proceedings	62
Item 1A. Risk Factors	62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3. Defaults Upon Senior Securities	64
Item 4. Mine Safety Disclosures	64
Item 5. Other Information	64
Item 6. Exhibits	65
Signatures	66

FORWARD-LOOKING STATEMENTS

Certain of the statements in this quarterly report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "expect," "anticipate," "goal," "objective," "intend," "plan," "believe," "should," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Such risks include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) the inability of Pinnacle Financial to grow its loan portfolio; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; (vi) increased competition with other financial institutions; (vii) greater than anticipated adverse conditions in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, particularly in commercial and residential real estate markets; (viii) rapid fluctuations or unanticipated changes in interest rates on loans or deposits; (ix) the results of regulatory examinations; (x) the ability to retain large, uninsured deposits; (xi) the development of any new market other than Nashville or Knoxville; (xii) a merger or acquisition; (xiii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiv) reduced ability to attract additional financial advisors (or failure of such advisors to cause their clients to switch to Pinnacle Financial) or otherwise to attract customers from other financial institutions; (xv) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvi) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xvii) risks associated with litigation, including the applicability of insurance coverage; (xviii) approval of the declaration of any dividend by Pinnacle Financial's board of directors, (xix) the vulnerability of our network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches, (xx) the possibility of increased compliance costs as a result of increased regulatory oversight and the development of additional banking products for our corporate and consumer clients, and (xxi) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2014 and Pinnacle Financial's most recent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on May 2, 2014 and August 1, 2014. Many of such factors are beyond Pinnacle Financial's ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

Item 1.

Part I. Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2014			December 31, 2013
ASSETS
Cash and noninterest-bearing due from banks	$	64,743,501		$	79,785,004
Interest-bearing due from banks		148,068,613			124,509,486
Federal funds sold and other		4,757,438			4,644,247
Cash and cash equivalents		217,569,552			208,938,737

Securities available-for-sale, at fair value		714,920,906			693,456,314
Securities held-to-maturity (fair value of $38,112,282 and $38,817,467 at
September 30, 2014 and December 31, 2013, respectively)		38,106,986			39,795,649
Mortgage loans held-for-sale		19,130,001			12,850,339

Loans		4,421,250,676			4,144,493,486
Less allowance for loan losses		(66,159,575	)		(67,969,693	)
Loans, net		4,355,091,101			4,076,523,793

Premises and equipment, net		71,551,257			72,649,574
Other investments		33,599,454			33,226,195
Accrued interest receivable		16,949,949			15,406,389
Goodwill		243,533,067			243,651,006
Core deposits and other intangible assets		3,129,236			3,840,750
Other real estate owned		12,329,278			15,226,136
Other assets		139,792,704			148,210,975
Total assets	$	5,865,703,491		$	5,563,775,857
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	1,357,934,212		$	1,167,414,487
Interest-bearing		860,781,126			884,294,802
Savings and money market accounts		1,983,237,139			1,962,714,398
Time		460,378,271			519,049,037
Total deposits		4,662,330,748			4,533,472,724
Securities sold under agreements to repurchase		64,772,511			70,465,326
Federal Home Loan Bank advances		215,523,517			90,637,328
Subordinated debt and other borrowings		96,783,292			98,658,292
Accrued interest payable		622,908			792,703
Other liabilities		43,736,364			46,041,823
Total liabilities		5,083,769,340			4,840,068,196
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized;
no shares issued and outstanding		-			-
Common stock, par value $1.00; 90,000,000 shares authorized;
35,654,541 and 35,221,941 shares issued and outstanding
at September 30, 2014 and December 31, 2013, respectively		35,654,541			35,221,941
Additional paid-in capital		558,070,636			550,212,135
Retained earnings		185,496,234			142,298,199
Accumulated other comprehensive gain (loss), net of taxes		2,712,740			(4,024,614	)
Total stockholders' equity		781,934,151			723,707,661
Total liabilities and stockholders' equity	$	5,865,703,491		$	5,563,775,857

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
Interest income:
Loans, including fees	$	47,510,761	$	42,778,193		$	136,296,125	$	126,441,555
Securities:
Taxable		3,469,311		3,538,446			10,817,854		10,860,146
Tax-exempt		1,533,029		1,601,067			4,694,438		4,741,440
Federal funds sold and other		268,455		259,536			828,335		834,748
Total interest income		52,781,556		48,177,242			152,636,752		142,877,889

Interest expense:
Deposits		2,435,426		2,708,376			7,512,428		9,076,757
Securities sold under agreements to repurchase		38,702		55,601			100,546		204,240
Federal Home Loan Bank advances and other borrowings		770,367		840,318			2,352,501		2,666,721
Total interest expense		3,244,495		3,604,295			9,965,475		11,947,718
Net interest income		49,537,061		44,572,947			142,671,277		130,930,171
Provision for loan losses		851,194		684,956			1,593,180		5,631,408
Net interest income after provision for loan losses		48,685,867		43,887,991			141,078,097		125,298,763

Noninterest income:
Service charges on deposit accounts		2,912,617		2,797,342			8,669,229		7,818,452
Investment services		2,353,118		1,955,652			6,645,362		5,643,690
Insurance sales commissions		1,037,043		1,021,430			3,566,835		3,522,430
Gain on mortgage loans sold, net		1,352,976		1,326,469			4,256,451		5,130,411
Gain (loss) on sale of investment securities		29,221		(1,441,234	)		29,221		(1,466,475	)
Trust fees2983		1,109,278		931,543			3,326,877		2,756,079
Other noninterest income		4,094,200		4,796,079			11,724,284		11,210,770
Total noninterest income		12,888,453		11,387,281			38,218,259		34,615,357

Noninterest expense:
Salaries and employee benefits		21,721,663		21,009,680			65,244,092		61,152,789
Equipment and occupancy		6,477,076		5,412,865			18,103,458		15,730,074
Other real estate expense		417,197		699,211			1,294,355		2,810,779
Marketing and other business development		945,805		720,866			2,919,696		2,498,708
Postage and supplies		569,707		581,433			1,674,515		1,690,588
Amortization of intangibles		236,163		246,675			711,514		1,015,848
Other noninterest expense		3,991,944		4,652,161			11,959,708		11,725,844
Total noninterest expense		34,359,555		33,322,891			101,907,338		96,624,630
Income before income taxes		27,214,765		21,952,381			77,389,018		63,289,490
Income tax expense		9,017,943		7,305,431			25,655,089		20,883,883
Net income	$	18,196,822	$	14,646,950		$	51,733,929	$	42,405,607
Per share information:
Basic net income per common share	$	0.52	$	0.43		$	1.49	$	1.24
Diluted net income per common share	$	0.52	$	0.42		$	1.48	$	1.23
Weighted average shares outstanding:
Basic		34,762,206		34,282,899			34,688,064		34,148,562
Diluted		35,155,224		34,606,567			35,069,764		34,415,776

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income	$	18,196,822		$	14,646,950		$	51,733,929		$	42,405,607
Other comprehensive income (loss), net of tax:
Change in fair value on available-for-sale securities, net of tax		(739,313	)		(1,191,495	)		9,311,318			(17,396,100	)
Change in fair value of cash flow hedges, net of tax		273,312			(421,473	)		(2,556,206	)		2,925,895
Net gain (loss) on sale of investment securities reclassified from other comprehensive income into net income, net of tax		(17,758	)		875,838			(17,758	)		891,177
Total comprehensive income	$	17,713,063		$	13,909,820		$	58,471,283		$	28,826,579

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

	Common Stock						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comp. Income (Loss), net			Total Stockholders' Equity
	Shares			Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comp. Income (Loss), net			Total Stockholders' Equity
Balances, December 31, 2012		34,696,597		$	34,696,597		$	543,760,439		$	87,386,689		$	13,227,634		$	679,071,359
Exercise of employee common stock
options and related tax benefits		191,928			191,928			2,372,601			-			-			2,564,529
Issuance of restricted common shares,
net of forfeitures		300,718			300,718			(300,718	)		-			-			-
Restricted shares withheld for taxes		(55,510	)		(55,510	)		(1,218,326	)		-			-			(1,273,836	)
Compensation expense for restricted shares		-			-			3,014,761			-			-			3,014,761
Compensation expense for stock options		-			-			12,470			-			-			12,470
Net income		-			-			-			42,405,607			-			42,405,607
Other comprehensive loss		-			-			-			-			(13,579,028	)		(13,579,028	)
Balances, September 30, 2013		35,133,733		$	35,133,733		$	547,641,227		$	129,792,296		$	(351,394	)	$	712,215,862

Balances, December 31, 2013		35,221,941		$	35,221,941		$	550,212,135		$	142,298,199		$	(4,024,614	)	$	723,707,661
Exercise of employee common stock
options and related tax benefits		218,108			218,108			6,347,045			-			-			6,565,153
Common dividends paid		-			-			-			(8,535,894	)					(8,535,894	)
Issuance of restricted common shares,
net of forfeitures		281,416			281,416			(281,416	)		-			-			-
Restricted shares withheld for taxes		(66,924	)		(66,924	)		(2,177,101	)		-			-			(2,244,025	)
Compensation expense for restricted shares		-			-			3,969,973			-			-			3,969,973
Net income		-			-			-			51,733,929			-			51,733,929
Other comprehensive income		-			-			-			-			6,737,354			6,737,354
Balances, September 30, 2014		35,654,541		$	35,654,541		$	558,070,636		$	185,496,234		$	2,712,740		$	781,934,151

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2014			2013
Operating activities:
Net income	$	51,733,929		$	42,405,607
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities		3,353,794			3,444,484
Depreciation and amortization		6,987,533			6,918,189
Provision for loan losses		1,593,180			5,631,408
Gain on mortgage loans sold, net		(4,256,451	)		(5,130,411	)
(Gain) loss on sale of investment securities		(29,221	)		1,466,475
Stock-based compensation expense		3,969,973			3,027,231
Deferred tax benefit		(361,424	)		(51,547	)
(Gains) losses on dispositions of other real estate and other investments		(92,577	)		2,889,742
Excess tax benefit from stock compensation		(1,526,772	)		(232,776	)
Mortgage loans held for sale:
Loans originated		(242,784,212	)		(320,203,874	)
Loans sold		240,761,000			349,567,000
Decrease in other assets		3,978,907			12,875,979
Decrease in other liabilities		(2,526,028	)		(3,105,860	)
Net cash provided by operating activities		60,801,631			99,501,647

Investing activities:
Activities in securities available-for-sale:
Purchases		(97,806,318	)		(182,289,872	)
Sales		2,360,478			1,414,628
Maturities, prepayments and calls		86,531,771			111,542,890
Activities in securities held-to-maturity:
Purchases		-			(2,452,919	)
Maturities, prepayments and calls		1,094,966			2,982,450
Increase in loans, net		(283,931,233	)		(269,103,013	)
Purchases of software, premises and equipment		(3,991,211	)		(4,371,613	)
Purchase of bank owned life insurance		-			(30,000,000	)
Decrease (increase) in other investments		31,553			(3,611,128	)
Net cash used in investing activities		(295,709,994	)		(375,888,577	)

Financing activities:
Net increase in deposits		128,858,023			318,355,000
Net decrease in securities sold under agreements to repurchase		(5,692,815	)		(30,635,547	)
Advances from Federal Home Loan Bank:
Issuances		585,000,000			624,000,000
Payments/maturities		(460,063,036	)		(584,128,201	)
Decrease in other borrowings		(1,875,000	)		(6,875,000	)
Exercise of common stock options and stock appreciation rights,
net of repurchase of restricted shares		4,321,128			1,290,692
Excess tax benefit from stock compensation		1,526,772			232,776
Common stock dividends paid		(8,535,894	)		-
Net cash provided by financing activities		243,539,178			322,239,720
Net decrease in cash and cash equivalents		8,630,815			45,852,790
Cash and cash equivalents, beginning of period		208,938,737			165,288,669
Cash and cash equivalents, end of period	$	217,569,552		$	211,141,459

See accompanying notes to consolidated financial statements (unaudited).

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle Bank. Pinnacle Bank is a commercial bank headquartered in Nashville, Tennessee. Pinnacle Bank provides a full range of banking services in its primary market areas of the Nashville-Davidson-Murfreesboro-Franklin, Tennessee and Knoxville, Tennessee Metropolitan Statistical Areas.

Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in the 2013 Annual Report previously filed on Form 10-K.

These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust II, PNFP Statutory Trust III and PNFP Statutory Trust IV are affiliates of Pinnacle Financial and are included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP 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 date and the reported amounts of revenues and expenses during the reporting period. 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 loan losses, any potential impairment of intangible assets, including goodwill and the valuation of deferred tax assets, other real estate owned, and our investment portfolio, including other-than-temporary impairment. These financial statements should be read in conjunction with Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes to Pinnacle Financial's significant accounting policies as disclosed in Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2013.

Recently Adopted Accounting Pronouncements — In February 2013, the FASB issued Accounting Standards Update 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" which provides disclosure guidance on amounts reclassified out of AOCI by component. The adoption did not have any impact on our financial position or results of operations but has impacted our financial statement disclosure. As shown on the statement of comprehensive income for the three and nine months ended September 30, 2014, Pinnacle Financial reclassifed net losses of approximately $18,000 out of other comprehensive income into loss on the sale of investment securities, net of tax, compared to reclassifications of net losses for the three and nine months ended September 30, 2013, of approximately $876,000 and $891,000, net of tax, respectively.

Goodwill — ASC 350-35-3 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 determines that this is the case, it is required to perform the quantitative two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). Based on the qualitative assessment, if an entity determines that the fair value of a reporting unit is more than its carrying amount, the quantitative two-step goodwill impairment test is not required. Pinnacle Financial performed its annual qualitative assessment as of September 30, 2014. No impairment was noted as a result of this assessment.

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the nine months ended September 30, 2014 and 2013 was as follows:

	For the nine months ended September 30,
	2014		2013
Cash Transactions:
Interest paid	$	10,186,045	$	12,434,753
Income taxes paid, net		22,150,000		20,850,009
Noncash Transactions:
Loans charged-off to the allowance for loan losses		5,634,327		14,088,656
Loans foreclosed upon and transferred to other real estate owned		1,672,459		3,491,421
Loans foreclosed upon and transferred to other repossessed assets		1,398,823		366,072
Available-for-sale securities transferred to held-to-maturity portfolio		-		39,959,647

Income Per Common Share — Basic net income per common share (EPS) is computed by dividing net income 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 shares outstanding is attributable to common stock options, common stock appreciation rights, restricted share awards, and restricted share unit awards. The dilutive effect of outstanding options, common stock appreciation rights, restricted share awards, and restricted share unit awards is reflected in diluted EPS by application of the treasury stock method.

The following is a summary of the basic and diluted net income per share calculations for the three and nine months ended September 30, 2014 and 2013:

	For the three months ended September 30				For the nine months ended September 30,
	2014		2013		2014		2013
Basic net income per share calculation:
Numerator - Net income	$	18,196,822	$	14,646,950	$	51,733,929	$	42,405,607

Denominator - Average common shares outstanding		34,762,206		34,282,899		34,688,064		34,148,562
Basic net income per share	$	0.52	$	0.43	$	1.49	$	1.24

Diluted net income per share calculation:
Numerator – Net income	$	18,196,822	$	14,646,950	$	51,733,929	$	42,405,607

Denominator - Average common shares outstanding		34,762,206		34,282,899		34,688,064		34,148,562
Dilutive shares contingently issuable		393,018		323,668		381,700		267,214
Average diluted common shares outstanding		35,155,224		34,606,567		35,069,764		34,415,776
Diluted net income per share	$	0.52	$	0.42	$	1.48	$	1.23

Note 2. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at September 30, 2014 and December 31, 2013 are summarized as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2014:
Securities available-for-sale:
U.S. Treasury securities	$	-	$	-	$	-	$	-
U.S. government agency securities		117,053		14		5,969		111,098
Mortgage-backed agency securities		429,834		10,086		4,266		435,654
State and municipal securities		135,043		8,407		255		143,195
Asset-backed securities		13,891		-		125		13,766
Corporate notes and other		10,202		1,007		1		11,208
	$	706,023	$	19,514	$	10,616	$	714,921
Securities held-to-maturity:
State and municipal securities	$	38,107	$	186	$	181	$	38,112
	$	38,107	$	186	$	181	$	38,112

December 31, 2013:
Securities available-for-sale:
U.S. Treasury securities	$	-	$	-	$	-	$	-
U.S. government agency securities		117,282		13		13,422		103,873
Mortgage-backed agency securities		411,967		9,771		8,802		412,936
State and municipal securities		143,763		5,504		856		148,411
Asset-backed securities		17,262		-		255		17,007
Corporate notes and other		10,218		1,018		7		11,229
	$	700,492	$	16,306		23,342	$	693,456
Securities held-to-maturity:
State and municipal securities	$	39,796	$	72	$	1,051	$	38,817
	$	39,796	$	72	$	1,051	$	38,817

At September 30, 2014, approximately $598.9 million of securities within Pinnacle Financial's investment portfolio were either pledged to secure public funds and other deposits or securities sold under agreements to repurchase.

The amortized cost and fair value of debt securities as of September 30, 2014 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage- and asset-backed securities since the mortgages and assets 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
September 30, 2014:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	7,676	$	7,725	$	1,770	$	1,776
Due in one year to five years		38,854		40,900		16,485		16,562
Due in five years to ten years		152,474		154,797		13,323		13,263
Due after ten years		63,294		62,079		6,529		6,511
Mortgage-backed agency securities		429,834		435,654		-		-
Asset-backed securities		13,891		13,766		-		-
	$	706,023	$	714,921	$	38,107	$	38,112

At September 30, 2014 and December 31, 2013, the following investments had unrealized losses. The table below classifies these investments according to the time period of the unrealized losses 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
At September 30, 2014:

U.S. Treasury securities	$	-	$	-	$	-	$	-	$	-	$	-
U.S. government agency securities		3,097		5		101,336		5,964		104,433		5,969
Mortgage-backed agency securities		89,115		457		104,285		3,809		193,400		4,266
State and municipal securities		1,175		14		22,918		422		24,093		436
Asset-backed securities		-		-		13,766		125		13,766		125
Corporate notes		250		-		155		1		405		1
Total temporarily-impaired securities	$	93,637	$	476	$	242,460	$	10,321	$	336,097	$	10,797

At December 31, 2013:

U.S. Treasury securities	$	-	$	-	$	-	$	-	$	-	$	-
U.S. government agency securities		8,742		22		92,869		13,400		101,611		13,422
Mortgage-backed agency securities		157,262		3,913		42,903		4,889		200,165		8,802
State and municipal securities		46,282		1,351		3,798		555		50,080		1,906
Asset-backed securities		-		-		17,006		255		17,006		255
Corporate notes		946		6		159		2		1,105		8
Total temporarily-impaired securities	$	213,232	$	5,292	$	156,735	$	19,101	$	369,967	$	24,393

The applicable dates for determining when securities are in an unrealized loss position are September 30, 2014 and December 31, 2013. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month periods ended September 30, 2014 and December 31, 2013, but is in the "Investments with an Unrealized Loss of less than 12 months" category above.

As shown in the tables above, at September 30, 2014, Pinnacle Financial had approximately $10.8 million in unrealized losses on $336.1 million of securities. The unrealized losses associated with these investment securities are driven by changes in interest rates and the unrealized loss is recorded as a component of equity, net of taxes. These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. If a shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.

Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at September 30, 2014, 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 does not consider these securities to be other-than-temporarily impaired at September 30, 2014.

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.

The carrying values of Pinnacle Financial's investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that Pinnacle Financial will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future. There is also a risk that other-than-temporary impairment charges may occur in the future if management's intention to hold these securities to maturity and or recovery changes.

Note 3. Loans and Allowance for Loan 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 with the Federal Deposit Insurance Corporation (FDIC).

Commercial loans receive risk ratings assigned by a financial advisor and approved by a senior credit officer 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. Pinnacle Financial believes that its categories follow those used by Pinnacle Bank's primary regulators. At September 30, 2014, approximately 75% of our loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating in the allowance for loan loss assessment. 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.

Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, our credit procedures require that every risk rated loan of $500,000 or more be subject to a formal credit risk review process. Each loan's risk rating is also subject to review by our independent loan review department, which reviews a substantial portion of our risk rated portfolio annually. Independent loan reviews are also performed of loans in targeted higher-risk portfolio segments.

The following table presents our loan balances by primary loan classification and the amount within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard, substandard-nonaccrual and doubtful-nonaccrual which are defined as follows:

	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 sound worth and paying 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 will 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.

The following table outlines the amount of each loan classification categorized into each risk rating category as of September 30, 2014 and December 31, 2013 (in thousands):

	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
September 30, 2014
Accruing loans
Pass	$	1,441,581	$	680,485	$	283,725	$	1,640,609	$	188,486	$	4,234,886
Special Mention		7,834		2,660		26,293		32,674		143		69,604
Substandard ⁽¹⁾		21,968		13,496		6,598		45,440		1		87,503
Total		1,471,383		696,641		316,616		1,718,723		188,630		4,391,993
Impaired loans
Nonaccrual loans
Substandard-nonaccrual		7,486		6,248		5,474		1,948		496		21,652
Doubtful-nonaccrual		-		-		-		-		-		-
Total nonaccrual loans		7,486		6,248		5,474		1,948		496		21,652
Troubled debt restructurings⁽²⁾
Pass		-		64		-		253		79		396
Special Mention		-		815		-		-		200		1,015
Substandard		-		3,033		-		3,162		-		6,195
Total troubled debt restructurings		-		3,912		-		3,415		279		7,606
Total impaired loans		7,486		10,160		5,474		5,363		775		29,258
Total loans	$	1,478,869	$	706,801	$	322,090	$	1,724,086	$	189,405	$	4,421,251


December 31, 2013
Accruing loans
Pass	$	1,332,387	$	670,412	$	275,876	$	1,557,923	$	143,032	$	3,979,630
Special Mention		8,282		1,824		31,835		20,065		-		62,006
Substandard ⁽¹⁾		20,296		14,107		7,297		23,174		154		65,028
Total		1,360,965		686,343		315,008		1,601,162		143,186		4,106,664
Impaired loans
Nonaccrual loans
Substandard-nonaccrual		9,017		5,289		1,070		2,565		242		18,183
Doubtful-nonaccrual		-		-		-		-		-		-
Total nonaccrual loans		9,017		5,289		1,070		2,565		242		18,183
Troubled debt restructurings⁽²⁾
Pass		2,564		1,666		113		320		276		4,939
Special Mention		-		-		-		-		-		-
Substandard		10,889		2,318		-		1,500		-		14,707
Total troubled debt restructurings		13,453		3,984		113		1,820		276		19,646
Total impaired loans		22,470		9,273		1,183		4,385		518		37,829
Total loans	$	1,383,435	$	695,616	$	316,191	$	1,605,547	$	143,704	$	4,144,493

(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 the impact of nonaccrual loans and troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $87.5 million at September 30, 2014, compared to $65.0 million at December 31, 2013.

(2)	Troubled debt restructurings are presented as impaired loans; however, they continue to accrue interest at modified contractual rates.

At September 30, 2014 and December 31, 2013, all loans classified as nonaccrual were deemed to be impaired. The principal balances of these nonaccrual loans amounted to $21.7 million and $18.2 million at September 30, 2014 and December 31, 2013, respectively, and are included in the tables above. For the nine months ended September 30, 2014, the average balance of nonaccrual loans was $22.1 million as compared to $21.5 million for the twelve months ended December 31, 2013. At the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Pinnacle Financial's policy is that 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 $205,000 in interest income from cash payments received on nonaccrual loans during the three and nine months ended September 30, 2014 and no interest income from cash payments received on nonaccrual loans during the year ended December 31, 2013. Had these remaining nonaccrual loans been on accruing status, interest income would have been higher by $682,000 for the nine months ended September 30, 2014 and by $901,000 for the nine months ended September 30, 2013.

The following table details the recorded investment, unpaid principal balance and related allowance and average recorded investment of our nonaccrual loans at September 30, 2014 and December 31, 2013 by loan classification and the amount of interest income recognized on a cash basis throughout the fiscal year-to-date period then ended, respectively, on these loans that remain on the balance sheets (in thousands):

	At September 30, 2014						For the nine months ended September 30, 2014
	Recorded investment		Unpaid principal balance		Related allowance⁽¹⁾		Average recorded investment		Interest income recognized
Collateral dependent nonaccrual loans:
Commercial real estate – mortgage	$	5,679	$	6,363	$	-	$	5,847	$	-
Consumer real estate – mortgage		1,700		1,707		-		1,562		-
Construction and land development		4,810		4,810		-		4,992		205
Commercial and industrial		975		1,154		-		989		-
Consumer and other		-		-		-		-		-
Total	$	13,164	$	14,034	$	-	$	13,390	$	205

Cash flow dependent nonaccrual loans:
Commercial real estate – mortgage	$	1,807	$	2,003	$	62	$	1,819	$	-
Consumer real estate – mortgage		4,548		4,870		571		4,568		-
Construction and land development		664		755		47		673		-
Commercial and industrial		973		1,004		110		1,110		-
Consumer and other		496		517		435		500		-
Total	$	8,488	$	9,149	$	1,225	$	8,670	$	-
Total nonaccrual loans	$	21,652	$	23,183	$	1,225	$	22,060	$	205

	At December 31, 2013						For the year ended December 31, 2013
	Recorded investment		Unpaid principal balance		Related allowance⁽¹⁾		Average recorded investment		Interest income recognized
Collateral dependent nonaccrual loans:
Commercial real estate – mortgage	$	7,035	$	7,481	$	-	$	6,522	$	-
Consumer real estate – mortgage		2,162		2,209		-		2,234		-
Construction and land development		545		545		-		938		-
Commercial and industrial		1,828		1,901		-		3,911		-
Consumer and other		-		-		-		-		-
Total	$	11,570	$	12,136	$	-	$	13,605	$	-

Cash flow dependent nonaccrual loans:
Commercial real estate – mortgage	$	1,982	$	2,166	$	142	$	2,448	$	-
Consumer real estate – mortgage		3,127		3,334		722		3,405		-
Construction and land development		525		609		33		568		-
Commercial and industrial		737		1,029		218		1,216		-
Consumer and other		242		252		72		242		-
Total	$	6,613	$	7,390	$	1,187	$	7,879	$	-
Total nonaccrual loans	$	18,183	$	19,526	$	1,187	$	21,484	$	-

(1)	Collateral dependent loans are typically charged-off to their net realizable value and no specific allowance is carried related to those loans.

Impaired loans also include loans that Pinnacle Bank has elected to formally restructure due to the weakening credit status of a borrower. The restructuring may facilitate a repayment plan that seeks to minimize the potential losses that Pinnacle Bank may otherwise incur. If on nonaccrual status as of the date of restructuring, the loans are included in nonaccrual loans. Loans that have been restructured that were performing as of the restructure date and continue to perform in accordance with the restructured terms are reported separately as troubled debt restructurings.

At September 30, 2014 and December 31, 2013, there were $7.6 million and $19.6 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. These troubled debt restructurings are considered impaired loans pursuant to U.S. GAAP. Troubled commercial loans are restructured by specialists within our Special Assets Group, and all restructurings are approved by committees and 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.

The following table outlines the amount of each troubled debt restructuring categorized by loan classification made during the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three months ended September 30, 2014						Nine months ended September 30, 2014
	Number of contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance		Number of contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance
Commercial real estate – mortgage		-	$	-	$	-		-	$	-	$	-
Consumer real estate – mortgage		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-
Commercial and industrial		1		215		171		8		3,162		2,273
Consumer and other		-		-		-		-		-		-
		1	$	215	$	171		8	$	3,162	$	2,273

	Three months ended September 30, 2013						Nine months ended September 30, 2013
	Number of contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance		Number of contracts		Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance
Commercial real estate – mortgage		-	$	-	$	-		-	$	-	$	-
Consumer real estate – mortgage		-		-		-		1		428		368
Construction and land development		-		-		-		1		50		43
Commercial and industrial		1		37		32		2		1,537		1,322
Consumer and other		1		58		51		2		258		223
		2	$	95	$	83		6	$	2,273	$	1,956

During the three months ended September 30, 2014 and 2013, Pinnacle Financial did not have any troubled debt restructurings that subsequently defaulted within twelve months of the restructuring. During the nine months ended September 30, 2014, Pinnacle Financial did not have any troubled debt restructurings that subsequently defaulted within twelve months of the restructuring. During the nine months ended ended September 30, 2013, one consumer real estate loan totaling $480,000 which was previously classified as a troubled debt restructuring subsequently defaulted, within twelve months of the restructuring. A default of a troubled debt restructuring is defined as an occurrence which violates the terms of the receivable's contract.

Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industry. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications. Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at September 30, 2014 with the comparative exposures for December 31, 2013 (in thousands):

	At September 30, 2014
	Outstanding Principal Balances			Unfunded Commitments			Total exposure			Total Exposure at December 31, 2013

Lessors of nonresidential buildings		$	492,242		$	68,316		$	560,558		$	515,240
Lessors of residential buildings			276,848			39,529			316,377			270,773

The table below presents past due balances at September 30, 2014 and December 31, 2013, by loan classification and segment allocated between accruing and nonaccrual status (in thousands):

September 30, 2014	30-89 days past due and accruing		90 days or more past due and accruing		Total past due and accruing		Nonaccrual⁽¹⁾		Current and accruing		Total Loans
Commercial real estate:
Owner-occupied	$	245	$	-	$	245	$	7,486	$	720,352	$	728,083
All other		-		-		-		-		750,786		750,786
Consumer real estate – mortgage		4,327		-		4,327		6,248		696,226		706,801
Construction and land development		863		-		863		5,474		315,753		322,090
Commercial and industrial		3,615		75		3,690		1,948		1,718,448		1,724,086
Consumer and other		4,967		8		4,975		496		183,934		189,405
	$	14,017	$	83	$	14,100	$	21,652	$	4,385,499	$	4,421,251

December 31, 2013
Commercial real estate:
Owner-occupied	$	2,534	$	-	$	2,534	$	7,750	$	669,014	$	679,298
All other		27		2,232		2,259		1,267		700,611		704,137
Consumer real estate – mortgage		2,215		-		2,215		5,289		688,112		695,616
Construction and land development		4,839		-		4,839		1,070		310,282		316,191
Commercial and industrial		1,847		825		2,672		2,565		1,600,310		1,605,547
Consumer and other		1,488		289		1,777		242		141,685		143,704
	$	12,950	$	3,346	$	16,296	$	18,183	$	4,110,014	$	4,144,493

(1)	Approximately $15.6 million and $10.9 million of nonaccrual loans as of September 30, 2014 and December 31, 2013, respectively, were performing pursuant to their contractual terms at those dates.

The following table shows the allowance allocation by loan classification and accrual status at September 30, 2014 and December 31, 2013 (in thousands):

					Impaired Loans
	Accruing Loans				Nonaccrual Loans				Troubled Debt Restructurings⁽¹⁾				Total Allowance for Loan Losses
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Commercial real estate –mortgage	$	18,597	$	19,298	$	62	$	142	$	35	$	1,932	$	18,694	$	21,372
Consumer real estate – mortgage		6,052		7,090		571		722		758		543		7,381		8,355
Construction and land development		5,763		7,186		47		33		-		16		5,810		7,235
Commercial and industrial		26,460		24,660		110		218		714		256		27,284		25,134
Consumer and other		2,150		1,521		435		72		61		39		2,646		1,632
Unallocated		-		-		-		-		-		-		4,345		4,242
	$	59,022	$	59,755	$	1,225	$	1,187	$	1,568	$	2,786	$	66,160	$	67,970

(1)	Troubled debt restructurings of $7.6 million and $19.6 million as of September 30, 2014 and December 31, 2013, respectively, are classified as impaired loans pursuant to U.S. GAAP; however, these loans continue to accrue interest at contractual rates.

The following table details the changes in the allowance for loan losses from December 31, 2012 to December 31, 2013 to September 30, 2014 by loan classification and the allocation of the allowance for loan losses (in thousands):

	Commercial real estate – mortgage			Consumer real estate – mortgage			Construction and land development			Commercial and industrial			Consumer and other			Unallocated			Total
Allowance for Loan Losses:
Balance at December 31, 2012	$	19,634		$	8,762		$	9,164		$	24,738		$	1,094		$	6,025		$	69,417
Charged-off loans		(4,123	)		(2,250	)		(1,351	)		(8,159	)		(1,369	)		-			(17,252	)
Recovery of previously charged-off loans		500			1,209			1,464			4,531			244			-			7,948
Provision for loan losses		5,361			634			(2,042	)		4,024			1,663			(1,783	)		7,857
Balance at December 31, 2013	$	21,372		$	8,355		$	7,235		$	25,134		$	1,632		$	4,242		$	67,970

Collectively evaluated for impairment	$	19,298		$	7,090		$	7,186		$	24,660		$	1,521					$	59,755
Individually evaluated for impairment		2,074			1,265			49			474			111						3,973
Loans acquired with deteriorated credit quality		-			-			-			-			-						-
Balance at December 31, 2013	$	21,372		$	8,355		$	7,235		$	25,134		$	1,632					$	67,970

Loans:
Collectively evaluated for impairment	$	1,360,965		$	686,343		$	315,008		$	1,601,162		$	143,186					$	4,106,664
Individually evaluated for impairment		22,470			9,273			1,183			4,385			518						37,829
Loans acquired with deteriorated credit quality		-			-			-			-			-						-
Balance at December 31, 2013	$	1,383,435		$	695,616		$	316,191		$	1,605,547		$	143,704					$	4,144,493

	Commercial real estate - mortgage			Consumer real estate - mortgage			Construction and land development			Commercial and industrial			Consumer and other			Unallocated		Total
Allowance for Loan Losses:
Balance at December 31, 2013	$	21,372		$	8,355		$	7,235		$	25,134		$	1,632		$	4,242	$	67,970
Charged-off loans		(875	)		(1,075	)		(301	)		(2,336	)		(1,047	)		-		(5,634	)
Recovery of previously charged-off loans		416			232			271			990			322			-		2,231
Provision for loan losses		(2,219	)		(131	)		(1,395	)		3,496			1,739			103		1,593
Balance at September 30, 2014	$	18,694		$	7,381		$	5,810		$	27,284		$	2,646		$	4,345	$	66,160

Collectively evaluated for impairment	$	18,597		$	6,052		$	5,763		$	26,460		$	2,150				$	59,022
Individually evaluated for impairment		97			1,329			47			824			496					2,793
Loans acquired with deteriorated credit quality		-			-			-			-			-					-
Balance at September 30, 2014	$	18,694		$	7,381		$	5,810		$	27,284		$	2,646				$	66,160

Loans:
Collectively evaluated for impairment	$	1,471,383		$	696,641		$	316,616		$	1,718,723		$	188,630				$	4,391,993
Individually evaluated for impairment		7,486			10,160			5,474			5,363			775					29,258
Loans acquired with deteriorated credit quality		-			-			-			-			-					-
Balance at September 30, 2014	$	1,478,869		$	706,801		$	322,090		$	1,724,086		$	189,405				$	4,421,251

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory insights.

At September 30, 2014, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $6.6 million to current directors, executive officers, and their related entities, of which $2.8 million had been drawn upon. At December 31, 2013, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $11.2 million to directors, executive officers, and their related entities, of which approximately $8.9 million had been drawn upon. These loans and extensions of credit were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to persons not related to Pinnacle Bank and did not involve more than the normal risk of collectability or present other unfavorable features. None of these loans to directors, executive officers, and their related entities were impaired at September 30, 2014 or December 31, 2013.

Residential Lending

At September 30, 2014, Pinnacle Financial had approximately $19.1 million of mortgage loans held-for-sale compared to approximately $12.9 million at December 31, 2013. Total loan volumes sold during the nine months ended September 30, 2014 were approximately $240.8 million compared to approximately $349.6 million for the nine months ended September 30, 2013. Traditionally, Pinnacle Financial would deliver residential loans that it had closed with borrowers to investors under a best efforts basis. Under this method, an investor would have agreed to purchase a particular loan from Pinnacle Financial once the loan had closed with the borrower and the loan satisfied the investor's underwriting criteria. Additionally, under the best efforts method, if a particular loan did not close, Pinnacle Financial was not obligated to deliver an alternative loan or otherwise compensate the investor that had previously agreed to purchase the loan for failure by Pinnacle Financial to deliver the loan. During the first quarter of 2014, Pinnacle Financial began delivering loans on a mandatory basis to its approved investors. The governing mandatory delivery agreements require that Pinnacle Financial deliver an individual loan contract to the investor or compensate the investor in the event the closed loan does not ultimately settle. As a result, mandatory delivery typically results in more advantageous pricing in the wholesale market. However, mandatory delivery exposes Pinnacle Financial to risks associated with failure to ultimately deliver the loan to the investor as well as interest rate risk between the initial rate-lock date and the date of the ultimate sale of the loan to an investor. Pinnacle Financial entered into a short-term economic hedging relationship with a third party for a fee to mitigate this interest rate exposure. Pinnacle Financial remains exposed to the impact interest rate fluctuations could have on investor demand for these loans and the resulting valuation of our loan pipeline. Fluctuations in interest rates also impact consumer behavior which could impact our ability to deliver these loans to our investors. These items impact our net revenues from this line of business. Pinnacle Financial has not entered into any forward commitments with investors for future bulk loan sales. All of these residential loan sales transfer servicing rights to the buyer. During the nine months ended September 30, 2014, Pinnacle Financial recognized $4.3 million in gains on the sale of these loans, net of commissions paid, compared to $5.1 million during the nine months ended September 30, 2013.

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 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, repurchase activity pursuant to the terms of these representations and warranties has been insignificant to Pinnacle Bank.

Note 4. Income Taxes

Accounting Standards Codification (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. As of September 30, 2014, Pinnacle Financial had no unrecognized tax benefits related to Federal or State income tax matters and does not currently anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to September 30, 2014. As of September 30, 2014, Pinnacle Financial has accrued no interest and no penalties related to uncertain tax positions.

Pinnacle Financial's effective tax rate for the three and nine months ended September 30, 2014 was 33.1% and 33.2% compared to 33.3% and 33.0% for the three and nine months ended September 30, 2013. The effective tax rate differs from the Federal income tax statutory rate of 35% and state income tax rate of 6.50% primarily due to our investments in bank qualified municipal securities, bank-owned life insurance, and tax savings from our captive insurance subsidiary, PNFP Insurance Inc., offset in part by meals and entertainment expense, a portion of which is non-deductible.

Note 5. 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, and 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 September 30, 2014, these commitments amounted to $1.3 billion.

Standby letters of credit are generally issued on behalf of an applicant (our 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 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 September 30, 2014, these commitments amounted to $69.9 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 only amounts drawn upon would be reflected in the future. 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 our customers default on their resulting obligation to us, Pinnacle Financial's maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments. At September 30, 2014, and December 31, 2013, Pinnacle Financial had accrued $1.4 million 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 claims outstanding at September 30, 2014 will not have a material adverse impact on Pinnacle Financial's consolidated financial condition, operating results or cash flows.

Note 6. Stock Options, Stock Appreciation Rights and Restricted Shares

At Pinnacle Financial's annual shareholders' meeting on April 15, 2014, the shareholders of Pinnacle Financial voted in favor of a proposal that adopted the 2014 Equity Incentive Plan (the "2014 Plan"). The 2014 Plan addressed the following matters:

(i)

Consolidation of the two existing equity incentive plans, the Pinnacle Financial Partners, Inc. 2004 Amended and Restated Equity Incentive Plan (the "2004 Plan") and the Mid-America Bancshares, Inc. 2006 Omnibus Equity Incentive Plan (the "Mid-America Plan") including approximately 396,000 shares in the aggregate that remained available for issuance under those two plans at that date; and

(ii)	Increased the maximum number of shares of common stock that may be issued to associates and directors by an additional 930,000 shares.

Total shares available for issuance under the 2014 Plan were approximately 1.3 million shares as of September 30, 2014, inclusive of shares returned to plan reserves during the nine months ended September 30, 2014. The 2014 Plan also permits Pinnacle Financial to reissue awards currently outstanding under the 2004 Plan and the Mid-America Plan that are subsequently forfeited or expired unexercised and returned to the 2014 Plan.

Common Stock Options and Stock Appreciation Rights

As of September 30, 2014, there were approximately 779,000 stock options and 3,700 stock appreciation rights outstanding to purchase common shares. A summary of the stock option and stock appreciation rights activity within the equity incentive plans during the nine months ended September 30, 2014 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters is as follows:

	Number			Weighted- Average Exercise Price		Weighted- Average Contractual Remaining Term (in years)		Aggregate Intrinsic Value (000's)
Outstanding at December 31, 2013		1,002,500		$	25.77		2.48	$	7,097	⁽¹⁾
Granted		-
Exercised		(217,499	)
Stock appreciation rights exercised⁽³⁾		(1,586	)
Forfeited		(632	)
Outstanding at September 30, 2014		782,783		$	26.70		2.00	$	7,676	⁽²⁾
Options exercisable at September 30, 2014		782,783		$	26.70		2.00	$	7,676	⁽²⁾

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of Pinnacle Financial common stock of $32.53 per common share at December 31, 2013 for the approximately 931,425 options and stock appreciation rights that were in-the-money at December 31, 2013.

(2)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of Pinnacle Financial common stock of $36.10 per common share at September 30, 2014 for the approximately 782,783 options and stock appreciation rights that were in-the-money at September 30, 2014.

(3)	1,586 stock appreciation rights were converted into 609 common shares upon exercise.

During the nine months ended September 30, 2014, Pinnacle Financial recorded no stock option compensation expense compared to $13,000 during the nine months ended September 30, 2013. Compensation costs related to unvested stock options granted under Pinnacle Financial's equity incentive plan had been fully recognized and all outstanding option awards are fully vested.

Restricted Share Awards

Additionally, the 2014 Plan provides for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards outstanding as of September 30, 2014 under the 2014 Plan.

A summary of activity for unvested restricted share awards for the nine months ended September 30, 2014 is as follows:

	Number			Grant Date Weighted-Average Cost
Unvested at December 31, 2013		821,695		$	19.18
Shares awarded		122,317			33.16
Conversion of restricted share units to restricted share awards		186,943			31.68
Restrictions lapsed and shares released to associates/directors		(242,136	)		18.23
Shares forfeited⁽¹⁾		(27,844	)		20.75
Unvested at September 30, 2014		860,975		$	24.10

(1)	Represents shares forfeited due to employee termination and/or retirement. No shares were forfeited due to failure to meet performance targets.

Pinnacle Financial grants restricted share awards to associates, executive management and outside directors with a combination of time and, in the case of executive management, performance vesting criteria. The following table outlines restricted stock grants that were made, grouped by similar vesting criteria, during the nine months ended September 30, 2014:

Grant Year	Group⁽¹⁾	Vesting Period in years	Shares awarded	Restrictions Lapsed and shares released to participants	Shares Forfeited by participants⁽⁵⁾	Shares Unvested
Time Based Awards⁽²⁾
2014	Associates	5	110,118	-	2,364	107,754
Performance Based Awards⁽³⁾
2014	Leadership team	5	186,943	-	3,096	183,847
Outside Director Awards⁽⁴⁾
2014	Outside directors	1	12,199	-	-	12,199

(1)

Groups include employees (referred to as associates above), the leadership team which includes our named executive officers and other key senior leadership members, and outside directors. When 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 to pay the applicable income taxes associated with the award. For time-based restricted share awards, dividends paid on shares for which the forfeiture restrictions do not lapse are subject to clawback at the time of termination. For performance-based awards, 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)	The forfeiture restrictions on these restricted share awards lapse in separate equal installments should Pinnacle Financial achieve certain earnings and soundness targets over each year of the subsequent vesting period.

(4)

Restricted share awards are issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on the one year anniversary date of the award based on each individual board member meeting their attendance goals for the various board and board committee meetings to which each member was scheduled to attend.

(5)	These shares represent forfeitures resulting from recipients for whom employment terminated during the year-to-date period ended September 30, 2014. Any dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of termination.

Compensation expense associated with the time-based 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 grant date fair value. Compensation expense associated with performance-based restricted share awards is recognized over the time period that the restrictions associated with the awards are anticipated to lapse based on a schedule consistent with the nature of the award. For the three and nine months ended September 30, 2014, Pinnacle Financial recognized approximately $1.3 million and $3.7 million in compensation costs attributable to restricted share awards, compared to $1.0 million and $3.0 million for the three and nine months ended September 30, 2013.

Restricted Share Units

Pinnacle Financial granted restricted share units to the senior executive officers and other members of the leadership team in the first quarter of 2014. The senior executive officers' restricted share unit award included a range from 58,404 units at the target compensation level to 102,209 units at the maximum compensation level. These restricted share units will convert to a number of restricted share awards based on the achievement of certain performance metrics. The Leadership Team restricted share unit award of 29,087 units was granted at a target level of performance. For both senior executive officers and the Leadership Team, approximately one-third of these awards are eligible for conversion to restricted share awards based on the achievement of certain predetermined goals for each of the fiscal years ended December 31, 2014, 2015 and 2016, respectively. Once converted to restricted share awards, the restrictions on these shares will lapse in 2018 and 2019 in 50% increments based on the attainment of certain soundness targets in fiscal 2017 and 2018, respectively. The performance metrics and soundness criteria for each of the impacted fiscal years were established concurrently with the restricted share unit grants in January 2014 by the Human Resources and Compensation Committee of Pinnacle Financial's board of directors (HRCC). These restricted share units are being expensed based on the requisite service period of the underlying traunche of the award. Each period, the number of shares that is expected to lapse to the recipient is reevaluated and the associated compensation expense is adjusted accordingly. For the three and nine months ended September 30, 2014, Pinnacle Financial recognized expense associated with the first traunche of this award totaling $93,000 and $248,000, respectively. The expense is being accrued at the maximum performance level for the senior executive officers and the target performance level for the Leadership Team.

Note 7. 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. During the nine months ended September 30, 2014, Pinnacle Bank paid $15.1 million in dividends to Pinnacle Financial. As of September 30, 2014, Pinnacle Bank could pay approximately $103.9 million of additional dividends to Pinnacle Financial without prior approval of the Commissioner of the TDFI. Pinnacle Financial initiated payment of a quarterly dividend of $0.08 per share of common stock in the fourth quarter of 2013 and has since declared four subsequent dividend payments. The amount and timing of all future dividend payments, if any, is subject to Board discretion and will depend on Pinnacle Financial's earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to us.

Pinnacle Financial and Pinnacle Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can result in the initiation of 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.

Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and Pinnacle Bank to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and for Pinnacle Bank of Tier I capital to average assets. Management believes, as of September 30, 2014, 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 minimum total risk-based, Tier I risk-based, and Tier I leverage 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. 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
At September 30,2014
Total capital to risk weighted assets:
Pinnacle Financial	$	677,061		13.4	%	$	403,967		8.0	%	$	505,395		10.0	%
Pinnacle Bank	$	641,862		12.8	%	$	402,803		8.0	%	$	503,957		10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial	$	613,887		12.2	%	$	201,984		4.0	%	$	303,237		6.0	%
Pinnacle Bank	$	578,867		11.5	%	$	201,401		4.0	%	$	302,374		6.0	%
Tier I capital to average assets (*):
Pinnacle Financial	$	613,887		11.2	%	$	220,294		4.0	%	$	N/A		N/A
Pinnacle Bank	$	578,867		10.6	%	$	219,507		4.0	%	$	274,383		5.0	%

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

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms will become effective as to Pinnacle Financial and Pinnacle Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes "capital" for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital.

The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are:

(i) a new common equity Tier 1 capital ratio of 4.5%;

(ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%);

(iii) a total risk-based capital ratio of 8% (unchanged from current rules);

(iv) a Tier 1 leverage ratio of 4% for all institutions.

The rules also establish a "capital conservation buffer" of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in:

(i) a common equity Tier 1 risk-based capital ratio of 7.0%,

(ii) a Tier 1 risk-based capital ratio of 8.5%, and

(iii) a total risk-based capital ratio of 10.5%.

The capital conservation buffer requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions

Under these new rules, Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Cumulative preferred stock and trust preferred securities issued after May 19, 2010, will no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including in the case of bank holding companies with less than $15.0 billion in total assets, trust preferred securities issued prior to that date, will continue to count as Tier 1 capital subject to certain limitations. As a result, Pinnacle Financial's Trust Preferred Securities will continue to qualify as Tier 1 capital. The definition of Tier 2 capital is generally unchanged for most banking organizations, subject to certain new eligibility criteria.

Common equity Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions.

The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. Pinnacle Financial expects that it will opt-out of this requirement.

Note 8. 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

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 a large U.S. financial institution in order to minimize the risk to Pinnacle Financial. These swaps are derivatives, but are not designated as hedging instruments.

Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or customer owes Pinnacle Financial, and results in credit risk to Pinnacle Financial. When the fair value of a derivative instrument contract is negative, Pinnacle Financial owes the customer or counterparty and therefore, has no credit risk.

A summary of Pinnacle Financial's interest rate swaps related to customers as of September 30, 2014 and December 31, 2013 is included in the following table (in thousands):

	September 30, 2014					December 31, 2013
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Interest rate swap agreements:
Pay fixed / receive variable swaps	$	251,774	$	12,280		$	294,486	$	13,296
Pay variable / receive fixed swaps		251,774		(12,668	)		294,486		(13,670	)
Total	$	503,548	$	(388	)	$	588,972	$	(374	)

Hedge derivatives

Pinnacle Financial has a forward cash flow hedge relationship 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 protects Pinnacle Financial from floating interest rate variability. The terms of the individual contracts within the relationship are as follows (in thousands):

									September 30, 2014				December 31, 2013
		Forecasted Notional Amount		Receive Rate	Pay Rate			Term⁽¹⁾	Asset/ (Liabilities)		Unrealized Gain in Accumulated Other Comprehensive Income		Asset/ (Liabilities)		Unrealized Gain in Accumulated Other Comprehensive Income
Interest Rate Swap⁽²⁾		$	33,000	3 month LIBOR		1.428	%	April 2015-April 2018	$	270	$	164	$	463	$	281
Interest Rate Swap⁽²⁾			33,000	3 month LIBOR		1.857	%	Oct. 2015-April 2019		416		253		837		509
Interest Rate Swap⁽²⁾			33,000	3 month LIBOR		1.996	%	Oct. 2015-Oct. 2019		423		257		1,007		612
Interest Rate Swap			33,000	3 month LIBOR		2.265	%	April 2016-April 2020		423		257		1,172		712
Interest Rate Swap			34,000	3 month LIBOR		2.646	%	April 2016-April 2022		354		215		1,818		1,105
Interest Rate Swap			34,000	3 month LIBOR		2.523	%	Oct. 2016-Oct. 2020		374		227		1,307		794
		$	200,000						$	2,260	$	1,373	$	6,604	$	4,013

⁽¹⁾	No cash will be exchanged prior to the term.
⁽²⁾	Subsequent to September 30, 2014, Pinnacle Financial terminated the first three individual contracts of the hedge relationship. Although we continue to expect that we will need this funding source in the future, internal forecasts for future interest rates have changed since this transaction was initiated and Pinnacle Financial no longer believes these hedging instruments necessary in managing interest rate risk given internal interest rate forecasts for those periods. As a result of terminating these contracts, Pinnacle Financial will incur a gain of $64,000 over the original term of the agreement which begins in April 2015.

On November 5, 2014, Pinnacle Financial entered into an additional forward cash flow hedge relationship for interest rate risk management purposes given the aforementioned changes in forecasted interest rates. The terms of the individual contracts within the relationship are as follows (in thousands):

		Forecasted Notional Amount		Receive Rate	Pay Rate			Term⁽¹⁾
Interest Rate Swap		$	33,000	3 month LIBOR		2.992	%	October 2017 - October 2021
Interest Rate Swap			33,000	3 month LIBOR		3.118	%	April 2018 - July 2022
Interest Rate Swap			33,000	3 month LIBOR		3.158	%	July 2018 - October 2022
		$	99,000

⁽¹⁾	No cash will be exchanged prior to the term.

During the second quarter of 2014, Pinnacle Financial entered into four interest rate swap agreements as part of the management of interest rate risk. Pinnacle Financial designated the interest rate swaps as cash flow hedges intended to protect against the variability of cash flows on selected LIBOR based loans. The swaps hedge the interest rate risk, wherein Pinnacle Financial receives a fixed rate of interest from a counterparty and pays a variable rate, based on one month LIBOR. The terms of the respective swaps range from seven to ten years and began on July 1, 2014. The swaps were entered into with a counterparty that met Pinnacle Financial's credit standards, and the agreements contains collateral provisions protecting the at-risk party. Pinnacle Financial believes that the credit risk inherent in the contract is not significant.

								September 30, 2014						December 31, 2013
	Forecasted Notional Amount		Receive Rate			Pay Rate	Term⁽¹⁾	Asset/ (Liabilities)			Unrealized Gain in Accumulated Other Comprehensive Income (Loss)			Asset/ (Liabilities)		Unrealized Gain in Accumulated Other Comprehensive Income
Interest Rate Swap	$	27,500		2.090	%	1 month LIBOR	July 2014 - July 2021	$	113		$	69		$	-	$	-
Interest Rate Swap		27,500		2.270	%	1 month LIBOR	July 2014 - July 2022		(47	)		(29	)		-		-
Interest Rate Swap		27,500		2.420	%	1 month LIBOR	July 2014 - July 2023		19			12			-		-
Interest Rate Swap		27,500		2.500	%	1 month LIBOR	July 2014 - July 2024		54			33			-		-
	$	110,000						$	139		$	84		$	-	$	-

⁽¹⁾	No cash will be exchanged prior to the term.

The cash flow hedges were determined to be fully effective during the period presented. And therefore, no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in other assets with changes in fair value recorded in accumulated other comprehensive (loss) income, net of tax. If a hedge was deemed to be ineffective, the amount included in accumulated other comprehensive (loss) income would be reclassified into a line item within the statement of income that impacts operating results. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or Pinnacle Financial discontinues hedge accounting. Pinnacle Financial expects the hedges to remain fully effective during the remaining terms of the swaps. Pinnacle Financial does not expect any amounts to be reclassified from accumulated other comprehensive (loss) income related to these swaps over the next twelve months.

Note 9. Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurements and Disclosures, which 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. 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 equity investments – Included in other investments are other equity investments in certain nonpublic private equity funds. The valuation of nonpublic private equity 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 ongoing reviews by senior investment managers. 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 as these funds are not widely traded and the underling investments of such funds are often privately-held and/or start-up companies for which market values are not readily available.

Other assets – Included in other assets are certain assets carried at fair value, including interest rate swap agreements, the cash flow hedge 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 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.

Nonaccrual loans – A loan is classified as nonaccrual when it is probable Pinnacle Financial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Nonaccrual loans are measured based on the present value of expected payments using the loan's original effective rate as the discount rate, the loan's observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent. If the recorded investment in the nonaccrual loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the difference may be recognized as a charge-off. Nonaccrual 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. Substantially all 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 loan 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. 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. 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.

The following tables present financial instruments measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):

September 30, 2014	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	$	-	$	-	$	-	$	-
U.S. government agency securities		111,098		-		111,098		-
Mortgage-backed securities		435,654		-		435,654		-
State and municipal securities		143,195		-		143,195		-
Agency-backed securities		13,766		-		13,766		-
Corporate notes and other		11,208		-		11,208		-
Total investment securities available-for-sale		714,921		-		714,921		-
Other equity investments		7,464		-		-		7,464
Other assets		15,463		-		15,463		-
Total assets at fair value	$	737,848	$	-	$	730,384	$	7,464

Other liabilities	$	12,668	$	-	$	12,668	$	-
Total liabilities at fair value	$	12,668	$	-	$	12,668	$	-

December 31, 2013
Investment securities available-for-sale:
U.S. government agency securities	$	103,873	$	-	$	103,873	$	-
Mortgage-backed securities		412,936		-		412,936		-
State and municipal securities		148,411		-		148,411		-
Agency-backed securities		17,007		-		17,007		-
Corporate notes and other		11,229		-		11,229		-
Total investment securities available-for-sale		693,456		-		693,456		-
Other equity investments		6,701		-		-		6,701
Other assets		19,900		-		19,900		-
Total assets at fair value	$	720,057	$	-	$	713,356	$	6,701

Other liabilities	$	13,670	$	-	$	13,670	$	-
Total liabilities at fair value	$	13,670	$	-	$	13,670	$	-

The following table presents assets measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013 (in thousands):

September 30, 2014	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)		Total losses for the year-to-date period then ended
Other real estate owned	$	12,329	$	-	$	-	$	12,329	$	(509	)
Nonaccrual loans, net ⁽¹⁾		20,427		-		-		20,427		(754	)
Total	$	32,756	$	-	$	-	$	32,756	$	(1,263	)

December 31, 2013
Other real estate owned	$	15,226	$	-	$	-	$	15,226	$	(2,258	)
Nonaccrual loans, net ⁽¹⁾		16,996		-		-		16,996		(2,921	)
Total	$	32,222	$	-	$	-	$	32,222	$	(5,179	)

(1)	Amount is net of a valuation allowance of $1.2 million at September 30, 2014 and $1.2 million at December 31, 2013 as required by ASC 310-10, "Receivables."

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 nine months ended September 30, 2014, there were no transfers between Levels 1, 2 or 3.

The table below includes a rollforward of the balance sheet amounts for the three and nine months ended September 30, 2014 (including the change in fair value) for financial instruments classified by Pinnacle Financial within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):

	For the nine months ended September 30,
	2014				2013
	Other assets		Other liabilities		Other assets			Other liabilities
Fair value, January 1	$	6,701	$	-	$	4,681		$	-
Total realized gains (losses) included in income		406		-		(366	)		-
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at September 30		-		-		-			-
Purchases		357		-		1,650			-
Issuances		-		-		-			-
Settlements		-		-		-			-
Transfers out of Level 3		-		-		-			-
Fair value, September 30	$	7,464	$	-	$	5,965		$	-
Total realized gains (losses) included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30	$	406	$	-	$	(366	)	$	-

The following methods and assumptions were used by Pinnacle Financial in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2014 and December 31, 2013. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Securities held-to-maturity - Estimated fair values for investment securities are based on quoted market prices where available. 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.

Loans, net - The fair value of our loan portfolio includes a credit risk factor in the determination of the fair value of our loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. Our loan portfolio is initially fair valued using a segmented approach. We divide our loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk.

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk to determine the exit price.

Mortgage loans held-for-sale - Mortgage loans held-for-sale are carried at the lower of cost or fair value. The estimate of fair value is based on pricing models and other information.

Deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances, subordinated debt and other borrowings - The carrying amounts of demand deposits, savings deposits, securities sold under agreements to repurchase, floating rate advances from the FHLB, floating rate subordinated debt and other borrowings, and floating rate loans approximate their fair values due to having no stated maturity. Fair values for certificates of deposit, fixed rate advances from the FHLB and fixed rate subordinated debt are estimated using discounted cash flow models, using current market interest rates offered on certificates, advances and other borrowings with similar remaining maturities. For fixed rate subordinated debt, the maturity is assumed to be as of the earliest date that the indebtedness will be repriced.

Off-balance sheet instruments - The fair values of Pinnacle Financial's off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to Pinnacle Financial until such commitments are funded.

The following table presents the carrying amounts, estimated fair value and placement in the fair value hierarchy of Pinnacle Financial's financial instruments at September 30, 2014 and December 31, 2013. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, 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).

September 30, 2014	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 held-to-maturity	$	38,107	$	38,112	$	-	$	38,112	$	-
Loans, net		4,355,091		4,244,502		-		-		4,244,502
Mortgage loans held-for-sale		19,130		19,428		-		19,428		-

Financial liabilities:
Deposits and securities sold under
agreements to repurchase		4,727,103		4,432,623		-		-		4,432,623
Federal Home Loan Bank advances		215,524		215,390		-		-		215,390
Subordinated debt and other borrowings		96,783		77,887		-		-		77,887

Off-balance sheet instruments:
Commitments to extend credit ⁽²⁾		1,339,618		1,112		-		-		1,112
Standby letters of credit ⁽³⁾		69,851		260		-		-		260


December 31, 2013
Financial assets:
Securities held-to-maturity	$	39,796	$	38,817	$	-	$	38,817	$	-
Loans, net		4,076,524		4,021,675		-		-		4,021,675
Mortgage loans held for sale		12,850		12,999		-		12,999		-

Financial liabilities:
Deposits and securities sold under
agreements to repurchase		4,603,938		4,378,805		-		-		4,378,805
Federal Home Loan Bank advances		90,637		90,652		-		-		90,652
Subordinated debt and other borrowings		98,658		73,083		-		-		73,083

Off-balance sheet instruments:
Commitments to extend credit ⁽²⁾		1,206,528		1,040		-		-		1,040
Standby letters of credit ⁽³⁾		69,231		331		-		-		331

(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 quarter, Pinnacle Financial evaluates the inherent risks of the outstanding off-balance sheet commitments. In making this evaluation, Pinnacle Financial evaluates the credit worthiness of the borrower, the collateral supporting the commitments and any other factors similar to those used to evaluate the inherent risks of our loan portfolio. Additionally, Pinnacle Financial evaluates the probability that the outstanding commitment will eventually become a funded loan. As a result, at September 30, 2014 and December 31, 2013, Pinnacle Financial included in other liabilities $1.1 million and $1.0 million, respectively, representing the inherent risks associated with these off-balance sheet commitments.

(3)

At September 30, 2014 and December 31, 2013, the fair value of Pinnacle Financial's standby letters of credit was $260,000 and $331,000, respectively. This amount represents the unamortized fee associated with these standby letters of credit and is included in the consolidated balance sheet of Pinnacle Financial and is believed to approximate fair value. This fair value will decrease over time as the existing standby letters of credit approach their expiration dates.

Note 10. 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 VIEs 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 VIEs primary beneficiary and disclosures surrounding those VIEs which have not been consolidated. The consolidation methodology provided in this footnote for the quarter ended September 30, 2014, and the year ended December 31, 2013, has been prepared in accordance with ASC 810.

At September 30, 2014, Pinnacle Financial did not have any consolidated VIEs to disclose but did have several nonconsolidated VIEs. As discussed more fully in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013, Pinnacle Financial has the following non-consolidated variable interest entities: low income housing partnerships, trust preferred issuances and accruing restructured commercial loans.

The following table summarizes VIE's that are not consolidated by Pinnacle Financial as of September 30, 2014 and December 31, 2013 (in thousands):

September 30, 2014

December 31, 2013

Type

Assets Recognized (maximum loss)

Liability

Recognized

Assets Recognized (maximum loss)

Liability

Recognized

Balance Sheet

Classification

Low income housing partnerships

9,450

7,945

Other assets

Trust preferred issuances

N/A

82,476

N/A

82,476

Subordinated debt

Commercial troubled debt restructurings

3,415

15,273

Loans

Managed discretionary trusts

N/A

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our financial condition at September 30, 2014 and December 31, 2013 and our results of operations for the three and nine months ended September 30, 2014 and 2013. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.

Overview

Our diluted net income per common share for the three and nine months ended September 30, 2014 was $0.52 and $1.48 compared to $0.42 and $1.23 for the same periods in 2013. At September 30, 2014, loans had increased to $4.421 billion, as compared to $4.144 billion at December 31, 2013, and total deposits increased to $4.662 billion at September 30, 2014 from $4.533 billion at December 31, 2013.

Results of Operations. Our net interest income increased approximately $5.0 million to $49.5 million for the third quarter of 2014 compared to $44.6 million for the third quarter of 2013. Our net interest income increased approximately $11.7 million to $142.7 million for the nine months ended September 30, 2014 compared to $130.9 million for the same period in the prior year. The net interest margin (the ratio of net interest income to average earning assets) for the three and nine months ended September 30, 2014 was 3.79% and 3.75% compared to 3.72% and 3.80% for the same periods in 2013.

Our provision for loan losses was $851,000 and $1.6 million for the three and nine months ended September 30, 2014 compared to $685,000 and $5.6 million for the same periods in 2013. Our provision expense correlates with the growth in our net loans offset by an overall reduction in the amount of our allowance for loan losses as a result of credit quality improvement in our loan portfolio. Net charge-offs were $1.6 million and $3.4 million for the three and nine months ended September 30, 2014, compared to $2.1 million and $7.8 million in the prior year's comparable periods. Our allowance for loan losses as a percentage of total loans decreased from 1.64% at December 31, 2013 to 1.50% at September 30, 2014, as a result of improving credit quality within our loan portfolio.

Noninterest income increased by $1.5 million and $3.6 million during the three and nine months ended September 30, 2014, compared to the same periods in the prior year. Service charges on deposit accounts have increased for both the three and nine months ended September 30, 2014 consistent with the growth in demand deposits, specifically commercial operating accounts. We have experienced increases for the three and nine month periods ended September 30, 2014, in each of our wealth management lines of business (trust, insurance agency and investment services) as compared to the same periods in 2013. These increases were offset by a reduction in income related to gains on residential mortgage loans sold largely due to the reduction in mortgage refinancing activity in 2014 as compared to 2013. Other noninterest income includes miscellaneous consumer fees, such as ATM revenues, other consumer fees (primarily interchange), interest rate swap fee transactions for commercial borrowers, and gains from the sale of commercial loans that occur from time to time.

Noninterest expense increased by $1.0 million and $5.3 million during the three and nine months ended September 30, 2014, as compared to the three and nine months ended September 30, 2013, primarily as a result of increased salaries and employment benefits resulting from annual merit increases awarded in the first quarter of 2014 as well as the $460,000 write-off in the third quarter of 2014 of equipment resulting from a decision to outsource certain services to a third-party provider. Costs associated with the disposal and maintenance of other real estate owned decreased by $282,000 and $1.5 million for both the three and nine months ended September 30, 2014, when compared to the same periods in 2013, due to an overall reduction in the levels of OREO.

During the three and nine months ended September 30, 2014, Pinnacle Financial recorded income tax expense of $9.0 million and $25.7 million, respectively. Pinnacle Financial's effective tax rate for the nine months ended September 30, 2014 and 2013 was 33.2% and 33.0%, respectively, and differs from the combined federal and state income tax statutory rate primarily due to investments in bank qualified municipal securities, our real estate investment trust, and bank-owned life insurance offset in part by a limitation related to deductibility of meals and entertainment expense.

Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 55.0% and 56.3%, respectively, for the three and nine months ended September 30, 2014, compared to 59.5% and 58.4% for the same periods in 2013. Net income for the three and nine months ended September 30, 2014 was $18.2 million and $51.7 million, respectively, compared to $14.6 million and $42.4 million for the same periods in 2013.

Financial Condition. Net loans increased $278.6 million, or 6.8% during the nine months ended September 30, 2014. Total deposits were $4.662 billion at September 30, 2014, compared to $4.533 billion at December 31, 2013, an increase of $128.9 million, or 2.8%. At September 30, 2014, our capital ratios, including our bank's capital ratios, exceeded those levels necessary to be considered well-capitalized under applicable regulatory guidelines.

From time to time we may be required to support the capital needs of our bank (Pinnacle Bank). At September 30, 2014, we had approximately $31.7 million of cash at the holding company substantially all of which could be used to support our bank. Although we do not anticipate our bank needing any additional capital from us currently, we believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with U.S. GAAP and with general practices within the banking industry. There have been no significant changes to our Critical Accounting Policies as described in our Annual Report on Form 10-K for the year ended December 31, 2013.

Results of Operations

The following is a summary of our results of operations (dollars in thousands, except per share data):

	Three months ended				2014-2013			Nine months ended				2014-2013
	September 30,				Percent			September 30,				Percent
	2014		2013		Increase (Decrease)				2014		2013	Increase (Decrease)
Interest income	$	52,782	$	48,177		9.6	%	$	152,636	$	142,878		6.8	%
Interest expense		3,245		3,604		(10.0	%)		9,965		11,948		(16.6	%)
Net interest income		49,537		44,573		11.1	%		142,671		130,930		9.0	%
Provision for loan losses		851		685		24.2	%		1,593		5,631		(71.7	%)
Net interest income after provision for loan losses		48,686		43,888		10.9	%		141,078		125,299		12.6	%
Noninterest income		12,889		11,387		13.2	%		38,218		34,615		10.4	%
Noninterest expense		34,360		33,323		3.1	%		101,907		96,625		5.5	%
Net income before income taxes		27,215		21,952		24.0	%		77,389		63,289		22.3	%
Income tax expense		9,018		7,305		23.4	%		25,655		20,884		22.8	%
Net income	$	18,197	$	14,647		24.2	%	$	51,734	$	42,405		22.0	%

Basic net income per common share	$	0.52	$	0.43		20.9	%	$	1.49	$	1.24		20.2	%

Diluted net income per common share	$	0.52	$	0.42		23.8	%	$	1.48	$	1.23		20.3	%

Net Interest Income. Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of our revenues. Net interest income totaled $49.5 million and $142.7 million for the three and nine months ended September 30, 2014, an increase of approximately $5.0 million and approximately $11.7 million, respectively, from the levels recorded in the same periods of 2013. We were able to increase net interest income during the nine months ended September 30, 2014 compared to the same period in 2013 due primarily to our focus on growing our loan portfolio (average loans for the nine months ended September 30, 2014 were 11.2% greater than average balances for the same period in 2013) and reducing our funding costs between the two periods as interest expense decreased 16.6% between the periods.

The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three months ended September 30, 2014							Three months ended September 30, 2013
	Average Balances		Interest		Rates/ Yields			Average Balances		Interest		Rates/ Yields
Interest-earning assets:
Loans ⁽¹⁾	$	4,358,473	$	47,511		4.34	%	$	3,932,218	$	42,778		4.33	%
Securities:
Taxable		598,713		3,469		2.30	%		571,985		3,538		2.45	%
Tax-exempt ⁽²⁾		169,182		1,533		4.80	%		167,640		1,601		5.06	%
Federal funds sold and other		138,223		269		0.92	%		153,709		260		0.80	%
Total interest-earning assets		5,264,591	$	52,782		4.03	%		4,825,552	$	48,177		4.02	%
Nonearning assets
Intangible assets		246,821							248,095
Other nonearning assets		241,364							239,356
Total assets	$	5,752,776						$	5,313,003

Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking	$	871,620	$	366		0.17	%	$	783,623	$	400		0.20	%
Savings and money market		1,997,900		1,427		0.28	%		1,755,037		1,370		0.31	%
Time		468,436		643		0.54	%		559,587		938		0.66	%
Total interest-bearing deposits		3,337,956		2,436		0.29	%		3,098,247		2,708		0.35	%
Securities sold under agreements to repurchase		66,429		39		0.23	%		110,123		56		0.20	%
Federal Home Loan Bank advances		135,920		150		0.44	%		181,392		173		0.38	%
Subordinated debt and other borrowings		100,404		620		2.45	%		100,995		667		2.62	%
Total interest-bearing liabilities		3,640,709		3,245		0.35	%		3,490,757		3,604		0.41	%
Noninterest-bearing deposits		1,317,091		-		-			1,100,532		-		-
Total deposits and interest-bearing liabilities		4,957,800	$	3,245		0.26	%		4,591,289	$	3,604		0.31	%
Other liabilities		20,944							16,439
Stockholders' equity		774,032							705,275
Total liabilities and stockholders' equity	$	5,752,776						$	5,313,003
Net interest income			$	49,537						$	44,573
Net interest spread ⁽³⁾						3.68	%						3.61	%
Net interest margin ⁽⁴⁾						3.79	%						3.72	%

1.	Average balances of nonaccrual loans are included in the above amounts.

2.	Yields based on the carrying value of those tax exempt instruments are shown on a fully tax equivalent basis.

Yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. The net interest spread calculation excludes the impact of demand deposits. Had the impact of demand deposits been included, the net interest spread for the three months ended September 30, 2014 would have been 3.77% compared to a net interest spread of 3.71% for the three months ended September 30, 2013.

4.	Net interest margin is the result of annualized net interest income calculated on a tax-equivalent basis divided by average interest-earning assets for the period.

	Nine Months Ended September 30, 2014							Nine Months Ended September 30, 2013
	Average Balances		Interest		Rates/ Yields			Average Balances		Interest		Rates/ Yields
Interest-earning assets:
Loans ⁽¹⁾	$	4,247,723	$	136,296		4.30	%	$	3,820,711	$	126,442		4.44	%
Securities:
Taxable		594,069		10,818		2.43	%		561,974		10,860		2.58	%
Tax-exempt ⁽²⁾		172,292		4,694		4.86	%		171,352		4,741		4.94	%
Federal funds sold and other		145,422		828		0.90	%		130,226		835		1.01	%
Total interest-earning assets		5,159,506	$	152,636		4.01	%		4,684,263	$	142,878		4.14	%
Nonearning assets
Intangible assets		247,086							248,488
Other nonearning assets		241,094							240,305
Total assets	$	5,647,686						$	5,173,056

Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking	$	$901,330	$	1,186		0.17	%	$	782,965	$	1,537		0.26	%
Savings and money market		1,954,549		4,245		0.28	%		1,656,988		4,381		0.35	%
Time		488,941		2,081		0.54	%		575,689		3,159		0.73	%
Total interest-bearing deposits		3,344,820		7,512		0.29	%		3,015,642		9,077		0.40	%
Securities sold under agreements to repurchase		62,954		101		0.23	%		123,395		204		0.22	%
Federal Home Loan Bank advances		148,237		460		0.44	%		191,622		587		0.41	%
Subordinated debt and other borrowings		99,363		1,892		2.45	%		103,427		2,080		2.69	%
Total interest-bearing liabilities		3,655,374		9,965		0.35	%		3,434,086		11,948		0.46	%
Noninterest-bearing deposits		1,216,881		-		0.00	%		1,022,576		-		-
Total deposits and interest-bearing liabilities		4,872,255	$	9,965		0.26	%		4,456,662	$	11,948		0.36	%
Other liabilities		18,018							18,639
Stockholders' equity		757,413							697,755
Total liabilities and stockholders' equity	$	5,647,686						$	5,173,056
Net interest income			$	142,671						$	130,930
Net interest spread ⁽³⁾						3.65	%						3.67	%
Net interest margin ⁽⁴⁾						3.75	%						3.80	%

1.	Average balances of nonaccrual loans are included in the above amounts.

2.	Yields based on the carrying value of those tax exempt instruments are shown on a fully tax equivalent basis.

Yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. The net interest spread calculation excludes the impact of demand deposits. Had the impact of demand deposits been included, the net interest spread for the nine months ended September 30, 2014 would have been 3.74% compared to a net interest spread of 3.78% for the nine months ended September 30, 2013.

4.	Net interest margin is the result of annualized net interest income calculated on a tax-equivalent basis divided by average interest-earning assets for the period.

For the three months ended September 30, 2014 and 2013, our net interest margin was 3.79% and 3.72%, respectively. For the nine months ended September 30, 2014 and 2013, our net interest margin was 3.75% and 3.80%, respectively. The improvement in the net interest margin for the three months ended September 30, 2014 as compared to the same period in 2013 was primarily attributable to continued lower funding costs. We also entered into a cash flow hedge during the second quarter of 2014 in which Pinnnacle Financial swapped interest rates on $110 million of our loan portfolio. For the quarter ended September 30, 2014, Pinnacle received a weighted average interest rate of 2.32% and paid the 1-month LIBOR rate of 0.15% on this portion of the loan portfolio, pursuant to the terms of our agreement with the swap counterparty. This resulted in an approximate contribution of $600,000 to our net interest margin during the third quarter of 2014. The decrease in our net interest income for the nine months ended September 30, 2014, as compared to the same period in 2013 was primarily the result of a reduction in yields on our earning assets.

For the nine months ended September 30, 2014, yields on our earning assets portfolio decreased by 13 basis points as compared to the same period in the prior year. The decrease was primarily attributable to three factors: proceeds from amortization, maturities and prepayments on loans with higher interest rates were reinvested into loans with lower interest rates; strong competition for quality loans in our markets intensified; and yields earned on our bond portfolio decreased as we took measured steps to decrease the effective duration of the portfolio and continue to migrate the balance sheet towards asset sensitivity. During the three and nine months ended September 30, 2014, total funding rates were less than those rates for the same period in the prior year by 5 and 9 basis points, respectively. The net decrease was largely caused by the continued shift in our deposit mix, as our non-interest bearing checking accounts increased and concurrently balances of higher-cost time deposits decreased. We will continue to seek opportunities to reduce the cost of specific deposit accounts where we believe the amount we are currently paying for those funds exceeds market pricing.

We continue to deploy various asset liability management strategies to manage our risk to interest rate fluctuations. We believe margin expansion over both the short and the long term will be challenging due to continued pressure on earning asset yields during this current period of low interest rates. Loan pricing for creditworthy borrowers is very competitive in our markets and has limited our ability to increase pricing on new and renewed loans over the last several quarters, and we anticipate that this challenging competitive environment will continue throughout the remainder of 2014.

We continue to believe our net interest income should increase throughout the remainder of 2014 compared to 2013 due to an increase in average earning asset volumes, primarily loans. We anticipate funding these increased earning assets primarily by growing our core deposits, with limited wholesale funding to fund the shortfall, if any.

Provision for Loan Losses. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management's evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. Based upon management's assessment of the loan portfolio, we adjust our allowance for loan losses quarterly to an amount deemed appropriate to adequately cover probable losses inherent in the loan portfolio. Our allowance for loan losses as a percentage of total loans decreased from 1.64% at December 31, 2013 to 1.50% at September 30, 2014.

Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at September 30, 2014. While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, local real estate market, or particular industry or borrower-specific conditions, which may materially negatively impact our asset quality and the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.

The provision for loan losses amounted to $851,000 and $685,000 for the three months ended September 30, 2014 and 2013, respectively, and $1.6 million and $5.6 million for the nine months ended September 30, 2014 and 2013, respectively. Provision expense is impacted by the absolute level of loans, loan growth, the credit quality of the loan portfolio and the amount of net charge-offs. We believe that the level of our allowance for loan losses as a percentage of our loan portfolio will continue to decrease consistent with overall improvements in the credit quality of our portfolio.

Noninterest Income. Our noninterest income is composed of several components, some of which vary significantly between quarterly and annual periods. Service charges on deposit accounts and other noninterest income generally reflect customer growth trends, while fees from our wealth management departments, the origination of mortgage loans and gains and losses on the sale of securities will often reflect market conditions and fluctuate from period to period.

The following is a summary of our noninterest income for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three months ended					2014-2013			Nine months ended					2014-2013
	September 30,					Percent			September 30,					Percent
	2014		2013			Increase (Decrease)				2014		2013		Increase (Decrease)
Noninterest income:
Service charges on deposit accounts	$	2,913	$	2,797			4.1	%	$	8,669	$	7,818			10.9	%
Investment services		2,353		1,956			20.3	%		6,645		5,644			17.7	%
Insurance sales commissions		1,037		1,021			1.5	%		3,567		3,522			1.3	%
Gains on mortgage loans sold, net		1,353		1,326			2.0	%		4,256		5,130			(17.0	%)
Gain (loss) on sale of investment securities, net		29		(1,441	)		(102.0	%)		29		(1,466	)		(102.0	%)
Trust fees		1,109		932			18.9	%		3,327		2,756			20.7	%
Other noninterest income:
Interchange and other consumer fees		2,043		1,976			3.4	%		6,124		5,671			8.0	%
Bank-owned life insurance		614		568			8.1	%		1,849		1,539			20.1	%
Loan swap fees		-		268			(100.0	%)		118		665			(82.3	%)
Other equity investments		332		(46	)		821.7	%		425		122			248.4	%
Other noninterest income		1,105		2,030			(45.6	%)		3,208		3,214			(0.2	%)
Total other noninterest income		4,094		4,796			(14.6	%)		11,724		11,211			4.6	%
Total noninterest income	$	12,888	$	11,387			13.2	%	$	38,218	$	34,615			10.4	%

The increase in service charges on deposit accounts in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 is primarily related to increased analysis fees due to an increase in the volume and number of commercial checking accounts.

Income from our wealth management groups (investments, insurance and trust) is also included in noninterest income. For the three and nine months ended September 30, 2014, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, increased by $397,000 and $1.0 million as compared to the three and nine months ended September 30, 2013. At September 30, 2014, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $1.7 billion in brokerage assets held with Raymond James Financial Services, Inc. compared to $1.4 billion at September 30, 2013. Revenues from the sale of insurance products by our insurance subsidiary were approximately $1.0 million and $3.6 million, respectively, for both the three and nine months ended September 30, 2014 and 2013. Included in insurance revenues for the nine months ended September 30, 2014 was $243,000 of contingent income received based on 2013 sales production compared to $334,000 recorded in the same prior year period. Additionally, at September 30, 2014, our trust department was receiving fees on approximately $681 million and $822 million of managed and custodied assets, respectively, compared to $576 million and $810 million at September 30, 2013, respectively. Accordingly, trust fees increased by 20.7% between the year-to-date periods presented.

Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. These mortgage fees are for loans originated in both the Middle Tennessee and Knoxville markets that are subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage origination fees increase in lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. Mortgage origination fees will fluctuate from quarter to quarter as the rate environment changes. Over the last several years, the reduced interest rates have provided home owners the opportunity to refinance their existing mortgages at low rates; however, as interest rates begin to rise, we anticipate that our mortgage originations will continue to decrease from those levels realized in recent years. The fees from the origination and sale of mortgage loans have been netted against the commission expense associated with these originations. Gains on mortgage loans sold, net, were $1.4 million and $4.3 million for the three and nine months ended September 30, 2014 as compared to $1.3 million and $5.1 million for the same periods in the prior year. The decrease for the nine months ended September 30, 2014 as compared to the same period in 2013 is the result of decreased demand in the market.

Included in other noninterest income are interchange and other consumer fees, gains from bank-owned life insurance, swap fees earned for the facilitation of derivative transactions for our clients, changes in the fair value of our other equity investments and other items. Interchange revenues increased as a result of the number of cards being used as compared to the comparable periods in 2013. Other noninterest income included changes in the cash surrender value of bank-owned life insurance which was $614,000 and $1.8 million for the three and nine months ended September 30, 2014 compared to $568,000 and $1.5 million for the three and nine months ended September 30, 2013. The increase in earnings on these bank-owned life insurance policies resulted primarily from the 2013 purchase of approximately $38 million in additional bank-owned life insurance with terms similar to our existing policies. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies) on these policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support the policies. Earnings on these policies generally are not taxable. Loan swap fees are also included in other noninterest income and decreased by $547,000 when compared to the nine months ended September 30, 2013 as a result of reductions in loan swap demand in the current rate environment.

Also, during the nine months ended September 30, 2014, we recognized approximately $425,000 in gains in the market value of our other equity investments compared to $122,000 in the prior year's comparable period. These investments are equity investments in certain nonpublic private equity funds. As such, the income associated with these investments may fluctuate from period to period.

Noninterest Expense. Noninterest expense consists of salaries and employee benefits, equipment and occupancy expenses, other real estate expenses, and other operating expenses. The following is a summary of our noninterest expense for the three and nine months ended September 30, 2014 and 2013 (in thousands):

	Three months ended				2014-2013			Nine months ended				2014-2013
	September 30,				Percent			September 30,				Percent
	2014		2013		Increase (Decrease)				2014		2013	Increase (Decrease)
Noninterest expense:
Salaries and employee benefits:
Salaries	$	12,120	$	11,829		2.5	%	$	36,738	$	34,787		5.6	%
Commissions		1,330		1,156		15.1	%		3,994		3,451		15.7	%
Cash and equity incentives		5,139		4,832		6.4	%		14,671		13,453		9.1	%
Employee benefits and other		3,133		3,193		(1.9	%)		9,841		9,462		4.0	%
Total salaries and employee benefits		21,722		21,010		3.4	%		65,244		61,153		6.7	%
Equipment and occupancy		6,477		5,413		19.7	%		18,103		15,730		15.1	%
Other real estate expense		417		699		(40.3	%)		1,294		2,811		(54.0	%)
Marketing and business development		946		721		31.2	%		2,920		2,499		16.8	%
Postage and supplies		570		581		(2.0	%)		1,674		1,690		(1.0	%)
Amortization of intangibles		236		247		(4.3	%)		712		1,015		(29.9	%)
Other noninterest expense		3,992		4,652		(14.2	%)		11,960		11,726		2.0	%
Total noninterest expense	$	34,360	$	33,323		3.1	%	$	101,906	$	96,623		5.5	%

Total salaries and employee benefits expenses increased approximately 6.7% for the first nine months of 2014 over the same period in 2013. The increase in salaries and employee benefits and other is the result of our annual merit increases being effective January 1 as well as the overall increase in our associate base. At September 30, 2014, our associate base had expanded to 757.5 full-time equivalent associates as compared to 738.0 at September 30, 2013. We expect that total salaries and employee benefits expense will continue to increase throughout the remainder of 2014 when compared to comparable periods in 2013 as a result of our hiring of additional experienced financial advisors during the nine months ended September 30, 2014.

We believe that cash and equity incentives are a valuable tool in motivating an employee base that is focused on providing our clients effective financial advice and increasing shareholder value. As a result, and unlike many other financial institutions, all of our non-commissioned associates participate in our annual cash incentive plan and all of our associates participate in our equity compensation plans. As compared to 2013, cash and equity incentives increased by $1.2 million to $14.7 million for the nine months ended September 30, 2014. Under the annual cash incentive plan, the targeted level of incentive payments requires achievement of a certain soundness threshold, a revenue component and a targeted level of earnings (subject to certain adjustments). To the extent that the soundness threshold is met and revenues and earnings are above or below the targeted amount, the aggregate incentive payments are increased or decreased. Historically, we have paid between 0% and 125% of our targeted incentives. We currently believe that our performance for fiscal 2014 will exceed our targets and we are currently accruing incentive costs for the cash incentive plan in 2014 above target levels at the upper end of award level, or 122% of targeted awards. Under our equity incentive plans, we provide a broad-based equity incentive program for all associates including both restricted share awards and performance unit awards. We believe that equity incentives provide an excellent vehicle for all associates to become meaningful stockholders of Pinnacle Financial over an extended period of time and create a stockholder-centric culture throughout our organization. We expect that compensation expense associated with equity awards for the remainder of 2014 will continue to increase as a result of the additional associates we have hired in 2014.

Equipment and occupancy expenses for the three and nine months ended September 30, 2014, increased $1.1 million and $2.4 million as compared to the same periods in the prior year. We expanded our retail operations in the second quarter of 2013 in the Knoxville market with the opening of our Cedar Bluff location and also increased our leased space at our corporate headquarters in downtown Nashville, Tennessee, in the first quarter of 2014. During the second quarter of 2014, we began construction of our fifth Knoxville market location. We anticipate opening this location late in the fourth quarter of 2014. In future periods, these expansions may lead to higher equipment and occupancy expenses as well as related increases in salaries and benefits expense. Additionally, during the third quarter of 2014, a decision to outsource certain services to a third-party provider was made resulting in a $460,000 write off of equipment.

At September 30, 2014, we had $12.3 million in OREO assets compared to $15.2 million at December 31, 2013. Other real estate expense was $417,000 and $1.3 million, respectively, for the three and nine months ended September 30, 2014, compared to $699,000 and $2.8 million, respectively, for the same periods in the prior year. Approximately $720,000 of the other real estate expense incurred during the nine months ended September 30, 2014, was realized losses on dispositions and holding losses due to reduced valuations of OREO properties compared to $1.8 million for the same period in the prior year. The remaining other real estate expense consisted of carrying costs to maintain or improve the properties.

The decrease in intangible amortization expense between the three and nine months ended September 30, 2014 as compared to the same periods in September 30, 2013 was attributable to the final amortization of the core deposit intangible associated with the 2006 acquisition of Cavalry Bancorp in the second quarter of 2013. The remaining expense for the amortization of intangibles relates primarily to the intangible acquired in the Mid-America merger in November 2007. This core deposit intangible is being amortized over ten years, using an accelerated method which anticipates the life of the underlying deposits to which the intangible is attributable. Amortization expense associated with this core deposit intangible will approximate $700,000 to $860,000 per year for the next three years with amounts declining each year for the remaining amortization period. Additionally, in connection with our acquisition of Miller Loughry Beach, an insurance brokerage firm, in July of 2008, we recorded a customer list intangible of $1,270,000 which is being amortized over 20 years on an accelerated basis. Amortization of the customer list intangible will approximate $6,000 to $85,000 per year for the next fourteen years with amounts declining each year for the remaining amortization period.

Total other noninterest expenses decreased by $660,000 and increased by $234,000, respectively, during the three and nine months ended September 30, 2014 when compared to the comparable periods in 2013. During the second quarter of 2013, we reversed a $2.0 million allowance for off-balance sheet exposures related to a letter of credit which funded during the second quarter of 2013. A corresponding specific allowance was recorded as a component of the allowance for loan losses. This $2.0 million allowance reversal was offset for the nine month period ended September 30, 2013 by an approximate $877,000 prepayment penalty we incurred due to the prepayment of $35.0 million in FHLB advances in the first quarter of 2013.

Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and noninterest income) was 55.0% and 56.3%, respectively, for the three and nine months ended September 30, 2014 compared to 59.5% and 58.4%, respectively, for the three and nine months ended September 30, 2013. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue.

Income Taxes. During the three and nine months ended September 30, 2014, we recorded income tax expense of $9.0 million and $25.7 million respectively, compared to $7.3 million and $20.9 million, respectively, for the three and nine months ended September 30, 2013. Our income tax expense for the year-to-date period ended September 30, 2014 reflects an effective income tax rate of 33.2% compared to 33.0% for the year-to-date period ended September 30, 2013. Our income tax expense is principally impacted by our investments in municipal securities, our real estate investment trust and bank-owned life insurance offset in part by meals and entertainment expense, a portion of which is non-deductible.

Financial Condition

Our consolidated balance sheet at September 30, 2014 reflects an increase in total loans outstanding to $4.421 billion at September 30, 2014 compared to $4.144 billion at December 31, 2013. Total deposits increased by $128.9 million between December 31, 2013 and September 30, 2014. Total assets were $5.866 billion at September 30, 2014 compared to $5.564 billion at December 31, 2013.

Loans. The composition of loans at September 30, 2014 and at December 31, 2013 and the percentage (%) of each classification to total loans are summarized as follows (dollars in thousands):

	September 30, 2014					December 31, 2013
	Amount		Percent			Amount		Percent
Commercial real estate – mortgage	$	1,478,869		33.4	%	$	1,383,435		33.4	%
Consumer real estate – mortgage		706,801		16.0	%		695,616		16.8	%
Construction and land development		322,090		7.3	%		316,191		7.6	%
Commercial and industrial		1,724,086		39.0	%		1,605,547		38.7	%
Consumer and other		189,405		4.3	%		143,704		3.5	%
Total loans	$	4,421,251		100.0	%	$	4,144,493		100.0	%

The primary changes within the composition of our loan portfolio at September 30, 2014 as compared to December 31, 2013 reflect increased loan demand in the commercial and industrial and commercial real estate segments. We believe that loan growth in the remainder of 2014 within the commercial real estate segment will outpace loan payoffs in that segment of the portfolio resulting in an increase in the percentage of commercial real estate loans as a percentage of total loans. The commercial real estate – mortgage category includes owner-occupied commercial real estate loans. At September 30, 2014, approximately 49.2% of the outstanding principal balance of our commercial real estate mortgage loans was secured by owner-occupied properties. Owner-occupied commercial real estate is similar in many ways to our commercial and industrial lending in that these loans are generally made to businesses on the basis of the cash flows of the business rather than on the valuation of the real estate. Growth in the consumer and other segment is primarily the result of increased indirect automobile lending.

The following table classifies our fixed and variable rate loans at September 30, 2014 according to contractual maturities of (1) one year or less, (2) after one year through five years, and (3) after five years. The table also classifies our variable rate loans pursuant to the contractual repricing dates of the underlying loans (dollars in thousands):

	Amounts at September 30, 2014						Percentage
	Fixed		Variable				At September 30,
	Rates		Rates		Totals		2014
Based on contractual maturity:
Due within one year	$	167,748	$	789,061	$	956,809		21.7	%
Due in one year to five years		1,062,112		932,938		1,995,050		45.1	%
Due after five years		635,019		834,373		1,469,392		33.2	%
Totals	$	1,864,879	$	2,556,372	$	4,421,251		100.0	%

Based on contractual repricing dates:
Daily floating rate (*)	$	-	$	1,296,916	$	1,296,916		29.3	%
Due within one year		167,748		476,550		644,298		14.6	%
Due in one year to five years		1,062,112		499,787		1,561,899		35.3	%
Due after five years		635,019		283,119		918,138		20.8	%
Totals	$	1,864,879	$	2,556,372	$	4,421,251		100.0	%

The above information does not consider the impact of scheduled principal payments.

(*) Daily floating rate loans are tied to Pinnacle Bank's prime lending rate or a national interest rate index with the underlying loan rates changing in relation to changes in these indexes. Interest rate floors are currently in effect on approximately $786.3 million of our daily floating rate loan portfolio and on approximately $453.1 million of the remaining variable rate loan portfolio at varying maturities. The weighted average rate of the floors for the daily floating rate portfolio is 4.41% compared to the average coupon of 3.73% for this portfolio. The weighted average rate of the floors for the remaining variable rate portfolio is 4.03% compared to the average coupon rate of 3.22% for this portfolio. As a result, interest income on these loans will not adjust until the contractual rate on the underlying loan exceeds the interest rate floor.

Accruing Loans in Past Due Status. The following table is a summary of our accruing loans that were past due at least 30 days but less than 89 days and 90 days or more past due as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30,			December 31,
Accruing loans past due 30 to 89 days:	2014			2013
Commercial real estate – mortgage	$	245		$	2,561
Consumer real estate – mortgage		4,327			2,215
Construction and land development		863			4,839
Commercial and industrial		3,615			1,847
Consumer and other		4,967			1,488
Total accruing loans past due 30 to 89 days	$	14,017		$	12,950

Accruing loans past due 90 days or more:
Commercial real estate – mortgage	$	-		$	2,232
Consumer real estate – mortgage		-			-
Construction and land development		-			-
Commercial and industrial		75			825
Consumer and other		8			289
Total accruing loans past due 90 days or more	$	83		$	3,346

Ratios:
Accruing loans past due 30 to 89 days as a percentage of total loans		0.32	%		0.31	%
Accruing loans past due 90 days or more as a percentage of total loans		0.00	%		0.08	%
Total accruing loans in past due status as a percentage of total loans		0.32	%		0.39	%

The decrease in our total accruing loans past due 90 days or more is primarily attributable to one $2.2 million loan to a borrower who was in the process of a liquidity event at December 31, 2013. Subsequent to that date, the loan was brought current and total debt outstanding to this borrower was reduced.

Potential Problem Loans. Potential problem loans, which are not included in nonperforming assets, amounted to approximately $87.5 million or 2.0% of total loans at September 30, 2014 compared to $65.0 million or 1.6% of total loans at December 31, 2013. The increase in potential problem loans from December 31, 2013 to September 30, 2014, is primarily attributable to one approximately $12.0 million loan for which we believe we have an adequate source of repayment. 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 serious 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 the impact of substandard nonaccrual loans and substandard troubled debt restructurings. Troubled debt restructurings are not included in potential problem loans. Approximately $1.4 million of potential problem loans were past due at least 30 days but less than 90 days as of September 30, 2014.

Nonperforming Assets and Troubled Debt Restructurings. At September 30, 2014, we had $34.0 million in nonperforming assets compared to $33.4 million at December 31, 2013. Included in nonperforming assets were $21.7 million in nonaccrual loans and $12.3 million in OREO at September 30, 2014 and $18.2 million in nonaccrual loans and $15.2 million in OREO assets at December 31, 2013. At September 30, 2014 and December 31, 2013, there were $7.6 million and $19.6 million, respectively, of troubled debt restructurings, all of which were accruing as of the restructured date and remain on accrual status but are considered impaired loans pursuant to U.S. GAAP.

The following table is a summary of our nonperforming assets and troubled debt restructurings at September 30, 2014 and December 31, 2013 (dollars in thousands):

	At December 31, 2013			Payments, Sales and Reductions⁽¹⁾			Foreclosures⁽²⁾			Inflows ⁽³⁾		At September 30, 2014
Nonperforming assets:
Nonaccrual loans:
Commercial real estate – mortgage	$	9,017		$	(2,335	)	$	(1,572	)	$	2,376	$	7,486
Consumer real estate – mortgage		5,289			(4,451	)		(100	)		5,510		6,248
Construction and land development		1,070			(408	)		-			4,812		5,474
Commercial and industrial		2,565			(3,671	)		-			3,054		1,948
Consumer and other		242			(3,803	)		-			4,057		496
Total nonaccrual loans ⁽⁴⁾		18,183			(14,668	)		(1,672	)		19,809		21,652
Other real estate owned		15,226			(4,569	)		1,672			-		12,329
Total nonperforming assets		33,409			(19,237	)		-			19,809		33,981
Troubled debt restructurings:
Commercial real estate – mortgage		13,453			(13,453	)		-			-		-
Consumer real estate – mortgage		3,984			(72	)		-			-		3,912
Construction and land development		113			(113	)		-			-		-
Commercial and industrial		1,820			(1,567	)		-			3,162		3,415
Consumer and other		276			(10	)		-			13		279
Total troubled debt restructurings		19,646			(15,215	)		-			3,175		7,606
Total nonperforming assets and troubled debt restructurings	$	53,055		$	(34,452	)	$	-		$	22,984	$	41,587
Ratios:
Nonaccrual loans to total loans		0.44	%										0.49	%
Nonperforming assets to total loans plus other
real estate owned		0.88	%										0.77	%
Nonperforming assets plus troubled debt
restructurings to total loans and
other real estate owned		1.28	%										0.94	%
Nonperforming assets, potential problem loans
and troubled debt restructurings
to Pinnacle Bank Tier I capital and
allowance for loan losses		19.02	%										20.01	%
Classified asset ratio (Pinnacle Bank)⁽⁵⁾		18.50	%										19.98	%
Allowance for loan loss coverage ratio		373.8	%										305.6	%

(1)

Payments, sales and reductions in nonaccrual loans are primarily attributable to payments we have collected from borrowers, charge-offs of recorded balances and nonaccrual loans that have been returned to accruing status during the nine months ended September 30, 2014. Payments, sales and reductions in other real estate owned represent either the sale, disposition or valuation adjustment on properties which had previously been foreclosed upon or acquired by deed in lieu of foreclosure. Payments, sales and reductions in troubled debt restructurings are those loans which were previously restructured whereby the borrower has reduced the outstanding balance of the loan or re-defaulted on the terms of the loan and therefore been charged-off.

(2)	Foreclosures in nonaccrual loans and troubled debt restructurings are representative of transfers of balances to OREO during the nine months ended September 30, 2014.

(3)

Inflows in nonaccrual loans are attributable to loans where we have discontinued the accrual of interest at some point during the nine months ended September 30, 2014. Increases in troubled debt restructurings are the result of increases in the number of loans where we have granted a concession due to the deteriorating financial condition of the borrower during 2014. These concessions can be in the form of a reduced interest rate, extended maturity date or other matters.

(4)	Approximately $15.6 million and $10.9 million as of September 30, 2014 and December 31, 2013, respectively, of nonaccrual loans included above are currently paying pursuant to their contractual terms.

(5)	Classified assets as a percentage of Tier 1 capital plus allowance for loan losses.

At September 30, 2014, we owned $12.3 million in other real estate which we had acquired (usually through foreclosure) from borrowers, compared to $15.2 million at December 31, 2013, substantially all of which is located within our principal markets. We segment our OREO into three categories: developed lots, undeveloped land, and other. The other category primarily consists of office buildings and existing homes. The following table shows the classification of our OREO (dollars in thousands):

	September 30,		December 31,
	2014		2013
Developed lots	$	508	$	1,296
Undeveloped land		10,621		11,564
Other		1,200		2,366
	$	12,329	$	15,226

Allowance for Loan Losses (allowance). We maintain the allowance at a level that our management deems appropriate to adequately cover the probable losses inherent in the loan portfolio. As of September 30, 2014 and December 31, 2013, our allowance for loan losses was approximately $66.2 million and $68.0 million, respectively, which our management deemed to be adequate at each of the respective dates. The judgments and estimates associated with our allowance determination are described under Critical Accounting Estimates in our Annual Report on Form 10-K for the year ended December 31, 2013.

The following table sets forth, based on management's best estimate, the allocation of the allowance to categories of loans as well as the unallocated portion as of September 30, 2014 and December 31, 2013 and the percentage of loans in each loan category to total loans (dollars in thousands):

	September 30, 2014					December 31, 2013
	Amount		Percent			Amount		Percent
Commercial real estate - mortgage	$	18,694		33.4	%	$	21,372		33.4	%
Consumer real estate - mortgage		7,381		16.0	%		8,355		16.8	%
Construction and land development		5,810		7.3	%		7,235		7.6	%
Commercial and industrial		27,284		39.0	%		25,134		38.7	%
Consumer and other		2,646		4.3	%		1,632		3.5	%
Unallocated		4,345	NA				4,242	NA
Total allowance for loan losses	$	66,160		100.0	%	$	67,970		100.0	%

The following is a summary of changes in the allowance for loan losses for the year-to-date period ended September 30, 2014 and for the year ended December 31, 2013 and the ratio of the allowance for loan losses to total loans as of the end of each period (dollars in thousands):

	Nine months ended September 30, 2014			Year ended December 31, 2013
Balance at beginning of period	$	67,970		$	69,417
Provision for loan losses		1,593			7,857
Charged-off loans:
Commercial real estate – mortgage		(875	)		(4,123	)
Consumer real estate – mortgage		(1,075	)		(2,250	)
Construction and land development		(301	)		(1,351	)
Commercial and industrial		(2,336	)		(8,159	)
Consumer and other loans		(1,047	)		(1,369	)
Total charged-off loans		(5,634	)		(17,252	)
Recoveries of previously charged-off loans:
Commercial real estate – mortgage		416			500
Consumer real estate – mortgage		232			1,209
Construction and land development		271			1,464
Commercial and industrial		990			4,531
Consumer and other loans		322			244
Total recoveries of previously charged-off loans		2,231			7,948
Net charge-offs		(3,403	)		(9,304	)
Balance at end of period	$	66,160		$	67,970
Ratio of allowance for loan losses to total loans outstanding at end of period		1.50	%		1.64	%
Ratio of net charge-offs to average total loans outstanding for the period ⁽¹⁾		0.11	%		0.24	%

(1)	Net charge-offs for the year-to-date period ended September 30, 2014 have been annualized.

Management assesses the adequacy of the allowance prior to the end of each calendar quarter. 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 the loan portfolios, past loan loss experience, known and inherent risks in the portfolio, the views of Pinnacle Bank's regulators, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. For further discussion regarding our allowance for loan losses, refer to the Annual Report on Form 10-K as of and for the year ended December 31, 2013.

Investments. Our investment portfolio, consisting primarily of U.S. Treasuries, Federal agency bonds, mortgage-backed securities, and state and municipal securities amounted to $753.0 million and $733.3 million at September 30, 2014 and December 31, 2013, respectively. Our investment portfolio serves many purposes including serving as a stable source of income, as collateral for public funds deposits and as a potential liquidity source. A summary of our investment portfolio at September 30, 2014 and December 31, 2013 follows:

	September 30, 2014	December 31, 2013
Weighted average life	4.62 years	5.22 years
Effective duration	3.01%	4.61%
Weighted average coupon	3.36%	3.50%
Tax equivalent yield	2.85%	3.15%

Deposits and Other Borrowings. We had approximately $4.662 billion of deposits at September 30, 2014 compared to $4.533 billion at December 31, 2013. Our deposits consist of noninterest and interest-bearing demand accounts, savings accounts, money market accounts and time deposits. Additionally, we entered into agreements with certain customers to sell certain securities under agreements to repurchase the security the following day. These agreements (which are typically associated with comprehensive treasury management programs for our business clients and provide them with short-term returns for their excess funds) amounted to $64.8 million at September 30, 2014 and $70.5 million at December 31, 2013. Additionally, at September 30, 2014 and December 31, 2013, Pinnacle Bank had borrowed $215.5 million and $90.6 million, respectively, in advances from the FHLB. We believe the use of FHLB advances as a component of our funding is prudent asset-liability management and seek to leverage those fundings when appropriate. At September 30, 2014, Pinnacle Bank also had approximately $1.310 billion in additional availability with the FHLB.

Generally, we have classified our funding base as either core funding or non-core funding. Core funding consists of all deposits other than time deposits issued in denominations greater than $250,000. All other funding is deemed to be non-core. The following table represents the balances of our deposits and other funding and the percentage of each type to the total at September 30, 2014 and December 31, 2013 (dollars in thousands):

	September 30,				December 31,
	2014		Percent		2013		Percent
Core funding:
Noninterest-bearing deposit accounts	$	1,357,934	27.0	%	$	1,167,763	24.4	%
Interest-bearing demand accounts		847,629	16.8	%		870,662	18.2	%
Savings and money market accounts		1,712,430	34.0	%		1,655,087	34.5	%
Time deposit accounts less than $250,000		342,634	6.8	%		408,520	8.5	%
Total core funding		4,260,627	84.6	%		4,102,032	85.5	%
Non-core funding:
Relationship based non-core funding:
Reciprocating NOW deposits ⁽¹⁾		13,152	0.3	%		13,633	0.3	%
Reciprocating money market accounts ⁽¹⁾		270,807	5.4	%		309,276	6.5	%
Reciprocating time deposits		45,469	0.9	%		32,689	0.7	%
Other time deposits		72,276	1.4	%		77,838	1.6	%
Securities sold under agreements to repurchase		64,773	1.3	%		70,465	1.5	%
Total relationship based non-core funding		466,477	9.3	%		503,901	10.5	%
Wholesale funding:
Brokered deposits		-	0.0	%		-	0.0	%
Federal Home Loan Bank advances		215,524	4.3	%		90,637	1.9	%
Holding company loan		14,307	0.3	%		16,182	0.3	%
Subordinated debt – Pinnacle Financial		82,476	1.6	%		82,476	1.7	%
Total wholesale funding		312,307	6.2	%		189,295	4.0	%
Total non-core funding		778,784	15.5	%		693,196	14.5	%
Totals	$	5,039,411	100.0	%	$	4,795,228	100.0	%

(1)	The reciprocating categories consists of deposits we receive from a bank network (the CDARS network) in connection with deposits of our customers in excess of our FDIC coverage limit that we place with the CDARS network.

Our funding policies impose limits on the amount of non-core funding we can utilize. Periodically, we may exceed our policy limitations, at which time management expects it will develop plans to bring our core funding ratios back within compliance. At September 30, 2014 and December 31, 2013, we were in compliance with our core funding policies. As noted in the table above, our core funding as a percentage of total funding decreased slightly from 85.5% at December 31, 2013 to 84.6% at September 30, 2014.

Continuing to grow our core deposit base is a key strategic objective of our firm. We have numerous commercial and affluent consumer depositors that maintain significant balances in their transaction and money market accounts. These deposits are subject to significant fluctuations from time to time for such purposes as distributions to owners, taxes, business acquisitions, etc. As a result, our core funding ratios may also fluctuate meaningfully based on these factors.

The amount of time deposits as of September 30, 2014 amounted to $460.4 million. The following table shows our time deposits in denominations of $250,000 and less and in denominations greater than $250,000 by category based on time remaining until maturity and the weighted average rate for each category (in thousands):

	Balances		Weighted Avg. Rate
Denominations less than $250,000
Three months or less	$	114,566		0.37	%
Over three but less than six months		86,999		0.35	%
Over six but less than twelve months		99,911		0.48	%
Over twelve months		86,627		0.93	%
	$	388,103		0.52	%
Denominations $250,000 and greater
Three months or less	$	20,444		0.49	%
Over three but less than six months		14,954		0.47	%
Over six but less than twelve months		26,360		0.59	%
Over twelve months		10,518		1.23	%
	$	72,276		0.63	%
Totals	$	460,379		0.54	%

Subordinated debt and other borrowings. We have four wholly-owned subsidiaries that are statutory business trusts. We are the sole sponsor of the Trusts and acquired each Trust's common securities. The Trusts were created for the exclusive purpose of issuing 30-year capital trust preferred securities and using the proceeds to acquire junior subordinated debentures (Subordinated Debentures) issued by ourselves. The sole assets of the Trusts are the Subordinated Debentures. At September 30, 2014, our $2,476,000 investment in the Trusts is included in other investments in the accompanying consolidated balance sheets and our $82,476,000 obligation is reflected as subordinated debt.

	Date Established	Maturity	Common Securities		Subordinated Debentures		Floating Interest Rate	Interest Rate at September 30, 2014
Trust I	December 29, 2003	December 30, 2033	$	310,000	$	10,000,000	Libor + 2.80%	3.03%
Trust II	September 15, 2005	September 30, 2035		619,000		20,000,000	Libor + 1.40%	1.63%
Trust III	September 7, 2006	September 30, 2036		619,000		20,000,000	Libor + 1.65%	1.88%
Trust IV	October 31, 2007	September 30, 2037		928,000		30,000,000	Libor + 2.85%	3.08%

The Trust Preferred Securities bear a floating interest rate based on a spread over 3-month LIBOR which is set each quarter. Distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. We guarantee the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trusts. Our obligations under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by ourselves of the obligations of the Trusts under the Trust Preferred Securities.

The Subordinated Debentures are unsecured, bear interest at a rate equal to the rates paid by the Trusts on the Trust Preferred Securities and mature on the same dates as those noted above for the Trust Preferred Securities. Interest is payable quarterly. We may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and our ability to pay dividends on our common shares and preferred shares will be restricted.

The Trust Preferred Securities may be redeemed prior to maturity at our option. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) the Trust becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by the parent company on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for the Trust to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the trust preferred securities as "Tier I capital" under the Federal Reserve capital adequacy guidelines. Under current Federal Reserve regulations, the trust preferred securities qualify as Tier 1 capital. The Federal Reserve published final Basel III capital regulations in June 2013 which continued the treatment of the trust preferred securities as Tier I capital for holding companies under $15.0 billion in assets.

On June 15, 2012, we entered into a loan agreement with a bank for $25 million. Our borrowings under the Loan Agreement bear interest at a LIBOR rate generally defined as the sum of (i) the average of the offered rates of interes quoted in the London Inter-Bank Eurodollar Market for U.S. Dollar deposits with prime banks (as published by Reuters or other commercially available sources) for three months (all as selected by the Company), and (ii) an applicable margin. The applicable margin under the Loan Agreement ranges from 2.25% (225 basis points) to 3.00% (300 basis points) depending on the total aggregate principal amount outstanding under the Loan Agreement. At September 30, the rate was 2.723%.

We began making quarterly principal payments of $625,000 on September 30, 2012, and the loan matures on June 15, 2017. We are also permitted to prepay all or a portion of the principal amount outstanding under the Loan Agreement without penalty (in minimum aggregate amounts of $100,000) at any time so long as no event of default or unmatured event of default has occurred and is continuing. As of September 30, 2014, we had prepaid $5.0 million on this loan. At September 30, 2014, the balance owed on this loan was $14.3 million.

On October 2, 2013, the Loan Agreement was amended to permit us to pay dividends on our capital stock so long as no event of default was then existing or would be caused by the payment of such dividends. As of September 30, 2014, we are aware of no defaults.

Capital Resources. At September 30, 2014 and December 31, 2013, our stockholders' equity amounted to $781.9 million and $723.7 million, respectively, an increase of approximately $58.2 million. Substantially all of this increase is attributable to our net income and increases in the unrealized gain on available-for-sale securities.

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to Pinnacle Bank and Pinnacle Financial. The final rules implement the regulaory capital reforms of the Basel Committee on Banking Supervision reflected in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" and changes required by the Dodd-Frank Act. These rules become effective for Pinnacle Bank and Pinnacle Financial on January 1, 2015. We anticipate that the effectiveness of these rules will dilute our capital ratios to a limited extent, but that we will remain well above regulatory minimums to be considered well-capitalized.

Dividends. Pursuant to Tennessee banking law, our bank may not, without the prior consent of the TDFI, pay any dividends to us in a calendar year in excess of the total of our bank's retained net profits for that year plus the retained net profits for the preceding two years. During the nine months ended September 30, 2014, our bank paid dividends of $15.1 million to us which is within the limits allowed by the TDFI.

During the nine months ended September 30, 2014, we paid $8.5 million in dividends to common shareholders. On October 21, 2014, our Board of Directors declared a $0.08 quarterly cash dividend to common shareholders which should approximate $2.9 million in aggregate dividend payments that will be paid on November 28, 2014 to common shareholders of record as of the close of business on November 7, 2014. The amount and timing of all future dividend payments, if any, is subject to Board discretion and will depend on our earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to us.

Market and Liquidity Risk Management

Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. Our Asset Liability Management Committee (ALCO) is charged with the responsibility of monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.

Interest Rate Sensitivity. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. Measurements which we use to help us manage interest rate sensitivity include an earnings simulation model and an economic value of equity ("EVE") model.

Our interest rate sensitivity modeling incorporates a number of assumptions for both earnings simulation and EVE, including loan and deposit re-pricing characteristics, the rate of loan prepayments, etc. ALCO periodically reviews these assumptions for accuracy based on historical data and future expectations. The base scenario assumes rates remain flat and is the scenario to which all others are compared in order to measure the change in net interest income and EVE. Policy limits are applied to the results of certain modeling scenarios. While the primary policy scenarios focus on a twelve month time frame, longer time horizons are also modeled. All policy scenarios assume a static balance sheet.

Earnings simulation model. We believe interest rate risk is best measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with forecasts of interest rates for the next 12 months and are combined with other factors in order to produce various earnings simulations. To limit interest rate risk, we have policy guidelines for our earnings at risk which seek to limit the variance of net interest income in both gradual and instantaneous changes to interest rates. For changes up or down in rates from management's flat interest rate forecast over the next twelve months, policy limits in the decline in net interest income are as follows:

·	+/- 10.0% for a gradual change of 400 points; +/-20.0% for an instantaneous change of 400 basis points

·	+/- 7.5% for a gradual change of 300 points; +/- 15.0% for an instantaneous change of 300 basis points

·	+/- 5.0% for a gradual change of 200 points; +/- 10.0% for an instantaneous change of 200 basis points

·	+/- 2.5% for a gradual change of 100 points; +/- 5.0% for an instantaneous change of 100 basis points

At September 30, 2014, our earnings simulation model indicated we were in compliance with our policies for both the gradual and instantaneous interest rate changes.

Economic value of equity. Our EVE model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case EVE. To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:

·	+/- 400 basis point change in interest rates, EVE shall not decrease by more than 40 percent

·	+/- 300 basis point change in interest rates, EVE shall not decrease by more than 30 percent

·	+/- 200 basis point change in interest rates, EVE shall not decrease by more than 20 percent

·	+/- 100 basis point change in interest rates, EVE shall not decrease by more than 10 percent

At September 30, 2014, our EVE model indicated we were in compliance with our policies noted above except for the down 100, down 200, and down 300 interest rate scenarios. We do not believe that our non-compliance with the down rate scenarios is particularly significant, as we believe further declines are not likely given the current rate environment.

Another commonly analyzed scenario is a most-likely earnings simulation scenario that projects the expected change in rates based on a forward yield curve adopted by management using expected balance sheet volumes forecasted by management. Separate growth assumptions are developed for loans, investments, deposits, etc. Other interest rate scenarios analyzed by management may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements to further analyze or stress our balance sheet under various interest rate scenarios.

Based on information gathered from these various modeling scenarios, management believes that at September 30, 2014, our balance sheet would likely be neutral to slightly asset sensitive pursuant to parallel shifts in interest rates in a rising interest rate environment of less than 100 basis points, while our balance sheet is likely to be asset sensitive in a rising rate environment of greater than 100 basis points and becoming more asset sensitive as rates continue to increase.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.

We may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities and as one tool to manage our interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. We may also enter into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, even though they are not designated as hedging instruments.

ALCO may determine that we should over time work toward being more or less asset or liability sensitive depending on the underlying balance sheet circumstances and the firm's conclusions as to anticipated interest rate fluctuations in future periods. At present, ALCO has determined that its "most likely" rate scenario considers an initial rise in short-term interest rates in mid- to late-2015 and that such rates will continue to increase over several quarters while the longer end of the rate curve will rise only slightly. Our "most likely" rate forecast has been basically consistent for several quarters and is based primarily on information we acquire from a service which includes a consensus forecast of numerous benchmarks. As a result and in preparing for an eventual rise in interest rates, we have implemented the following strategies:

·	Reduced our exposure to fixed rate investment securities in relation to total assets from approximately 23% as of December 31, 2010 to a current position of approximately 13% of total assets. This reduction should assist the firm in becoming more asset sensitive over time.

·	Executed a series of cash flow hedges involving approximately $200 million in FHLB borrowings at pre-established fixed rates. Fixed rate liabilities also provide for a more asset sensitive balance sheet.

Participated in interest rate swaps whereby our customers pay a fixed rate which we remit to our counter party while we receive in return a floating rate on these commercial loans. These loans amounted to approximately $252 million at September 30, 2014. Floating rate loans promote an asset sensitive balance sheet.

Reduced the difference between the weighted average floor rate on floating and variable rate commercial loans and the weighted average contract rate on these type of loans from 0.84% at December 31, 2013 to 0.73% at September 30, 2014. This reduction results in requiring a lesser increase in shorter-term rates for the floors to be overcome, thus making these loans with rate floors more asset sensitive over time.

We believe market forces will also assist us in achievement of increased asset sensitivity in our balance sheet position over time; however, we may also implement a series of actions designed to accelerate our achievement of neutrality or asset sensitivity as conditions warrant.

Liquidity Risk Management. The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.

To assist in determining the adequacy of our liquidity, we perform a variety of liquidity stress tests including idiosyncratic, systemic and combined scenarios for both moderate and severe events. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining our ability to meet the daily cash flow requirements of our customers, both depositors and borrowers. We seek to maintain a sufficiently liquid asset balance to ensure our ability to meet our obligations. The amount of the appropriate minimum liquid asset balance is determined through severe liquidity stress testing as measured by our liquidity coverage ratio calculation. At September 30, 2014, we were in compliance with our liquidity coverage ratio.

Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates, and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.

In addition, our bank is a member of the FHLB. As a result, our bank receives advances from the FHLB, pursuant to the terms of various borrowing agreements, which assist it in the funding of its home mortgage and commercial real estate loan portfolios. Under the borrowing agreements with the FHLB, our bank has pledged certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral. At September 30, 2014, our bank had received advances from the FHLB totaling $215.4 million at the following rates and maturities (dollars in thousands):

Scheduled Maturities	Amount		Interest Rates⁽¹⁾
2014	$	200,000		0.17	%
2015		-		-
2016		15,000		2.35	%
2017		-		-
2018		9		2.00	%
Thereafter		408		2.44	%
Total	$	215,417
Weighted average interest rate				0.32	%

(1)	Some FHLB advances include variable interest rates and could increase in the future. The table reflects rates in effect as of September 30, 2014.

At September 30, 2014, Pinnacle Bank also had approximately $1.310 billion in additional availability with the FHLB. Our bank also has accommodations with upstream correspondent banks available for unsecured short-term advances which aggregate $155.0 million. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within a month. There were no outstanding borrowings at September 30, 2014, or during the quarter then ended under these agreements. Our bank also has approximately $1.5 billion in available Federal Reserve discount window lines of credit.

At September 30, 2014, excluding reciprocating time deposits issued through the CDARS network, we had no brokered certificates of deposit. Historically, we have issued brokered certificates through several different brokerage houses based on competitive bid. Typically, these funds have been for varying maturities of up to two years and were issued at rates which were competitive to rates we would be required to pay to attract similar deposits within our local markets as well as rates for FHLB advances of similar maturities. Although we consider these deposits to be a ready source of liquidity under current market conditions, we anticipate that these deposits will not represent a significant percentage of our total funding in 2014 or 2015 as we seek to maintain a higher level of core deposits.

At September 30, 2014, we had no significant commitments for capital expenditures, although we have initiated construction of a new retail location in the Knoxville MSA. Our management believes that we have adequate liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.

Industry regulators have defined additional liquidity guidelines, through the issuance of the Basel III Liquidity Coverage Ratio (LCR) and the Modified LCR, for banking institutions greater than $250 billion in assets, and $50 billion in assets respectively, in the United States. These regulatory guidelines will become effective January 2015 with phase in over subsequent years and will require these large institutions to follow prescriptive guidance in determining an absolute level of a high quality liquid asset (HQLA) buffer that must be maintained on their balance sheets in order to withstand a potential liquidity crisis event. Although we follow the principles outlined in the Interagency Policy Statement on Liquidity Risk Management, issued March 2010, to determine its HQLA buffer, we are not currently subject to these regulations. However, these formulas could eventually be imposed on smaller banks, such as our bank, and require an increase in the absolute level of liquidity on our balance sheet. Consequently, this could result in lower net interest margins for us in future periods.

Off-Balance Sheet Arrangements. At September 30, 2014, we had outstanding standby letters of credit of $69.9 million and unfunded loan commitments outstanding of $1.3 billion. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, Pinnacle Bank has the ability to liquidate Federal funds sold or on a short-term basis to borrow and purchase Federal funds from other financial institutions.

Impact of Inflation

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with U.S. GAAP and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation.

Recent Accounting Pronouncements

There are currently no new accounting standards that have been issued that will have a significant impact on the Company's financial position, results of operations or cash flows upon adoption.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item 3 is included on pages 39 through 60 of Part I - Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations."

ITEM 4. 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.

Changes in Internal Controls

There were no changes in Pinnacle Financial's internal control over financial reporting during Pinnacle Financial's fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, Pinnacle Financial's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Various legal proceedings to which Pinnacle Financial or a subsidiary of Pinnacle Financial is a party arise from time to time in the normal course of business. Except as described below, there are no material pending legal proceedings to which Pinnacle Financial or a subsidiary of Pinnacle Financial is a party or of which any of their property is the subject.

ITEM 1A. RISK FACTORS

Investing in Pinnacle Financial involves various risks which are particular to our company, our industry and our market area. We believe all significant risks to investors in Pinnacle Financial have been outlined in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. However, other risks may prove to be important in the future, and new risks may emerge at any time. We cannot predict with certainty all potential developments which could materially affect our financial performance or condition. There has been no material change to our risk factors as previously disclosed in the above described Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Period	Total Number of Shares Repurchased ⁽¹⁾		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
July 1, 2014 to July 31, 2014		-	$	-		-		-
August 1, 2014 to August 31, 2014		11,624		35.26		-		-
September 1, 2014 to September 30, 2014		206		37.42		-		-
Total		11,830	$	35.30		-		-

(1)	During the quarter ended September 30, 2014, 42,710 shares of restricted stock previously awarded to certain of our associates vested. We withheld 11,830 shares to satisfy tax withholding requirements associated with the vesting of these restricted shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

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 2002
32.2	Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document
101.DEF	XBRL Definition Linkbase Document

SIGNATURES

Pursuant to the requirements 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.


November 7, 2014		/s/ M. Terry Turner
		M. Terry Turner
		President and Chief Executive Officer


November 7, 2014		/s/ Harold R. Carpenter
		Harold R. Carpenter
		Chief Financial Officer