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PINNACLE FINANCIAL PARTNERS INC - Quarter Report: 2022 June (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
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
Pinnacle Financial Partners Inc.
pnfp-20220630_g1.jpg, 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 900Nashville,TN 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      No     

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit such files).  Yes      No     

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

Large Accelerated Filer                            Accelerated Filer     
Non-accelerated Filer                              Smaller reporting company
(do not check if you are a smaller reporting company)                Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes      No     

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each ClassTrading SymbolName of Exchange on which Registered
Common Stock, par value $1.00PNFPThe Nasdaq Stock Market LLC
Depositary Shares (each representing 1/40th interest in a share of 6.75% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series B)PNFPPThe Nasdaq Stock Market LLC

As of July 31, 2022, there were 76,417,037 shares of common stock, $1.00 par value per share, issued and outstanding.


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Pinnacle Financial Partners, Inc.
Report on Form 10-Q
June 30, 2022
TABLE OF CONTENTSPage No.
  
  

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FORWARD-LOOKING STATEMENTS

All statements, other than statements of historical fact, included in this report, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "expect," "anticipate," "intend," "may," "should," "plan," "believe," "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 statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to: (i) deterioration in the financial condition of borrowers of Pinnacle Bank and its subsidiaries or Bankers Healthcare Group, LLC (BHG), including as a result of the negative impact of inflationary pressures on our and BHG's customers and their businesses resulting in significant increases in loan losses and provisions for those losses and, in the case of BHG, substitutions; (ii) fluctuations or differences in interest rates on loans or deposits from those that Pinnacle Financial is modeling or anticipating, including as a result of Pinnacle Bank's inability to better match deposit rates with the changes in the short-term rate environment, or that affect the yield curve; (iii) adverse conditions in the national or local economies including in Pinnacle Financial's markets throughout Tennessee, North Carolina, South Carolina, Georgia, Alabama and Virginia, particularly in commercial and residential real estate markets; (iv) the inability of Pinnacle Financial, or entities in which it has significant investments, like BHG, to maintain the long-term historical growth rate of its, or such entities', loan portfolio; (v) the ability to grow and retain low-cost core deposits and retain large, uninsured deposits, including during times when Pinnacle Bank is seeking to limit the rates it pays on deposits; (vi) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (vii) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; (viii) the impact of competition with other financial institutions, including pricing pressures and the resulting impact on Pinnacle Financial’s results, including as a result of compression to net interest margin; (ix) the effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on Pinnacle Financial's and its customers' business, results of operations, asset quality and financial condition; (x) further public acceptance of the booster shots of the vaccines that were developed against the virus as well as the decisions of governmental agencies with respect to vaccines including recommendations related to booster shots and requirements that seek to mandate that individuals receive or employers require that their employees receive the vaccine; (xi) those vaccines' efficacy against the virus, including new variants; (xii) the results of regulatory examinations; (xiii) Pinnacle Financial's ability to identify potential candidates for, consummate, and achieve synergies from, potential future acquisitions; (xiv) difficulties and delays in integrating acquired businesses or fully realizing costs savings and other benefits from acquisitions; (xv) BHG's ability to profitably grow its business and successfully execute on its business plans; (xvi) risks of expansion into new geographic or product markets; (xvii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including goodwill or other intangible assets; (xviii) the ineffectiveness of Pinnacle Bank's hedging strategies, or the unexpected counterparty failure or hedge failure of the underlying hedges; (xix) reduced ability to attract additional financial advisors (or failure of such advisors to cause their clients to switch to Pinnacle Bank), to retain financial advisors (including as a result of the competitive environment for associates) or otherwise to attract customers from other financial institutions; (xx) deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xxi) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies, required capital maintenance levels or regulatory requests or directives, particularly if Pinnacle Bank's level of applicable commercial real estate loans were to exceed percentage levels of total capital in guidelines recommended by its regulators; (xxii) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xxiii) the vulnerability of Pinnacle Bank's network and online banking portals, and the systems of parties with whom Pinnacle Bank contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xxiv) the possibility of increased compliance and operational costs as a result of increased regulatory oversight (including by the Consumer Financial Protection Bureau), including oversight of companies in which Pinnacle Financial or Pinnacle Bank have significant investments, like BHG, and the development of additional banking products for Pinnacle Bank's corporate and consumer clients; (xxv) the risks associated with Pinnacle Financial and Pinnacle Bank being a minority investor in BHG, including the risk that the owners of a majority of the equity interests in BHG decide to sell the company or all or a portion of their ownership interests in BHG (triggering a similar sale by Pinnacle Financial and Pinnacle Bank) if not prohibited from doing so by Pinnacle Financial or Pinnacle Bank; (xxvi) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxvii) fluctuations in the valuations of Pinnacle Financial's equity investments and the ultimate success of such investments; (xxviii) the availability of and access to capital; (xxix) adverse results (including costs, fines, reputational harm, inability to obtain necessary approvals and/or other negative effects) from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of Pinnacle Bank's participation in and execution of government programs related to the COVID-19 pandemic; and (xxx) general competitive, economic, political and market conditions. Additional factors which could affect the forward-looking statements can be found in Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2021 and subsequently filed Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC and available on the SEC's website at http://www.sec.gov. Pinnacle
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Financial disclaims any obligation to update or revise any forward-looking statements contained in this report, which speak only as of the date hereof, whether as a result of new information, future events or otherwise.
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Item 1.Part I. Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except per share data)June 30, 2022December 31, 2021
ASSETS  
Cash and noninterest-bearing due from banks$265,507 $188,287 
Restricted cash 29,739 82,505 
Interest-bearing due from banks1,336,667 3,830,747 
Federal funds sold and other— — 
Cash and cash equivalents1,631,913 4,101,539 
Securities purchased with agreement to resell1,328,876 1,000,000 
Securities available-for-sale, at fair value3,809,338 4,914,194 
Securities held-to-maturity (fair value of $2.5 billion and $1.2 billion, net of allowance for credit losses of $1.2 million and $161 at June 30, 2022 and Dec. 31, 2021, respectively)2,744,555 1,155,958 
Consumer loans held-for-sale67,467 45,806 
Commercial loans held-for-sale25,901 17,685 
Loans26,333,096 23,414,262 
Less allowance for credit losses(272,483)(263,233)
Loans, net26,060,613 23,151,029 
Premises and equipment, net302,389 288,182 
Equity method investment403,191 360,833 
Accrued interest receivable116,038 98,813 
Goodwill1,846,466 1,819,811 
Core deposits and other intangible assets37,617 33,819 
Other real estate owned8,237 8,537 
Other assets1,738,691 1,473,193 
Total assets$40,121,292 $38,469,399 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Deposits:  
Noninterest-bearing$11,058,198 $10,461,071 
Interest-bearing6,617,324 6,530,015 
Savings and money market accounts12,492,329 12,179,663 
Time2,427,452 2,133,784 
Total deposits32,595,303 31,304,533 
Securities sold under agreements to repurchase199,585 152,559 
Federal Home Loan Bank advances1,289,059 888,681 
Subordinated debt and other borrowings423,614 423,172 
Accrued interest payable13,551 12,504 
Other liabilities284,941 377,343 
Total liabilities34,806,053 33,158,792 
Shareholders' equity:  
Preferred stock, no par value, 10.0 million shares authorized; 225,000 shares non-cumulative perpetual preferred stock, Series B, liquidation preference $225.0 million, issued and outstanding at June 30, 2022 and Dec. 31, 2021, respectively217,126 217,126 
Common stock, par value $1.00; 180.0 million shares authorized; 76.4 million and 76.1 million shares issued and outstanding at June 30, 2022 and Dec. 31, 2021, respectively76,385 76,143 
Additional paid-in capital3,056,228 3,045,802 
Retained earnings2,096,950 1,864,350 
Accumulated other comprehensive income (loss), net of taxes(131,450)107,186 
Total shareholders' equity5,315,239 5,310,607 
Total liabilities and shareholders' equity$40,121,292 $38,469,399 
See accompanying notes to consolidated financial statements (unaudited).
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except per share data)Three months ended
June 30,
Six months ended
June 30,
 2022202120222021
Interest income:  
Loans, including fees$252,182 $232,788 $479,229 $460,160 
Securities:  
Taxable12,725 8,359 23,773 16,087 
Tax-exempt19,898 16,546 37,344 32,044 
Federal funds sold and other7,571 1,543 10,647 2,862 
Total interest income292,376 259,236 550,993 511,153 
Interest expense:  
Deposits18,181 13,861 28,431 31,329 
Securities sold under agreements to repurchase82 56 138 128 
Federal Home Loan Bank advances and other borrowings9,539 12,094 18,375 23,601 
Total interest expense27,802 26,011 46,944 55,058 
Net interest income264,574 233,225 504,049 456,095 
Provision for credit losses12,907 2,834 15,627 10,069 
Net interest income after provision for credit losses251,667 230,391 488,422 446,026 
Noninterest income:  
Service charges on deposit accounts11,616 8,906 22,646 17,213 
Investment services13,205 8,997 23,896 17,188 
Insurance sales commissions2,554 2,406 6,590 5,631 
Gain on mortgage loans sold, net2,150 6,700 6,216 20,366 
Investment gains (losses) on sales, net— 366 (61)366 
Trust fees6,065 5,062 12,038 9,749 
Income from equity method investment49,465 32,071 83,120 61,021 
Other noninterest income40,447 33,699 74,553 59,382 
Total noninterest income125,502 98,207 228,998 190,916 
Noninterest expense:  
Salaries and employee benefits126,611 110,824 248,463 213,552 
Equipment and occupancy26,921 23,321 52,457 46,541 
Other real estate (income) expense, net86 (657)191 (670)
Marketing and other business development4,759 2,652 8,536 5,001 
Postage and supplies2,320 2,115 4,691 3,921 
Amortization of intangibles2,051 2,167 3,922 4,373 
Other noninterest expense33,290 25,718 60,439 48,118 
Total noninterest expense196,038 166,140 378,699 320,836 
Income before income taxes181,131 162,458 338,721 316,106 
Income tax expense36,004 30,668 64,484 58,888 
Net income145,127 131,790 274,237 257,218 
Preferred stock dividends(3,798)(3,798)(7,596)(7,596)
Net income available to common shareholders$141,329 $127,992 $266,641 $249,622 
Per share information:  
Basic net income per common share$1.87 $1.70 $3.52 $3.31 
Diluted net income per common share$1.86 $1.69 $3.51 $3.30 
Weighted average common shares outstanding:  
Basic75,751,296 75,481,198 75,703,407 75,427,340 
Diluted75,940,500 75,809,974 75,934,025 75,735,763 

See accompanying notes to consolidated financial statements (unaudited).
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

(dollars in thousands)Three months ended
June 30,
Six months ended
June 30,
 2022202120222021
Net income$145,127 $131,790 $274,237 $257,218 
Other comprehensive income (loss), net of tax:  
Change in fair value on available-for-sale securities, net of tax(96,191)28,242 (231,086)(5,130)
Change in fair value of cash flow hedges, net of tax— (631)— (18,373)
Accretion of net unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax(1,595)(2,098)(2,575)(3,789)
Net gain on cash flow hedges reclassified from other comprehensive income into net income, net of tax(2,511)(2,692)(5,020)(2,188)
Net loss (gain) on sale of investment securities reclassified from other comprehensive income into net income, net of tax— (270)45 (270)
Total other comprehensive income (loss), net of tax(100,297)22,551 (238,636)(29,750)
Total comprehensive income$44,830 $154,341 $35,601 $227,468 

See accompanying notes to consolidated financial statements (unaudited).
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)

(dollars and shares in thousands)Preferred
Stock
 Amount
Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comp. Income (Loss), netTotal Shareholders' Equity
 SharesAmounts
Balance at December 31, 2020$217,126 75,850 $75,850 $3,028,063 $1,407,723 $175,849 $4,904,611 
Exercise of employee common stock options & related tax benefits— 13 13 291 — — 304 
Preferred dividends paid ($16.88 per share)— — — — (3,798)— (3,798)
Common dividends paid ($0.18 per share)— — — — (13,902)— (13,902)
Issuance of restricted common shares, net of forfeitures— 172 172 (172)— — — 
Restricted shares withheld for taxes & related tax benefits— (34)(34)(2,422)— — (2,456)
Issuance of common stock pursuant to restricted stock unit (RSU) and performance stock unit (PSU) agreements, net of shares withheld for taxes & related tax benefits— 86 86 (3,848)— (3,762)
Compensation expense for restricted shares & performance stock units— — — 5,399 — — 5,399 
Net income— — — — 125,428 — 125,428 
Other comprehensive loss— — — — — (52,301)(52,301)
Balance at March 31, 2021$217,126 76,087 $76,087 $3,027,311 $1,515,451 $123,548 $4,959,523 
Exercise of employee common stock options & related tax benefits— 95 — — 100 
Preferred dividends paid ($16.88 per share)— — — — (3,798)— (3,798)
Common dividends paid ($0.18 per share)— — — — (13,863)— (13,863)
Issuance of restricted common shares, net of forfeitures— (3)— — — 
Restricted shares withheld for taxes & related tax benefits— (8)(8)(731)— — (739)
Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes & related tax benefits— (3)— — (2)
Compensation expense for restricted shares & performance stock units— — — 5,669 — — 5,669 
Net income— — — — 131,790 — 131,790 
Other comprehensive income— — — — — 22,551 22,551 
Balance at June 30, 2021217,126 76,088 76,088 3,032,338 1,629,580 146,099 5,101,231 

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 Preferred Stock
 Amount
Common Stock Accumulated Other Comp. Income (Loss), netTotal Shareholders' Equity
 SharesAmountsAdditional Paid-in CapitalRetained Earnings
Balance at December 31, 2021$217,126 76,143 $76,143 $3,045,802 $1,864,350 $107,186 $5,310,607 
Exercise of employee common stock options & related tax benefits— 124 — — 130 
Preferred dividends paid ($16.88 per share) — — — — (3,798)— (3,798)
Common dividends paid ($0.22 per share)— — — — (16,976)— (16,976)
Issuance of restricted common shares, net of forfeitures— 158 158 (158)— — — 
Restricted shares withheld for taxes & related tax benefits— (35)(35)(3,736)— — (3,771)
Issuance of common stock pursuant to RSU and PSU agreements, net of shares withheld for taxes & related tax benefits— 105 105 (5,566)— — (5,461)
Compensation expense for restricted shares & performance stock units— — — 9,448 — — 9,448 
Net income— — — — 129,110 — 129,110 
Other comprehensive loss— — — — — (138,339)(138,339)
Balance at March 31, 2022$217,126 76,377 $76,377 $3,045,914 $1,972,686 $(31,153)$5,280,950 
Exercise of employee common stock options & related tax benefits— 185 — — 193 
Preferred dividends paid ($16.88 per share)— — — — (3,798)— (3,798)
Common dividends paid ($0.22 per share)— — — — (17,065)— (17,065)
Issuance of restricted common shares, net of forfeitures— (8)— — — 
Restricted shares withheld for taxes & related tax benefits— (8)(8)(623)— — (631)
Compensation expense for restricted shares & performance stock units— — — 10,760 — — 10,760 
Net income— — — — 145,127 — 145,127 
Other comprehensive loss— — (100,297)(100,297)
Balance at June 30, 2022$217,126 76,385 $76,385 $3,056,228 $2,096,950 $(131,450)$5,315,239 
See accompanying notes to consolidated financial statements (unaudited).
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)Six months ended
June 30,
 20222021
Operating activities:  
Net income$274,237 $257,218 
Adjustments to reconcile net income to net cash provided by operating activities:  
Net amortization/accretion of premium/discount on securities34,643 25,413 
Depreciation, amortization and accretion29,328 27,057 
Provision for credit losses15,627 10,069 
Gain on mortgage loans sold, net(6,216)(20,366)
Investment losses (gains) on sales, net61 (366)
Gain on other equity investments, net(8,379)(10,397)
Stock-based compensation expense20,208 11,068 
Deferred tax expense2,807 4,427 
Gains on dispositions of other real estate and other investments(20)(806)
Gain on remeasurement of previously held noncontrolling interest(5,500)— 
Income from equity method investment(83,120)(61,021)
  Dividends received from equity method investment40,762 49,409 
Excess tax benefit from stock compensation(2,921)(1,867)
Gain on commercial loans sold, net(1,679)(2,356)
Commercial loans held for sale originated(274,755)(288,031)
Commercial loans held for sale sold268,218 295,743 
Consumer loans held for sale originated(844,206)(1,117,635)
Consumer loans held for sale sold828,761 1,168,854 
Decrease in other assets10,524 24,016 
Decrease in other liabilities(98,201)(83,266)
Net cash provided by operating activities200,179 287,163 
Investing activities:  
Activities in securities available-for-sale:  
Purchases(597,249)(1,075,927)
Sales2,866 2,240 
Maturities, prepayments and calls240,767 280,795 
Activities in securities held-to-maturity:  
Purchases(578,716)— 
Maturities, prepayments and calls34,324 23,300 
Increase in securities purchased under agreements to resell(328,876)(500,000)
Increase in loans, net(2,899,140)(492,984)
Purchases of software, premises and equipment(23,065)(10,451)
Proceeds from sales of software, premises and equipment292 281 
Proceeds from sale of other real estate320 4,183 
Purchase of bank owned life insurance policies(75,000)— 
Proceeds from bank owned life insurance settlements1,002 952 
Proceeds from derivative instruments— 99,710 
Proceeds from sale (purchase) of FHLB stock(15,853)10,329 
Acquisition, net of cash acquired(30,415)— 
Increase in other investments(62,669)(19,239)
Net cash used in investing activities(4,331,412)(1,676,811)
Financing activities:  
Net increase in deposits1,295,442 512,121 
Net increase in securities sold under agreements to repurchase47,026 49,497 
Federal Home Loan Bank: Advances400,000 — 
Federal Home Loan Bank: Repayments/maturities— (200,000)
Repayments of other borrowings(29,547)— 
Principal payments of finance lease obligation(137)(128)
Issuance of common stock pursuant to RSU and PSU agreements, net of shares withheld for taxes(5,461)(3,764)
Exercise of common stock options, net of shares surrendered for taxes(4,079)(2,791)
Common stock dividends paid(34,041)(27,765)
Preferred stock dividends paid(7,596)(7,596)
Net cash provided by financing activities1,661,607 319,574 
Net decrease in cash, cash equivalents, and restricted cash(2,469,626)(1,070,074)
Cash, cash equivalents, and restricted cash, beginning of period4,101,539 3,961,449 
Cash, cash equivalents, and restricted cash, end of period$1,631,913 $2,891,375 
See accompanying notes to consolidated financial statements (unaudited).
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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 financial 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 Financial completed its acquisitions of CapitalMark Bank & Trust (CapitalMark), Magna Bank (Magna), Avenue Financial Holdings, Inc. (Avenue), BNC Bancorp (BNC) and Advocate Capital, Inc. (Advocate Capital) on July 31, 2015, September 1, 2015, July 1, 2016, June 16, 2017 and July 2, 2019, respectively. Pinnacle Financial and Pinnacle Bank also collectively hold a 49% interest in Bankers Healthcare Group, LLC (BHG), a company that primarily serves as a full-service commercial loan provider to healthcare and other professional practices but also makes consumer loans for various purposes. Pinnacle Bank provides a full range of banking services, including investment, mortgage, insurance, and comprehensive wealth management services, in its 15 primarily urban markets across the Southeast.

On March 1, 2022, Pinnacle Bank acquired the remaining 80% outstanding membership interest of JB&B Capital, LLC (JB&B) for a cash price of $32.0 million. JB&B is a commercial equipment financing business headquartered in Knoxville, TN. Pinnacle Bank had previously acquired 20% of JB&B in 2017. Pinnacle Financial accounted for the acquisition of JB&B under the acquisition method in accordance with ASC Topic 805. Accordingly, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the date of the acquisition. Determining the fair value of assets and liabilities, particularly illiquid assets and liabilities, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair value. Fair value adjustments based on updated estimates could materially affect the goodwill recorded on the JB&B acquisition. At the acquisition date, JB&B's net assets were initially recorded at a fair value of $12.9 million, consisting mainly of loans and leases receivable. JB&B's $29.5 million of indebtedness was also paid off in connection with consummation of the acquisition. The preexisting noncontrolling interest of JB&B held by Pinnacle Bank was remeasured at a fair value of $8.0 million on the acquisition date resulting in a gain on remeasurement of $5.5 million that was recorded in other noninterest income during the six months ended June 30, 2022. The purchase price allocations for the acquisition of JB&B are preliminary and will be finalized upon the receipt of final valuations on certain assets and liabilities.

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 consolidated financial statements and related notes appearing in Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2021 (2021 10-K).

These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. Certain statutory trust affiliates of Pinnacle Financial, as noted in Note 11. Other Borrowings are included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

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 credit losses and determination of any impairment of goodwill or intangible assets. There have been no significant changes to Pinnacle Financial's significant accounting policies as disclosed in the 2021 10-K.

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Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for the six months ended June 30, 2022 and 2021 was as follows (in thousands):
 For the six months ended
June 30,
 20222021
Cash Transactions:  
Interest paid$45,298 $63,683 
Income taxes paid, net70,182 56,073 
Operating lease payments7,669 7,133
Noncash Transactions:  
Loans charged-off to the allowance for credit losses15,685 27,029 
Loans foreclosed upon and transferred to other real estate owned— 620 
Available-for-sale securities transferred to held-to-maturity portfolio1,059,737 — 
Right-of-use asset recognized during the period in exchange for lease obligations7,276 4,771 

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

The following is a summary of the basic and diluted net income per common share calculations for the three and six months ended June 30, 2022 and 2021 (in thousands, except per share data):
 Three months ended
June 30,
Six months ended
June 30,
 2022202120222021
Basic net income per common share calculation:  
Numerator - Net income available to common shareholders
$141,329 $127,992 $266,641 $249,622 
Denominator - Weighted average common shares outstanding
75,751 75,481 75,703 75,427 
Basic net income per common share$1.87 $1.70 $3.52 $3.31 
Diluted net income per common share calculation:  
Numerator - Net income available to common shareholders
$141,329 $127,992 $266,641 $249,622 
Denominator - Weighted average common shares outstanding
75,751 75,481 75,703 75,427 
Dilutive common shares contingently issuable189 329 231 308 
Weighted average diluted common shares outstanding75,941 75,810 75,934 75,736 
Diluted net income per common share$1.86 $1.69 $3.51 $3.30 

Recently Adopted Accounting Pronouncements  In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Pinnacle Financial has implemented a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. Pinnacle Financial intends to discontinue originating LIBOR-based loans during 2022 and has begun negotiating loans primarily using its preferred replacement index, the Secured Overnight Financing Rate ("SOFR"). For Pinnacle Financial's currently outstanding LIBOR-based loans, the timing and manner in which each customer's contract transitions to SOFR will vary on a case-by-case basis. Pinnacle Financial expects to complete all loan transitions by June 30, 2023.


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Newly Issued Not Yet Effective Accounting Standards — In March 2022, the FASB issued Accounting Standards Update 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method, which allows multiple hedged layers to be designated for a single closed portfolio of financial assets resulting in a greater portion of the interest rate risk in the closed portfolio being eligible to be hedged. The amendments allow the flexibility to use different types of derivatives or combinations of derivatives to better align with risk management strategies. Furthermore, among other things, the amendments clarify that basis adjustments of hedged items in the closed portfolio should be allocated at the portfolio level and not the individual assets within the portfolio. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-01 prospectively. If an entity elects to early adopt ASU 2022-01 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. Pinnacle Financial is assessing ASU 2022-01 and its impact on its accounting and disclosures.

In March 2022, the FASB issued Accounting Standards Update 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a borrower results in a new loan or continuation of an existing loan. The amendments enhance existing disclosures and require new disclosures for receivables when there has been a modification in contractual cash flows due to a borrower experiencing financial difficulties. Additionally, the amendments require public business entities to disclose gross charge-off information by year of origination in the vintage disclosures. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-02 prospectively. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. Pinnacle Financial is assessing ASU 2022-02 and its impact on its accounting and disclosures.

In June 2022, the FASB issued Accounting Standards Update 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies the guidance in ASC 820 when measuring the fair value of equity securities subject to contractual restrictions that prohibit the sale of an equity security. This update also requires specific disclosures related to these types of securities. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-03 prospectively once adopted. Pinnacle Financial is assessing ASU 2022-03 and its impact on its accounting and disclosures.

Other than those pronouncements discussed above and those which have been recently adopted, Pinnacle Financial does not believe there were any other recently issued accounting pronouncements that may materially impact its consolidated financial statements.

Subsequent Events — ASC Topic 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Pinnacle Financial evaluated all events or transactions that occurred after June 30, 2022 through the date of the issued financial statements.

Note 2. Equity method investment

A summary of BHG's financial position as of June 30, 2022 and December 31, 2021 and results of operations as of and for the three and six months ended June 30, 2022 and 2021, were as follows (in thousands):
 As of
 June 30, 2022December 31, 2021
Assets$3,465,380 $2,724,542 
Liabilities2,980,649 2,355,256 
Equity interests484,731 369,286 
Total liabilities and equity$3,465,380 $2,724,542 
 For the three months ended
June 30,
For the six months ended
June 30,
 2022202120222021
Revenues$297,947 $178,984 $536,559 $336,607 
Net income$107,207 $62,353 $177,033 $120,915 

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At June 30, 2022, technology, trade name and customer relationship intangibles, net of related amortization, totaled $6.6 million compared to $6.8 million as of December 31, 2021. Amortization expense of $128,000 and $256,000, respectively, was included for the three and six months ended June 30, 2022 compared to $188,000 and $376,000, respectively, for the same periods in the prior year. Accretion income of $188,000 and $431,000, respectively, was included in the three and six months ended June 30, 2022 compared to $395,000 and $846,000, respectively, for the same periods in the prior year.

During the three and six months ended June 30, 2022, Pinnacle Financial and Pinnacle Bank received dividends of $28.5 million and $40.8 million, respectively, from BHG in the aggregate compared to $39.4 million and $49.4 million, respectively, during the three and six months ended June 30, 2021. Earnings from BHG are included in Pinnacle Financial's consolidated tax return. Profits from intercompany transactions are eliminated. During the three and six months ended June 30, 2022, Pinnacle Bank purchased $76.0 million of loans from BHG. Pinnacle Bank purchased $50.3 million and $124.9 million, respectively, of loans from BHG during the three and six months ended June 30, 2021. These loans were purchased at par pursuant to BHG's joint venture loan program whereby BHG and Pinnacle Bank share proportionately in the credit risk of the acquired loans based on the rate on the loan and the rate of the purchase. The yield on this portfolio to Pinnacle Bank is anticipated to be between 4.50% and 5.50% per annum. At June 30, 2022 and December 31, 2021, there were $351.4 million and $319.1 million, respectively, of BHG joint venture program loans held by Pinnacle Bank.

Note 3.  Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2022 and December 31, 2021 are summarized as follows (in thousands):
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
June 30, 2022:    
Securities available-for-sale:    
U.S. Treasury securities$246,604 $184 $685 $246,103 
U.S. Government agency securities440,148 — 24,633 415,515 
Mortgage-backed securities1,524,170 685 127,177 1,397,678 
State and municipal securities1,558,987 4,741 78,341 1,485,387 
Asset-backed securities165,825 — 12,415 153,410 
Corporate notes and other117,162 490 6,407 111,245 
 $4,052,896 $6,100 $249,658 $3,809,338 
Securities held-to-maturity:    
U.S. Treasury securities$92,938 $— $4,748 $88,190 
U.S. Government agency securities328,982 — 16,433 312,549 
Mortgage-backed securities404,608 — 30,356 374,252 
State and municipal securities1,741,998 306 197,534 1,544,770 
Asset-backed securities163,210 — 11,827 151,383 
Corporate notes and other14,027 — 813 13,214 
 $2,745,763 $306 $261,711 $2,484,358 
Allowance for credit losses - securities held-to-maturity(1,208)
Securities held-to-maturity, net of allowance for credit losses$2,744,555 
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December 31, 2021:    
Securities available-for-sale:    
U.S. Treasury securities$194,490 $— $881 $193,609 
U.S. Government agency securities634,611 2,359 4,961 632,009 
Mortgage-backed securities1,908,675 29,874 18,310 1,920,239 
State and municipal securities1,774,119 52,961 3,243 1,823,837 
Asset-backed securities232,294 60 2,785 229,569 
Corporate notes and other114,355 3,082 2,506 114,931 
 $4,858,544 $88,336 32,686 $4,914,194 
Securities held-to-maturity:    
U.S. Government agency securities11,920 — 37 11,883 
Mortgage-backed securities 106,555 86 196 106,445 
State and municipal securities 1,037,644 32,966 889 1,069,721 
$1,156,119 $33,052 $1,122 $1,188,049 
Allowance for credit losses - securities held-to-maturity(161)
Securities held-to-maturity, net of allowance for credit losses$1,155,958 
 
During the quarters ended March 31, 2022, March 31, 2020 and September 30, 2018, Pinnacle Financial transferred, at fair value, $1.1 billion, $873.6 million and $179.8 million, respectively, of securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized after tax losses of $1.5 million, net unrealized after tax gains of $69.0 million and net unrealized after tax losses of $2.2 million, respectively, remained in accumulated other comprehensive income (loss) and are being amortized over the remaining life of the transferred securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer. At June 30, 2022, approximately $685.1 million of securities within Pinnacle Financial's investment portfolio were pledged to secure either public funds and other deposits or securities sold under agreements to repurchase. At June 30, 2022, repurchase agreements comprised of secured borrowings totaled $199.6 million and were secured by $199.6 million of pledged U.S. government agency securities, mortgage-backed securities, municipal securities, asset-backed securities and corporate debentures. As the fair value of securities pledged to secure repurchase agreements may decline, Pinnacle Financial regularly evaluates its need to pledge additional securities to remain adequately secured.

The amortized cost and fair value of debt securities as of June 30, 2022 by contractual maturity is 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-saleHeld-to-maturity
June 30, 2022:Amortized
Cost
Fair
Value
Amortized
 Cost
Fair
Value
Due in one year or less$34,637 $34,521 $1,979 $1,965 
Due in one year to five years169,777 171,874 317,795 300,462 
Due in five years to ten years374,434 359,517 112,841 109,314 
Due after ten years1,784,053 1,692,338 1,745,330 1,546,982 
Mortgage-backed securities1,524,170 1,397,678 404,608 374,252 
Asset-backed securities165,825 153,410 163,210 151,383 
 $4,052,896 $3,809,338 $2,745,763 $2,484,358 


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At June 30, 2022 and December 31, 2021, the following available-for-sale securities had unrealized losses. The table below classifies these investments according to the term 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 ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized
Losses
At June 30, 2022      
U.S. Treasury securities$182,142 $685 $— $— $182,142 $685 
U.S. Government agency securities386,971 22,017 28,543 2,616 415,514 24,633 
Mortgage-backed securities1,149,133 94,808 220,024 32,369 1,369,157 127,177 
State and municipal securities1,238,230 76,205 19,632 2,136 1,257,862 78,341 
Asset-backed securities149,344 12,045 4,066 370 153,410 12,415 
Corporate notes65,464 3,900 19,870 2,507 85,334 6,407 
Total temporarily-impaired securities$3,171,284 $209,660 $292,135 $39,998 $3,463,419 $249,658 
At December 31, 2021      
U.S. Treasury securities$178,610 $881 $— $— $178,610 $881 
U.S. Government agency securities353,951 2,987 54,266 1,974 408,217 4,961 
Mortgage-backed securities744,996 11,663 178,956 6,647 923,952 18,310 
State and municipal securities309,605 2,198 57,270 1,045 366,875 3,243 
Asset-backed securities198,349 2,595 6,513 190 204,862 2,785 
Corporate notes14,991 554 20,270 1,952 35,261 2,506 
Total temporarily-impaired securities$1,800,502 $20,878 $317,275 $11,808 $2,117,777 $32,686 

The applicable dates for determining when available-for-sale securities were in an unrealized loss position were June 30, 2022 and December 31, 2021. As such, it is possible that an available-for-sale security had a market value less than its amortized cost on other days during the twelve-month periods ended June 30, 2022 and December 31, 2021, but is not in the "Investments with an Unrealized Loss of less than 12 months" category above.

As shown in the tables above, at June 30, 2022, Pinnacle Financial had approximately $249.7 million in unrealized losses on approximately $3.5 billion of available-for-sale securities. For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, Pinnacle Financial assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because Pinnacle Financial currently does not intend to sell those available-for-sale securities that have an unrealized loss at June 30, 2022, and it is not more-likely-than-not that Pinnacle Financial will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial has determined that no write-down is necessary. In addition, Pinnacle Financial evaluates whether any portion of the decline in fair value of available-for-sale securities is the result of credit deterioration, which would require the recognition of an allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with available-for-sale securities at June 30, 2022 are driven by changes in interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at June 30, 2022. These securities will continue to be monitored as a part of Pinnacle Financial's ongoing evaluation of credit quality. 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.

The allowance for credit losses on held-to-maturity securities is measured on a collective basis by major security type. Pinnacle Financial has a zero loss expectation for U.S. treasury securities in addition to U.S. Government agency securities and mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and accordingly, no allowance for credit losses is estimated for these securities. Credit losses on held-to-maturity state and municipal securities and corporate notes and other securities are estimated using third-party probability of default and loss given default models driven primarily by macroeconomic factors over a reasonable and supportable period of eighteen months with a twelve month reversion to average loss factors. At June 30, 2022 and December 31, 2021, the estimated allowance for credit losses on these held-to-maturity securities was $1.2 million and $161,000, respectively, with the change driven largely by the increase in the balance of held-to-maturity securities and by changes in macroeconomic forecasts.

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Pinnacle Financial utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt securities held-to-maturity. At June 30, 2022, all debt securities classified as held-to-maturity were rated A or higher by the ratings agencies. Updated credit ratings are obtained as they become available from the ratings agencies.

Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes or preparing for anticipated changes in market interest rates. 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. During the six months ended June 30, 2022, $2.9 million of available-for-sale securities were sold resulting in gross realized losses of $61,000. During the six months ended June 30, 2021, $2.2 million of available-for-sale securities were sold resulting in gross realized gains of $366,000.

Pinnacle Financial has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the fair values of available for sale securities. See Note 8. Derivative Instruments for disclosure of the gains and losses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities.

Note 4. Loans and Allowance for Credit Losses

For financial reporting purposes, Pinnacle Financial classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by Pinnacle Bank with the Federal Deposit Insurance Corporation (FDIC).

Pinnacle Financial uses the following loan categories for presentation of loan balances and the related allowance for credit losses on loans:
Owner occupied commercial real estate mortgage loans - Owner occupied commercial real estate mortgage loans are secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. For such loans, repayment is largely dependent upon the operation of the borrower's business.
Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily dependent on lease income generated from the underlying collateral.
Consumer real estate mortgage loans - Consumer real estate mortgage consists primarily of loans secured by 1-4 family residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower.
Construction and land development loans - Construction and land development loans include loans where the repayment is dependent on the successful completion and eventual sale, refinance or operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development.
Commercial and industrial loans - Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Loans totaling $51.1 million and $371.1 million granted under the Paycheck Protection Program are included in this category as of June 30, 2022, and December 31, 2021, respectively.
Consumer and other loans - Consumer and other loans include all loans issued to individuals not included in the consumer real estate mortgage classification. Examples of consumer and other loans are automobile loans, consumer credit cards and loans to finance education, among others. Many consumer loans are unsecured. Repayment is primarily dependent on the personal cash flow of the borrower.


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Loans at June 30, 2022 and December 31, 2021 were as follows (in thousands):
June 30, 2022December 31, 2021
Commercial real estate:
Owner occupied$3,243,018 $3,048,822
Non-owner occupied5,861,596 5,221,704
Consumer real estate – mortgage4,047,051 3,680,684
Construction and land development3,386,866 2,903,017
Commercial and industrial9,295,808 8,074,546
Consumer and other498,757 485,489
Subtotal$26,333,096 $23,414,262 
Allowance for credit losses(272,483)(263,233)
Loans, net$26,060,613 $23,151,029 

Commercial loans receive risk ratings assigned by a financial advisor subject to validation by Pinnacle Financial's independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pass rated loans include multiple ratings categories representing varying degrees of risk attributes lesser than those of the other defined risk categories further described below. Pinnacle Financial believes its categories follow those used by Pinnacle Bank's primary regulators. At June 30, 2022, approximately 78.4% of Pinnacle Financial's loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating. Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans. However, certain consumer real estate-mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature. Consumer loans that have been placed on nonaccrual but have not otherwise been assigned a risk rating are believed by management to share risk characteristics with loans rated substandard-nonaccrual and have been presented as such in Pinnacle Financial's risk rating disclosures.
 
Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, Pinnacle Financial's credit procedures require every risk rated loan of $1.0 million or more be subject to a formal credit risk review process. Each loan's risk rating is also subject to review by Pinnacle Financial's independent loan review department, which reviews a substantial portion of Pinnacle Financial's risk rated portfolio annually. Included in the coverage are independent reviews of loans in targeted higher-risk portfolio segments such as certain commercial and industrial loans, land loans and/or loan types in certain geographies.

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

Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit position at some future date.
Substandard loans are inadequately protected by the current net worth and financial capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize collection of the debt. Substandard loans are characterized by the distinct possibility that Pinnacle Financial could sustain some loss if the deficiencies are not corrected.
Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.
Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.


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The table below presents loan balances classified within each risk rating category by primary loan type and based on year of origination or most recent renewal as of June 30, 2022 (in thousands):
June 30, 202220222021202020192018PriorRevolving LoansTotal
Commercial real estate - Owner occupied
Pass$574,287 $858,414 $658,343 $355,582 $280,823 $366,273 $51,913 $3,145,635 
Special Mention24,128 20,434 9,556 1,621 1,247 11,280 12,990 81,256 
Substandard (1)
2,260 1,007 1,664 5,620 184 2,636 — 13,371 
Substandard-nonaccrual— 1,151 — 257 959 389 — 2,756 
Doubtful-nonaccrual— — — — — — — — 
Total Commercial real estate - owner occupied$600,675 $881,006 $669,563 $363,080 $283,213 $380,578 $64,903 $3,243,018 
Commercial real estate - Non-owner occupied
Pass$1,336,133 $1,589,780 $987,203 $829,154 $381,453 $539,685 $67,906 $5,731,314 
Special Mention7,457 13,390 60,295 13,927 — 26,254 — 121,323 
Substandard (1)
— 1,654 3,806 1,315 — — — 6,775 
Substandard-nonaccrual— 1,040 — — 461 683 — 2,184 
Doubtful-nonaccrual— — — — — — — — 
Total Commercial real estate - Non-owner occupied$1,343,590 $1,605,864 $1,051,304 $844,396 $381,914 $566,622 $67,906 $5,861,596 
Consumer real estate – mortgage
Pass$572,274 $1,186,965 $523,748 $261,456 $148,454 $304,406 $1,040,556 $4,037,859 
Special Mention— — — — 224 48 — 272 
Substandard (1)
— — 349 — — — — 349 
Substandard-nonaccrual— 192 1,047 4,093 989 2,087 163 8,571 
Doubtful-nonaccrual— — — — — — — — 
Total Consumer real estate – mortgage$572,274 $1,187,157 $525,144 $265,549 $149,667 $306,541 $1,040,719 $4,047,051 
Construction and land development
Pass$1,027,671 $1,642,080 $515,833 $157,522 $8,281 $10,448 $14,171 $3,376,006 
Special Mention— — — 9,849 — — — 9,849 
Substandard (1)
441 — — 13 146 — 608 
Substandard-nonaccrual— — — 204 — 199 — 403 
Doubtful-nonaccrual— — — — — — — — 
Total Construction and land development$1,028,112 $1,642,080 $515,833 $167,583 $8,294 $10,793 $14,171 $3,386,866 
Commercial and industrial
Pass$2,226,356 $2,187,721 $609,856 $468,021 $191,181 $165,983 $3,258,859 $9,107,977 
Special Mention1,832 22,789 6,528 35,529 5,922 1,274 48,454 122,328 
Substandard (1)
13,506 11,325 299 5,938 1,386 1,041 30,463 63,958 
Substandard-nonaccrual184 126 — 255 217 467 296 1,545 
Doubtful-nonaccrual— — — — — — — — 
 Total Commercial and industrial$2,241,878 $2,221,961 $616,683 $509,743 $198,706 $168,765 $3,338,072 $9,295,808 
Consumer and other
Pass$84,705 $124,829 $68,254 $3,471 $1,365 $1,776 $214,357 $498,757 
Special Mention— — — — — — — — 
Substandard (1)
— — — — — — — — 
Substandard-nonaccrual— — — — — — — — 
Doubtful-nonaccrual— — — — — — — — 
Total Consumer and other$84,705 $124,829 $68,254 $3,471 $1,365 $1,776 $214,357 $498,757 
Total loans
Pass$5,821,426 $7,589,789 $3,363,237 $2,075,206 $1,011,557 $1,388,571 $4,647,762 $25,897,548 
Special Mention33,417 56,613 76,379 60,926 7,393 38,856 61,444 335,028 
Substandard (1)
16,207 13,986 6,118 12,881 1,583 3,823 30,463 85,061 
Substandard-nonaccrual184 2,509 1,047 4,809 2,626 3,825 459 15,459 
Doubtful-nonaccrual— — — — — — — — 
Total loans$5,871,234 $7,662,897 $3,446,781 $2,153,822 $1,023,159 $1,435,075 $4,740,128 $26,333,096 

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(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 troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $85.1 million at June 30, 2022, compared to $109.6 million at December 31, 2021.

The table below presents the aging of past due balances by loan segment at June 30, 2022 and December 31, 2021 (in thousands):

June 30, 202230-59 days past due60-89 days past due90 days or more past dueTotal
past due
CurrentTotal loans
Commercial real estate:
Owner occupied$650 $756 $2,564 $3,970 $3,239,048 $3,243,018 
Non-owner occupied631 — 1,723 2,354 5,859,242 5,861,596 
Consumer real estate – mortgage1,834 9,961 5,604 17,399 4,029,652 4,047,051 
Construction and land development— 200 204 3,386,662 3,386,866 
Commercial and industrial7,064 3,074 3,260 13,398 9,282,410 9,295,808 
Consumer and other2,531 1,566 498 4,595 494,162 498,757 
Total$12,714 $15,357 $13,849 $41,920 $26,291,176 $26,333,096 
December 31, 2021
Commercial real estate:
Owner occupied$727 $— $2,426 $3,153 $3,045,669 $3,048,822 
Non-owner occupied1,434 — 645 2,079 5,219,625 5,221,704 
Consumer real estate – mortgage8,710 122 4,450 13,282 3,667,402 3,680,684 
Construction and land development61 — 127 188 2,902,829 2,903,017 
Commercial and industrial4,926 2,677 7,311 14,914 8,059,632 8,074,546 
Consumer and other1,715 568 372 2,655 482,834 485,489 
Total$17,573 $3,367 $15,331 $36,271 $23,377,991 $23,414,262 

The following table details the changes in the allowance for credit losses for the three and six months ended June 30, 2022 and 2021, respectively, by loan classification (in thousands):
 Commercial real estate - Owner occupiedCommercial real estate - Non-owner occupiedConsumer
 real estate - mortgage
Construction and land developmentCommercial and industrialConsumer
and other
Total
Three months ended June 30, 2022:
Balance at March 31, 2022$19,505 $56,078 $32,320 $29,823 $112,412 $11,480 $261,618 
Charged-off loans(879)(185)(92)(150)(5,275)(2,592)(9,173)
Recovery of previously charged-off loans207 184 578 75 5,600 1,652 8,296 
Provision for credit losses on loans776 (3,530)1,077 (1,067)13,035 1,451 11,742 
Balance at June 30, 2022$19,609 $52,547 $33,883 $28,681 $125,772 $11,991 $272,483 
Three months ended June 30, 2021:      
Balance at March 31, 2021$22,065 $80,519 $30,199 $37,642 $101,076 $9,380 $280,881 
Charged-off loans(6)(332)(161)— (10,972)(1,284)(12,755)
Recovery of previously charged-off loans476 147 548 200 645 771 2,787 
Provision for credit losses on loans(3,224)(1,253)(141)(4,355)11,352 455 2,834 
Balance at June 30, 2021$19,311 $79,081 $30,445 $33,487 $102,101 $9,322 $273,747 
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 Commercial real estate - Owner occupiedCommercial real estate - Non-owner occupiedConsumer
 real estate - mortgage
Construction and land developmentCommercial and industrialConsumer
and other
Total
Six months ended June 30, 2022:      
Balance at December 31, 2021$19,618 $58,504 $32,104 $29,429 $112,340 $11,238 $263,233 
Charged-off loans(965)(185)(254)(150)(9,655)(4,476)(15,685)
Recovery of previously charged-off loans334 247 872 149 7,524 2,724 11,850 
Provision for credit losses on loans622 (6,019)1,161 (747)15,563 2,505 13,085 
Balance at June 30, 2022$19,609 $52,547 $33,883 $28,681 $125,772 $11,991 $272,483 
Six months ended June 30, 2021:      
Balance at December 31, 2020$23,298 $79,132 $33,304 $42,408 $98,423 $8,485 $285,050 
Charged-off loans(703)(472)(532)(367)(22,721)(2,234)(27,029)
Recovery of previously charged-off loans1,078 159 913 237 1,851 1,426 5,664 
Provision for credit losses on loans(4,362)262 (3,240)(8,791)24,548 1,645 10,062 
Balance at June 30, 2021$19,311 $79,081 $30,445 $33,487 $102,101 $9,322 $273,747 

The adequacy of the allowance for credit losses is reviewed by Pinnacle Financial's management on a quarterly basis. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay the loan (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

Pinnacle Financial adopted ASU 2016-13 on January 1, 2020, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset. Under the CECL methodology the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis.

For commercial real estate, consumer real estate, construction and land development, and commercial and industrial loans, Pinnacle Financial primarily utilizes a probability of default and loss given default modeling approach. These models utilize historical correlations between default experience and certain macroeconomic factors as determined through a statistical regression analysis. All loan segments modeled using this approach consider changes in the national unemployment rate. In addition to the national unemployment rate, GDP and the three month treasury rate are considered for owner occupied commercial real estate, the commercial real estate price index and the five year treasury rate are considered for construction loans, and the three month treasury rate is considered for commercial and industrial loans. For the consumer and other loan segment, a non-statistical approach based on historical charge off rates is utilized.

Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by Pinnacle Financial and are dependent on the current economic environment among other factors. A reasonable and supportable period of 24 months was utilized for all loan segments at June 30, 2022 and December 31, 2021, followed by a 12 month straight line reversion to long term averages at each measurement date.

The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. These adjustments are based upon quarterly trend assessments in portfolio concentrations, policy exceptions, associate retention, independent loan review results, collateral considerations, risk ratings, competition and peer group credit quality trends. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors.

Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. Individual evaluations are generally performed for loans greater than $1.0 million which have experienced significant credit deterioration. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral.
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The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, as of June 30, 2022 and December 31, 2021 (in thousands):
Real EstateBusiness AssetsOtherTotal
June 30, 2022
Commercial real estate:
Owner occupied$5,203 $— $— $5,203 
Non-owner occupied4,707 — — 4,707 
Consumer real estate – mortgage14,067 — — 14,067 
Construction and land development1,240 — — 1,240 
Commercial and industrial— 1,491 — 1,491 
Consumer and other— — — — 
Total $25,217 $1,491 $— $26,708 
December 31, 2021
Commercial real estate:
Owner occupied$5,300 $— $— $5,300 
Non-owner occupied5,631 — — 5,631 
Consumer real estate – mortgage16,392 — — 16,392 
Construction and land development1,208 — — 1,208 
Commercial and industrial— 6,976 206 7,182 
Consumer and other— — — — 
Total $28,531 $6,976 $206 $35,713 

The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at June 30, 2022 and December 31, 2021. Also presented is the balance of loans on nonaccrual status at June 30, 2022 for which there was no related allowance for credit losses recorded (in thousands):
June 30, 2022December 31, 2021
Total nonaccrual loansNonaccrual loans with no allowance for credit lossesLoans past due 90 or more days and still accruingTotal nonaccrual loansNonaccrual loans with no allowance for credit lossesLoans past due 90 or more days and still accruing
Commercial real estate:
Owner occupied$2,756 $— $— $2,694 $— $— 
Non-owner occupied2,184 1,040 — 1,404 — — 
Consumer real estate – mortgage8,572 — 1,181 10,264 — 144 
Construction and land development403 — — 356 — — 
Commercial and industrial1,545 184 2,160 16,849 13,188 1,091 
Consumer and other— — 498 — 372 
Total$15,460 $1,224 $3,839 $31,569 $13,188 $1,607 
Pinnacle Financial's policy is the accrual of interest income will be discontinued when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date loans are placed on nonaccrual status, Pinnacle Financial reverses all previously accrued interest income against current year earnings. Pinnacle Financial's policy is once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized no interest income from cash payments received on nonaccrual loans during the three and six months ended June 30, 2022 and 2021, respectively. Had these loans been on accruing status, an additional $459,000 and $903,000 of interest income would have been recognized for the three and six months ended June 30, 2022 compared to an additional $776,000 and $1.1 million for the three and six months ended June 30, 2021, respectively. Approximately $3.5 million and $15.5 million of nonaccrual loans were performing pursuant to their contractual terms as of June 30, 2022 and December 31, 2021, respectively.
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At June 30, 2022 and December 31, 2021, there were $2.3 million and $2.4 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. Troubled commercial loans are restructured by specialists within Pinnacle Bank's Special Assets Group, and all restructurings are approved by committees and/or credit officers separate and apart from the normal loan approval process. These specialists are charged with reducing Pinnacle Financial's overall risk and exposure to loss in the event of a restructuring by obtaining some or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral release terms, additional collateral or other similar strategies.

There were no troubled debt restructurings made during the six months ended June 30, 2022 and 2021. During the six months ended June 30, 2022 and 2021, there were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring.

Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industries. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications. Pinnacle Financial 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 June 30, 2022 with the comparative exposures for December 31, 2021 (in thousands):
 June 30, 2022 
 Outstanding Principal BalancesUnfunded CommitmentsTotal exposureTotal Exposure at December 31, 2021
Lessors of nonresidential buildings$4,499,466 $2,062,884 $6,562,350 $5,368,638 
Lessors of residential buildings1,621,735 1,572,489 3,194,224 2,566,352 
New housing for-sale builders677,418 1,109,695 1,787,113 1,534,789 

Among other data, Pinnacle Financial monitors two ratios regarding construction and commercial real estate lending as part of its concentration management processes. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by Pinnacle Bank’s total risk-based capital. At June 30, 2022 and December 31, 2021, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were 87.4% and 79.1%, respectively. Non-owner occupied commercial real estate and multifamily loans (including construction and land development loans) as a percentage of total risk-based capital were 250.2% and 234.1% as of June 30, 2022 and December 31, 2021, respectively. Banking regulations have established guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-owner occupied ratio of less than 300% of total risk-based capital. When a bank’s ratios are in excess of one or both of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. At June 30, 2022, Pinnacle Bank was within the 100% and 300% guidelines and has established what it believes to be appropriate controls to monitor its lending in these areas as it aims to keep the level of these loans below the 100% and 300% thresholds.

At June 30, 2022, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $47.0 million to current directors, executive officers, and their related interests, of which $36.9 million had been drawn upon. At December 31, 2021, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $45.2 million to directors, executive officers, and their related interests, of which approximately $14.5 million had been drawn upon. All loans to directors, executive officers, and their related interests were performing in accordance with contractual terms at June 30, 2022 and December 31, 2021.

Loans Held for Sale

At June 30, 2022, Pinnacle Financial had approximately $25.9 million in commercial loans held for sale compared to $17.7 million at December 31, 2021, which primarily included commercial real estate and apartment loans originated for sale to a third-party as part of a multi-family loan program. Such loans are closed under a pass-through commitment structure wherein Pinnacle Bank's loan commitment to the borrower is the same as the third party's take-out commitment to Pinnacle Bank and the third party purchase typically occurs within thirty days of Pinnacle Bank closing with the borrowers.

At June 30, 2022, Pinnacle Financial had approximately $21.7 million of mortgage loans held-for-sale compared to approximately $30.3 million at December 31, 2021. Total loan volumes sold during the six months ended June 30, 2022 were approximately $510.5 million compared to approximately $941.3 million for the six months ended June 30, 2021. During the three and six months ended June 30, 2022, Pinnacle Financial recognized $2.2 million and $6.2 million, respectively, in gains on the sale of these loans, net of commissions paid, compared to $6.7 million and $20.4 million, respectively, during the three and six months ended June 30, 2021.

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These residential mortgage loans held-for-sale are originated internally and are primarily to borrowers in Pinnacle Bank's geographic markets. These sales are typically on a mandatory basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines.
 
Each purchaser of a residential mortgage loan held-for-sale has specific guidelines and criteria for sellers of loans and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require Pinnacle Bank to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties, Pinnacle Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan. To date, Pinnacle Bank's liability pursuant to the terms of these representations and warranties has been insignificant to Pinnacle Bank.

Note 5. Income Taxes

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

The unrecognized tax benefit related to uncertain tax positions related to state income tax filings was $12.7 million at June 30, 2022 and December 31, 2021, respectively. No change was recorded to the unrecognized tax benefit related to uncertain tax positions in each of the three and six month periods ended June 30, 2022 and 2021.

Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. During the three and six months ended June 30, 2022, Pinnacle Financial recognized $264,000 in interest and penalties. No interest and penalties were recorded in the income statement for the three and six months ended June 30, 2021.

Pinnacle Financial's effective tax rate for the three and six months ended June 30, 2022 was 19.9% and 19.0%, respectively, compared to 18.9% and 18.6%, respectively, for the three and six months ended June 30, 2021. The difference between the effective tax rate and the federal and state income tax statutory rate of 26.14% at June 30, 2022 and 2021 is primarily due to investments in bank qualified municipal securities, tax benefits of Pinnacle Bank's real estate investment trust subsidiary, participation in the Tennessee Community Investment Tax Credit (CITC) program, and tax benefits associated with share-based compensation, bank-owned life insurance and Pinnacle Financial's captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense, non-deductible FDIC premiums and non-deductible executive compensation.

Income tax expense is also impacted by the vesting of equity-based awards and the exercise of employee stock options, which expense or benefit is recorded as a discrete item as a component of total income tax, the amount of which is dependent upon the change in the grant date fair value and the vest date fair value of the underlying award. Accordingly, for the three and six months ended June 30, 2022 and 2021, Pinnacle Financial recognized excess tax benefits of $282,000 and $2.9 million, respectively, compared to benefits of $302,000 and $1.9 million, respectively, for the three and six months ended June 30, 2021.
 
Note 6. Commitments and Contingent Liabilities

In the normal course of business, Pinnacle Financial has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. At June 30, 2022, these commitments amounted to $14.4 billion, of which approximately $1.5 billion related to home equity lines of credit.

Standby letters of credit are generally issued on behalf of an applicant (customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby
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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 June 30, 2022, these commitments amounted to $330.0 million.

Pinnacle Financial typically 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 typically 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 Pinnacle Bank's customers default on their resulting obligation to Pinnacle Bank, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments. At June 30, 2022 and December 31, 2021, Pinnacle Financial had accrued reserves of $24.0 million and $22.5 million, respectively, for the inherent risks associated with these off-balance sheet commitments.

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolutions of these claims outstanding at June 30, 2022 are not expected to have a material adverse impact on Pinnacle Financial's consolidated financial condition, operating results or cash flows.

Note 7.  Stock Options and Restricted Shares

Pinnacle Financial's Amended and Restated 2018 Omnibus Equity Incentive Plan (the "2018 Plan") permits Pinnacle Financial to reissue outstanding awards that are subsequently forfeited, settled in cash, withheld by Pinnacle Financial to cover withholding taxes or expire unexercised and returned to the 2018 Plan. At June 30, 2022, there were approximately 1.4 million shares available for issuance under the 2018 Plan.

Upon the acquisition of CapitalMark, Pinnacle Financial assumed approximately 858,000 stock options under the CapitalMark Option Plan. No further awards remain available for issuance under the CapitalMark Option Plan. At June 30, 2022, all of the options remaining outstanding under any equity incentive plan of Pinnacle Financial were granted under the CapitalMark Option Plan.

Common Stock Options

A summary of the stock option activity within the equity incentive plans during the six months ended June 30, 2022 and information regarding, contractual terms remaining, intrinsic values and other matters is as follows:
 NumberWeighted-Average
Exercise
Price
Weighted-Average
Contractual
Remaining Term
(in years)
Aggregate
Intrinsic
Value
(000's)
 
Outstanding at December 31, 202156,147 $24.51 1.19$3,985 
(1)
Granted—    
 
Exercised(14,000)   
 
Forfeited—    
 
Outstanding at June 30, 202242,147 $25.00 0.82$1,994 
(2)
Options exercisable at June 30, 202242,147 $25.00 0.82$1,994 
(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 $95.50 per common share at December 31, 2021 for the 56,147 options that were in-the-money at December 31, 2021.
(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 $72.31 per common share at June 30, 2022 for the 42,147 options that were in-the-money at June 30, 2022.

Compensation costs related to stock options granted under Pinnacle Financial's equity incentive plans have been fully recognized and all outstanding option awards are fully vested.

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Restricted Share Awards

A summary of activity for unvested restricted share awards for the six months ended June 30, 2022 is as follows:
 NumberGrant Date
Weighted-Average Cost
Unvested at December 31, 2021613,335 $64.93 
Shares awarded199,545 
Restrictions lapsed and shares released to associates/directors(157,077)
Shares forfeited(24,224)
Unvested at June 30, 2022631,579 $77.39 

Pinnacle Financial has granted restricted share awards to associates and outside directors with a time-based vesting criteria. Compensation expense associated with time-based vesting restricted share awards is recognized over the time period that the restrictions associated with the awards lapse on a straight-line basis based on the total cost of the award. The following table outlines restricted stock grants that were made, grouped by similar vesting criteria, during the six months ended June 30, 2022. The table reflects the life-to-date activity for these awards:
Grant
year
Group (1)
Vesting
period in years
Shares
awarded
Restrictions lapsed and shares released to participantsShares withheld for taxes by participants
Shares forfeited by participants (4)
Shares unvested
Time Based Awards      
2022
Associates (2)
3 -5190,065 55 51 5,200 184,759 
Outside Director Awards (3)
      
2022Outside directors19,480 — — — 9,480 

(1)Groups include employees (referred to as associates above) and outside directors. When the restricted shares are awarded, a participant receives voting rights and forfeitable dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. Once the restrictions lapse, the participant is taxed on the value of the award and may elect to sell some shares (or have Pinnacle Financial withhold some shares) to pay the applicable income taxes associated with the award. Alternatively, the recipient can pay the withholding taxes in cash. For time-based vesting restricted share awards, dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of termination. For awards to Pinnacle Financial's directors, dividends are placed into escrow until the forfeiture restrictions on such shares lapse.
(2)The forfeiture restrictions on these restricted share awards lapse in equal annual installments on the anniversary date of the grant.
(3)Restricted share awards are issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on March 1, 2023 based on each individual board member meeting attendance goals for the various board and board committee meetings to which each member was scheduled to attend.
(4)These shares represent forfeitures resulting from recipients whose employment or board membership was terminated during the year-to-date period ended June 30, 2022. Any dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of termination or will not be distributed from escrow, as applicable.

Restricted Stock Unit Awards

A summary of activity for unvested restricted stock units for the six months ended June 30, 2022 is as follows:
 NumberGrant Date
Weighted-Average Cost
Unvested at December 31, 202156,368 $71.22 
Shares awarded38,133 
Restrictions lapsed and shares released to associates/directors(18,897)
Shares forfeited(1,479)
Unvested at June 30, 202274,125 $88.21 

Pinnacle Financial grants restricted stock units to its Named Executive Officers (NEOs) and leadership team members with time-based vesting criteria. Compensation expense associated with time-based vesting restricted stock unit awards is recognized over the time period that the restrictions associated with the awards lapse on a straight-line basis based on the total cost of the award. The
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following table outlines restricted stock unit grants that were made, grouped by similar vesting criteria, during the six months ended June 30, 2022. The table reflects the life-to-date activity for these awards:

Grant yearVesting
period in years
Shares
awarded
Restrictions lapsed and shares released to participantsShares withheld for taxes by participants
Shares forfeited by participants (1)
Shares unvested
2022338,133 15 — 431 37,687 

(1)These shares represent forfeitures resulting from recipients whose employment was terminated during the year-to-date period ended June 30, 2022. Dividend equivalents are held in escrow for award recipients for dividends paid prior to the forfeiture restrictions lapsing. Such dividend equivalents are not released from escrow if an award is forfeited.

Performance Stock Unit Awards
The following table details the performance stock unit awards outstanding at June 30, 2022:
 Units Awarded    
Grant year

NEOs (1)
Leadership Team other than NEOsApplicable performance periods associated with each tranche
(fiscal year)
Service period per tranche
(in years)
Subsequent holding period per tranche
(in years)
Period in which units to be settled into shares of common stock(2)
202256,465135,514 32,320 2022-2024002025
2022230,000 — 2022-2024012026
202189,234214,155 45,240 2021-2023002024
2020136,137204,220 59,648 2020232025
2021222025
2022212025
2019166,211249,343 52,244 2019232024
2020222024
2021212024
201896,878145,339 25,990 2018232023
2019222023
2020212023
(1)The named executive officers are awarded a range of awards that generally may be earned based on attainment of goals between a target level of performance and a maximum level of performance. The 230,000 performance units awarded to the NEOs in 2022 may be earned based on target level performance and do not include maximum level payout.
(2)Performance stock unit awards granted in or after 2021, if earned, will be settled in shares of Pinnacle Financial common stock in the period noted in the table, if the performance criterion included in the applicable performance unit award agreement are met.

During the six months ended June 30, 2022 and 2021, the restrictions associated with 149,893 and 133,041 performance stock unit awards granted in prior years lapsed, based on the terms of the agreement and approval by Pinnacle Financial's Human Resources and Compensation Committee, and were settled into shares of Pinnacle Financial common stock with 53,125 and 46,332 shares being withheld to pay the taxes associated with the settlement of those shares.

Additionally, during the six months ended June 30, 2021, 199,633 performance stock unit awards granted in prior years were forfeited due to the failure to reach performance targets for the year ended December 31, 2020 as defined in the associated performance stock unit award agreements.

Stock compensation expense related to restricted share awards, restricted stock unit awards and performance stock unit awards for the three and six months ended June 30, 2022 was $10.8 million and $20.2 million, respectively, compared to $5.7 million and $11.1 million, respectively, for the three and six months ended June 30, 2021. As of June 30, 2022, the total compensation cost related to unvested restricted share awards, restricted stock unit awards and performance stock unit awards estimated at maximum performance not yet recognized was $92.3 million. This expense, if the underlying units are earned, is expected to be recognized over a weighted-average period of 2.16 years.


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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 and classification as either a cash flow hedge or fair value hedge for those derivatives which are designated as part of a hedging relationship.

Non-hedge derivatives

For derivatives not designated as hedges, the gain or loss is recognized in current period earnings. Pinnacle Financial enters into interest rate swaps (swaps) to facilitate customer transactions and meet their financing needs. Upon entering into these instruments to meet customer needs, Pinnacle Financial enters into offsetting positions in order to minimize the risk to Pinnacle Financial. These swaps qualify as derivatives, but are not designated as hedging instruments. The income statement impact of the offsetting positions is limited to changes in the reserve for counterparty credit risk. A summary of Pinnacle Financial's interest rate swaps to facilitate customers' transactions as of June 30, 2022 and December 31, 2021 is included in the following table (in thousands):

 June 30, 2022December 31, 2021
 Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
Interest rate swap agreements:    
Assets$1,625,725 $21,235 $1,540,992 $39,770 
Liabilities1,625,725 (21,465)1,540,992 (40,241)
Total$3,251,450 $(230)$3,081,984 $(471)

The effects of Pinnacle Financial's interest rate swaps to facilitate customers' transactions on the income statement during the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
Amount of Gain (Loss) Recognized in Income
Location of Gain (Loss) Recognized in IncomeThree Months Ended June 30,Six Months Ended June 30,
2022202120222021
Interest rate swap agreementsOther noninterest income$(40)$51 $241 $501 

Derivatives designated as cash flow hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income (loss), net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. Pinnacle Financial uses forward cash flow hedge relationships in an effort to manage future interest rate exposure. There were no cash flow hedges outstanding as of June 30, 2022 and December 31, 2021.

The effects of Pinnacle Financial's cash flow hedge relationships on the statement of comprehensive income (loss) during the three and six months ended June 30, 2022 and 2021 were as follows, net of tax (in thousands):
Amount of Loss Recognized
in Other Comprehensive Income (Loss)
Three Months Ended June 30,Six Months Ended June 30,
Asset derivatives2022202120222021
Interest rate floor - loans$— $240 $— $(15,034)

The cash flow hedges were determined to be highly effective during the periods presented and as a result qualify for hedge accounting treatment. If a hedge was deemed to be ineffective, the amount included in accumulated other comprehensive income (loss) would be reclassified into a line item within the statement of income that impacts operating results. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or Pinnacle Financial discontinues hedge accounting. Gains on cash flow hedges totaling $2.5 million and $5.0 million, net of tax, were reclassified from accumulated other comprehensive income (loss) into net income during the three and six months ended June 30, 2022, respectively, compared to gains totaling $2.7 million and $2.2 million, net of tax, during the three and six months ended June 30, 2021,
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respectively. Approximately $9.9 million in unrealized gains, net of tax, are expected to be reclassified from accumulated other comprehensive income (loss) into net income over the next twelve months related to previously terminated cash flow hedges.

Derivatives designated as fair value hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. Pinnacle Financial utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable available-for-sale securities. The hedging strategy converts the fixed interest rates to variable interest rates based on LIBOR or federal funds rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities.

A summary of Pinnacle Financial's fair value hedge relationships as of June 30, 2022 and December 31, 2021 is as follows (in thousands):
June 30, 2022December 31, 2021
Balance Sheet LocationWeighted Average Remaining Maturity (In Years)Weighted Average Pay RateReceive RateNotional AmountEstimated Fair ValueNotional AmountEstimated Fair Value
Asset derivatives
Interest rate swaps - securitiesOther assets8.531.98%3 month LIBOR/ Federal Funds/ SOFR$1,094,534 $41,928 $559,820 $15,109 
Liability derivatives
Interest rate swaps - securitiesOther liabilities5.813.15%3 month LIBOR/ SOFR$333,190 $(2,417)$471,670 $(39,781)
$1,427,724 $39,511 $1,031,490 $(24,672)

Notional amounts of $471.7 million included in the table above receive a variable rate of interest based on three month LIBOR, notional amounts totaling $392.2 million receive a variable rate of interest based on the daily compounded federal funds rate, and notional amounts totaling $563.8 million receive a variable rate of interest based on the daily compounded secured overnight financing rate.

The effects of Pinnacle Financial's securities fair value hedge relationships on the income statement during the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
Location of Gain (Loss)Amount of Gain (Loss) Recognized in Income
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Interest rate swaps - securitiesInterest income on securities$15,344 $(8,092)$64,183 $26,674 
Securities available-for-saleInterest income on securities$(15,344)$8,092 $(64,183)$(26,674)

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at June 30, 2022 and December 31, 2021 (in thousands):
Carrying Amount of the Hedged AssetsCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
June 30, 2022December 31, 2021June 30, 2022December 31, 2021
Line item on the balance sheet
Securities available-for-sale$1,476,346 $1,165,773 $(39,511)$24,672 

During the three and six months ended June 30, 2022, amortization expense totaling $544,000 and $1.2 million, respectively, related to previously terminated fair value hedges was recognized as a reduction to interest income on loans compared to $927,000 and $1.9 million, respectively, during the three and six months ended June 30, 2021.


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In April 2022, interest rates swaps designated as fair value hedges with notional amounts totaling $164.3 million and market values totaling $14.3 million were terminated. Approximately $986,000 in gains were recognized at the time of termination and the remaining $13.3 million will be accreted as additional interest income on the previously hedged available-for-sale mortgage backed and municipal securities over the same period as existing purchase discounts or premiums on these securities.

Note 9. Fair Value of Financial Instruments

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

Valuation Hierarchy

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

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

Assets

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

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

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

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

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

Liabilities

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

The following tables present financial instruments measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):
Total carrying value in the consolidated balance sheetQuoted market prices in an active market
(Level 1)
Models with significant observable market parameters
(Level 2)
Models with significant unobservable market parameters
(Level 3)
June 30, 2022
Investment securities available-for-sale:    
U.S. Treasury securities$246,103 $— $246,103 $— 
U.S. Government agency securities415,515 — 415,515 — 
Mortgage-backed securities1,397,678 — 1,397,678 — 
State and municipal securities1,485,387 — 1,484,731 656 
Agency-backed securities153,410 — 153,410 — 
Corporate notes and other111,245 — 111,245 — 
Total investment securities available-for-sale3,809,338 — 3,808,682 656 
Other investments144,589 — 22,978 121,611 
Other assets97,153 — 97,153 — 
Total assets at fair value$4,051,080 $— $3,928,813 $122,267 
Other liabilities$56,579 $— $56,579 $— 
Total liabilities at fair value$56,579 $— $56,579 $— 
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Total carrying value in the consolidated balance sheetQuoted market prices in an active market
(Level 1)
Models with significant observable market parameters
(Level 2)
Models with significant unobservable market parameters
(Level 3)
December 31, 2021
Investment securities available-for-sale:    
U.S. Treasury securities$193,609 $— $193,609 $— 
U.S. Government agency securities632,009 — 632,009 — 
Mortgage-backed securities1,920,239 — 1,920,239 — 
State and municipal securities1,823,837 — 1,823,009 828 
Agency-backed securities229,569 — 229,569 — 
Corporate notes and other114,931 — 114,931 — 
Total investment securities available-for-sale4,914,194 — 4,913,366 828 
Other investments125,969 — 24,973 100,996 
Other assets57,441 — 57,441 — 
Total assets at fair value$5,097,604 $— $4,995,780 $101,824 
Other liabilities$80,106 $— $80,106 $— 
Total liabilities at fair value$80,106 $— $80,106 $— 

The following table presents assets measured at fair value on a nonrecurring basis as of June 30, 2022 and December 31, 2021 (in thousands):
June 30, 2022Total carrying value in the consolidated balance sheetQuoted market prices in an active market
(Level 1)
Models with significant observable market parameters
(Level 2)
Models with significant unobservable market
parameters
(Level 3)
Other real estate owned$8,237 $— $— $8,237 
Collateral dependent loans (1)
24,270 — — 24,270 
Total$32,507 $— $— $32,507 
December 31, 2021    
Other real estate owned$8,537 $— $— $8,537 
Collateral dependent loans (1)
30,799 — — 30,799 
Total$39,336 $— $— $39,336 

(1) The carrying values of collateral dependent loans at June 30, 2022 and December 31, 2021 are net of valuation allowances of $1.5 million and $1.7 million, respectively.

In the case of the available-for-sale 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 six months ended June 30, 2022, 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 six months ended June 30, 2022 and 2021 (including the change in fair value) for financial instruments classified by Pinnacle Financial within Level 3 of the valuation hierarchy measured at fair value on a recurring basis including changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):
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 For the Three months ended June 30,For the Six months ended June 30,
 2022202120222021
 Available-for-sale SecuritiesOther
investments
Available-for-sale SecuritiesOther
 investments
Available-for-sale SecuritiesOther
investments
Available-for-sale SecuritiesOther
investments
Fair value, beginning of period$662 $106,694 $13,513 $62,129 $828 $100,996 $15,497 $47,759 
Total realized gains included in income6,669 1,256 6,957 8,379 1,298 10,397 
Changes in unrealized gains/losses included in other comprehensive income(7)— (1,293)— (17)— (3,168)— 
Purchases— 11,352 — 13,124 — 18,763 — 25,556 
Issuances— — — — — — — — 
Settlements— (3,104)(12,636)(3,455)(158)(6,527)(12,787)(4,957)
Transfers out of Level 3— — — — — — — — 
Fair value, end of period$656 $121,611 $840 $78,755 $656 $121,611 $840 $78,755 
Total realized gains included in income$$6,669 $1,256 $6,957 $$8,379 $1,298 $10,397 

The following tables present the carrying amounts, estimated fair value and placement in the fair value hierarchy of Pinnacle Financial's financial instruments at June 30, 2022 and December 31, 2021. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash, cash equivalents, and restricted cash, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as non-interest bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity (in thousands):
Carrying/
Notional
Amount
Estimated
Fair Value (1)
Quoted market prices in an active market
(Level 1)
Models with significant observable market parameters
(Level 2)
Models with significant unobservable market
parameters
(Level 3)
June 30, 2022
Financial assets:     
Securities purchased with agreement to resell$1,328,876 $1,267,352 $— $— $1,267,352 
Securities held-to-maturity2,744,555 2,484,358 — 2,484,358 — 
Loans, net26,060,613 25,535,858 — — 25,535,858 
Consumer loans held-for-sale67,467 67,477 — 67,477 — 
Commercial loans held-for-sale25,901 25,905 — 25,905 — 
Financial liabilities:     
Deposits and securities sold under     
agreements to repurchase32,794,888 31,729,054 — — 31,729,054 
Federal Home Loan Bank advances1,289,059 1,476,589 — — 1,476,589 
Subordinated debt and other borrowings423,614 445,745 — — 445,745 
Off-balance sheet instruments:     
Commitments to extend credit (2)
14,772,651 25,821 — — 25,821 
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Carrying/
Notional
Amount
Estimated
Fair Value (1)
Quoted market prices in an active market
(Level 1)
Models with significant observable market parameters
(Level 2)
Models with significant unobservable market
parameters
(Level 3)
December 31, 2021
Financial assets:     
Securities purchased with agreement to resell$1,000,000 $980,543 $— $— $980,543 
Securities held-to-maturity1,155,958 1,188,049 — 1,188,049 — 
Loans, net23,151,029 23,223,299 — — 23,223,299 
Consumer loans held-for-sale45,806 46,288 — 46,288 — 
Commercial loans held-for-sale17,685 17,871 — 17,871 — 
Financial liabilities:     
Deposits and securities sold under     
agreements to repurchase31,457,092 30,812,222 — — 30,812,222 
Federal Home Loan Bank advances888,681 1,006,866 — — 1,006,866 
Subordinated debt and other borrowings423,172 479,879 — — 479,879 
Off-balance sheet instruments:     
Commitments to extend credit (2)
13,063,942 24,351 — — 24,351 
(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, including both commitments for unfunded loans and standby letters of credit. In making this evaluation, Pinnacle Financial utilizes credit loss expectations on funded loans from our allowance for credit losses methodology and evaluates the probability that the outstanding commitment will eventually become a funded loan. As a result, at June 30, 2022 and December 31, 2021, Pinnacle Financial included in other liabilities $24.0 million and $22.5 million, respectively, representing expected credit losses on off-balance sheet commitments, which are reflected in the estimated fair values of the related commitments. Also included in the fair values at June 30, 2022 and December 31, 2021 are unamortized fees related to these commitments of $1.9 million.


Note 10. Regulatory Matters

Pursuant to Tennessee banking law, Pinnacle Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (TDFI), pay any dividends to Pinnacle Financial in a calendar year in excess of the total of Pinnacle Bank's retained net income for that year plus the retained net income for the preceding two years. Under Tennessee corporate law, Pinnacle Financial is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, Pinnacle Financial's board of directors must consider its and Pinnacle Bank's current and prospective capital, liquidity, and other needs. In addition to state law limitations on Pinnacle Financial's ability to pay dividends, the Federal Reserve imposes limitations on Pinnacle Financial's ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if Pinnacle Financial's regulatory capital is below the level of regulatory minimums plus the applicable 2.5% capital conservation buffer.

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

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During the six months ended June 30, 2022, Pinnacle Bank paid $49.6 million of dividends to Pinnacle Financial. As of June 30, 2022, Pinnacle Bank could pay approximately $806.0 million of additional dividends to Pinnacle Financial without prior approval of the Commissioner of the TDFI. Since the fourth quarter of 2013, Pinnacle Financial has paid a quarterly common stock dividend. The board of directors of Pinnacle Financial has increased the dividend amount per share over time. The most recent increase occurred on January 18, 2022 when the board of directors increased the dividend to $0.22 per common share from $0.18 per common share. During the second quarter of 2020, Pinnacle Financial issued 9.0 million depositary shares, each representing a 1/40th fractional interest in a share of Series B noncumulative, perpetual preferred stock (the "Series B Preferred Stock") in a registered public offering to both retail and institutional investors. Beginning in the third quarter of 2020, Pinnacle Financial began paying a quarterly dividend of $16.88 per share (or $0.422 per depositary share), on the Series B Preferred Stock. The amount and timing of all future dividend payments by Pinnacle Financial, if any, including dividends on Pinnacle Financial's Series B Preferred Stock (and associated depositary shares), is subject to discretion of Pinnacle Financial's board of directors and will depend on Pinnacle Financial's receipt of dividends from Pinnacle Bank, earnings, capital position, financial condition and other factors, including regulatory capital requirements, as they become known to Pinnacle Financial and receipt of any regulatory approvals that may become required as a result of each of Pinnacle Financial's or Pinnacle Bank's financial results.

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

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

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


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Management believes, as of June 30, 2022, 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 Bank must maintain certain total risk-based, Tier 1 risk-based, common equity Tier 1 and Tier 1 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. The capital conservation buffer is not included in the required ratios of the table presented below. Pinnacle Financial's and Pinnacle Bank's actual capital amounts and resulting ratios, not including the applicable 2.5% capital conservation buffer, are presented in the following table (in thousands):
 ActualMinimum Capital
Requirement
Minimum
To Be Well-Capitalized
 AmountRatioAmountRatioAmountRatio
At June 30, 2022      
Total capital to risk weighted assets:      
Pinnacle Financial$4,289,120 12.9 %$2,669,286 8.0 %$3,336,607 10.0 %
Pinnacle Bank$3,877,155 11.7 %$2,651,969 8.0 %$3,314,961 10.0 %
Tier 1 capital to risk weighted assets:      
Pinnacle Financial$3,622,608 10.9 %$2,001,964 6.0 %$2,669,286 8.0 %
Pinnacle Bank$3,639,643 11.0 %$1,988,976 6.0 %$2,651,969 8.0 %
Common equity Tier 1 capital to risk weighted assets      
Pinnacle Financial$3,405,359 10.2 %$1,501,473 4.5 %NANA
Pinnacle Bank$3,639,521 11.0 %$1,491,732 4.5 %$2,154,724 6.5 %
Tier 1 capital to average assets (*):      
Pinnacle Financial$3,622,608 9.8 %$1,485,542 4.0 %NANA
Pinnacle Bank$3,639,643 9.9 %$1,477,760 4.0 %$1,847,200 5.0 %
At December 31, 2021
Total capital to risk weighted assets:
Pinnacle Financial$4,060,598 13.8 %$2,347,963 8.0 %$2,934,953 10.0 %
Pinnacle Bank$3,670,111 12.6 %$2,334,243 8.0 %$2,917,804 10.0 %
Tier 1 capital to risk weighted assets:
Pinnacle Financial$3,425,751 11.7 %$1,760,972 6.0 %$2,347,963 8.0 %
Pinnacle Bank$3,464,265 11.9 %$1,750,683 6.0 %$2,334,243 8.0 %
Common equity Tier 1 capital to risk weighted assets
Pinnacle Financial$3,208,503 10.9 %$1,320,729 4.5 %NANA
Pinnacle Bank$3,464,142 11.9 %$1,313,012 4.5 %$1,896,573 6.5 %
Tier 1 capital to average assets (*):
Pinnacle Financial$3,425,751 9.7 %$1,412,747 4.0 %NANA
Pinnacle Bank$3,464,265 9.9 %$1,406,063 4.0 %$1,757,578 5.0 %
(*) Average assets for the above calculations were based on the most recent quarter.
















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Note 11.  Other Borrowings

Pinnacle Financial has twelve wholly-owned subsidiaries that are statutory business trusts created for the exclusive purpose of issuing 30-year capital trust preferred securities and has entered into certain other subordinated debt agreements. These instruments are outlined below as of June 30, 2022 (in thousands):
NameDate
Established
MaturityTotal Debt OutstandingInterest Rate at June 30, 2022Coupon Structure
Trust preferred securities   
Pinnacle Statutory Trust IDecember 29, 2003December 30, 2033$10,310 4.83 %
30-day LIBOR + 2.80% (1)
Pinnacle Statutory Trust IISeptember 15, 2005September 30, 203520,619 3.65 %
30-day LIBOR + 1.40% (1)
Pinnacle Statutory Trust IIISeptember 7, 2006September 30, 203620,619 3.90 %
30-day LIBOR + 1.65% (1)
Pinnacle Statutory Trust IVOctober 31, 2007September 30, 203730,928 4.68 %
30-day LIBOR + 2.85% (1)
BNC Capital Trust IApril 3, 2003April 15, 20335,155 4.29 %
30-day LIBOR + 3.25% (1)
BNC Capital Trust IIMarch 11, 2004April 7, 20346,186 3.89 %
30-day LIBOR + 2.85% (1)
BNC Capital Trust IIISeptember 23, 2004September 23, 20345,155 3.44 %
30-day LIBOR + 2.40% (1)
BNC Capital Trust IVSeptember 27, 2006December 31, 20367,217 3.95 %
30-day LIBOR + 1.70% (1)
Valley Financial Trust IJune 26, 2003June 26, 20334,124 5.30 %
30-day LIBOR + 3.10% (1)
Valley Financial Trust IISeptember 26, 2005December 15, 20357,217 3.32 %
30-day LIBOR + 1.49% (1)
Valley Financial Trust IIIDecember 15, 2006January 30, 20375,155 3.02 %
30-day LIBOR + 1.73% (1)
Southcoast Capital Trust IIIAugust 5, 2005September 30, 203510,310 3.75 %
30-day LIBOR + 1.50% (1)
Subordinated Debt   
Pinnacle Financial Subordinated NotesSeptember 11, 2019September 15, 2029300,000 4.13 %
Fixed (2)
Debt issuance costs and fair value adjustments(9,381) 
Total subordinated debt and other borrowings$423,614  
(1) Transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 30-day LIBOR is no longer published on a future adjustment date.
(2) Migrates to three month LIBOR + 2.775% (or an alternative benchmark rate plus comparable spread in the event that three month LIBOR is no longer published on such adjustment date) beginning September 15, 2024 through the end of the term.

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

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

The following is a discussion of our financial condition at June 30, 2022 and December 31, 2021 and our results of operations for the three and six months ended June 30, 2022 and 2021. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein and the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 (Form 10-K) and the other reports we have filed with the Securities and Exchange Commission since we filed that Form 10-K.

Overview

General. Our diluted net income per common share for the three and six months ended June 30, 2022 was $1.86 and $3.51, respectively, compared to $1.69 and $3.30, respectively, for the same periods in 2021. At June 30, 2022, loans increased to $26.3 billion, as compared to $23.4 billion at December 31, 2021, and total deposits increased to $32.6 billion at June 30, 2022 from $31.3 billion at December 31, 2021.

Impact of COVID-19 Pandemic. Information regarding the impact of the COVID-19 pandemic on our financial condition and results of operations as of and for the three and six months ended June 30, 2022 and comparable prior year periods is noted throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.

Results of Operations.  Our net interest income increased to $264.6 million and $504.0 million, respectively, for the three and six months ended June 30, 2022 compared to $233.2 million and $456.1 million, respectively, for the same periods in the prior year, representing increases of $31.3 million and $48.0 million, respectively. For the three and six months ended June 30, 2022 when compared to the comparable periods in 2021, this increase was largely the result of organic loan growth and lower cost of funds. Partially offsetting the increase was a decrease in the interest and fees related to PPP loans and discount accretion associated with fair value adjustments as well as yield compression in our earning asset portfolio during the year-to-date period. The net interest margin (the ratio of net interest income to average earning assets) for the three and six months ended June 30, 2022 was 3.17% and 3.03%, respectively, compared to 3.08% and 3.05%, respectively, for the same periods in 2021 and reflects the rising short-term interest rate environment, including the initial impact of exceeding a significant portion of our loan floors in the second quarter of 2022, and the deployment of excess funds in higher yielding loans offset in part by the diminishing impact of loans made and fees recognized pursuant to the PPP, declining levels of positive impact from purchase accounting as well as the competitive rate environments for loans and deposits in our markets.

Our provision for credit losses was $12.9 million and $15.6 million for the three and six months ended June 30, 2022 compared to $2.8 million and $10.1 million for the same periods in 2021. The increase in provision expense as compared to the same periods in 2021 is primarily due to growth in the loan portfolio and the developing uncertain economic environment. Also contributing to the provision expense for the three and six months ended June 30, 2022 were net charge-offs totaling $877,000 and $3.8 million, respectively, compared to $10.0 million and $21.4 million for the same periods in 2021.
Noninterest income increased by $27.3 million, or 27.8%, and $38.1 million, or 19.9%, respectively, during the three and six months ended June 30, 2022 compared to the same periods in 2021. The growth was in part attributable to an increase in wealth management revenues which were $21.8 million and $42.5 million, respectively, for the three and six months ended June 30, 2022 compared to $16.5 million and $32.6 million, respectively, in the same periods in the prior year as well as an increase in income from our equity method investment in BHG of $17.4 million, or 54.2%, and $22.1 million, or 36.2%, respectively, during the three and six months ended June 30, 2022 compared to the same periods in the prior year. Additionally, service charges on deposit accounts increased $2.7 million and $5.4 million, respectively, during the three and six months ended June 30, 2022 due to fluctuations in transaction volumes in these accounts. Additionally, the carrying values of other equity investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through financial reports provided by the portfolio managers of the investments. Income related to these investments decreased $287,000 and $2.0 million, respectively, during the three and six months ended June 30, 2022 when compared to the same periods in the prior year as we experienced greater increases in certain of our venture fund investment valuations, due to changes in the valuations in their underlying portfolios, during the three and six months ended June 30, 2021 than was the case in the three and six months ended June 30, 2022. Other noninterest income, which includes fee revenue lines of business other than those noted above, also increased during the three and six months ended June 30, 2022 by $6.7 million and $15.2 million, respectively, when compared to the same periods in the prior year. The year-to-date increase is largely the result of a $5.5 million gain on the remeasurement of our previously held equity investment in JB&B Capital, LLC (JB&B), resulting from our bank subsidiary's acquisition of the 80% equity interests of JB&B it did not previously own. The increases we experienced in certain noninterest income items were offset by a significant decline in gains on mortgage loans sold, net, which decreased by $4.6 million
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and $14.2 million, respectively, for the three and six months ended June 30, 2022 as compared to the same periods in the prior year as increases in the rate environment and declines in housing inventory in our markets negatively impacted originations.

Noninterest expense increased by $29.9 million, or 18.0%, and $57.9 million, or 18.0%, respectively, during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. Impacting noninterest expense for the three and six months ended June 30, 2022 as compared to the same prior year periods were increases of $15.8 million and $34.9 million, respectively, in salaries and employee benefits. The change in salaries and employee benefits was primarily the result of an increase in our associate base to 3,074 full-time equivalent associates at June 30, 2022 versus 2,706 at June 30, 2021 as well as annual merit increases effective in January 2022. Increased equity compensation expenses also contributed to the year-over-year increase. Noninterest expense categories, other than salaries and employee benefits, were $69.4 million and $130.2 million, respectively, during the three and six months ended June 30, 2022, compared to $55.3 million and $107.3 million, respectively, during three and six months ended June 30, 2021.
Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 50.3% and 51.7%, respectively, for the three and six months ended June 30, 2022 compared to 50.1% and 49.6%, respectively, for the three and six months ended June 30, 2021. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue.
During the three and six months ended June 30, 2022, we recorded income tax expense of $36.0 million and $64.5 million, respectively, compared to $30.7 million and $58.9 million, respectively, for the three and six months ended June 30, 2021. Our effective tax rate for the three and six months ended June 30, 2022 was 19.9% and 19.0%, respectively, compared to 18.9% and 18.6%, respectively, for the three and six months ended June 30, 2021. Our tax rate in each period was impacted by the vesting and exercise of equity-based awards previously granted under our equity-based compensation program, resulting in the recognition of tax benefits of $282,000 and $2.9 million, respectively, for the three and six months ended June 30, 2022 compared to benefits of $302,000 and $1.9 million, respectively, for the three and six months ended June 30, 2021.
Financial Condition. Loans increased $2.9 billion, or 12.5%, during the six months ended June 30, 2022, when compared to December 31, 2021. The increase is primarily the result of loans made to borrowers that principally operate or are located in our core markets, including the markets in which we recently expanded, increases in the number of relationship advisors we employ and continued focus on attracting new customers to our company offset in part by the $320.0 million decrease in the amount of PPP loans in our portfolio during the six months ended June 30, 2022 as these loans are paid down or forgiven by the SBA. Loan growth was also positively impacted during the six months ended June 30, 2022 by the addition of certain specialty lending groups, including franchise lending and equipment lease financing. Total deposits were $32.6 billion at June 30, 2022, compared to $31.3 billion at December 31, 2021, an increase of $1.3 billion, or 4.1%. Deposit growth slowed during the quarter ended June 30, 2022, increasing approximately $299.5 million from March 31, 2022, as a result of seasonal outflows including those associated with our clients tax obligations.
At June 30, 2022, our allowance for credit losses was $272.5 million compared to $263.2 million at December 31, 2021. The increase in the allowance for credit losses is largely the result of growth in the loan portfolio.
Capital and Liquidity. At June 30, 2022 and December 31, 2021, our capital ratios, including our bank's capital ratios, exceeded regulatory minimum capital requirements and those necessary to be considered well-capitalized under applicable federal regulations. See Note 10. Regulatory Matters in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q for additional information regarding our capital ratios. From time to time we may be required to support the capital needs of our bank (Pinnacle Bank). At June 30, 2022, we had approximately $163.5 million of cash at the parent company that could be used to support our bank.

On January 19, 2021, our board of directors authorized a share repurchase program for up to $125.0 million of our outstanding common stock. The authorization for this program remained in effect through March 31, 2022. On January 18, 2022, our board of directors authorized a share repurchase program for up to $125.0 million of our common stock which commenced upon the expiration of the share repurchase program that expired on March 31, 2022. The new authorization is to remain in effect through March 31, 2023. We did not repurchase any shares under either share repurchase program during the six months ended June 30, 2022 or 2021, respectively.
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 Estimates as described in our Form 10-K.


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Selected Financial Information

The following is a summary of certain financial information for the three and six month periods ended June 30, 2022 and 2021 and as of June 30, 2022 and December 31, 2021 (dollars in thousands, except per share data):
Three Months Ended
June 30,
2022 - 2021 PercentSix Months Ended
June 30,
2022 - 2021 Percent
 20222021Increase (Decrease)20222021Increase (Decrease)
Income Statement:
Interest income$292,376 $259,236 12.8 %$550,993 $511,153 7.8 %
Interest expense27,802 26,011 6.9 %46,944 55,058 (14.7)%
Net interest income264,574 233,225 13.4 %504,049 456,095 10.5 %
Provision for credit losses12,907 2,834 >100%15,627 10,069 55.2 %
Net interest income after provision for credit losses251,667 230,391 9.2 %488,422 446,026 9.5 %
Noninterest income125,502 98,207 27.8 %228,998 190,916 19.9 %
Noninterest expense196,038 166,140 18.0 %378,699 320,836 18.0 %
Net income before income taxes181,131 162,458 11.5 %338,721 316,106 7.2 %
Income tax expense36,004 30,668 17.4 %64,484 58,888 9.5 %
Net income145,127 131,790 10.1 %274,237 257,218 6.6 %
Preferred stock dividends(3,798)(3,798)— %(7,596)(7,596)— %
Net income available to common shareholders$141,329 $127,992 10.4 %$266,641 $249,622 6.8 %
Per Share Data:
Basic net income per common share$1.87 $1.70 10.0 %$3.52 $3.31 6.3 %
Diluted net income per common share$1.86 $1.69 10.1 %$3.51 $3.30 6.4 %
Performance Ratios:
Return on average assets (1)
1.46 %1.46 %— %1.39 %1.44 %(3.5)%
Return on average shareholders' equity (2)
10.66 %10.19 %4.6 %10.10 %10.07 %0.3 %
Return on average common shareholders' equity (3)
11.12 %10.65 %4.4 %10.53 %10.53 %— %
June 30, 2022December 31, 2021
Balance Sheet:
Loans, net of allowance for credit losses$26,060,613$23,151,02912.6%
Deposits$32,595,303$31,304,5334.1%
(1) Return on average assets is the result of net income available to common shareholders for the reported period on an annualized basis, divided by average assets for the period.
(2) Return on average shareholders' equity is the result of net income available to common shareholders for the reported period on an annualized basis, divided by average shareholders' equity for the period.
(3) Return on average common shareholders' equity is the result of net income available to common shareholders for the reported period on an annualized basis, divided by average common shareholders' equity for the period.

Results of Operations

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 $264.6 million and $504.0 million, respectively, for the three and six months ended June 30, 2022 compared to $233.2 million and $456.1 million, respectively, for the same periods in the prior year, representing increases of $31.3 million and $48.0 million, respectively. For the three and six months ended June 30, 2022 when compared to the comparable periods in 2021, this increase was largely the result of organic loan growth and lower cost of funds when comparing the comparable periods. Partially offsetting the increase was a decrease in the interest and fees related to PPP loans and discount accretion associated with fair value adjustments as well as yield compression in our earning asset portfolio during the year-to-date period.

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 six months ended June 30, 2022 and 2021 (dollars in thousands):
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 Three Months Ended
June 30, 2022
Three Months Ended
June 30, 2021
 Average BalancesInterestRates/ YieldsAverage BalancesInterestRates/ Yields
Interest-earning assets
Loans (1) (2)
$25,397,389 $252,182 4.07 %$23,179,803 $232,788 4.11 %
Securities
Taxable3,420,950 12,725 1.49 %2,581,063 8,359 1.30 %
Tax-exempt (2)
3,025,824 19,898 3.19 %2,455,723 16,546 3.25 %
Interest-bearing due from banks1,332,463 2,611 0.79 %2,484,192 556 0.09 %
Securities purchased under agreements to resell1,326,790 3,844 1.16 %484,066 410 0.34 %
Federal funds sold— — — %17,405 — — %
Other178,426 1,116 2.51 %157,415 577 1.47 %
Total interest-earning assets34,681,842 $292,376 3.49 %31,359,667 $259,236 3.42 %
Nonearning assets
Intangible assets1,882,546 1,859,170 
Other nonearning assets2,216,398 1,834,935 
Total assets$38,780,786 $35,053,772 
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking$6,520,804 6,134 0.38 %$5,453,520 2,407 0.18 %
Savings and money market12,084,911 9,071 0.30 %11,288,119 5,658 0.20 %
Time2,074,946 2,976 0.58 %2,771,555 5,796 0.84 %
Total interest-bearing deposits20,680,661 18,181 0.35 %19,513,194 13,861 0.28 %
Securities sold under agreements to repurchase216,846 82 0.15 %173,268 56 0.13 %
Federal Home Loan Bank advances1,095,531 5,231 1.92 %888,184 4,501 2.03 %
Subordinated debt and other borrowings427,191 4,308 4.04 %674,162 7,593 4.52 %
Total interest-bearing liabilities22,420,229 27,802 0.50 %21,248,808 26,011 0.49 %
Noninterest-bearing deposits10,803,439 — 0.00 %8,500,465 — 0.00 %
Total deposits and interest-bearing liabilities33,223,668 $27,802 0.34 %29,749,273 $26,011 0.35 %
Other liabilities240,899 264,891 
Total liabilities 33,464,567 30,014,164 
Shareholders' equity 5,316,219 5,039,608 
Total liabilities and shareholders' equity$38,780,786 $35,053,772 
Net  interest  income 
$264,574 $233,225 
Net interest spread (3)
2.99 %2.93 %
Net interest margin (4)
3.17 %3.08 %
(1) Average balances of nonperforming loans, consumer loans held-for-sale and commercial loans held-for-sale are included in the above amounts.
(2) Yields computed on tax-exempt instruments on a tax equivalent basis and include $9.6 million of taxable equivalent income for the three months ended June 30, 2022 compared to $7.9 million for the three months ended June 30, 2021. The tax-exempt benefit has been reduced by the projected impact of tax-exempt income that will be disallowed pursuant to IRS Regulations as of and for the then current period presented.
(3) 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 June 30, 2022 would have been 3.16% compared to a net interest spread of 3.07% for the three months ended June 30, 2021.
(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.

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 Six Months Ended
June 30, 2022
Six Months Ended
June 30, 2021
 Average BalancesInterestRates/ YieldsAverage BalancesInterestRates/ Yields
Interest-earning assets
Loans (1) (2)
$24,627,240 $479,229 4.01 %$23,014,861 $460,160 4.11 %
Securities
Taxable3,381,538 23,773 1.42 %2,427,050 16,087 1.34 %
Tax-exempt (2)
2,914,519 37,344 3.12 %2,425,501 32,044 3.20 %
Interest-bearing due from banks2,334,566 3,914 0.34 %2,824,360 1,268 0.09 %
Securities purchased under agreements to resell1,304,392 5,058 0.78 %245,857 410 0.34 %
Federal funds sold— — — %20,092 — — %
Other174,434 1,675 1.94 %158,741 1,184 1.50 %
Total interest-earning assets34,736,689 $550,993 3.30 %31,116,462 $511,153 3.41 %
Nonearning assets
Intangible assets1,873,190 1,860,272 
Other nonearning assets2,099,522 1,880,809 
Total assets$38,709,401 $34,857,543 
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking$6,456,418 8,733 0.27 %$5,459,919 5,007 0.18 %
Savings and money market12,334,678 14,195 0.23 %11,304,640 12,371 0.22 %
Time2,078,477 5,503 0.53 %2,990,753 13,951 0.94 %
Total interest-bearing deposits20,869,573 28,431 0.27 %19,755,312 31,329 0.32 %
Securities sold under agreements to repurchase198,459 138 0.14 %158,509 128 0.16 %
Federal Home Loan Bank advances992,710 9,705 1.97 %911,295 8,995 1.99 %
Subordinated debt and other borrowings434,433 8,670 4.02 %673,913 14,606 4.37 %
Total interest-bearing liabilities22,495,175 46,944 0.42 %21,499,029 55,058 0.52 %
Noninterest-bearing deposits10,641,819 — 0.00 %8,062,995 — 0.00 %
Total deposits and interest-bearing liabilities33,136,994 $46,944 0.29 %29,562,024 $55,058 0.38 %
Other liabilities248,637 298,649 
Total liabilities 33,385,631 29,860,673 
Shareholders' equity 5,323,770 4,996,870 
Total liabilities and shareholders' equity$38,709,401 $34,857,543 
Net  interest  income 
$504,049 $456,095 
Net interest spread (3)
2.88 %2.89 %
Net interest margin (4)
3.03 %3.05 %
(1) Average balances of nonperforming loans, consumer loans held-for-sale and commercial loans held-for-sale are included in the above amounts.
(2) Yields computed on tax-exempt instruments on a tax equivalent basis and include $18.1 million of taxable equivalent income for the six months ended June 30, 2022 compared to $15.2 million for the six months ended June 30, 2021. The tax-exempt benefit has been reduced by the projected impact of tax-exempt income that will be disallowed pursuant to IRS Regulations as of and for the then current period presented.
(3) 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 six months ended June 30, 2022 would have been 3.02% compared to a net interest spread of 3.04% for the six months ended June 30, 2021.
(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 and six months ended June 30, 2022, our net interest margin was 3.17% and 3.03%, respectively, compared to 3.08% and 3.05%, respectively, for the same periods in 2021. Our net interest margin for the three and six months ended June 30, 2022 reflects the rising short-term rate environment, including the initial impacts of exceeding a significant portion of our loan floors in the second quarter of 2022, and the deployment of excess funds in higher yielding loans offset in part by the diminishing impact of loans made and fees recognized pursuant to the PPP and declining levels of positive impact from purchase accounting as well as the competitive rate environments for loans and deposits in our markets. More specifically, our net interest margin was impacted by yield compression in our earning asset portfolio due to a historically low macroeconomic interest rate environment that we have recently begun to exit. During the three and six months ended June 30, 2022, our earning asset yield increased by 7 basis points and decreased by 11 basis
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points, respectively, from the same periods in the prior year. Conversely, our net interest margin was positively impacted as our total funding rates, led by declines in time deposits and rates on our subordinated debt, decreased by 1 basis point and 9 basis points, respectively, during the three and six months ended June 30, 2022 compared to the same periods in the prior year. In July 2022, the Federal Reserve again raised short-term interest rates by 75 basis points and our current expectation is another 100 basis point increase during the remainder of 2022. Given that a significant portion of the loan floors on our adjustable rate loans were exceeded in the second quarter of 2022, these subsequent rate increases should contribute to expansion in our net interest margin in the second half of 2022 when compared to comparable periods in 2021.

We continue to deploy various asset liability management strategies to manage our risk to interest rate fluctuations. Pricing remains competitive in our markets. We believe this challenging competitive environment will continue throughout the second half of 2022. The additional on-balance sheet liquidity that has accumulated primarily due to government stimulus efforts in response to the COVID-19 pandemic has and will continue to negatively impact our net interest margin until on-balance sheet liquidity returns to more normalized levels, though that impact was less during the three and six months ended June 30, 2022 as a result of our organic loan growth in those periods as compared to the same periods in 2021 and is expected to continue to lessen during the second half of 2022 and into 2023. Our 'most likely' forecast has short-term interest rates moving higher during the second half of 2022 and 2023.

Provision for Credit Losses. The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for all expected credit losses. Our provision for credit losses was $12.9 million and $15.6 million, respectively, for the three and six months ended June 30, 2022 compared to $2.8 million and $10.1 million, respectively, for the same periods in 2021. The provision for credit losses is impacted by growth in our loan portfolio, recent historical and projected future economic conditions, our internal assessment of the credit quality of the loan portfolio and net charge-offs. The increase in provision expense as compared to the same periods in 2021 is primarily due to growth in the loan portfolio and the developing uncertain economic environment. Also contributing to the provision expense for the three and six months ended June 30, 2022 were net charge-offs totaling $877,000 and $3.8 million, respectively, compared to $10.0 million and $21.4 million, respectively, for the same periods in 2021.

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, gains on mortgage loans sold, gains and losses on the sale of securities and gains or losses related to our efforts to mitigate risks associated with interest rate volatility will often reflect financial market conditions or our asset/liability management efforts and fluctuate from period to period.

The following is a summary of our noninterest income for the three and six months ended June 30, 2022 and 2021 (in thousands):

Three Months Ended
June 30,
2022 - 2021Six Months Ended
June 30,
2022 - 2021
 20222021Increase (Decrease)20222021Increase (Decrease)
Noninterest income:      
Service charges on deposit accounts$11,616 $8,906 30.4%$22,646 $17,213 31.6%
Investment services13,205 8,997 46.8%23,896 17,188 39.0%
Insurance sales commissions2,554 2,406 6.2%6,590 5,631 17.0%
Gains on mortgage loans sold, net2,150 6,700 (67.9)%6,216 20,366 (69.5)%
Investment gains (losses) on sales of securities, net— 366 NM(61)366 >(100)%
Trust fees6,065 5,062 19.8%12,038 9,749 23.5%
Income from equity method investment49,465 32,071 54.2%83,120 61,021 36.2%
Other noninterest income:
Interchange and other consumer fees19,216 14,136 35.9%33,846 26,728 26.6%
Bank-owned life insurance5,124 4,743 8.0%9,760 9,469 3.1%
Loan swap fees1,668 985 69.3%3,442 1,888 82.3%
SBA loan sales1,562 3,834 (59.3)%4,658 5,689 (18.1)%
Income from other equity investments6,669 6,956 (4.1)%8,379 10,396 (19.4)%
Other noninterest income6,208 3,045 >100%14,468 5,212 >100%
Total other noninterest income40,447 33,699 20.0%74,553 59,382 25.5%
Total noninterest income$125,502 $98,207 27.8%$228,998 $190,916 19.9%

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The increase in service charges on deposit accounts in the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 relates to an increase in analysis fees and increased transaction volumes in commercial checking accounts which we believe is the result of the increased economic activity in our markets. We expect future service charge revenues to be negatively impacted by the previously announced changes to our insufficient funds programs.

Income from our wealth management groups (investments, insurance and trust) is also included in noninterest income. For the three and six months ended June 30, 2022, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, and fees from our wealth advisory group, PNFP Capital Markets, Inc., increased by $4.2 million and $6.7 million, respectively, when compared to the three and six months ended June 30, 2021. At June 30, 2022 and 2021, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $6.8 billion and $6.3 billion, respectively, in brokerage assets. The increases in these fees for the three and six months ended June 30, 2022 when compared to the three and six months ended June 30, 2021 were favorably impacted by an increase in investment and transaction advisory fees from PNFP Capital Markets, Inc. which increased $2.3 million during the six months ended June 30, 2022 when compared to the six months ended June 30, 2021. Revenues from the sale of insurance products by our insurance subsidiaries for the three and six months ended June 30, 2022 increased by $148,000 and $959,000, respectively, compared to the same periods in the prior year. Included in insurance revenues for the six months ended June 30, 2022 was $1.4 million of contingent income that was based on 2021 sales production and claims experience compared to $927,000 recorded in the same period in the prior year. Additionally, at June 30, 2022, our trust department was receiving fees on approximately $4.2 billion of managed assets compared to $3.6 billion at June 30, 2021, reflecting organic growth and changes in market valuations. We believe the improvement in the results of our wealth management businesses during the three and six months ended June 30, 2022 when compared to the comparable periods in 2021 is primarily attributable to an increased number of wealth management advisors and corresponding client acquisition.

Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. These mortgage fees are for loans primarily originated in our current markets that are subsequently sold to third-party investors. Substantially 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. Gains on mortgage loans sold, net, were $2.2 million and $6.2 million, respectively, for the three and six months ended June 30, 2022 compared to $6.7 million and $20.4 million, resepctively, for the same periods in the prior year. This decrease is the direct result of the increases in the rate environment and the decrease in housing inventory in the markets where we operate negatively impacting originations. We hedge a portion of our mortgage pipeline as part of a mandatory delivery program whereby the hedge protects against changes in the fair value of the pipeline. The hedge is not designated as a hedge for GAAP purposes and, as such, changes in its fair value are recorded directly through the income statement. The change in the fair value of the outstanding mortgage pipeline at the end of any reporting period will directly impact the amount of gain recorded for mortgage loans held for sale during that reporting period. At June 30, 2022, the mortgage pipeline included $93.4 million in loans expected to close in 2022 compared to $180.8 million in loans at June 30, 2021 expected to close in 2021.

Investment gains and losses on sales, net, represent the net gains and losses on sales of investment securities in our available-for-sale securities portfolio during the periods noted. During the six months ended June 30, 2022, $2.9 million of securities were sold for a net loss of $61,000 as compared to the six months ended June 30, 2021, when we sold $2.2 million of securities for a net gain of $366,000.

Income from equity-method investment. Income from equity-method investment is comprised solely of income from our 49% equity-method investment in BHG. BHG is engaged in the origination of commercial and consumer loans largely to healthcare providers and other skilled professionals throughout the United States. The loans originated by BHG are either financed by secured borrowings or sold to independent financial institutions and investors.

Income from this equity-method investment was $49.5 million and $83.1 million, respectively, for the three and six months ended June 30, 2022 compared to $32.1 million and $61.0 million, respectively, for the same periods last year. Historically, BHG has sold the majority of the loans it originates to a network of bank purchasers through a combination of online auctions, direct sales and its direct purchase option. In recent years, BHG began an effort to retain more loans on its balance sheet. BHG’s decision to sell loans through its auction platform or retain loans on its balance sheet will be impacted by a variety of factors, including interest rates. In a rising rate environment, it may choose to sell more loans through its auction platform if the cost of financing loans on its balance sheet is not as attractive as a sale through its auction platform. Since 2020, BHG has completed five securitizations totaling $1.7 billion, with the latest securitization of $300 million having been completed in the second quarter of 2022. We anticipate that in the second half of 2022, BHG will retain a larger percentage of the loans it originates on its balance sheet than it did in the first half of 2022.

Income from equity-method investment is recorded net of amortization expense associated with customer lists and other intangible assets of $128,000 and $256,000, respectively, for the three and six months ended June 30, 2022 compared to $188,000 and $376,000, respectively, for the three and six months ended June 30, 2021. At June 30, 2022, there were $6.6 million of these intangible assets that are expected to be amortized in lesser amounts over the next 13 years. Also included in income from equity-method investment is
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accretion income associated with the fair valuation of certain of BHG's liabilities of $188,000 and $431,000, respectively, for the three and six months ended June 30, 2022, compared to $395,000 and $846,000, respectively, for the three and six months ended June 30, 2021. At June 30, 2022, there were $700,000 of these liabilities that are expected to accrete into income in lesser amounts over the next four years.

During the three and six months ended June 30, 2022, Pinnacle Financial and Pinnacle Bank received dividends of $28.5 million and $40.8 million, respectively, from BHG in the aggregate compared to $39.4 million and $49.4 million, respectively, during the three and six months ended June 30, 2021. Dividends from BHG during such periods reduced the carrying amount of our investment in BHG, while earnings from BHG during such periods increased the carrying amount of our investment in BHG. Profits from intercompany transactions are eliminated. Our proportionate share of earnings from BHG is included in our consolidated tax return. During the three and six months ended June 30, 2022, Pinnacle Bank purchased $76.0 million of loans from BHG. Pinnacle Bank purchased $50.3 million and $124.9 million, respectively, of loans from BHG during the three and six months ended June 30, 2021. These loans were purchased at par pursuant to BHG's joint venture loan program whereby BHG and Pinnacle Bank share proportionately in the credit risk of the acquired loans based on the rate on the loan and the rate of the purchase. The yield on this portfolio to Pinnacle Bank is anticipated to be between 4.50% and 5.50% per annum. At June 30, 2022 and December 31, 2021, there were $351.4 million and $319.1 million, respectively, of BHG joint venture program loans held by Pinnacle Bank.

For the three and six months ended June 30, 2022, BHG reported $297.9 million and $536.6 million, respectively, in revenues, net of substitution losses of $18.8 million and $38.1 million, respectively, compared to revenues of $179.0 million and $336.6 million, respectively, for the three and six months ended June 30, 2021, net of substitution losses of $25.0 million and $53.5 million, respectively. Earnings from BHG are likely to fluctuate from period-to-period. Approximately $190.0 million and $338.0 million, respectively, of BHG's revenues for the three and six months ended June 30, 2022 related to gains on the sale of commercial and consumer loans compared to $127.5 million and $243.5 million, respectively, for the three and six months ended June 30, 2021. These loans have typically been sold by BHG with no recourse to a network of community banks and other financial institutions at a premium to the par value of the loan, although the purchaser may access a BHG cash reserve account of up to 3% of the loan balance to support loan payments. BHG retains no servicing or other responsibilities related to the core product loan once sold. As a result, this gain on sale premium represents BHG's compensation for absorbing the costs to originate the loan as well as marketing expenses associated with maintaining its business model. At June 30, 2022 and 2021, there were $4.7 billion and $4.0 billion, respectively, of these loans previously sold by BHG that were being actively serviced by BHG's network of bank purchasers. BHG, at its sole option, may also provide purchasers of these loans the ability to substitute the acquired loan with another more recently-issued BHG loan should the previously-acquired loan become at least 90-days past due as to its monthly payments. As a result, BHG maintained a liability as of June 30, 2022 and 2021 of $234.9 million and $267.1 million, respectively, that represents an estimate of the future inherent losses for the outstanding core portfolio that may be subject to future substitution due to payment default or loan prepayment. This liability represents 5.0% and 6.7%, respectively, of core product loans previously sold by BHG that remain outstanding as of June 30, 2022 and 2021, respectively. The decrease in this liability in the six months ended June 30, 2022 compared to the period ended June 30, 2021 was principally the result of a partial release of the reserve BHG recorded in 2020 related to the economic disruption associated with the COVID-19 pandemic which adversely impacted physician and dental practices in a material manner in 2020 and into 2021. We anticipate that the gain on sale premium earned by BHG on the sale of commercial and consumer loans, including in connection with substitutions, will be negatively impacted by the rising rate environment.

In addition to these loans that BHG sells into its auction market, at June 30, 2022, BHG reported loans that remained on BHG's balance sheet totaling $2.9 billion compared to $1.6 billion as of June 30, 2021. A portion of these loans do not qualify for sale accounting and accordingly an offsetting secured borrowing liability has been recorded. At June 30, 2022 and 2021, BHG had $2.1 billion and $1.1 billion, respectively, of secured borrowings associated with loans held for investment. At June 30, 2022 and 2021, BHG reported allowance for loan losses totaling $75.8 million and $33.7 million, respectively, with respect to the loans on its balance sheet. BHG records its allowance for loan losses under the incurred loss method, but will be required to adopt CECL effective October 1, 2023. Interest income and fees amounted to $98.1 million and $181.3 million, respectively, for the three and six months ended June 30, 2022 compared to $44.0 million and $78.6 million, respectively, for the three and six months ended June 30, 2021. 

Included in our 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, SBA loan sales, gains or losses on other equity investments and other noninterest income items. Interchange revenues increased 35.9% and 26.6%, respectively, during the three and six months ended June 30, 2022 as compared to the same periods in 2021 due to increased commercial credit card volumes period-over-period as compared to 2021. Other noninterest income included changes in the cash surrender value of bank-owned life insurance which was $5.1 million and $9.8 million, respectively, for the three and six months ended June 30, 2022 compared to $4.7 million and $9.5 million, respectively, in the same periods in the prior year. The assets that support these policies are administered by the life insurance carriers and the income we recognize (i.e., increases or decreases in the cash surrender value of the policies) on these policies is dependent upon the crediting rates applied by the insurance carriers, which are subject to change at the discretion of the carriers, subject to any applicable floors. Earnings on these policies generally are not taxable. During the first six months of 2022, we
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purchased an additional $75 million of bank owned life insurance. SBA loan sales are included in other noninterest income and decreased by $2.3 million and $1.0 million, respectively, during the three and six months ended June 30, 2022 when compared to the same periods in the prior year. The decrease is primarily due to the changing market conditions in the second quarter of 2022 as SBA loan sales generally fluctuate based on general market conditions. Additionally, the carrying values of other equity investments we have made are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through financial reports provided by the portfolio managers of the investments. Income related to these investments decreased $287,000 and $2.0 million, respectively, during the three and six months ended June 30, 2022 when compared to the same periods in the prior year as we experienced greater increases in certain of our venture fund investment valuations, due to changes in the valuations in their underlying portfolios, during the three and six months ended June 30, 2021 than was the case in the three and six months ended June 30, 2022. Loan swap fees increased by $683,000 and $1.6 million, respectively, during the three and six months ended June 30, 2022 as compared to the same periods in 2021 due primarily to a change in the volume of activity resulting from the current interest rate environment. The other components of other noninterest income increased $3.2 million and $9.3 million, respectively, during the three and six months ended June 30, 2022 compared to the same periods in the prior year. The increase during the six months ended June 30, 2022 is largely the result of a $5.5 million gain on remeasurement of our previously held investment in JB&B resulting from our bank subsidiary's purchase of the remaining outstanding equity interests of JB&B it did not previously own on March 1, 2022.

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 six months ended June 30, 2022 and 2021 (in thousands):
 Three Months Ended
June 30,
2022-2021Six Months Ended
June 30,
2022-2021
 20222021Increase (Decrease)20222021Increase (Decrease)
Noninterest expense:      
Salaries and employee benefits:      
Salaries$70,405 $58,622 20.1%$139,547 $116,211 20.1%
Commissions6,353 5,452 16.5%12,575 10,176 23.6%
Cash and equity incentives31,808 31,293 1.6%57,702 54,934 5.0%
Employee benefits and other18,045 15,457 16.7%38,639 32,231 19.9%
Total salaries and employee benefits126,611 110,824 14.2%248,463 213,552 16.3%
Equipment and occupancy26,921 23,321 15.4%52,457 46,541 12.7%
Other real estate (income) expense, net86 (657)>100%191 (670)>100%
Marketing and other business development4,759 2,652 79.4%8,536 5,001 70.7%
Postage and supplies2,320 2,115 9.7%4,691 3,921 19.6%
Amortization of intangibles2,051 2,167 (5.4%)3,922 4,373 (10.3%)
Other noninterest expense:
Deposit related expense7,311 7,041 3.8%14,373 13,845 3.8%
Lending related expense14,744 9,634 53.0%25,839 17,416 48.4%
Wealth management related expense630 509 23.8%1,253 945 32.6%
Other noninterest expense10,605 8,534 24.3%18,974 15,912 19.2%
Total other noninterest expense33,290 25,718 29.4%60,439 48,118 25.6%
Total noninterest expense$196,038 $166,140 18.0%$378,699 $320,836 18.0%

Total salaries and employee benefits expenses increased $15.8 million and $34.9 million, respectively, for the three and six months ended June 30, 2022 compared to the same periods in 2021. The change in salaries and employee benefits was largely the result of an increase in our associate base in 2022 versus 2021 as well as annual merit increases effective in January 2022. Our associate base increased to 3,074 full-time equivalent associates at June 30, 2022 from 2,706 at June 30, 2021. We expect salary and benefit expenses in 2022 to increase when compared to 2021 as we continue our focus on hiring experienced bankers in all of our markets.

We believe that cash and equity incentives are a valuable tool in motivating an associate 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 bank's non-commissioned associates participate in our annual cash incentive plan with a minimum targeted bonus equal to 10% of each associate's annual salary, and all of our bank's associates participate in our equity compensation plans. Under the 2022 annual cash incentive plan, the targeted level of incentive payments requires achievement of a certain soundness threshold and a targeted level of
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quarterly pre-tax, pre-provision net revenue (PPNR) and annual earnings per common share (subject to certain adjustments). To the extent that the soundness threshold is met and PPNR and earnings per common share 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. For 2022, maximum payouts under the plan could reach 125% of target compared to 160% of target for 2021. Through both the second quarter of 2022 and 2021, we accrued incentive costs for the cash incentive plan at maximum payout of our targeted awards of 125% and 160%, respectively.

Also included in employee benefits and other expense for the three and six months ended June 30, 2022 were approximately $10.8 million and $20.2 million, respectively, of compensation expenses related to equity-based awards for restricted shares, restricted stock units and performance stock unit awards, compared to $5.7 million and $11.1 million, respectively, for the three and six months ended June 30, 2021. Under our equity incentive plans, we provide a broad-based equity incentive program for all of our bank's associates. We believe that equity incentives provide a vehicle for all associates to become meaningful shareholders of Pinnacle Financial over an extended period of time and create a shareholder-centric culture throughout our organization. Our compensation expense associated with equity awards with time-based vesting criteria is likely to continue to increase during the remainder of 2022 when compared to 2021 as a result of the increased number of associates and our intention to hire additional experienced financial advisors. Compensation expense associated with our performance-based vesting awards will continue to be impacted by our performance in 2022 and will likely be higher than the comparable prior year period during the remainder of 2022 as the amount of performance-based vesting awards granted in 2022 was greater than those granted in the prior year. Through the three and six months ended June 30, 2022, we have accrued for that portion of our performance awards with performance tied to 2022 at above-target payout.

Employee benefits and other expenses were $18.0 million and $38.6 million, respectively, for the three and six months ended June 30, 2022 compared to $15.5 million and $32.2 million, respectively, for the three and six months ended June 30, 2021 and include costs associated with our 401k plan, health insurance and payroll taxes. These costs fluctuate based on changes in our associate base and the level of participation in these programs by our associates. Costs associated with our health insurance and 401k plan programs increased $737,000 and $3.0 million, respectively, in the aggregate during the three and six months ended June 30, 2022 when compared to the same periods in 2021.

Equipment and occupancy expenses for the three and six months ended June 30, 2022 were $26.9 million and $52.5 million, respectively, compared to $23.3 million and $46.5 million, respectively, for the three and six months ended June 30, 2021. The increases are in part the result of the three new office locations that we opened after June 30, 2021, one in Georgia, one in Alabama and the other in our Middle Tennessee market. We expect to incur additional costs in future periods as we continue to enhance and expand our current locations, including in our new markets, and further develop our technology infrastructure. Additionally, during 2021, we announced our intention to move our corporate headquarters to an office tower under construction in Nashville, where we will be a founding partner and sponsor of the project. This move is currently planned for 2025 and will impact equipment and occupancy costs as we plan for this move.

Other real estate income and expenses, net, for the three and six months ended June 30, 2022 was expense of $86,000 and $191,000, respectively, as compared to benefits of $657,000 and $670,000, respectively, for the same periods in the prior year.

Marketing and business development expense for the three and six months ended June 30, 2022 was $4.8 million and $8.5 million, respectively, compared to $2.7 million and $5.0 million, respectively, for the three and six months ended June 30, 2021. The primary source of the increase for the three and six months ended June 30, 2022 as compared to the same periods in 2021 is the result of increased associate engagement as we brought back in-person orientation and associate meetings in the first quarter of 2022 and increased client engagement as COVID restrictions lapsed. We expect these costs to rise modestly and return to more normalized levels in 2022 taking into account anticipated increases associated with the associates we have hired since December 31, 2020.

Intangible amortization expense was $2.1 million and $3.9 million, respectively, for the three and six months ended June 30, 2022 compared to $2.2 million and $4.4 million, respectively, for the same periods in 2021. The following table outlines our amortizing intangible assets, their initial valuation and amortizable lives at June 30, 2022:
  Year
acquired
Initial
Valuation
 (in millions)
Amortizable
Life
(in years)
Remaining Value
(in millions)
Core Deposit Intangible:   
Avenue2016$8.8 $1.0 
BNC201748.1 10 18.5 
Book of Business Intangible:   
Miller Loughry Beach Insurance2008$1.3 20 $0.1 
CapitalMark 20150.3 16 0.1 
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  Year
acquired
Initial
Valuation
 (in millions)
Amortizable
Life
(in years)
Remaining Value
(in millions)
BNC Insurance20170.4 20 0.2 
BNC Trust20171.9 10 0.9 
Advocate Capital201913.6 13 7.1 
JB&B Capital20226.7 10 6.4 
These assets are being amortized on an accelerated basis which reflects the anticipated life of the underlying assets. Annual amortization expense of these intangibles is estimated to decrease from $7.4 million to $4.6 million per year over the next five years with lesser amounts for the remaining amortization period.

Other noninterest expenses, which consists primarily of deposit, lending, wealth management and administrative expenses increased by $7.6 million and $12.3 million, respectively, for the three and six months ended June 30, 2022 when compared to the three and six months ended June 30, 2021. Lending related expense increased by $5.1 million and $8.4 million, respectively, for the three and six months ended June 30, 2022 when compared to the same periods in the prior year. This increase is primarily the result of increased expense associated with our consumer and commercial credit card programs for which transaction volumes also increased in the respective period. Deposit related expense increased by $270,000 and $528,000, respectively, during the three and six months ended June 30, 2022 when compared to the same periods in 2021. Wealth management related expenses increased $121,000, or 23.8%, and $308,000, or 32.6%, respectively, during the three and six months ended June 30, 2022 when compared to the same periods in 2021 due primarily to an increased number of accounts being serviced by these areas. Other noninterest expenses increased $2.1 million and $3.1 million, respectively, during the three and six months ended June 30, 2022 as compared to the same periods in 2021 due in part to increases in consultant fees, contributions and other miscellaneous expense items.

Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 50.3% and 51.7%, respectively, for the three and six months ended June 30, 2022 compared to 50.1% and 49.6%, respectively, for the three and six months ended June 30, 2021. The efficiency ratio for the three and six months ended June 30, 2022 compared to the same periods in 2021 was negatively impacted in part by increased noninterest expense during the periods as a result of increased salaries and employee benefits, a decrease in the amount of gains on mortgage loans sold, which decrease was offset, in part, by increased income from our equity method investment in BHG.

Income Taxes. During the three and six months ended June 30, 2022, we recorded income tax expense of $36.0 million and $64.5 million, respectively, compared to $30.7 million and $58.9 million, respectively, for the three and six months ended June 30, 2021. Our effective tax rate for the three and six months ended June 30, 2022 was 19.9% and 19.0%, respectively, compared 18.9% and 18.6%, respectively, for the three and six months ended June 30, 2021. Our effective tax rate differs from the combined federal and state income tax statutory rate in effect of 26.14% primarily due to our investments in bank-qualified municipal securities, tax benefits from our real estate investment trust subsidiary, participation in Tennessee's Community Investment Tax Credit (CITC) program, tax benefits associated with share-based compensation, bank-owned life insurance and our captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense, non-deductible FDIC insurance premiums and non-deductible executive compensation. Our tax rate in each period was also impacted by the vesting and exercise of equity-based awards previously granted under our equity-based compensation program, resulting in the recognition of tax benefits of $282,000 and $2.9 million, respectively, for the three and six months ended June 30, 2022 compared to $302,000 and $1.9 million, respectively, for the three and six months ended June 30, 2021.


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Financial Condition

Our consolidated balance sheet at June 30, 2022 reflects an increase in total loans outstanding to $26.3 billion compared to $23.4 billion at December 31, 2021. Total deposits increased by $1.3 billion to $32.6 billion between December 31, 2021 and June 30, 2022. Total assets were $40.1 billion at June 30, 2022 compared to $38.5 billion at December 31, 2021.

Loans.  The composition of loans at June 30, 2022 and at December 31, 2021 and the percentage (%) of each classification to total loans are summarized as follows (in thousands):
 June 30, 2022December 31, 2021
 AmountPercentAmountPercent
Commercial real estate:
Owner occupied$3,243,018 12.3 %$3,048,82213.0 %
Non-owner occupied5,861,596 22.2 %5,221,70422.3 %
Consumer real estate – mortgage4,047,051 15.4 %3,680,68415.7 %
Construction and land development3,386,866 12.9 %2,903,01712.4 %
Commercial and industrial9,295,808 35.3 %8,074,54634.5 %
Consumer and other498,757 1.9 %485,4892.1 %
Total loans$26,333,096 100.0 %$23,414,262 100.0 %

At June 30, 2022, our loan portfolio composition had changed modestly from the composition at December 31, 2021 with commercial real estate and commercial and industrial lending generally continuing to make up the largest segments of our portfolio. At June 30, 2022, approximately 35.6% of the outstanding principal balance of our commercial real estate loans was secured by owner occupied commercial real estate properties, compared to 36.9% at December 31, 2021. 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. Additionally, the construction and land development loan segment continues to be a meaningful portion of our portfolio and reflects the development and growth of the local communities in which we operate and is diversified between commercial, residential and land.
Banking regulations have established guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-owner occupied ratio of less than 300% of total risk-based capital. Should a bank’s ratios be in excess of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by Pinnacle Bank’s total risk-based capital. At June 30, 2022, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital was 87.4% compared to 79.1% at December 31, 2021. Construction and land development, non-owner occupied commercial real estate and multifamily loans as a percentage of total risk-based capital were 250.2% and 234.1% as of June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, Pinnacle Bank was within the 100% and 300% guidelines and has established what it believes to be appropriate controls to monitor its lending in these areas as it aims to keep the level of these loans to below the 100% and 300% thresholds.

The following table presents the maturity distribution of our loan portfolio by loan segment at June 30, 2022 according to contractual maturities of (1) one year or less, (2) after one but within five years, (3) after five but within fifteen years and (4) after fifteen years.  The table also presents the portion of loans by loan segment that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index (dollars in thousands):
Due in one year or lessAfter one but within five yearsAfter five but within fifteen yearsAfter fifteen yearsTotal
Commercial real estate:
Owner-occupied$230,740 $1,268,128 $1,372,706 $371,444 $3,243,018 
Non-owner occupied1,099,234 3,868,566 834,620 59,176 5,861,596 
Consumer real estate - mortgage91,503 454,156 375,635 3,125,757 4,047,051 
Construction and land development943,146 2,088,905 290,889 63,926 3,386,866 
Commercial and industrial2,391,413 4,969,905 1,683,894 250,596 9,295,808 
Consumer and other138,570 185,058 159,174 15,955 498,757 
Total loans$4,894,606 $12,834,718 $4,716,918 $3,886,854 $26,333,096 
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Loans with fixed interest rates:
Commercial real estate:
Owner-occupied$139,424 $921,327 $1,035,711 $270,403 $2,366,865 
Non-owner occupied368,178 2,100,039 521,463 41,243 3,030,923 
Consumer real estate - mortgage48,260 312,340 151,370 1,959,608 2,471,578 
Construction and land development160,575 471,820 179,122 36,353 847,870 
Commercial and industrial957,317 1,634,052 1,138,735 179,893 3,909,997 
Consumer and other85,108 104,168 157,763 15,953 362,992 
Total loans$1,758,862 $5,543,746 $3,184,164 $2,503,453 $12,990,225 
Loans with variable interest rates:
Commercial real estate:
Owner-occupied$91,316 $346,801 $336,995 $101,041 $876,153 
Non-owner occupied731,056 1,768,527 313,157 17,933 2,830,673 
Consumer real estate - mortgage43,243 141,816 224,265 1,166,149 1,575,473 
Construction and land development782,571 1,617,085 111,767 27,573 2,538,996 
Commercial and industrial1,434,096 3,335,853 545,159 70,703 5,385,811 
Consumer and other53,462 80,890 1,411 135,765 
Total loans$3,135,744 $7,290,972 $1,532,754 $1,383,401 $13,342,871 

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

Loans in Past Due Status.  The following table is a summary of our loans that were past due at least 30 days but less than 89 days and 90 days or more past due as of June 30, 2022 and December 31, 2021 (in thousands):
 June 30,December 31,
Loans past due 30 to 89 days:20222021
Commercial real estate:
Owner occupied$1,406 $727 
Non-owner occupied631 1,434 
Consumer real estate – mortgage11,795 8,832 
Construction and land development61 
Commercial and industrial10,138 7,603 
Consumer and other4,097 2,283 
Total loans past due 30 to 89 days$28,071 $20,940 
Loans past due 90 days or more: 
Commercial real estate:
Owner occupied$2,564 $2,426 
Non-owner occupied1,723 645 
Consumer real estate – mortgage5,604 4,450 
Construction and land development200 127 
Commercial and industrial3,260 7,311 
Consumer and other498 372 
Total loans past due 90 days or more$13,849 $15,331 
Ratios: 
Loans past due 30 to 89 days as a percentage of total loans0.11 %0.09 %
Loans past due 90 days or more as a percentage of total loans0.05 %0.06 %
Total loans in past due status as a percentage of total loans0.16 %0.15 %

Potential Problem Loans. Potential problem loans, which are not included in nonperforming assets, amounted to approximately $85.1 million, or 0.3% of total loans at June 30, 2022, compared to $109.6 million, or 0.5% of total loans at December 31, 2021. 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, or worse, but not considered nonperforming loans. None of the potential problem loans were past due at least 30 days but less than 90 days as of June 30, 2022.

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Nonperforming Assets and Troubled Debt Restructurings. At June 30, 2022, we had $23.7 million in nonperforming assets compared to $40.1 million at December 31, 2021. Included in nonperforming assets were $15.5 million in nonaccrual loans and $8.2 million in OREO and other nonperforming assets at June 30, 2022 and $31.6 million in nonaccrual loans and $8.5 million in OREO and other nonperforming assets at December 31, 2021. At June 30, 2022 and December 31, 2021, there were $2.3 million and $2.4 million, respectively, of troubled debt restructurings, all of which were accruing as of the restructured date and remain on accrual status.

Allowance for Credit Losses on Loans (ACL). On January 1, 2020, we adopted FASB ASU 2016-13, which introduced the current expected credit losses (CECL) methodology and required us to estimate all expected credit losses over the remaining life of our loan portfolio. Accordingly, the ACL represents an amount that, in management's evaluation, is adequate to provide coverage for all expected future credit losses on outstanding loans. As of June 30, 2022 and December 31, 2021, our ACL was approximately $272.5 million and $263.2 million, respectively, which our management believed to be adequate at each of the respective dates. Our ACL as a percentage of total loans, inclusive of PPP loans, was 1.03% at June 30, 2022, down from 1.12% at December 31, 2021. No ACL has been recorded for PPP loans as they are fully guaranteed by the SBA.

Our CECL models rely largely on recent historical and projected future macroeconomic conditions to estimate future credit losses. Macroeconomic factors used in the model include the national unemployment rate, gross domestic product, the commercial real estate price index and certain U.S. Treasury interest rates. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to predict quarterly rates of default.

Under the CECL methodology, the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis.

Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. At June 30, 2022, a reasonable and supportable period of twenty-four months was utilized for all loan segments followed by a twelve month straight line reversion period to long term averages.

The following table sets forth, based on management's estimate, the allocation of the allowance for credit losses on loans to categories of loans and loan balances by category and the percentage of loans in each category to total loans and allowance for credit losses as a percentage of total loans within each loan category as of June 30, 2022 and December 31, 2021 (in thousands):
 June 30, 2022December 31, 2021
 ACL Allocated ($)Total Loans
($)
ACL to
Total Loans (%)
Loans to Total Loans (%)ACL Allocated ($)Total Loans
($)
ACL to
Total Loans (%)
Loans to Total Loans (%)
Commercial real estate:
Owner occupied$19,609 $3,243,0180.60 %12.3 %$19,618 $3,048,8220.64 %13.0 %
Non-owner occupied52,547 5,861,5960.90 %22.2 %58,504 5,221,7041.12 %22.3 %
Consumer real estate - mortgage33,883 4,047,0510.84 %15.4 %32,104 3,680,6840.87 %15.7 %
Construction and land development28,681 3,386,8660.85 %12.9 %29,429 2,903,0171.01 %12.4 %
Commercial and industrial125,772 9,295,8081.35 %35.3 %112,340 8,074,5461.39 %34.5 %
Consumer and other11,991 498,7572.40 %1.9 %11,238 485,4892.31 %2.1 %
Total$272,483 $26,333,096 1.03 %100.0 %$263,233 $23,414,262 1.12 %100.0 %

The following table presents information related to credit losses on loans by loan segment for the six months ended June 30, 2022 and year ended December 31, 2021 (in thousands):
Provision for
credit losses
Net (charge-offs) recoveriesAverage loans
Ratio of net (charge-offs) recoveries to average loans (1)
For the six months ended June 30, 2022:
Commercial real estate:
Owner occupied$622 $(631)$3,107,066 (0.04)%
Non-owner occupied(6,019)62 5,466,113 — %
Consumer real estate - mortgage1,161 618 3,821,545 0.03 %
Construction and land development(747)(1)3,175,347 — %
Commercial and industrial15,563 (2,131)8,517,402 (0.05)%
Consumer and other2,505 (1,752)456,394 (0.77)%
Total loans$13,085 $(3,835)$24,543,867 (0.03)%
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Provision for
credit losses
Net (charge-offs) recoveriesAverage loans
Ratio of net (charge-offs) recoveries to average loans (1)
For the year ended December 31, 2021:
Commercial real estate:
Owner occupied$(3,869)$189 $2,891,798 0.01 %
Non-owner occupied(20,811)183 5,358,828 — %
Consumer real estate - mortgage(2,856)1,656 3,320,083 0.05 %
Construction and land development(12,984)2,845,957 — %
Commercial and industrial52,645 (38,728)8,154,391 (0.47)%
Consumer and other4,781 (2,028)403,624 (0.05)%
Total loans$16,906 $(38,723)$22,974,681 (0.17)%
(1) Net charge-offs for the year-to-date period ended June 30, 2022 have been annualized.

Pinnacle Financial's management assesses the adequacy of the ACL on a quarterly basis. This assessment includes procedures to estimate the ACL and test the adequacy and appropriateness of the resulting balance. The level of the ACL is based upon management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay the loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The ACL is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.
Based upon our evaluation of the loan portfolio, we believe the ACL to be adequate to absorb our estimate of expected future credit losses on loans outstanding at June 30, 2022. While our policies and procedures used to estimate the ACL as well as the resultant provision for credit 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 a particular industry or borrower which may negatively impact, materially, our asset quality and the adequacy of our ACL and, thus, the resulting provision for credit losses.

Investments.  Our investment securities portfolio, consisting primarily of Federal agency bonds, mortgage-backed securities, and state and municipal securities, amounted to $6.6 billion at June 30, 2022 compared to $6.1 billion at December 31, 2021. 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 June 30, 2022 and December 31, 2021 follows:
 June 30, 2022December 31, 2021
Weighted average life11.40 years6.26 years
Effective duration*4.57%4.07%
Tax equivalent yield2.29%2.08%
(*) The metric is presented net of fair value hedges tied to certain investment portfolio holdings. The effective duration of the investment portfolio without the fair value hedges as of June 30, 2022 and December 31, 2021 was 6.26% and 5.21%, respectively.

Restricted Cash. Our restricted cash balances totaled approximately $29.7 million at June 30, 2022, compared to $82.5 million at December 31, 2021. This restricted cash is maintained at other financial institutions as collateral primarily for our derivative portfolio. The decrease in restricted cash is attributable primarily to a decrease in collateral requirements on certain derivative instruments for which the fair value has increased. See Note 8. Derivative Instruments in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q.

Securities Purchased with Agreement to Resell. At June 30, 2022 and December 31, 2021, we had $1.3 billion and $1.0 billion, respectively, in securities purchased with agreement to resell. This balance is the result of repurchase agreement transactions with financial institution counterparties. These investments deployed some of our liquidity position into an instrument that improved the return on those funds in the historically low interest rate environment we recently experienced, and we believe it has positioned us more favorably for the current rising interest rate environment. No securities were purchased with agreement to resell prior to 2021.

Deposits and Other Borrowings. We had approximately $32.6 billion of deposits at June 30, 2022 compared to $31.3 billion at December 31, 2021. Our deposits consist of noninterest and interest-bearing demand accounts, savings accounts, money market accounts and time deposits. Additionally, we routinely enter 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 clients and provide them with short-term returns for their excess funds) amounted to $199.6
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million at June 30, 2022 and $152.6 million at December 31, 2021. Additionally, at June 30, 2022 and December 31, 2021, Pinnacle Bank had borrowed $1.3 billion and $888.7 million, respectively, in advances from the Federal Home Loan Bank of Cincinnati (FHLB). At June 30, 2022, Pinnacle Bank had approximately $3.2 billion in additional availability with the FHLB; however, incremental borrowings are subject to applicable collateral requirements and are made in a formal request by Pinnacle Bank and the subsequent approval by the FHLB.

Generally, we have classified our funding base as either core funding or noncore funding as shown in the table below. The following table represents the balances of our deposits and other funding, the average rate paid for each type and the percentage of each type to the total at June 30, 2022 and December 31, 2021 (in thousands):
June 30,
2022
Average Rate PaidPercentDecember 31, 2021Average Rate PaidPercent
Core funding:    
Noninterest-bearing deposit accounts$11,058,198 0.00%32.0%$10,461,071 0.00%31.9%
Interest-bearing demand accounts4,843,826 0.31%14.0%4,936,735 0.14%15.1%
Savings and money market accounts10,094,308 0.26%29.3%9,792,104 0.18%29.9%
Time deposit accounts less than $250,0001,013,085 0.37%3.0%998,586 0.65%3.0%
Reciprocating demand deposit accounts (1)
1,280,101 0.27%3.7%1,075,774 0.21%3.3%
Reciprocating savings accounts (1)
1,546,076 0.36%4.5%1,885,806 0.26%5.8%
Reciprocating CD accounts (1)
175,850 0.43%0.5%166,836 0.57%0.5%
Total core funding30,011,444 0.18%87.0%29,316,912 0.14%89.5%
Noncore funding:  
Relationship based noncore funding:  
Other time deposits594,420 0.50%1.7%565,184 0.76%1.7%
Securities sold under agreements to repurchase199,585 0.15%0.6%152,559 0.15%0.5%
Total relationship based noncore funding794,005 0.40%2.3%717,743 0.65%2.2%
   Wholesale funding:
  
Brokered deposits1,345,342 1.14%3.9%1,019,259 0.31%3.1%
Brokered time deposits644,097 1.28%1.9%403,178 1.15%1.2%
Federal Home Loan Bank advances1,289,059 1.92%3.7%888,681 2.01%2.7%
Subordinated debt and other funding423,614 4.19%1.2%423,172 4.38%1.3%
Total wholesale funding3,702,112 1.89%10.7%2,734,290 1.60%8.3%
Total noncore funding4,496,117 1.57%13.0%3,452,033 1.42%10.5%
Totals$34,507,561 0.34%100.0%$32,768,945 0.33%100.0%
(1)The reciprocating categories consists of deposits we receive from a bank network (the IntraFi network) in connection with deposits of our customers in excess of our FDIC coverage limit that we place with the IntraFi network.

As noted in the table above, our core funding as a percentage of total funding declined slightly moving from 89.5% at December 31, 2021 to 87.0% at June 30, 2022. Total core funding slowed during the second quarter of 2022 largely as a result of seasonal outflows including those associated with our clients tax obligations. We are optimistic that we will again be able to grow our levels of core funding in the second half of 2022 and believe that the growth in noninterest bearing deposits in the year-to-date period shows strength in our core funding portfolio as these deposits become increasingly valuable in a rising rate environment. When wholesale funding is necessary to complement the company's core deposit base, including during those times when our loan growth outpaces our ability to increase levels of core funding, management determines which source is best suited to address both liquidity risk management and interest rate risk management objectives. Increased reliance on non-core funding sources, which can be more expensive than core funding, could negatively impact our net interest margin. Our Asset Liability Management Policy imposes limitations on overall wholesale funding reliance and on brokered deposit exposure specifically. Both our overall reliance on wholesale funding and exposure to brokered deposits and brokered time deposits were within those policy limitations as of June 30, 2022.


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The amount of time deposits as of June 30, 2022 amounted to $2.4 billion. The following table shows our time deposits in denominations of less than $250,000 and in denominations of $250,000 and greater by category based on time remaining until maturity and the weighted average rate for each category as of June 30, 2022 (in thousands):
 BalancesWeighted Avg. Rate
Denominations less than $250,000 
Three months or less$384,986 0.34 %
Over three but less than six months367,989 0.51 %
Over six but less than twelve months506,630 0.82 %
Over twelve months515,217 1.90 %
 $1,774,822 0.96 %
Denominations $250,000 and greater
Three months or less$222,993 0.43 %
Over three but less than six months154,948 0.67 %
Over six but less than twelve months176,626 0.58 %
Over twelve months98,063 1.41 %
 $652,630 0.68 %
Totals$2,427,452 0.89 %

Subordinated debt and other borrowings.  Pinnacle 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, Pinnacle Bank has pledged certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral. At June 30, 2022, Pinnacle Bank had received advances from the FHLB totaling $1.3 billion. At June 30, 2022, the scheduled maturities of FHLB advances and interest rates are as follows (in thousands):
 Scheduled maturities
Weighted average interest rates (1)
2022$400,000 1.84 %
2023— — %
2024— — %
2025116,250 2.06 %
2026— — %
Thereafter775,013 2.15 %
 1,291,263 
Deferred costs2,204 
Total Federal Home Loan Bank advances1,289,059 
Weighted average interest rate2.04 %
(1)Some FHLB advances include variable interest rates and could increase in the future. The table reflects rates in effect as of June 30, 2022.

We have established, or through acquisition acquired, twelve statutory business trusts which were established to issue 30-year trust preferred securities and certain other subordinated debt agreements. These securities qualify as Tier 2 capital subject to annual phase outs beginning five years from maturity. These instruments are outlined below (in thousands):

NameDate
Established
MaturityTotal Debt OutstandingInterest Rate at June 30, 2022Coupon Structure
Trust preferred securities   
Pinnacle Statutory Trust IDecember 29, 2003December 30, 2033$10,310 4.83 %30-day LIBOR + 2.80%
Pinnacle Statutory Trust IISeptember 15, 2005September 30, 203520,619 3.65 %30-day LIBOR + 1.40%
Pinnacle Statutory Trust IIISeptember 7, 2006September 30, 203620,619 3.90 %30-day LIBOR + 1.65%
Pinnacle Statutory Trust IVOctober 31, 2007September 30, 203730,928 4.68 %30-day LIBOR + 2.85%
BNC Capital Trust IApril 3, 2003April 15, 20335,155 4.29 %30-day LIBOR + 3.25%
BNC Capital Trust IIMarch 11, 2004April 7, 20346,186 3.89 %30-day LIBOR + 2.85%
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NameDate
Established
MaturityTotal Debt OutstandingInterest Rate at June 30, 2022Coupon Structure
BNC Capital Trust IIISeptember 23, 2004September 23, 20345,155 3.44 %30-day LIBOR + 2.40%
BNC Capital Trust IVSeptember 27, 2006December 31, 20367,217 3.95 %30-day LIBOR + 1.70%
Valley Financial Trust IJune 26, 2003June 26, 20334,124 5.30 %30-day LIBOR + 3.10%
Valley Financial Trust IISeptember 26, 2005December 15, 20357,217 3.32 %30-day LIBOR + 1.49%
Valley Financial Trust IIIDecember 15, 2006January 30, 20375,155 3.02 %30-day LIBOR + 1.73%
Southcoast Capital Trust IIIAugust 5, 2005September 30, 203510,310 3.75 %30-day LIBOR + 1.50%
Subordinated Debt   
Pinnacle Financial Subordinated NotesSeptember 11, 2019September 15, 2029300,000 4.13 %
Fixed (1)
Debt issuance costs and fair value adjustments(9,381) 
Total subordinated debt and other borrowings$423,614  

(1) Migrates to three month LIBOR + 2.775% (or an alternative benchmark rate plus a comparable spread in the event three month LIBOR is no longer published on such adjustment date) beginning September 15, 2024 through the end of the term.
 
On July 30, 2021, Pinnacle Bank redeemed $130.0 million aggregate principal amount of subordinated notes due July 30, 2025. Additionally, Pinnacle Financial redeemed $120.0 million aggregate principal amount of subordinated notes due November 16, 2026 on November 16, 2021. The redemptions were funded with existing cash on hand. Pursuant to regulatory guidelines, once the maturity date on subordinated notes is within five years, a portion of the notes will no longer be eligible to be included in regulatory capital, with an additional portion being excluded each year over the five year period approaching maturity.

Capital Resources. At both June 30, 2022 and December 31, 2021, our shareholders' equity amounted to $5.3 billion. During the six months ended June 30, 2022, shareholders' equity was negatively impacted by accumulated other comprehensive losses on our available-for-sale securities portfolio that were caused by the rising short-term interest rate environment. At June 30, 2022 and December 31, 2021, our capital ratios, including our bank's capital ratios, exceeded regulatory minimum capital requirements and those necessary to be considered well-capitalized under applicable federal regulations. See Note 10. Regulatory Matters in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q for additional information regarding our capital ratios. From time to time we may be required to support the capital needs of our bank (Pinnacle Bank). At June 30, 2022, we had approximately $163.5 million of cash at the parent company that could be used to support our bank.

Share Repurchase Program. On January 19, 2021, our board of directors authorized a share repurchase program for up to $125.0 million of our outstanding common stock. The authorization for this program remained in effect through March 31, 2022. On January 18, 2022, our board of directors authorized a share repurchase program for up to $125.0 million of our common stock which commenced upon the expiration of the share repurchase program that expired on March 31, 2022. The new authorization is to remain in effect through March 31, 2023. We did not repurchase any shares under either share repurchase program during the six months ended June 30, 2022 or 2021, respectively.

Dividends. Pursuant to Tennessee banking law, our bank may not, without the prior consent of the Commissioner 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, which was $806.0 million at June 30, 2022. During the six months ended June 30, 2022, the bank paid dividends of $49.6 million to us which is within the limits allowed by the TDFI.

During the three and six months ended June 30, 2022, we paid $17.1 million and $34.0 million, respectively, in dividends to our common shareholders and $3.8 million and $7.6 million, respectively, in dividends on our Series B Preferred Stock. On July 19, 2022, our board of directors declared a $0.22 per share quarterly cash dividend to common shareholders which should approximate $17.1 million in aggregate dividend payments that are expected to be paid on August 26, 2022 to common shareholders of record as of the close of business on August 5, 2022. Additionally, on that same day, our board of directors approved a quarterly dividend of approximately $3.8 million, or $16.88 per share (or $0.422 per depositary share), on the Series B Preferred Stock payable on September 1, 2022 to shareholders of record at the close of business on August 17, 2022. 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, if necessary, our receipt of dividends from Pinnacle Bank, regulatory capital requirements, as they become known to us and receipt of any regulatory approvals that may become required as a result of our and our bank subsidiary's financial results.

Market and Liquidity Risk Management

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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. Our ALCO policy requires that 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 is on a twelve month time frame for the earnings simulations model, longer time horizons are also modeled. All policy scenarios assume a static volume forecast where the balance sheet is held constant, although other scenarios are modeled.

There were several noteworthy factors when comparing the results of both the earnings simulation and the economic value of equity modeling results as of June 30, 2022 to the modeling results as of June 30, 2021:
The Federal Reserve increased the Federal Funds target rate by 150 basis points since December 31, 2021, which brought a significant portion of our floating-rate loans above contractual interest-rate floors.
The fixed-rate PPP loan portfolio declined $1.3 billion with most proceeds transitioning to floating-rate assets.
Short term floating-rate assets comprised of interest-bearing cash and repurchase agreements decreased $410 million.

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 over that same 12-month period. 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 instantaneous upward and downward changes in rates from management's flat interest rate forecast over the next twelve months, assuming a static balance sheet, the following estimated changes are calculated:
Estimated % Change in Net Interest Income Over 12 Months
June 30, 2022*June 30, 2021*
Instantaneous Rate Change
300 bps increase
7.83 %7.48 %
200 bps increase
5.57 %4.93 %
100 bps increase
2.86 %1.87 %
100 bps decrease
(7.67)%(1.83)%
*: Negative interest rates are not contemplated in these scenarios. The Treasury curve and all short-term rate indices, such as Fed Funds, LIBOR, etc., are assumed to be zero bound.

While an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, we believe that a gradual shift in interest rates would have a more modest impact. Further, the earnings simulation model does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, hedging activities we might take and changing product spreads that could mitigate any potential adverse impact of changes in interest rates.

The behavior of our deposit portfolio in the baseline forecast and in alternate interest rate scenarios set out in the table above is a key assumption in our projected estimates of net interest income. The projected impact on net interest income in the table above assumes no change in deposit portfolio size or mix from the baseline forecast in alternative rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher-yielding deposits or market-based funding would reduce the assumed benefit of those deposits. The projected impact on net interest income in the table above also assumes a "through-the-cycle" non-maturity deposit beta which may not be an accurate predictor of actual deposit rate changes realized in scenarios of smaller and/or non-parallel interest rate movements.
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At June 30, 2022, our earnings simulation model indicated we were in compliance with our policies for all interest rate scenarios for which we model as required by our board approved Asset Liability Policy.

Economic value of equity model. While earnings simulation modeling attempts to determine the impact of a changing rate environment to our net interest income, our EVE model measures estimated changes to the economic values of our assets, liabilities and off-balance sheet items 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. We then shock rates as prescribed by our Asset Liability Policy and measure the sensitivity in EVE values for each of those shocked rate scenarios versus the base case. The Asset Liability Policy sets limits for those sensitivities. At June 30, 2022, our EVE modeling calculated the following estimated changes in EVE due to instantaneous upward and downward changes in rates:
June 30, 2022*
June 30, 2021*
Instantaneous Rate Change
300 bps increase
(17.17)%(9.26)%
200 bps increase
(11.04)%(5.67)%
100 bps increase
(5.71)%(1.33)%
100 bps decrease
4.33 %(7.71)%
*: Negative interest rates are not contemplated in these scenarios. The Treasury curve and all short-term rate indices, such as Fed Funds, LIBOR, etc., are assumed to be zero bound.Funds, LIBOR, etc., are assumed to be zed.

While an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, we believe that a gradual shift in interest rates would have a more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, hedging activities we might take and changing product spreads that could mitigate the adverse impact of changes in interest rates.

At June 30, 2022, our EVE model indicated we were in compliance with our policies for all interest rate scenarios for which we model as required by our board approved Asset Liability Policy.

Most likely earnings simulation models. We also analyze 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. Each scenario is evaluated by management. These processes assist management to better anticipate our financial results and, as a result, management may determine the need to invest in other operating strategies and tactics which might enhance results or better position the firm's balance sheet to reduce interest rate risk going forward.

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.

Management's model governance, model implementation and model validation processes and controls are subject to review in our regulatory examinations to ensure they are in compliance with the most recent regulatory guidelines and industry and regulatory practices. Management utilizes a respected, sophisticated third party asset liability modeling software to help ensure implementation of management's assumptions into the model are processed as intended in a robust manner. That said, there are numerous assumptions regarding financial instrument behavior that are integrated into the model. The assumptions are formulated by combining observations
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gleaned from our historical studies of financial instruments and our best estimations of how these instruments may behave in the future given changes in economic conditions, technology, etc. These assumptions may prove to be inaccurate. Additionally, given the large number of assumptions built into our asset liability modeling software, it is difficult, at best, to compare our results to other firms.

ALCO may determine that Pinnacle Financial should over time become more or less asset or liability sensitive depending on the underlying balance sheet circumstances and our conclusions as to anticipated interest rate fluctuations in future periods. At present, ALCO has determined that its "most likely" rate scenario assumes an additional 100 basis point increase in the Federal Funds Rate during 2022. Our "most likely" rate forecast is based primarily on information we acquire from a service which includes a consensus forecast of numerous interest rate benchmarks. We may implement additional actions designed to achieve our desired sensitivity position which could change from time to time.

We have in the past used, and may in the future continue to use, derivative financial instruments as one tool to manage our interest rate sensitivity, including in our mortgage lending program, while continuing to meet the credit and deposit needs of our customers. For further details on the derivatives we currently use, see Note 8. Derivative Instruments in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q.

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.

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 June 30, 2022, 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.

As noted previously, Pinnacle Bank is a member of the FHLB Cincinnati and, pursuant to a borrowing agreement with the FHLB Cincinnati, has pledged certain assets pursuant to a blanket lien. As such, Pinnacle Bank may use the FHLB Cincinnati as a source of liquidity depending on the firm's ALCO strategies. Additionally, we may pledge additional qualifying assets or reduce the amount of pledged assets with the FHLB Cincinnati to increase or decrease our borrowing capacity at the FHLB Cincinnati. At June 30, 2022, we believe we had an estimated $3.2 billion in additional borrowing capacity with the FHLB Cincinnati; however, incremental borrowings are made via a formal request by Pinnacle Bank and the subsequent approval by the FHLB Cincinnati.

Pinnacle Bank also has accommodations with upstream correspondent banks 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 less than one month. There were no outstanding borrowings under these agreements at June 30, 2022, or during the three months then ended, although we test the availability of these accommodations periodically. Pinnacle Bank also had approximately $4.7 billion in available Federal Reserve discount window lines of credit at June 30, 2022.

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At June 30, 2022, excluding reciprocating time and money market deposits issued through the IntraFiNetwork, we had approximately $2.0 billion in brokered deposits. Historically, we have issued brokered certificates through several different brokerage houses based on competitive bid. During 2020, and in response to the uncertainty resulting from the COVID-19 pandemic, we intentionally increased our levels of on-balance sheet liquidity. Core deposit growth during 2021 increased such that we were able to prepay certain wholesale maturities while maintaining an elevated level of on-balance sheet liquidity. We intend to continue to prepay and/or let mature wholesale funding as core deposit levels allow.

Banking regulators have defined additional liquidity guidelines, through the issuance of the Basel III Liquidity Coverage Ratio (LCR) and the Modified LCR. These regulatory guidelines became effective January 2015 with phase in over subsequent years and 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 Pinnacle Financial follows the principles outlined in the Interagency Policy Statement on Liquidity Risk Management, issued March 2010, to determine its HQLA buffer, Pinnacle Financial is not currently subject to these regulations. However, these formulas could eventually be imposed on smaller banks, such as Pinnacle Bank, and require an increase in the absolute level of liquidity on our balance sheet, which could result in lower net interest margins for us in future periods.

At June 30, 2022, we had no individually significant commitments for capital expenditures. But, we believe the number of our locations, including non-branch locations, will increase over an extended period of time across our footprint, including the markets to which we have recently expanded, and that certain of our locations will be in need of required renovations. In future periods, these expansions and renovation projects may lead to additional equipment and occupancy expenses as well as related increases in salaries and benefits expense. Additionally, we expect we will continue to incur costs associated with technology improvements to enhance the infrastructure of our firm.

Our short-term borrowings (borrowings which mature within the next fiscal year) consist primarily of securities sold under agreements to repurchase (these agreements are typically associated with comprehensive treasury management programs for our clients and provide them with short-term returns on their excess funds) and FHLB Cincinnati advances.

We have certain contractual obligations as of June 30, 2022, which by their terms have a contractual maturity and termination dates subsequent to June 30, 2022. Each of these commitments is noted throughout Item 2. Management's Discussion and Analysis. 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 and that we will have adequate liquidity to meet our obligations over a longer-term as well.

Off-Balance Sheet Arrangements.  At June 30, 2022, we had outstanding standby letters of credit of $330.0 million and unfunded loan commitments outstanding of $14.4 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 securities available-for-sale, or on a short-term basis to borrow and purchase federal funds from other financial institutions.

We follow the same credit policies and underwriting practices when making these commitments as we do 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. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments. At June 30, 2022, we had accrued reserves of $24.0 million related to expected credit losses associated with off-balance sheet commitments.

Recently Adopted Accounting Pronouncements

See "Part I - Item 1. Consolidated Financial Statements - Note. 1 Summary of Significant Accounting Policies" of this Report for further information.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item 3 is included on pages 38 through 59 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 as of the end of the period covered by this report in ensuring that the information required to be disclosed by Pinnacle Financial in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to Pinnacle Financial's management (including the Principal Executive Officer and Principal Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Changes in Internal Controls

No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) or 15d-(f)) occurred during the fiscal quarter ended June 30, 2022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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. 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 II, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. 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
The following table discloses shares of our common stock repurchased during the three months ended June 30, 2022.
Period
Total Number of Shares Repurchased (1)(2)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
April 1, 2022 to April 30, 20225,166 $85.67 — 125,000,000 
May 1, 2022 to May 31, 2022147 78.08 — 125,000,000 
June 1, 2022 to June 30, 20222,410 73.15 — 125,000,000 
Total7,723 $82.13 — 125,000,000 
______________________
(1)During the quarter ended June 30, 2022, 26,037 shares of restricted stock or time-based vesting restricted stock units previously awarded to certain of the participants in our equity incentive plans vested. We withheld 7,723 shares of common stock to satisfy tax withholding requirements associated with the vesting of these awards.

(2)On January 18, 2022, our board of directors authorized a share repurchase program for up to $125.0 million of our common stock which commenced upon the expiration of the share repurchase program that expired on March 31, 2022. The new authorization is to remain in effect through March 31, 2023. Share repurchases may be made from time to time, on the open market or in privately negotiated transactions, at the discretion of the management of Pinnacle Financial, after the board of directors of Pinnacle Financial authorizes a repurchase program. The approved share repurchase program does not obligate Pinnacle Financial to repurchase any dollar amount or number of shares, and the program may be extended, modified, suspended, or discontinued at any time. Stock repurchases generally are affected through open market purchases, and may be made through unsolicited negotiated transactions. The timing of these repurchases will depend on market conditions and other requirements. Pinnacle Financial did not repurchase any shares under its share repurchase program during the three months ended June 30, 2022.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable

ITEM 5. OTHER INFORMATION

None


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ITEM 6.  EXHIBITS
 
 
 
 
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Schema Documents
101.CAL* Inline XBRL Calculation Linkbase Document
101.LAB* Inline XBRL Label Linkbase Document
101.PRE* Inline XBRL Presentation Linkbase Document
101.DEF* Inline XBRL Definition Linkbase Document
104The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL (included in Exhibit 101)
*Filed herewith.
**Furnished herewith.

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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.
   
August 5, 2022 /s/ M. Terry Turner
  M. Terry Turner
  President and Chief Executive Officer
August 5, 2022 /s/ Harold R. Carpenter
  Harold R. Carpenter
  Chief Financial Officer

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