Loans and Allowance for Loan Losses | Note 5. Loans and Allowance for Loan Losses For financial reporting purposes, Pinnacle Financial classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed with the Federal Deposit Insurance Corporation (FDIC). Pinnacle Financial uses five loan categories: commercial real estate mortgage, consumer real estate mortgage, construction and land development, commercial and industrial, and consumer and other. · Commercial real-estate mortgage loans · Consumer real-estate mortgage loans · Construction and land development loans · Commercial and industrial loans · Consumer and other loans Commercial loans receive risk ratings assigned by a financial advisor and approved by a senior credit officer subject to validation by Pinnacle Financial's independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pinnacle Financial believes that its categories follow those used by Pinnacle Bank's primary regulators. At March 31, 2016, approximately 74.55% of our loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating in the allowance for loan loss assessment. Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans. However, certain consumer real-estate mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature. Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, our credit procedures require that every risk rated loan of $500,000 or more be subject to a formal credit risk review process by the assigned financial advisor. Each loan's risk rating is also subject to review by our independent loan review department, which reviews a substantial portion of our risk rated portfolio annually. 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. The following table presents our loan balances by primary loan classification and the amount within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard, substandard-nonaccrual and doubtful-nonaccrual which are defined as follows:  Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit position at some future date.  Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize collection of the debt. Substandard loans are characterized by the distinct possibility that Pinnacle Financial will sustain some loss if the deficiencies are not corrected.  Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.  Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Commercial real estate - mortgage Consumer real estate - mortgage Construction and land development Commercial and industrial Consumer and other Total March 31, 2016 Accruing loans Pass $ 2,285,128 $ 1,013,661 $ 746,663 $ 2,314,663 $ 242,170 $ 6,602,285 Special Mention 15,494 2,789 2,537 39,791 106 60,717 Substandard (1) 34,518 12,250 7,686 57,939 61 112,454 2,335,140 1,028,700 756,886 2,412,393 242,337 6,775,456 Impaired loans Nonaccrual loans (2) Substandard-nonaccrual 5,356 10,178 7,193 15,959 3,742 42,428 Doubtful-nonaccrual 2 2 - 92 - 96 Total nonaccrual loans 5,358 10,180 7,193 16,051 3,742 42,524 Troubled debt restructurings (3) Pass 222 404 - 292 27 945 Special Mention - 247 - - - 247 Substandard - 2,838 - 5,920 - 8,758 Total troubled debt restructurings 222 3,489 - 6,212 27 9,950 Total impaired loans 5,580 13,669 7,193 22,263 3,769 52,474 Total loans $ 2,340,720 $ 1,042,369 $ 764,079 $ 2,434,656 $ 246,106 $ 6,827,930 December 31, 2015 Accruing loans Pass $ 2,217,639 $ 1,020,239 $ 732,662 $ 2,143,006 $ 239,874 $ 6,353,420 Special Mention 18,162 1,894 1,133 26,037 118 47,344 Substandard (1) 33,638 11,346 6,295 53,671 74 105,024 Total 2,269,439 1,033,479 740,090 2,222,714 240,066 6,505,788 Impaired loans Nonaccrual loans (2) Substandard-nonaccrual 5,819 9,344 7,607 1,591 4,902 29,263 Doubtful-nonaccrual 2 2 - 92 - 96 Total nonaccrual loans 5,821 9,346 7,607 1,683 4,902 29,359 Troubled debt restructurings (3) Pass 223 409 - 553 28 1,213 Special Mention - 422 - - - 422 Substandard - 2,861 - 3,592 - 6,453 Total troubled debt restructurings 223 3,692 - 4,145 28 8,088 Total impaired loans 6,044 13,038 7,607 5,828 4,930 37,447 Total loans $ 2,275,483 $ 1,046,517 $ 747,697 $ 2,228,542 $ 244,996 $ 6,543,235 (1) Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators for loans classified as substandard, excluding the impact of nonaccrual loans and troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $112.5 million at March 31, 2016, compared to $105.0 million at December 31, 2015. (2) Included in nonaccrual loans at March 31, 2016 and December 31, 2015 are $10.8 million and $12.1 million, respectively, in purchase credit impaired loans acquired with deteriorated credit quality. (3) Troubled debt restructurings are presented as an impaired loan; however, they continue to accrue interest at contractual rates. PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table details the recorded investment, unpaid principal balance and related allowance and average recorded investment of our nonaccrual loans at March 31, 2016 and December 31, 2015 by loan classification and the amount of interest income recognized on a cash basis throughout the fiscal year-to-date period then ended, respectively, on these loans that remain on the balance sheets (in thousands): At March 31, 2016 For the three months ended March 31, 2016 Recorded investment Unpaid principal balance (1) Related allowance (2) Average recorded investment Interest income recognized Collateral dependent nonaccrual loans: Commercial real estate – mortgage $ 3,826 $ 4,491 $ - $ 3,854 $ - Consumer real estate – mortgage 4,431 4,916 - 4,462 - Construction and land development 7,122 7,526 - 7,320 31 Commercial and industrial 14,747 17,252 - 15,451 - Consumer and other 385 409 - 386 - Total $ 30,511 $ 34,594 $ - $ 31,473 $ 31 Cash flow dependent nonaccrual loans: Commercial real estate – mortgage $ 1,532 $ 1,536 $ 197 $ 1,548 $ - Consumer real estate – mortgage 5,749 5,665 529 5,815 - Construction and land development 71 68 256 74 - Commercial and industrial 1,304 1,294 1,056 1,128 - Consumer and other 3,357 3,878 236 3,702 - Total $ 12,013 $ 12,441 $ 2,274 $ 12,267 $ - Total nonaccrual loans $ 42,524 $ 47,035 $ 2,274 $ 43,740 $ 31 PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) At December 31, 2015 For the year ended December 31, 2015 Recorded investment Unpaid principal balance (1) Related allowance (2) Average recorded investment Interest income recognized Collateral dependent nonaccrual loans: Commercial real estate – mortgage $ 4,411 $ 5,659 $ - $ 2,253 $ - Consumer real estate – mortgage 5,596 6,242 - 3,067 - Construction and land development 7,531 7,883 - 4,317 308 Commercial and industrial 1,420 3,151 - 1,527 - Consumer and other - - - - - Total $ 18,958 $ 22,935 $ - $ 11,164 $ 308 Cash flow dependent nonaccrual loans: Commercial real estate – mortgage $ 1,410 $ 1,661 $ 20 $ 1,466 $ - Consumer real estate – mortgage 3,750 4,098 616 3,815 - Construction and land development 76 125 12 87 - Commercial and industrial 263 281 19 168 - Consumer and other 4,902 5,341 3,002 4,913 - Total $ 10,401 $ 11,506 $ 3,669 $ 10,449 $ - Total nonaccrual loans $ 29,359 $ 34,441 $ 3,669 $ 21,613 $ 308 (1) Unpaid principal balance presented net of fair value adjustments recorded in conjunction with purchase accounting. (2) Collateral dependent loans are typically charged-off to their net realizable value and no specific allowance is carried related to those loans. Loans acquired with deteriorated credit quality are recorded pursuant to the provisions of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality The following table provides a rollforward of purchase credit impaired loans from December 31, 2015 through March 31, 2016 (in thousands): Gross Contractual Receivable Accretable Yield Nonaccretable Yield Carrying Value December 31, 2015 $ 16,274 $ - $ (4,143 ) $ 12,131 Year-to-date settlements (1,484 ) - 154 (1,330 ) Additional fundings 54 - - 54 March 31, 2016 $ 14,855 $ - $ (3,989 ) $ 10,855 These loans have been deemed to be collateral dependent and as such, no accretable yield has been recorded for these loans. At the date of acquisition, the Day 1 Fair Value represents the carrying value. 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 also include loans that Pinnacle Bank has elected to formally restructure due to the weakening credit status of a borrower. The restructuring may facilitate a repayment plan that seeks to minimize the potential losses that Pinnacle Bank may otherwise incur. If on nonaccrual status as of the date of restructuring, the loans are included in nonaccrual loans. Loans that have been restructured that were performing as of the restructure date and continue to perform in accordance with the restructured terms are reported separately as troubled debt restructurings. At both March 31, 2016 and December 31, 2015, there were $10.0 million and $8.1 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. These troubled debt restructurings are considered impaired loans pursuant to U.S. GAAP. Troubled commercial loans are restructured by specialists within our Special Assets Group, and all restructurings are approved by committees and credit officers separate and apart from the normal loan approval process. These specialists are charged with reducing Pinnacle Financial's overall risk and exposure to loss in the event of a restructuring by obtaining some or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral release terms, additional collateral or other similar strategies. PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Three months ended March 31, 2016 Number of contracts Pre Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment, net of related allowance Commercial real estate – mortgage - $ - $ - Consumer real estate – mortgage - - - Construction and land development - - - Commercial and industrial 1 2,333 1,536 Consumer and other - - - 1 $ 2,333 $ 1,536 2015 Commercial real estate – mortgage - $ - $ - Consumer real estate – mortgage - - - Construction and land development - - - Commercial and industrial 1 434 337 Consumer and other - - - 1 $ 434 $ 337 During the three months ended March 31, 2016 and 2015, Pinnacle Financial did not have any troubled debt restructurings that subsequently defaulted within twelve months of the restructuring. The table below presents past due balances by loan classification and segment at March 31, 2016 and December 31, 2015, allocated between accruing and nonaccrual status (in thousands): March 31, 2016 30-89 days past due and accruing 90 days or more past due and accruing Total past due and accruing Nonaccrual (1) Current and accruing Total Loans Commercial real estate: Owner-occupied $ 4,509 $ - $ 4,509 $ 4,545 $ 1,090,617 $ 1,099,671 All other 296 - 296 813 1,239,940 1,241,049 Consumer real estate – mortgage 2,432 16 2,448 10,180 1,029,741 1,042,369 Construction and land development 2,220 770 2,990 7,193 753,896 764,079 Commercial and industrial 2,347 3,225 5,572 16,051 2,413,033 2,434,656 Consumer and other 5,704 544 6,248 3,742 236,116 246,106 $ 17,508 $ 4,555 $ 22,063 $ 42,524 $ 6,763,343 $ 6,827,930 December 31, 2015 Commercial real estate: Owner-occupied $ - $ - $ - $ 5,103 $ 1,078,394 $ 1,083,497 All other - - - 718 1,191,268 1,191,986 Consumer real estate – mortgage 6,380 1,396 7,776 9,346 1,029,395 1,046,517 Construction and land development 309 - 309 7,607 739,781 747,697 Commercial and industrial 4,798 - 4,798 1,683 2,222,061 2,228,542 Consumer and other 6,721 373 7,094 4,902 233,000 244,996 $ 18,208 $ 1,769 $ 19,977 $ 29,359 $ 6,493,899 $ 6,543,235 (1) Approximately $26.3 million and $19.0 million of nonaccrual loans as of March 31, 2016 and December 31, 2015, respectively, were performing pursuant to their contractual terms at those dates. PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table shows the allowance allocation by loan classification and accrual status at Impaired Loans Accruing Loans Nonaccrual Loans Troubled Debt Restructurings (1) Total Allowance for Loan Losses March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 March 31, 2016 December 31, 2015 Commercial real estate –mortgage $ 13,306 $ 15,452 $ 197 $ 20 $ 48 $ 41 $ 13,551 $ 15,513 Consumer real estate – mortgage 5,880 6,109 529 616 760 495 7,169 7,220 Construction and land development 3,686 2,891 256 12 - - 3,942 2,903 Commercial and industrial 21,735 22,669 1,056 19 1,353 955 24,144 23,643 Consumer and other 11,616 12,609 236 3,002 6 5 11,858 15,616 Unallocated - - - - - - 1,575 537 $ 56,223 $ 59,730 $ 2,274 $ 3,669 $ 2,167 $ 1,496 $ 62,239 $ 65,432 (1) Troubled debt restructurings of $10.0 million and $8.1 million as of both March 31, 2016 and December 31, 2015, respectively, are classified as impaired loans pursuant to U.S. GAAP; however, these loans continue to accrue interest at contractual rates. The following table details the changes in the allowance for loan losses from December 31, 2014 to December 31, 2015 to March 31, 2016 by loan classification and the allocation of the allowance for loan losses (in thousands): Commercial real estate – mortgage Consumer real estate – mortgage Construction and land development Commercial and industrial Consumer and other Unallocated Total Allowance for Loan Losses: Balance at December 31, 2014 $ 22,202 $ 5,424 $ 5,724 $ 29,167 $ 1,570 $ 3,272 $ 67,359 Charged-off loans (384 ) (365 ) (190 ) (2,207 ) (18,002 ) - (21,148 ) Recovery of previously charged-off loans 85 874 1,479 1,730 5,865 - 10,033 Provision for loan losses (6,390 ) 1,287 (4,110 ) (5,047 ) 26,183 (2,735 ) 9,188 Balance at December 31, 2015 $ 15,513 $ 7,220 $ 2,903 $ 23,643 $ 15,616 $ 537 $ 65,432 Collectively evaluated for impairment $ 15,452 $ 6,109 $ 2,891 $ 22,669 $ 12,609 $ 59,730 Individually evaluated for impairment 61 1,111 12 974 3,007 5,165 Loans acquired with deteriorated credit quality - - - - - - Balance at December 31, 2015 $ 15,513 $ 7,220 $ 2,903 $ 23,643 $ 15,616 $ 65,432 Loans: Collectively evaluated for impairment $ 2,269,439 $ 1,033,479 $ 740,090 $ 2,222,714 $ 240,066 $ 6,505,788 Individually evaluated for impairment 2,420 8,986 3,689 5,288 4,930 25,313 Loans acquired with deteriorated credit quality 3,624 4,052 3,918 540 - 12,134 Balance at December 31, 2015 $ 2,275,483 $ 1,046,517 $ 747,697 $ 2,228,542 $ 244,996 $ 6,543,235 PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Commercial real estate - mortgage Consumer real estate - mortgage Construction and land development Commercial and industrial Consumer and other Unallocated Total Allowance for Loan Losses: Balance at December 31, 2015 $ 15,513 $ 7,220 $ 2,903 $ 23,643 $ 15,616 $ 537 $ 65,432 Charged-off loans - (199 ) - (1,624 ) (7,404 ) - (9,227 ) Recovery of previously charged-off loans 58 85 25 1,433 540 - 2,141 Provision for loan losses (2,020 ) 63 1,014 692 3,106 1,038 3,893 Balance at March 31, 2016 $ 13,551 $ 7,169 $ 3,942 $ 24,144 $ 11,858 $ 1,575 $ 62,239 Collectively evaluated for impairment $ 13,306 $ 5,880 $ 3,686 $ 21,735 $ 11,616 $ 56,223 Individually evaluated for impairment 245 1,289 256 2,409 242 4,441 Loans acquired with deteriorated credit quality - - - - - - Balance at March 31, 2016 $ 13,551 $ 7,169 $ 3,942 $ 24,144 $ 11,858 $ 62,239 Loans: Collectively evaluated for impairment $ 2,335,140 $ 1,028,700 $ 756,886 $ 2,412,393 $ 242,337 $ 6,775,456 Individually evaluated for impairment 3,025 10,353 3,642 21,215 3,384 41,619 Loans acquired with deteriorated credit quality 2,555 3,316 3,551 1,048 385 10,855 Balance at March 31, 2016 $ 2,340,720 $ 1,042,369 $ 764,079 $ 2,434,656 $ 246,106 $ 6,827,930 The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter using a migration analysis compiled using loss data over the previous 24 quarters. 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 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. Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industry. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications. Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at March 31, 2016 with the comparative exposures for December 31, 2015 (in thousands): at March 31, 2016 Outstanding Principal Balances Unfunded Commitments Total exposure Total Exposure at December 31, 2015 Lessors of nonresidential buildings $ 874,814 $ 232,748 $ 1,107,562 $ 1,078,211 Lessors of residential buildings 398,569 173,805 572,374 500,266 At March 31, 2016, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $10.5 million to current directors, executive officers, and their related entities, of which $7.4 million had been drawn upon. At December 31, 2015, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $14.5 million to directors, executive officers, and their related entities, of which approximately $11.4 million had been drawn upon. None of these loans to directors, executive officers, and their related entities were impaired at March 31, 2016 or December 31, 2015. PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Residential Lending At March 31, 2016, Pinnacle Financial had approximately $35.4 million of mortgage loans held-for-sale compared to approximately $47.9 million at December 31, 2015. Total loan volumes sold during the three months ended March 31, 2016 were approximately $163.9 million compared to approximately $95.8 million for the three months ended ended March 31, 2015. During the three months ended March 31, 2016, Pinnacle Financial recognized $3.6 million in gains on the sale of these loans, net of commissions paid, compared to $1.9 million during the three months ended March 31, 2015. These mortgage loans held-for-sale are originated internally and are primarily to borrowers in Pinnacle Bank's geographic markets. These sales are typically on a mandatory basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines. Each purchaser has specific guidelines and criteria for sellers of loans, and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require Pinnacle Bank to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties, Pinnacle Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan. To date, repurchase activity pursuant to the terms of these representations and warranties has been insignificant to Pinnacle Bank. |