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, ~~2019~~2020



☐			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.

, Inc.

(Exact name of registrant as specified in its charter)

Tennessee

62-1812853

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

150 Third Avenue South, Suite 900

Nashville,

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 Class	Trading Symbol	Name of Exchange on which Registered
Common Stock, par value $1.00	PNFP	The Nasdaq ~~Global Select~~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)	PNFPP	The Nasdaq Stock Market LLC

As of July ~~30, 2019~~31, 2020 there were ~~76,949,554~~75,844,238 shares of common stock, $1.00 par value per share, issued and outstanding.

Table of Contents

Pinnacle Financial Partners, Inc.

Report on Form 10-Q

June 30, ~~2019~~2020

Table of Contents

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," "aims," "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) further deterioration in the financial condition of borrowers of Pinnacle Bank and its subsidiaries or Bankers Healthcare Group, LLC (BHG) resulting in significant increases in loan losses and provisions for those ~~losses;~~losses and, in the case of BHG, substitutions; (ii) the further effects of the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its 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; (iii) the ability to grow and retain low-cost core deposits and retain large, uninsured deposits, including during times when Pinnacle Bank is seeking to lower rates it pays on deposits; ~~(iii)~~(iv) the inability of Pinnacle Financial, or entities in which it has significant investments, like ~~Bankers Healthcare Group, LLC (BHG),~~BHG, to maintain the historical growth rate of its, or such entities', loan portfolio; ~~(iv)~~(v) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; ~~(v)~~(vi) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; ~~(vi)~~(vii) 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; ~~(vii) greater than anticipated~~(viii) adverse conditions in the national or local economies including in Pinnacle Financial's markets throughout Tennessee, North Carolina, South Carolina, Georgia and Virginia, particularly in commercial and residential real estate markets; ~~(viii)~~(ix) 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; ~~(ix)~~(x) the results of regulatory examinations; ~~(x) a merger~~(xi) Pinnacle Financial's ability to identify potential candidates for, consummate, and achieve synergies from, potential future acquisitions; (xii) difficulties and delays in integrating acquired businesses or ~~acquisition; (xi)~~fully realizing costs savings and other benefits from acquisitions; (xiii) BHG's ability to profitably grow its business and successfully execute on its business plans; (xiv) risks of expansion into new geographic or product ~~markets; (xii)~~markets including the recent expansion into the Atlanta, Georgia metro market; (xv) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including goodwill or other intangible assets; ~~(xiii)~~(xvi) 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; ~~(xiv) the ability of Pinnacle Financial to implement its branch consolidation strategy on the timeliness, and at the costs, presently contemplated; (xv)~~(xvii) deterioration in the valuation of other real estate owned and increased expenses associated therewith; ~~(xvi)~~(xviii) 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 ~~Financial's~~Bank's level of applicable commercial real estate loans were to exceed percentage levels of total capital in guidelines recommended by its regulators; ~~(xvii)~~(xix) approval of the declaration of any dividend by Pinnacle Financial's board of directors; ~~(xviii)~~(xx) the vulnerability of Pinnacle Bank's network and online banking portals, and the systems of parties with whom Pinnacle ~~Financial~~Bank contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; ~~(xix)~~(xxi) 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; ~~(xx)~~(xxii) 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 if not prohibited from doing so by Pinnacle Financial or Pinnacle Bank; ~~(xxi)~~(xxiii) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxii) risks associated with the possible shutdown of the United States federal government, including the adverse effects on the national or local economies and adverse effects resulting from a shutdown of the U.S. Small Business Administration’s SBA loan program; (xxiii)(xxiv) the availability of and access to capital; ~~(xxiv)~~(xxv) 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;~~actions, including as a result of Pinnacle Bank's participation in and ~~(xxv)~~execution of government programs related to the COVID-19 pandemic; and (xxvi) 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, 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 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.

Table of Contents



Item 1.			Part I. Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

~~(in thousands)~~


	June 30, 2019			December 31, 2018
(dollars in thousands, except per share data)							(dollars in thousands, except per share data)	June 30, 2020		December 31, 2019
ASSETS							ASSETS
Cash and noninterest-bearing due from banks	$	153,071		$	137,433		Cash and noninterest-bearing due from banks	$	213,551	$	157,901
Restricted cash	121,440			65,491			Restricted cash	254,593		137,045
Interest-bearing due from banks	332,862			516,920			Interest-bearing due from banks	2,221,519		210,784
Federal funds sold and other	20,214			1,848			Federal funds sold and other	3,798		20,977
Cash and cash equivalents	627,587			721,692			Cash and cash equivalents	2,693,461		526,707

Securities available-for-sale, at fair value	3,256,906			3,083,686			Securities available-for-sale, at fair value	3,310,278		3,539,995
Securities held-to-maturity (fair value of $200.6 million and $193.1 million at June 30, 2019 and Dec. 31, 2018, respectively)	190,928			194,282
Securities held-to-maturity (fair value of $1.1 billion, net of allowance for credit losses of $188 at June 30, 2020 and fair value of $201.2 million at Dec. 31, 2019, respectively)							Securities held-to-maturity (fair value of $1.1 billion, net of allowance for credit losses of $188 at June 30, 2020 and fair value of $201.2 million at Dec. 31, 2019, respectively)	1,048,035		188,996
Consumer loans held-for-sale	70,004			34,196			Consumer loans held-for-sale	69,443		81,820
Commercial loans held-for-sale	21,295			15,954			Commercial loans held-for-sale	16,201		17,585

Loans	18,814,318			17,707,549			Loans	22,520,300		19,787,876
Less allowance for loan losses	(90,253		)	(83,575		)
Less allowance for credit losses							Less allowance for credit losses	(285,372)		(94,777)
Loans, net	18,724,065			17,623,974			Loans, net	22,234,928		19,693,099

Premises and equipment, net	274,729			265,560			Premises and equipment, net	281,739		273,932
Equity method investment	243,875			239,237			Equity method investment	302,879		278,037
Accrued interest receivable	84,582			79,657			Accrued interest receivable	112,675		84,462
Goodwill	1,807,121			1,807,121			Goodwill	1,819,811		1,819,811
Core deposits and other intangible assets	41,578			46,161			Core deposits and other intangible assets	47,131		51,130
Other real estate owned	26,657			15,165			Other real estate owned	22,080		29,487
Other assets	1,171,028			904,359			Other assets	1,383,451		1,220,435
Total assets	$	26,540,355		$	25,031,044		Total assets	$	33,342,112	$	27,805,496

LIABILITIES AND STOCKHOLDERS' EQUITY							LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:							Deposits:
Noninterest-bearing	$	4,493,419		$	4,309,067		Noninterest-bearing	$	6,892,864	$	4,795,476
Interest-bearing	3,129,941			3,464,001			Interest-bearing	4,815,012		3,630,168
Savings and money market accounts	7,547,166			7,607,796			Savings and money market accounts	9,338,719		7,813,939
Time	4,278,857			3,468,243			Time	4,475,234		3,941,445
Total deposits	19,449,383			18,849,107			Total deposits	25,521,829		20,181,028
Securities sold under agreements to repurchase	154,169			104,741			Securities sold under agreements to repurchase	194,553		126,354
Federal Home Loan Bank advances	1,960,062			1,443,589			Federal Home Loan Bank advances	1,787,551		2,062,534
Subordinated debt and other borrowings	464,144			485,130			Subordinated debt and other borrowings	717,043		749,080
Accrued interest payable	30,376			23,586			Accrued interest payable	34,916		42,183
Other liabilities	305,860			158,951			Other liabilities	390,573		288,569
Total liabilities	22,363,994			21,065,104			Total liabilities	28,646,465		23,449,748
Stockholders' equity:							Stockholders' equity:
Preferred stock, no par value; 10.0 million shares authorized; no shares issued and outstanding	—			—
Common stock, par value $1.00; 180.0 million shares authorized at June 30, 2019 and Dec. 31, 2018; 76.9 million and 77.5 million shares issued and outstanding at June 30, 2019 and Dec. 31, 2018, respectively	76,929			77,484
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, 2020 and no shares issued and outstanding at Dec. 31, 2019, respectively.							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, 2020 and no shares issued and outstanding at Dec. 31, 2019, respectively.	217,632		—
Common stock, par value $1.00; 180.0 million shares authorized; 75.8 million and 76.6 million shares issued and outstanding at June 30, 2020 and Dec. 31, 2019, respectively							Common stock, par value $1.00; 180.0 million shares authorized; 75.8 million and 76.6 million shares issued and outstanding at June 30, 2020 and Dec. 31, 2019, respectively	75,836		76,564
Additional paid-in capital	3,076,486			3,107,431			Additional paid-in capital	3,019,286		3,064,467
Retained earnings	1,002,434			833,130			Retained earnings	1,218,367		1,184,183
Accumulated other comprehensive income (loss), net of taxes	20,512			(52,105		)
Accumulated other comprehensive income, net of taxes							Accumulated other comprehensive income, net of taxes	164,526		30,534
Total stockholders' equity	4,176,361			3,965,940			Total stockholders' equity	4,695,647		4,355,748
Total liabilities and stockholders' equity	$	26,540,355		$	25,031,044		Total liabilities and stockholders' equity	$	33,342,112	$	27,805,496

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

~~(dollars in thousands, except per share data)~~


(dollars in thousands, except per share data)	Three months ended June 30,						Six months ended June 30,
	2020		2019		2020		2019
Interest income:
Loans, including fees	$	226,281	$	237,653	$	462,701	$	467,032
Securities:
Taxable	9,589		12,243		19,857		25,783
Tax-exempt	14,596		12,556		28,420		24,228
Federal funds sold and other	1,272		3,399		3,829		6,691
Total interest income	251,738		265,851		514,807		523,734

Interest expense:
Deposits	33,727		58,988		84,425		113,205
Securities sold under agreements to repurchase	94		142		209		287
Federal Home Loan Bank advances and other borrowings	17,260		17,803		35,964		34,078
Total interest expense	51,081		76,933		120,598		147,570
Net interest income	200,657		188,918		394,209		376,164
Provision for credit losses	68,332		7,195		168,221		14,379
Net interest income after provision for credit losses	132,325		181,723		225,988		361,785

Noninterest income:
Service charges on deposit accounts	6,910		8,940		15,942		17,482
Investment services	5,971		5,868		15,210		11,336
Insurance sales commissions	2,231		2,147		5,471		5,075
Gain on mortgage loans sold, net	19,619		6,011		28,202		10,889
Investment gains (losses) on sales, net	(128)		(4,466)		335		(6,426)
Trust fees	3,958		3,461		8,128		6,756
Income from equity method investment	17,208		32,261		32,800		45,551
Other noninterest income	17,185		16,460		37,243		31,082
Total noninterest income	72,954		70,682		143,331		121,745

Noninterest expense:
Salaries and employee benefits	73,887		75,620		154,367		145,996
Equipment and occupancy	22,026		23,844		43,004		43,175
Other real estate expense, net	2,888		2,523		5,303		2,769
Marketing and other business development	2,142		3,282		5,393		6,230
Postage and supplies	2,070		2,079		4,060		3,971
Amortization of intangibles	2,479		2,271		4,999		4,582

Other noninterest expense	26,113		18,067		51,828		35,014
Total noninterest expense	131,605		127,686		268,954		241,737
Income before income taxes	73,674		124,719		100,365		241,793
Income tax expense	11,230		24,398		9,565		47,512
Net income	$	62,444	$	100,321	$	90,800	$	194,281
Per share information:
Basic net income per common share	$	0.83	$	1.31	$	1.20	$	2.54
Diluted net income per common share	$	0.83	$	1.31	$	1.20	$	2.53
Weighted average common shares outstanding:
Basic	75,210,869		76,343,608		75,507,136		76,572,120
Diluted	75,323,259		76,611,657		75,645,768		76,866,163

Three months ended
June 30, Six months ended
June 30,
2019 2018 2019 2018
Interest income:
Loans, including fees $ 237,653
$ 208,758
$ 467,032
$ 399,972
Securities:

Taxable 12,243
11,748
25,783
22,970
Tax-exempt 12,556
8,350
24,228
15,635
Federal funds sold and other 3,399
2,128
6,691
3,935
Total interest income 265,851
230,984
523,734
442,512

Interest expense:

Deposits 58,988
32,767
113,205
56,748
Securities sold under agreements to repurchase 142
143
287
273
Federal Home Loan Bank advances and other borrowings 17,803
15,838
34,078
28,784
Total interest expense 76,933
48,748
147,570
85,805
Net interest income 188,918
182,236
376,164
356,707
Provision for loan losses 7,195
9,402
14,379
16,333
Net interest income after provision for loan losses 181,723
172,834
361,785
340,374

Noninterest income:

Service charges on deposit accounts 8,940
8,456
17,482
16,361
Investment services 5,803
5,074
11,207
10,319
Insurance sales commissions 2,147
2,048
5,075
5,167
Gain on mortgage loans sold, net 6,011
3,777
10,889
7,521
Investment gains and losses on sales, net (4,466 ) —
(6,426 ) 30
Trust fees 3,461
3,564
6,756
6,681
Income from equity method investment 32,261
9,690
45,551
19,050
Other noninterest income 16,525
15,330
31,211
26,993
Total noninterest income 70,682
47,939
121,745
92,122

Noninterest expense:

Salaries and employee benefits 75,620
64,112
145,996
127,831
Equipment and occupancy 23,844
18,208
43,175
35,951
Other real estate expense, net 2,523
819
2,769
25
Marketing and other business development 3,282
2,544
6,230
4,791
Postage and supplies 2,079
2,291
3,971
4,330
Amortization of intangibles 2,271
2,659
4,582
5,357
Merger-related expense —
2,906
—
8,259
Other noninterest expense 18,067
17,369
35,014
32,944
Total noninterest expense 127,686
110,908
241,737
219,488
Income before income taxes 124,719
109,865
241,793
213,008
Income tax expense 24,398
23,000
47,512
42,633
Net income $ 100,321
$ 86,865
$ 194,281
$ 170,375
Per share information:

Basic net income per common share $ 1.31
$ 1.13
$ 2.54
$ 2.21
Diluted net income per common share $ 1.31
$ 1.12
$ 2.53
$ 2.20
Weighted average shares outstanding:

Basic 76,343,608
77,123,854
76,572,120
77,101,816
Diluted 76,611,657
77,468,082
76,866,163
77,417,930

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

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,
	2020		2019		2020		2019
Net income	$	62,444	$	100,321	$	90,800	$	194,281
Other comprehensive income, net of tax:
Change in fair value on available-for-sale securities, net of tax	36,007		25,514		68,879		61,894
Change in fair value of cash flow hedges, net of tax	4,555		6,613		65,639		6,090
Amortization (accretion) of net unrealized losses (gains) on securities transferred from available-for-sale to held-to-maturity, net of tax	(1,514)		41		(1,981)		70
Net loss (gain) on cash flow hedges reclassified from other comprehensive income into net income, net of tax	(123)		73		1,702		(183)
Net loss (gain) on sale of investment securities reclassified from other comprehensive income into net income, net of tax	95		3,299		(247)		4,746
Total other comprehensive income, net of tax	39,020		35,540		133,992		72,617
Total comprehensive income	$	101,464	$	135,861	$	224,792	$	266,898

Three months ended
June 30, Six months ended
June 30,
2019 2018 2019 2018
Net income $ 100,321
$ 86,865
$ 194,281
$ 170,375
Other comprehensive income (loss), net of tax:

Change in fair value on available-for-sale securities, net of tax 25,514
(2,785 ) 61,894
(36,268 )
Change in fair value of cash flow hedges, net of tax 6,613
950
6,090
2,670
Amortization of net unrealized losses (gains) on securities transferred from available-for-sale to held-to-maturity, net of tax 41
(35 ) 70
(93 )
Gain (loss) on cash flow hedges reclassified from other comprehensive income into net income, net of tax 73
(143 ) (183 ) (284 )
Net loss (gain) on sale of investment securities reclassified from other comprehensive income into net income, net of tax 3,299
—
4,746
(22 )
Total other comprehensive income (loss), net of tax 35,540
(2,013 ) 72,617
(33,997 )
Total comprehensive income $ 135,861
$ 84,852
$ 266,898
$ 136,378

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(dollars and shares in thousands)


			Common Stock
	Preferred Stock Amount		Shares	Amounts		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comp. Income (Loss), net		Total Stockholder's Equity
Balance at December 31, 2018	$	—	77,484	$	77,484	$	3,107,431	$	833,130	$	(52,105)	$	3,965,940
Exercise of employee common stock options & related tax benefits	—		5	5		125		—		—		130
Common stock dividends paid ($0.16 per share)	—		—	—		—		(12,545)		—		(12,545)
Repurchase of common stock	—		(543)	(543)		(29,506)		—		—		(30,049)
Issuance of restricted common shares, net of forfeitures	—		180	180		(180)		—		—		—
Restricted shares withheld for taxes & related tax benefit	—		(62)	(62)		(3,425)		—		—		(3,487)
Compensation expense for restricted shares & performance stock units	—		—	—		4,913		—		—		4,913
Net income	—		—	—		—		93,960		—		93,960
Other comprehensive income	—		—	—		—		—		37,077		37,077
Balance at March 31, 2019	$	—	77,064	$	77,064	$	3,079,358	$	914,545	$	(15,028)	$	4,055,939
Exercise of employee common stock options & related tax benefits	$	—	1	$	1	$	8	—		$	—	$	9
Common stock dividends paid ($0.16 per share)	—		—	—		—		(12,432)		—		(12,432)
Repurchase of common stock	—		(132)	(132)		(7,243)		—		—		(7,375)
Issuance of restricted common shares, net of forfeitures	—		10	10		(10)		—		—		—
Restricted shares withheld for taxes & related tax benefit	—		(14)	(14)		(787)		—		—		(801)
Compensation expense for restricted shares & performance stock units	—		—	—		5,160		—		—		5,160
Net income	—		—	—		—		100,321		—		100,321
Other comprehensive income	—		—	—		—		—		35,540		35,540
Balance at June 30, 2019	$	—	76,929	$	76,929	$	3,076,486	$	1,002,434	$	20,512	$	4,176,361

Table of Contents

Common Stock
Shares Amounts Additional Paid-in Capital Retained Earnings Accumulated Other Comp. Income (Loss), net Total Stockholder's Equity
Balance at December 31, 2017 77,740
$ 77,740
$ 3,115,304
$ 519,144
$ (4,236 ) $ 3,707,952
Exercise of employee common stock options and related tax benefits 87
87
1,529
—
—
1,616
Common dividends paid ($0.14 per share) —
—
—
(10,974 ) —
(10,974 )
Issuance of restricted common shares, net of forfeitures 106
106
(106 ) —
—
—
Restricted shares withheld for taxes and related tax benefit (80 ) (80 ) (5,185 ) —
—
(5,265 )
Compensation expense for restricted shares —
—
4,448
—
—
4,448
Net income —
—
—
83,510
—
83,510
Other comprehensive loss —
—
—
—
(31,984 ) (31,984 )
Balance at March 31, 2018 77,853
$ 77,853
$ 3,115,990
$ 591,680
$ (36,220 ) $ 3,749,303
Exercise of employee common stock options and related tax benefits 3
$ 3
$ 79
$ —
$ —
$ 82
Common dividends paid ($0.14 per share) —
—
—
(10,951 ) —
(10,951 )
Issuance of restricted common shares, net of forfeitures 13
13
(13 ) —
—
—
Restricted shares withheld for taxes and related tax benefit (14 ) (14 ) (898 ) —
—
(912 )
Compensation expense for restricted shares —
—
4,303
—
—
4,303
Net income —
—
—
86,865
—
86,865
Other comprehensive loss —
—
—
—
(2,013 ) (2,013 )
Balance at June 30, 2018 77,855
$ 77,855
$ 3,119,461
$ 667,594
$ (38,233 ) $ 3,826,677

Balance at December 31, 2018 77,484
$ 77,484
$ 3,107,431
$ 833,130
$ (52,105 ) $ 3,965,940
Exercise of employee common stock options and related tax benefits 5
5
125
—
—
130
Common dividends paid ($0.16 per share) —
—
—
(12,545 ) —
(12,545 )
Repurchase of common stock (543 ) (543 ) (29,506 ) —
—
(30,049 )
Issuance of restricted common shares, net of forfeitures 180
180
(180 ) —
—
—
Restricted shares withheld for taxes and related tax benefit (62 ) (62 ) (3,425 ) —
—
(3,487 )
Compensation expense for restricted shares —
—
4,913
—
—
4,913
Net income —
—
—
93,960
—
93,960
Other comprehensive income —
—
—
—
37,077
37,077
Balance at March 31, 2019 77,064
$ 77,064
$ 3,079,358
$ 914,545
$ (15,028 ) $ 4,055,939
Exercise of employee common stock options and related tax benefits 1
1
8
—
—
9
Common dividends paid ($0.16 per share) —
—
—
(12,432 ) —
(12,432 )
Repurchase of common stock (132 ) (132 ) (7,243 ) —
—
(7,375 )
Issuance of restricted common shares, net of forfeitures 10
10
(10 ) —
—
—
Restricted shares withheld for taxes and related tax benefit (14 ) (14 ) (787 ) —
—
(801 )
Compensation expense for restricted shares —
—
5,160
—
—
5,160
Net income —
—
—
100,321
—
100,321
Other comprehensive income —
—
—
—
35,540
35,540
Balance at June 30, 2019 76,929
$ 76,929
$ 3,076,486
$ 1,002,434
$ 20,512
$ 4,176,361


			Common Stock
	Preferred Stock Amount		Shares	Amounts		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comp. Income (Loss), net		Total Stockholder's Equity
Balance at December 31, 2019	$	—	76,564	$	76,564	$	3,064,467	$	1,184,183	$	30,534	$	4,355,748
Exercise of employee common stock options & related tax benefits	—		1	1		4		—		—		5
Common dividends paid ($0.16 per share)	—		—	—		—		(12,442)		—		(12,442)
Repurchase of common stock	—		(1,015)	(1,015)		(49,775)		—		—		(50,790)
Issuance of restricted common shares, net of forfeitures	—		198	198		(198)		—		—		—
Restricted shares withheld for taxes & related tax benefits	—		(32)	(32)		(1,925)		—		—		(1,957)
Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes & related tax benefits	—		84	84		(2,553)		—		—		(2,469)
Compensation expense for restricted shares & performance stock units	—		—	—		5,501		—		—		5,501
Net income	—		—	—		—		28,356		—		28,356
Cumulative effect of change in accounting principle	—		—	—		—		(31,796)		—		(31,796)
Other comprehensive income	—		—	—		—		—		94,972		94,972
Balance at March 31, 2020	$	—	75,800	$	75,800	$	3,015,521	$	1,168,301	$	125,506	$	4,385,128
Issuance of preferred stock, net of issuance costs	$	217,632	—	$	—	$	—	$	—	$	—	$	217,632
Exercise of employee common stock options & related tax benefits	—		9	9		216		—		—		225
Common dividends paid ($0.16 per share)	—		—	—		—		(12,378)				(12,378)

Issuance of restricted common shares, net of forfeitures	—		38	38		(38)		—		—		—
Restricted shares withheld for taxes & related tax benefits	—		(13)	(13)		(540)		—		—		(553)
Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes & related tax benefits	—		2	2		(21)		—		—		(19)
Compensation expense for restricted shares & performance stock units	—		—	—		4,148		—		—		4,148
Net income	—		—	—		—		62,444		—		62,444
Other comprehensive income	—		—	—		—		—		39,020		39,020
Balance at June 30, 2020	$	217,632	75,836	$	75,836	$	3,019,286	$	1,218,367	$	164,526	$	4,695,647

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,
2019 2018
Operating activities:
Net income $ 194,281
$ 170,375
Adjustments to reconcile net income to net cash provided by operating activities:

Net amortization/accretion of premium/discount on securities 9,029
9,956
Depreciation, amortization and accretion 2,276
(13,095 )
Provision for loan losses 14,379
16,333
Gain on mortgage loans sold, net (10,889 ) (7,521 )
Investment losses (gains) on sales, net 6,426
(30 )
Stock-based compensation expense 10,073
8,751
Deferred tax expense 6,907
12,460
Losses (gains) on dispositions of other real estate and other investments 2,438
(15 )
Income from equity method investment (45,551 ) (19,050 )
Dividends received from equity method investment 40,914
23,433
Excess tax benefit from stock compensation (701 ) (2,754 )
Gain on commercial loans sold, net (1,809 ) (1,538 )
Commercial loans held for sale:

Loans originated (209,747 ) (161,395 )
Loans sold 206,214
167,113
Consumer loans held for sale:

Loans originated (617,164 ) (648,596 )
Loans sold 592,244
651,254
Increase in other assets (50,505 ) (1,002 )
Increase in other liabilities 35,230
5,860
Net cash provided by operating activities 184,045
210,539
Investing activities:

Activities in securities available-for-sale:

Purchases (670,956 ) (668,671 )
Sales 476,702
14,454
Maturities, prepayments and calls 149,344
149,868
Activities in securities held-to-maturity:

Purchases (3,822 ) —
Maturities, prepayments and calls 6,745
5,280
Increase in loans, net (1,110,214 ) (1,391,216 )
Purchases of software, premises and equipment (28,686 ) (14,484 )
Proceeds from sales of software, premises and equipment 52
166
Proceeds from sale of other real estate 3,117
9,566
Purchase of bank owned life insurance policies (110,000 ) (50,000 )
Proceeds from bank owned life insurance settlements 217
—
Payments related to derivative instruments (37,982 ) —
Increase in other investments (31,352 ) (34,027 )
Net cash used in investing activities (1,356,835 ) (1,979,064 )
Financing activities:

Net increase in deposits 600,598
1,407,105
Net increase (decrease) in securities sold under agreements to repurchase 49,428
(6,523 )
Advances from Federal Home Loan Bank:

Issuances 2,222,500
1,312,000
Payments/maturities (1,706,028 ) (1,050,028 )
Decrease in other borrowings, net (21,152 ) (220 )
Principal payments of finance lease obligation (111 ) (78 )
Exercise of common stock options, net of repurchase of restricted shares (4,149 ) (4,479 )
Repurchase of common stock (37,424 ) —
Common stock dividends paid (24,977 ) (21,925 )
Net cash provided by financing activities 1,078,685
1,635,852
Net decrease in cash, cash equivalents, and restricted cash (94,105 ) (132,673 )
Cash, cash equivalents, and restricted cash, beginning of period 721,692
779,596
Cash, cash equivalents, and restricted cash, end of period $ 627,587
$ 646,923


(dollars in thousands)	Six months ended June 30,
	2020		2019
Operating activities:
Net income	$	90,800	$	194,281
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities	16,092		9,029
Depreciation, amortization and accretion	21,031		2,276
Provision for credit losses	168,221		14,379
Gain on mortgage loans sold, net	(28,202)		(10,889)
Investment losses (gains) on sales, net	(335)		6,426
Stock-based compensation expense	9,649		10,073
Deferred tax expense (benefit)	(24,038)		6,907
Losses on dispositions of other real estate and other investments	5,033		2,438
Income from equity method investment	(32,800)		(45,551)
Dividends received from equity method investment	7,957		40,914
Excess tax benefit from stock compensation	(590)		(701)
Gain on commercial loans sold, net	(1,221)		(1,809)
Commercial loans held for sale:
Loans originated	(180,238)		(209,747)
Loans sold	182,844		206,214
Consumer loans held for sale:
Loans originated	(955,401)		(617,164)
Loans sold	995,979		592,244
Increase in other assets	(173,328)		(50,505)
Increase in other liabilities	83,745		35,230
Net cash provided by operating activities	185,198		184,045
Investing activities:
Activities in securities available-for-sale:
Purchases	(810,119)		(670,956)
Sales	100,055		476,702
Maturities, prepayments and calls	186,492		149,344
Activities in securities held-to-maturity:
Purchases	—		(3,822)
Maturities, prepayments and calls	8,948		6,745
Increase in loans, net	(2,738,112)		(1,110,214)
Purchases of software, premises and equipment	(18,663)		(28,686)

Proceeds from sales of software, premises and equipment	—		52
Proceeds from sale of other real estate	5,130		3,117

Purchase of bank owned life insurance policies	—		(110,000)
Proceeds from bank owned life insurance settlements	1,690		217
Proceeds from (payments for) derivative instruments	35,680		(37,982)

Purchase of trade name	(1,000)		—
Increase in other investments	(26,813)		(31,352)
Net cash used in investing activities	(3,256,712)		(1,356,835)
Financing activities:
Net increase in deposits	5,340,992		600,598
Net increase in securities sold under agreements to repurchase	68,199		49,428

Federal Home Loan Bank: Issuances, net of restructuring charges	762,472		2,222,500
Federal Home Loan Bank: Payments/maturities	(1,037,518)		(1,706,028)
Increase in other borrowings, net of issuance costs	56,568		—
Decrease in other borrowings	(89,579)		(21,152)
Principal payments of finance lease obligation	(120)		(111)
Issuance of preferred stock, net of issuance costs	217,632		—
Issuance of common stock pursuant to restricted stock unit agreement, net of shares withheld for taxes	(2,488)		—
Exercise of common stock options, net of repurchase of restricted shares	(2,280)		(4,149)
Repurchase of common stock	(50,790)		(37,424)

Common stock dividends paid	(24,820)		(24,977)
Net cash provided by financing activities	5,238,268		1,078,685
Net increase (decrease) in cash, cash equivalents, and restricted cash	2,166,754		(94,105)
Cash, cash equivalents, and restricted cash, beginning of period	526,707		721,692
Cash, cash equivalents, and restricted cash, end of period	$	2,693,461	$	627,587

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a ~~bank~~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) and BNC Bancorp (BNC) on July 31, 2015, September 1, 2015, July 1, 2016 and June 16, 2017, 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. Pinnacle Bank provides a full range of banking services, including investment, mortgage, insurance, and comprehensive wealth management services, in its 1112 primarily urban markets within Tennessee, the Carolinas, Virginia and ~~Virginia.~~beginning in December 2019, Georgia.

On July 2, 2019, Pinnacle Bank acquired all of the outstanding stock of Advocate Capital, Inc. (Advocate Capital) for a cash price of $59.0 million. Advocate Capital is a finance firm headquartered in Nashville, TN which supports the financial needs of legal firms through both case expense financing and working capital lines of credit. Pinnacle Financial accounted for the acquisition of Advocate Capital 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 acquired as of the date of 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. At the acquisition date, Advocate Capital's net assets were recorded at a fair value of approximately $45.6 million, consisting mainly of loans receivable. Advocate Capital's $134.3 million of indebtedness was also paid off in connection with consummation of the acquisition. The purchase price allocations for the acquisition of Advocate Capital were finalized during the second quarter of 2020.

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, ~~2018 (2018~~2019 (2019 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. ~~Subordinated Debt and~~ 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 ~~loan~~credit losses and determination of any impairment of goodwill or intangible assets. It is reasonably possible Pinnacle Financial's estimate of the allowance for credit losses and determination of impairment of goodwill or intangible assets could change as a result of the continued impact of the COVID-19 pandemic on the economy. The resulting change in these estimates could be material to Pinnacle Financial's consolidated financial statements. There have been no significant changes to Pinnacle Financial's significant accounting policies as disclosed in the ~~2018 10-K.~~2019 10-K other than those that relate to the allowance for credit losses upon adoption of ASU 2016-13 as described later within Note 1.

Table of Contents

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for the six months ended June 30, ~~2019~~2020 and ~~June 30, 2018~~2019 was as follows (in thousands):

For the six months ended
June 30,
2019 2018
Cash Transactions:
Interest paid $ 141,208
$ 82,321
Income taxes paid, net 41,928
28,105
Noncash Transactions:

Loans charged-off to the allowance for loan losses 14,548
15,367
Loans foreclosed upon and transferred to other real estate owned 11,760
1,505
Loans foreclosed upon and transferred to other assets 93
950
Fixed assets transferred to other real estate owned 5,126
—
Right-of-use asset recognized during the period in exchange for lease obligations ⁽¹⁾
82,856
—


	For the six months ended June 30,
	2020		2019
Cash Transactions:
Interest paid	$	127,807	$	141,208
Income taxes paid, net	23,749		41,928
Operating lease payments	6,750		6,761
Noncash Transactions:
Loans charged-off to the allowance for credit losses	20,695		14,548
Loans foreclosed upon and transferred to other real estate owned	2,442		11,760
Loans foreclosed upon and transferred to other assets	25		93

Fixed assets transferred to other real estate owned	—		5,126
Available-for-sale securities transferred to held-to-maturity portfolio	873,613		—



Right-of-use asset recognized during the period in exchange for lease obligations ⁽¹⁾	2,928		82,856

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

Income Per Common Share — Basic net income per common share (EPS) is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average common shares outstanding is attributable to common stock options, restricted share awards, and restricted share unit awards. The dilutive effect of outstanding

options, ~~common stock appreciation rights,~~ restricted share awards, and restricted share unit awards is reflected in diluted EPS by application of the treasury stock method.

The following is a summary of the basic and diluted net income per common share calculations for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 (in thousands, except per share data):


	Three months ended June 30,						Six months ended June 30,
	2020		2019		2020		2019
Basic net income per common share calculation:
Numerator - Net income	$	62,444	$	100,321	$	90,800	$	194,281

Denominator - Weighted average common shares outstanding	75,211		76,344		75,507		76,572
Basic net income per common share	$	0.83	$	1.31	$	1.20	$	2.54
Diluted net income per common share calculation:
Numerator – Net income	$	62,444	$	100,321	$	90,800	$	194,281

Denominator - Weighted average common shares outstanding	75,211		76,344		75,507		76,572
Dilutive shares contingently issuable	112		268		139		294
Weighted average diluted common shares outstanding	75,323		76,612		75,646		76,866
Diluted net income per common share	$	0.83	$	1.31	$	1.20	$	2.53

Three months ended
June 30, Six months ended
June 30,
2019 2018 2019 2018
Basic net income per share calculation:
Numerator - Net income
$ 100,321
$ 86,865
$ 194,281
$ 170,375

Denominator - Weighted average common shares outstanding
76,344
77,124
76,572
77,102
Basic net income per common share $ 1.31
$ 1.13
$ 2.54
$ 2.21

Diluted net income per share calculation:

Numerator – Net income
$ 100,321
$ 86,865
$ 194,281
$ 170,375

Denominator - Weighted average common shares outstanding
76,344
77,124
76,572
77,102
Dilutive shares contingently issuable 268
344
294
316
Weighted average diluted common shares outstanding 76,612
77,468
76,866
77,418
Diluted net income per common share $ 1.31
$ 1.12
$ 2.53
$ 2.20

Allowance for Credit Losses - Loans - As described below under Recently Adopted Accounting Pronouncements, Pinnacle Financial adopted FASB ASC 326 effective January 1, 2020, which requires the estimation of an allowance for credit losses in accordance with the current expected credit loss (CECL) methodology. Pinnacle Financial's management assesses the adequacy of the allowance on a quarterly basis. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off.

Table of Contents

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

•Owner occupied commercial real estate mortgage loans - Owner occupied commercial real estate mortgage loans are secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. For such loans, repayment is largely dependent upon the operation of the borrower's business.

•Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily dependent on lease income generated from the underlying collateral.

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

•Construction and land development loans - Construction and land development loans include loans where the repayment is dependent on the successful completion and eventual sale, refinance or operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development.

•Commercial and industrial loans - Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows.

•Consumer and other loans - Consumer and other loans include all loans issued to individuals not included in the consumer real estate mortgage classification. Examples of consumer and other loans are automobile loans, consumer credit cards and loans to finance education, among others. Many consumer loans are unsecured. Repayment is primarily dependent on the personal cash flow of the borrower.

For commercial real estate, consumer real estate, construction and land development, and commercial and industrial loans, Pinnacle Financial primarily utilizes a probability of default (PD) and loss given default (LGD) modeling approach. These models utilize historical correlations between default experience and certain macroeconomic factors as determined through a statistical regression analysis. All loan segments modeled using this approach consider changes in the national unemployment rate. In addition to the national unemployment rate, gross domestic product and the three month treasury rate are considered for owner occupied commercial real estate, the commercial real estate price index and the five year treasury rate are considered for construction loans, and the three month treasury rate is considered for commercial and industrial loans. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to predict quarterly rates of default based on the statistical PD models. The predicted quarterly default rates are then applied to the estimated future exposure at default (EAD), as determined based on contractual amortization terms and estimated prepayments. An estimated LGD, determined based on historical loss experience, is applied to the quarterly defaulted balances for each loan segment to estimate future losses of the loan's amortized cost.

Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by Pinnacle Financial and are dependent on the current economic environment among other factors. Upon implementation of CECL on January 1, 2020, a reasonable and supportable period of eighteen months was utilized for all loan segments, followed by a twelve month straight line reversion to long term averages. At June 30, 2020, a reasonable and supportable period of twelve months was used for owner occupied commercial real estate, construction and land development and commercial and industrial, and a reasonable and supportable period of eighteen months was used for all other loan segments. The twelve month straight line reversion period was maintained for all loan segments at June 30, 2020.

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

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The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in portfolio concentrations, policy exceptions, associate retention, independent loan review results, collateral considerations, risk ratings, competition and peer group credit quality trends. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors.

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

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

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

Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums, deferred loan fees and costs and accrued interest receivable. Accrued interest receivable is presented separately on the balance sheets and as allowed under ASU 2016-13 is excluded from the tabular loan disclosures in Note 4.

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

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

Allowance for Credit Losses - Securities Held-to-Maturity - Expected credit losses on debt securities classified as held-to-maturity are measured on a collective basis by major security type. The estimates of expected credit losses are based on historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The models rely on regression analyses to predict PD based on projected macroeconomic factors, including unemployment rates and GDP, among others. At June 30, 2020, Pinnacle Financial's held-to-maturity securities consisted entirely of municipal securities rated A or higher by the ratings agencies. A reasonable and supportable period of 18 months and reversion period of 12 months is utilized to estimate credit losses on held-to-maturity municipal securities. The allowance is increased through provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off.

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Allowance for Credit Losses - Securities Available-for-Sale - For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, Pinnacle Financial assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through net income. If neither criteria is met, Pinnacle Financial evaluates whether any portion of the decline in fair value is the result of credit deterioration. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. If the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded through provisions for credit losses for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income.

Recently Adopted Accounting Pronouncements —

~~In February 2016, the FASB issued~~ ~~Accounting Standards Update 2016-02, Leases~~ which requires recognition in the statement of financial position of lease right of use assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP guidance. The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP guidance that did not require lease assets and lease liabilities to be recognized for operating leases. In July 2016, the FASB issued ~~Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases~~ ~~which provided technical corrections and improvements to ASU 2016-02. In July 2016, the FASB issued~~ ~~Accounting Standards Update 2018-11, Leases (Topic 842): Targeted Improvements~~ which provided an optional transition method to adopt the new requirements of ASU 2016-02 as of the adoption date with no adjustment to the presentation or disclosure of comparative prior periods included in the financial statements in the period of adoption. Pinnacle Financial has elected this optional transition method and has presented periods prior to adoption under the prior lease guidance of ASC Topic 840. In December 2018, the FASB issued ~~Accounting Standards Update 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors~~. ASU 2018-20 permits lessors to account for certain taxes as lessee costs, permits lessors to exclude from revenue certain lessor costs paid by lessees directly to third parties, and requires lessors to allocate certain variable payments to lease and non-lease components. In March 2019, the FASB issued ~~Accounting Standards Update No. 2019-01, Leases (Topic 842): Codification Improvements.~~ The amendments in this ASU (i) reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers to use cost as the fair value of the underlying asset, (ii) state that lessors that are depository and lending institutions should present principal payments received under sales type and direct financing leases within investing activities, and (iii) exempt Topic 842 from certain transition related interim disclosure requirements. ASU 2016-02 and the subsequently issued ASUs related to Topic 842 became effective for Pinnacle Financial on January 1, 2019. As part of the adoption of these updates, Pinnacle Financial has elected the following practical expedients: 1) to not reassess whether existing contracts are or contain a lease, 2) to not reassess lease classification for existing leases, 3) to not reassess initial direct costs, 4) to not separate lease components from nonlease components for real estate leases, and 5) to not recognize short term leases (12 months or less) on the balance sheet. See Note 12 for additional detail related to lease amounts recognized as of June 30, 2019 under Topic 842.

~~In February 2018, the FASB issued~~ ~~Accounting Standards Update 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~. The amendments in this ASU addressed the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the lower federal corporate tax rate included in the Tax Cuts and Jobs Act issued December 22, 2017 (Tax Act). These amendments allow an entity to make a reclassification from other comprehensive income to retained earnings for the difference between the historical corporate income tax rate and the lower corporate income tax rate included in the Tax Act. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Pinnacle Financial has elected not to adopt this standard due to its insignificant impact on Pinnacle Financial's consolidated financial position.

~~Newly Issued not yet Effective Accounting Standards~~ — In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify how entities other than private companies, such as public business entities and not-for-profit entities, are required to test goodwill for impairment by eliminating the comparison of the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The amendments ~~are~~became effective for fiscal years beginning after December 15, 2019, including interim periods within those periods. If this standard had been effective as of the date of the financial statements included in this report, there wouldPinnacle Financial on January 1, 2020 and did not have ~~been no~~a material impact on Pinnacle Financial's consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ~~(CECL)~~(Topic 326), ,and has issued subsequent amendments thereto, which introduces the current expected credit losses (CECL) methodology. Among other things, ~~CECL~~ASC 326 requires the measurement of all expected credit losses for financial assets, including loans and held-to-maturity debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new model ~~will require~~requires institutions to calculate all probable and estimable losses that are expected to be incurred through the financial asset's ~~entire~~contractual life through a provision for credit losses, including loans obtained as a result of any acquisition not deemed to be purchased credit deteriorated (PCD). ~~CECL~~ASC 326 also requires the allowance for credit losses for PCD loans to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance ~~will be~~determined at acquisition is added to the purchase price rather than recorded as provision expense. ~~The~~In accordance with ASC 326, the disclosure of credit quality indicators related to the amortized cost of financing receivables ~~will be~~is further disaggregated by year of origination (or vintage). ~~Institutions~~Pinnacle Financial adopted ASU 2016-13 and all subsequent amendments thereto effective January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures. Amounts for periods beginning on or after January 1, 2020 are ~~to apply the changes through~~presented under ASC 326 and all prior period information is presented in accordance with previously applicable GAAP. At January 1, 2020, Pinnacle Financial recognized a ~~cumulative-effect~~cumulative adjustment to ~~their~~ retained earnings of $31.8 million, net of tax, attributable to an increase in the allowance for credit losses of $34.3 million, an increase in the allowance for off balance sheet credit exposures of $8.8 million, and an increase in deferred tax assets of $11.3 million. In addition, an allowance of $3.8 million was recognized on loans purchased with credit deterioration (PCD) previously classified as purchased credit impaired (PCI) with a corresponding adjustment to the gross carrying amount of the loans. Pinnacle Financial adopted ASC 326 using the prospective transition approach for PCD loans, which did not require re-evaluation of whether loans previously classified as PCI loans met the criteria of PCD assets at the date of adoption. The remaining noncredit discount will be accreted into interest income at the effective interest rate as of January 1, 2020.

Newly Issued Not Yet Effective Accounting Standards — 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, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Pinnacle Financial is implementing a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. Pinnacle Financial is assessing ASU 2020-04 and its impact on the transition away from LIBOR for its loans and other financial instruments.

In January 2020, the FASB issued Accounting Standards Update 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. These amendments, among other things, clarify that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323,

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Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including early adoption in an interim period. An entity should apply ASU 2020-01 prospectively at the beginning of the ~~first reporting~~interim period ~~in which~~that includes the adoption date. Pinnacle Financial is assessing ASU 2020-01 and its impact on its accounting and disclosures.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes to simplify various aspects of the current guidance to promote consistent application of the standard ~~is effective.~~among reporting entities by moving certain exceptions to the general principles. The amendments are effective for fiscal years beginning after December 15, ~~2019. Early application is permitted for fiscal years beginning after December 15, 2018.~~2020, with early adoption permitted. Pinnacle Financial ~~has concluded that an increase in the overall allowance for loan losses is likely upon adoption of CECL in order~~does not plan to ~~provide for expected credit losses over the life~~adopt this standard early. If this standard had been effective as of the ~~loan portfolio.~~date of the financial statements included in this report, there would have been no impact on Pinnacle Financial's consolidated financial statements.

Other than those pronouncements discussed above and those which have been recently adopted, we do not believe there were any other recently issued accounting pronouncements that are expected to materially impact Pinnacle Financial.

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

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, ~~2019~~2020 through the date of the issued financial statements.

On July 2, 2019, Pinnacle Bank acquired all of the outstanding stock of Advocate Capital, Inc. for a cash price of $59 million. Advocate Capital is a finance firm headquartered in Nashville, TN which supports the financial needs of legal firms through both case expense financing and working capital lines of credit.

Note 2. Equity method investment

A summary of BHG's financial position as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 and results of operations as of and for the three and six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, were as follows (in thousands):


	As of
	June 30, 2020		December 31, 2019
Assets	$	1,268,208	$	840,398

Liabilities	1,046,948		641,037
Equity interests	221,260		199,361
Total liabilities and equity	$	1,268,208	$	840,398

As of
June 30, 2019 December 31, 2018
Assets $ 606,548
$ 459,816

Liabilities 451,095
324,211
Equity interests 155,453
135,605
Total liabilities and equity $ 606,548
$ 459,816

For the three months ended
June 30, For the six months ended
June 30,
2019 2018 2019 2018
Revenues $ 107,982
$ 49,053
$ 170,799
$ 92,804
Net income $ 67,564
$ 19,102
$ 94,699
$ 38,106


	For the three months ended June 30,						For the six months ended June 30,
	2020		2019		2020		2019
Revenues	$	92,790	$	107,982	$	190,734	$	170,799
Net income	$	37,674	$	67,564	$	70,145	$	94,699

At June 30, ~~2019,~~2020, technology, trade name and customer relationship intangibles, net of related amortization, totaled ~~$9.7~~$8.2 million compared to ~~$10.7~~$8.8 million as of December 31, ~~2018.~~2019. Amortization expense of ~~$475,000~~$293,000 and ~~$950,000,~~$587,000, respectively, was included for the three and six months ended June 30, ~~2019~~2020 compared to ~~$693,000~~$475,000 and ~~$1.4 million,~~$950,000, respectively, for the same periods in the prior

year. Accretion income of ~~$660,000~~$541,000 and ~~$1.3~~$1.1 million, respectively, was included in the three and six months ended June 30, ~~2019~~2020 compared to ~~$729,000~~$660,000 and ~~$1.5~~$1.3 million, respectively, for the same periods in the prior year.

During the three months ended June 30, 2020, Pinnacle Financial and Pinnacle Bank received 0 dividends from BHG. During the six months ended June 30, 2020, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $8.0 million in the aggregate. During the three and six months ended June 30, 2019, Pinnacle Financial and Pinnacle Bank received dividends ~~from BHG~~ of $28.2 million and $40.9 million, respectively, in the ~~aggregate compared to $19.1 million and $23.4 million, respectively, for the same periods in the prior year.~~aggregate. Earnings from BHG are included in Pinnacle Financial's consolidated tax return. Profits from intercompany transactions are eliminated. NoNaN loans were purchased from BHG by Pinnacle Bank for the three and six month periods ended June 30, ~~2019~~2020 or ~~2018,~~2019, respectively.

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Note 3. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are summarized as follows (in thousands):


										Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2019:
June 30, 2020:									June 30, 2020:
Securities available-for-sale:									Securities available-for-sale:
U.S. Treasury securities	$	48,883	$	34	$	—	$	48,917	U.S. Treasury securities	$	72,482	$	130	$	—	$	72,612
U.S. government agency securities	55,907		111		995		55,023		U.S. government agency securities	74,939		1,404		32		76,311
Mortgage-backed securities	1,289,189		9,155		6,431		1,291,913		Mortgage-backed securities	1,661,910		77,923		1,387		1,738,446
State and municipal securities	1,572,847		64,161		506		1,636,502		State and municipal securities	1,182,925		28,447		31,643		1,179,729
Asset-backed securities	169,457		942		976		169,423		Asset-backed securities	142,504		521		2,610		140,415
Corporate notes and other	56,179		462		1,513		55,128		Corporate notes and other	106,923		499		4,657		102,765
	$	3,192,462	$	74,865	$	10,421	$	3,256,906		$	3,241,683	$	108,924	$	40,329	$	3,310,278
Securities held-to-maturity:									Securities held-to-maturity:
State and municipal securities	$	190,928	$	9,639	$	1	$	200,566	State and municipal securities	$	1,048,223	$	19,387	$	6,377	$	1,061,233
	$	190,928	$	9,639	$	1	$	200,566		$	1,048,223	$	19,387	$	6,377	$	1,061,233
Allowance for credit losses - securities held-to-maturity									Allowance for credit losses - securities held-to-maturity	(188)
Securities held-to-maturity, net of allowance for credit losses									Securities held-to-maturity, net of allowance for credit losses	$	1,048,035

December 31, 2018:
Securities available-for-sale:
U.S. Treasury securities $ 30,325
$ —
$ 25
$ 30,300
U.S. government agency securities 71,456
49
1,346
70,159
Mortgage-backed securities 1,336,469
3,110
28,634
1,310,945
State and municipal securities 1,244,471
3,785
18,602
1,229,654
Asset-backed securities 379,107
820
4,345
375,582
Corporate notes and other 69,399
170
2,523
67,046
$ 3,131,227
$ 7,934
55,475
$ 3,083,686
Securities held-to-maturity:

State and municipal securities $ 194,282
$ 152
$ 1,303
$ 193,131
$ 194,282
$ 152
$ 1,303
$ 193,131


December 31, 2019:
Securities available-for-sale:
U.S. Treasury securities	$	72,862	$	19	$	14	$	72,867
U.S. government agency securities	80,096		306		710		79,692
Mortgage-backed securities	1,458,894		12,789		7,776		1,463,907
State and municipal securities	1,669,606		52,096		7,249		1,714,453
Asset-backed securities	153,963		302		1,293		152,972
Corporate notes and other	56,212		635		743		56,104
	$	3,491,633	$	66,147	17,785		$	3,539,995
Securities held-to-maturity:
State and municipal securities	$	188,996	$	12,221	$	—	$	201,217
	$	188,996	$	12,221	$	—	$	201,217

During the first quarter of 2020, Pinnacle Financial transferred, at fair value, $873.6 million of municipal securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related unrealized after tax gains of $69.0 million remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of discount on the transferred securities. No gains or losses were recognized at the time of transfer. At June 30, ~~2019,~~2020, approximately ~~$1.2~~$1.3 billion 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, ~~2019,~~2020, repurchase agreements comprised of secured borrowings totaled ~~$154.2~~$194.6 million and were secured by ~~$154.2~~$194.6 million of pledged U.S. government agency securities, municipal securities, ~~asset backed~~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, ~~2019~~2020 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage- and asset-backed securities since the mortgages and assets underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary (in thousands):

Available-for-sale Held-to-maturity
June 30, 2019:
Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value
Due in one year or less $ 64,432
$ 64,479
$ 1,401
$ 1,401
Due in one year to five years 18,158
18,203
1,020
1,022
Due in five years to ten years 85,576
85,416
5,779
5,866
Due after ten years 1,565,650
1,627,472
182,728
192,277
Mortgage-backed securities 1,289,189
1,291,913
—
—
Asset-backed securities 169,457
169,423
—
—
$ 3,192,462
$ 3,256,906
$ 190,928
$ 200,566

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	Available-for-sale						Held-to-maturity
June 30, 2020:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	73,636	$	73,774	$	—	$	—
Due in one year to five years	9,378		9,640		1,000		1,047
Due in five years to ten years	173,763		174,310		2,905		2,979
Due after ten years	1,180,492		1,173,693		1,044,318		1,057,207
Mortgage-backed securities	1,661,910		1,738,446		—		—
Asset-backed securities	142,504		140,415		—		—
	$	3,241,683	$	3,310,278	$	1,048,223	$	1,061,233

At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the following investments 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 Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
At June 30, 2020
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
U.S. government agency securities	—		—		6,507		32		6,507		32
Mortgage-backed securities	59,233		614		43,978		773		103,211		1,387
State and municipal securities	182,186		3,557		496,371		28,448		678,557		32,005
Asset-backed securities	59,994		1,260		54,376		1,350		114,370		2,610
Corporate notes	43,808		1,548		18,650		3,109		62,458		4,657
Total temporarily-impaired securities	$	345,221	$	6,979	$	619,882	$	33,712	$	965,103	$	40,691

At December 31, 2019
U.S. Treasury securities	$	40,505	$	14	$	—	$	—	$	40,505	$	14
U.S. government agency securities	1,222		1		30,892		709		32,114		710
Mortgage-backed securities	458,881		5,102		163,767		2,674		622,648		7,776
State and municipal securities	204,958		1,938		244,884		5,311		449,842		7,249
Asset-backed securities	75,488		796		59,816		497		135,304		1,293
Corporate notes	—		—		16,908		743		16,908		743
Total temporarily-impaired securities	$	781,054	$	7,851	$	516,267	$	9,934	$	1,297,321	$	17,785

Investments with an Unrealized Loss of
less than 12 months

Investments with an Unrealized Loss of
12 months or longer

Total Investments with an
Unrealized Loss
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value
Unrealized
Losses
At June 30, 2019
U.S. Treasury securities $ —
$ —
$ 250
$ —
$ 250
$ —
U.S. government agency securities 2,064
9
35,391
986
37,455
995
Mortgage-backed securities 84,937
535
471,224
5,896
556,161
6,431
State and municipal securities 76,291
489
11,663
53
87,954
542
Asset-backed securities 104,510
775
22,373
201
126,883
976
Corporate notes 17,337
508
10,502
1,005
27,839
1,513
Total temporarily-impaired securities $ 285,139
$ 2,316
$ 551,403
$ 8,141
$ 836,542
$ 10,457

At December 31, 2018

U.S. Treasury securities $ 30,054
$ 22
$ 246
$ 3
$ 30,300
$ 25
U.S. government agency securities 13,697
328
42,539
1,018
56,236
1,346
Mortgage-backed securities 203,299
2,134
882,231
26,500
1,085,530
28,634
State and municipal securities 805,821
18,643
198,610
4,078
1,004,431
22,721
Asset-backed securities 268,677
4,118
11,828
227
280,505
4,345
Corporate notes 26,272
1,538
25,915
985
52,187
2,523
Total temporarily-impaired securities $ 1,347,820
$ 26,783
$ 1,161,369
$ 32,811
$ 2,509,189
$ 59,594

The applicable dates for determining when securities were in an unrealized loss position were June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. As such, it is possible that a security had a market value ~~that exceeded~~less than its amortized cost on other days during the past twelve-month periods ended June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, but is not in the "Investments with an Unrealized Loss of lessthan 12 months" category above.

As shown in the tables above, including both available-for-sale and held-to-maturity investment securities, at June 30, ~~2019,~~2020, Pinnacle Financial had approximately ~~$10.5~~$40.7 million in unrealized losses on ~~$836.5~~$965.1 million of securities. The unrealized losses associated with $873.6 million and $179.8 million of municipal securities transferred from the available-for-sale portfolio to the held-to-maturity portfolio induring the quarters ended March 31, 2020 and September 30, 2018, ~~described below~~respectively, represent unrealized losses since the date of purchase, independent of the impact associated with changes in the cost basis upon transfer between portfolios. As described in Note 1. Summary of Significant Accounting Policies, for any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, Pinnacle Financial assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at June 30, 2020, and it is not more-likely-than-not that Pinnacle Financial will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial has determined that no write-down is necessary. In addition, Pinnacle Financial evaluates whether any portion of the decline in fair value is the result of credit deterioration, which would require the recognition of an allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with ~~these investment~~ securities at June 30, 2020 are driven by changes in interest rates and are not due to the credit quality of the ~~securities.~~securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at June 30,

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2020. These securities will continue to be monitored as a part of Pinnacle Financial's ongoing ~~impairment analysis.~~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. ~~Because~~

The allowance for credit losses on held-to-maturity securities is measured on a collective basis by major security type as described in Note 1. Summary of Significant Accounting Policies. At June 30, 2020, Pinnacle ~~Financial currently does not intend~~Financial's held-to-maturity securities consist entirely of municipal securities. A reasonable and supportable period of 18 months and reversion period of 12 months was utilized to ~~sell those~~estimate credit losses on held-to-maturity municipal securities ~~that have an unrealized loss~~ at June 30, ~~2019, and it is not more-likely-than-not that~~ 2020. With the implementation of CECL effective January 1, 2020, estimated credit losses on held-to-maturity municipal securities totaled approximately $10,000. At June 30, 2020, the estimated allowance for credit losses on these securities increased to $188,000, with the increase driven largely by changes in macroeconomic projections.

Pinnacle Financial ~~will be required~~

utilizes bond credit ratings assigned by third party ratings agencies to ~~sell~~monitor the credit quality of debt securities ~~before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial does not consider these securities to be other-than-temporarily impaired at~~held-to-maturity. At June 30, ~~2019.~~

In2020, all debt securities classified as held-to-maturity were rated A or higher by the ~~third quarter of 2018, Pinnacle Financial transferred, at fair value, $179.8 million of municipal securities~~ratings agencies. Updated credit ratings are obtained as they become available from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized after tax losses of $2.2 million remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of discount on the transferred securities. No gains or losses were recognized at the time of the transfer.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. Consistent with the investment policy, during the ~~three and~~ six months ended June 30, ~~2019~~2020, available-for-sale securities of approximately ~~$350.1~~$100.1 million ~~and $476.7 million, respectively,~~ were sold and net unrealized ~~losses,~~gains, net of tax, of ~~$3.3 million and $4.7 million, respectively,~~$247,000 were reclassified from accumulated other comprehensive income into net income.

The carrying values of Pinnacle Financial's investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that Pinnacle Financial will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future. Additionally, there is a risk that other-than-temporary impairment charges may occur in the future if management's intention to hold these securities to maturity and/or recovery changes. 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 ~~Loan~~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 ~~five~~the following loan ~~categories:~~categories for presentation of loan balances and the related allowance for credit losses on loans:

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accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Loans amounting to $2.3 billion which were granted under the Paycheck Protection Program are included in this category.

•Consumer and other loans - Consumer and other loans include all loans issued to individuals not included in the consumer real estate mortgage ~~construction and land development, commercial and industrial, and~~classification. Examples of consumer and ~~other.~~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.

•

~~Commercial real estate mortgage loans~~

Loans at June 30, 2020 and December 31, 2019 were as follows:


	June 30, 2020		December 31, 2019
Commercial real estate:
Owner occupied	$	2,708,306	$	2,669,766
Non-owner occupied	5,384,018		5,039,452
Consumer real estate – mortgage	3,042,604		3,068,625
Construction and land development	2,574,494		2,430,483
Commercial and industrial	8,516,333		6,290,296
Consumer and other	294,545		289,254
Subtotal	$	22,520,300	$	19,787,876
Allowance for credit losses	(285,372)		(94,777)
Loans, net	$	22,234,928	$	19,693,099

. Commercial real estate mortgage loans are categorized as such based on investor exposures where repayment is largely dependent upon the operation, refinance, or sale of the underlying real estate. Commercial real estate mortgage loans also includes owner-occupied commercial real estate which Pinnacle Financial believes shares a similar risk profile to Pinnacle Financial's commercial and industrial products.


•	~~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.~~

•

~~Construction and land development loans~~. Construction and land development loans include loans where the repayment is dependent on the successful 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.~~


•	~~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, credit cards and loans to finance education, among others.

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 six distinct ratings categories for loans that represent specific attributes. Pinnacle Financial believes that its categories follow those used by Pinnacle Bank's primary regulators. At June 30, ~~2019,~~2020, approximately ~~80.5%~~82.5% 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 ~~that~~ 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 loan 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. During the second quarter of 2020, Pinnacle Financial performed an in-depth review of all risk-graded loans greater than $1.0 million for which we had granted the borrower the ability to defer the payment of principal and/or interest for a period of up to 90 days following the COVID-19 outbreak. Pinnacle Financial also performed an in-depth review of all of its hotel and retail commercial real estate loans greater than $1.0 million regardless of their receipt of deferral.

~~The following table presents Pinnacle Financial's loan balances by primary loan classification and~~Following are the ~~amount within each~~definitions of the risk rating ~~category.~~categories used by Pinnacle Financial. Pass rated loans include all credits other than those included ~~in special mention, substandard, substandard-nonaccrual and doubtful-nonaccrual which are defined as follows:~~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.

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

The table below presents loan balances classified within each risk rating category by primary loan type and based on year of origination as of June 30, 2020 (in thousands):


June 30, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Commercial real estate- owner occupied
Pass	$	342,164	$	485,461	$	509,788	$	388,684	$	389,384	$	347,423	$	64,075	$	2,526,979
Special Mention	2,445		8,612		23,239		11,957		5,563		5,775		—		57,591
Substandard ⁽¹⁾	18,292		6,902		6,877		18,256		12,685		3,880		45,038		111,930
Substandard-nonaccrual	821		442		2,138		2,611		1,595		4,089		110		11,806
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Commercial real estate - owner occupied	$	363,722	$	501,417	$	542,042	$	421,508	$	409,227	$	361,167	$	109,223	$	2,708,306
Commercial real estate- Non-owner occupied
Pass	$	798,839	$	1,154,829	$	867,521	$	623,990	$	574,543	$	476,052	$	71,274	$	4,567,048
Special Mention	46,818		170,003		95,155		163,384		174,600		136,136		284		786,380
Substandard ⁽¹⁾	6,068		1,484		4,976		3,541		1,072		2,995		—		20,136
Substandard-nonaccrual	—		3,717		763		147		1,071		4,756		—		10,454
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Commercial real estate - Non-owner occupied	$	851,725	$	1,330,033	$	968,415	$	791,062	$	751,286	$	619,939	$	71,558	$	5,384,018
Consumer real estate – mortgage
Pass	$	276,995	$	590,211	$	409,497	$	200,643	$	156,708	$	387,684	$	974,695	$	2,996,433
Special Mention	493		2,697		3,314		645		—		1,025		8,739		16,913
Substandard ⁽¹⁾	932		1,200		—		900		378		2,141		470		6,021
Substandard-nonaccrual	491		1,488		921		1,439		3,027		11,489		4,382		23,237
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Consumer real estate – mortgage	$	278,911	$	595,596	$	413,732	$	203,627	$	160,113	$	402,339	$	988,286	$	3,042,604
Construction and land development
Pass	$	594,375	$	1,216,171	$	487,354	$	126,976	$	20,375	$	11,501	$	21,788	$	2,478,540
Special Mention	6,750		32,465		47,324		—		4,243		—		—		90,782
Substandard ⁽¹⁾	824		687		31		—		240		160		—		1,942
Substandard-nonaccrual	322		565		275		87		—		1,981		—		3,230
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Construction and land development	$	602,271	$	1,249,888	$	534,984	$	127,063	$	24,858	$	13,642	$	21,788	$	2,574,494
Commercial and industrial
Pass	$	3,293,463	$	1,359,904	$	889,189	$	436,566	$	166,155	$	114,273	$	2,001,673	$	8,261,223
Special Mention	11,101		54,226		15,780		16,176		7,897		1,958		22,232		129,370
Substandard ⁽¹⁾	6,657		46,915		15,328		2,993		616		2,571		36,881		111,961
Substandard-nonaccrual	2,894		6,122		517		877		262		259		2,848		13,779
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Commercial and industrial	$	3,314,115	$	1,467,167	$	920,814	$	456,612	$	174,930	$	119,061	$	2,063,634	$	8,516,333
Consumer and other
Pass	$	47,178	$	29,683	$	9,739	$	10,453	$	6,082	$	2,962	$	188,337	$	294,434
Special Mention	—		—		—		—		—		—		9		9
Substandard ⁽¹⁾	—		—		—		—		—		—		47		47
Substandard-nonaccrual	—		—		4		43		5		3		—		55
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Consumer and other	$	47,178	$	29,683	$	9,743	$	10,496	$	6,087	$	2,965	$	188,393	$	294,545
Total loans
Pass	$	5,353,014	$	4,836,259	$	3,173,088	$	1,787,312	$	1,313,247	$	1,339,895	$	3,321,842	$	21,124,657
Special Mention	67,607		268,003		184,812		192,162		192,303		144,894		31,264		1,081,045

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June 30, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Substandard ⁽¹⁾	32,773		57,188		27,212		25,690		14,991		11,747		82,436		252,037
Substandard-nonaccrual	4,528		12,334		4,618		5,204		5,960		22,577		7,340		62,561
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total loans	$	5,457,922	$	5,173,784	$	3,389,730	$	2,010,368	$	1,526,501	$	1,519,113	$	3,442,882	$	22,520,300

The following table outlines the ~~amount~~risk category of ~~each loan classification categorized into each risk rating category~~loans as of ~~June 30, 2019 and~~ December 31, ~~2018~~2019 (in thousands):


														Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
June 30, 2019
December 31, 2019													December 31, 2019
Pass	$	7,380,522	$	2,900,661	$	2,102,602	$	5,597,038	$	364,773	$	18,345,596	Pass	$	7,499,725	$	3,019,203	$	2,422,347	$	6,069,757	$	288,361	$	19,299,393
Special Mention	96,283		7,816		7,015		47,930		1,145		160,189		Special Mention	51,147		13,787		2,816		79,819		698		148,267
Substandard ⁽¹⁾	84,797		11,381		5,957		130,256		65		232,456		Substandard ⁽¹⁾	139,518		10,969		3,042		125,035		47		278,611
Substandard-nonaccrual	23,790		29,896		2,395		19,883		111		76,075		Substandard-nonaccrual	18,828		24,666		2,278		15,685		148		61,605
Doubtful-nonaccrual	1		1		—		—		—		2		Doubtful-nonaccrual	—		—		—		—		—		—
Total loans	$	7,585,393	$	2,949,755	$	2,117,969	$	5,795,107	$	366,094	$	18,814,318	Total loans	$	7,709,218	$	3,068,625	$	2,430,483	$	6,290,296	$	289,254	$	19,787,876

Commercial real estate - mortgage Consumer real estate - mortgage Construction and land development Commercial and industrial Consumer
and other Total
December 31, 2018
Pass $ 6,998,485
$ 2,787,570
$ 2,059,376
$ 5,148,726
$ 352,516
$ 17,346,673
Special Mention 55,932
7,902
4,334
24,284
711
93,163
Substandard ⁽¹⁾
78,202
20,906
5,358
75,351
62
179,879
Substandard-nonaccrual 32,335
28,069
3,387
23,060
983
87,834
Doubtful-nonaccrual —
—
—
—
—
—
Total loans $ 7,164,954
$ 2,844,447
$ 2,072,455
$ 5,271,421
$ 354,272
$ 17,707,549

⁽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 ~~$227.5~~$251.3 million at June 30, ~~2019,~~2020, compared to ~~$176.3~~$276.0 million at December 31, ~~2018.~~2019.

~~Loans acquired with deteriorated credit quality are recorded pursuant to~~The table below presents the ~~provisions~~aging of ~~ASC 310-30,~~past due balances by loan segment at June 30, 2020 and ~~are referred to as purchase credit impaired loans. The following table provides a rollforward of purchase credit impaired loans from~~ December 31, ~~2018 through June 30,~~ 2019 (in thousands):


June 30, 2020	30-59 days past due		60-89 days past due		90 days or more past due				Total past due		Current		Total loans
Commercial real estate:
Owner-occupied	$	2,446	$	1,241	$	4,943			$	8,630	$	2,699,676	$	2,708,306
Non-owner occupied	576		64		9,950				10,590		5,373,428		5,384,018
Consumer real estate – mortgage	3,318		1,557		5,917				10,792		3,031,812		3,042,604
Construction and land development	1,461		598		2,154				4,213		2,570,281		2,574,494
Commercial and industrial	7,641		2,651		4,991				15,283		8,501,050		8,516,333
Consumer and other	1,580		23		548				2,151		292,394		294,545
Total	$	17,022	$	6,134	$	28,503	$	28,503	$	51,659	$	22,468,641	$	22,520,300

December 31, 2019
Commercial real estate:
Owner-occupied	$	2,307	$	2,932	$	1,719			$	6,958	$	2,662,808	$	2,669,766
Non-owner occupied	3,156		3,641		3,816				10,613		5,028,839		5,039,452
Consumer real estate – mortgage	11,646		2,157		7,304				21,107		3,047,518		3,068,625
Construction and land development	1,392		711		1,487				3,590		2,426,893		2,430,483
Commercial and industrial	8,474		2,478		6,364				17,316		6,272,980		6,290,296
Consumer and other	1,770		414		570				2,754		286,500		289,254
Total	$	28,745	$	12,333	$	21,260	$	21,260	$	62,338	$	19,725,538	$	19,787,876

Gross Carrying Value
Accretable
Yield
Nonaccretable
Yield
Net Carrying
Value
December 31, 2018 $ 42,837
$ (114 ) $ (17,394 ) $ 25,329
Acquisition —
—
—
—
Year-to-date settlements (8,878 ) 197
3,157
(5,524 )
June 30, 2019 $ 33,959
$ 83
$ (14,237 ) $ 19,805

Certain of these loans have been deemed to be collateral dependent and, as such, no accretable yield has been recorded for these loans. The carrying value is adjusted for additional draws, pursuant to contractual arrangements, offset by loan paydowns. Year-to-date settlements include both loans that were charged-off as well as loans that were paid off, typically as a result of refinancings at other institutions.

Impaired loans include nonaccrual loans, troubled debt restructurings, and other loans deemed to be impaired but that continue to accrue interest. The following tables detail the recorded investment, unpaid principal balance and related allowance of Pinnacle Financial's impaired loans at June 30, 2019 and December 31, 2018 by loan classification (in thousands):

At June 30, 2019 At December 31, 2018
Recorded investment Unpaid principal balances Related allowance Recorded investment Unpaid principal balances Related allowance
Impaired loans with an allowance:
Commercial real estate – mortgage $ 12,639
$ 12,640
$ 778
$ 14,114
$ 14,124
$ 724
Consumer real estate – mortgage 19,770
19,879
2,148
19,864
19,991
1,443
Construction and land development 626
621
43
581
579
28
Commercial and industrial 10,634
10,601
2,560
9,252
9,215
1,441
Consumer and other 111
134
—
983
1,005
328
Total $ 43,780
$ 43,875
$ 5,529
$ 44,794
$ 44,914
$ 3,964

Impaired loans without an allowance:

Commercial real estate – mortgage $ 10,332
$ 10,341
$ —
$ 14,724
$ 14,739
$ —
Consumer real estate – mortgage 10,885
10,909
—
7,247
7,271
—
Construction and land development —
—
—
1,786
1,786
—
Commercial and industrial 11,318
11,317
—
14,595
14,627
—
Consumer and other —
—
—
—
—
—
Total $ 32,535
$ 32,567
$ —
$ 38,352
$ 38,423
$ —

Total impaired loans $ 76,315
$ 76,442
$ 5,529
$ 83,146
$ 83,337
$ 3,964

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~~For~~

The following table details the changes in the allowance for credit losses for the three and six months ended June 30, 2020 and 2019, respectively, by loan classification (in thousands):


	Commercial real estate - Owner occupied		Commercial real estate - Non-owner occupied		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Unallocated		Total
Three months ended June 30, 2020:
Balance at March 31, 2020	$	23,634	$	32,114	$	32,998	$	38,911	$	88,060	$	6,748	$	—	$	222,465
Charged-off loans	—		(2)		(1,196)		—		(6,734)		(1,070)		—		(9,002)
Recovery of previously charged-off loans	80		106		484		50		2,249		648		—		3,617
Provision for credit losses on loans	15,089		36,208		(2,928)		2,936		17,035		(48)		—		68,292
Balance at June 30, 2020	$	38,803	$	68,426	$	29,358	$	41,897	$	100,610	$	6,278	$	—	$	285,372
Three months ended June 30, 2019:
Balance at March 31, 2019	$	12,618	$	17,549	$	8,369	$	10,915	$	32,699	$	4,803	$	241	$	87,194
Charged-off loans	(1,065)		—		(580)		(4)		(5,408)		(1,423)		—		(8,480)
Recovery of previously charged-off loans	16		876		372		19		2,744		317		—		4,344
Provision for credit losses on loans	605		227		328		276		7,401		(1,583)		(59)		7,195
Balance at June 30, 2019	$	12,174	$	18,652	$	8,489	$	11,206	$	37,436	$	2,114	$	182	$	90,253
Six months ended June 30, 2020:
Balance at December 31, 2019	$	13,406	$	19,963	$	8,054	$	12,662	$	36,112	$	3,595	$	985	$	94,777
Impact of adopting ASC 326	264		(4,740)		21,029		(3,144)		23,040		2,638		(985)		38,102
Charged-off loans	(1,061)		(263)		(2,126)		—		(14,998)		(2,247)		—		(20,695)
Recovery of previously charged-off loans	225		199		674		93		2,997		967		—		5,155
Provision for credit losses on loans	25,969		53,267		1,727		32,286		53,459		1,325		—		168,033
Balance at June 30, 2020	$	38,803	$	68,426	$	29,358	$	41,897	$	100,610	$	6,278	$	—	$	285,372
Six months ended June 30, 2019:
Balance at December 31, 2018	$	11,297	$	15,649	$	7,670	$	11,128	$	31,731	$	5,423	$	677	$	83,575
Charged-off loans	(1,586)		(13)		(930)		(4)		(8,760)		(3,255)		—		(14,548)
Recovery of previously charged-off loans	76		888		741		141		4,342		659		—		6,847
Provision for credit losses on loans	2,387		2,128		1,008		(59)		10,123		(713)		(495)		14,379
Balance at June 30, 2019	$	12,174	$	18,652	$	8,489	$	11,206	$	37,436	$	2,114	$	182	$	90,253

The following table details the ~~average~~allowance for credit losses on loans and recorded investment in loans by loan classification and by impairment evaluation method as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Unallocated		Total
December 31, 2019
Allowance for Loan Losses:
Collectively evaluated for impairment	$	32,134	$	6,762	$	12,629	$	35,401	$	3,586			$	90,512
Individually evaluated for impairment	1,235		1,292		33		711		9				3,280
Loans acquired with deteriorated credit quality⁽¹⁾	—		—		—		—		—				—
Total allowance for loan losses	$	33,369	$	8,054	$	12,662	$	36,112	$	3,595	$	985	$	94,777

Loans:
Collectively evaluated for impairment	$	7,681,608	$	3,036,922	$	2,426,901	$	6,274,280	$	289,106			$	19,708,817
Individually evaluated for impairment	18,122		25,018		561		14,295		148				58,144
Loans acquired with deteriorated credit quality	9,488		6,685		3,021		1,721		—				20,915
Total loans	$	7,709,218	$	3,068,625	$	2,430,483	$	6,290,296	$	289,254			$	19,787,876

⁽¹⁾Prior to the adoption of ASC 326 on January 1, 2020, an allowance for loan losses was recorded on loans acquired with deteriorated credit quality only in the event of additional credit deterioration subsequent to acquisition.

Table of Contents

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.

As described in Note 1. Summary of Significant Accounting Policies, 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 all loan segments collectively evaluated, 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. Upon implementation of ASU 2016-13 on January 1, 2020, Pinnacle Financial utilized a reasonable and supportable period of eighteen months for all loan segments, followed by a twelve month straight line reversion to long term averages. At June 30, 2020, a reasonable and supportable period of twelve months was utilized for owner occupied commercial real estate, construction and land development, and commercial and industrial in response to the relatively high level of economic uncertainly related to the ongoing COVID-19 pandemic. For all other loan segments, the reasonable and supportable period of eighteen months was maintained as longer variable lag structures are used within their statistical models, which inherently mitigates the uncertainty in the economic projections by placing less reliance on sudden changes in the projections. The twelve month straight line reversion period was maintained for all loan segments at June 30, 2020. Upon adoption of ASU 2016-13, the opening balance of ~~impaired~~the allowance for credit losses was increased by $38.1 million through retained earnings. The additional increase during the three months ended June 30, 2020 is primarily attributable to the change in projected economic conditions resulting from the COVID-19 pandemic, with the projected increase in the unemployment rate being the most significant driver.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine

expected credit losses:


June 30, 2020	Real Estate		Business Assets		Other		Total
Commercial real estate:
Owner-occupied	16,215		—		—		16,215
Non-owner occupied	14,447		—		—		14,447
Consumer real estate – mortgage	29,385		—		—		29,385
Construction and land development	4,452		—		—		4,452
Commercial and industrial	482		14,769		309		15,560
Consumer and other	—		—		48		48
Total	$	64,981	$	14,769	$	357	$	80,107

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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, 2020 and December 31, 2019. Also presented is the balance of loans on nonaccrual status at June 30, 2020 for which there was ~~$86.2 million and $85.2 million, respectively, compared to $75.1 million and $69.8 million, respectively,~~no related allowance for ~~the same periods in 2018.~~ credit losses recorded (in thousands):


	June 30, 2020										December 31, 2019
	Total nonaccrual loans		Nonaccrual loans with no allowance for credit losses		Loans past due 90 or more days and still accruing		Total nonaccrual loans		Loans past due 90 or more days and still accruing
Commercial real estate:
Owner-occupied	$	11,806	$	4,325	$	—	$	11,654	$	—
Non-owner occupied	10,454		7,540		—		7,173		—
Consumer real estate – mortgage	23,237		—		18		24,667		168
Construction and land development	3,230		1,222		—		2,278		—
Commercial and industrial	13,780		6,753		1,459		15,685		946
Consumer and other	55		—		505		148		501
Total	$	62,562	$	19,840	$	1,982	$	61,605	$	1,615

Pinnacle Financial's policy is ~~that~~ 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 ~~that~~ once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. ~~As detailed in the following table,~~ Pinnacle Financial recognized ~~$89,000 and $176,000, respectively, in~~0 interest income from cash payments received on nonaccrual loans during the three and six months ended June 30, ~~2019~~2020, compared to ~~$153,000~~$89,000 and ~~$253,000, respectively,~~$176,000 during the three and six months ended June 30, ~~2018.~~2019, respectively. Had these nonaccruing loans been on accruing status, interest income would have been higher by $854,000 and $1.6 million for the three and six months ended June 30, 2020, respectively, compared to $1.4 million and $2.6 million ~~respectively,~~higher for the three and six months ended June 30, 2019, ~~compared to $1.2~~respectively. Approximately $32.1 million and ~~$2.2~~$35.8 million ~~respectively, higher for the three and six months ended~~of nonaccrual loans as of June 30, ~~2018.~~2020 and December 31, 2019, respectively, were performing pursuant to their contractual terms at those dates.

The following table presents impaired loans at December 31, 2019 as determined under ASC 310 prior to the adoption of ASU 2016-13. Impaired loans generally include nonaccrual loans, troubled debt restructurings, and other loans deemed to be impaired but that continue to accrue interest. Presented are the recorded investment, unpaid principal balance and related allowance of impaired loans at December 31, 2019 by loan classification (in thousands):


	At December 31, 2019
	Recorded investment		Unpaid principal balances		Related allowance
Impaired loans with an allowance:
Commercial real estate – mortgage	$	9,998	$	10,983	$	1,235
Consumer real estate – mortgage	20,996		23,105		1,292
Construction and land development	542		654		33
Commercial and industrial	4,074		5,381		711
Consumer and other	148		182		9
Total	$	35,758	$	40,305	$	3,280

Impaired loans without an allowance:
Commercial real estate – mortgage	$	8,124	$	8,891	$	—
Consumer real estate – mortgage	4,022		4,021		—
Construction and land development	19		17		—
Commercial and industrial	10,221		11,322		—
Consumer and other	—		—		—
Total	$	22,386	$	24,251	$	—

Total impaired loans	$	58,144	$	64,556	$	3,280

Table of Contents

The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three and six months ended June 30, 2019, ~~and 2018,~~ respectively, of impaired loans by loan classification as determined under ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


	Three months ended						Six months ended
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Impaired loans with an allowance:
Commercial real estate – mortgage	$	15,589	$	—	$	15,097	$	—
Consumer real estate – mortgage	22,219		—		21,434		—
Construction and land development	747		—		692		—
Commercial and industrial	9,718		—		9,563		—
Consumer and other	221		—		475		—
Total	$	48,494	$	—	$	47,261	$	—

Impaired loans without an allowance:
Commercial real estate – mortgage	$	13,503	$	89	$	13,910	$	176
Consumer real estate – mortgage	10,658		—		9,521		—
Construction and land development	—		—		595		—
Commercial and industrial	13,505		—		13,868		—
Consumer and other	—		—		—		—
Total	$	37,666	$	89	$	37,894	$	176

Total impaired loans	$	86,160	$	89	$	85,155	$	176

For the three months ended
June 30, For the six months ended
June 30,
2019 2018 2019 2018
Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized Average recorded investment Interest income recognized
Impaired loans with an allowance:
Commercial real estate – mortgage $ 15,589
$ —
$ 12,527
$ —
$ 15,097
$ —
$ 8,968
$ —
Consumer real estate – mortgage 22,219
—
11,066
—
21,434
—
10,053
—
Construction and land development 747
—
1,059
—
692
—
1,547
—
Commercial and industrial 9,718
—
7,976
—
9,563
—
9,491
—
Consumer and other 221
—
822
—
475
—
548
—
Total $ 48,494
$ —
$ 33,450
$ —
$ 47,261
$ —
$ 30,607
$ —

Impaired loans without an allowance:

Commercial real estate – mortgage $ 13,503
$ 89
$ 18,493
$ 153
$ 13,910
$ 176
$ 17,783
$ 253
Consumer real estate – mortgage 10,658
—
4,805
—
9,521
—
4,585
—
Construction and land development —
—
—
—
595
—
882
—
Commercial and industrial 13,505
—
18,401
—
13,868
—
15,902
—
Consumer and other —
—
—
—
—
—
—
—
Total $ 37,666
$ 89
$ 41,699
$ 153
$ 37,894
$ 176
$ 39,152
$ 253

Total impaired loans $ 86,160
$ 89
$ 75,149
$ 153
$ 85,155
$ 176
$ 69,759
$ 253

Prior to the adoption of ASU 2016-13, loans acquired with deteriorated credit quality, referred to under ASC 310-30 as purchased credit impaired loans and under ASU 2016-13 as purchased credit deteriorated loans, were assigned a credit related purchase discount and non-credit related purchase discount at acquisition. Upon adoption of ASU 2016-13 on January 1, 2020, the remaining credit related discount was re-classified to a component of the allowance for credit losses. The remaining non-credit discount will continue to be accreted into income over the remaining lives of the related loans. The following table provides a rollforward of purchased credit deteriorated loans from December 31, 2019 through June 30, 2020 (in thousands):


	Gross Carrying Value		Accretable Yield		Nonaccretable Yield		Net Carrying Value
December 31, 2019	$	29,544	$	(4,801)	$	(3,828)	$	20,915

Reclassification of discount to allowance for credit losses	—		—		3,828		3,828
Year-to-date settlements	(3,152)		1,939		—		(1,213)
June 30, 2020	$	26,392	$	(2,862)	$	—	$	23,530

The carrying value is adjusted for additional draws, pursuant to contractual arrangements, offset by loan paydowns. Year-to-date settlements include both loans that were charged-off as well as loans that were paid off, typically as a result of refinancings at other institutions.

At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were ~~$7.4~~$3.3 million and ~~$5.9~~$4.9 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.

Table of Contents

The following table outlines the amount of each loan category where troubled debt restructurings were made during the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands):


	Three Months Ended June 30,								Six Months Ended June 30,
	Number of contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance		Number of contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance
2020
Commercial real estate:
Owner-occupied	—	$	—	$	—	—	$	—	$	—
Non-owner occupied	—	—		—		—	—		—
Consumer real estate – mortgage	—	—		—		1	807		807
Construction and land development	—	—		—		—	—		—
Commercial and industrial	—	—		—		—	—		—
Consumer and other	—	—		—		—	—		—
	—	$	—	$	—	1	$	807	$	807

2019
Commercial real estate:	—	$	—	$	—	—	$	—	$	—
Consumer real estate – mortgage	1	712		626		1	712		626
Construction and land development	1	21		19		1	21		19
Commercial and industrial	1	1,397		796		1	1,397		796
Consumer and other	—	—		—		—	—		—
	3	$	2,130	$	1,441	3	$	2,130	$	1,441

Three Months Ended
June 30, Six Months Ended
June 30,
2019 Number
of contracts Pre Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment, net of related allowance Number
of contracts Pre Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment, net of related allowance
Commercial real estate – mortgage —
$ —
$ —
—
$ —
$ —
Consumer real estate – mortgage 1
712
626
1
712
626
Construction and land development 1
21
19
1
21
19
Commercial and industrial 1
1,397
796
1
1,397
796
Consumer and other —
—
—
—
—
—
3
$ 2,130
$ 1,441
3
$ 2,130
$ 1,441

2018
Commercial real estate – mortgage —
$ —
$ —
—
$ —
$ —
Consumer real estate – mortgage 1
38
38
1
38
�� 38
Construction and land development —
—
—
—
—
—
Commercial and industrial —
—
—
—
—
—
Consumer and other —
—
—
—
—
—
1
$ 38
$ 38
1
$ 38
$ 38

There were no troubled debt restructurings made during the three months ended June 30, 2020. During the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, there were no0 troubled debt restructurings that subsequently defaulted within twelve months of the restructuring.

~~At June~~In response to the COVID-19 pandemic and its economic impact to its customers, Pinnacle Bank implemented a short-term modification program in accordance with interagency regulatory guidance to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 ~~2019,~~days past due at the ~~allowance~~time of the modification. This program allows for ~~loan losses included~~ a ~~$900,000 allowance specifically related~~deferral of payments for 90 days, which Pinnacle Bank may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. Pursuant to ~~accruing troubled debt restructurings,~~the interagency regulatory guidance, Pinnacle Financial may elect to not classify loans for which these deferrals are ~~classified~~granted as impaired loans pursuant to U.S. GAAP, but which continued to accrue interest at contractual rates at that date. At December 31, 2018, the allowance for loan losses included no allowance specifically related to accruing troubled debt restructurings.

~~In addition to the loan metrics above,~~ 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, ~~2019~~2020 with the comparative exposures for December 31, ~~2018~~2019 (in thousands):


	June 30, 2020
	Outstanding Principal Balances		Unfunded Commitments		Total exposure		Total Exposure at December 31, 2019
Lessors of nonresidential buildings	$	3,780,487	$	907,096	$	4,687,583	$	4,578,116
Lessors of residential buildings	1,046,928		773,602		1,820,530		1,599,837
New Housing For-Sale Builders	529,797		608,139		1,137,936		1,090,603
Hotels (except Casino Hotels) and Motels	874,824		155,778		1,030,602		967,771

June 30, 2019
Outstanding Principal Balances Unfunded Commitments Total exposure
Total Exposure at
December 31, 2018
Lessors of nonresidential buildings $ 3,375,085
$ 871,369
$ 4,246,454
$ 3,932,059
Lessors of residential buildings 1,003,666
398,766
1,402,432
1,484,697
New Housing For-Sale Builders 508,964
575,435
1,084,399
1,100,989
Hotels (except Casino Hotels) and Motels 847,103
154,986
1,002,089
920,001

~~Additionally,~~

Table of Contents

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 both June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were ~~82.6% and 85.2%, respectively.~~83.6%. Non-owner occupied commercial real estate and multifamily loans (including construction and land development loans) as a percentage of total risk-based capital were ~~288.9%~~275.0% and ~~277.7%~~268.3% as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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, ~~2019,~~2020, 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 table below presents past due balances by loan classification and segment at June 30, 2019 and December 31, 2018, allocated between accruing and nonaccrual status (in thousands):~~

Accruing Nonaccruing
June 30, 2019 30-89 days past due and accruing 90 days or more past due and accruing Total past due and accruing Current and accruing Purchase credit impaired
Nonaccrual ⁽¹⁾
Nonaccruing purchase credit impaired ⁽¹⁾
Total loans
Commercial real estate:
Owner-occupied $ 2,373
$ 70
$ 2,443
$ 2,606,321
$ 2,450
$ 11,976
$ 970
$ 2,624,160
All other 4,731
—
4,731
4,940,587
5,070
10,828
17
4,961,233
Consumer real estate – mortgage 10,603
220
10,823
2,905,629
3,406
25,501
4,396
2,949,755
Construction and land development 3,469
—
3,469
2,110,684
1,421
605
1,790
2,117,969
Commercial and industrial 11,420
1,537
12,957
5,761,982
285
19,883
—
5,795,107
Consumer and other 4,658
906
5,564
360,419
—
111
—
366,094
Total $ 37,254
$ 2,733
$ 39,987
$ 18,685,622
$ 12,632
$ 68,904
$ 7,173
$ 18,814,318

Accruing Nonaccruing
December 31, 2018 30-89 days past due and accruing 90 days or more past due and accruing Total past due and accruing Current and accruing Purchase credit impaired
Nonaccrual ⁽¹⁾
Nonaccruing purchase credit impaired ⁽¹⁾
Total loans
Commercial real estate:
Owner-occupied $ 10,170
$ —
$ 10,170
$ 2,623,700
$ 2,664
$ 16,025
$ 874
$ 2,653,433
All other 1,586
—
1,586
4,488,840
5,659
12,634
2,802
4,511,521
Consumer real estate – mortgage 18,059
—
18,059
2,794,630
3,689
22,564
5,505
2,844,447
Construction and land development 3,759
—
3,759
2,063,201
2,108
2,020
1,367
2,072,455
Commercial and industrial 21,451
1,082
22,533
5,225,205
623
23,022
38
5,271,421
Consumer and other 3,276
476
3,752
349,537
—
983
—
354,272
Total $ 58,301
$ 1,558
$ 59,859
$ 17,545,113
$ 14,743
$ 77,248
$ 10,586
$ 17,707,549


~~(1)~~	~~Approximately $34.8 million and $52.5 million of nonaccrual loans as of June 30, 2019 and December 31, 2018, respectively, were performing pursuant to their contractual terms at those dates~~.

~~The following table details the changes in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018, respectively, by loan classification (in thousands):~~

Commercial real estate - mortgage
Consumer
real estate - mortgage
Construction and land development Commercial and industrial
Consumer
and other
Unallocated Total
Three months ended June 30, 2019:
Balance at March 31, 2019 $ 30,167
$ 8,369
$ 10,915
$ 32,699
$ 4,803
$ 241
$ 87,194
Charged-off loans (1,065 ) (580 ) (4 ) (5,408 ) (1,423 ) —
(8,480 )
Recovery of previously charged-off loans 892
372
19
2,744
317
—
4,344
Provision for loan losses 832
328
276
7,401
(1,583 ) (59 ) 7,195
Balance at June 30, 2019 $ 30,826
$ 8,489
$ 11,206
$ 37,436
$ 2,114
$ 182
$ 90,253

Three months ended June 30, 2018:

Balance at March 31, 2018 $ 22,688
$ 5,100
$ 10,116
$ 26,648
$ 5,476
$ 176
$ 70,204
Charged-off loans (234 ) (935 ) (10 ) (1,724 ) (3,795 ) —
(6,698 )
Recovery of previously charged-off loans 58
537
1,010
567
590
—
2,762
Provision for loan losses 2,336
1,151
(132 ) 2,847
2,901
299
9,402
Balance at June 30, 2018 $ 24,848
$ 5,853
$ 10,984
$ 28,338
$ 5,172
$ 475
$ 75,670

Six months ended June 30, 2019:
Balance at December 31, 2018 $ 26,946
$ 7,670
$ 11,128
$ 31,731
$ 5,423
$ 677
$ 83,575
Charged-off loans (1,599 ) (930 ) (4 ) (8,760 ) (3,255 ) —
(14,548 )
Recovery of previously charged-off loans 964
741
141
4,342
659
—
6,847
Provision for loan losses 4,515
1,008
(59 ) 10,123
(713 ) (495 ) 14,379
Balance at June 30, 2019 $ 30,826
$ 8,489
$ 11,206
$ 37,436
$ 2,114
$ 182
$ 90,253

Six months ended June 30, 2018:

Balance at December 31, 2017 $ 21,188
$ 5,031
$ 8,962
$ 24,863
$ 5,874
$ 1,322
$ 67,240
Charged-off loans (962 ) (1,271 ) (12 ) (4,264 ) (8,858 ) —
(15,367 )
Recovery of previously charged-off loans 1,454
1,203
1,575
1,455
1,777
—
7,464
Provision for loan losses 3,168
890
459
6,284
6,379
(847 ) 16,333
Balance at June 30, 2018 $ 24,848
$ 5,853
$ 10,984
$ 28,338
$ 5,172
$ 475
$ 75,670

The following table details the allowance for loan losses and recorded investment in loans by loan classification and by impairment evaluation method as of June 30, 2019 and December 31, 2018, respectively (in thousands):

Commercial real estate - mortgage
Consumer
real estate - mortgage
Construction and land development Commercial and industrial
Consumer
and other
Unallocated Total
June 30, 2019

Allowance for Loan Losses:

Collectively evaluated for impairment $ 30,048
$ 6,341
$ 11,163
$ 34,876
$ 2,114

$ 84,542
Individually evaluated for impairment 778
2,148
43
2,560
—

5,529
Loans acquired with deteriorated credit quality⁽¹⁾
—
—
—
—
—

—
Total allowance for loan losses $ 30,826
$ 8,489
$ 11,206
$ 37,436
$ 2,114
$ 182
$ 90,253

Loans:

Collectively evaluated for impairment $ 7,553,915
$ 2,911,298
$ 2,114,132
$ 5,772,870
$ 365,983

$ 18,718,198
Individually evaluated for impairment 22,971
30,655
626
21,952
111

76,315
Loans acquired with deteriorated credit quality 8,507
7,802
3,211
285
—

19,805
Total loans $ 7,585,393
$ 2,949,755
$ 2,117,969
$ 5,795,107
$ 366,094

$ 18,814,318

December 31, 2018

Allowance for Loan Losses:

Collectively evaluated for impairment $ 26,222
$ 6,227
$ 11,100
$ 30,290
$ 5,095

$ 78,934
Individually evaluated for impairment 724
1,443
28
1,441
328

3,964
Loans acquired with deteriorated credit quality⁽¹⁾
—
—
—
—
—

—
Total allowance for loan losses $ 26,946
$ 7,670
$ 11,128
$ 31,731
$ 5,423
$ 677
$ 83,575

Loans:

Collectively evaluated for impairment $ 7,124,117
$ 2,808,142
$ 2,066,613
$ 5,246,913
$ 353,289

$ 17,599,074
Individually evaluated for impairment 28,838
27,111
2,367
23,847
983

83,146
Loans acquired with deteriorated credit quality 11,999
9,194
3,475
661
—

25,329
Total loans $ 7,164,954
$ 2,844,447
$ 2,072,455
$ 5,271,421
$ 354,272

$ 17,707,549

⁽¹⁾~~Loans acquired with deteriorated credit quality are recorded at fair value at the time of acquisition. An allowance for loan losses is recorded only in the event of subsequent credit deterioration.~~

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The allowance for loan losses for purchased loans is calculated similarly to the method utilized for legacy Pinnacle Bank loans. Pinnacle Financial's accounting policy is to compare the computed allowance for loan losses for purchased loans on a loan-by-loan basis to any remaining fair value adjustment. If the computed allowance is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a charge to the provision for loan losses.

At June 30, 2020, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $11.1 million to current directors, executive officers, and their related entities, of which $7.1 million had been drawn upon. At December 31, 2019, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $38.4 million to current directors, executive officers, and their related entities, of which $19.6 million had been drawn upon. At December 31, 2018, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $37.9$10.6 million to directors, executive officers, and their related entities, of which approximately ~~$18.3~~$6.8 million had been drawn upon. ~~None of these~~All loans to directors, executive officers, and their related entities were ~~impaired~~performing in accordance with contractual terms at June 30, ~~2019 or~~2020 and December 31, ~~2018.~~2019.

At June 30, ~~2019,~~2020, Pinnacle Financial had approximately ~~$21.3~~$16.2 million in commercial loans held for sale compared to ~~$16.0~~$17.6 million at December 31, ~~2018,~~2019, 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.

Residential Lending

At June 30, ~~2019,~~2020, Pinnacle Financial had approximately ~~$55.7~~$53.7 million of mortgage loans held-for-sale compared to approximately ~~$31.8~~$61.6 million at December 31, ~~2018.~~2019. Total loan volumes sold during the six months ended June 30, ~~2019~~2020 were approximately ~~$485.6~~$837.4 million compared to approximately ~~$636.7~~$485.6 million for the six months ended June 30, ~~2018.~~2019. During the three and six months ended June 30, ~~2019,~~2020, Pinnacle Financial recognized ~~$6.0~~$19.6 million and ~~$10.9~~$28.2 million, respectively, in gains on the sale of these loans, net of commissions paid, compared to ~~$3.8~~$6.0 million and ~~$7.5~~$10.9 million, respectively, net of commissions paid, during the three and six months ended June 30, ~~2018.~~2019.

These mortgage loans held-for-sale are originated internally and are primarily to borrowers in Pinnacle Bank's geographic markets. These sales are typically on a mandatory basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines.

Each purchaser of a mortgage loan held-for-sale has specific guidelines and criteria for sellers of loans and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require Pinnacle Bank to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties, Pinnacle Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan. To date, Pinnacle Bank's liability pursuant to the terms of these representations and warranties has been insignificant to Pinnacle Bank.

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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 ~~$5.1~~$6.9 million at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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, ~~2019~~2020 and ~~2018.~~2019.

Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For both the three and six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, there were no0 interest and penalties recorded in the income statement.

Pinnacle Financial's effective tax rate for the three and six months ended June 30, ~~2019~~2020 was ~~19.6%~~expense of 15.2% and 9.5%, respectively, compared to ~~20.9% and 20.0%~~expense of 19.6% for the three and six months ended June 30, ~~2018, respectively.~~2019. The difference between the effective tax rate and the federal and state income tax statutory rate of 26.14% at June 30, ~~2019~~2020 and ~~2018~~2019 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 our captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense, non-deductible executive compensation and non-deductible FDIC premiums. ~~Also impacting~~

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, ~~expense~~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, ~~2019 were~~2020 we recognized excess tax expense of $272,000 and benefits of $590,000, respectively, compared to excess tax expense of $68,000 and benefits of $701,000, respectively, ~~recognized upon the lapse of restrictions on stock awards and stock options exercises, compared to benefits of $72,000 and $2.8 million, respectively,~~ for the three and six months ended June 30, ~~2018.~~2019. For the six months ended June 30, 2020, income tax expense was also impacted by provision for credit losses, including provision for credit losses resulting from the COVID-19 pandemic, which was recorded as a discrete item as a component of total income tax. Accordingly, we recognized a tax benefit of $22.4 million for the six months ended June 30, 2020.

Note 6. Commitments and Contingent Liabilities

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

and may require payment of a fee. At June 30, ~~2019,~~2020, these commitments amounted to ~~$7.6~~$8.7 billion, of which approximately ~~$1.0~~$1.1 billion related to home equity lines of credit.

Standby letters of credit are generally issued on behalf of an applicant (Pinnacle Bank's customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from Pinnacle Bank under certain prescribed circumstances. Subsequently, Pinnacle Bank would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit. At June 30, ~~2019,~~2020, these commitments amounted to ~~$198.9~~$213.3 million.

Pinnacle Bank 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.

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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, ~~2019~~2020 and December 31, ~~2018,~~2019, Pinnacle Financial had accrued ~~$2.4~~$20.8 million and ~~$2.9~~$2.4 million, respectively, for the inherent risks associated with these off-balance sheet commitments. The adoption of ASU 2016-13 effective January 1, 2020, which introduced the CECL methodology for measuring credit losses, as discussed more fully in Note. 1 Summary of Significant Accounting Policies, increased the opening balance of our accrual for off-balance sheet commitments at adoption by $8.8 million. The remainder of the increase is largely attributable to the anticipated economic impact of the COVID-19 pandemic and its effect on Pinnacle Financial's CECL credit loss modeling for the three and six months ended June 30, 2020.

In June 2020, a purported class action lawsuit was filed against Pinnacle Bank alleging, among other claims, that Pinnacle Bank failed to pay fees to purported agents of PPP borrowers that the plaintiff alleges were owed under the PPP in violation of SBA regulations. Pinnacle Bank disputes the plaintiff’s claims and intends to vigorously defend itself in connection with this proceeding.

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the ~~resolution~~resolutions of these claims outstanding at June 30, ~~2019 will~~2020 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

The 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, ~~2019,~~2020, there were approximately ~~1.3 million~~838,996 shares available for issuance under the 2018 Plan.

The BNC Bancorp 2013 Amended and Restated Omnibus Stock Incentive Plan (the "BNC Plan") was assumed by Pinnacle Financial in connection with its merger with BNC. As of June 30, ~~2019, the BNC Plan had approximately 8,000~~2020, there were 0 shares remaining available for issuance ~~to existing associates that were previously~~from the BNC ~~associates. No~~Plan. NaN new awards may be granted under equity incentive plans of Pinnacle Financial other than the 2018 ~~Plan except for shares remaining available for issuance to the former BNC associates pursuant to the BNC~~ Plan.

Upon the acquisition of CapitalMark, Pinnacle Financial assumed approximately 858,000 stock options under the CapitalMark Option Plan. NoNaN further ~~shares~~awards remain available for issuance under the CapitalMark Option Plan. At June 30, ~~2019,~~2020, all of the remaining options outstanding 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, ~~2019~~2020 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters is as follows:


	Number	Weighted-Average Exercise Price		Weighted-Average Contractual Remaining Term (in years)	Aggregate Intrinsic Value (000's)
Outstanding at December 31, 2019	119,274	$	23.45	2.85	$	4,837	⁽¹⁾
Granted	—
Exercised	(9,787)
Forfeited	—
Outstanding at June 30, 2020	109,487	$	23.44	2.35	$	2,031	⁽²⁾
Options exercisable at June 30, 2020	109,487	$	23.44	2.35	$	2,031	⁽²⁾

Number
Weighted-Average
Exercise
Price
Weighted-Average
Contractual
Remaining Term
(in years)
Aggregate
Intrinsic
Value
(000's)

Outstanding at December 31, 2018 176,709
$ 22.77
2.23 $ 4,123
⁽¹⁾
Granted —

Exercised (5,600 )

Forfeited —

Outstanding at June 30, 2019 171,109
$ 22.70
2.81 $ 5,951
⁽²⁾
Options exercisable at June 30, 2019 171,109
$ 22.70
2.81 $ 5,951
⁽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 $64.00 per common share at December 31, 2019 for the 119,274 options that were in-the-money at December 31, 2019.


~~(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 $46.10 per common share at December 31, 2018 for the 176,709 options that were in-the-money at December 31, 2018.


~~(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 $57.48 per common share at June 30, 2019 for the 171,109 options that were in-the-money at June 30, 2019.

(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 $41.99 per common share at June 30, 2020 for the 109,487 options that were in-the-money at June 30, 2020.

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, ~~2019~~2020 is as follows:


	Number	Grant Date Weighted-Average Cost
Unvested at December 31, 2019	555,296	$	57.04
Shares awarded	249,545	58.07
Restrictions lapsed and shares released to associates/directors	(167,615)	55.90
Shares forfeited ⁽¹⁾	(12,586)	59.97
Unvested at June 30, 2020	624,640	$	57.70

Number
Grant Date
Weighted-Average Cost
Unvested at December 31, 2018 692,806
$ 55.19
Shares awarded 209,220

Restrictions lapsed and shares released to associates/directors (261,061 )

Shares forfeited ⁽¹⁾
(19,211 )

Unvested at June 30, 2019 621,754
$ 56.99
(1)Represents shares forfeited due to employee termination and/or retirement. NaN shares were forfeited due to failure to meet performance targets.


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

Pinnacle Financial has granted restricted share awards to associates ~~(including members of executive management)~~ and outside directors with a ~~combination of time and, in the case of the annual award to the members of the Company's leadership team, performance~~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, ~~2019.~~2020. 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 participants	Shares Forfeited by participants ⁽⁴⁾	Shares Unvested
Time Based Awards
2020	Associates ⁽²⁾	3	-	5	231,020	97	2,973	227,950
Outside Director Awards ⁽³⁾
2020	Outside directors			1	18,525	—	—	18,525

(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 performance-based vesting 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 February 28, 2021 based on each individual board member meeting their attendance goals for the various board and board committee meetings to which each member was scheduled to attend.

(4)These shares represent forfeitures resulting from recipients whose employment or board membership was terminated during the year-to-date period ended June 30, 2020. 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.

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Grant
Year

Group ⁽¹⁾

Vesting
Period in years

Shares
awarded
Restrictions Lapsed and shares released to participants
Shares Forfeited by participants ⁽⁴⁾
Shares Unvested
Time Based Awards
2019
Associates ⁽²⁾
3 - 5 192,671
224
5,124
187,323
Outside Director Awards ⁽³⁾

2019 Outside directors 1 16,549
—
—
16,549

~~(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 performance-based vesting 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 February 29, 2020 based on each individual board member meeting their attendance goals for the various board and board committee meetings to which each member was scheduled to attend.


~~(4)~~	These shares represent forfeitures resulting from recipients whose employment or board membership was terminated during the year-to-date period ended June 30, 2019. 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.

Performance-based Vesting Restricted ~~Share~~Stock Units

The following table details the performance-based vesting restricted ~~share~~stock unit awards ~~(all of which are performance units)~~ outstanding at June 30, ~~2019:~~2020:

Units Awarded
Grant year
Named Executive Officers
(NEOs) ⁽¹⁾
Leadership Team other than NEOs
Applicable Performance Periods associated with each tranche
(fiscal year)
Service period per tranche
(in years)
Subsequent holding period per tranche
(in years)
Period in which units to be settled into shares of common stock⁽²⁾
2019 166,211 - 249,343
52,244
2019 2 3 2024
2020 2 2 2024
2021 2 1 2024
2018 96,878 - 145,339
25,990
2018 2 3 2023
2019 2 2 2023
2020 2 1 2023
2017 72,537 - 109,339
24,916
2017 2 3 2022

2018 2 2 2022

2019 2 1 2022
2016 73,474 - 110,223
26,683
2016 2 3 2021

2017 2 2 2021

2018 2 1 2021
2015 58,200 - 101,850
28,378
2015 2 3 2020

2016 2 2 2020

2017 2 1 2020


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


~~(2)~~	Restricted share unit awards granted in 2019, 2018, 2017, 2016 and 2015, if earned, will be settled in shares of Pinnacle Financial Common Stock in the periods noted in the table, if Pinnacle Bank's ratio of non-performing assets to its loans plus ORE is less than amounts established in the applicable award agreement.


	Units Awarded
Grant year	Named Executive Officers (NEOs) ⁽¹⁾					Leadership Team other than NEOs	Applicable Performance Periods associated with each tranche (fiscal year)	Service period per tranche (in years)	Subsequent holding period per tranche (in years)	Period in which units to be settled into shares of common stock⁽²⁾
2020	136,137	—	204,220	59,648	2020	2	3	2025
					2021	2	2	2025
					2022	2	1	2025
2019	166,211	-	249,343	52,244	2019	2	3	2024
					2020	2	2	2024
					2021	2	1	2024
2018	96,878	-	145,339	25,990	2018	2	3	2023
					2019	2	2	2023
					2020	2	1	2023
2017	72,537	-	109,339	24,916	2017	2	3	2022
					2018	2	2	2022
					2019	2	1	2022
2016	73,474	-	110,223	26,683	2016	2	3	2021
					2017	2	2	2021
					2018	2	1	2021

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

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

During the six months ended June 30, 2020, the restrictions associated with 129,723 performance-based vesting restricted stock unit awards granted in prior years and 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 43,996 shares being withheld to pay the taxes associated with the settlement of those shares.

Stock compensation expense related to both restricted share awards and restricted share units for the three and six months ended June 30, ~~2019~~2020 was $4.1 million and $9.6 million, respectively, compared to $5.2 million and $10.1 ~~million, respectively, compared to $4.3 million and $8.8~~ million, respectively, for the three and six months ended June 30, ~~2018.~~2019. As of the June 30, ~~2019,~~2020, the total compensation cost related to unvested restricted share awards and performance-based vesting restricted ~~share~~stock units not yet recognized was $~~44.7~~$45.1 million. This expense, if the underlying units are earned, is expected to be recognized over a weighted-average period of 2.06 years.

~~1.64~~ ~~years.~~

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.

Non-hedge derivatives

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

~~Non-hedge derivatives~~

Pinnacle Financial enters into interest rate swaps (swaps) to facilitate customer transactions and meet their financing needs. Upon entering into these instruments to meet customer needs, Pinnacle Financial enters into offsetting positions 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, ~~2019~~2020 and December 31, ~~2018~~2019 is included in the following table (in thousands):

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		June 30, 2019					December 31, 2018							June 30, 2020						December 31, 2019
	Balance Sheet Location	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value				Balance Sheet Location	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Interest rate swap agreements:												Interest rate swap agreements:
Assets	Other assets	$	1,132,854	$	41,659		$	1,059,724	$	22,273		Assets	Other assets	$	1,526,515	$	122,073	$	1,296,389	$	43,507
Liabilities	Other liabilities	1,132,854		(41,889		)	1,059,724		(22,401		)	Liabilities	Other liabilities	1,526,515		(123,418)		1,296,389		(43,715)
Total		$	2,265,708	$	(230	)	$	2,119,448	$	(128	)	Total		$	3,053,030	$	(1,345)	$	2,592,778	$	(208)

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, ~~2019~~2020 and ~~2018~~2019 were as follows ~~net of tax~~ (in thousands):


		Amount of Loss Recognized in Income
	Location of Loss Recognized in Income	Three Months Ended June 30,									Six Months Ended June 30,
				2020			2019			2020			2019
Interest rate swap agreements	Other noninterest income	$	(794)		$	(89)		$	(1,137)		$	(102)

Amount of Gain (Loss) Recognized in Income
Location of Loss Recognized in Income Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Interest rate swap agreements Other noninterest income $ (89 ) $ (14 ) $ (102 ) $ (34 )

Derivatives designated as cash flow hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. Pinnacle Financial uses interest rate floors in an effort to mitigate the impact of declining interest rates on LIBOR-based variable rate loans. Pinnacle Financial uses forward cash flow hedges in an effort to manage future interest rate exposure on borrowings. The hedging strategy converts the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and is used in an effort to protect Pinnacle Financial from floating interest rate variability. ~~During the second quarter of 2019, Pinnacle Financial purchased an interest rate floor to mitigate the impact of declining interest rates on LIBOR-based variable rate loans.~~ A summary of Pinnacle Financial's cash flow hedge relationships as of June 30, ~~2019~~2020 and December 31, ~~2018 are~~2019 is as follows (in thousands):


					June 30, 2019					December 31, 2018										June 30, 2020						December 31, 2019
	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)	Weighted Average Pay Rate	Receive Rate	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value				Balance Sheet Location	Weighted Average Remaining Maturity (In Years)	Weighted Average Pay Rate	Receive Rate	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Asset derivatives															Asset derivatives
Interest rate floor	Other assets	2.34	—%	2.75% minus 1 month LIBOR	$	1,300,000	$	34,428		$	—	$	—		Interest rate floor	Other assets	4.44	—%	2.25% minus 1 month LIBOR	$	1,500,000	$	142,560	$	2,800,000	$	87,422
Liability derivatives															Liability derivatives
Interest rate swaps	Other liabilities	2.85	3.09%	3 month LIBOR	$	99,000	$	(3,793	)	$	99,000	$	(1,757	)	Interest rate swaps	Other liabilities	1.85	3.09%	3 month LIBOR	$	99,000	$	(5,261)	$	99,000	$	(3,312)

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, ~~2019~~2020 and ~~2018~~2019 were as follows, net of tax (in thousands):

Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
Three Months Ended June 30, Six Months Ended June 30,
Asset derivatives 2019 2018 2019 2018
Interest rate floor - loans $ 7,924
$ —
$ 7,924
$ —
Liability derivatives
Interest rate swaps - borrowings $ (980 ) $ 950
$ (1,503 ) $ 2,670
$ 6,944
$ 950
$ 6,421
$ 2,670


	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
	Three Months Ended June 30,						Six Months Ended June 30,
Asset derivatives	2020		2019		2020		2019
Interest rate floor - loans	$	6,318	$	7,924	$	71,667	$	7,924
Liability derivatives
Interest rate swaps - borrowings	$	141	$	(980)	$	(1,439)	$	(1,503)
	$	6,459	$	6,944	$	70,228	$	6,421

The cash flow hedges were determined to be highly effective during the periods presented and as a result qualify for hedge accounting treatment. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or Pinnacle Financial discontinues hedge accounting. Pinnacle Financial expects the hedges at June 30, 2020 to continue to be highly effective and qualify for hedge accounting during the remaining terms of the ~~swaps. A loss~~original hedging transactions. Gains totaling ~~$73,000~~$123,000 net of tax and ~~gains~~losses totaling ~~$183,000, respectively,~~$1.7 million net of tax were reclassified from accumulated other

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comprehensive income (loss) into net income during the three and six months ended June 30, ~~2019~~2020, respectively, compared to ~~$143,000~~losses totaling $73,000 net of tax and ~~$284,000, respectively, for~~gains totaling $183,000 net of tax during the three and six months ended June

30, ~~2018 related to previously terminated derivatives. No amounts~~2019, respectively. During the first quarter of 2020, loan interest rate floors entered into in the second quarter of 2019 with a notional amount totaling $1.3 billion and unrealized gains totaling $16.5 million were terminated. These unrealized gains are being amortized into income on a straight line basis through October 2021. Approximately $8.1 million in unrealized gains, net of tax, are expected to be reclassified from accumulated other comprehensive income (loss) into net income over the next twelve months related to ~~derivatives that are currently on the balance sheet.~~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 ~~securities~~ available-for-sale ~~and fixed rate prepayable loans.~~securities. The hedging strategy ~~on securities~~ converts the fixed interest rates to LIBOR-based variable interest 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. Pinnacle Financial also utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of the loans. A specified portion of the prepayable loans have been designated as the hedged assets under the "last-of-layer" method. Such hedging designations are allowed on the portion of a closed portfolio of prepayable assets that is not expected to be affected by prepayments, defaults, and other factors affecting the timing and amount of cash flows.

A summary of Pinnacle Financial's fair value hedge relationships as of June 30, ~~2019~~2020 and December 31, ~~2018 are~~2019 is as follows (in thousands):


					June 30, 2020						December 31, 2019
	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)	Weighted Average Pay Rate	Receive Rate	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Liability derivatives
Interest rate swap agreements - securities	Other liabilities	6.54	3.08%	3 month LIBOR	$	477,905	$	(82,210)	$	477,905	$	(40,778)

June 30, 2019 December 31, 2018
Balance Sheet Location Weighted Average Remaining Maturity (In Years) Weighted Average Pay Rate Receive Rate Notional Amount Estimated Fair Value Notional Amount Estimated Fair Value
Liability derivatives
Interest rate swap agreements - securities Other liabilities 7.55 3.08% 3 month LIBOR $ 477,905
$ (41,039 ) $ 477,905
$ (14,796 )
Interest rate swap agreements - loans Other liabilities — — — —
—
900,000
(7,037 )
7.55 3.08% $ 477,905
$ (41,039 ) $ 1,377,905
$ (21,833 )

The effects of Pinnacle Financial's fair value hedge relationships on the income statement during the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 were as follows (in thousands):


	Location of Loss on Derivative	Amount of Loss Recognized in Income
				Three Months Ended June 30,									Six Months Ended June 30,
Liability derivatives				2020			2019			2020			2019
Interest rate swaps - securities	Interest income on securities	$	(2,559)		$	(15,963)		$	(41,432)		$	(26,243)
Interest rate swaps - loans	Interest income on loans	$	—		$	(2,061)		$	—		$	(6,915)

Location of Gain (Loss)
on Derivative
Amount of Gain (Loss) Recognized in Income
Three Months Ended June 30, Six Months Ended June 30,
Liability derivatives 2019 2018 2019 2018
Interest rate swaps - securities Interest income on securities $ (15,963 ) $ (1,343 ) $ (26,243 ) $ 236
Interest rate swaps - loans Interest income on loans $ (2,061 ) $ 1,122
$ (6,915 ) $ 1,122

Location of Gain (Loss)
on Hedged Item

Three Months Ended June 30, Six Months Ended June 30,
Liability derivatives - hedged items 2019 2018 2019 2018
Interest rate swaps - securities Interest income on securities $ 15,963
$ 1,343
$ 26,243
$ (236 )
Interest rate swaps - loans Interest income on loans $ 2,061
$ (1,122 ) $ 6,915
$ (1,122 )


	Location of Gain on Hedged Item	Amount of Gain Recognized in Income
				Three Months Ended June 30,									Six Months Ended June 30,
Liability derivatives - hedged items				2020			2019			2020			2019
Interest rate swaps - securities	Interest income on securities	$	2,559		$	15,963		$	41,432		$	26,243
Interest rate swaps - loans	Interest income on loans	$	—		$	2,061		$	—		$	6,915

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	Carrying Amount of the Hedged Assets						Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Line item on the balance sheet
Securities available-for-sale	$	591,147	$	551,789	$	82,210	$	40,778

Carrying Amount of the Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
June 30, 2019 December 31, 2018 June 30, 2019 December 31, 2018
Line item on the balance sheet
Securities available-for-sale $ 513,052
$ 515,063
$ 41,039
$ 14,796
Loans ⁽¹⁾
$ —
$ 907,037
$ —
$ 7,037


~~(1)~~	The carrying amount as shown represents the designated last-of-layer. At December 31, 2018, the total amortized cost basis of the closed portfolio of loans designated in these hedging relationships was $2.7 billion.

During the second quarter of 2019, the fair value hedging relationship on loans was unwound resulting in a swap termination payment to the counterparty of approximately $14.0 million. The corresponding loan fair value hedging adjustment of $14.0 million as of the date of termination will be amortized over the remaining lives of the designated loans. During both the three and six months ended June 30, ~~2019,~~2020, amortization expense totaling ~~$445,000~~$1.0 million and $2.1 million, respectively, related to previously terminated fair value hedges was recognized as a reduction to interest income on loans.

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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 ongoing reviews by senior investment managers. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies and changes in market outlook and the third-party financing environment over time. In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions. These investments are included in Level 3 of the valuation hierarchy if the entities and funds are not widely traded and the underlying investments are in privately-held and/or start-up companies for which market values are not readily available. Certain investments in funds for which the underlying assets of the fund represent publicly traded investments are included in Level 2 of the valuation hierarchy.

Other assets – Included in other assets are certain assets carried at fair value, including interest rate swap agreements to facilitate customer transactions, interest rate floors designated as cash flow hedges, and interest rate locks associated with the mortgage loan

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

~~Impaired~~

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Collateral dependent loans – A loan is classified as impaired when it is probable Pinnacle Financial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. ImpairedCollateral dependent loans are measured ~~based on the present value of expected payments using the loan's original effective rate as the discount rate, the loan's observable market price, or~~at the fair value of the collateral ~~less selling costs if~~securing the loan ~~is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of~~less estimated selling costs. The fair value ~~a valuation allowance may be established as a component~~ of ~~the allowance~~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 ~~loan losses or the difference may be recognized as a charge-off. Impaired~~property specific factors. Non real estate collateral is valued based on various sources, including third party asset valuations and internally determined values based on cost adjusted for depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial condition.

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

Liabilities

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

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The following tables present financial instruments measured at fair value on a recurring basis as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):


	Total carrying value in the consolidated balance sheet		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)
June 30, 2020
Investment securities available-for-sale:
U.S. Treasury securities	$	72,612	$	—	$	72,612	$	—
U.S. government agency securities	76,311		—		76,311		—
Mortgage-backed securities	1,738,446		—		1,738,446		—
State and municipal securities	1,179,729		—		1,164,434		15,295
Agency-backed securities	140,415		—		140,415		—
Corporate notes and other	102,765		—		102,765		—
Total investment securities available-for-sale	$	3,310,278	$	—	$	3,294,983	$	15,295
Other investments	66,276		—		25,664		40,612
Other assets	280,593		—		280,593		—
Total assets at fair value	$	3,657,147	$	—	$	3,601,240	$	55,907

Other liabilities	$	212,810	$	—	$	212,810	$	—
Total liabilities at fair value	$	212,810	$	—	$	212,810	$	—

December 31, 2019
Investment securities available-for-sale:
U.S. Treasury securities	$	72,867	$	—	$	72,867	$	—
U.S. government agency securities	79,692		—		79,692		—
Mortgage-backed securities	1,463,907		—		1,463,907		—
State and municipal securities	1,714,453		—		1,698,550		15,903
Agency-backed securities	152,972		—		152,972		—
Corporate notes and other	56,104		—		56,104		—
Total investment securities available-for-sale	3,539,995		—		3,524,092		15,903
Other investments	63,291		—		25,135		38,156
Other assets	134,040		—		134,040		—
Total assets at fair value	$	3,737,326	$	—	$	3,683,267	$	54,059

Other liabilities	$	87,613	$	—	$	87,613	$	—
Total liabilities at fair value	$	87,613	$	—	$	87,613	$	—

Total carrying value in the consolidated balance sheet
Quoted market prices in an active market
(Level 1)

Models with significant observable market parameters
(Level 2)

Models with significant unobservable market parameters
(Level 3)
June 30, 2019
Investment securities available-for-sale:
U.S. Treasury securities $ 48,917
$ —
$ 48,917
$ —
U.S. government agency securities 55,023
—
55,023
—
Mortgage-backed securities 1,291,913
—
1,291,913
—
State and municipal securities 1,636,502
—
1,621,239
15,263
Agency-backed securities 169,423
—
169,423
—
Corporate notes and other 55,128
—
55,128
—
Total investment securities available-for-sale $ 3,256,906
$ —
$ 3,241,643
$ 15,263
Other investments 56,573
—
25,050
31,523
Other assets 79,776
—
79,776
—
Total assets at fair value $ 3,393,255
$ —
$ 3,346,469
$ 46,786

Other liabilities $ 87,276
$ —
$ 87,276
$ —
Total liabilities at fair value $ 87,276
$ —
$ 87,276
$ —

Total carrying value in the consolidated balance sheet
Quoted market prices in an active market
(Level 1)

Models with significant observable market parameters
(Level 2)

Models with significant unobservable market parameters
(Level 3)
December 31, 2018
Investment securities available-for-sale:

U.S. Treasury securities $ 30,300
$ —
$ 30,300
$ —
U.S. government agency securities 70,159
—
70,159
—
Mortgage-backed securities 1,310,945
—
1,310,945
—
State and municipal securities 1,229,654
—
1,215,059
14,595
Agency-backed securities 375,582
—
375,582
—
Corporate notes and other 67,046
—
67,046
—
Total investment securities available-for-sale 3,083,686
—
3,069,091
14,595
Other investments 50,791
—
24,369
26,422
Other assets 24,524
—
24,524
—
Total assets at fair value $ 3,159,001
$ —
$ 3,117,984
$ 41,017

Other liabilities $ 46,550
$ —
$ 46,550
$ —
Total liabilities at fair value $ 46,550
$ —
$ 46,550
$ —

The following table presents assets measured at fair value on a nonrecurring basis as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):

June 30, 2019 Total carrying value in the consolidated balance sheet
Quoted market prices in an active market
(Level 1)

Models with significant observable market parameters
(Level 2)

Models with significant unobservable market
parameters
(Level 3)
Total losses for the year-to-date period then ended
Other real estate owned $ 26,657
$ —
$ —
$ 26,657
$ (2,438 )
Impaired loans, net ⁽¹⁾
38,251
—
—
38,251
(5,228 )
Total $ 64,908
$ —
$ —
$ 64,908
$ (7,666 )

December 31, 2018

Other real estate owned $ 15,165
$ —
$ —
$ 15,165
$ (84 )
Impaired loans, net ⁽¹⁾
40,830
—
—
40,830
(1,214 )
Total $ 55,995
$ —
$ —
$ 55,995
$ (1,298 )


June 30, 2020	Total carrying value in the consolidated balance sheet		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)
Other real estate owned	$	22,080	$	—	$	—	$	22,080

Collateral dependent loans	36,408		—		—		36,408
Total	$	58,488	$	—	$	—	$	58,488

December 31, 2019
Other real estate owned	$	29,487	$	—	$	—	$	29,487
Impaired loans, net ⁽¹⁾	32,478		—		—		32,478
Total	$	61,965	$	—	$	—	$	61,965

⁽¹⁾ Amount is net of valuation allowance of ~~$5.5 million and $4.0~~$3.3 million at ~~June 30, 2019 and~~ December 31, ~~2018, respectively,~~2019 as required by ASC 310-10, "Receivables."

In the case of the investment securities portfolio, Pinnacle Financial monitors the portfolio to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the six months ended June 30, ~~2019,~~2020, there were no0 transfers between Levels 1, 2 or 3.

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The table below includes a rollforward of the balance sheet amounts for the three and six months ended June 30, ~~2019~~2020 and June 30, ~~2018~~2019 (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):


	For the Three months ended June 30,													For the Six months ended June 30,
	2020						2019						2020					2019
	Available-for-sale Securities		Other assets		Available-for-sale Securities		Other assets		Available-for-sale Securities		Other assets			Available-for-sale Securities		Other assets
Fair value, beginning of period	$	14,767	$	39,756	$	13,730	$	28,107	$	15,903	$	38,156		$	14,595	$	26,422
Total realized gains (losses) included in income	27		(278)		29		481		55		(452)			59		929
Changes in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at period-end	501		—		1,504		—		480		—			1,008		—
Purchases	—		1,366		—		3,518		—		3,727			—		5,188
Issuances	—		—		—		—		—		—			—		—
Settlements	—		(232)		—		(584)		(1,143)		(819)			(399)		(1,017)
Transfers out of Level 3	—		—		—		—		—		—			—		—
Fair value, end of period	$	15,295	$	40,612	$	15,263	$	31,522	$	15,295	$	40,612		$	15,263	$	31,522
Total realized gains (losses) included in income related to financial assets and liabilities still on the consolidated balance sheet at period-end	$	27	$	(278)	$	29	$	481	$	55	$	(452)		$	59	$	929

For the three months ended June 30, For the six months ended June 30,
2019 2018 2019 2018
Available-for-sale Securities Other
assets Available-for-sale Securities Other
assets Available-for-sale Securities
Other
assets
Available-for-sale Securities
Other
assets
Fair value, beginning of period $ 13,730
$ 28,107
$ 15,226
$ 29,788
$ 14,595
$ 26,422
$ 17,029
$ 28,874
Total realized gains included in income 29
481
30
2,265
59
929
60
2,777
Changes in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at period-end 1,504
—
34
—
1,008
—
(631 ) —
Purchases —
3,518
—
3,948
—
5,188
—
4,818
Issuances —
—
—
—
—
—
—
—
Settlements —
(584 ) —
(257 ) (399 ) (1,017 ) (1,168 ) (725 )
Transfers out of Level 3 —
—
—
(12,166 ) —
—
—
(12,166 )
Fair value, end of period $ 15,263
$ 31,522
$ 15,290
$ 23,578
$ 15,263
$ 31,522
$ 15,290
$ 23,578
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at period-end $ 29
$ 481
$ 30
$ 2,265
$ 59
$ 929
$ 60
$ 2,777

The following methods and assumptions were used by Pinnacle Financial in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2019 and December 31, 2018. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

~~Securities held-to-maturity~~ - Estimated fair values for investment securities are based on quoted market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics.

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

The values derived from the discounted cash flow approach for our performing loan portfolio incorporate credit risk to determine the exit price. Fair values for impaired loans are estimated using discounted cash flow models or are based on the fair value of the underlying collateral.

Purchased loans, including loans acquired through a merger, are initially recorded at fair value on the date of purchase. Purchased loans that contain evidence of post-origination credit deterioration as of the purchase date are carried at the nettables present value of expected future cash flows. All other purchased loans are recorded at their initial fair value, and adjusted for subsequent advances, pay downs, amortization or accretion of any fair value premium or discount on purchase, charge-offs and any other adjustment to carrying value.

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

~~Deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances, subordinated debt and other borrowings~~ - The fair value of demand deposits, savings deposits and securities sold under agreements to repurchase are derived from a selection of market transactions reflecting our peer group. Fair values for certificates of deposit, FHLB advances and

~~subordinated debt are estimated using discounted cash flow models, using current market interest rates offered on certificates, advances and other borrowings with similar remaining maturities.~~

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

~~The following table presents~~ the carrying amounts, estimated fair value and placement in the fair value hierarchy of Pinnacle Financial's financial instruments at June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash, ~~and~~ 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):


June 30, 2020	Carrying/ Notional Amount		Estimated Fair Value ⁽¹⁾		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)
Financial assets:
Securities held-to-maturity	$	1,048,035	$	1,061,233	$	—	$	1,061,233	$	—
Loans, net	22,234,928		22,534,896		—		—		22,534,896
Consumer loans held-for-sale	69,443		71,409		—		71,409		—
Commercial loans held-for-sale	16,201		16,660		—		16,660		—

Financial liabilities:
Deposits and securities sold under
agreements to repurchase	25,716,382		24,880,600		—		—		24,880,600
Federal Home Loan Bank advances	1,787,551		1,936,334		—		—		1,936,334
Subordinated debt and other borrowings	717,043		728,610		—		—		728,610

Off-balance sheet instruments:
Commitments to extend credit ⁽²⁾	8,898,952		22,238		—		—		22,238

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June 30, 2019	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, 2019											December 31, 2019
Financial assets:											Financial assets:
Securities held-to-maturity	$	190,928	$	200,566	$	—	$	200,566	$	—	Securities held-to-maturity	$	188,996	$	201,217	$	—	$	201,217	$	—
Loans, net	18,724,065		18,644,090		—		—		18,644,090		Loans, net	19,693,099		19,717,845		—		—		19,717,845
Consumer loans held-for-sale	70,004		71,108		—		71,108		—		Consumer loans held-for-sale	81,820		82,986		—		82,986		—
Commercial loans held-for-sale	21,295		21,631		—		21,631		—		Commercial loans held-for-sale	17,585		17,836		—		17,836		—

Financial liabilities:											Financial liabilities:
Deposits and securities sold under											Deposits and securities sold under
agreements to repurchase	19,603,552		18,966,437		—		—		18,966,437		agreements to repurchase	20,307,382		19,647,392		—		—		19,647,392
Federal Home Loan Bank advances	1,960,062		1,965,111		—		—		1,965,111		Federal Home Loan Bank advances	2,062,534		2,078,514		—		—		2,078,514
Subordinated debt and other borrowings	464,144		446,951		—		—		446,951		Subordinated debt and other borrowings	749,080		712,220		—		—		712,220

Off-balance sheet instruments:											Off-balance sheet instruments:
Commitments to extend credit ⁽²⁾	7,582,092		1,083		—		—		1,083		Commitments to extend credit ⁽²⁾	8,141,920		3,786		—		—		3,786
Standby letters of credit ⁽³⁾	198,945		1,281		—		—		1,281

December 31, 2018
Financial assets:
Securities held-to-maturity	$	194,282	$	193,131	$	—	$	193,131	$	—
Loans, net	17,623,974		17,288,795		—		—		17,288,795
Consumer loans held-for-sale	34,196		34,929		—		34,929		—
Commercial loans held-for-sale	15,954		16,296		—		16,296		—

Financial liabilities:
Deposits and securities sold under
agreements to repurchase	18,953,848		18,337,848		—		—		18,337,848
Federal Home Loan Bank advances	1,443,589		1,432,003		—		—		1,432,003
Subordinated debt and other borrowings	485,130		464,616		—		—		464,616

Off-balance sheet instruments:
Commitments to extend credit ⁽²⁾	6,921,689		1,733		—		—		1,733
Standby letters of credit ⁽³⁾	177,475		1,131		—		—		1,131


~~(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)~~

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

(2)At the end of each quarter, Pinnacle Financial evaluates the inherent risks of the outstanding off-balance sheet commitments. In making this evaluation, Pinnacle Financial evaluates the credit worthiness of the borrower, the collateral supporting the commitments and any other factors similar to those used to evaluate the inherent risks of our loan portfolio. Additionally, Pinnacle Financial evaluates the probability that the outstanding commitment will eventually become a funded loan. As a result, at June 30, 2019 and December 31, 2018, Pinnacle Financial included in other liabilities $1.1~~million and$1.7million, respectively, representing the inherent risks associated with these~~ 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, 2020 and December 31, 2019, Pinnacle Financial included in other liabilities $20.8 million and $2.4 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, 2020 and December 31, 2019 are unamortized fees related to these commitments of $1.4 million at both dates.

~~(3)~~

At June 30, 2019 and December 31, 2018, the aggregate fair value of Pinnacle Financial's standby letters of credit was $1.3 million and $1.1 million, respectively. These amounts represent the unamortized fee associated with these standby letters of credit and are included in the consolidated balance sheets of Pinnacle Financial and are believed to approximate fair value. These fair values will decrease over time as the existing standby letters of credit approach their expiration dates.

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 capital conservation buffer.

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

During the six months ended June 30, ~~2019,~~2020, Pinnacle Bank paid ~~$78.7~~$94.1 million in dividends to Pinnacle Financial. As of June 30, ~~2019,~~2020, Pinnacle Bank could pay approximately ~~$608.9~~$619.2 million of additional dividends to Pinnacle Financial without prior approval of the Commissioner of the TDFI. Since the fourth quarter of 2018, Pinnacle Financial has paid a quarterly common stock dividend of $0.16 per share. The amount and timing of all future dividend payments by Pinnacle Financial, if any, is subject to discretion of Pinnacle Financial's board of directors and will depend on Pinnacle Financial's receipt of dividends, including dividends on Pinnacle Financial's 6.75% fixed rate non-cumulative perpetual preferred stock, Series B (the Series B Preferred Stock) from Pinnacle Bank, earnings, capital position, financial condition and other factors, including ~~new~~ regulatory capital requirements, as they become known to Pinnacle ~~Financial.~~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

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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.

~~The~~As permitted by the interim final ~~rules implementing~~rule issued on March 27, 2020 by the ~~Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for~~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, ~~2015 with full compliance with all~~2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the ~~requirements being~~quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 (collectively the “transition adjustments”), will be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased inout of the regulatory capital calculations evenly over a ~~multi-year schedule,~~three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully phased in on January 1, 2019. The minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6%; (iii) a total risk-based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. The Basel III rules also established a capital conservation buffer of 2.5% (which was phased in over three years) above the regulatory minimum risk-based capital ratios. The capital conservation buffer was phased in beginning in January 2016 at 0.625% and increased each year by a like percentage until fully implemented in January 2019. Upon full implementation in January 2019, minimum risk-based capital ratios including the capital conservation buffer are: i) a common equity Tier 1 capital ratio of 7%, ii) a Tier 1 risk-based capital ratio of 8.5%, and iii) a total risk-based capital ratio of 10.5%. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. reversed.

Management believes, as of June 30, ~~2019,~~2020, 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 capital conservation buffer, are presented in the following table (in thousands):

Actual
Minimum Capital
Requirement

Minimum
To Be Well-Capitalized
Amount Ratio Amount Ratio Amount Ratio
At June 30, 2019
Total capital to risk weighted assets:
Pinnacle Financial $ 2,729,341
12.0 % $ 1,821,607
8.0 % NA
NA
Pinnacle Bank $ 2,563,617
11.3 % $ 1,816,521
8.0 % $ 2,270,651
10.0 %
Tier 1 capital to risk weighted assets:

Pinnacle Financial $ 2,168,431
9.5 % $ 1,366,205
6.0 % NA
NA
Pinnacle Bank $ 2,342,892
10.3 % $ 1,362,391
6.0 % $ 1,816,521
8.0 %
Common equity Tier 1 capital to risk weighted assets

Pinnacle Financial $ 2,168,308
9.5 % $ 1,024,654
4.5 % NA
NA
Pinnacle Bank $ 2,342,770
10.3 % $ 1,021,793
4.5 % $ 1,475,923
6.5 %
Tier 1 capital to average assets (*):

Pinnacle Financial $ 2,168,431
9.1 % $ 957,546
4.0 % NA
NA
Pinnacle Bank $ 2,342,892
9.8 % $ 955,401
4.0 % $ 1,194,252
5.0 %


														Actual						Minimum Capital Requirement						Minimum To Be Well-Capitalized Under Prompt Corrective Action Regulations
	Actual				Minimum Capital Requirement				Minimum To Be Well-Capitalized					Amount		Ratio		Amount		Ratio		Amount		Ratio
	Amount		Ratio		Amount		Ratio		Amount		Ratio
At December 31, 2018
At June 30, 2020													At June 30, 2020
Total capital to risk weighted assets:													Total capital to risk weighted assets:
Pinnacle Financial	$	2,580,143	12.2	%	$	1,691,017	8.0	%	NA		NA		Pinnacle Financial	$	3,499,695	14.0	%	$	1,995,003	8.0	%	$	2,493,754	10.0	%
Pinnacle Bank	$	2,432,419	11.5	%	$	1,686,046	8.0	%	$	2,107,558	10.0	%	Pinnacle Bank	$	3,078,671	12.4	%	$	1,988,337	8.0	%	$	2,485,421	10.0	%
Tier 1 capital to risk weighted assets:													Tier 1 capital to risk weighted assets:
Pinnacle Financial	$	2,024,193	9.6	%	$	1,268,263	6.0	%	NA		NA		Pinnacle Financial	$	2,601,104	10.4	%	$	1,496,252	6.0	%	$	1,995,003	8.0	%
Pinnacle Bank	$	2,218,003	10.5	%	$	1,264,535	6.0	%	$	1,686,046	8.0	%	Pinnacle Bank	$	2,729,080	11.0	%	$	1,491,253	6.0	%	$	1,988,337	8.0	%
Common equity Tier 1 capital to risk weighted assets													Common equity Tier 1 capital to risk weighted assets
Pinnacle Financial	$	2,024,070	9.6	%	$	951,197	4.5	%	NA		NA		Pinnacle Financial	$	2,383,349	9.6	%	$	1,122,189	4.5	%	NA
Pinnacle Bank	$	2,217,880	10.5	%	$	948,401	4.5	%	$	1,369,912	6.5	%	Pinnacle Bank	$	2,728,958	11.0	%	$	1,118,439	4.5	%	$	1,615,524	6.5	%
Tier 1 capital to average assets (*):													Tier 1 capital to average assets (*):
Pinnacle Financial	$	2,024,193	8.9	%	$	909,102	4.0	%	NA		NA		Pinnacle Financial	$	2,601,104	8.4	%	$	1,231,757	4.0	%	NA
Pinnacle Bank	$	2,218,003	9.8	%	$	906,185	4.0	%	$	1,132,731	5.0	%	Pinnacle Bank	$	2,729,080	8.9	%	$	1,226,324	4.0	%	$	1,532,905	5.0	%

At December 31, 2019													At December 31, 2019
Total capital to risk weighted assets:													Total capital to risk weighted assets:
Pinnacle Financial													Pinnacle Financial	$	3,159,375	13.2	%	$	1,912,885	8.0	%	$	2,391,106	10.0	%
Pinnacle Bank													Pinnacle Bank	$	2,906,853	12.2	%	$	1,906,839	8.0	%	$	2,383,549	10.0	%
Tier 1 capital to risk weighted assets:													Tier 1 capital to risk weighted assets:
Pinnacle Financial													Pinnacle Financial	$	2,319,234	9.7	%	$	1,434,664	6.0	%	$	1,912,885	8.0	%
Pinnacle Bank													Pinnacle Bank	$	2,679,713	11.2	%	$	1,430,129	6.0	%	$	1,906,839	8.0	%
Common equity Tier 1 capital to risk weighted assets													Common equity Tier 1 capital to risk weighted assets
Pinnacle Financial													Pinnacle Financial	$	2,319,112	9.7	%	$	1,075,998	4.5	%	NA
Pinnacle Bank													Pinnacle Bank	$	2,679,590	11.2	%	$	1,072,597	4.5	%	$	1,549,307	6.5	%
Tier 1 capital to average assets (*):													Tier 1 capital to average assets (*):
Pinnacle Financial													Pinnacle Financial	$	2,319,234	9.1	%	$	1,021,836	4.0	%	NA
Pinnacle Bank													Pinnacle Bank	$	2,679,713	10.5	%	$	1,019,210	4.0	%	$	1,274,012	5.0	%

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

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During the second quarter of 2020, Pinnacle Financial issued 9.0 million depositary shares, each representing a 1/40th interest in a share of Series B preferred stock in a registered public offering to both retail and institutional investors. Net proceeds from the transaction were approximately $217.6 million after deducting the underwriting discounts and offering expenses payable by Pinnacle Financial. The net proceeds were retained by Pinnacle Financial and are available to support the capital needs of Pinnacle Financial and Pinnacle Bank, to support Pinnacle Financial's obligations, including interest payments on its outstanding indebtedness, and for other general corporate purposes.

Note 11. ~~Subordinated Debt and~~ Other ~~borrowings~~Borrowings

Pinnacle Financial has ~~twelve~~12 wholly-owned subsidiaries that are statutory business trusts created for the exclusive purpose of issuing 30-year capital trust preferred ~~securities. Pinnacle Financial also has a $75.0 million revolving credit facility, of which it had no outstanding borrowings as of June 30, 2019. Additionally,~~securities, and Pinnacle Financial and Pinnacle Bank have entered into ~~or assumed in connection with acquisitions,~~ certain other subordinated debt ~~agreements~~agreements. On April 22, 2020, Pinnacle Financial established a credit facility with the Federal Reserve Bank in conjunction with the SBA Paycheck Protection Program, with available borrowing capacity equal to the outstanding balance of Paycheck Protection Program loans, which totaled approximately $2.2 billion at June 30, 2020. Pinnacle Financial also had a $75.0 million revolving credit facility with no outstanding borrowings as of June 30, 2020 that matured on July 24, 2020 and was not renewed. These instruments are outlined below as of June 30, ~~2019~~2020 (in thousands):

Name

Date
Established

Maturity

Total Debt Outstanding

Interest Rate at
June 30, 2019

Coupon Structure

Name

Date
Established

Maturity

Total Debt Outstanding

Interest Rate at June 30, 2020

Coupon Structure

Trust preferred securities

Pinnacle Statutory Trust I

December 29, 2003

December 30, 2033

10,310

5.21

30-day LIBOR + 2.80%

Pinnacle Statutory Trust I

December 29, 2003

December 30, 2033

10,310

3.10

30-day LIBOR + 2.80%

Pinnacle Statutory Trust II

September 15, 2005

September 30, 2035

20,619

3.72

30-day LIBOR + 1.40%

Pinnacle Statutory Trust II

September 15, 2005

September 30, 2035

20,619

1.71

30-day LIBOR + 1.40%

Pinnacle Statutory Trust III

September 7, 2006

September 30, 2036

20,619

3.97

30-day LIBOR + 1.65%

Pinnacle Statutory Trust III

September 7, 2006

September 30, 2036

20,619

1.96

30-day LIBOR + 1.65%

Pinnacle Statutory Trust IV

October 31, 2007

September 30, 2037

30,928

5.26

30-day LIBOR + 2.85%

Pinnacle Statutory Trust IV

October 31, 2007

September 30, 2037

30,928

3.16

30-day LIBOR + 2.85%

BNC Capital Trust I

April 3, 2003

April 15, 2033

5,155

5.85

30-day LIBOR + 3.25%

BNC Capital Trust I

April 3, 2003

April 15, 2033

5,155

4.47

30-day LIBOR + 3.25%

BNC Capital Trust II

March 11, 2004

April 7, 2034

6,186

5.45

30-day LIBOR + 2.85%

BNC Capital Trust II

March 11, 2004

April 7, 2034

6,186

4.07

30-day LIBOR + 2.85%

BNC Capital Trust III

September 23, 2004

September 23, 2034

5,155

5.00

30-day LIBOR + 2.40%

BNC Capital Trust III

September 23, 2004

September 23, 2034

5,155

3.62

30-day LIBOR + 2.40%

BNC Capital Trust IV

September 27, 2006

December 31, 2036

7,217

4.02

30-day LIBOR + 1.70%

BNC Capital Trust IV

September 27, 2006

December 31, 2036

7,217

2.01

30-day LIBOR + 1.70%

Valley Financial Trust I

June 26, 2003

June 26, 2033

4,124

5.43

30-day LIBOR + 3.10%

Valley Financial Trust I

June 26, 2003

June 26, 2033

4,124

4.33

30-day LIBOR + 3.10%

Valley Financial Trust II

September 26, 2005

December 15, 2035

7,217

1.80

30-day LIBOR + 1.49%

Valley Financial Trust III

December 15, 2006

January 30, 2037

5,155

2.49

30-day LIBOR + 1.73%

Southcoast Capital Trust III

August 5, 2005

September 30, 2035

10,310

1.81

30-day LIBOR + 1.50%

Subordinated Debt

Pinnacle Bank Subordinated Notes

July 30, 2015

July 30, 2025

60,000

4.88

Fixed ⁽¹⁾

Pinnacle Bank Subordinated Notes

March 10, 2016

July 30, 2025

70,000

4.88

Fixed ⁽¹⁾

Pinnacle Financial Subordinated Notes

November 16, 2016

November 16, 2026

120,000

5.25

Fixed ⁽²⁾

Pinnacle Financial Subordinated Notes

September 11, 2019

September 15, 2029

300,000

4.13

Fixed ⁽³⁾

Other Borrowings

Revolving credit facility ⁽⁴⁾

April 22, 2020

July 24, 2020

—

30-day LIBOR + 1.50%

Paycheck Protection Program Liquidity Facility

April 22, 2020

September 30, 2020

47,082

0.35

Fixed

Debt issuance costs and fair value adjustments

(13,034)

Total subordinated debt and other borrowings

717,043

Name Date
Established Maturity Total Debt Outstanding Interest Rate at
June 30, 2019 Coupon Structure
Valley Financial Trust II
September 26, 2005
December 15, 2035
7,217
3.90 % 30-day LIBOR + 1.49%
Valley Financial Trust III
December 15, 2006
January 30, 2037
5,155
4.31 % 30-day LIBOR + 1.73%
Southcoast Capital Trust III
August 5, 2005
September 30, 2035
10,310
3.82 % 30-day LIBOR + 1.50%

Subordinated Debt

Pinnacle Bank Subordinated Notes
July 30, 2015
July 30, 2025
60,000
4.88 %
Fixed ⁽¹⁾
Pinnacle Bank Subordinated Notes
March 10, 2016
July 30, 2025
70,000
4.88 %
Fixed ⁽¹⁾
Avenue Subordinated Notes
December 29, 2014
December 29, 2024
20,000
6.75 %
Fixed ⁽²⁾
Pinnacle Financial Subordinated Notes
November 16, 2016
November 16, 2026
120,000
5.25 %
Fixed ⁽³⁾
BNC Subordinated Notes
September 25, 2014
October 1, 2024
60,000
5.50 %
Fixed ⁽⁴⁾
BNC Subordinated Note
October 15, 2013
October 15, 2023
8,840
7.44 %
30-day LIBOR + 5.00% ⁽⁵⁾

Other Borrowings

Revolving credit facility ⁽⁶⁾
April 25, 2019
April 24, 2020
—
3.94 % 30-day LIBOR + 1.50%

Debt issuance costs and fair value adjustments (7,691 )

Total subordinated debt and other borrowings $ 464,144

(1) Migrates to three month LIBOR + 3.128% beginning July 30, 2020 through the end of the term.

(2) Migrates to three month ~~LIBOR + 4.95%~~ ~~beginning January 1, 2020 through the end of the term.~~

~~(3) Migrates to three month~~ LIBOR + 3.884% beginning November 16, 2021 through the end of the term.

~~(4)~~(3) Migrates to three month LIBOR + ~~3.59%~~2.775% beginning ~~October 1, 2019~~September 15, 2024 through the end of the ~~term if not redeemed on that date.~~term.

~~(5) Coupon structure includes a floor of 5.5% and a cap of 9.5%.~~

~~(6)~~(4) Borrowing capacity on the revolving credit facility is $75.0 million. At June 30, ~~2019,~~2020, there were no0 amounts outstanding under this facility. An unused fee of 0.30% is assessed on the average daily unused amount of the ~~loan.~~

~~Note 12. Leases~~

line. This credit facility matured on July 24, 2020 and was not renewed.

Pinnacle Financial has entered into various operating leases, primarily for office space and branch facilities, and through acquisition assumed a single finance lease for a branch facility. Upon adoption of FASB ASU 2016-02
~~Leases~~ ~~on January 1,~~

On September 11, 2019, Pinnacle Financial ~~began recognizing right-of-use assets~~issued $300.0 aggregate principal amount of 4.125% Fixed-to-Floating Rate Subordinated Notes due 2029 (the 2029 Notes) in a public offering. The offering and ~~lease liabilities related~~sale of the 2029 Notes yielded net proceeds of approximately $296.5 million after deducting the underwriting discount and offering expenses payable by Pinnacle Financial. Pinnacle Financial used approximately $8.8 million of such proceeds to ~~its operating leases. Prior~~redeem the previously outstanding Subordinated Note due October 15, 2023, which Pinnacle Financial assumed in the BNC merger and which carried an interest rate of 7.23% at the time of such redemption, which occurred on September 30, 2019. Pinnacle Financial also used a portion of the net proceeds of this offering to ASU 2016-02, such assets and liabilities were recognized only for capital leases (referred to as finance leases under the amendments of ASU 2016-02). In accordance with the optional transition method allowed by ASU 2016-11, comparative prior period information included within this note is presented in accordance with guidance in effect during those periods. Right-of-use assets and lease liabilities related to Pinnacle Financial's operating and finance leases are as follows at June 30, 2019 (in thousands):

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Balance Sheet Location June 30, 2019
Right-of-use assets
Operating leases ⁽¹⁾
Other assets $ 72,719
Finance leases Premises and equipment, net
2,100
Total right-of-use assets $ 74,819
Lease liabilities
Operating leases Other liabilities $ 80,697
Finance leases Other liabilities 3,359
Total lease liabilities $ 84,056

⁽¹⁾ ~~Presented~~redeem, effective January 1, 2020, the outstanding balance and accrued interest of the $20.0 million aggregate principal amount of Avenue subordinated notes and $60.0 million aggregate principal amount of BNC subordinated notes. Pinnacle Financial intends to use the remainder of the net proceeds from the offering of ~~tenant improvement allowances~~the 2029 Notes for general corporate purposes, including providing capital to support the growth of ~~$1.7 million and purchase accounting fair value adjustments of $2.8 million.~~

~~Lease costs during the three and six months ended June 30, 2019 related to these leases were as follows (in thousands):~~Pinnacle Bank's business.

Three Months Ended June 30, 2019 Six Months Ended
June 30, 2019
Operating lease cost $ 3,532
$ 6,972
Short-term lease cost 14
28
Finance lease cost:
Interest on lease liabilities 61
123
Amortization of right-of-use asset 57
113
Sublease income (312 ) (561 )
Net lease cost $ 3,352
$ 6,675

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~~Rent expense related to leases during the three and six months ended June 30, 2018 was $3.1 million and $6.3 million, respectively.~~

~~Cash flows related to leases during the three and six months ended June 30, 2019 were as follows (in thousands):~~

Three Months Ended June 30, 2019 Six Months Ended
June 30, 2019
Operating cash flows related to operating leases $ 3,380
$ 6,761
Operating cash flows related to finance leases 61
123
Financing cash flows related to finance leases 57
112

Lease liabilities are determined based on lease term discounted at an effective rate of interest. Certain lease agreements contain renewal options which are considered in the determination of the lease term if they are deemed reasonably certain to be exercised. Discount rates used to determine the present value of lease payments are based on secured borrowing rates as of the commencement date of the lease. The following table presents the weighted average remaining lease term and weighted average discount rate used to determine lease liabilities at June 30, 2019 (in thousands):



	~~June 30, 2019~~
~~Weighted average remaining lease term:~~
~~Operating leases~~	~~10.60 years~~
~~Finance leases~~	~~9.33 years~~
~~Weighted average discount rate:~~
~~Operating leases~~	~~3.34~~	%
~~Finance leases~~	~~7.22~~	%

The following table presents a maturity analysis of undiscounted cash flows due under operating leases and finance leases and a reconciliation to total operating lease liabilities and finance lease liabilities at June 30, 2019 (in thousands):

Operating Leases Finance Leases
2019 ⁽¹⁾
$ 6,776
$ 235
2020 12,538
470
2021 12,110
470
2022 9,725
470
2023 8,874
479
Thereafter 48,305
2,548
98,328
4,672
Less: Imputed interest (17,631 ) (1,313 )
Total lease liabilities $ 80,697
$ 3,359

⁽¹⁾~~Includes the period from July 1, 2019 - December 31, 2019.~~

~~At December 31, 2018, the future minimum lease payments due under operating leases and capital leases, and a reconciliation to total capital lease liabilities were as follows (in thousands):~~

Operating Leases Capital Leases
2019 $ 12,889
$ 470
2020 11,805
470
2021 11,527
470
2022 9,410
470
2023 8,820
479
Thereafter 43,730
2,548
Future minimum lease payments $ 98,181
4,907
Less: Imputed interest (1,437 )
Total capital lease liabilities $ 3,470

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, ~~2019~~2020 and December 31, ~~2018~~2019 and our results of operations for the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. 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 Part II, Item 1A - Risk Factors, herein ~~and in~~as well as our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2018 (2018~~2019 (Form 10-K) and the other reports we have filed with the Securities and Exchange Commission since we filed that Form 10-K.

Impact of COVID-19 Pandemic

On January 30, 2020, the ~~2018 10-K.~~World Health Organization declared a global health emergency related to a novel strain of the coronavirus, COVID-19. With that declaration, we activated our pandemic response team and began work to prepare both our associates and clients for the impact of COVID-19. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. These actions included the decision by the Federal Reserve Open Markets Committee to lower the target for the federal funds rate to a range of between zero to 0.25% on March 15, 2020. This action followed a prior reduction of the targeted federal funds rate to a range of 1.0% to 1.25% on March 3, 2020.

We have been intentional in our response to the COVID-19 pandemic to ensure strength in our balance sheet, including increases in liquidity and reserves. As a part of this intentional response, during the second quarter of 2020, we performed an in-depth review of all risk-graded loans greater than $1.0 million for which we had granted the borrower the ability to defer the payment of principal and/or interest for a period of up to 90 days following the COVID-19 outbreak. We also performed an in-depth review of all of our hotel and retail commercial real estate loans greater than $1.0 million regardless of their receipt of deferral. Additionally, we have continued to adjust our business practices, including restricting employee travel, encouraging employees to work from home, where possible, converting to drive-thru only service with specific needs facilitated by appointment, implementing social distancing guidelines within our offices and by the launch of our pandemic response team, which continues to meet on a regular basis.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program ("PPP"), a program designed to aid small- and medium-sized businesses, sole proprietors and other self-employed persons through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight to 24 weeks of payroll and other costs to provide support to participating businesses and increase the ability of these businesses to retain workers. As of June 30, 2020, we had obtained approvals for approximately 14,000 clients totaling approximately $2.3 billion in approved loans. These loans are fully guaranteed by the SBA, carry a term of two or five years, dependent on the date originated, and a 1.0% annualized rate. Inclusive of fees from the SBA, our yield on PPP loans in the second quarter was 2.89%. The reduction in approved dollars from the amounts we previously disclosed as of April 30, 2020 is the result of PPP loans that borrowers chose to return to the SBA prior to June 30, 2020.

We have also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers. This program allows for a deferral of principal and/or interest payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. As of June 30, 2020, we had granted deferrals on approximately $4.2 billion in aggregate principal amount of loans. As of July 17, 2020, loans with aggregate principal balances of approximately $2.7 billion remained on deferral.

We believe our response has allowed and continues to allow us to appropriately support our associates, clients and their communities. The COVID-19 pandemic along with the implementation of CECL have contributed to an increased provision for credit losses for the first half of 2020 and an extended duration of economic disruption resulting from the virus could lead to increased net charge-offs and continued elevated levels of provisioning expense. We continue to monitor both the impact of COVID-19 and the effects of the CARES Act closely; however, the extent to which each will impact our operations and financial results during the remainder of 2020 remains uncertain.

Overview

Our diluted net income per common share for the three and six months ended June 30, ~~2019~~2020 was $0.83 and $1.20, respectively, compared to $1.31 and $2.53, ~~respectively, compared to $1.12 and $2.20,~~ respectively, for the same periods in ~~2018.~~2019. At June 30, ~~2019,~~2020, reflecting the significant number of loans

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we had originated under the PPP, loans had increased to ~~$18.8~~$22.5 billion, as compared to ~~$17.7~~$19.8 billion at December 31, ~~2018,~~2019, and total deposits increased to ~~$19.4~~$25.5 billion at June 30, ~~2019~~2020 from ~~$18.8~~$20.2 billion at December 31, ~~2018.~~2019.

Results of Operations. Our net interest income increased to ~~$188.9~~$200.7 million and ~~$376.2~~$394.2 million, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to ~~$182.2~~$188.9 million and ~~$356.7~~$376.2 million, respectively, for the same periods in the prior year, representing increases of ~~$6.7~~$11.7 million and ~~$19.5~~$18.0 million, respectively. For the three and six months ended June 30, ~~2019~~2020 when compared to the comparable periods in ~~2018, these increases were~~2019, this increase was largely the result of lower cost of funds, the impact of both interest and fees related to the PPP and our acquisition of additional liquidity in response to the economic uncertainty resulting from the COVID-19 pandemic as well as organic loan growth during the comparable periods. The net interest margin (the ratio of net interest income to average earning assets) for the three and six months ended June 30, ~~2019~~2020 was ~~3.48%~~2.87% and ~~3.55%~~3.06%, respectively, compared to ~~3.69%~~3.48% and ~~3.73%~~3.55%, respectively, for the same periods in ~~2018~~2019 and reflects the impact of loans made pursuant to the PPP and our acquisition of additional on-balance sheet liquidity as noted above, the decline in short-term interest rates, declining levels of positive impact from purchase accounting and the competitive rate environments for loans and deposits in our ~~markets and declining levels of positive impact from purchase accounting.~~markets.

Our provision for ~~loan~~credit losses was ~~$7.2~~$68.3 million and ~~$14.4~~$168.2 million, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to ~~$9.4~~$7.2 million and ~~$16.3~~$14.4 million, respectively, for the same periods in ~~2018. Net~~2019. The primary drivers of the increase in provision were the anticipated economic impact of the COVID-19 pandemic and our adoption of FASB ASU 2016-13 on January 1, 2020. ASU 2016-13, which introduces the current expected credit losses (CECL) methodology, requires us to estimate all expected credit losses over the remaining life of our loan portfolio. Also contributing to the increase in provision was an increase in net charge-offs, ~~were $4.1~~which totaled $5.4 million and ~~$7.7~~$15.5 million, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to ~~$3.9~~$4.1 million and ~~$7.9~~$7.7 million, respectively, for the same periods in ~~2018.~~2019. The increase in net charge-offs in the first six months of 2020 was in large part the result of an approximately $5.0 million charge-off related to a single credit in the commercial and industrial loan category during the first quarter of 2020. This credit was criticized going into the COVID-19 pandemic and as a result of the pandemic suffered further deterioration resulting in its partial charge-off during the first quarter of 2020. During the second quarter of 2020, we had a partial recovery of approximately $1.7 million on this credit.

At June 30, ~~2019,~~2020, our allowance for ~~loan~~credit losses as a percentage of total loans, inclusive of PPP loans, was ~~0.48%~~1.27% compared to ~~0.47%~~0.48% at December 31, ~~2018.~~2019. The ~~slight~~ increase in the allowance ~~as a percentage~~for credit losses is largely the result of ~~total loans is primarily attributable~~the implementation of CECL on January 1, 2020, which resulted in an adjustment to ~~provision expense related to organic loan growth~~the opening balance of the allowance for credit losses of $38.1 million, and increased provisioning during the first half of ~~2019.~~2020 due to the anticipated economic impact of the COVID-19 pandemic. The increase in the opening balance upon the implementation of CECL is partially attributable to a change in the treatment of acquired loans. Prior to the adoption of CECL, acquired loans required an allowance only if estimated credit losses exceeded the remaining purchase accounting fair value discounts. Under CECL, an allowance for credit losses is recognized for all loans without regard to fair value discounts. Also contributing to the increase in the opening balance upon adoption was an overall increase in reserve rates under CECL due to the estimation of all expected credit losses over the remaining contractual life of the portfolio rather than only probable incurred losses as was required under the prior accounting standard.

Noninterest income increased by ~~$22.7~~$2.3 million, or ~~47.4%~~3.2%, and ~~$29.6~~$21.6 million, or ~~32.2%~~17.7%, respectively, during the three and six months ended June 30, ~~2019~~2020 compared to the same periods in ~~2018.~~2019. The ~~significant portion of the~~ growth in noninterest income was in large part attributable to ~~an increase in income from our equity method investment in BHG~~gains on mortgage loans sold, net, which ~~was $32.3~~increased by $13.6 million and ~~$45.6~~$17.3 million, respectively, for the three and six months ended June 30, ~~2019~~2020 as compared to ~~$9.7 million and $19.1 million, respectively, for~~ the same periods in the prior ~~year. Also impacting noninterest income~~year, largely due to the favorable interest rate environment as well are our increased number of mortgage originators in the three and six months ended June 30, 2019, were $4.5 million and $6.4 million in net losses on sales of securities compared to no net losses on the sales of securities during the three months ended June 30, 2018 and $30,000 in netrespective periods. These gains on ~~sales~~mortgage loans sold, net, were offset in part by a decrease in income from our equity method investment in BHG of securities during the six months ended June 30, 2018. Additionally, during the three and six months ended June 30, 2019, we incurred a $1.5 million loss from the sale of our remaining non-prime automobile portfolio to finalize our exit from that business.

~~Noninterest expense increased by $16.8~~$15.1 million, or ~~15.1%~~46.7%, and ~~$22.2~~$12.8 million, or ~~10.1%~~28.0%, respectively, during the three and six months ended June 30, ~~2019~~2020 compared to the same periods in the prior year. Additionally impacting noninterest income were wealth management revenues of $12.2 million and $28.8 million, respectively, for the three and six months ended June 30, 2020 compared to $11.5 million and $23.2 million, respectively, in the same periods in the prior year as well as $128,000 in net losses and $335,000 in net gains on sales of securities, respectively, during the three and six months ended June 30, 2020 compared to $4.5 million and $6.4 million, respectively, in net losses on sales of securities during the same periods in the prior year. Other noninterest income, which is the result of fee revenue lines of business other than those noted above, increased during the three and six months ended June 30, 2020 by $725,000 and $6.2 million, respectively, when compared to the same periods in the prior year.

Noninterest expense increased by $3.9 million, or 3.1%, and $27.2 million, or 11.3%, during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2018. This increase is attributable in part to a $3.2 million non-cash impairment charge related to the proposed consolidation of five offices across the firm's footprint as well as a $2.4 million write-down of facilities and land acquired in the BNC acquisition that previously had been held2019. Impacting noninterest expense for ~~potential expansion, both of which were recorded in the second quarter of 2019. Also impacting noninterest expenses during~~ the three and six months ended June 30, ~~2019,~~2020 as compared to the same prior year periods was the $1.7 million decrease and $8.4 million increase, respectively, in salaries and employee benefits. The change in salaries and employee benefits was the result of an increase in our associate base in the first ~~half~~six months of 2020 versus the first six months of 2019 ~~versus~~offset in part, or in the case of the three months ended June 30, 2020, in whole, by the reduction of our cash incentive plan accrual as well as the reduction in stock-based compensation expense due to our performance through the first half of ~~2018~~2020 compared to the earnings per share performance metric targets established pursuant to our

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annual cash incentive plan and the ~~resulting~~return on average tangible assets performance metric targets applicable pursuant to certain performance-based equity awards we have previously awarded, each due to the effects of COVID-19 on our anticipated earnings and performance for the year ended December 31, 2020. Also impacting noninterest expense in the first half of 2020 was $9.7 million in lending related costs related to an increase in ~~salaries and employment benefits expense.~~our off balance sheet reserves. The increase in the expense related to off balance sheet reserves during the six months ended June 30, 2020 was largely due to the impact of the COVID-19 pandemic on expected credit losses under CECL.

Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was ~~49.2%~~48.1% and ~~48.6%~~50.0%, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to ~~48.2%~~49.2% and ~~48.9%~~48.6%, respectively, for the same periods in ~~2018.~~2019. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue. ~~The changes in the efficiency ratio for the three and six months ended June 30, 2019 compared to the same periods in 2018 were primarily impacted by~~

the above-noted contributing factors to increases in our noninterest income and noninterest expense in the first six months of 2019 as well as increased revenue caused by higher levels of interest earning assets and the absence of merger-related expenses in 2019.

During the three and six months ended June 30, ~~2019,~~2020, we recorded income tax expense of $11.2 million and $9.6 million, respectively, compared to income tax expense of $24.4 million and $47.5 ~~million, respectively, compared to $23.0 million and $42.6~~ million, respectively, for the three and six months ended June 30, ~~2018.~~2019. Our effective tax rate for the three and six months ended June 30, 2020 was 15.2% and 9.5%, respectively, compared to 19.6% for both the three and six months ended June 30, ~~2019 was 19.6% compared to 20.9% and 20.0%, respectively, for the three and six months ended June 30, 2018.~~2019. Our tax expense in the first half of 2020 was impacted by the provision for credit losses recorded in response to the COVID-19 pandemic, a portion of which was recorded as a discrete item of total income tax in the first quarter of 2020 and contributed a tax benefit of $22.4 million. 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 expense of $272,000 and a tax benefit of $590,000, respectively, for the three and six months ended June 30, 2020 compared to tax expense of $68,000 and a tax benefit of $701,000, respectively, for the three and six months ended June 30, ~~2019 compared to tax benefits of $72,000 and $2.8 million, respectively for the three and six months ended June 30, 2018.~~2019.

Financial Condition. Net loans increased ~~$1.1~~$2.7 billion, or ~~6.2%~~13.8%, during the six months ended June 30, ~~2019,~~2020, when compared to December 31, ~~2018, due~~2019. Contributing to ~~continued economic growth~~increased loan volumes during the six months ended June 30, 2020, were $2.2 billion of loans, as of June 30, 2020, issued through the Small Business Administration's (SBA's) Paycheck Protection Program (PPP). The remainder of the increase is primarily the result of loans made to borrowers that principally operate or are located in our core markets that were made prior to the COVID-19 pandemic, increases in the number of relationship advisors we employ and continued focus on attracting new customers to our company. Total deposits were ~~$19.4~~$25.5 billion at June 30, ~~2019,~~2020, compared to ~~$18.8~~$20.2 billion at December 31, ~~2018,~~2019, an increase of ~~$600.3 million,~~$5.3 billion, or ~~3.2%~~26.5%. Deposit growth during the period was likely aided by our clients' need to build liquidity going into the COVID-19 pandemic and current stock market conditions, but was also due in part to our intentional emphasis on gathering low cost core deposits during 2020. Although it is difficult to measure precisely the level of increased deposits that came to us from the PPP, we estimate that our PPP borrowers increased their deposit balances with us by approximately $1.7 billion between March 31, 2020 and June 30, 2020.

Capital and Liquidity. At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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. From time to time we may be required to support the capital needs of our bank (Pinnacle Bank). At June 30, ~~2019,~~2020, we had approximately ~~$95.2~~$318.8 million of cash at the parent company ~~substantially all of which could~~to be used to support our bank. We

During the second quarter of 2020, we issued 9.0 million depositary shares, each representing a 1/40th interest in a share of our 6.75% fixed rate non-cumulative, perpetual preferred stock, Series B (Series B Preferred Stock) in a registered public offering to both retail and institutional investors. Net proceeds from the transaction after underwriting discounts and offering expenses payable by us were approximately $217.6 million. The net proceeds were retained at Pinnacle Financial and are available to support our capital needs and other obligations, including payments related to our outstanding indebtedness, to support the capital needs and other obligations of our bank and for other general corporate purposes. Additionally, we believe we have various capital raising techniques available to us to provide for the capital needs of our company and bank, ~~including an established line~~such as the $300 million subordinated debt offering issued during the third quarter of 2019 or entering into a new revolving credit facility with another ~~bank that can be utilized, subject to the terms and conditions thereof, to provide up to $75 million of additional capital support to Pinnacle Bank and for other matters, if needed.~~financial institution. We also ~~have the ability to issue equity or debt securities from time to time as we have done in the past to support the capital needs of Pinnacle Bank and~~ periodically evaluate capital markets conditions to identify ~~opportunistic times~~opportunities to access those ~~markets.~~markets if necessary or prudent to support our capital levels.

On November 13, 2018, wePinnacle Financial announced that ~~our~~its board of directors ~~had~~ authorized a share repurchase program for up to $100.0 million of ~~our~~Pinnacle Financial’s outstanding common ~~stock.~~stock and on October 15, 2019, the board approved an additional $100.0 million of repurchase authorization. The initial repurchase program ~~is scheduled~~expired on March 31, 2020, with the additional $100.0 million authorization expiring on December 31, 2020. Prior to ~~expire upon the earlier~~January 1, 2020, we repurchased approximately 1.5 million shares of our ~~repurchase~~common stock at an aggregate cost of $82.1 million. During the quarter ended March 31, 2020, we repurchased approximately 1.0 million shares of our common stock at an aggregate cost of $50.8 million. Our last purchase of shares of our common stock ~~having an aggregate purchase price of $100.0 million and December 31, 2019. During the six months ended June 30, 2019, we repurchased 674,473 shares of~~occurred on March 19, 2020. We suspended our common stock at a weighted average price of $55.46 and an aggregate cost of $37.4 million. In aggregate, we have repurchased approximately 1.1 million shares, for approximately $58.1 million at a weighted average share price of $53.82 under this share repurchase program ~~through June 30, 2019.~~at the end of the first quarter of 2020 and it remains suspended until we gain more clarity on the length and depth of the COVID-19 pandemic.

Critical Accounting Estimates

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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. On January 1, 2020, we adopted FASB ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) which significantly changes our methodology for determining our allowance for credit losses, and ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment which simplifies our process for performing goodwill impairment testing.See Note 1. Summary of Significant Accounting Policies in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q for further information related to these changes. There have been no other significant changes to our Critical Accounting Estimates as described in our ~~2018~~Form 10-K.

~~Results of Operations~~Selected Financial Information

The following is a summary of ~~our results~~certain financial information as of ~~operations~~or for the three and six month periods ended June 30, 2020 and as of December 31, 2019 and for the three and six months ended June 30, 2019 (dollars in thousands, except per share data):


	Three Months Ended June 30,								2020 - 2019 Percent				Six Months Ended June 30,					2020 - 2019 Percent
	2020			2019			Increase (Decrease)			2020			2019			Increase (Decrease)
Income Statement:
Interest income	$	251,738		$	265,851		(5.3)	%		$	514,807		$	523,734		(1.7)	%
Interest expense	51,081			76,933			(33.6)	%		120,598			147,570			(18.3)	%
Net interest income	200,657			188,918			6.2	%		394,209			376,164			4.8	%
Provision for credit losses	68,332			7,195			849.7	%		168,221			14,379			1,069.9	%
Net interest income after provision for credit losses	132,325			181,723			(27.2)	%		225,988			361,785			(37.5)	%
Noninterest income	72,954			70,682			3.2	%		143,331			121,745			17.7	%
Noninterest expense	131,605			127,686			3.1	%		268,954			241,737			11.3	%
Net income before income taxes	73,674			124,719			(40.9)	%		100,365			241,793			(58.5)	%
Income tax expense	11,230			24,398			(54.0)	%		9,565			47,512			(79.9)	%
Net income	$	62,444		$	100,321		(37.8)	%		$	90,800		$	194,281		(53.3)	%
Per Share Data:
Basic net income per common share	$	0.83		$	1.31		(36.6)	%		$	1.20		$	2.54		(52.8)	%
Diluted net income per common share	$	0.83		$	1.31		(36.6)	%		$	1.20		$	2.53		(52.6)	%

Balance Sheet:
Loans, net of allowance for credit losses	$	22,234,928		$	19,693,099		12.9	%		$	22,234,928		$	19,693,099		12.9	%
Deposits	$	25,521,829		$	20,181,028		26.5	%		$	25,521,829		$	20,181,028		26.5	%

Performance Ratios:
Return on average assets ⁽¹⁾	0.77		%	1.55		%	(50.3)	%		0.60		%	1.54		%	(61.0)	%
Return on average stockholders' equity ⁽²⁾	5.58		%	9.77		%	(42.9)	%		4.10		%	9.63		%	(57.4)	%
Return on average common stockholders' equity⁽³⁾	5.66		%	9.77		%	(42.1)	%		4.12		%	9.63		%	(57.2)	%

Three months ended
June 30, 2019 - 2018 Percent Six Months Ended
June 30, 2019 - 2018 Percent
2019 2018 Increase (Decrease) 2019 2018 Increase (Decrease)
Interest income $ 265,851
$ 230,984
15.1 % $ 523,734
$ 442,512
18.4 %
Interest expense 76,933
48,748
57.8 % 147,570
85,805
72.0 %
Net interest income 188,918

182,236
3.7 % 376,164

356,707
5.5 %
Provision for loan losses 7,195
9,402
(23.5 )% 14,379
16,333
(12.0 )%
Net interest income after provision for loan losses 181,723

172,834
5.1 % 361,785

340,374
6.3 %
Noninterest income 70,682
47,939
47.4 % 121,745
92,122
32.2 %
Noninterest expense 127,686
110,908
15.1 % 241,737
219,488
10.1 %
Net income before income taxes 124,719

109,865
13.5 % 241,793

213,008
13.5 %
Income tax expense 24,398
23,000
6.1 % 47,512
42,633
11.4 %
Net income $ 100,321

$ 86,865
15.5 % $ 194,281

$ 170,375
14.0 %

Basic net income per common share $ 1.31
$ 1.13
15.9 % $ 2.54
$ 2.21
14.9 %

Diluted net income per common share $ 1.31
$ 1.12
17.0 % $ 2.53
$ 2.20
15.0 %

⁽¹⁾ Return on average assets is the result of net income for the reported period on an annualized basis, divided by average assets for the period.

⁽²⁾Return on average stockholders' equity is the result of net income for the reported period on an annualized basis, divided by average stockholders' equity for the period.

⁽³⁾Return on average common stockholders' equity is the result of net income for the reported period on an annualized basis, divided by average common stockholders' 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 ~~$188.9~~$200.7 million and ~~$376.2~~$394.2 million, respectively, for the three and six months ended June 30, ~~2019, an increase of $6.7~~2020 compared to $188.9 million and ~~$19.5~~$376.2 million, respectively, ~~from the levels recorded in~~for the same periods in the prior year, representing increases of ~~2018. This~~$11.7 million and $18.0 million, respectively. For the three and six months ended June 30, 2020 when compared to the comparable periods in 2019, this increase was ~~attributable to organic growth in our loan portfolio and an increase in~~largely the ~~interest rates we receive on interest earning assets, offset in part by increases in~~result of lower funding costs, the ~~volume and~~impact of the ~~rates we pay on deposits~~PPP and our ~~other funding sources.~~acquisition of additional on-balance

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sheet liquidity in response to the economic uncertainty resulting from the COVID-19 pandemic as well as organic loan growth during the comparable periods.

The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands):


	Three Months Ended June 30, 2020										Three Months Ended June 30, 2019
	Average Balances		Interest		Rates/ Yields		Average Balances		Interest		Rates/ Yields
Interest-earning assets:
Loans ⁽¹⁾⁽²⁾	$	22,257,168	$	226,281	4.16	%	$	18,611,164	$	237,653	5.22	%
Securities:
Taxable	2,157,081		9,589		1.79	%	1,781,814		12,243		2.76	%
Tax-exempt⁽²⁾	2,037,730		14,596		3.44	%	1,630,661		12,556		3.68	%
Federal funds sold and other	2,618,832		1,272		0.20	%	530,556		3,399		2.57	%
Total interest-earning assets	29,070,811		$	251,738	3.58	%	22,554,195		$	265,851	4.85	%
Nonearning assets
Intangible assets	1,868,231						1,850,146
Other nonearning assets	1,846,349						1,511,630
Total assets	$	32,785,391					$	25,915,971

Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking	4,639,729		4,256		0.37	%	3,150,865		9,305		1.18	%
Savings and money market	9,181,266		8,904		0.39	%	7,355,783		26,947		1.47	%
Time	4,554,027		20,567		1.82	%	3,958,445		22,736		2.30	%
Total interest-bearing deposits	18,375,022		33,727		0.74	%	14,465,093		58,988		1.64	%
Securities sold under agreements to repurchase	191,084		94		0.20	%	117,261		142		0.49	%
Federal Home Loan Bank advances	2,213,769		9,502		1.73	%	2,164,341		11,552		2.14	%
Subordinated debt and other borrowings	706,657		7,758		4.42	%	469,498		6,251		5.34	%
Total interest-bearing liabilities	21,486,532		51,081		0.96	%	17,216,193		76,933		1.79	%
Noninterest-bearing deposits	6,432,010		—		0.00	%	4,399,766		—		0.00	%
Total deposits and interest-bearing liabilities	27,918,542		$	51,081	0.74	%	21,615,959		$	76,933	1.43	%
Other liabilities	367,411						182,258
Stockholders' equity	4,499,438						4,117,754
Total liabilities and stockholders' equity	$	32,785,391					$	25,915,971
Net interest income			$	200,657					$	188,918
Net interest spread ⁽³⁾					2.62	%					3.06	%
Net interest margin ⁽⁴⁾					2.87	%					3.48	%

Three months ended
June 30, 2019
Three months ended
June 30, 2018
Average Balances Interest Rates/ Yields Average Balances Interest Rates/ Yields
Interest-earning assets:

Loans ⁽¹⁾⁽²⁾
$ 18,611,164
$ 237,653
5.22 % $ 16,729,734
$ 208,758
5.04 %
Securities:
Taxable 1,781,814
12,243
2.76 % 1,792,845
11,748
2.63 %
Tax-exempt⁽²⁾
1,630,661
12,556
3.68 % 1,177,422
8,350
3.34 %
Federal funds sold and other 530,556
3,399
2.57 % 442,401
2,128
1.93 %
Total interest-earning assets 22,554,195
$ 265,851
4.85 % 20,142,402
$ 230,984
4.66 %
Nonearning assets
Intangible assets 1,850,146
1,860,868

Other nonearning assets 1,511,630
1,233,675

Total assets $ 25,915,971
$ 23,236,945

Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking 3,150,865
9,305
1.18 % 3,038,705
6,395
0.84 %
Savings and money market 7,355,783
26,947
1.47 % 6,739,430
16,165
0.96 %
Time 3,958,445
22,736
2.30 % 2,900,779
10,207
1.41 %
Total interest-bearing deposits 14,465,093
58,988
1.64 % 12,678,914
32,767
1.04 %
Securities sold under agreements to repurchase 117,261
142
0.49 % 123,447
143
0.47 %
Federal Home Loan Bank advances 2,164,341
11,552
2.14 % 1,884,828
9,690
2.06 %
Subordinated debt and other borrowings 469,498
6,251
5.34 % 474,328
6,148
5.20 %
Total interest-bearing liabilities 17,216,193
76,933
1.79 % 15,161,517
48,748
1.29 %
Noninterest-bearing deposits 4,399,766
—
0.00 % 4,270,459
—
0.00 %
Total deposits and interest-bearing liabilities 21,615,959
$ 76,933
1.43 % 19,431,976
$ 48,748
1.01 %
Other liabilities 182,258
9,005

Stockholders' equity 4,117,754
3,795,963

Total liabilities and stockholders' equity $ 25,915,971
$ 23,236,944

Net interest income
$ 188,918
$ 182,236

Net interest spread ⁽³⁾
3.06 % 3.37 %
Net interest margin ⁽⁴⁾
3.48 % 3.69 %

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

(2) Yields computed on tax-exempt instruments on a tax equivalent basis and include $6.9 million of taxable equivalent income for each of the three months ended June 30, ~~2019 compared to $3.1 million for~~2020 and the three months ended June 30, ~~2018.~~2019. 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, ~~2019~~2020 would have been ~~3.42%~~2.84% compared to a net interest spread of ~~3.66%~~3.42% for the three months ended June 30, ~~2018.~~2019.

(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, 2019
Six months ended
June 30, 2018
Average Balances Interest Rates/ Yields Average Balances Interest Rates/ Yields
Interest-earning assets:

Loans ⁽¹⁾⁽²⁾
$ 18,276,680
$ 467,032
5.25 % $ 16,345,734
$ 399,972
4.98 %
Securities:
Taxable 1,813,693
25,783
2.87 % 1,793,619
22,970
2.58 %
Tax-exempt⁽²⁾
1,544,186
24,228
3.77 % 1,106,705
15,635
3.33 %
Federal funds sold and other 500,400
6,691
2.70 % 389,043
3,935
2.04 %
Total interest-earning assets 22,134,959
$ 523,734
4.89 % 19,635,101
$ 442,512
4.61 %
Nonearning assets
Intangible assets 1,851,292
1,862,294

Other nonearning assets 1,499,104
1,226,229

Total assets $ 25,485,355
$ 22,723,624

Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking 3,140,734
18,628
1.20 % 3,006,328
11,509
0.77 %
Savings and money market 7,446,911
53,284
1.44 % 6,597,734
28,153
0.86 %
Time 3,727,061
41,293
2.23 % 2,725,534
17,086
1.26 %
Total interest-bearing deposits 14,314,706
113,205
1.59 % 12,329,596
56,748
0.93 %
Securities sold under agreements to repurchase 113,305
287
0.51 % 126,690
273
0.43 %
Federal Home Loan Bank advances 2,046,007
21,515
2.12 % 1,735,385
16,697
1.94 %
Subordinated debt and other borrowings 470,133
12,563
5.39 % 475,066
12,087
5.13 %
Total interest-bearing liabilities 16,944,151
147,570
1.76 % 14,666,737
85,805
1.18 %
Noninterest-bearing deposits 4,298,169
—
0.00 % 4,287,229
—
0.00 %
Total deposits and interest-bearing liabilities 21,242,320
$ 147,570
1.40 % 18,953,966
$ 85,805
0.91 %
Other liabilities 175,193
5,185

Stockholders' equity 4,067,842
3,764,473

Total liabilities and stockholders' equity $ 25,485,355
$ 22,723,624

Net interest income
$ 376,164
$ 356,707

Net interest spread ⁽³⁾
3.14 % 3.43 %
Net interest margin ⁽⁴⁾
3.55 % 3.73 %


(dollars in thousands)	Six months ended										Six months ended
			June 30, 2020										June 30, 2019
	Average Balances		Interest		Rates/ Yields		Average Balances		Interest		Rates/ Yields
Interest-earning assets
Loans^{(1) (2)}	$	21,133,228	$	462,701	4.48	%	$	18,276,680	$	467,032	5.25	%
Securities
Taxable	2,040,855		19,857		1.96	%	1,813,693		25,783		2.87	%
Tax-exempt ⁽²⁾	1,963,822		28,420		3.47	%	1,544,186		24,228		3.77	%
Federal funds sold and other	1,713,314		3,829		0.45	%	500,400		6,691		2.70	%
Total interest-earning assets	26,851,219		$	514,807	3.96	%	22,134,959		$	523,734	4.89	%
Nonearning assets
Intangible assets	1,869,147						1,851,292
Other nonearning assets	1,791,150						1,499,104
Total assets	$	30,511,516					$	25,485,355

Interest-bearing liabilities
Interest-bearing deposits:
Interest checking	4,192,505		12,723		0.61	%	3,140,734		18,628		1.20	%
Savings and money market	8,639,407		29,339		0.68	%	7,446,911		53,284		1.44	%
Time	4,315,462		42,363		1.97	%	3,727,061		41,293		2.23	%
Total interest-bearing deposits	17,147,374		84,425		0.99	%	14,314,706		113,205		1.59	%
Securities sold under agreements to repurchase	166,138		209		0.25	%	113,305		287		0.51	%
Federal Home Loan Bank advances	2,121,828		19,909		1.89	%	2,046,007		21,515		2.12	%
Subordinated debt and other borrowings	690,036		16,055		4.68	%	470,133		12,563		5.39	%
Total interest-bearing liabilities	20,125,376		120,598		1.21	%	16,944,151		147,570		1.76	%
Noninterest-bearing deposits	5,595,869		—		—		4,298,169		—		—
Total deposits and interest-bearing liabilities	25,721,245		$	120,598	0.94	%	21,242,320		$	147,570	1.40	%
Other liabilities	331,975						175,193
Stockholders' equity	4,458,296						4,067,842
Total liabilities and stockholders' equity	$	30,511,516					$	25,485,355
Net interest income			$	394,209					$	376,164
Net interest spread ⁽³⁾					2.76	%					3.14	%
Net interest margin ⁽⁴⁾					3.06	%					3.55	%

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

(2) Yields computed on tax-exempt instruments on a tax equivalent basis and include ~~$13.4~~$14.0 million of taxable equivalent income for the six months ended June 30, ~~2019~~2020 compared to ~~$6.3~~$13.4 million for the six months ended June 30, ~~2018.~~2019. 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, ~~2019~~2020 would have been ~~3.49%~~3.02% compared to a net interest spread of ~~3.70%~~3.49% for the six months ended June 30, ~~2018.~~2019.

(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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For the three and six months ended June 30, ~~2019,~~2020, our net interest margin was 2.87% and 3.06%, respectively, compared to 3.48% and 3.55%, respectively, ~~compared to 3.69% and 3.73%, respectively,~~for the same periods in 2019. Our net interest margin for the three and six months ended June 30, ~~2018. Although our net~~2020 reflects the impact of PPP and the firm's acquisition of additional on-balance sheet liquidity as noted above, the decline in short-term interest margin for the three and six-month periods ended June 30, 2019 was positively impacted by yield expansion in our earning asset portfolio and growth in interest-earning assets, these increases were offset by increases in our total funding costs andrates, declining levels of positive impact from purchase ~~accounting. The expansion of~~accounting and the competitive rate environments for loans and deposits in our markets. More specifically, our net interest margin was negatively impacted by yield compression in our earning asset ~~yields was driven~~portfolio due to a declining macroeconomic interest rate environment, which included a 150 basis points reduction in ~~part by~~ the ~~impact of Federal~~federal funds rate ~~increases throughout 2018, which positively impacted our floating and variable rate loan and investment portfolios.~~in March 2020. This decrease was offset somewhat by a decrease in funding costs. During the three and six months ended June 30, ~~2019,~~2020, our earning asset yield ~~increased~~decreased by 19127 basis points and 2893 basis points, respectively, from the same periods in the prior year. ~~However, our~~Our total funding rates ~~increased~~decreased by 4269 basis points and 4946 basis points, respectively, compared to the ~~three and six months ended June 30, 2018, outpacing~~same periods in the growth in our yields on earning assets. The increase in our funding costs was primarily caused by higher market interest rates due to increased competition and increased borrowing costs for noncore funding.prior year.

We continue to deploy various asset liability management strategies to manage our risk to interest rate fluctuations. ~~Although the rise in interest rates over the last two years has lifted the yields we receive on earning assets, pricing~~Pricing for creditworthy borrowers and meaningful depositors is very competitive in our markets and this competition has adversely impacted, and may continue to adversely impact, our margins. ~~We anticipate that this~~This challenging competitive environment ~~will~~may continue during ~~the remainder~~2020 even during a time of ~~2019.~~economic uncertainty due to COVID-19. We also expect the positive impact of purchase accounting on our net interest income will ~~continue to~~ lessen in future periods, which will negatively affect our net interest margin in ~~2019. Though we~~2020. We have sought to mitigate much of the negative impact that reductions in short-term interest rates would have on our net interest margin through restructuring a portion of our investment securities portfolio, purchasing a loan interest rate ~~floor,~~floors, and unwinding fixed-to-floating loan interest rate ~~swaps,~~swaps. Those tactics have benefited us during this recent period of falling short-term interest ~~rate cuts like those announced by the Federal Reserve on July 31, 2019 will likely negatively impact~~rates. However, our net interest margin ~~particularly~~could be additionally impacted if we are not able to continue to lower ~~our funding cost on our~~ deposit ~~products as quickly and meaningfully as yields decline on~~rates at a pace necessary to offset declines in our earning ~~assets. Though we believe our~~asset yields. We determined that holding elevated levels of on-balance sheet liquidity is a prudent response to the COVID-19 pandemic. This strategy will negatively impact the net interest margin ~~may decrease slightly for the remainder of 2019, we believe our net interest income should continue~~until on-balance sheet liquidity returns to ~~increase in 2019 compared to 2018 primarily due to increased average earning asset volumes, primarily loans.~~more normalized levels. We seek to fund ~~these~~ increased loan volumes by growing our core deposits, but will utilize ~~noncore~~non-core funding to fund shortfalls, if any. To the extent that our dependence on ~~noncore~~non-core funding sources increases ~~in 2019~~during 2020, our net interest margin would likely be negatively ~~impacted.~~impacted as we may not be able to reduce the rates we pay on these deposits as quickly as we can on core deposits.

Provision for ~~Loan~~Credit Losses. ~~The~~On January 1, 2020, we adopted FASB ASU 2016-13, which introduces the current expected credit losses (CECL) methodology and requires us to estimate all expected credit losses over the remaining life of our loan and held-to-maturity securities portfolios. Accordingly, the provision for ~~loan~~credit losses represents a charge to earnings necessary to establish an allowance for ~~loan~~credit losses that, in management's evaluation, ~~should be~~is adequate to provide coverage for ~~the inherent losses on outstanding loans.~~all expected credit losses. The provision for ~~loan~~credit losses amounted to $68.3 million and $168.2 million, respectively, for the three and six months ended June 30, 2020 compared to $7.2 million and $14.4 million, respectively, for the three and six months ended June 30, ~~2019 compared~~2019. Provision expense is impacted by organic loan growth in our loan portfolio, our internal assessment of the credit quality of the loan portfolio, our expectations about future economic conditions and net charge-offs. The primary driver of the increase in provision for credit losses for the three and six months ended June 30, 2020 was the estimated economic impact of the COVID-19 pandemic. Our CECL model relies on projected macroeconomic conditions, including unemployment and GDP, as key inputs to ~~$9.4~~estimate future credit losses. As a result, the anticipated deterioration in economic conditions resulting from COVID-19 has resulted in a significant increase in expected credit losses. Also contributing to the increase in provision was an increase in net charge-offs, which totaled $5.4 million and ~~$16.3~~$15.5 million, respectively, for the three and six months ended June 30, ~~2018. Provision expense is impacted primarily by organic loan growth~~2020 compared to $4.1 million and $7.7 million, respectively, for the same periods in ~~our loan portfolio and by our internal assessment of the credit quality of the loan portfolio and~~2019. The increase in net ~~charge-offs. Provision expense~~charge-offs in the first ~~half~~six months of ~~2019 reflected charge-offs primarily~~2020 was in large part the result of an approximately $5.0 million charge-off related to ~~non-prime automobile loans~~a single credit in the commercial and ~~commercial~~industrial loan category during the first quarter of 2020. This credit ~~card losses.~~was criticized going into the COVID-19 pandemic and as a result of the pandemic suffered further deterioration resulting in its partial charge-off during the first quarter of 2020. During the second quarter of 2020, we had a partial recovery of approximately $1.7 million on this credit.

Our allowance for ~~loan~~credit losses reflects an amount deemed appropriate to adequately cover ~~probable~~all expected future losses ~~inherent in~~as of the ~~loan portfolio~~date the allowance is determined based on our allowance for ~~loan~~credit losses assessment methodology. At June 30, ~~2019,~~2020, our allowance for ~~loan~~credit losses as a percentage of total loans, inclusive of PPP loans, was ~~0.48%~~1.27%, up ~~slightly~~ from ~~0.47%~~0.48% at December 31, ~~2018.~~2019. The ~~slight~~ increase in the allowance ~~as a percentage of total loans is primarily attributable to provision expense associated with organic loan growth. The absolute level of our allowance~~ for ~~loan~~credit losses is largely ~~driven by continued favorable~~the result of the implementation of CECL on January 1, 2020, which resulted in an adjustment to the opening balance of the allowance for credit ~~experience in our larger portfolios~~losses of $38.1 million, and ~~we believe it is supported by~~increased provisioning during the ~~strong economies presently in place in~~three and six months ended June 30, 2020 due to the ~~markets in which we operate.~~estimated economic impact of the COVID-19 pandemic.

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, ~~and~~ 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 and fluctuate from period to period.

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The following is a summary of our noninterest income for the three and six months ended June 30, 2020 and 2019 ~~and 2018 (dollars in~~(in thousands):

Three months ended
June 30,
2019 - 2018
Percent
Six Months Ended
June 30, 2019 - 2018
Percent
2019 2018 Increase (Decrease) 2019 2018 Increase (Decrease)
Noninterest income:
Service charges on deposit accounts $ 8,940
$ 8,456
5.7% $ 17,482
$ 16,361
6.9%
Investment services 5,803
5,074
14.4% 11,207
10,319
8.6%
Insurance sales commissions 2,147
2,048
4.8% 5,075
5,167
(1.8)%
Gains on mortgage loans sold, net 6,011
3,777
59.1% 10,889
7,521
44.8%
Investment gains and losses on sales, net (4,466 ) —
NM (6,426 ) 30
NM
Trust fees 3,461
3,564
(2.9)% 6,756
6,681
1.1%
Income from equity method investment 32,261
9,690
232.9% 45,551
19,050
139.1%
Other noninterest income:

Interchange and other consumer fees 9,091
7,030
29.3% 16,598
13,501
22.9%
Bank-owned life insurance 4,201
2,894
45.2% 8,296
5,646
46.9%
Loan swap fees 799
752
6.3% 1,560
1,256
24.2%
SBA loan sales 1,171
1,728
(32.2)% 1,743
2,846
(38.8)%
Gain on other equity investments 832
2,112
(60.6)% 1,614
2,301
(29.9)%
Other noninterest income 431
814
(47.1)% 1,400
1,443
(3.0)%
Total other noninterest income 16,525

15,330
7.8% 31,211

26,993
15.6%
Total noninterest income $ 70,682

$ 47,939
47.4% $ 121,745

$ 92,122
32.2%


	Three Months Ended June 30,					2020 - 2019 Percent			Six Months Ended June 30,			2020 - 2019 Percent
	2020		2019		Increase (Decrease)		2020		2019		Increase (Decrease)
Noninterest income:
Service charges on deposit accounts	$	6,910	$	8,940	(22.7)%		$	15,942	$	17,482	(8.8)%
Investment services	5,971		5,868		1.8%		15,210		11,336		34.2%
Insurance sales commissions	2,231		2,147		3.9%		5,471		5,075		7.8%
Gains on mortgage loans sold, net	19,619		6,011		226.4%		28,202		10,889		159.0%
Investment (gains) losses on sales of securities, net	(128)		(4,466)		97.1%		335		(6,426)		105.2%
Trust fees	3,958		3,461		14.4%		8,128		6,756		20.3%
Income from equity method investment	17,208		32,261		(46.7)%		32,800		45,551		(28.0)%
Other noninterest income:
Interchange and other consumer fees	8,323		9,088		(8.4)%		18,292		16,595		10.2%
Bank-owned life insurance	4,726		4,201		12.5%		9,378		8,296		13.0%
Loan swap fees	614		799		(23.2)%		2,801		1,560		79.6%
SBA loan sales	941		1,171		(19.6)%		2,282		1,743		30.9%
Gain (loss) on other equity investments	(278)		832		(133.4)%		(452)		1,614		(128.0)%
Other noninterest income	2,859		369		674.8%		4,942		1,274		287.9%
Total other noninterest income	17,185		16,460		4.4%		37,243		31,082		19.8%
Total noninterest income	$	72,954	$	70,682	3.2%		$	143,331	$	121,745	17.7%

The ~~increase~~decrease in service charges on deposit accounts in the three and six months ended June 30, ~~2019~~2020 compared to the three and six months ended June 30, ~~2018~~2019 is primarily related to ~~increased~~ analysis fees due to ~~an increase~~a decrease in the transaction volume ~~and number~~ of commercial checking accounts ~~resulting from organic growth.~~which we believe is the result of the COVID-19 pandemic.

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, ~~2019,~~2020, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, increased by ~~$729,000~~$103,000 and ~~$888,000, respectively,~~$3.9 million when compared to the three and six months ended June 30, ~~2018.~~2019. At June 30, ~~2019~~2020 and ~~2018,~~2019, Pinnacle Asset Management was receiving commissions and fees in connection with approximately ~~$4.3~~$4.5 billion and ~~$3.7~~$4.3 billion, respectively, in brokerage assets. Revenues from the sale of insurance products by our insurance subsidiaries for the three and six months ended June 30, ~~2019~~2020 increased by ~~$99,000~~$84,000 and ~~decreased by $92,000,~~$396,000, respectively, compared to the same periods in the prior year. Included in insurance revenues for the ~~three and~~ six months ended June 30, ~~2019~~2020 was ~~$873,000~~$1.1 million of contingent income received in the first ~~half~~quarter of ~~2019~~2020 that was based on ~~2018~~2019 sales production and claims experience compared to ~~$1.0 million~~$873,000 recorded in the same period in the prior year. Additionally, at June 30, ~~2019,~~2020, our trust department was receiving fees on approximately ~~$2.4~~$2.9 billion of managed assets compared to ~~$1.9~~$2.4 billion at June 30, ~~2018,~~2019, reflecting organic growth and increased market valuations. The growth in our wealth management businesses is attributable to ~~our expanded distribution platform in our Carolina and Virginia markets as well as~~ the addition of associates in ~~our legacy Tennessee markets.~~these areas, market volatility and the attractive markets in which we operate.

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 ~~$6.0~~$19.6 million and ~~$10.9~~$28.2 million, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to ~~$3.8~~$6.0 million and ~~$7.5~~$10.9 million, respectively, for the same periods in the prior year. This sizeable increase is the direct result of the current interest rate environment and the strong markets in which we operate. We hedge a portion of our mortgage pipeline as part of a mandatory delivery program. 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. There is a positive correlation between the dollar amount of the mortgage pipeline and the value of this hedge. Therefore, the change in 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, ~~2019,~~2020, the mortgage pipeline included ~~$134.6~~$340.7 million in loans expected to close in ~~2019~~2020 compared to ~~$130.7~~$134.6 million in loans at June 30, ~~2018~~2019 expected to close in ~~2018.~~2019.

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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, 2020, we sold approximately $100.1 million of securities for a net gain of $335,000 compared to the six months ended June 30, 2019, when we sold approximately $476.7 million of securities for a net ~~losses~~loss of $6.4 million as we sought to reposition a portion of our securities portfolio for a declining rate environment compared to the six months ended June 30, 2018 where we sold approximately $14.5 million of securities for a net gain of $30,000.million.

Included in other noninterest income are interchange and other consumer fees, gains from bank-owned life insurance, swap fees earned for the facilitation of derivative transactions for our clients, SBA loan sales, gains or losses on other equity investments and other noninterest income items. Interchange revenues increased in the three and six months ended June 30, 2019 as a result of increased debit and credit card transactions as compared to the comparable periods in 2018 resulting from organic growth. Other noninterest income included changes in the cash surrender value of bank-owned life insurance which was $4.2 million and $8.3 million, respectively, for the three and six months ended June 30, 2019 compared to $2.9 million and $5.6 million, respectively, for the three and six months ended June 30, 2018. The increase in earnings on these bank-owned life insurance policies resulted primarily from the purchase of $100.0 million of new policies during 2018 and $110.0 million of new policies purchased in the first half of 2019. 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. Loan swap fees and SBA loan sales are all included in other noninterest income and fluctuate based on the current market environment. 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 ongoing reviews by senior investment managers.

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 primarily to healthcare providers and other professionals throughout the United States. The loans originated by BHG are either financed by secured borrowings or sold without recourse to independent financial institutions and investors. BHG has expanded its operations to include commercial lending to other professional service firms such as attorneys, accountants and others.

Income from this equity-method investment was ~~$32.3~~$17.2 million and ~~$45.6~~$32.8 million, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to ~~$9.7~~$32.3 million and ~~$19.1~~$45.6 million, respectively, for the same periods last year. Historically, BHG has sold the majority of the loans its originates to a network of bank purchasers through a combination of online auctions, direct sales and its direct purchase option. In the second half of 2019, BHG began retaining more loans on its balance sheet than historically had been the case in recent years. As a result of the economic disruption resulting from the COVID-19 pandemic, BHG, in the first six months of 2020, sold more loans through its auction platform than we had anticipated would be the case earlier in the year and will likely slow its transition to holding more loans on its balance sheet as the effects of COVID-19 are monitored. As is the case for our business, the impact of the COVID-19 pandemic on BHG's business is not fully known at this point though we believe its business, including demand for its loans and losses it may incur as a result of borrowers experiencing financial difficulty, will be negatively impacted.

Income from equity-method investment is recorded net of amortization expense associated with customer lists and other intangible assets of $293,000 and $587,000, respectively, for the three and six months ended June 30, 2020 compared to $475,000 and $950,000, respectively, for the three and six months ended June 30, ~~2019 compared to $693,000 and $1.4 million, respectively, for the three and six months ended June 30, 2018.~~2019. At June 30, ~~2019,~~2020, there were ~~$9.7~~$8.2 million of these intangible assets ~~which will~~that are expected to be amortized in lesser amounts over the next 1615 years. Also included in income from equity-method investment, is accretion income associated with the fair valuation of certain of BHG's liabilities of $541,000 and $1.1 million, respectively, for the three and six months ended June 30, 2020, compared to $660,000 and $1.3 million, respectively, for the three and six months ended June 30, ~~2019, compared to $729,000 and $1.5 million, respectively, for the three and six months ended June 30, 2018.~~2019. At June 30, ~~2019,~~2020, there were ~~$6.0~~$3.7 million of these liabilities ~~which will be accreted~~that are expected to accrete into income in lesser amounts over the next 7six years.

During the three months ended June 30, 2020, Pinnacle Financial and Pinnacle Bank received no dividends from BHG. During the six months ended June 30, 2020, Pinnacle Financial and Pinnacle Bank received $8.0 million in dividends from BHG in the aggregate. During the three and six months ended June 30, 2019, Pinnacle Financial and Pinnacle Bank received dividends ~~from BHG~~ of $28.2 million and $40.9 million, respectively, in the ~~aggregate compared to $19.1 million and $23.4 million, respectively, for the same~~aggregate. Dividends from BHG during such periods ~~in the prior year, which~~ reduced the carrying amount of our investment in BHG, while earnings from BHG during ~~the three and six months ended June 30, 2019~~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. No loans were purchased from BHG by Pinnacle Bank for the three and six month periods ended June 30, ~~2019~~2020 or ~~2018,~~2019, respectively. Earnings from BHG ~~may~~are likely to fluctuate from period-to-period.

As our ownership interest in BHG is 49%, and our representatives do not occupy a majority of the seats on BHG's board of managers, we do not consolidate BHG's results of operations or financial position into our financial statements but record the net result of BHG's activities at our percentage ownership in income from equity method investment in noninterest income. For the three and six months ended June 30, ~~2019,~~2020, BHG reported ~~$108.0~~$92.8 million and ~~$170.8~~$190.7 million, respectively, in revenues, net of substitution losses of ~~$12.7~~$28.1 million and ~~$25.1~~$44.4 million, respectively, compared to revenues of ~~$49.1~~$108.0 million and ~~$92.8~~$170.8 million, respectively, for the three and six months ended June 30, ~~2018,~~2019, net of substitution losses of ~~$10.5~~$12.7 million and ~~$21.8~~$25.1 million, respectively.

Approximately ~~$90.5~~$67.3 million and ~~$139.2~~$136.9 million, respectively, of BHG's revenues for the three and six months ended June 30, ~~2019~~2020 related to gains on the sale of commercial loans BHG had previously issued primarily to doctor, dentist and other medical ~~and professional~~ practices compared to ~~$39.1~~$90.5 million and ~~$74.2~~$139.2 million, respectively, for the three and six months ended June 30, ~~2018.~~2019. BHG refers to this activity as its core product. BHG typically funds these loans from cash reserves on its balance sheet. Subsequent to origination, these core product loans ~~are~~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. 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.

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At June 30, ~~2019~~2020 and ~~June 30, 2018,~~2019, there were ~~$2.2~~$3.2 billion and ~~$1.7~~$2.2 billion, respectively, in core product loans previously sold by BHG that were being actively serviced by BHG's ~~bank~~ network of bank purchasers. ~~Traditionally,~~ BHG, at its sole option, may also provide purchasers of these core product 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. This substitution is subject to the purchaser having adhered to the standards of its purchase agreement with BHG. Additionally, all substitutions are subject to the approval by BHG's board of managers. As a result, the reacquired loans are deemed ~~purchase~~purchased credit impaired and recorded on BHG's balance sheet at the net present value of the loan's anticipated cash flows. BHG will then initiate collection efforts and attempt to restore the reacquired loan to performing status. As a result, BHG maintained a liability as of June 30, 2020 and 2019 ~~and 2018~~ of ~~$100.3~~$229.3 million and ~~$77.9~~$100.3 million, respectively, that represents an estimate of the future inherent losses for the outstanding core portfolio that may be subject to future substitution. This liability represents 7.2% and 4.6%, respectively, of core product loans previously sold by BHG that remain outstanding as of June 30, 2020 and 2019, respectively. The increase in this liability in the six months ended June 30, 2020 was principally the result of the economic disruption associated with the COVID-19 pandemic which has adversely impacted physician and ~~2018, respectively.~~dental practices in a material manner.

BHG will maintain loans on its balance sheet for a period of time prior to sale or transfer to a purchaser. Alternatively, BHG may elect to keep certain loans on its balance sheet through maturity. From time to time, BHG may hold a higher volume of these loans depending upon the timing of loan originations, ~~their~~its loan pipeline and market ~~demand.~~demand as well as the deployment of its business strategy. As previously discussed, BHG realigned its business model to retain more of its originated loans on the balance sheet beginning in the second half of 2019. At June 30, 2020, BHG reported loans totaling $839.3 million compared to $467.2 million as of June 30, 2019. A portion of these loans do not qualify for sale accounting and accordingly an offsetting secured borrowing liability has been recorded. At June 30, 2020 and 2019, BHG had $310.4 million and $217.6 million, respectively, of secured borrowings associated with loans held for investment which did not qualify for sale accounting. At June 30, 2020 and 2019, BHG reported allowance for loan losses totaling $9.5 million and $2.3 million, respectively. Interest income and fees amounted to $22.0 million and $46.1 million, respectively, for the three and six months ended June 30, 2020 compared to $13.5 million and $24.2 million, respectively, for the three and six months ended June 30, ~~2019 compared to $7.3 million and $13.8 million, respectively, for the three and six months ended June 30, 2018.~~2019.

~~Additionally,~~ BHG ~~will~~ also ~~refer~~sometimes refers loans to other ~~lenders~~financial institutions and, based on an agreement with the ~~lender, earn~~institution, earns a fee for doing so. Typically, these are loans that BHG believes would either be classified as consumer-type loans rather than commercial loans, ~~the loans~~ fail to meet the credit underwriting standards of BHG but another ~~lender~~institution will accept the loans or are loans issued to borrowers in certain geographic locations where BHG has elected not to do business. For the three and six months ended June 30, ~~2019,~~2020, BHG recognized fee income of $195,000 and $753,000, respectively, compared to $495,000 and $1.1 million, ~~respectively, compared to $394,000 and $584,000,~~ respectively, for the same periods in the prior year related to these activities.

~~Recently, BHG has expanded its operations~~Included in other noninterest income are interchange and other consumer fees, gains from bank-owned life insurance, swap fees earned for the facilitation of derivative transactions for our clients, SBA loan sales, gains or losses on other equity investments and other noninterest income items. Interchange revenues decreased in the three months ended June 30, 2020 as a result of decreased debit and credit card transactions as compared to ~~include commercial lending~~the comparable period in 2019, which we believe is the result of the COVID-19 pandemic. Interchange revenues increased during the six months ended June 30, 2020 as compared to the same period in 2019 due to increased loan fees primarily as a result of loan prepayments during the second quarter of 2020. Other noninterest income included changes in the cash surrender value of bank-owned life insurance which was $4.7 million and $9.4 million, respectively, for the three and six months ended June 30, 2020 compared to $4.2 million and $8.3 million, respectively, for the three and six months ended June 30, 2019. During the six months ended June 30, 2019, we purchased $110.0 million of new bank-owned life insurance policies. 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. Loan swap fees increased by $1.2 million during the six months ended June 30, 2020 as compared to the same period in 2019 due primarily to reduced third party fees and an increase in the volume of activity resulting from the current interest rate environment. SBA loan sales are also included in other ~~professional service firms such~~noninterest income and fluctuate based on the current market environment. Additionally, the carrying values of other equity investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as ~~attorneys, accountants~~evidenced by financing and ~~others. Through subsidiaries that it owns, it also has expanded into patient financing, which involves loans~~sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing reviews by senior investment managers. Other other noninterest income fluctuated during the three and six months ended June 30, 2020 as compared to ~~individuals~~the same periods in 2019 due to ~~finance medical expenses, particularly those to patients with high deductible health plans.~~the $1.5 million loss on the sale of the high-yield automobile portfolio in the second quarter of 2019.

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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, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three Months Ended June 30,					2020 - 2019 Percent			Six Months Ended June 30,				2020 - 2019 Percent
	2020		2019		Increase (Decrease)		2020			2019		Increase (Decrease)
Noninterest expense:
Salaries and employee benefits:
Salaries	$	54,645	$	44,625	22.5%		$	106,821		$	89,681	19.1%
Commissions	3,611		3,224		12.0%		7,594			6,364		19.3%
Cash and equity incentives	4,824		16,159		(70.1%)		15,104			27,322		(44.7%)
Employee benefits and other	10,807		11,612		(6.9%)		24,848			22,629		9.8%
Total salaries and employee benefits	73,887		75,620		(2.3%)		154,367			145,996		5.7%
Equipment and occupancy	22,026		23,844		(7.6%)		43,004			43,175		(0.4%)
Other real estate expense, net	2,888		2,523		14.5%		5,303			2,769		91.5%
Marketing and other business development	2,142		3,282		(34.7%)		5,393			6,230		(13.4%)
Postage and supplies	2,070		2,079		(0.4%)		4,060			3,971		2.2%
Amortization of intangibles	2,479		2,271		9.2%		4,999			4,582		9.1%

Other noninterest expense:
Deposit related expense	5,677		4,873		16.5%		10,915			9,416		15.9%
Lending related expense	10,476		5,401		94.0%		22,544			10,700		110.7%
Wealth management related expense	499		610		(18.2%)		1,057			1,140		(7.3%)
Other noninterest expense	9,461		7,183		31.7%		17,312			13,758		25.8%
Total other noninterest expense	$	26,113	$	18,067	44.5%		$	51,828		$	35,014	48.0%
Total noninterest expense	$	131,605	$	127,686	3.1%		$	268,954		$	241,737	11.3%

Three Months Ended
June 30, 2019 - 2018
Percent Six Months Ended
June 30, 2019 - 2018
Percent
2019 2018 Increase (Decrease) 2019 2018 Increase (Decrease)
Noninterest expense:
Salaries and employee benefits:
Salaries $ 44,625
$ 39,136
14.0% $ 89,681
$ 78,240
14.6%
Commissions 3,224
3,148
2.4% 6,364
6,177
3.0%
Cash and equity incentives 16,159
11,224
44.0% 27,322
21,404
27.6%
Employee benefits and other 11,612
10,604
9.5% 22,629
22,010
2.8%
Total salaries and employee benefits 75,620
64,112
17.9% 145,996
127,831
14.2%
Equipment and occupancy 23,844
18,208
31.0% 43,175
35,951
20.1%
Other real estate expense, net 2,523
819
208.1% 2,769
25
NM
Marketing and other business development 3,282
2,544
29.0% 6,230
4,791
30.0%
Postage and supplies 2,079
2,291
(9.3%) 3,971
4,330
(8.3%)
Amortization of intangibles 2,271
2,659
(14.6%) 4,582
5,357
(14.5%)
Merger-related expense —
2,906
(100.0%) —
8,259
(100.0%)
Other noninterest expense:
Deposit related expense 4,873
6,078
(19.8%) 9,416
11,753
(19.9%)
Lending related expense 5,401
4,695
15.0% 10,700
8,603
24.4%
Wealth management related expense 610
465
31.2% 1,140
988
15.4%
Other noninterest expense 7,183
6,131
17.2% 13,758
11,600
18.6%
Total other noninterest expense $ 18,067
$ 17,369
4.0% $ 35,014
$ 32,944
6.3%
Total noninterest expense $ 127,686
$ 110,908
15.1% $ 241,737
$ 219,488
10.1%

Total salaries and employee benefits expenses decreased approximately $1.7 million and increased approximately ~~$11.5 million and $18.2~~$8.4 million, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to the same periods in ~~2018, primarily as~~2019. The change in salaries and employee benefits was the result of ~~our annual merit increases that are effective on January 1 of each year and as a result of increases~~an increase in our associate ~~base.~~base in 2020 versus 2019 offset in part, or in the case of the three months ended June 30, 2020, in whole, by the reduction of our cash incentive plan accrual as well as the reduction in stock-based compensation expense due to our performance through the first half of 2020 compared to the earnings per diluted share performance metric targets established pursuant to our annual cash incentive plan and the return on average tangible assets performance metric targets applicable pursuant to certain performance-based equity awards we have previously granted, each due to the effects of COVID-19 on our anticipated earnings and performance for the year ended December 31, 2020. At June 30, ~~2019,~~2020, our associate base was ~~2,361.0~~2,577.5 full-time equivalent associates as compared to ~~2,198.5~~2,361.0 at June 30, ~~2018.~~2019. We expect salary and benefit expenses will continue to rise though at a lesser percentage rate on a linked-quarter basis as ~~a result~~we slow our hiring efforts and focus primarily on expanding our associate base in the Atlanta market and those hires critical to our business across the rest of our ~~intention to continue our practice of hiring experienced bankers and other associates across our~~ franchise.

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 annual cash incentive plan, the targeted level of incentive payments requires achievement of a certain soundness threshold and a targeted level of, ~~revenues~~and average rate paid on, core deposits and earnings (subject to certain adjustments). To the extent that the soundness threshold is met and ~~revenues~~core deposit volumes and rates and earnings are above or below the targeted amount, the aggregate incentive payments are increased or decreased. Historically, we have paid between 0% and 125% of our targeted incentives. Through the second quarter of ~~2019,~~2020, we have accrued incentive costs for the cash incentive plan in ~~2019~~2020 at approximately ~~85%~~25% of our targeted ~~awards.~~

awards in light of our expectations that our 2020 results will not meet the minimum level of earnings per diluted share required under the plan. The rate at which we are accruing for payouts under the plan is largely the result of the current and expected future impact of the COVID-19 pandemic on our results of operations and deposit volumes and costs. The current rate of 25% is solely the result of our newly implemented deposit component for which our associates are outperforming with respect to both deposit and volume goals.

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Also included in employee benefits and other expense for the three and six months ended June 30, ~~2019~~2020 were approximately ~~$5.2~~$4.1 million and ~~$10.1~~$9.6 million, respectively, of compensation expenses related to equity-based awards for restricted shares or restricted share units, including those with performance-based vesting criteria, compared to ~~$4.3~~$5.2 million and ~~$8.8~~$10.1 million, respectively, for the three and six months ended June 30, ~~2018.~~2019. 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 for the three and six months ended June 30, ~~2019 increased~~2020 decreased when compared to the three and six months ended June 30, ~~2018. Key drivers~~2019 primarily as a result of ~~this increase were~~ the ~~first-time inclusion~~fact that our performance through the first half of ~~our associates hired through our acquisition~~2020 made it unlikely that these awards would be earned as a result of BNC in our annual associate grant in January of 2019 as well as additional associates we have hired throughout our footprint as well as increased performance-based awards to senior management. We expect ourthe pandemic. Our compensation expense associated with equity awards with time-based vesting criteria is likely to continue to increase during the remainder of ~~2019~~2020 when compared to ~~2018~~2019 as a result of the increased number of associates and our intention to hire additional experienced financial advisors, ~~during~~though for the remainder of ~~2019~~.2020 we will focus primarily on expanding our associate base in the Atlanta market and those hires critical to our business across the rest of our franchise. Compensation expense associated with our performance-based vesting awards will be impacted by our performance in 2020 and will likely continue to be less than prior year comparable periods.

Employee benefits and other expenses were $10.8 million and $24.8 million, respectively, for the three and six months ended June 30, 2020 compared to $11.6 million and $22.6 million, respectively, for the three and six months ended June 30, 2019 ~~compared to $10.6 million and $22.0 million, respectively, for the three and six months ended June 30, 2018~~ and include costs associated with our 401k plan, health insurance and payroll taxes.

Equipment and occupancy expenses for the three and six months ended June 30, ~~2019 increased $5.6~~2020 were $22.0 million and ~~$7.2~~$43.0 million, respectively, compared to $23.8 million and $43.2 million, respectively, ~~as compared to~~for the ~~same~~three and six months ended June 30, 2019. These costs were generally consistent between periods in the prior year. Included in the increase was a non-recurring $3.2 million non-cash impairment charge incurred during the second quarter of 2019 related to the proposed consolidation of five offices across our footprint. Additionally,though we ~~experienced increased expenses associated with technology improvements to enhance the infrastructure of our firm during the comparable periods and~~ expect to incur additional costs in future periods as we continue to enhance our technology infrastructure.

Other real estate income and expenses for the three and six months ended June 30, ~~2019 increased $1.7~~2020 were $2.9 million and ~~$2.7~~$5.3 million, respectively, as compared to $2.5 million and $2.8 million, respectively, ~~as compared to~~for the same periods in the prior ~~year due to a $2.4 million write-down~~year. Included in the ~~second~~six months ended June 30, 2020 were writedowns in the first quarter of ~~2019~~2020 of ~~facilities and land acquired in the BNC acquisition that~~ previously ~~had been held for potential expansion.~~foreclosed upon properties to market value based on updated appraisals received.

Marketing and business development expense for the three and six months ended June 30, ~~2019~~2020 was $2.1 million and $5.4 million, respectively, compared to $3.3 million and $6.2 ~~million, respectively, compared to $2.5 million and $4.8~~ million, respectively, for the three and six months ended June 30, ~~2018.~~2019. The primary source of the ~~increase in 2019~~decrease for the three and six months ended June 30, 2020 as compared to ~~2018~~the same periods 2019 is the ~~associated marketing~~result of limited in-person client meetings and business development expenses ~~necessary to support~~as a result of the ~~growth of our firm across our entire footprint in Tennessee,~~restrictions resulting from the ~~Carolinas and Virginia.~~

COVID-19 pandemic.

Intangible amortization expense was ~~$2.3~~$2.5 million and ~~$4.6~~$5.0 million, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to ~~$2.7~~$2.3 million and ~~$5.4~~$4.6 million, respectively, for the same periods in ~~2018.~~2019. The following table outlines our amortizing intangible assets, their initial valuation and amortizable lives at June 30, ~~2019:~~2020:


	Year acquired	Initial Valuation (in millions)		Amortizable Life (in years)	Remaining Value (in millions)
Core Deposit Intangible:

CapitalMark	2015	$	6.2	7	$	0.6
Magna Bank	2015	3.2		6	0.1
Avenue	2016	8.8		9	2.7
BNC	2017	48.1		10	27.9
Book of Business Intangible:
Miller Loughry Beach Insurance	2008	$	1.3	20	$	0.2
CapitalMark	2015	0.3		16	0.1
BNC Insurance	2017	0.4		20	0.3
BNC Trust	2017	1.9		10	1.3
Advocate Capital	2019	13.6		13	11.5

Year
acquired

Initial
Valuation
(in millions)

Amortizable
Life
(in years)

Remaining Value
(in millions)
Core Deposit Intangible:
CapitalMark 2015 $ 6.2
7
$ 1.2
Magna Bank 2015 3.2
6
0.4
Avenue 2016 8.8
9
3.9
BNC 2017 48.1
10
33.7
Book of Business Intangible:

Miller Loughry Beach Insurance 2008 $ 1.3
20
$ 0.3
CapitalMark 2015 0.3
16
0.1
BNC Insurance 2017 0.4
20
0.3
BNC Trust 2017 1.9
10
1.5

These assets are being amortized on an accelerated basis which reflects the anticipated life of the underlying assets. Amortization expense of these intangibles is estimated to decrease from ~~$8.3~~$9.1 million to ~~$4.5~~$5.1 million per year over the next 5five years with lesser amounts for the remaining amortization period.

~~No merger-related~~

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Other noninterest expenses, ~~were recorded during the three~~which consists primarily of deposit, lending, wealth management and ~~six months ended June 30, 2019. Merger-related~~administrative expenses ~~were $2.9~~increased by $8.0 million and ~~$8.3~~$16.8 million, respectively, for the three and six months ended June 30, 2018. Merger-related expenses incurred for the three and six months ended June 30, 2018 were associated with our merger with BNC and were inclusive of costs associated with associate retention packages and cultural and technology integrations.

~~Other noninterest expenses increased by $698,000 and $2.1 million, respectively, between the three and six months ended June 30, 2019~~2020 when compared to the three and six months ended June 30, ~~2018.~~2019. Deposit related expense ~~decreased~~increased by ~~$1.2 million~~$804,000 and ~~$2.3~~$1.5 million, respectively, during the three and six months ended June 30, ~~2019~~2020 when compared to the same periods in ~~2018. This decrease is primarily attributable to decreased FDIC insurance premiums of $1.3~~2019. Lending related expenses increased $5.1 million and $2.5 million, respectively, in the three and six months ended June 30, 2019 compared to the same periods in 2018 as a result of the elimination of the large bank surcharge during these periods. Lending and wealth management related expenses each increased during both the three and six months ended June 30, 2019 when compared to the same periods in 2018. These increases are directly correlated with increased lending and wealth management activities during the respective periods.

~~Total other noninterest expenses increased by $1.1 million and $2.2~~$11.8 million, respectively, during the three and six months ended June 30, ~~2019~~2020 when compared to the same periods in ~~2018. These increases are due~~2019. This increase is primarily the result of building our off-balance sheet reserves following the implementation of CECL effective January 1, 2020 and the effect that macroeconomic factors impacted by the COVID-19 pandemic had on our CECL models. Wealth management related expenses decreased during the three and six months ended June 30, 2020 when compared to the same periods in 2019. Total other noninterest expenses increased by $2.3 million and $3.6 million, respectively, during the three and six months ended June 30, 2020 when compared to the same periods in 2019. This increase is primarily the result of $2.9 million in FHLB prepayment penalties as a ~~variety~~result of ~~factors and include increases~~our prepayment of $392.5 million in ~~audit and consulting fees, increased regulatory exam fees and increased state franchise tax expense.~~FHLB borrowings during the second quarter of 2020.

Our efficiency ratio ~~(ratio~~(the ratio of noninterest expense to the sum of net interest income and noninterest income) was ~~49.2%~~48.1% and ~~48.6%~~50.0%, respectively, for the three and six months ended June 30, ~~2019~~2020 compared to ~~48.2%~~49.2% and ~~48.9%~~48.6%, respectively, for the ~~three and six months ended June 30, 2018.~~same periods in 2019. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue. The ~~changes in the~~ efficiency ratio for the three and six months ended June 30, ~~2019~~2020 compared to the same periods in ~~2018 were negatively~~2019 was impacted in part by increased noninterest expense during the ~~2019 periods by~~period as a ~~$1.5 million loss on the sale~~result of our ~~non-prime automobile portfolio, a $2.4 million write-down~~building of ~~facilities and land acquired in~~off-balance sheet reserves upon the ~~BNC acquisition that previously had been held for potential expansion, a $3.2 million non-cash impairment charge related to~~adoption of CECL during the ~~proposed consolidation of five offices across our footprint~~quarter as well as net gains and losses on sales of securities, gains on mortgage loans sold and income from our equity method investment in BHG in both the 2018 and 2019 periods. Increased revenue from increased interest earning assets in the 2019 periods over the 2018 periods and the absence of merger-related expenses in 2019 positively impacted our efficiency ratio in the 2019 periods when compared to 2018 periods.

Income Taxes. During the three and six months ended June 30, ~~2019,~~2020, we recorded income tax expense of $11.2 million and $9.6 million, respectively, compared to income tax expense of $24.4 million and $47.5 ~~million, respectively, compared to $23.0 million and $42.6~~ million, respectively, for the three and six months ended June 30, ~~2018.~~2019. Our effective tax rate for the three and six months ended June 30, 2020 was 15.2% and 9.5%, respectively, compared to 19.6% for both the three and six months ended June 30, ~~2019 was 19.6% compared to 20.9% and 20.0%, respectively, for the three and six months ended June 30, 2018.~~2019. 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. ~~Income~~Our tax expense isin the six months ended June 30, 2020 was impacted by the provision expense recorded in response to the COVID-19 pandemic, which was recorded in the first quarter of 2020 as a discrete item of total income tax and contributed a tax benefit of $22.4 million. Our tax rate in each period was also impacted by the vesting ~~of restricted share awards~~ and ~~the~~ exercise of ~~employee stock options, which~~equity-based awards previously granted under our equity-based compensation program, resulting in the recognition of tax expense orof $272,000 and a tax benefit ~~is recorded as a discrete item as a component~~ of ~~total income tax. Accordingly, we recognized~~$590,000, respectively, for the three and six months ended June 30, 2020 compared to tax expense of $68,000 and a tax benefit of $701,000, respectively, for the three and six months ended June 30, 2019 compared to tax benefits of $72,000 and $2.8 million, respectively for the three and six months ended June 30, 2018 related to the vesting and exercise of equity-based awards during those periods.2019.

Financial Condition

Our consolidated balance sheet at June 30, ~~2019~~2020 reflects an increase in total loans outstanding to ~~$18.8~~$22.5 billion compared to ~~$17.7~~$19.8 billion at December 31, ~~2018.~~2019. Total deposits increased by ~~$600.3 million~~$5.3 billion between December 31, ~~2018~~2019 and June 30, ~~2019.~~2020. Total assets were ~~$26.5~~$33.3 billion at June 30, ~~2019~~2020 compared to ~~$25.0~~$27.8 billion at December 31, ~~2018.~~2019.

Loans. The composition of loans at June 30, ~~2019~~2020 and at December 31, ~~2018~~2019 and the percentage (%) of each classification to total loans are summarized as follows ~~(dollars in~~(in thousands):


	June 30, 2020						December 31, 2019
	Amount		Percent		Amount		Percent
Commercial real estate:
Owner-occupied	$	2,708,306	12.0	%	$	2,669,766	13.5	%
Non-owner occupied	5,384,018		23.9	%	5,039,452		25.5	%
Consumer real estate – mortgage	3,042,604		13.5	%	3,068,625		15.5	%
Construction and land development	2,574,494		11.4	%	2,430,483		12.3	%
Commercial and industrial	8,516,333		37.8	%	6,290,296		31.8	%
Consumer and other	294,545		1.4	%	289,254		1.4	%
Total loans	$	22,520,300	100.0	%	$	19,787,876	100.0	%

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June 30, 2019 December 31, 2018
Amount Percent Amount Percent
Commercial real estate – mortgage $ 7,585,393
40.3 % $ 7,164,954
40.4 %
Consumer real estate – mortgage 2,949,755
15.7 % 2,844,447
16.1 %
Construction and land development 2,117,969
11.3 % 2,072,455
11.7 %
Commercial and industrial 5,795,107
30.8 % 5,271,421
29.8 %
Consumer and other 366,094
1.9 % 354,272
2.0 %
Total loans $ 18,814,318
100.0 % $ 17,707,549
100.0 %

~~The composition of~~At June 30, 2020, our loan portfolio composition had changed ~~with our acquisition~~modestly from the composition at December 31, 2019 principally as a result of ~~BNC in 2017, which focused more on~~the PPP loans, though commercial real estate ~~lending, including construction, than we did in our legacy Tennessee markets, where our focus was on commerical~~ and ~~industrial lending. As we intend to focus on growth of the~~ commercial and industrial ~~segment in our expanded footprint, we~~lending generally continue to ~~believe our commercial and industrial portfolio will again become a more substantial portion~~make up the largest segments of our ~~total loan~~ portfolio.

~~The commercial real estate – mortgage category includes owner-occupied commercial real estate loans.~~ At June 30, ~~2019,~~2020, approximately ~~34.6%~~33.5% of the outstanding principal balance of our commercial real estate ~~- mortgage~~ loans was secured by owner-occupied commercial real estate properties, compared to ~~37.0%~~34.6% at December 31, ~~2018.~~2019. 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 economies 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 both June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were ~~82.6%~~83.6%. Construction and ~~85.2%, respectively. Non-owner~~land development, non-owner occupied commercial real estate and multifamily loans ~~(including construction and land development loans)~~ as a percentage of total risk-based capital were ~~288.9%~~275.0% and ~~277.7%~~268.3% as of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. At June 30, ~~2019,~~2020, 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 classifies our fixed and variable rate loans at June 30, ~~2019~~2020 according to contractual maturities of (1) one year or less, (2) after one year through five years, and (3) after five years. The table also classifies our variable rate loans pursuant to the contractual repricing dates of the underlying loans ~~(dollars in~~(in thousands):


	Amounts at June 30, 2019						Percentage			Amounts at June 30, 2020								Percentage
	Fixed Rates		Variable Rates		Totals		At June 30, 2019	At December 31, 2018		Fixed Rates		Variable Rates		Totals		At June 30, 2020	At December 31, 2019
Based on contractual maturity:									Based on contractual maturity:
Due within one year	$	1,184,476	$	2,626,539	$	3,811,015	20.3%	18.9%	Due within one year	$	2,238,016	$	1,691,375	$	3,929,391	17.4%	20.6%
Due in one year to five years	5,008,201		4,407,027		9,415,228		50.0%	49.7%	Due in one year to five years	8,004,035		4,694,556		12,698,591		56.4%	50.2%
Due after five years	2,673,930		2,914,145		5,588,075		29.7%	31.4%	Due after five years	3,896,408		1,995,910		5,892,318		26.2%	29.2%
Totals	$	8,866,607	$	9,947,711	$	18,814,318	100.0%		Totals	$	14,138,459	$	8,381,841	$	22,520,300	100.0%

Based on contractual repricing dates:									Based on contractual repricing dates:
Daily floating rate	$	—	$	2,619,751	$	2,619,751	13.9%	15.6%	Daily floating rate	$	—	$	1,289,724	$	1,289,724	5.7%	13.4%
Due within one year	1,184,476		6,674,544		7,859,020		41.8%	39.0%	Due within one year	2,238,016		6,503,917		8,741,933		38.8%	42.7%
Due in one year to five years	5,008,201		365,965		5,374,166		28.6%	28.8%	Due in one year to five years	8,004,035		309,803		8,313,838		36.9%	27.7%
Due after five years	2,673,930		287,451		2,961,381		15.7%	16.6%	Due after five years	3,896,408		278,397		4,174,805		18.6%	16.2%
Totals	$	8,866,607	$	9,947,711	$	18,814,318	100.0%		Totals	$	14,138,459	$	8,381,841	$	22,520,300	100.0%

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

~~Accruing~~ Loans in Past Due Status. The following table is a summary of our ~~accruing~~ loans that were past due at least 30 days but less than 89 days and 90 days or more past due as of June 30, ~~2019~~2020 and December 31, ~~2018 (dollars in~~2019 (in thousands):

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								June 30,			December 31,
	June 30,			December 31,
Accruing loans past due 30 to 89 days:	2019			2018
Commercial real estate – mortgage	$	7,104		$	11,756
Loans past due 30 to 89 days:							Loans past due 30 to 89 days:	2020			2019
Commercial real estate:							Commercial real estate:
Owner occupied							Owner occupied	$	3,687		$	5,239
Non-owner occupied							Non-owner occupied	640			6,797
Consumer real estate – mortgage	10,603			18,059			Consumer real estate – mortgage	4,875			13,803
Construction and land development	3,469			3,759			Construction and land development	2,059			2,103
Commercial and industrial	11,420			21,451			Commercial and industrial	10,292			10,952
Consumer and other	4,658			3,276			Consumer and other	1,603			2,184
Total accruing loans past due 30 to 89 days	$	37,254		$	58,301
Total loans past due 30 to 89 days							Total loans past due 30 to 89 days	$	23,156		$	41,078

Accruing loans past due 90 days or more:
Commercial real estate – mortgage	$	70		$	—
Loans past due 90 days or more:							Loans past due 90 days or more:
Commercial real estate:							Commercial real estate:
Owner occupied							Owner occupied	$	4,943		$	1,719
Non-owner occupied							Non-owner occupied	9,950			3,816
Consumer real estate – mortgage	220			—			Consumer real estate – mortgage	5,917			7,304
Construction and land development	—			—			Construction and land development	2,154			1,487
Commercial and industrial	1,537			1,082			Commercial and industrial	4,991			6,364
Consumer and other	906			476			Consumer and other	548			570
Total accruing loans past due 90 days or more	$	2,733		$	1,558
Total loans past due 90 days or more							Total loans past due 90 days or more	$	28,503		$	21,260

Ratios:							Ratios:
Accruing loans past due 30 to 89 days as a percentage of total loans	0.20		%	0.33		%
Accruing loans past due 90 days or more as a percentage of total loans	0.01		%	0.01		%
Total accruing loans in past due status as a percentage of total loans	0.21		%	0.34		%
Loans past due 30 to 89 days as a percentage of total loans							Loans past due 30 to 89 days as a percentage of total loans	0.10		%	0.21		%
Loans past due 90 days or more as a percentage of total loans							Loans past due 90 days or more as a percentage of total loans	0.13		%	0.11		%
Total loans in past due status as a percentage of total loans							Total loans in past due status as a percentage of total loans	0.23		%	0.32		%

Potential Problem Loans. Potential problem loans, which are not included in nonperforming assets, amounted to approximately ~~$227.5~~$251.3 million, or ~~1.2%~~1.1% of total loans at June 30, ~~2019,~~2020, compared to ~~$176.3~~$276.0 million, or ~~1.0%~~1.4% of total loans at December 31, ~~2018.~~2019. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators, for loans classified as substandard, excluding the impact of substandard nonaccrual loans and substandard troubled debt restructurings. Troubled debt restructurings are not included in potential problem loans. The increase in potential problem loans at June 30, 2019 compared to December 31, 2018 is related to certain credits in our commercial and industrial portfolio representing various industries such as fiber optics, education and publishing. Approximately ~~$5.5~~$5.4 million of potential problem loans were past due at least 30 days but less than 90 days as of June 30, ~~2019.~~2020.

Nonperforming Assets and Troubled Debt Restructurings. At June 30, ~~2019,~~2020, we had ~~$102.7~~$84.7 million in nonperforming assets compared to ~~$103.2~~$91.1 million at December 31, ~~2018.~~2019. Included in nonperforming assets were ~~$76.1~~$62.6 million in nonaccrual loans and ~~$26.7~~$22.1 million in OREO and other nonperforming assets at June 30, ~~2019~~2020 and ~~$87.8~~$61.6 million in nonaccrual loans and ~~$15.4~~$29.5 million in OREO and other nonperforming assets at December 31, ~~2018.~~2019. At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were ~~$7.4~~$3.3 million and ~~$5.9~~$4.9 million, respectively, of troubled debt restructurings, all of which were accruing as of the restructured date and remain on accrual ~~status but~~status. In response to the COVID-19 pandemic and its economic impact to its customers, Pinnacle Bank implemented a short-term modification program in accordance with interagency regulatory guidance to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments of principal and/or interest for 90 days, which Pinnacle Bank may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. Pursuant to the interagency regulatory guidance, Pinnacle Financial may elect to not classify loans for which these deferrals are ~~considered impaired loans pursuant to U.S. GAAP.~~

~~Allowance for Loan Losses (allowance).~~ ~~We maintain the allowance at a level that our management deems appropriate to adequately cover the probable losses inherent in the loan portfolio.~~granted as troubled debt restructurings. As of June 30, ~~2019~~2020, we had granted deferrals on approximately $4.2 billion in aggregate principal amount of loans. As of July 17, 2020, approximately $2.7 billion in aggregate principal loan balances remained on deferral.

Allowance for Credit Losses on Loans (allowance). On January 1, 2020, we adopted FASB ASU 2016-13, which introduces the current expected credit losses (CECL) methodology and requires us to estimate all expected credit losses over the remaining life of our loan portfolio. Accordingly, beginning in 2020, the allowance for credit losses 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, 2020 and December 31, ~~2018,~~2019, our allowance for ~~loan~~credit losses was approximately ~~$90.3~~$285.4 million and ~~$83.6~~$94.8 million, respectively, which our management ~~deemed~~believes to be adequate at each of the respective dates. Our allowance for loan losses is adjusted to an amount that our management deems appropriate to adequately cover the probable losses in the loan portfolio based on our allowance for loan loss methodology. Our allowance for loancredit losses as a percentage of total loans, inclusive of PPP loans, was ~~0.48%~~1.27% at June 30, ~~2019,~~2020, up ~~slightly~~ from ~~0.47%~~0.48% at December 31, ~~2018.~~ 2019.

The ~~absolute level~~increase in the allowance for credit losses is largely the result of the implementation of ASU 2016-13 on January 1, 2020, which resulted in an adjustment to the opening balance of the allowance for credit losses of $38.1 million, and increased provisioning during

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the six months ended June 30, 2020 due primarily to the estimated economic impact of the COVID-19 pandemic. Our CECL models rely largely on projections of 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 US Treasury interest rates. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to predict quarterly rates of default. Projected macroeconomic factors have experienced significant deterioration during the six months ended June 30, 2020, which has resulted in the significant increase in our allowance for ~~loan~~credit losses during the same period.

Under the CECL methodology the allowance for credit losses is ~~largely driven~~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, 2020, reasonable and supportable periods ranging from 12 to 18 months were utilized followed by ~~continued favorable credit experience and we believe it is supported by the strong economies presently in place in the markets in which we operate.~~a 12 month straight line reversion period to long term averages.

~~Also impacting the~~The overall balance of our allowance ~~for loan losses is~~at December 31, 2019 was impacted by fair value accounting on our acquired loan portfolios, ~~as no allowance~~ for ~~loan losses is assigned to acquired loans as of the date of acquisition; however,~~which an allowance for ~~loan~~credit losses was only necessary if it exceeded the remaining fair value discount. Subsequent to the adoption of ASU 2016-13 on January 1, 2020, an allowance for credit losses is ~~recorded~~recognized for ~~purchased~~all acquired loans, ~~that have experienced~~regardless of the amount of remaining fair value discounts. In addition, the remaining nonaccretable discount at December 31, 2019 was reclassified into the allowance for credit ~~deterioration subsequent to acquisition or increases in balances outstanding.~~losses upon adoption of ASU 2016-13 on January 1, 2020. At June 30, ~~2019,~~2020, the remaining fair value discount for all acquired portfolios was ~~$75.4~~$38.0 million, ~~consisting~~all of $14.2 million of nonaccretable discount attributable to purchase credit impaired loans and $61.1 million of accretable discount. For loans acquired in connection with our acquisitions, the calculation of the allowance for loan losses subsequent to the acquisition datewhich is consistent with that utilized for our legacy loans. Our accounting policy is to compare the computed allowance for loan losses on purchased loans to the remaining fair value adjustment at the individual loan level. Generally the fair value adjustments are expected to ~~accrete to interest~~be accreted into income over the remaining contractual ~~life~~lives of the ~~underlying loans and decrease proportionately with the~~ related loan balance. However, if the computed allowance is greater than the remaining fair value adjustment, the excess is added to the allowance for loan losses by a provision for loan losses. Additional provisioning for purchased portfolios results from credit deterioration on the individual loan following consummation of the acquisition or from increased borrowings on loans and lines that existed as of the acquisition date. Should a loan with a remaining fair value discount be paid off prior to maturity, the remaining fair value discount is recognized as interest income in the period when the loan is paid off.loans.

~~As of June 30, 2019, net loans included a remaining net fair value discount of $75.4 million.~~ For the six months ended June 30, ~~2019,~~2020, the net fair value discount changed as ~~follows:~~follows (in thousands):


	Accretable Yield		Nonaccretable Yield		Total
December 31, 2019	$	(51,322)	$	(3,828)	$	(55,150)

Reclassification of discount to allowance for credit losses	—		3,828		3,828
Year-to-date accretion and settlements	13,319		—		13,319
June 30, 2020	$	(38,003)	$	—	$	(38,003)

Accretable
Yield

Nonaccretable
Yield
Total
December 31, 2018 $ (78,282 ) $ (17,394 ) $ (95,676 )
Acquisitions —
—
—
Year-to-date accretion and settlements 17,134
3,157
20,291
June 30, 2019 $ (61,148 ) $ (14,237 ) $ (75,385 )

The following table sets forth, based on management's estimate, the allocation of the allowance for ~~loan~~credit losses to categories of loans as well as the unallocated portion as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 and the percentage of loans in each category to total loans ~~(dollars in~~(in thousands):


	June 30, 2020						December 31, 2019
	Amount		Percent		Amount		Percent
Commercial real estate:
Owner occupied	$	38,803	12.0	%	$	13,406	13.5	%
Non-owner occupied	68,426		23.9	%	19,963		25.5	%
Consumer real estate - mortgage	29,358		13.5	%	8,054		15.5	%
Construction and land development	41,897		11.4	%	12,662		12.3	%
Commercial and industrial	100,610		37.8	%	36,112		31.8	%
Consumer and other	6,278		1.4	%	3,595		1.4	%
Unallocated	—		NA		985		NA
Total allowance for credit losses on loans	$	285,372	100.0	%	$	94,777	100.0	%

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June 30, 2019 December 31, 2018
Amount Percent Amount Percent
Commercial real estate - mortgage $ 30,826
40.3 % $ 26,946
40.4 %
Consumer real estate - mortgage 8,489
15.7 % 7,670
16.1 %
Construction and land development 11,206
11.3 % 11,128
11.7 %
Commercial and industrial 37,436
30.8 % 31,731
29.8 %
Consumer and other 2,114
1.9 % 5,423
2.0 %
Unallocated 182
NA
677
NA
Total allowance for loan losses $ 90,253
100.0 % $ 83,575
100.0 %

The following is a summary of changes in the allowance for ~~loan~~credit losses on loans for the six months ended June 30, ~~2019~~2020 and for the year ended December 31, ~~2018~~2019 and the ratio of the allowance for ~~loan~~credit losses on loans to total loans as of the end of each period ~~(dollars in~~(in thousands):


	Six Months Ended June 30, 2020			Year ended December 31, 2019
Balance at beginning of period	$	94,777		$	83,575
Impact of adopting ASC 326	38,102			—
Provision for credit losses on loans	168,033			27,283
Charged-off loans:
Commercial real estate:
Owner occupied	(1,061)			(1,625)
Non-owner occupied	(263)			(75)
Consumer real estate – mortgage	(2,126)			(1,335)
Construction and land development	—			(18)
Commercial and industrial	(14,998)			(19,208)
Consumer and other loans	(2,247)			(6,206)
Total charged-off loans	(20,695)			(28,467)
Recoveries of previously charged-off loans:
Commercial real estate:
Owner occupied	225			1,252
Non-owner occupied	199			980
Consumer real estate – mortgage	674			1,827
Construction and land development	93			682
Commercial and industrial	2,997			6,473
Consumer and other loans	967			1,172
Total recoveries of previously charged-off loans	5,155			12,386
Net charge-offs	(15,540)			(16,081)
Balance at end of period	$	285,372		$	94,777
Ratio of allowance for credit losses on loans to total loans outstanding at end of period	1.27		%	0.48		%
Ratio of net charge-offs to average total loans outstanding for the period ⁽¹⁾	0.15		%	0.08		%

Six months ended
June 30, 2019
Year ended
December 31, 2018
Balance at beginning of period $ 83,575
$ 67,240
Provision for loan losses 14,379
34,377
Charged-off loans:
Commercial real estate – mortgage (1,599 ) (3,030 )
Consumer real estate – mortgage (930 ) (1,593 )
Construction and land development (4 ) (74 )
Commercial and industrial (8,760 ) (13,175 )
Consumer and other loans (3,255 ) (12,528 )
Total charged-off loans (14,548 ) (30,400 )
Recoveries of previously charged-off loans:
Commercial real estate – mortgage 964
2,096
Consumer real estate – mortgage 741
2,653
Construction and land development 141
1,863
Commercial and industrial 4,342
3,035
Consumer and other loans 659
2,711
Total recoveries of previously charged-off loans 6,847
12,358
Net charge-offs (7,701 ) (18,042 )
Balance at end of period $ 90,253
$ 83,575
Ratio of allowance for loan losses to total loans outstanding at end of period 0.48 % 0.47 %
Ratio of net charge-offs to average total loans outstanding for the period ⁽¹⁾
0.08 % 0.11 %

⁽¹⁾Net charge-offs for the year-to-date period ended June 30, ~~2019~~2020 have been annualized.

~~Management~~Pinnacle Financial's management assesses the adequacy of the allowance ~~prior to the end of each calendar quarter.~~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 ~~the loan portfolios, past loan~~historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, ~~the views of Pinnacle Bank's regulators,~~ adverse situations that may affect the ~~borrower's~~borrowers' ability to repay the loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, ~~economic conditions,~~ industry and peer bank loan quality indications and other pertinent ~~factors. This evaluation~~factors, including regulatory recommendations. The allowance is ~~inherently subjective as it requires material estimates including the~~increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts ~~and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.~~previously charged-off. For further discussion regarding our allowance for ~~loan~~credit losses, refer to Critical Accounting Estimates ~~included~~in Part I Item 2 - Critical Accounting Estimates herein. We expect that the economic disruption caused by the COVID-19 pandemic will cause our net charge-offs to increase in ~~the 2018 10-K.~~2020 when compared to comparable periods in 2019.

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Based upon our evaluation of the loan portfolio, we believe the allowance for ~~loan~~credit losses to be adequate to absorb our estimate of ~~inherent~~expected future credit losses ~~existing in the loan portfolio~~on loans outstanding at June 30, ~~2019.~~2020. While our policies and procedures used to estimate the allowance for ~~loan~~credit losses as well as the resultant provision for ~~loan~~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 allowance for ~~loan~~credit losses and, thus, the resulting provision for ~~loan~~credit losses. In particular, the length and severity of the economic disruption of the COVID-19 pandemic is difficult to predict and each may be worse than we have estimated, which could cause our provision for credit losses to be negatively impacted for the duration of the pandemic and its aftermath. We believe borrowers that operate in the restaurant, entertainment, hospitality, medical, dental, retail and construction sectors, including owners of commercial real estate properties and hotels, continue to be the most likely to be negatively impacted by the economic disruptions related to the COVID-19 pandemic, though other businesses and nonprofit and religious organizations have been, and are likely to continue to be, negatively impacted as well. If the strict social distancing practices or safer-at-home directives that were initially implemented in response to the spread of COVID-19 were to return, these impacts could be more severe than currently anticipated.

Investments. Our investment portfolio, consisting primarily of Federal agency bonds, mortgage-backed securities, and state and municipal securities amounted to ~~$3.4~~$4.4 billion and ~~$3.3~~$3.7 billion at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Our investment portfolio serves many purposes including serving as a stable source of income, as collateral for public funds deposits and as a potential liquidity source. A summary of our investment portfolio at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 follows:

June 30, 2019 December 31, 2018
Weighted average life 6.29 years 7.23 years
Effective duration* 4.13% 3.62%
Tax equivalent yield 3.20% 3.22%


	June 30, 2020	December 31, 2019
Weighted average life	6.73 years	6.55 years
Effective duration*	4.60%	4.75%
Tax equivalent yield	2.59%	2.85%

(*) 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, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~5.32%~~5.45% and ~~4.82%~~5.89%, respectively.

Restricted Cash. Our restricted cash balances totaled approximately $254.6 million at June 30, 2020, compared to $137.0 million at December 31, 2019. This restricted cash is maintained at other financial institutions as collateral primarily for our derivative portfolio. The increase in restricted cash is attributable primarily to an increase in collateral requirements on certain derivative instruments for which the fair value has declined. See Note 8. Derivative Instruments in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q.

Deposits and Other Borrowings. We had approximately ~~$19.4~~$25.5 billion of deposits at June 30, ~~2019~~2020 compared to ~~$18.8~~$20.2 billion at December 31, ~~2018.~~2019. Our deposits consist of noninterest and interest-bearing demand accounts, savings accounts, money market accounts and time deposits. Additionally, we ~~entered~~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 ~~$154.2~~$194.6 million at June 30, ~~2019~~2020 and ~~$104.7~~$126.4 million at December 31, ~~2018.~~2019. Additionally, at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Pinnacle Bank had borrowed ~~$2.0~~$1.8 billion and ~~$1.4~~$2.1 billion, respectively, in advances from the Federal Home Loan Bank of Cincinnati (FHLB). During the three and six months ended June 30, 2020, $392.5 million in FHLB advances were restructured and prepayment penalties of $2.9 million were recognized in expense for the three months ended June 30, 2020. At June 30, ~~2019,~~2020, Pinnacle Bank ~~also~~ had approximately ~~$2.1~~$2.4 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. Our efforts to increase our on-balance sheet liquidity in the second half of the first quarter resulted in increased borrowings from the FHLB Cincinnati.

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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 and the percentage of each type to the total at June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	June 30, 2019		Percent	December 31, 2018		Percent		June 30, 2020		Percent	December 31, 2019		Percent
Core funding:							Core funding:
Noninterest-bearing deposit accounts	$	4,493,419	20.4%	$	4,309,067	20.6%	Noninterest-bearing deposit accounts	$	6,892,864	24.4%	$	4,795,476	20.7%
Interest-bearing demand accounts	2,711,568		12.3%	3,097,110		14.8%	Interest-bearing demand accounts	3,747,577		13.3%	3,135,581		13.6%
Money Market accounts	6,773,118		30.7%	6,805,186		32.6%
Savings and money market accounts							Savings and money market accounts	7,424,099		26.3%	6,807,825		29.5%
Time deposit accounts less than $250,000	1,678,117		7.6%	1,605,983		7.7%	Time deposit accounts less than $250,000	1,524,146		5.4%	1,674,970		7.2%
Reciprocating demand deposit accounts ⁽¹⁾	227,280		1.0%	162,410		0.8%	Reciprocating demand deposit accounts ⁽¹⁾	455,889		1.6%	302,610		1.3%
Reciprocating savings accounts ⁽¹⁾	486,977		2.2%	418,230		2.0%	Reciprocating savings accounts ⁽¹⁾	1,120,722		4.0%	717,149		3.1%
Reciprocating CD accounts ⁽¹⁾	133,207		0.6%	91,187		0.4%	Reciprocating CD accounts ⁽¹⁾	226,496		0.8%	183,868		0.8%
Total core funding	16,503,686		74.8%	16,489,173		78.9%	Total core funding	21,391,793		75.8%	17,617,479		76.2%
Noncore funding:							Noncore funding:
Relationship based noncore funding:							Relationship based noncore funding:
Other time deposits	783,946		3.6%	687,427		3.3%	Other time deposits	827,254		2.9%	850,189		3.7%
Securities sold under agreements to repurchase	154,169		0.7%	104,741		0.5%	Securities sold under agreements to repurchase	194,553		0.7%	126,354		0.5%
Total relationship based noncore funding	938,115		4.3%	792,168		3.8%	Total relationship based noncore funding	1,021,807		3.6%	976,543		4.2%
Wholesale funding:							Wholesale funding:
Brokered deposits	478,163		2.2%	588,861		2.8%	Brokered deposits	1,405,444		5.0%	480,942		2.1%
Brokered time deposits	1,683,587		7.6%	1,083,646		5.2%	Brokered time deposits	1,897,338		6.7%	1,232,418		5.3%
Federal Home Loan Bank advances	1,960,062		8.9%	1,443,589		6.9%	Federal Home Loan Bank advances	1,787,551		6.3%	2,062,534		8.9%
Paycheck Protection Program liquidity facility							Paycheck Protection Program liquidity facility	47,082		0.2%	—		—%
Subordinated debt and other funding	464,144		2.2%	485,130		2.4%	Subordinated debt and other funding	669,961		2.4%	749,080		3.3%
Total wholesale funding	4,585,956		20.9%	3,601,226		17.3%	Total wholesale funding	5,807,376		20.6%	4,524,974		19.6%
Total noncore funding	5,524,071		25.2%	4,393,394		21.1%	Total noncore funding	6,829,183		24.2%	5,501,517		23.8%
Totals	$	22,027,757	100.0%	$	20,882,567	100.0%	Totals	$	28,220,976	100.0%	$	23,118,996	100.0%


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

As noted in the table above, our core funding as a percentage of total funding decreased from ~~78.9%~~76.2% at December 31, ~~2018~~2019 to ~~74.8%~~75.8% at June 30, ~~2019,~~2020, primarily as a result of ~~increased competition~~the significant increase in deposits estimated to have been funded by PPP loans, offset in part by our intentional increase in wholesale funding to build on-balance sheet liquidity as we prepared for the initial impact of the COVID-19 pandemic. Competition for core deposits in our markets remains very competitive and we anticipate that our ~~need~~percentage of non-core funding is likely to ~~fund the continued growth in our earning assets.~~increase as PPP loan funds are utilized.

When wholesale funding is necessary to complement the company's core deposit base, management determines which source is best suited to address both liquidity risk management and interest rate risk management objectives. Our Asset Liability Management Policy imposes limitations on overall ~~noncore~~wholesale funding reliance and on brokered deposit exposure specifically. Both our overall reliance on ~~noncore~~wholesale funding and exposure to brokered deposits and brokered time deposits were within those policy limitations as of June 30, ~~2019.~~2020.

Our funding policies impose limits on the amount of ~~noncore~~non-core funding we can utilize based on the ~~noncore~~non-core funding dependency ratio which is calculated pursuant to regulatory guidelines. Periodically, we may exceed our policy limitations, at which time management will develop plans to bring our funding sources back into compliance with our core funding ratios. At June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we were in compliance with our core funding policies. Though growing our core deposit base is a key strategic objective of our firm ~~our current~~and we experienced meaningful growth ~~plans contemplate that~~in core deposits in the first half of 2020, we may increase our ~~noncore~~non-core funding amounts from current levels if we need to do so to fund growth or increase levels of on-balance sheet liquidity, but we do not currently anticipate that such increases will exceed the limits we have established in our internal ~~policies.~~policies for total levels of non-core funding.

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The amount of time deposits as of June 30, ~~2019~~2020 amounted to ~~$4.3~~$4.5 billion. The following table shows our time deposits in denominations of $100,000 and less and in denominations greater than $100,000 by category based on time remaining until maturity and the weighted average rate for each category as of June 30, ~~2019~~2020 (in thousands):


	Balances		Weighted Avg. Rate
Denominations less than $100,000
Three months or less	$	492,482	1.68	%
Over three but less than six months	429,745		1.90	%
Over six but less than twelve months	841,281		1.36	%
Over twelve months	726,287		1.06	%
	$	2,489,795	1.43	%
Denominations $100,000 and greater
Three months or less	$	644,536	1.86	%
Over three but less than six months	433,041		1.70	%
Over six but less than twelve months	576,978		1.63	%
Over twelve months	330,884		1.85	%
	$	1,985,439	1.76	%
Totals	$	4,475,234	1.57	%

Balances Weighted Avg. Rate
Denominations less than $100,000
Three months or less $ 604,614
2.14 %
Over three but less than six months 650,105
2.32 %
Over six but less than twelve months 666,541
2.36 %
Over twelve months 380,332
2.42 %
$ 2,301,592
2.30 %
Denominations $100,000 and greater
Three months or less $ 388,007
2.01 %
Over three but less than six months 297,308
2.10 %
Over six but less than twelve months 643,373
2.26 %
Over twelve months 648,577
2.64 %
$ 1,977,265
2.31 %
Totals $ 4,278,857
2.31 %

Subordinated debt and other borrowings. We have established, or through acquisition acquired, ~~a number of~~twelve statutory business trusts which were established to issue 30-year trust preferred securities ~~and related junior subordinated debt instruments~~ and certain other subordinated debt agreements. These securities qualify as Tier 2 capital subject to annual phase outs beginning five years from maturity. On April 22, 2020, we established a credit facility with the Federal Reserve Bank in conjunction with the PPP, with available borrowing capacity equal to the outstanding balance of PPP loans, which totaled approximately $2.2 billion at June 30, 2020. We also ~~have~~had a $75.0 million revolving credit facility ~~which had~~with no ~~amounts~~ outstanding borrowings as of June 30, ~~2019. We amended this credit facility~~2020 that matured on ~~April 24, 2019 to, among other things, extend the maturity date to April~~July 24, 2020 ~~reduce the applicable margin calculation related to interest rates paid on borrowings thereunder~~ and ~~change the unused line fee from 0.35% to 0.30%.~~was not renewed. These instruments are outlined below (in thousands):


Name	Date Established	Maturity	Total Debt Outstanding		Interest Rate at June 30, 2020		Coupon Structure
Trust preferred securities
Pinnacle Statutory Trust I	December 29, 2003	December 30, 2033	$	10,310	3.10	%	30-day LIBOR + 2.80%
Pinnacle Statutory Trust II	September 15, 2005	September 30, 2035	20,619		1.71	%	30-day LIBOR + 1.40%
Pinnacle Statutory Trust III	September 7, 2006	September 30, 2036	20,619		1.96	%	30-day LIBOR + 1.65%
Pinnacle Statutory Trust IV	October 31, 2007	September 30, 2037	30,928		3.16	%	30-day LIBOR + 2.85%
BNC Capital Trust I	April 3, 2003	April 15, 2033	5,155		4.47	%	30-day LIBOR + 3.25%
BNC Capital Trust II	March 11, 2004	April 7, 2034	6,186		4.07	%	30-day LIBOR + 2.85%
BNC Capital Trust III	September 23, 2004	September 23, 2034	5,155		3.62	%	30-day LIBOR + 2.40%
BNC Capital Trust IV	September 27, 2006	December 31, 2036	7,217		2.01	%	30-day LIBOR + 1.70%
Valley Financial Trust I	June 26, 2003	June 26, 2033	4,124		4.33	%	30-day LIBOR + 3.10%
Valley Financial Trust II	September 26, 2005	December 15, 2035	7,217		1.80	%	30-day LIBOR + 1.49%
Valley Financial Trust III	December 15, 2006	January 30, 2037	5,155		2.49	%	30-day LIBOR + 1.73%
Southcoast Capital Trust III	August 5, 2005	September 30, 2035	10,310		1.81	%	30-day LIBOR + 1.50%

Subordinated Debt
Pinnacle Bank Subordinated Notes	July 30, 2015	July 30, 2025	60,000		4.88	%	Fixed ⁽¹⁾
Pinnacle Bank Subordinated Notes	March 10, 2016	July 30, 2025	70,000		4.88	%	Fixed ⁽¹⁾
Pinnacle Financial Subordinated Notes	November 16, 2016	November 16, 2026	120,000		5.25	%	Fixed ⁽²⁾
Pinnacle Financial Subordinated Notes	September 11, 2019	September 15, 2029	300,000		4.13	%	Fixed ⁽³⁾

Other Borrowings
Revolving credit facility ⁽⁴⁾	April 22, 2020	July 24, 2020	—				30-day LIBOR + 1.50%
Paycheck Protection Program Liquidity Facility	April 22, 2020	September 30, 2020	47,082		0.35	%	Fixed

Debt issuance costs and fair value adjustments							(13,034)
Total subordinated debt and other borrowings							$	717,043

Table of Contents

Name Date
Established Maturity Total Debt Outstanding Interest Rate at
June 30, 2019 Coupon Structure
Trust preferred securities
Pinnacle Statutory Trust I December 29, 2003 December 30, 2033 $ 10,310
5.21 % 30-day LIBOR + 2.80%
Pinnacle Statutory Trust II September 15, 2005 September 30, 2035 20,619
3.72 % 30-day LIBOR + 1.40%
Pinnacle Statutory Trust III September 7, 2006 September 30, 2036 20,619
3.97 % 30-day LIBOR + 1.65%
Pinnacle Statutory Trust IV October 31, 2007 September 30, 2037 30,928
5.26 % 30-day LIBOR + 2.85%
BNC Capital Trust I April 3, 2003 April 15, 2033 5,155
5.85 % 30-day LIBOR + 3.25%
BNC Capital Trust II March 11, 2004 April 7, 2034 6,186
5.45 % 30-day LIBOR + 2.85%
BNC Capital Trust III September 23, 2004 September 23, 2034 5,155
5.00 % 30-day LIBOR + 2.40%
BNC Capital Trust IV September 27, 2006 December 31, 2036 7,217
4.02 % 30-day LIBOR + 1.70%
Valley Financial Trust I June 26, 2003 June 26, 2033 4,124
5.43 % 30-day LIBOR + 3.10%
Valley Financial Trust II September 26, 2005 December 15, 2035 7,217
3.90 % 30-day LIBOR + 1.49%
Valley Financial Trust III December 15, 2006 January 30, 2037 5,155
4.31 % 30-day LIBOR + 1.73%
Southcoast Capital Trust III August 5, 2005 September 30, 2035 10,310
3.82 % 30-day LIBOR + 1.50%

Subordinated Debt

Pinnacle Bank Subordinated Notes July 30, 2015 July 30, 2025 60,000
4.88 %
Fixed ⁽¹⁾
Pinnacle Bank Subordinated Notes March 10, 2016 July 30, 2025 70,000
4.88 %
Fixed ⁽¹⁾
Avenue Subordinated Notes December 29, 2014 December 29, 2024 20,000
6.75 %
Fixed ⁽²⁾
Pinnacle Financial Subordinated Notes November 16, 2016 November 16, 2026 120,000
5.25 %
Fixed ⁽³⁾
BNC Subordinated Notes September 25, 2014 October 1, 2024 60,000
5.50 %
Fixed ⁽⁴⁾
BNC Subordinated Note October 15, 2013 October 15, 2023 8,840
7.44 %
30-day LIBOR + 5.00% ⁽⁵⁾

Other Borrowings

Revolving credit facility ⁽⁶⁾
April 25, 2019 April 24, 2020 —
3.94 % 30-day LIBOR + 1.50%

Name Date
Established Maturity Total Debt Outstanding Interest Rate at
June 30, 2019 Coupon Structure

Debt issuance costs and fair value adjustments (7,691 )

Total subordinated debt and other borrowings $ 464,144

⁽¹⁾ Migrates to three month LIBOR + 3.128% beginning July 30, 2020 through the end of the term.

⁽²⁾ ~~Migrates to three month LIBOR + 4.95% beginning January 1, 2020 through the end of the term.~~

⁽³⁾ Migrates to three month LIBOR + 3.884% beginning November 16, 2021 through the end of the term.

⁽⁴⁾⁽³⁾ Migrates to three month LIBOR + ~~3.59%~~2.775% beginning ~~October 1, 2019~~September 15, 2024 through the end of the ~~term if not redeemed on that date.~~term.

^{(5) (4)}~~Coupon structure includes a floor of 5.5% and a cap of 9.5%.~~

⁽⁶⁾ Borrowing capacity on the revolving credit facility is $75.0 million. At June 30, ~~2019,~~2020, there were no amounts outstanding under this facility. An unused fee of 0.30% is assessed on the average daily unused amount of the ~~loan.~~line. This credit facility matured on July 24, 2020 and was not renewed.

Effective January 1, 2020, we used $80.0 million of the net proceeds from our 2019 subordinated debt offering to redeem certain other of our subordinated notes, including the $20.0 million aggregate principal amount of Avenue subordinated notes and $60.0 million aggregate principal amount of BNC subordinated notes. We had previously anticipated using $130 million of the net proceeds from our 2019 subordinated debt offering to redeem two tranches of subordinated notes issued by Pinnacle Bank with a maturity date of July 30, 2025 but have decided to not redeem those notes at this time in light of the uncertainty resulting from the ongoing COVID-19 pandemic. Pursuant to regulatory guidelines, once the maturity date on these 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 June 30, ~~2019 and December 31, 2018,~~2020, our shareholders' equity amounted to ~~$4.2~~$4.7 billion compared to $4.4 billion at December 31, 2019. During the second quarter of 2020, we issued 9.0 million depositary shares, each representing a 1/40th interest in a share of Series B Preferred Stock with a liquidation preference of $1,000 per share of Series B Preferred Stock in a registered public offering to both retail and ~~$4.0 billion, respectively, an increase of~~institutional investors. Net proceeds from the transaction after underwriting discounts and offering costs were approximately ~~$200~~$217.6 million. The ~~increase is primarily attributable~~net proceeds were retained by Pinnacle Financial and are available to support our obligations including payments related to our outstanding indebtedness, to support the capital needs of our company and our bank, and for other general corporate purposes. Additionally, shareholders' equity during the six months ended June 30, 2020 was impacted by increases in our net income and ~~our~~ other comprehensive income ~~and has been reduced~~offset in part by ~~$37.4~~$50.8 million ~~in 2019~~ related to shares repurchased pursuant to the share repurchase ~~program~~programs authorized by our board of directors in November ~~2018.~~2018 and October 2019 and dividends of $24.8 million paid on shares of our common stock. We currently have approximately $67.2 million remaining of our authorized repurchase program which is set to expire December 31, 2020. In March 2020, we suspended our share repurchase program in light of uncertainty regarding the length and severity of the COVID-19 pandemic. Our share repurchase program remains suspended as of the date of this filing. For additional information regarding our capital and shareholders’ equity, see Note 10. Regulatory Matters in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q.

Dividends. Pursuant to Tennessee banking law, our bank may not, without the prior consent of the TDFI, pay any dividends to us in a calendar year in excess of the total of our bank's retained net profits for that year plus the retained net profits for the preceding two years, which was ~~$608.9~~$619.2 million at June 30, ~~2019.~~2020. During the ~~three and~~ six months ended June 30, ~~2019,~~2020, our bank paid dividends of ~~$39.6~~$94.1 million ~~and $78.7 million, respectively,~~ to us which is within the limits allowed by the TDFI.

During the three and six months ended June 30, ~~2019,~~2020, we paid $12.4 million and ~~$25.0~~$24.8 million, respectively, in dividends to our common shareholders. On July ~~16, 2019,~~21, 2020, our board of directors declared a $0.16 per share quarterly cash dividend to common shareholders which should approximate ~~$12.5~~$12.4 million in aggregate dividend payments that are expected to be paid on Aug. ~~30, 2019~~28, 2020 to common shareholders of record as of the close of business on Aug. ~~2, 2019.~~7, 2020. 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 Sept. 1, 2020 to shareholders of record at the close of business on Aug. 17, 2020. 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.~~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

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

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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.

During the first half of 2020, several unique events occurred that are noteworthy when comparing the results of both the earnings simulation and the economic value of equity modeling results as of June 30, 2020 to the modeling results at December 31, 2019:

•In response to the COVID-19 pandemic, the Federal Reserve reduced the target federal funds rate by 150 basis points.

•We built over $2.5 billion in additional on-balance-sheet liquidity.

•We unwound a $1.3 billion in-the-money interest rate floor.

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, ~~2019~~2020*
Instantaneous Rate Change
100 bps increase	~~2.2~~0.0	%
200 bps increase	~~4.2~~1.7	%
100 bps decrease	~~(2.1~~0.6	%)

*: 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 ~~our~~the assumed benefit of those deposits. The projected impact on net interest income in ~~those scenarios.~~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.

At June 30, ~~2019,~~2020, our earnings simulation model indicated we were in compliance with our policies for interest rate scenarios for which we model as required by our board approved Asset Liability Policy. ~~The board has suspended the requirement to model the down 300 and 400 bps scenario while 10 year maturity Treasury rates are below 3.0%, which was the case as of June 30, 2019.~~

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, ~~2019,~~2020, our EVE modeling calculated the following estimated changes in EVE due to instantaneous upward and downward changes in rates:



	June 30, ~~2019~~2020*
Instantaneous Rate Change
100 bps increase	~~(2.4~~1.9	%)
200 bps increase	(~~8.1~~1.2	%)
100 bps decrease	~~0.5~~(2.9	%)

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*: 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. 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, ~~2019,~~2020, 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. ~~The board has suspended the requirement to model the down 300 and 400 bps scenario while 10 year maturity Treasury rates are below 3.0%, which was the case as of June 30, 2019.~~

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 and weighted to determine the most likely result.~~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 gleaned from our historical studies of financial instruments and our best estimations of how, if at all, 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 firms' 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 considers ~~two decreases~~no change in short-term interest rates throughout the remainder of ~~2019.~~2020. 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.

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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, ~~2019,~~2020, we were in compliance with our internal policies related to liquidity coverage ratio.

Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates. If deposits are not priced in response to market rates, a loss of deposits, particularly noncore deposit, could occur which would negatively affect our liquidity position.

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to

prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.

In addition, our bank is a member of the FHLB Cincinnati. As a result, our bank receives advances from the FHLB Cincinnati, pursuant to the terms of various borrowing agreements, which support our funding needs. Under the borrowing agreements with the FHLB Cincinnati, our bank has pledged certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral. As such, Pinnacle Bank may use the FHLB Cincinnati as a source of liquidity depending on its ALCO strategies. Additionally, we may pledge additional qualifying assets, or reduce the amount of pledged assets or experience changes in the value of pledged assets with the FHLB Cincinnati to increase or decrease our borrowing capacity with the FHLB Cincinnati. At June 30, ~~2019,~~2020, we estimate we had ~~$2.1~~$2.4 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. During the three and six months ended June 30, 2020, $392.5 million in FHLB advances were restructured and prepayment penalties of $2.9 million were recognized in expense for the three months ended June 30, 2020. At June 30, ~~2019,~~2020, our bank had received advances from the FHLB Cincinnati totaling ~~$2.0~~$1.8 billion. At June 30, ~~2019,~~2020, the scheduled maturities of Pinnacle Bank's FHLB Cincinnati advances and interest rates are as follows (in thousands):


Scheduled Maturities	Amount		Interest Rates ⁽¹⁾
2020	$	125,000	0.62%
2021	575,000		0.89%
2022	—		—%
2023	—		—%
2024	200,000		2.09%
Thereafter	891,266		1.95%
Total	$	1,791,266
Weighted average interest rate				1.53%

Scheduled Maturities Amount
Interest Rates ⁽¹⁾
2019 $ 197,500
1.68%
2020 522,546
2.07%
2021 223,750
2.26%
2022 41,250
2.85%
2023 —
0.00%
Thereafter 975,016
2.14%
Total $ 1,960,062

Weighted average interest rate 2.10%

(1)Some FHLB Cincinnati advances include variable interest rates and could increase in the future. The table reflects rates in effect as of June 30, ~~2019.~~2020.

Pinnacle Bank also has accommodations with upstream correspondent banks available for unsecured short-term advances which aggregate ~~$170.0~~$195 million. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within a month of borrowing. We had no outstanding borrowings at June 30, ~~2019~~2020 under these agreements. Our bank also had approximately ~~$3.6~~$3.4 billion in available Federal Reserve discount window lines of credit at June 30, ~~2019.~~2020.

At June 30, ~~2019,~~2020, excluding reciprocating time and money market deposits issued through the Promontory Network, we had ~~$2.2~~$3.3 billion of brokered deposits. Historically, we have issued brokered certificates of deposit through several different brokerage houses based on competitive bid. During the first half of 2020, and in response to the uncertainty resulting from the COVID-19 pandemic, we intentionally increased our levels of on-balance sheet liquidity. During the first quarter of 2020, this increase was funded by a

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combination of increased core deposits, increased borrowings from the FHLB Cincinnati and increases in brokered time deposits. Core deposit growth during the second quarter of 2020 increased such that we were able to prepay certain wholesale maturities while maintaining an elevated level of on-balance sheet liquidity.

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, ~~2019,~~2020, 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.~~footprint 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.

Equipment and occupancy expenses for the three and six months ended June 30, 2019 increased $5.6 million and $7.2 million, respectively, to $23.8 million and $43.2 million, respectively, as compared to the same periods in the prior year. Included in the increase was a non-recurring $3.2 million non-cash impairment charge incurred during the second quarter of 2019 related to the proposed consolidation of five offices across our footprint.

Off-Balance Sheet Arrangements. At June 30, ~~2019,~~2020, we had outstanding standby letters of credit of ~~$198.9~~$213.3 million and unfunded loan commitments outstanding of ~~$7.6~~$8.7 billion. Because these commitments generally have fixed expiration dates and many will expire

without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, Pinnacle Bank has the ability to liquidate Federal funds sold or, on a short-term basis, to borrow and purchase Federal funds from other financial institutions.

Impact of Inflation

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

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 3743 through 5867 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

~~Other than as described below in regards to our remediation of the material weakness identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, no~~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 fiscal quarter ended June 30, ~~2019~~2020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~Previously identified Material Weakness Related to Certain Residential Mortgage Loan Originations~~

~~Based on the assessment~~Table of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, as described in our Annual Report on Form 10-K, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2018 due to a material weakness arising from certain control deficiencies existing during 2018 related to residential mortgage loans originated by the Company. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As stated in the 2018 Annual Report on Form 10-K, management concluded that the existence of this material weakness did not result in any material misstatement of the Company’s interim or annual financial statements or related disclosures for the fiscal year ended December 31, 2018, nor was there any financial loss incurred by the Company as a result of this material weakness.Contents

~~Remediation of Material Weakness~~

The Company has addressed the underlying causes of the above-described material weakness and developed additional automated controls to enhance the control structure that existed as of December 31, 2018. The enhanced internal controls over this area have been in operation for a sufficient period of time and the Company’s management has concluded that the material weakness has been fully remediated.

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.

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ITEM 1A. RISK FACTORS

Investing in ~~our common stock~~Pinnacle Financial involves various risks which are particular to our company, our industry and our market ~~areas. If~~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, 2019. 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 except as set forth below:

The COVID-19 pandemic is adversely affecting our business and the businesses of a significant percentage of our customers as well as certain of our third-party vendors and service providers, and the adverse impacts on our business, financial position, capital, liquidity, results of operations and prospects could be significant.

The spread of COVID-19 has created a global public health crisis that has resulted in uncertainty, volatility and deterioration in financial markets and in governmental, commercial and consumer activity including in the United States, where we conduct substantially all of our activity.

To combat the spread of COVID-19, federal, state and local governments have taken a variety of actions that have materially and adversely affected the businesses and lives of our customers. These actions have included orders closing non-essential businesses and restricting movement of individuals through the issuance of safer-at-home orders and other guidance encouraging individuals to observe strict social distancing measures. At times, the actions being taken by governmental authorities are not always coordinated or consistent across states or even within states and the impact of those actions across our markets may be uneven. These actions, together with the independent actions of individuals and businesses aimed at slowing the spread of the virus, have resulted in extensive economic disruption and rapid declines in consumer and commercial activity. Many businesses are experiencing significant declines in revenue and there has been a rapid rise in unemployment rates throughout our markets with corresponding negative effects on consumer spending and behavior. Global supply chains have also been negatively impacted as have equity and debt markets. Whether the efforts to stop the spread of COVID-19 will be successful is unknown at this time as in recent weeks the number of cases, hospitalizations and death in some of our markets has trended upward following ~~risks were~~efforts to ~~occur, we may not be able to conduct~~re-open the economies in our ~~business as currently planned~~markets, and continued spread of the disease or continuation of higher levels of cases, hospitalizations and death over the remainder of 2020 or into 2021 will further negatively impact the businesses and lives of our customers and our results of ~~operations~~operations.

In March 2020, the Federal Open Market Committee reduced the target Federal funds rate by 150 basis points and ~~financial condition could be materially~~for a portion of March 2020 the 10-year treasury bond rate fell to below 1.00% for the first time in history. These actions, and other actions being taken by governmental and regulatory agencies affecting monetary policy in response to the unprecedented challenges resulting from the spread of COVID-19, have negatively ~~impacted. These matters could cause the trading price of~~impacted our ~~common stock to decline in future periods.~~

~~Our~~ net interest margin and ~~consequently our net earnings, are significantly affected by interest rate levels.~~

Our profitability is dependent to a large extent on net interest income, which is the difference between interest income earned on loans and investment securities and interest expense paid on deposits, other borrowings, subordinated debentures and subordinated notes. The absolute level of interest rates as well as changes in interest rates or that affect the yield curve may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rate fluctuations are caused by many factors which, for the most part, are not under our control. For example, national monetary policy plays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with our customers also impact the rates we collect on loans and the rates we pay on deposits. In addition, changes in the method of determining the London Interbank Offered Rate (LIBOR) or other reference rates, or uncertainty related to such potential changes, may adversely affect the value of reference rate-linked debt securities that we hold or issue, which could further impact our interest rate spread.

Changes in the level of interest rates also may negatively affect our ability to originate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which could ultimately affect our results ~~of operations~~ and financial condition. A decline in the market value of our assets may limit our ability to borrow additional funds. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses. Following changes in the general level of interest rates, our ability to maintain a positive net interest spread is dependent on our ability to increase (in a rising rate environment) or maintain or minimize the decline in (in a falling rate environment) our loan offering rates, minimize increases on our deposit rates in a rising rate environment or promptly reduce the rates we pay on deposits in a falling rate environment, and maintain an acceptable level and mix of funding. Although we have implemented strategies we believe will reduce the potential effects of changes in interest rates on our net interest income, these strategies may not always be successful, and, in the case of certain hedging strategies, could materially and adversely impact our results of operations if short term interest rates move in a direction that is different than the direction we anticipated at the time we initiated the strategy. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest income and our net interest margin, asset quality, loan origination volume, liquidity, and overall profitability. We cannot assure you that we can minimize our interest rate risk.

Over the last few years, short-term interest rates have increased, but the Board of Governors of the Federal Reserve System announced on July 31, 2019 that it was reducing the benchmark federal funds rate by 0.25%. Because of significant competitive pressures in our markets and the negative impact of these pressures on our deposit and loan pricing, our net interest margin is likely to ~~be negatively impacted by this rate cut and additional rate cuts may further~~continue to negatively impact our net interest ~~margin. Though we instituted initiatives during the second quarter of 2019 in an effort to counteract the possible pressure on our net interest~~ margin in a falling rate environment, such as purchasing a loan interest rate floor, unwinding fixed-to-floating loan interest rate swaps and repositioning a portion of our investment securities portfolio, those efforts are not likely to fully mitigate the adverse impact of a decline in short-term interest rates in 2019. An important component of our ability to mitigate pressures of a down rate environment will be our ability to reduce the rates we pay on deposits, including core deposits. If we are unable to reduce these rates, because of competitive pricing pressures in our markets or otherwise, our net interest margin will be negatively impacted. In addition, as our growth in earnings assets has outpaced growth in our core deposits in recent quarters, we have had to increase our reliance on noncore funding. These funding sources may be more rate sensitive than our core depositors, and, accordingly, we may be limited in our ability to reduce the rates we pay on these funds while maintaining on-balance sheet liquidity levels consistent with our policies, which would negatively impact our net interest margin.

As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities (usually deposits and borrowings) will be more sensitive to changes in market interest rates than our interest-earning assets (usually loans and investment securities), or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work against us, and our results of operations and financial condition may be negatively affected. We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing characteristics, and balances of the different types of our interest-earning assets and interest-bearing liabilities. Interest rate risk management techniques are not exact. As discussed above, in the second quarter of 2019, we repositioned a portion of our investment securities portfolio in an effort to better position our balance sheet for potential reductions in short-term rates. We employ the use of models and modeling techniques to quantify the levels of risks to net interest income, which inherently involve the use of assumptions, judgments, and estimates. While we strive to ensure the accuracy of our modeled interest rate risk profile, there are inherent limitations and imprecisions in this determination and actual results may differ.

We have entered into certain hedging transactions including interest rate swaps and interest rate floors, which are designed to lessen elements of our interest rate exposure. In addition, we have utilized fixed-to-floating rate cash flow hedges to manage interest rate exposure for our wholesale borrowings portfolio. This hedging strategy converted the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and was used in an effort to protect us from floating interest rate variability in a rising rate environment. In the second quarter of 2019 as it became more likely that short-term interest rates would decline overthroughout the remainder of ~~2019, we, among other actions, unwound~~2020 and possibly into 2021. The fair values of certain of our ~~fixed-to-floating rate swaps and purchased an interest rate floor in an effort~~investments are also likely to better position our balance sheet for a falling rate environment. In the event that interest rates do not change in the manner that we anticipate at the times we institute our hedging strategies or at the pace that we anticipated, such transactions may materially and adversely affect our results of operations.

~~We have a concentration of credit exposure to borrowers in certain industries, and we also target small to medium-sized businesses.~~

We have meaningful credit exposures to borrowers in certain businesses, including commercial and residential building lessors and new home builders. These industries experienced adversity during 2008 through 2010decline as a result of sluggish economic conditions, and, as a result, an increased level of borrowers in these industries were unable to perform under their loan agreements with us, or suffered loan downgrades which negatively impacted our results of operations. If the economic environment in our markets weakens in the second half of 2019 or beyond, these industry or other concentrations could result in increased deterioration in credit quality, past dues, loan charge offs and collateral value declines, which could cause our results of operations and financial condition to be negatively impacted. Furthermore, any of our large credit exposures that deteriorate unexpectedly could cause us to have to make significant additional loan loss provisions, negatively impacting our results of operations and financial condition.COVID-19.

A substantial focus of our marketing and business strategy is to serve small to medium-sized businesses in our market areas. As a result, a relatively high percentage of our loan portfolio consists of commercial loans primarily to small to medium-sized businesses. At June 30, 2019, our commercial and industrial loans accounted for approximately 30.8% of our total loans. Additionally, approximately 34.6% of our commercial real-estate mortgage loans at June 30, 2019 are owner-occupied commercial real estate loans, which are loans to businesses secured by the businesses’ real estate. We expect to seek to expand the amount of these two types of loans in our portfolio during the remainder of 2019. During periods of lower economic growth or challenging economic periods, small to medium-sized businesses may be impacted more severely and more quickly than larger businesses. Consequently, the ability of such businesses to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition.

As a result of COVID-19, many of our ~~recent acquisitions~~borrowers, particularly those that operate in the restaurant, entertainment, hospitality, medical, dental, retail and ~~our organic growth in our legacy markets~~construction sectors, but also other businesses as well, ~~as our revaluation of deferred tax assets and recognized investment securities losses following the passage of the Tax Cuts and Jobs Act during the fourth quarter of 2017, our level~~including owners of commercial real estate properties and hotels, are experiencing varying degrees of financial distress, which is expected to continue, and may likely increase, over the coming months. As a result, these borrowers will likely have difficulty paying, on a timely basis, interest and principal payments on their loans increased markedly from approximately 190% of Pinnacle Bank's total risk-based capital as of December 31, 2014 to approximately 278% of Pinnacle Bank's total risk-based capital as of December 31, 2018. The level of these loans as a percentage of our total risk-based capital continued to increase during the first six months of 2019 and represented approximately 289% of Pinnacle Bank's total risk-based capital at June 30, 2019. If our level of commercial real estate loans were to exceed regulatory guidelines (as was the case during the first half of 2018), our ability to grow our loan portfolio in line with our targets may be negatively impacted if we don’t increase our capital levels and it may be more difficult to secure any required regulatory approvals necessary to execute on our expansion strategy without increasing our capital levels.

The percentage of real estate construction and development loans in our loan portfolio was approximately 11.3% of total loans at June 30, 2019 and approximately 83% of Pinnacle Bank's total risk-based capital. These loans make up approximately 3.1% of our non-performing loans at June 30, 2019. This type of lending is generally considered to have relatively high credit risks because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and operation of

the related real estate project. Real estate industry pricing dynamics in the geographical markets in which we operate can vary from year to year, and with respect to construction, can vary between project funding and project completion. Asset values to which we underwrite loans can fluctuate from year to year and impact collateral values and the ability of our borrowers to repay their loans. Like regulatory guidelines on commercial real estate loans, federal regulators have issued guidance that imposes additional restrictions on banks with construction and development loans in excess of 100% of total risk-based capital. If our level of these loans was to exceed these guidelines, our ability to make additional loans in this segment would be limited.

~~Weakness in residential real estate market prices as well as demand could result in price reductions in home and land values adversely affecting~~ the value of collateral securing ~~some of~~these obligations is likely to be adversely impacted as well. Though we have offered these borrowers, and others, the ~~construction and development loans that we hold. Should we experience the return of adverse economic and real estate market conditions similar~~ability to ~~those we experienced from 2008 through 2010~~defer interest and/or principal payments for 90 days which we may ~~again experience increases~~extend for an additional 90 days, that deferral period may not be sufficient to allow the impacts of COVID-19 to have sufficiently subsided, and these borrowers may still be experiencing distress at the expiration of those deferral periods. As a result, these borrowers may have difficulty satisfying their obligations to us. Disruptions to our customers’ businesses, together with volatility in ~~non-performing loans~~the stock market, could also result in declines to our wealth management revenues.

The economic pressures and ~~other real estate owned, increased losses and expenses~~uncertainties arising from the ~~management~~COVID-19 pandemic may result in specific changes in consumer and ~~disposition of non-performing assets, increases in provision for loan losses,~~business spending and ~~increases in operating expenses as a result of the allocation of management time~~borrowing and ~~resources to the collection and work out of loans, all of which would negatively impact our financial condition and results of operations.~~

Our ability to grow our loan portfolio may be limited by, among other things, economic conditions, competition within our market areas, the timing of loan repayments, our ability to grow our core deposits, our ability to hire experienced bankers and seasonality.

Our ability to continue to improve our results of operations is dependent upon, among other things, aggressively growing our loan portfolio. While we believe that our strategy to grow our loan portfolio is sound and our growth targets are achievable over an extended period of time, competition within our market areas is significant, particularly for borrowers whose businesses were less negatively impacted by the challenging economic conditions of the recession. We compete with both large regional and national financial institutions, who are sometimes able to offer more attractive interest rates and other financial terms than we choose to offer, and smaller community-based financial institutions who seek to offer a similar level of service to that which we offer. This competition can make loan growth challenging, particularly if we are unwilling to price loans at levels that would cause unacceptable levels of compression of our net interest margin or if we are unwilling to structure a loan in a manner that we believe results in a level of risk to us that we are not willing to accept.

Our ability to grow our loan portfolio is also dependent on our ability to fund loan growth. We primarily seek to fund our loan growth through stable, core deposits, but at times our ability to attract core deposits may be limited by competitive pressures in our markets and our business model that focuses principally on serving small to medium-sized businesses and their owners rather than a broad retail distribution strategy. Larger banks, with a more developed retail footprint, are better able to attract lower-cost retail deposits than we can, which at times causes us to utilize a larger percentage of noncore funding to fund our loan growth. If we are unable to attract core deposits at sufficient levels to fund our loan growth and our percentage of noncore funding rises to levels that approach our policy limits, we may need to modify our growth plans, liquidate certain assets, participate loans to correspondents or execute other actions to allow for us to return to an acceptable level of noncore funding within a reasonable amount of time, any one of which actions could adversely affect our results of operations, particularly during periods of time when our net interest margin is experiencing compression. Moreover, loan growth throughout the year can fluctuate due in part to seasonality of the businesses of our borrowers and potential borrowers and the timing on loan repayments, particularly those of our borrowers with significant relationships with us, resulting from, among other things, excess levels of liquidity.

Much of our organic loan growth that we have experienced in recent years (and a key part of our loan growth strategy in 2019 and beyond) was the result not of strong loan demand but rather of our ability to attract experienced financial services professionals who have been able to attract customers from other financial institutions. Inability to retain these key personnel (including key personnel of the businesses we have acquired) or to continue to attract experienced lenders with established books of business (including, in either case, as a result of competitive compensation and other hiring and retention pressures), at all or at the pace we have anticipated, could negatively impact our growth because of the loss of these individuals’ skills and customer relationships and/or the potential difficulty of promptly replacing them. Moreover, if these advisors we hire are unable to cause their customers to move their relationships to us in the time periods that we are targeting or at all, or if we are unable to retain such business, our loan growth may be negatively affected, which could have a material adverse effect on our results of operations and financial condition.

~~Negative developments in the U.S. and local economy may adversely impact our results in the future.~~

Our financial performance is highly dependent on the business environment in the markets where we operate and in the U.S. as a whole. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, investor or business confidence, consumer sentiment, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, natural disasters, terrorist attacks, acts of war, or a combination of these or other

factors. Economic conditions in the markets in which we operate deteriorated significantly between early 2008 and the middle of 2010. These challenges manifested themselves primarily in the form of increased levels of provisions for loan losses and other real estate expense related to declining collateral values in our real estate loan portfolio and increased costs associated with our portfolio of other real estate owned. A worsening of business and economic conditions generally or specifically in the principal markets in which we conduct business could have adverse effects, including the following:

•~~a decrease in deposit balances or~~saving habits, affecting the demand for loans and other products and services we ~~offer;~~offer. Consumers affected by COVID-19 may continue to demonstrate changed behavior even after the crisis is over. For example, consumers may decrease discretionary spending on a permanent or long-term basis, certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to return to full social interaction, We lend to customers operating in such industries including restaurants, hotels/lodging, entertainment, retail and commercial real estate, among others, that have been significantly impacted by COVID-19 and we are continuing to monitor these customers closely. The potential changes in behaviors driven by COVID-19 also present heightened liquidity risks, for example, arising from increased

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~~an increase in the number~~demand for our products and services (such as elevated levels of ~~borrowers who become delinquent, file~~draws on credit facilities) or decreased demand for ~~protection under bankruptcy laws~~our products and services (such as idiosyncratic, or ~~default on their loans~~broad-based, market or other ~~obligations to us, which could~~developments that lead to ~~higher levels~~deposit outflows).

Like our borrowers, BHG’s borrowers have been similarly affected by COVID-19. Many of ~~nonperforming assets, net charge-offs and provisions for credit losses;~~

~~a decrease in the value of loans and other assets secured~~BHG’s borrowers are medical or dental practices that have been particularly impacted by ~~real estate;~~

~~a decrease in net interest income from our lending and deposit gathering activities;~~

~~an increase in competition resulting from financial services companies.~~

~~Although economic conditions~~safer-at-home orders that have ~~strengthened in most of our markets in recent periods and we have focused our efforts on growing our earning assets, we believe that it is possible we will continue~~effectively caused those practices’ revenues to ~~experience an uncertain and volatile economic environment during 2019, including~~decline materially as a result of ~~political uncertainties~~elective procedures being prohibited, cancelled or delayed or individuals’ decisions to postpone non-emergency procedures, even as restrictions on elective procedures are relaxed. For those loans that ~~led~~BHG has sold through its auction platform, BHG may at its sole discretion, in response to a request from a purchaser of a loan, agree to substitute a performing loan for one that has become past due. If requests for substitutions increase, and BHG opts to provide the ~~shutdown~~substitution. BHG’s credit losses may likewise increase and its results of operations would be adversely impacted.

COVID-19’s economic disruption has also impacted many states and municipalities. As a result, many states and municipalities are facing a strain on resources and a reduction in tax collections and some of these have sought assistance from the Federal government to cover the cost of resource depletion and tax shortfalls. The ability of states and municipalities to fund shortfalls could have an adverse effect on their ability to sustain debt maintenance obligations which would negatively impact the value of our municipal bond portfolio.

Banks and bank holding companies have been particularly impacted by the COVID-19 pandemic as a result of disruption and volatility in the global capital markets. This disruption has impacted our cost of capital and may adversely affect our ability to access the capital markets if we need or desire to do so and, although the ultimate impact cannot be reliably estimated at this time in light of the ~~federal~~uncertainties and ongoing developments noted herein, such impacts could be material. Furthermore, bank regulatory agencies have been (and are expected to continue to be) very proactive in responding to both market and supervisory concerns arising from the COVID-19 pandemic as well as the potential impact on customers, especially borrowers. As shown during and following the financial crisis, periods of economic and financial disruption and stress have, in the past, resulted in increased scrutiny of banking organizations. We are closely monitoring the potential for new laws and regulations impacting lending and funding practices as well as capital and liquidity standards. Such changes could require us to maintain significantly more capital, with common equity as a more predominant component, or manage the composition of our assets and liabilities to comply with formulaic liquidity requirements. Furthermore, provisions of the CARES Act allow, but do not require, the FDIC to guarantee deposit obligations of banks in non-interest-bearing transaction accounts through December 31, 2020. Participation in any such guarantee program may result in fees and other assessments as the FDIC determines and may include special assessments. Other provisions of the CARES Act as well as actions taken by bank regulators, such as potential relief for working with borrowers who are distressed as a result of the effects of COVID-19, could similarly impact aggregate deposit insurance expense.

As we sought to protect the health and safety of our employees and customers during the first and second quarter of 2020, we took numerous actions to modify our business operations, including restricting employee travel, directing a significant percentage of our employees that were able to do so to work from home, closing the lobbies of many of our branches, and in some cases the branch itself, and implementing our business continuity plans and protocols. We may take further actions in the future either of our own volition or as a result of government orders or directives. Though we believe we have been able to adequately service our clients under these restrictions, we cannot provide any assurances that our ability to do so wouldn’t be negatively impacted if additional restrictions are necessary or imposed on us in ~~January 2019~~the future, including if key employees of ours or a significant number of our associates become ill as a result of contracting the virus. Given our preference for hiring experienced lenders the average age of an associate of ours may be higher than many of our peers and ~~which~~those of our associates who are of an age that puts them in a higher risk category may be more susceptible to contracting the virus. We rely on the services of various key vendors and business partners to service our clients and if those companies’ businesses or workforces are impacted in ways similar to those that may impact our business, our ability to service our customers could be impacted.

The economic uncertainty caused by COVID-19’s spread and the efforts of government and non-governmental authorities and the behavior of individuals seeking to slow its spread, have caused our provision expense for credit losses to increase materially in the

first half of 2020 and may contribute to ~~similar shutdowns~~further elevated levels of provision expense through the duration of the pandemic and any recovery period following its end. Increased provision levels would negatively impact our capital levels which may impact our ability to pay dividends or cause us to need to access the capital markets to support our capital needs. We have also taken efforts to increase our on-balance sheet liquidity and those efforts have caused, and may continue to cause, our net interest margin to be adversely impacted.

COVID-19 has not yet been contained, and given the ongoing and fluid nature of the country’s response to the pandemic, it is difficult for us to accurately estimate the length and severity of the economic disruption being caused by COVID-19. As a result, the extent to which our results of operations, provision expense, capital levels, liquidity ratios and published credit ratings will be impacted is difficult to predict.

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Our participation in the ~~future, prolonged international trade disputes~~PPP may expose us to financial liability, credit losses, compliance costs or reputational damage.

Under the CARES Act, Congress created the PPP and ~~those~~authorized the Treasury to implement rules regarding the program. Banks, like us, and non-bank lenders, including BHG, facilitated funding under the program on behalf of the SBA for borrowers that were eligible participants. Since the roll out of the PPP, Treasury has issued rules and other interpretive guidance seeking to address uncertainty surrounding the ~~presidential election~~program and its eligibility and other criteria. This constantly changing guidance caused challenges for us and other lenders under the program, like BHG, in ~~2020.~~finalizing and submitting applications. We are beginning to receive requests from our customers for forgiveness of their obligations under their PPP loans and again guidance is lacking from the Treasury and SBA on how to process these requests. As a result, we, and other lenders under the PPP, may face criticism from customers or others that are seeking forgiveness. This criticism could cause reputational damage to us and there is a possibility that customers or others may threaten and pursue legal action against banks and other lenders like us and BHG under the program. Moreover, as a result of updated guidance regarding the PPP and its eligibility standards, some borrowers that received loans through our processing efforts, have repaid their loans in full and others may choose to do the same. If that happens, we may not receive the fees that we were entitled to as a result of originating these loans.

Among other regulatory requirements, PPP loans are subject to forbearance of loan payments for a six-month period to the extent that loans are not eligible for forgiveness. If PPP borrowers fail to qualify for loan forgiveness, including by failing to use the funds appropriately in order to qualify for forgiveness under the program, we and BHG have a greater risk of holding these loans at unfavorable interest rates. In addition, because of the short time period between the passing of the CARES Act and the implementation of the PPP, there is ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us and BHG to risks relating to noncompliance with the PPP. There is risk that the SBA or another governmental entity could conclude there is a deficiency in the manner in which we or BHG originated, funded, or serviced PPP loans, which may or may not be related to the ambiguity in the CARES Act or the rules and guidance promulgated by the SBA and the Treasury regarding the operation of the PPP. In the event of such deficiency, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from us or BHG.

Since the commencement of the PPP, several banks have been subject to litigation regarding the process and procedures that such banks followed in accepting and processing applications for the PPP. We and BHG may be exposed to the risk of similar litigation, from both customers and non-customers that contacted us or BHG regarding obtaining PPP loans with respect to the processes and procedures we or BHG used in processing applications for the PPP. Legal proceedings related to our or BHG’s participation in the PPP, like the purported class action lawsuit filed against our bank subsidiary in June 2020 that alleges, among other claims, that our bank subsidiary failed to pay fees to purported agents of PPP borrowers that the plaintiff alleges were owed under the PPP in violation of SBA regulations, if not resolved in a manner that is favorable to us, or BHG, may result in significant financial liability to us or BHG, or adversely affect our, or BHG’s results of operations, financial condition or reputation. In addition, litigation can be ~~no assurance that these conditions will improve in the near term~~costly, regardless of outcome. Any financial liability, litigation costs, or ~~that conditions will not worsen. Such conditions~~reputational damage caused by PPP-related litigation could ~~adversely affect~~have a material adverse impact on our or BHG's reputation, business, financial condition, and results of operations.

In addition, over the last several years, including beginning on December 22, 2018, the federal government has shut down periodically, in some cases for prolonged periods. It is possible that the federal government may shut down again in the future. If a prolonged government shutdown occurs, it could significantly impact business and economic conditions generally or specifically in our principal markets, which could have a material adverse effect on our results of operations and financial condition.

~~Our operations are principally geographically concentrated in certain markets in the southeastern United States, and changes in local economic conditions impact our profitability.~~

A significant percentage of our borrowers are situated in various MSAs in Tennessee, North Carolina, South Carolina and Virginia in which we operate. Our success significantly depends upon the growth in population, income levels, deposits, employment levels and housing starts in our markets, along with the continued attraction of business ventures to these areas, and our profitability is impacted by the changes in general economic conditions in these markets and other markets in which collateral securing our loans is located. We cannot assure you that economic conditions, including loan demand, in these markets will not deteriorate during the remainder of 2019 or thereafter, and upon any deterioration, we may be subject to regulatory scrutiny regarding our processing of PPP applications or our origination or servicing of PPP loans. While the SBA has said that in many instances, banks may rely on the certifications of borrowers regarding their eligibility for PPP loans, we do have several obligations under the PPP, and if the SBA found that we did not meet those obligations, the remedies the SBA may seek against us are unknown but may include not guarantying the PPP loans resulting in credit exposure to borrowers who may be ~~able to grow our loan portfolio in line with our expectations and the ability of our customers~~unable to repay their ~~loans~~loans. The PPP may also attract significant interest from federal and state enforcement authorities, oversight agencies, regulators, and Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling us to rely on borrower certifications, and take more aggressive action against us for alleged violations of the provisions governing our participation in the PPP.

Additional issuances of preferred stock or securities convertible into preferred stock may further dilute existing holders of the depositary shares.

We may determine that it is advisable, or we may encounter circumstances where we determine it is necessary, to issue additional shares of preferred stock, securities convertible into, exchangeable for, or that represent an interest in preferred stock, or preferred stock-equivalent securities to fund strategic initiatives or other business needs or to build additional capital. Our board of directors is authorized to cause us to issue one or more classes or series of preferred stock from time to time without any action on the part of our shareholders, including issuing additional shares of our 6.75% fixed rate non-cumulative perpetual preferred stock, Series B (Series B preferred stock) or additional depositary shares. Our board of directors also has the power, without shareholder approval, to set the terms of any such classes or series of preferred stock that may be ~~negatively impacted~~issued, including voting rights, dividend rights, and preferences over the Series B preferred stock with respect to dividends or upon our ~~financial condition~~dissolution, liquidation or winding-up and ~~results~~other terms.

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Although the affirmative vote or consent of the holders of at least two-thirds of all outstanding shares of the Series B preferred stock, voting together as a single class with any parity stock having similar voting rights, is required to authorize or issue any shares of capital stock senior in rights and preferences to the Series B preferred stock, if we issue preferred stock or depositary shares in the future with voting rights that dilute the voting power of the Series B preferred stock or depositary shares, the rights of holders of the depositary shares or the market price of the depositary shares could be ~~negatively and materially impacted.~~

~~Our business may suffer if there are significant declines in the value of real estate.~~

adversely affected. The market ~~value~~price of ~~real estate can fluctuate significantly in a short period of time~~the depositary shares could decline as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, we may not be able to realize the value of the security anticipated when we originated the loan, which in turn could have an adverse effect on our allowance and provision for loan and lease losses and our financial condition, results of operations and liquidity.

~~Most of our foreclosed assets are comprised of real estate properties. We carry~~ these properties at their estimated fair values less estimated selling costs. While we believe the carrying values for such assets are reasonable and appropriately reflect current market conditions, there can be no assurance that the values of such assets will not further decline prior to sale or that the amount of proceeds realized upon disposition of foreclosed assets will approximate the carrying value of such assets. If the proceeds from any such dispositions are less than the carrying value of foreclosed assets, we will record a loss on the disposition of such assets, which in turn could have an adverse effect on our results of operations.

Compared to national financial institutions, we are less able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or return of more favorable economic conditions in our primary market areas if they do occur.

~~If our allowance for loan losses is not sufficient to cover losses inherent in our loan portfolio, our results of operations and financial condition will be negatively impacted.~~

If loan customers with significant loan balances fail to repay their loans, our results of operations, financial condition and capital levels will suffer. We make various assumptions and judgments about the probable losses in our loan portfolio, including the creditworthiness of our borrowers and the value of any collateral securing the loans. Utilizing objective and subjective factors, we maintain an allowance for loan losses, established through a provision for loan losses charged to expense, to cover our estimate of the probable losses in our loan portfolio. In determining the size of this allowance, we utilize estimates based on analyses of volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, loss experience of various loan categories, national and local economic conditions, industry and peer bank loan quality indications, and other pertinent factors and information. Actual losses are difficult to forecast, especially if those losses stem from factors beyond our historical experience or are otherwise inconsistent with our credit quality assessments. If our assumptions are inaccurate, our current allowance may not be sufficient to cover potential loan losses, and additional provisions may be necessary which would negatively impact our results of operations and financial condition.

In addition, federal and state regulators periodically review our loan portfolio and may require us to increase our allowance for loan losses or recognize loan charge-offs. Their conclusions about the quality of a particular borrower or our entire loan portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge offs as required by these regulatory agencies could have a negative effect on our results of operations and financial condition. Moreover, additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information regarding existing loans, identification of additional problem loans, accounting rule changes (like those related to the Financial Accounting Standards Board’s rules regarding accounting for current expected credit losses that are not yet effective) and other factors, both within and outside of our management’s control. These additions may require increased provision expense which would negatively impact our results of operations and financial condition.

~~Liquidity risk could impair our ability to fund our operations and jeopardize our financial condition.~~

Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Liquidity risk arises from the possibility that we may be unable to satisfy current or future funding requirements and needs.

~~The objective of managing liquidity risk is to ensure that our cash flow requirements resulting from depositor, borrower and other creditor demands~~offerings, as well as ~~our operating cash needs, are met, and that our cost~~other sales of ~~funding such requirements and needs is reasonable. We maintain an asset/liability and interest rate risk policy and~~ a liquidity and funds management policy, including a contingency funding plan that, among other things, include procedures for managing and monitoring liquidity risk. Generally we rely on deposits, repaymentslarge block of ~~loans and cash flows from our investment~~depositary shares, Series B preferred stock, or similar securities ~~as our primary sources of funds. Our principal deposit sources include consumer, commercial and public funds customers~~ in our markets. We have used these funds, together with wholesale deposit sources such as brokered deposits, along with Federal Home Loan Bank of Cincinnati (“FHLB Cincinnati”) advances, federal funds purchased and other sources of short-term and long-term borrowings, including subordinated indebtedness, to make loans, acquire investment securities and other assets and to fund continuing operations.

An inability to maintain or raise funds in amounts necessary to meet our liquidity needs could have a substantial negative effect, individually or collectively, on Pinnacle Financial's and Pinnacle Bank's liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specificallythe market thereafter, or the ~~financial services industry in general. For example, factors~~perception that such sales could ~~detrimentally impact our access to liquidity sources include a decrease in~~occur. Holders of the level of our business activity due to a market downturn or adverse regulatory action against us, a reduction in our credit rating, any damage to our reputation or any other decrease in depositor or investor confidence in our creditworthiness and business. Our access to liquidity could also be impaired by factors thatSeries B preferred stock are not ~~specific~~entitled to ~~us, such as severe volatility~~preemptive rights or ~~disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Any such event or failure~~other protections against dilution.

Because our decision to ~~manage our liquidity effectively could affect our competitive position, increase our borrowing costs and the interest rates we pay~~issue securities in any future offering will depend on ~~deposits, limit our access to the capital markets, cause our regulators to criticize our operations and have a material adverse effect on our results of operations or financial condition.~~

Deposit levels may be affected by a number of factors, including demands by customers, rates paid by competitors (particularly as it relates to brokered deposits and other noncore deposits), general interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other factors. Loan repayments are a relatively stable source of funds but are subject to the borrowers’ ability to repay loans, which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters, prolonged

government shutdowns and other factors. Furthermore, loans generally are not readily convertible to cash. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet growth in loans, deposit withdrawal demands or otherwise fund operations. Such secondary sources include FHLB Cincinnati advances, brokered deposits, secured and unsecured federal funds lines of credit from correspondent banks, Federal Reserve borrowings and/or accessing the equity or debt capital markets. As our reliance on non-core funding (particularly brokered time deposits) has increased in the first half of 2019, our liquidity risk has similarly increased.

These noncore funding sources can be more rate sensitive than core deposits, and the availability of these noncore funding sources is subject to broad economic conditions, in some instances regulation, and to investor assessment of our financial strength and, as such, the cost of funds may fluctuate significantly and/or the availability of such funds may be restricted, thus impacting our net interest income, our immediate liquidity and/or our access to additional liquidity. We have somewhat similar risks to the extent high balance core deposits exceed the amount of deposit insurance coverage available.

In the event that our funding strategies call for the use of brokered deposits, there can be no assurance that such sources will be available, or will remain available, or that the cost of such funding sources will be reasonable, or that we will be able to offer competitive rates to retain these deposits upon their maturity (particularly in a down rate environment). Additionally, should we no longer be considered well-capitalized, our ability to access new brokered deposits or retain existing brokered deposits could be affected by market conditions, regulatory requirements or a combination thereof, which could result in most, if not all, brokered deposit sources being unavailable. The inability to utilize brokered deposits as a source of funding could have an adverse effect on our results of operations, financial condition and liquidity.

We anticipate we will continue to rely primarily on deposits, loan repayments, and cash flows from our investment securities to provide liquidity. Additionally, where necessary, the secondary sources of borrowed funds and brokered deposits described above will be used to augment our primary funding sources. If we are unable to access any of these secondary funding sources when needed, or retain these funding sources upon maturity, we might be unable to meet our customers’ or creditors’ needs, which would adversely affect our financial condition, results of operations, and liquidity.

The performance of our investment securities portfolio is subject to fluctuation due to changes in interest rates and market conditions, including credit deterioration of the issuers of individual securities.

Changes in interest rates can negatively affect the performance of most of our investment securities. Interest rate volatility can reduce unrealized gains or increase unrealized losses in our portfolio. Interest rates are highly sensitive to many factors including monetary policies, domestic and international economic and political issues, including trade disputes, and other factors beyond our ~~control. Fluctuations in interest rates can materially affect both~~control, we cannot predict or estimate the ~~returns on and market value~~amount, timing or nature of our investment securities. Additionally, actual investment income and cash flows from investment securities that carry prepayment risk, such as mortgage-backed securities and callable securities, may materially differ from those anticipated at the time of investment or subsequently as a result of changes in interest rates and market conditions.

Our investment securities portfolio consists of several securities whose trading markets are “not active.” As a result, we utilize alternative methodologies for pricing these securities that include various estimates and assumptions. There can be no assurance that we can sell these investment securities at the price derived by these methodologies, or that we can sell these investment securities at all, which could have an adverse effect on our financial condition, results of operations and liquidity.

~~We monitor the financial position~~future offerings. Thus, holders of the various issuers of investment securities in our portfolio, including each of the state and local governments and other political subdivisions where we have exposure. To the extent we have securities in our portfolio from issuers who have experienced a deterioration of financial condition, or who may experience future deterioration of financial condition, the value of such securities may decline and could result in an other-than-temporary impairment charge, which could have an adverse effect on our financial condition, results of operations and liquidity.

In addition, from time to time we may restructure portions of our investment securities portfolio as part of our asset liability management strategies, and may incur losses, which may be material, in connection with any such restructuring.

~~A new accounting standard may require us to increase our ALLL and could have a material adverse effect on our financial condition and results of operations.~~

The FASB has adopted a new accounting standard that is expected to be effective for Pinnacle Bank beginning January 1, 2020. This standard, referred to as current expected credit loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses through provision for loan losses. This will change the current method of provisioning for loan losses that are probable, which will likely require us to increase our

allowance for loan losses, and is likely to increase the types of data we would need to collect and review to determine the appropriate level of our allowance for loan losses. In addition, this change may result in more volatility in the level of our allowance for loan losses. An increase, to the extent material, in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses could have a material adverse effect on our capital levels, financial condition and results of operations. A reduction in our capital levels could subject us to a variety of enforcement remedies available to the federal regulatory authorities and would negatively impact our ability to pursue acquisitions or other expansion opportunities if we are unable to satisfactorily raise additional capital.

~~A decline in our stock price or expected future cash flows, or a material adverse change in our results of operations or prospects, could result in impairment of our goodwill.~~

A significant and sustained decline in our stock price and market capitalization below book value, a significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result in impairment of our goodwill. At June 30, 2019, our goodwill and other identifiable intangible assets totaled approximately$1.9 billion. If we were to conclude that a write-down of our goodwill is necessary, then the appropriate charge would likely cause a material loss. Any significant loss would adversely impact the capacity of Pinnacle Bank to pay dividends to Pinnacle Financial without seeking prior regulatory approval, which could adversely affect Pinnacle Financial’s ability to pay required interest payments on its outstanding indebtedness or to continue to pay dividends to its shareholders.

~~Our accounting estimates and risk management processes rely on analytical and forecasting models and tools.~~

The processes we use to estimate probable credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other measures of our financial condition and results of operations, depend upon the use of analytical and forecasting models and tools. These models and tools reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models and tools may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. Any such failure in our analytical or forecasting models and tools could have a material adverse effect on our business, financial condition and results of operations.

~~Our selection of accounting policies and methods may affect our reported financial results.~~

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting materially different results than would have been reported under a different alternative.

Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following: significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the reserve provided; recognize significant impairment on goodwill and other intangible asset balances; reduce the carrying value of an asset measured at fair value; or significantly increase our accrued tax liability. Any of these could have a material adverse effect on our business, financial condition or results of operations. For a discussion of our critical accounting policies, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” included in the 2018 10-K.

Changes to LIBOR may adversely affect the holder of, the market value of, and the interest expense paid on our subordinated notes and our subordinated debentures and related trust preferred securities, and may affect certain of our loans.

On July 27, 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the LIBOR administrator. The announcement indicates that the continuation of LIBOR on the current basis will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator, whether LIBOR will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of securities based on LIBOR such as our subordinated notes and our subordinated debentures and related trust preferred securities.

Uncertainty as to the nature of such potential changes, alternative reference rates, the replacement or disappearance of LIBOR or other reforms may adversely affect the value of and the return on our subordinated notes and our subordinated debentures and related trust preferred securities, as well as the interest we pay on those securities.

At June 30, 2019, approximately 35% of our total loan portfolio was indexed to 30-day, 90-day, 180-day and one-year LIBOR. Many of our loan agreements that are indexed to LIBOR include provisions that do not require us to default to any alternative index recommendations but instead allow us, in our sole discretion, to designate an alternative interest rate index in the event that LIBOR should become unavailable or unstable. While we believe these provisions within our loan agreements address the potential future unavailability of LIBOR, there can be no assurance that such provisions will be effective or will not be challenged by our borrowers.

BHG’s results of operations have become a larger portion of our results of operations in 2019, and challenges in BHG’s business that negatively affect its results would now more significantly impact our results than in 2018.

Pinnacle Financial and Pinnacle Bank collectively hold a 49% interest in BHG. While we have a significant stake in BHG, are entitled to designate two members of BHG’s five person board of managers and in some instances have protective rights to block BHG from engaging in certain activities, including, until March 1, 2020, a sale of BHG (following March 1, 2020, the other managers can approve a sale of BHG without our consent), the other managers and members of BHG may make most decisions regarding BHG’s and its subsidiaries’ operations without our consent or approval. Any sale of all or a portion of our interest in BHG would adversely affect our recurring noninterest income. Moreover, there are certain limitations on our ability to sell our interest in BHG without first offering BHG and the other members a right of first refusal, and we are prohibited from transferring any portion of our interest without the consent of the other members of BHG prior to March 1, 2021, other than transfers in connection with an acquisition of Pinnacle Financial or Pinnacle Bank or as a result of a change in applicable law that forces Pinnacle Financial and/or Pinnacle Bank to divest Pinnacle Financial’s or Pinnacle Bank’s ownership interests in BHG.

A significant portion of BHG’s revenue (and correspondingly our interest in any of BHG’s net profits) comes from the sale of loans originated by BHG to community banks. BHG, and its subsidiaries, also retain loans that they originate on their balance sheet and earn interest income on those loans. Recently, BHG has been retaining more of the loans that it originates on its balance sheet. This practice requires more external funding of BHG’s business than the historical practice of routinely selling loans to other financial institutions and will likely increase BHG’s funding costs. It also increases BHG’s exposure to credit losses in its portfolio, which losses could materially and adversely impact BHG’s results of operations and Pinnacle Financial’s and Pinnacle Bank’s interest in BHG’s net profits.

Future contributions to our earnings from BHG and its subsidiaries will require that they continue to grow their business and increase the amount of loans that they are able to originate and sell, if not retained on BHG’s or a subsidiary’s balance sheet. In the event that BHG’s loan growth slows over historical levels or its loan sales decrease (including but not limited to as a result of regulatory restrictions on banks that are the principal purchasers of BHG’s loans), its results of operations and our noninterest income would be adversely affected. BHG currently operates in most states without the need for a permit or any other license as its loans are principally commercial, business purpose loans that don’t trigger the need for licensure. In the event that BHG or its subsidiaries were required to register or become licensed in any state in which they operate, including as a result of their expanding into consumer lending or expanding into other lending areas like patient financing, or regulations are adopted that seek to limit BHG’s or its subsidiaries’ ability to operate in any jurisdiction or that seek to limit the amounts of interest that BHG can charge on its loans, BHG’s results of operations (and Pinnacle Financial’s and Pinnacle Bank’s interest in BHG’s net profits) could be materially and adversely affected.

Recently, BHG has expanded its operations to include commercial lending to other professional service firms like attorneys, accountants and others. Through subsidiaries that it owns, it also has expanded into patient financing, which involves making loans to individuals to finance medical expenses, particularly those where patients have high deductible health plans. BHG may further expand its business into other types of lending, which may not be as profitable as BHG’s current lending products or successful at all. These new product lines may involve more risk than BHG’s historical business and BHG’s loss rates may increase when compared to historical levels. Moreover, BHG and its subsidiaries will likely face greater regulatory scrutiny in certain of these lines of business that may increase BHG’s compliance costs and its risk of regulatory scrutiny. Failure to realize the expected revenue increases and/or other projected benefits from, and any increased compliance costs and regulatory scrutiny in connection with, any such expansion could have a negative impact on BHG’s business, which would negatively impact our interest in BHG’s profits.

BHG’s business is also subject to increased scrutiny by bank regulatory agencies as a result of our investment. The FDIC has published guidance related to the operation of marketplace lenders and banks’ business relationships with such lenders and other

third parties in which banks are required to exercise increased oversight and ongoing monitoring and other responsibility for such third parties’ compliance with applicable regulatory guidance and requirements. As a result, we are subject to enhanced responsibility for and risk related to BHG and our relationship with it. BHG’s compliance costs have increased since our investment and are likely to continue to increase, including as a result of its new product lines, and its loan yields may be negatively impacted, which would negatively impact its results of operations and Pinnacle Financial’s and Pinnacle Bank’s interest in BHG’s net profits. If banks that are examined by the FDIC became restricted in their ability to buy loans originated by BHG, BHG’s business would be negatively impacted, which would negatively impact our interest in BHG’s profits.

Because of our ownership of a portion of BHG, BHG is limited in the types of activities in which it may engage. Were BHG to desire to expand its operations into areas that are not permissible for an entity owned by a state member bank like Pinnacle Bank, it may need to do so through separate entities in which we do not have an ownership interest. Were these businesses to be more profitable than BHG’s core business or require BHG’s management’s attention in ways that are detrimental to BHG, our investment in BHG may be negatively impacted.

Implementation of the various provisions of the Dodd-Frank Act may increase our operating costs or otherwise have a material adverse effect on our business, financial condition or results of operations.

Since the 2008 financial crisis, financial institutions generally have been subjected to increased regulation and scrutiny from federal regulatory authorities. The U.S. Congress responded to the financial crisis by enacting a variety of statutes, in particular the Dodd-Frank Act, which contained numerous far-reaching changes and reforms for the financial services industry and directs federal regulatory agencies to issue regulations to implement these reforms. The Dodd-Frank Act also restructured the regulation of depository institutions, including the creation of the CFPB to administer consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. The provisions of the Dodd-Frank Act and the rules adopted to implement those provisions have made far-reaching changes to the regulatory framework under which we operate and have had, and may continue to have, a material impact on our operations, particularly through increased regulatory burdens and compliance costs.

The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in total assets, including compliance with portions of the Federal Reserve’s enhanced prudential oversight requirements. In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with respect to various federal consumer financial protection laws and regulations. Previously, Pinnacle Bank was subject to regulations adopted by the CFPB, but the FDIC was primarily responsible for examining our compliance with consumer protection laws and those CFPB regulations. As a relatively new agency with evolving regulations and practices, there is uncertainty as to how the CFPB’s examination and regulatory authority might impact our business. Should the CFPB take issue with our operations or determine that we are not complying with applicable rules and regulations, we may incur additional costs (including personnel costs) which may be significant to comply with those rules and regulations for which the CFPB has oversight responsibility or fines for noncompliance.

Beginning on July 1, 2017 we became subject to the Durbin Amendment promulgated under the Dodd-Frank Act. Under the Durbin Amendment, interchange fees for debit card transactions are capped at $0.21 plus five basis points (plus $0.01 for fraud loss). This limitation on interchange fees has adversely impacted our results of operations and will continue to do so.

Ongoing compliance with our regulatory obligations may result in further increased regulatory compliance costs, fee reductions and restrictions on activities in which we may have otherwise engaged, any of which could have a material adverse effect on our business, financial condition or results of operations. Moreover, our failure to comply with these or other regulations could result in regulatory enforcement actions against us or make it more difficult to receive any required regulatory approvals necessary to execute on our growth strategy, each of which could have a material adverse effect on our results of operations, business or financial condition.

Future changes to the laws and regulations applicable to the financial industry, if enacted or adopted, may impact our profitability or financial condition, require more oversight or change certain of our business practices, and expose us to additional costs, including increased compliance costs. We cannot predict whether any such legislative or regulatory changes, including those that could benefit our business and results of operations, will be enacted or adopted or, if they are, whether they will have a material effect on us.

Changes to capital requirements for bank holding companies and depository institutions that became effective January 1, 2015 and that are now fully phased in may negatively impact Pinnacle Financial’s and Pinnacle Bank’s results of operations.

In July 2013, the Federal Reserve and the FDIC approved final rules that substantially amended the regulatory risk-based capital rules applicable to Pinnacle Bank and Pinnacle Financial. The final rules, which became effective on January 1, 2015, implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The minimum capital level requirements now applicable to bank holding companies and banks subject to the rules are: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (that is now fully phased in as of January 1, 2019) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios now that the capital conservation buffer is fully phased in: (i) a CET1 capital ratio of 7%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. We will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if our capital levels fall below these minimums plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Under these rules, Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, minority interest in the equity accounts of consolidated subsidiaries, and noncumulative preferred stock and related surplus, less goodwill and other specified intangible assets and other regulatory deductions. CET1 capital generally consists of common stock, retained earnings and paid in capital. CET1 capital is reduced by goodwill, certain intangible assets, net of associated deferred tax liabilities, deferred tax assets that arise from tax credit and net operating loss carryforwards, net of any valuation allowance, and certain other items specified in the Basel III capital rules. The Basel III capital rules also provide for a number of deductions from and adjustments to CET1 capital. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 capital to the extent that any one such category exceeds 10% of CET1 capital or all such categories in the aggregate exceed 15% of CET1 capital.

Tier 2 capital generally consists of perpetual preferred stock and related surplus not meeting the Tier 1 capital definition, qualifying subordinated debt, qualifying mandatorily convertible debt securities, and a limited amount of loan loss reserves. Cumulative preferred stock and trust preferred securities issued after May 19, 2010, no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including in the case of bank holding companies with less than $15.0 billion in total assets at that date, trust preferred securities issued prior to that date, continue to count as Tier 1 capital subject to certain limitations. Following the merger with BNC and as a result of that merger, our total assets were in excess of $15.0 billion which caused the subordinated debentures we and BNC issued related to trust preferred offerings to cease to qualify as Tier 1 capital under applicable banking regulations. Though these securities no longer qualify as Tier 1 capital, we believe these subordinated debentures continue to qualify as Tier 2 capital. Subordinated notes we, and entities we have acquired, have previously issued also qualify as Tier 2 capital subject to certain limitations. Under applicable regulatory guidelines, beginning on the fifth year from the maturity date of a Tier 2 capital instrument, the portion of the instrument that is able to be counted as Tier 2 capital is reduced on a pro rata basis over that five-year period. We may need to increase the level of Tier 1 capital we maintain through issuance of common stock or noncumulative perpetual preferred stock, which could cause dilution to our existing common shareholders. Similarly, as existing Tier 2 capital instruments approach maturity, we may seek to refinance those instruments or issue or incur additional indebtedness to support our and Pinnacle Bank’s capital levels.

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

The application of more stringent capital requirements for Pinnacle Financial and Pinnacle Bank, like those adopted to implement the Basel III reforms or future reforms, could, among other things, result in lower returns on invested capital, require the raising of additional capital, particularly in the form of common stock, make it more difficult for us to receive regulatory approvals related to our growth initiatives and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III either because we became subject to those requirements directly or because our regulators seek to propose additional on-balance sheet liquidity requirements on us, could result in our having to lengthen the term of our funding, restructure our business models and/or increase our holdings of liquid assets, which could adversely impact our results of operations.

Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying dividends or buying back shares.

~~Our ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions.~~

Federal and state bank regulators require Pinnacle Financial and Pinnacle Bank to maintain adequate levels of capital to support operations. At June 30, 2019, Pinnacle Bank’s regulatory capital ratios were at “well-capitalized” levels under regulatory guidelines. Growth in assets (either organically or as a result of acquisitions) at rates in excess of the rate at which our capital is increased through retained earnings will reduce our capital ratios unless we continue to increase capital. Failure by us to meet applicable capital guidelines or to satisfy certain other regulatory requirements could subject us to a variety of enforcement remedies available to the federal regulatory authorities and would negatively impact our ability to pursue acquisitions or other expansion opportunities.

We may need to raise additional capital (including through the issuance of common stock or additional Tier 2 capital instruments) in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs or in connection with our growth or as a result of deterioration in our asset quality. Our ability to maintain capital levels, sources of funding and liquidity could be impacted by negative perceptions of our business or prospects, changes in the capital markets and deteriorating economic and market conditions. Pinnacle Bank is required to obtain regulatory approval in order to pay dividends to Pinnacle Financial unless the amount of such dividends does not exceed its net income for that calendar year plus retained net income for the preceding two years. Any restriction on the ability of Pinnacle Bank to pay dividends to Pinnacle Financial could impact Pinnacle Financial’s ability to continue to pay dividends on its common stock or its ability to pay interest on its indebtedness.

We cannot assure you that access to capital will be available to us on acceptable terms or at all. Any occurrence that may limit our access to the capital markets may materially and adversely affect our capital costs and our ability to raise capital and/or debt and, in turn, our liquidity. If we cannot raise additional capital when needed, our ability to expand through internal growth or acquisitions or to continue operations could be impaired.

~~We currently invest in bank owned life insurance (“BOLI”) and may continue to do so in the future.~~

We had $643.7 million in general, hybrid and separate account BOLI contracts at June 30, 2019. BOLI is an illiquid long-term asset that provides tax savings because cash value growth and life insurance proceeds are not taxable. However, if we needed additional liquidity and converted the BOLI to cash, such transaction would be subject to ordinary income tax and applicable penalties. We are also exposed to the credit risk of the underlying securities in the investment portfolio and to the insurance carrier’s credit risk (in a general account contract). If BOLI was exchanged to another carrier, additional fees would be incurred and a tax-free exchange could only be done for insureds that were still actively employed by us at that time. There is interest rate risk relating to the market value of the underlying investment securities associated with the BOLI in that there is no assurance that the market value of these securities will not decline. Investing in BOLI exposes us to liquidity, credit and interest rate risk, which could adversely affect our results of operations, financial condition and liquidity.

~~Our acquisitions and future expansion may result in additional risks.~~

From 2015 through 2017, we completed the acquisitions of CapitalMark, Magna, Avenue and BNC. We expect to continue to consider and explore opportunities to expand in our current markets and in select primarily high-growth markets located outside of Tennessee in the southern portion of the United States through additional branches and also may consider expansion within these markets through additional acquisitions of all or part of other financial institutions. These types of expansions involve various risks, including:

~~Management of Growth.~~ ~~We may be unable to successfully:~~

~~maintain loan quality in the context of significant loan growth;~~

~~identify and expand into suitable markets;~~

~~obtain regulatory and other approvals;~~

~~identify and acquire suitable sites for new banking offices;~~

~~attract sufficient deposits and capital to fund anticipated loan growth;~~

~~maintain adequate common equity and regulatory capital;~~

~~scale our technology platform and operational infrastructure;~~

~~avoid diversion or disruption of our existing operations or management as well as those of the acquired institution;~~

~~maintain adequate management personnel and systems to oversee and support such growth;~~

~~maintain adequate internal audit, loan review and compliance functions; and~~

~~implement additional policies, internal controls, procedures and operating systems required to support such growth.~~

~~Results of Operations.~~ There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth strategy necessarily entails growth in overhead expenses as we add new offices and staff. Our historical results may not be indicative of future results or results that may be achieved as we continue to evaluate opportunities to increase the number and concentration of our branch offices in our newer markets.

~~Development of offices.~~ There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, any new branches we establish can be expected to negatively impact our earnings for some period of time until they reach certain economies of scale. The same is true for our efforts to expand in these markets with the hiring of additional seasoned professionals with significant experience in that market. Our expenses could be further increased if we encounter delays in opening any of our new branches. We may be unable to accomplish future branch expansion plans due to a lack of available satisfactory sites, difficulties in acquiring such sites, failure or inability to receive any required regulatory approvals, increased expenses or loss of potential sites due to complexities associated with zoning and permitting processes, higher than anticipated merger and acquisition costs or other factors. Finally, we have no assurance any branch will be successful even after it has been established or acquired, as the case may be.

~~Regulatory and economic factors.~~ Our growth and expansion plans may be adversely affected by a number of regulatory and economic developments or other events. Failure or inability to obtain required regulatory approvals, changes in laws and regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may prevent or adversely affect our continued growth and expansion. Such factors may cause us to alter our growth and expansion plans or slow or halt the growth and expansion process, which may prevent us from entering into or expanding in our other markets or allow competitors to gain or retain market share in our existing markets.

~~Infrastructure and Controls.~~ We may not successfully implement improvements to, or integrate, our information and control systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, our systems, controls and procedures must be able to accommodate an increase in transaction volume and the infrastructure that comes with new products, branches, markets or any combination thereof. Thus, our growth strategy may divert management from our existing operation and may require us to incur additional expenditures to expand our administrative and operational infrastructure, which may adversely affect earnings, shareholder returns, and our efficiency ratio.

Failure to successfully address these and other issues related to our expansion could have a material adverse effect on our financial condition and results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our results of operations and financial condition could be materially adversely affected.

~~We may face risks with respect to future acquisitions.~~

When we attempt to expand our business through mergers and acquisitions (as we did from 2015 through 2017), we seek targets that are culturally similar to us, have experienced management and possess either significant market presence or have potential for improved profitability through economies of scale or expanded services. In addition to the general risks associated with our growth plans which are highlighted above, in general acquiring other banks, businesses or branches, particularly those in markets with which we are less familiar, involves various risks commonly associated with acquisitions, including, among other things:

~~the time and costs associated with identifying and evaluating potential acquisition and merger targets;~~

~~inaccuracies in the estimates and judgments used to evaluate credit, operations, culture, management and market risks with respect to the target institution;~~

the time and costs of evaluating new markets, hiring experienced local management, including as a result of de novo expansion into a market, and opening new bank locations, and the time lags between these activities and the generation of sufficient assets and deposits to support the significant costs of the expansion that we may incur, particularly in the first 12 to 24 months of operations;

~~our ability to finance (or increase capital levels in connection with) an acquisition and possible dilution to our existing shareholders;~~

~~the diversion of our management’s attention to the negotiation of a transaction and integration of an acquired company’s operations with ours;~~

~~the incurrence of an impairment of goodwill associated with an acquisition and adverse effects on our results of operations;~~

~~entry into new markets where we have limited or no direct prior experience;~~

~~closing delays and increased expenses related to the resolution of lawsuits filed by our shareholders or shareholders of companies we may seek to acquire;~~

~~the inability to receive regulatory approvals timely or at all, including as a result of community objections, or such approvals being restrictively conditional; and~~

~~risks associated with integrating the operations, technologies and personnel of the acquired business.~~

Though we expect to remain principally focused on organically growing our business in our existing markets during the remainder of 2019, we nonetheless may have opportunities to evaluate merger and acquisition opportunities that are presented to us in our current markets as well as other markets throughout the southern portion of the United States and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities and related capital raising transactions may occur at any time. Generally, acquisitions of financial institutions involve the payment of a premium over book and market values, and, therefore, some dilution of our book value and fully diluted earnings per share may occur in connection with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in product presence and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.

In addition, we may face significant competition from numerous other financial services institutions, many of which may have greater financial resources than we do, when considering acquisition opportunities, particularly in our targeted high-growth markets located outside of Tennessee. Accordingly, attractive acquisition opportunities may not be available to us. There can be no assurance that we will be successful in identifying or completing any potential future acquisitions.

~~An ineffective risk management framework could have a material adverse effect on our strategic planning and our ability to mitigate risks and/or losses and could have adverse regulatory consequences.~~

We have implemented a risk management framework to identify and manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, operational, capital, compliance, strategic and reputational risks. Our framework also includes financial, analytical, forecasting, or other modeling methodologies, which involves management assumptions and judgment. In addition, our board of directors, in consultation with management, has adopted a risk appetite statement, which sets forth certain thresholds and limits to govern our overall risk profile. However, there is no assurance that our risk management framework, including the risk metrics under our risk appetite statement, will be effective under all circumstances or that it will adequately identify, manage or mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and become subject to regulatory consequences, as a result of which our business, financial condition, results of operations or prospects could be materially adversely affected.

We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of operations.

We are dependent upon information technologies, computer systems and networks, including those maintained by us and those maintained and provided to us by third parties, to conduct operations and are reliant on technology to help increase efficiency in our business. These systems could become unavailable or impaired from a variety of causes, including storms and other natural disasters, terrorist attacks, fires, utility outages, internal or external theft or fraud, design defects, human error or complications encountered as existing systems are maintained, replaced or upgraded. We maintain a system of internal controls and security to mitigate the risks of many of these occurrences and maintain insurance coverage for certain risks; however, should an event occur that is not prevented or detected by our internal controls, causes an interruption in service, or is uninsured against or in excess of applicable insurance limits, such occurrence could have an adverse effect on our business and our reputation, which, in turn, could have a material adverse effect on our financial condition, results of operations and liquidity.

Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify these systems as circumstances warrant, the security of our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. We provide our customers the ability to bank remotely, including over the Internet or through their mobile device. The secure transmission of confidential information is a critical element of remote and mobile banking. Our network, and the systems of parties with whom we contract or on which we rely, as well as those of our customers and regulators, could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. Sources of attacks vary and may include hackers, disgruntled employees or vendors, organized crime, terrorists, foreign governments, corporate espionage and

activists. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts.

Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent. The techniques used by bad actors change frequently, may not be recognized until launched and may not be recognized until well after a breach has occurred. Additionally, the existence of cyber attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner. Consistent with industry trends, we remain at risk for attempted electronic fraudulent activity, as well as attempts at security breaches and cybersecurity-related incidents. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our vendors, regulators or customers involve the storage and transmission of confidential information, security breaches (including breaches of security of customer, vendor or regulator systems and networks) and viruses could expose us to claims, litigation and other possible liabilities, which may be significant. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation, results of operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject us to additional regulatory scrutiny, expose us to civil litigation and possible financial liability and cause reputational damage.

In addition, we outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

~~We also face~~depositary shares bear the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate our business activities, including vendors, exchanges, and other financial intermediaries. Such parties could also be the source or cause of an attack on, or breach of, our operational systems, data or infrastructure, and could disclose such attack or breach to us in a delayed manner or not at all. In addition, we may be at risk of an operational failure with respect to our customers’ systems. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats and the continued uncertain global economic environment.

As cyber threats continue to evolve, we may be required to expend significant, additional resources to continue to modify or enhance our protective measures, investigate and remediate any information security vulnerabilities, or respond to any changes to state or federal regulations, policy statements or laws concerning information systems or security. Any failure to maintain adequate security over our information systems, our technology-driven products and services or our customers’ personal and transactional information could negatively affect our business and our reputation and result in fines, penalties, or other costs, including litigation expense and/or additional compliance costs, all of which could have a material adverse effect on our financial condition, results of operations and liquidity. Furthermore, the public perception that a cyber attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. A successful penetration or circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.

Our risk and exposure to cyber threats and other information security breaches is heightened as we expand our use of cloud technology and internet and mobile banking delivery channels for our products and services.

~~Environmental liability associated with commercial lending could result in losses.~~

In the course of business, Pinnacle Bank may acquire, through foreclosure, or deed in lieu of foreclosure, properties securing loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, Pinnacle Financial, or Pinnacle Bank, might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have a material adverse effect on our business, results of operations and financial condition.

We have acquired a number of retail banking facilities and other real properties, any of which may contain hazardous or toxic substances. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

~~National or state legislation or regulation may increase our expenses and reduce earnings.~~

Bank regulators are increasing regulatory scrutiny, and additional restrictions (including those originating from the Dodd-Frank Act) on financial institutions have been proposed or adopted by regulators and by Congress. Changes in tax law, federal legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer protection laws, and capital requirements, among others, can result in significant increases in our expenses and/or charge-offs, which may adversely affect our results of operations and financial condition. Changes in state or federal tax laws or regulations can have a similar impact. State and municipal governments, including the State of Tennessee, could seek to increase their tax revenues through increased tax levies which could have a meaningful impact on our results of operations. Furthermore, financial institution regulatory agencies are expected to continue to be aggressive in responding to concerns and trends identified in examinations, including the continued issuance of additional formal or informal enforcement or supervisory actions. These actions, whether formal or informal, could result in our agreeing to limitations or to take actions that limit our operational flexibility, restrict our growth or increase our capital or liquidity levels. Failure to comply with any formal or informal regulatory restrictions, including informal supervisory actions, could lead to further regulatory enforcement actions. In addition, the issuance of certain regulatory enforcement actions against Pinnacle Financial or Pinnacle Bank could constitute an event of default under our loan agreement with U.S. Bank, which could cause the acceleration of any outstanding borrowings under the loan agreement and termination of the agreement.

Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans.

~~Our business reputation and relationships are important and any damage to them could have a material adverse effect on our business.~~

Our reputation is very important in sustaining our business and we rely on our relationships with our current, former and potential clients and shareholders and other actors in the industries that we serve. Any damage to our reputation, whether arising from regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, the way in which we conduct our business or otherwise could strain our existing relationships and make it difficult for us to develop new relationships. Any such damage to our reputation and relationships could in turn lead to a material adverse effect on our business.

~~We face substantial competition and are subject to certain regulatory constraints not applicable to some of our competitors, which may decrease our growth or profits.~~

We face substantial competition for deposits, and for credit and trust relationships, and other financial services and products in the communities we serve. Competing providers include other banks, thrifts and trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, title companies, money market funds and other financial and nonfinancial companies which may offer products functionally equivalent to those offered by us. Competing providers may have greater financial resources than we do and offer services within and outside the market areas we serve. In addition to this challenge of attracting and retaining customers for traditional banking services, our competitors include securities dealers, brokers, mortgage bankers, investment advisors and finance and insurance companies who seek to offer one-stop financial services to their customers that may include services that financial institutions have not been able or allowed to offer to their customers in the past. The increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. If we are unable to adjust both to increased

~~competition for traditional banking services and changing customer needs and preferences, our financial performance could be adversely affected.~~

Some of our competitors, including credit unions, are not subject to certain regulatory constraints, such as the Community Reinvestment Act, which, among other things, requires us to implement procedures to make and monitor loans throughout the communities we serve. Credit unions also have federal tax exemptions that may allow them to offer lower rates on loans and higher rates on deposits than taxpaying financial institutions such as commercial banks. In addition, non-depository institution competitors are generally not subject to the extensive regulation applicable to institutions, like Pinnacle Bank, that offer federally insured deposits. Other institutions may have other competitive advantages in particular markets or may be willing to accept lower profit margins on certain products. These differences in resources, regulation, competitive advantages, and business strategy may decrease our net interest margin, may increase our operating costs, and may make it harder for us to compete profitably.

Inability to retain senior management and key employees or to attract new experienced financial services professionals could impair our relationship with our customers, reduce growth and adversely affect our business.

We have assembled a senior management team which has substantial background and experience in banking and financial services in our markets. Moreover, much of our organic loan growth that we have experienced in recent years (and that we are seeking during the remainder of 2019 and beyond) was the result not of strong loan demand but rather of our ability to attract experienced financial services professionals who have been able to attract customers from other financial institutions. We are deploying a similar hiring strategy in the Carolinas and Virginia. Inability to retain these key personnel (including key personnel of the businesses we have acquired) or to continue to attract experienced lenders with established books of business (including, in either case, as a result of competitive compensation and other hiring and retention pressures), at all or at the pace we have anticipated, could negatively impact our growth because of the loss of these individuals’ skills and customer relationships and/or the potential difficulty of promptly replacing them. Moreover, the higher costs we have to pay to hire and retain these experienced individuals could cause our noninterest expense levels to rise and negatively impact our results of operations.

Many of our key associates, and those we seek to hire, are experienced bankers who have been engaged in the business of commercial banking for a significant period of time. While we believe this model of hiring has contributed to our success, we face risks associated with this older workforce. Our healthcare costs may exceed those of our peers on account of our older associate base. Additionally, as a number of our long-term employees approach retirement age, our ability to successfully plan for the transition of those associates’ clients to other associates becomes more important to our future ~~success. If we are unable to successfully manage such transitions, our relationships with our clients may be negatively impacted and our results of operations may be negatively affected.~~

~~We are subject to certain litigation, and our expenses related to this litigation may adversely affect our results.~~

We are from time to time subject to certain litigation in the ordinary course of our business. As we have aggressively hired new revenue producing associates over the last five years we, and the associates we have hired, have also periodically been the subject of litigation and threatened litigation with these associates’ former employers. We may also be subject to claims related to our loan servicing programs, particularly those involving servicing of commercial real estate loans. These and other claims and legal actions, as well as supervisory and enforcement actions by our regulators, including the CFPB or other regulatory agencies with which we deal, including those with oversight of our loan servicing programs, could involve large monetary claims, capital directives, agreements with federal regulators, cease and desist orders and significant defense costs. The outcome of any such cases or actions is uncertain. Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects.

In accordance with GAAP, for matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable we will incur a loss and the amount can be reasonably estimated, we establish an accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings or threatened claims, however, may turn out to be substantially higher than the amount accrued. Further, our insurance may not cover all litigation, other proceedings or claims, or the costs of defense. Future developments could result in an unfavorable outcome for any existing or new lawsuits or investigations in which we are, or may become, involved, which may have a material adverse effect on our business and our results of operations.

~~Our business is dependent on technology, and an inability to invest in technological improvements may adversely affect our results of operations and financial condition.~~

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven solutions, and as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and

made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems, as well as nontraditional alternatives like crowdfunding and digital wallets. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. We have made significant investments in data processing, management information systems and internet banking accessibility. Our future success will depend in part upon our ability to create additional efficiencies in our operations through the use of technology. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot make assurances that our technological improvements will increase our operational efficiency or that we will be able to effectively implement new technology-driven solutions or be successful in marketing these products and services to our customers.

~~We are subject to various statutes and regulations that may impose additional costs or limit our ability to take certain actions.~~

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged on loans, interest rates paid on deposits and locations of offices. We are also subject to capital requirements established by our regulators, which require us to maintain specified levels of capital. It is possible that our FDIC assessments may increase in the future. Any future assessment increases could negatively impact our results of operations. Significant changes in laws and regulations applicable to the banking industry have been recently adopted and others are being considered in Congress. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

~~The soundness of other financial institutions could adversely affect us.~~

Our ability to engage in routine funding transactions could be adversely affected by the actions and financial stability of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to various counterparties, including brokers and dealers, commercial and correspondent banks, and others including those with whom we have implemented our hedging strategies. As a result, defaults by, or rumors or questions about, one or more financial services institutions, or the financial services industry generally, may result in market-wide liquidity problems and could lead to losses or defaults by such other institutions. Such occurrences could expose us to credit risk in the event of default of one or more counterparties and could have a material adverse effect on our financial position, results of operations and liquidity.

~~We depend on the accuracy and completeness of information about customers.~~

In deciding whether to extend credit or enter into certain transactions, we rely on information furnished by or on behalf of customers, including financial statements, credit reports, tax returns and other financial information. We may also rely on representations of those customers or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading personal information, financial statements, credit reports, tax returns or other financial information, including information falsely provided as a result of identity theft, could have an adverse effect on our business, financial condition and results of operations.

~~We may be subject to claims and litigation asserting lender liability.~~

From time to time, and particularly during periods of economic stress, customers, including real estate developers and consumer borrowers, may make claims or otherwise take legal action pertaining to performance of our responsibilities. These claims are often referred to as “lender liability” claims and are sometimes brought in an effort to produce or increase leverage against us in workout negotiations or debt collection proceedings. Lender liability claims frequently assert one or more of the following allegations: breach of fiduciary duties, fraud, economic duress, breach of contract, breach of the implied covenant of good faith and fair dealing, and similar claims. Whether customer claims and legal action related to the performance of our responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a favorable manner, they may result in significant financial liability and/or adversely affect our market reputation, products and services, as well as potentially affecting customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition, results of operations and liquidity.

~~We may be subject to claims and litigation pertaining to fiduciary responsibility.~~

From time to time as part of our normal course of business, customers may make claims and take legal action against us based on actions or inactions related to the fiduciary responsibilities of Pinnacle Bank’s trust and wealth management associates. If such claims and legal actions are not resolved in a manner favorable to us, they may result in financial liability and/or adversely affect

our market reputation or our products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

~~Natural disasters may adversely affect us.~~

Our operations and customer base are located in markets where natural disasters, including tornadoes, severe storms, fires, wildfires, floods, hurricanes and earthquakes often occur. Such natural disasters could significantly impact the local population and economies and our business, and could pose physical risks to our properties. Although our banking offices are geographically dispersed throughout portions of the southeastern United States and we maintain insurance coverages for such events, a significant natural disaster in or near one or more of our markets could have a material adverse effect on our financial condition, results of operations or liquidity.

~~Pinnacle Financial is required to act as a source of financial and managerial strength for Pinnacle Bank in times of stress.~~

Under federal law, Pinnacle Financial is required to act as a source of financial and managerial strength to Pinnacle Bank, and to commit resources to support Pinnacle Bank if necessary. Pinnacle Financial may be required to commit additional resources to Pinnacle Bank at times when Pinnacle Financial may not be in a financial position to provide such resources or when it may not be in Pinnacle Financial’s, or its shareholders’ or its creditors’ best interests to do so. Providing such support is more likely during times of financial stress for Pinnacle Financial and Pinnacle Bank, which may make any capital Pinnacle Financial is required to raise to provide such support more expensive or dilutive than it might otherwise be. In addition, any capital loans Pinnacle Financial makes to Pinnacle Bank are subordinate in right of payment to depositors and to certain other indebtedness of Pinnacle Bank. In the event of Pinnacle Financial’s bankruptcy, any commitment by it to a federal banking regulator to maintain the capital of Pinnacle Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

~~Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines or sanctions against us.~~

The Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, requires financial institutions to design and implement programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department's Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches, as well as additional operating expenses to add staff and/or technological enhancements to our systems to better comply with our obligations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us, which could have a material adverse effect on our business, financial condition or results of operations.

~~The price of our common stock may be volatile or may decline.~~

The trading price of our common stock may fluctuate as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affectofferings reducing the market price of ~~our common stock. Among~~ the ~~factors that could affect our stock price are:~~

•~~actual or anticipated quarterly fluctuations in our results of operations~~depositary shares and ~~financial condition;~~

•~~changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;~~

•~~failure to meet analysts’ revenue or earnings estimates;~~

•~~speculation~~diluting their holdings in the ~~press or investment community;~~depositary shares.

•
~~strategic actions by us or our competitors;~~

•~~actions by institutional shareholders;~~

•~~fluctuations in the stock price and operating results of our competitors;~~

•~~general market conditions and, in particular, developments related to market conditions for the financial services industry;~~

~~market perceptions about the innovation economy, including levels of funding or "exit" activities of companies in the industries we serve;~~

•~~proposed or adopted regulatory changes or developments;~~

•~~changes in the political climate;~~

•~~market reactions to social media messages or posts;~~

•~~anticipated or pending investigations, proceedings or litigation that involve or affect us; and~~

•~~domestic and international economic factors unrelated to our performance.~~

The trading price of the shares of our common stock and the value of our other securities will further depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, and future sales of our equity or equity-related securities. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. A significant decline in our stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation, as well as the loss of key employees.

Our ability to declare and pay dividends is limited.

While our board of directors has approved the payment of a quarterly cash dividend on our common stock since the fourth quarter of 2013 and approved the payment of the initial quarterly dividend on the Series B Preferred Stock (and underlying depositary shares), there can be no assurance of whether or when we may pay dividends on our ~~common~~capital stock in the future. Future dividends, if any, will be declared and paid at the discretion of our board of directors and will depend on a number of factors, including our and Pinnacle Bank’s capital levels. Moreover, our ability to pay dividends on our common stock is limited by the terms of our Series B preferred stock which provides that if we have not paid dividends on the Series B preferred stock for the most recently completed dividend period, then no dividend or distribution shall be declared, paid, or set aside for payment on shares of our common stock.

Our principal source of funds used to pay cash dividends on our common stock will be cash we may hold from time to time as well as dividends that we receive from Pinnacle Bank. Although Pinnacle Bank’s asset quality, earnings performance, liquidity and capital requirements will be taken into account before we declare or pay any future dividends on our common stock, our board of directors will also consider our liquidity and capital requirements and our board of directors could determine to declare and pay dividends without relying on dividend payments from Pinnacle Bank.

Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends we may declare and pay and that Pinnacle Bank may declare and pay to us. For example, Federal Reserve regulations implementing the capital rules required under Basel III do not permit dividends unless capital levels exceed certain higher levels applying capital conservation buffers. 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, like the Series B preferred stock, 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.

In addition, subject to certain exceptions, the terms of ~~(i)~~ our subordinated debentures, ~~(ii)~~including the subordinated ~~notes we assumed upon consummation of the Avenue merger, and (iii) the subordinated~~ debentures ~~and subordinated notes~~ we assumed upon the consummation of the BNC merger, prohibit us from paying dividends on shares of our ~~common~~capital stock at times when we are deferring the payment of interest on such subordinated ~~debentures~~debentures.

The Series B preferred stock constitutes an equity security and ranks junior to all of our and our subsidiaries’ existing indebtedness and will rank junior to our and our subsidiaries’ future indebtedness.

Shares of the Series B preferred stock are equity interests in Pinnacle Financial and do not constitute indebtedness. Accordingly, shares of the Series B preferred stock and the related depositary shares are and will be junior in right of payment to any existing and all future indebtedness and other non-equity claims of Pinnacle Financial with respect to assets available to satisfy claims on us, including in a liquidation of Pinnacle Financial. In the event of our bankruptcy, liquidation, dissolution or winding-up, our assets will be available to pay obligations on the Series B preferred stock and any parity stock only after all of our liabilities have been paid and any obligations we owe on any securities that rank senior to the Series B preferred stock then outstanding, if any, have been satisfied. In case of such bankruptcy, liquidation, dissolution or winding-up, the Series B preferred stock will rank equally with any parity stock in the distribution of our assets. Holders of the depositary shares may be fully subordinated ~~notes.~~to

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interests held by the U.S. government in the event of a receivership, insolvency, liquidation or similar proceeding. In addition, our existing and future indebtedness may restrict payment of dividends on the Series B preferred stock.

The Series B preferred stock and the depositary shares representing the Series B preferred stock effectively rank junior to any existing and all future liabilities of our subsidiaries.

We are a financial holding company and conduct substantially all of our operations through our subsidiaries. Our right to participate in any distribution of the assets of our subsidiaries upon any liquidation, reorganization, receivership or conservatorship of any subsidiary (and thus the ability of the holder of the Series B preferred stock and the holders of the depositary shares to benefit indirectly from such distribution) will rank junior to the prior claims of that subsidiary’s creditors. In the event of bankruptcy, liquidation or winding-up, there may not be sufficient assets remaining, after paying our and our subsidiaries’ liabilities, to pay amounts due on any or all of the Series B preferred stock and the depositary shares representing the Series B preferred stock then outstanding.

We, together with Pinnacle Bank, own 49% of the outstanding equity interests of BHG. Our right to participate in any distribution of the assets of BHG upon its liquidation, reorganization, receivership or conservatorship (and thus the ability of the holders of the Series B preferred stock and the holders of the depositary shares to benefit indirectly from such distribution) will rank junior to the prior claims of BHG’s creditors. Moreover, our 49% ownership interest in BHG and minority board representation on BHG’s board means that we, and Pinnacle Bank, cannot cause BHG to make distributions to us and Pinnacle Bank that could be used to pay dividends on the Series B preferred stock. In addition, BHG is a party to various loan agreements pursuant to which BHG’s ability to make distributions to us may be limited.

The Series B preferred stock and the depositary shares representing the Series B preferred stock places no restrictions on our business or operations or on our ability to incur indebtedness or engage in any transactions, subject only to the limited voting rights of the shares of Series B preferred stock. The holders of the Series B preferred stock, and therefore the holders of the depositary shares representing the Series B preferred stock, have limited voting rights.

Dividends on the Series B preferred stock are non-cumulative and discretionary. If we do not declare dividends on the Series B preferred stock, holders of the depositary shares will not be entitled to receive related distributions on their depositary shares.

Dividends on the Series B preferred stock are non-cumulative and discretionary, not mandatory. Consequently, if our board of directors does not authorize and declare a dividend for any dividend period, the holder of the Series B preferred stock, and therefore the holders of the depositary shares, will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and be payable. We will have no obligation to pay dividends for such dividend period, whether or not dividends are authorized and declared for any subsequent dividend period with respect to the Series B preferred stock. Our board of directors may determine that it would be in our best interests to pay less than the full amount of the stated dividends on the Series B preferred stock or no dividend for any dividend period even if funds are available. Factors that would be considered by our board of directors in making this determination include our financial condition, liquidity and capital needs, the impact of current and pending legislation and regulations, economic conditions, including worsening economic conditions resulting from the COVID-19 pandemic, our ability to service any equity or debt obligations senior to the Series B preferred stock, any credit agreements to which we are a party, tax considerations and such other factors as our board of directors may deem relevant.

Unlike indebtedness, where principal and interest would customarily be payable on specified due dates, in the case of preferred stock like the Series B preferred stock dividends are payable only when, as and if authorized and declared by our board of directors or a duly authorized committee of the board and as a Tennessee corporation, we are subject to restrictions on payments of dividends out of lawfully available funds as described elsewhere in this report.

The holders of the Series B preferred stock, and therefore the holders of the depositary shares representing the Series B preferred stock, have limited voting rights.

Until and unless we are in arrears on our dividend payments on the Series B preferred stock for six quarterly dividend periods, whether consecutive or not, the holders of the Series B preferred stock, and therefore the holders of the depositary shares, have no voting rights with respect to matters that generally require the approval of voting shareholders, except with respect to certain fundamental changes in the terms of the ~~loan agreement~~Series B preferred stock, and except as may be required by the rules of any securities exchange or quotation system on which the Series B preferred stock is listed, traded or quoted or by Tennessee law. If dividends on the Series B preferred stock are not paid in full for ~~Pinnacle Financial’s line~~six dividend periods, whether consecutive or not, the holders of ~~credit prohibits us from paying dividends when there is an event~~Series B preferred stock, voting together as a class with any other equally ranked series of ~~default existing under~~preferred stock that have similar voting rights then outstanding, if any, will have the ~~loan agreement,~~right, at the first annual meeting or special meeting held thereafter and at subsequent annual meetings, to elect two directors to our board. The terms of the additional directors so elected will end upon the payment or setting

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aside for payment by us of continuous noncumulative dividends for at least four dividend periods on the Series B preferred stock and any other equally ranked series of preferred stock then outstanding, if any.

Holders of the depositary shares must act through the depositary to exercise any voting rights of the Series B preferred stock. Although each depositary share is entitled to 1/40th of a ~~dividend would cause an event of default.~~

~~We may issue additional common stock or other equity securities in~~vote, the ~~future which could dilute the ownership interest of existing shareholders.~~

~~We may issue additional~~depositary can only vote whole shares of ~~common stock, or securities convertible into, exchangeable for or representing rights to acquire~~Series B preferred stock. While the depositary will vote the maximum number of whole shares of ~~common~~Preferred Stock in accordance with the instructions it receives, any remaining fractional votes of holders of the depositary shares will not be voted.

The price of our capital stock ~~including~~may be volatile or may decline.

The trading price of our capital stock may fluctuate as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in ~~connection with acquisitions. We may sell these~~trading volumes that affect the market prices of the shares ~~at prices below~~of many companies. These broad market fluctuations could adversely affect the ~~current~~ market price of ~~shares, and~~our capital stock. Among the ~~sale of these shares may significantly dilute shareholder ownership. We~~factors that could also issue additional shares in connection with acquisitions of other financial institutions (as we did in connection with our acquisition of BNC and our other recent acquisitions) or investments in fee-related or other businesses (as we did with BHG), which could also dilute shareholder ownership.

~~Holders of Pinnacle Financial’s junior subordinated debentures have rights that are senior to those of Pinnacle Financial’s shareholders.~~

~~At June 30, 2019, Pinnacle Financial had outstanding trust preferred securities and accompanying junior subordinated debentures totaling $133.0 million. Payments of~~affect the principal and interest on the trust preferred securities are conditionally guaranteed by Pinnacle Financial, and the accompanying subordinated debentures are senior to shares of Pinnacle Financial’s common stock. As a result, Pinnacle Financial must make payments on the subordinated debentures (and the related trust preferred securities) before any dividends can be paid on common stock and, in the event of Pinnacle Financial’s bankruptcy, dissolution or liquidation, the holders of the subordinated debentures must be satisfied before any distributions can be made on Pinnacle Financial’s common stock. Pinnacle Financial has the right to defer distributions on its junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on its common stock.

~~Pinnacle Financial and Pinnacle Bank have issued subordinated indebtedness the holders of which have rights that are senior to those of Pinnacle Financial’s common shareholders.~~

From time to time, Pinnacle Financial and Pinnacle Bank have issued, and in connection with the Avenue merger and BNC merger, assumed, subordinated notes. At June 30, 2019, Pinnacle Financial and Pinnacle Bank had an aggregate of $338.8 million of subordinated notes outstanding, not including the subordinated debentures issued in connection with our trust preferred

securities. The terms of these notes prohibit or will prohibit Pinnacle Financial or Pinnacle Bank, as applicable, from declaring or paying any dividends or distributions on its common stock at any time when payment of interest on these notes has not been timely made and while any such accrued and unpaid interest remains unpaid. Moreover, the notes we have issued or assumed rank senior to shares of Pinnacle Financial’s common stock and Pinnacle Bank’s subordinated indebtedness is structurally senior to the rights of the holders of Pinnacle Financial’s common stock. In the event of any bankruptcy, dissolution or liquidation of Pinnacle Financial, these notes, along with Pinnacle Financial’s other indebtedness, would have to be repaid before Pinnacle Financial’s shareholders would be entitled to receive any of the assets of Pinnacle Financial.

Pinnacle Financial or Pinnacle Bank may from time to time issue additional subordinated indebtedness that would have to be repaid before Pinnacle Financial’s shareholders would be entitled to receive any of the assets of Pinnacle Financial or Pinnacle Bank.

We identified a material weakness in our internal controls over financial reporting as of December 31, 2018 and determined that our disclosure controls and procedures were not effective at December 31, 2018 and March 31, 2019. Though we believe we have remediated this material weakness as of June 30, 2019, we may be unable to develop, implement and maintain effective internal control over financial reporting and disclosure controls and procedures in future periods.

~~The Sarbanes-Oxley Act and related rules and regulations require that management report annually on the effectiveness~~trading prices of our ~~internal control over financial reporting and assess the effectiveness of our disclosure controls and procedures on a~~capital stock are:

•actual or anticipated quarterly basis. Among other things, management must conduct an assessment of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act and related rules and regulations. Maintaining and adapting our internal controls is expensive and requires significant management attention. Moreover, as we continue to grow, our internal controls may become more complex and require additional resources to ensure they remain effective amid dynamic regulatory and other guidance. Failure to maintain effective controls or implement required new or improved controls or difficulties encounteredfluctuations in ~~the process may harm~~ our results of operations and financial ~~condition~~condition;

•changes in revenue or ~~cause us to fail~~earnings estimates or publication of research reports and recommendations by financial analysts;

•failure to meet ~~our reporting obligations.~~analysts’ revenue or earnings estimates;

Based on management’s assessment, we concluded that as of December 31, 2018 we had a material weakness in our internal control over financial reporting that contributed to our disclosure controls and procedures not being effective as of that date or as of March 31, 2019. The specific issues leading to these conclusions are described in Part II - Item 9A. “Controls and Procedures” of the 2018 10-K and in “Management’s Report on Internal Control over Financial Reporting” appearing elsewhere•speculation in the 2018 10-K. Item 4 above and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 provides additional information regarding our remediation of this material weakness and the status of our disclosure controls and internal control over financial reporting as of June 30, 2019.press or investment community;

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis. The material weakness identified in Item 4 below did not result in any material misstatement in our consolidated financial statements and we have remediated the material weaknesses and related disclosure controls. However, if the remedial measures we have implemented are insufficient, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting or in our disclosure controls occur in the future, our future consolidated financial statements or other information filed with the SEC may contain material misstatements. Any material misstatements could require a restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, leading to a decline in the market value of our securities.

~~Our issuance of preferred stock could adversely affect holders of our common stock.~~

We have the ability under our current effective shelf registration statement to issue shares of preferred stock. Further, our shareholders authorized our board of directors to issue up to 10,000,000 shares of preferred stock without any further action on the part of our shareholders. Our board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up, and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution, or winding up, or if we issue debt securities, incur other borrowings or issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected.

~~We and/or the holders of certain types of our securities could be adversely affected by unfavorable ratings from rating agencies.~~

The ratings agencies regularly evaluate Pinnacle Financial and Pinnacle Bank, and their ratings of our long-term debt are based on a number of factors, including our financial strength as well as factors not entirely within our control, including conditions affecting the financial services industry generally. There can be no assurance that we will not receive adverse changes in our ratings in the future, which could adversely affect the cost and other terms upon which we are able to obtain funding, and the way in which we are perceived in the capital markets. Actual or anticipated changes, or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade, could affect the market value and liquidity of our securities, increase our borrowing costs and negatively impact our profitability. Additionally, a downgrade of the credit rating of any particular security issued•strategic actions by us or our ~~subsidiaries could negatively affect~~competitors;

•actions by institutional shareholders;

•fluctuations in the ~~ability~~stock price and operating results of ~~the holders of that security~~our competitors;

•general market conditions and, in particular, developments related to ~~sell the securities and the prices at which any such securities may be sold.~~

~~Even though our common stock is currently traded on the Nasdaq Stock Market’s Global Select Market, it has less liquidity than many other stocks quoted on a national securities exchange.~~

The trading volume in our common stock on the Nasdaq Global Select Market has been relatively low when compared with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. Although we have experienced increased liquidity in our stock, we cannot say with any certainty that a more active and liquid trading market ~~for our common stock will continue to develop. Because of this, it may be more difficult for shareholders to sell a substantial number of shares~~conditions for the ~~same price at which shareholders could sell a smaller number~~financial services industry;

•market perceptions about the innovation economy, including levels of ~~shares.~~

~~We cannot predict the effect, if any, that future sales~~funding or "exit" activities of ~~our common stock~~companies in the ~~market,~~industries we serve;

•proposed or ~~the availability of shares of common stock for sale~~adopted regulatory changes or developments;

•changes in the political climate;

•market ~~will have on the market price of our common stock. We can give no assurance~~reactions to social media messages or posts;

•anticipated or pending investigations, proceedings or litigation that ~~sales of substantial amounts of common stock in the market,~~involve or ~~the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.~~affect us; and

~~The market price of our common stock has fluctuated significantly,~~•domestic and ~~may fluctuate in the future. These fluctuations may be~~international economic and social factors unrelated to our performance. ~~General market or industry~~

The trading price ~~declines or overall market volatility in~~of the ~~future could adversely affect the price~~shares of our common stock and ~~the current market price may not be indicative of future market prices.~~

~~Our corporate organizational documents~~depositary shares representing fractional interests in our Series B preferred stock and the provisions of Tennessee law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition of Pinnacle Financial that you may favor.

Our amended and restated charter, as amended, and bylaws, as amended, contain various provisions that could have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control of Pinnacle Financial. These provisions include:

•~~a provision requiring our board of directors to take into account specific factors when considering an acquisition proposal;~~

~~a provision that all extraordinary corporate transactions to which we are a party must be approved by a majority of the directors and a majority of the shares entitled to vote;~~

~~a provision that any special meeting~~value of our ~~shareholders~~other securities will further depend on many factors, which may ~~be called only by~~change from time to time, including, without limitation, our ~~chairman,~~financial condition, performance, creditworthiness and prospects, our ~~chief executive officer, our president, our board of directors, or the holders of 25% of the outstanding shares~~ability to pay dividends and future sales of our ~~voting~~equity or equity-related securities. In some cases, the markets have produced downward pressure on trading prices of capital stock ~~that have held~~and credit availability for certain issuers without regard to those ~~shares for at least one year; and~~

~~a provision establishing certain advance notice procedures for nomination of candidates for election as directors at an annual or special meeting of shareholders at which directors are elected.~~

~~Additionally, our amended and restated charter, as amended, authorizes~~issuers’ underlying financial strength. A significant decline in the ~~board of directors to issue shares~~trading price of our ~~preferred~~capital stock ~~without shareholder approval~~could result in substantial losses for individual shareholders and ~~upon such terms~~could lead to costly and disruptive securities litigation, as well as the ~~board~~loss of directors may determine. The issuance of our preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings, and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in us. In addition, certain provisions of Tennessee law, including a provision which restricts certain business combinations between a Tennessee corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of our company.key employees.

An investment in our ~~common~~capital stock is not an insured deposit and is not guaranteed by the FDIC.

An investment in our ~~common~~capital stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our ~~common~~capital stock is inherently

risky for the reasons described herein and our shareholders will bear the risk of loss if the value or market price of our ~~common~~capital stock is adversely affected.

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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, ~~2019.~~2020.

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, 2019 to April 30, 2019 116,161
$ 56.48
113,789
42,859,000
May 1, 2019 to May 31, 2019 18,319
55.59
17,099
41,910,000
June 1, 2019 to June 30, 2019 11,198
56.37
—
41,910,000
Total 145,678
$ 56.35
130,888
41,910,000


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, 2020 to April 30, 2020	3,890	$	37.14	—	67,170,000
May 1, 2020 to May 31, 2020	1,089	36.83		—	67,170,000
June 1, 2020 to June 30, 2020	9,009	42.95		—	67,170,000
Total	13,988	$	40.62	—	67,170,000

______________________


~~(1)~~	During the quarter ended June 30, 2019, 51,063 shares of restricted stock previously awarded to certain of the participants in our equity incentive plans vested. We withheld 14,790 shares to satisfy tax withholding requirements associated with the vesting of these restricted shares.

(1)During the quarter ended June 30, 2020, 49,982 shares of restricted stock or performance-based vesting restricted stock units previously awarded to certain of the participants in our equity incentive plans vested. We withheld 13,988 shares to satisfy tax withholding requirements associated with the vesting of these awards.

~~(2)~~

On November 13, 2018, Pinnacle Financial announced that its board of directors authorized a share repurchase program for up to $100.0 million of Pinnacle Financial’s outstanding common stock. The repurchase program is scheduled to expire upon the earlier of Pinnacle Financial’s repurchase of shares of its common stock having an aggregate purchase price of $100.0 million and December 31, 2019. Pinnacle Financial repurchased 130,888 shares and 674,473 shares, respectively, of its common stock at an aggregate cost of $7.4 million and $37.4 million, respectively, in the three and six months ended June 30, 2019. 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.

(2)On November 13, 2018, Pinnacle Financial announced that its board of directors authorized a share repurchase program for up to $100.0 million of Pinnacle Financial’s outstanding common stock that expired on March 31, 2020. On October 15, 2019, Pinnacle Financial's board of directors approved and additional $100.0 million share repurchase program that commenced upon the exhaustion of the original $100.0 million repurchase program. The additional share repurchase program will expire on December 31, 2020. Pinnacle Financial repurchased 1,015,039 shares of its common stock at an aggregate cost of $50.8 million in the quarter ended March 31, 2020. 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 programs do not obligate Pinnacle Financial to repurchase any dollar amount or number of shares, and the programs 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 has chosen to suspend its repurchase program in light of uncertainty regarding the length and severity of the COVID-19 pandemic. No shares were purchased in the quarter ended June 30, 2020.

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



3.1~~10.1~~		Amended and Restated, as amended (restated for SEC filing purposes only).*
~~Fifth~~4.1		Deposit Agreement, dated June 3, 2020, by and among the Company, Computershare Inc. and Computershare Trust Company, N.A. acting jointly as the depositary, and the holders from time to time of the depositary receipts described therein (incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement on Form 8-A, filed June 3, 2020)
4.2		Specimen of Certificate representing the Series B Preferred Stock (incorporated herein by reference to Exhibit 4.2 of the Company’s Registration Statement on Form 8-A, filed June 3, 2020)
4.3		Form of Depositary Receipt (included in Exhibit 4.1 hereto)
10.1		Seventh Amendment to Loan Agreement dated as of April ~~24, 2019~~22, 2020 by and between U.S. Bank National Association and Pinnacle Financial Partners, Inc., incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April ~~29, 2019.~~24, 2020.
~~10.2~~31.1*		~~Sixth Amendment to Loan Agreement dated as of July 1, 2019 by and between U.S. Bank National Association and Pinnacle Financial Partners, Inc.~~
31.1*	Certification pursuant to Rule 13a-14(a)/15d-14(a)
31.2*		Certification pursuant to Rule 13a-14(a)/15d-14(a)
32.1**		Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
32.2**		Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Schema Documents
101.CAL*		Inline XBRL Calculation Linkbase Document
101.LAB*		Inline XBRL Label Linkbase Document
101.PRE*		Inline XBRL Presentation Linkbase Document
101.DEF*		Inline XBRL Definition Linkbase Document
104		The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2019,~~2020, formatted in Inline XBRL (included in Exhibit 101)

*		Filed herewith.
**		Furnished herewith.
#	~~Management compensatory plan or arrangement~~

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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 7, 2020		/s/ M. Terry Turner
		M. Terry Turner
		President and Chief Executive Officer

August 7, 2020		~~PINNACLE FINANCIAL PARTNERS, INC.~~

~~August 2, 2019~~	~~/s/ M. Terry Turner~~
	~~M. Terry Turner~~
	~~President and Chief Executive Officer~~

~~August 2, 2019~~	/s/ Harold R. Carpenter
		Harold R. Carpenter
		Chief Financial Officer



TABLE OF CONTENTS			Page No.

PART I – Financial Information:			4
Item 1. Consolidated Financial Statements (Unaudited)			4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			3742
Item 3. Quantitative and Qualitative Disclosures about Market Risk			5967
Item 4. Controls and Procedures			5967

PART II – Other Information:			6068
Item 1. Legal Proceedings			6068
Item 1A. Risk Factors			6069
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			8175
Item 3. Defaults Upon Senior Securities			8175
Item 4. Mine Safety Disclosures			8175
Item 5. Other Information			8175
Item 6. Exhibits			8175
Signatures			8377



December 31, 2018:
Securities available-for-sale:
U.S. Treasury securities	$	30,325	$	—	$	25	$	30,300
U.S. government agency securities	71,456		49		1,346		70,159
Mortgage-backed securities	1,336,469		3,110		28,634		1,310,945
State and municipal securities	1,244,471		3,785		18,602		1,229,654
Asset-backed securities	379,107		820		4,345		375,582
Corporate notes and other	69,399		170		2,523		67,046
	$	3,131,227	$	7,934	55,475		$	3,083,686
Securities held-to-maturity:
State and municipal securities	$	194,282	$	152	$	1,303	$	193,131
	$	194,282	$	152	$	1,303	$	193,131



	At June 30, 2019						At December 31, 2018
	Recorded investment		Unpaid principal balances		Related allowance		Recorded investment		Unpaid principal balances		Related allowance
Impaired loans with an allowance:
Commercial real estate – mortgage	$	12,639	$	12,640	$	778	$	14,114	$	14,124	$	724
Consumer real estate – mortgage	19,770		19,879		2,148		19,864		19,991		1,443
Construction and land development	626		621		43		581		579		28
Commercial and industrial	10,634		10,601		2,560		9,252		9,215		1,441
Consumer and other	111		134		—		983		1,005		328
Total	$	43,780	$	43,875	$	5,529	$	44,794	$	44,914	$	3,964

Impaired loans without an allowance:
Commercial real estate – mortgage	$	10,332	$	10,341	$	—	$	14,724	$	14,739	$	—
Consumer real estate – mortgage	10,885		10,909		—		7,247		7,271		—
Construction and land development	—		—		—		1,786		1,786		—
Commercial and industrial	11,318		11,317		—		14,595		14,627		—
Consumer and other	—		—		—		—		—		—
Total	$	32,535	$	32,567	$	—	$	38,352	$	38,423	$	—

Total impaired loans	$	76,315	$	76,442	$	5,529	$	83,146	$	83,337	$	3,964



	Accruing										Nonaccruing
June 30, 2019	30-89 days past due and accruing		90 days or more past due and accruing		Total past due and accruing		Current and accruing		Purchase credit impaired		Nonaccrual ⁽¹⁾		Nonaccruing purchase credit impaired ⁽¹⁾		Total loans
Commercial real estate:
Owner-occupied	$	2,373	$	70	$	2,443	$	2,606,321	$	2,450	$	11,976	$	970	$	2,624,160
All other	4,731		—		4,731		4,940,587		5,070		10,828		17		4,961,233
Consumer real estate – mortgage	10,603		220		10,823		2,905,629		3,406		25,501		4,396		2,949,755
Construction and land development	3,469		—		3,469		2,110,684		1,421		605		1,790		2,117,969
Commercial and industrial	11,420		1,537		12,957		5,761,982		285		19,883		—		5,795,107
Consumer and other	4,658		906		5,564		360,419		—		111		—		366,094
Total	$	37,254	$	2,733	$	39,987	$	18,685,622	$	12,632	$	68,904	$	7,173	$	18,814,318



	Number		Grant Date Weighted-Average Cost
Unvested at December 31, 2018	692,806		$	55.19
Shares awarded	209,220
Restrictions lapsed and shares released to associates/directors	(261,061	)
Shares forfeited ⁽¹⁾	(19,211	)
Unvested at June 30, 2019	621,754		$	56.99



	Location of Gain (Loss) on Derivative	Amount of Gain (Loss) Recognized in Income
		Three Months Ended June 30,						Six Months Ended June 30,
Liability derivatives		2019			2018			2019			2018
Interest rate swaps - securities	Interest income on securities	$	(15,963	)	$	(1,343	)	$	(26,243	)	$	236
Interest rate swaps - loans	Interest income on loans	$	(2,061	)	$	1,122		$	(6,915	)	$	1,122



	Location of Gain (Loss) on Hedged Item
		Three Months Ended June 30,					Six Months Ended June 30,
Liability derivatives - hedged items		2019		2018			2019		2018
Interest rate swaps - securities	Interest income on securities	$	15,963	$	1,343		$	26,243	$	(236	)
Interest rate swaps - loans	Interest income on loans	$	2,061	$	(1,122	)	$	6,915	$	(1,122	)



	Balance Sheet Location	June 30, 2019
Right-of-use assets
Operating leases ⁽¹⁾	Other assets	$	72,719
Finance leases	Premises and equipment, net	2,100
Total right-of-use assets		$	74,819
Lease liabilities
Operating leases	Other liabilities	$	80,697
Finance leases	Other liabilities	3,359
Total lease liabilities		$	84,056



	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Operating lease cost	$	3,532		$	6,972
Short-term lease cost	14			28
Finance lease cost:
Interest on lease liabilities	61			123
Amortization of right-of-use asset	57			113
Sublease income	(312		)	(561		)
Net lease cost	$	3,352		$	6,675



	Operating Leases			Finance Leases
2019 ⁽¹⁾	$	6,776		$	235
2020	12,538			470
2021	12,110			470
2022	9,725			470
2023	8,874			479
Thereafter	48,305			2,548
	98,328			4,672
Less: Imputed interest	(17,631		)	(1,313		)
Total lease liabilities	$	80,697		$	3,359



	Operating Leases		Capital Leases
2019	$	12,889	$	470
2020	11,805		470
2021	11,527		470
2022	9,410		470
2023	8,820		479
Thereafter	43,730		2,548
Future minimum lease payments	$	98,181	4,907
Less: Imputed interest			(1,437		)
Total capital lease liabilities			$	3,470



	Three months ended June 30,				2019 - 2018 Percent		Six Months Ended June 30,				2019 - 2018 Percent
	2019		2018		Increase (Decrease)		2019		2018		Increase (Decrease)
Interest income	$	265,851	$	230,984	15.1	%	$	523,734	$	442,512	18.4	%
Interest expense	76,933		48,748		57.8	%	147,570		85,805		72.0	%
Net interest income	188,918		182,236		3.7	%	376,164		356,707		5.5	%
Provision for loan losses	7,195		9,402		(23.5	)%	14,379		16,333		(12.0	)%
Net interest income after provision for loan losses	181,723		172,834		5.1	%	361,785		340,374		6.3	%
Noninterest income	70,682		47,939		47.4	%	121,745		92,122		32.2	%
Noninterest expense	127,686		110,908		15.1	%	241,737		219,488		10.1	%
Net income before income taxes	124,719		109,865		13.5	%	241,793		213,008		13.5	%
Income tax expense	24,398		23,000		6.1	%	47,512		42,633		11.4	%
Net income	$	100,321	$	86,865	15.5	%	$	194,281	$	170,375	14.0	%

Basic net income per common share	$	1.31	$	1.13	15.9	%	$	2.54	$	2.21	14.9	%

Diluted net income per common share	$	1.31	$	1.12	17.0	%	$	2.53	$	2.20	15.0	%



	Three months ended June 30, 2019						Three months ended June 30, 2018
	Average Balances		Interest		Rates/ Yields		Average Balances		Interest		Rates/ Yields
Interest-earning assets:
Loans ⁽¹⁾⁽²⁾	$	18,611,164	$	237,653	5.22	%	$	16,729,734	$	208,758	5.04	%
Securities:
Taxable	1,781,814		12,243		2.76	%	1,792,845		11,748		2.63	%
Tax-exempt⁽²⁾	1,630,661		12,556		3.68	%	1,177,422		8,350		3.34	%
Federal funds sold and other	530,556		3,399		2.57	%	442,401		2,128		1.93	%
Total interest-earning assets	22,554,195		$	265,851	4.85	%	20,142,402		$	230,984	4.66	%
Nonearning assets
Intangible assets	1,850,146						1,860,868
Other nonearning assets	1,511,630						1,233,675
Total assets	$	25,915,971					$	23,236,945

Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking	3,150,865		9,305		1.18	%	3,038,705		6,395		0.84	%
Savings and money market	7,355,783		26,947		1.47	%	6,739,430		16,165		0.96	%
Time	3,958,445		22,736		2.30	%	2,900,779		10,207		1.41	%
Total interest-bearing deposits	14,465,093		58,988		1.64	%	12,678,914		32,767		1.04	%
Securities sold under agreements to repurchase	117,261		142		0.49	%	123,447		143		0.47	%
Federal Home Loan Bank advances	2,164,341		11,552		2.14	%	1,884,828		9,690		2.06	%
Subordinated debt and other borrowings	469,498		6,251		5.34	%	474,328		6,148		5.20	%
Total interest-bearing liabilities	17,216,193		76,933		1.79	%	15,161,517		48,748		1.29	%
Noninterest-bearing deposits	4,399,766		—		0.00	%	4,270,459		—		0.00	%
Total deposits and interest-bearing liabilities	21,615,959		$	76,933	1.43	%	19,431,976		$	48,748	1.01	%
Other liabilities	182,258						9,005
Stockholders' equity	4,117,754						3,795,963
Total liabilities and stockholders' equity	$	25,915,971					$	23,236,944
Net interest income			$	188,918					$	182,236
Net interest spread ⁽³⁾					3.06	%					3.37	%
Net interest margin ⁽⁴⁾					3.48	%					3.69	%



	Six months ended June 30, 2019						Six months ended June 30, 2018
	Average Balances		Interest		Rates/ Yields		Average Balances		Interest		Rates/ Yields
Interest-earning assets:
Loans ⁽¹⁾⁽²⁾	$	18,276,680	$	467,032	5.25	%	$	16,345,734	$	399,972	4.98	%
Securities:
Taxable	1,813,693		25,783		2.87	%	1,793,619		22,970		2.58	%
Tax-exempt⁽²⁾	1,544,186		24,228		3.77	%	1,106,705		15,635		3.33	%
Federal funds sold and other	500,400		6,691		2.70	%	389,043		3,935		2.04	%
Total interest-earning assets	22,134,959		$	523,734	4.89	%	19,635,101		$	442,512	4.61	%
Nonearning assets
Intangible assets	1,851,292						1,862,294
Other nonearning assets	1,499,104						1,226,229
Total assets	$	25,485,355					$	22,723,624

Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking	3,140,734		18,628		1.20	%	3,006,328		11,509		0.77	%
Savings and money market	7,446,911		53,284		1.44	%	6,597,734		28,153		0.86	%
Time	3,727,061		41,293		2.23	%	2,725,534		17,086		1.26	%
Total interest-bearing deposits	14,314,706		113,205		1.59	%	12,329,596		56,748		0.93	%
Securities sold under agreements to repurchase	113,305		287		0.51	%	126,690		273		0.43	%
Federal Home Loan Bank advances	2,046,007		21,515		2.12	%	1,735,385		16,697		1.94	%
Subordinated debt and other borrowings	470,133		12,563		5.39	%	475,066		12,087		5.13	%
Total interest-bearing liabilities	16,944,151		147,570		1.76	%	14,666,737		85,805		1.18	%
Noninterest-bearing deposits	4,298,169		—		0.00	%	4,287,229		—		0.00	%
Total deposits and interest-bearing liabilities	21,242,320		$	147,570	1.40	%	18,953,966		$	85,805	0.91	%
Other liabilities	175,193						5,185
Stockholders' equity	4,067,842						3,764,473
Total liabilities and stockholders' equity	$	25,485,355					$	22,723,624
Net interest income			$	376,164					$	356,707
Net interest spread ⁽³⁾					3.14	%					3.43	%
Net interest margin ⁽⁴⁾					3.55	%					3.73	%



	Three months ended June 30,					2019 - 2018 Percent	Six Months Ended June 30,					2019 - 2018 Percent
	2019			2018		Increase (Decrease)	2019			2018		Increase (Decrease)
Noninterest income:
Service charges on deposit accounts	$	8,940		$	8,456	5.7%	$	17,482		$	16,361	6.9%
Investment services	5,803			5,074		14.4%	11,207			10,319		8.6%
Insurance sales commissions	2,147			2,048		4.8%	5,075			5,167		(1.8)%
Gains on mortgage loans sold, net	6,011			3,777		59.1%	10,889			7,521		44.8%
Investment gains and losses on sales, net	(4,466		)	—		NM	(6,426		)	30		NM
Trust fees	3,461			3,564		(2.9)%	6,756			6,681		1.1%
Income from equity method investment	32,261			9,690		232.9%	45,551			19,050		139.1%
Other noninterest income:
Interchange and other consumer fees	9,091			7,030		29.3%	16,598			13,501		22.9%
Bank-owned life insurance	4,201			2,894		45.2%	8,296			5,646		46.9%
Loan swap fees	799			752		6.3%	1,560			1,256		24.2%
SBA loan sales	1,171			1,728		(32.2)%	1,743			2,846		(38.8)%
Gain on other equity investments	832			2,112		(60.6)%	1,614			2,301		(29.9)%
Other noninterest income	431			814		(47.1)%	1,400			1,443		(3.0)%
Total other noninterest income	16,525			15,330		7.8%	31,211			26,993		15.6%
Total noninterest income	$	70,682		$	47,939	47.4%	$	121,745		$	92,122	32.2%



	Six months ended June 30, 2019			Year ended December 31, 2018
Balance at beginning of period	$	83,575		$	67,240
Provision for loan losses	14,379			34,377
Charged-off loans:
Commercial real estate – mortgage	(1,599		)	(3,030		)
Consumer real estate – mortgage	(930		)	(1,593		)
Construction and land development	(4		)	(74		)
Commercial and industrial	(8,760		)	(13,175		)
Consumer and other loans	(3,255		)	(12,528		)
Total charged-off loans	(14,548		)	(30,400		)
Recoveries of previously charged-off loans:
Commercial real estate – mortgage	964			2,096
Consumer real estate – mortgage	741			2,653
Construction and land development	141			1,863
Commercial and industrial	4,342			3,035
Consumer and other loans	659			2,711
Total recoveries of previously charged-off loans	6,847			12,358
Net charge-offs	(7,701		)	(18,042		)
Balance at end of period	$	90,253		$	83,575
Ratio of allowance for loan losses to total loans outstanding at end of period	0.48		%	0.47		%
Ratio of net charge-offs to average total loans outstanding for the period ⁽¹⁾	0.08		%	0.11		%

Three Months Ended June 30, 2019

Six Months Ended
June 30, 2019

Operating cash flows related to operating leases

Operating cash flows related to finance leases

Financing cash flows related to finance leases