Loans and Allowance for Loan Losses | Note 6. 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, consumer and other. • Commercial real-estate mortgage loans . 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 also includes owner occupied commercial real estate which shares a similar risk profile to our commercial and industrial products. • Consumer real-estate mortgage loans . Consumer real-estate mortgage consists primarily of loans secured by 1-4 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 by the assigned financial advisor subject to validation by Pinnacle Financial's independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pass-rated loans include five distinct ratings categories for loans that represent specific attributes. Pinnacle Financial believes that its categories follow those outlined by Pinnacle Bank's primary regulators. At December 31, 2017 , approximately 81.4% 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 policy requires 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 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. The following table outlines the amount of each loan classification categorized into each risk rating category as of December 31, 2017 and 2016 (in thousands): December 31, 2017 Commercial real estate - mortgage Consumer real estate - mortgage Construction and land development Commercial and industrial Consumer and other Total Pass $ 6,487,368 $ 2,503,688 $ 1,880,704 $ 4,014,656 $ 351,359 $ 15,237,775 Special Mention 94,134 18,356 8,148 46,898 1,177 168,713 Substandard (1) 72,044 21,053 13,468 62,529 79 169,173 Substandard-nonaccrual 16,064 18,117 5,968 17,258 48 57,455 Doubtful-nonaccrual — — — — — — Total loans $ 6,669,610 $ 2,561,214 $ 1,908,288 $ 4,141,341 $ 352,663 $ 15,633,116 December 31, 2016 Commercial real estate - mortgage Consumer real estate - mortgage Construction and land development Commercial and industrial Consumer Total Pass $ 3,137,452 $ 1,160,361 $ 897,556 $ 2,782,713 $ 264,723 $ 8,242,805 Special Mention 21,449 1,856 2,716 25,641 802 52,464 Substandard (1) 29,674 15,627 5,788 75,861 129 127,079 Substandard-nonaccrual 4,921 8,073 6,613 7,492 475 27,574 Doubtful-nonaccrual — — — 3 — 3 Total loans $ 3,193,496 $ 1,185,917 $ 912,673 $ 2,891,710 $ 266,129 $ 8,449,925 (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 substandard nonperforming loans and substandard troubled debt restructurings. Potential problem loans, which are not included in nonperforming assets, amounted to approximately $164.0 million at December 31, 2017 , compared to $114.6 million at December 31, 2016 . At December 31, 2017 and 2016 , all loans classified as nonaccrual were deemed to be impaired. The principal balances of these nonaccrual loans amounted to $57.5 million and $27.6 million at December 31, 2017 and 2016 , respectively, and are included in the table above. For the twelve months ended December 31, 2017 , the average balance of nonaccrual loans was $66.0 million as compared to $35.1 million for the twelve months ended December 31, 2016. Pinnacle Financial's policy is that the discontinuation of the accrual of interest income will occur 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 the above mentioned loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had these nonaccruing loans been on accruing status, interest income would have been higher by $2.7 million , $2.1 million and $2.3 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. The following table provides a rollforward of purchase credit impaired loans from December 31, 2016 through December 31, 2017 (in thousands): Gross Carrying Value Accretable Yield Nonaccretable Yield Carrying Value December 31, 2015 $ 16,274 $ — $ (4,143 ) $ 12,131 Acquisitions 1,359 — (812 ) 547 Settlements, net (5,165 ) — 1,322 (3,843 ) December 31, 2016 12,468 — (3,633 ) 8,835 Acquisitions 80,812 (196 ) (32,314 ) 48,302 Settlements, net (18,956 ) 64 4,410 (14,482 ) December 31, 2017 $ 74,324 $ (132 ) $ (31,537 ) $ 42,655 These loans were deemed to be collateral dependent at the time of acquisition. 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. Purchase credit impaired loans purchased during the year ended December 31, 2017 for which it was probable at acquisition that all contractually required payments would not be collected are as follows (in thousands): December 31, 2017 2016 2015 Contractually required payments receivable $ 94,312 $ 1,359 $ 19,960 Cash flows expected to be collected at acquisition 48,498 547 14,257 Fair value of acquired loans at acquisition 48,302 547 14,257 The following tables detail the recorded investment, unpaid principal balance and related allowance and average recorded investment of our nonaccrual loans at December 31, 2017 , 2016 and 2015 by loan classification and the amount of interest income recognized on a cash basis throughout the year-to-date period then ended, respectively, on these loans that remain on the balance sheets (in thousands): December 31, 2017 For the year ended Recorded investment Unpaid principal balance Related allowance Average recorded investment Cash basis interest income recognized Collateral dependent nonaccrual loans: Commercial real estate – mortgage $ 13,570 $ 16,631 $ 38 $ 13,839 $ — Consumer real estate – mortgage 10,093 14,309 115 11,216 — Construction and land development 5,735 10,273 6 5,935 95 Commercial and industrial 2,135 3,533 362 2,980 — Consumer and other — — — — — Total $ 31,533 $ 44,746 $ 521 $ 33,970 $ 95 Cash flow dependent nonaccrual loans: Commercial real estate – mortgage $ 2,494 $ 2,505 $ 95 $ 3,463 $ — Consumer real estate – mortgage 8,024 8,079 411 10,076 — Construction and land development 233 233 12 438 — Commercial and industrial 15,171 15,224 1,278 18,027 — Consumer and other — — — — — Total $ 25,922 $ 26,041 $ 1,796 $ 32,004 $ — Total Nonaccrual Loans $ 57,455 $ 70,787 $ 2,317 $ 65,974 $ 95 December 31, 2016 For the year ended Recorded investment Unpaid principal balance Related allowance Average recorded investment Cash basis interest income recognized Collateral dependent nonaccrual loans: Commercial real estate – mortgage $ 2,308 $ 2,312 $ — $ 2,540 $ — Consumer real estate – mortgage 2,880 2,915 — 2,907 — Construction and land development 3,128 3,135 — 3,132 159 Commercial and industrial 6,373 6,407 — 8,841 — Consumer and other — — — — — Total $ 14,689 $ 14,769 $ — $ 17,420 $ 159 Cash flow dependent nonaccrual loans: Commercial real estate – mortgage $ 2,613 $ 3,349 $ 59 $ 2,688 $ — Consumer real estate – mortgage 5,193 5,775 688 5,966 — Construction and land development 3,485 4,154 20 3,476 — Commercial and industrial 1,122 2,714 77 2,884 — Consumer and other 475 851 227 2,624 — Total $ 12,888 $ 16,843 $ 1,071 $ 17,638 $ — Total Nonaccrual Loans $ 27,577 $ 31,612 $ 1,071 $ 35,058 $ 159 December 31, 2015 For the year ended Recorded investment Unpaid principal balance Related allowance Average recorded investment Cash basis 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 Pinnacle Financial's policy is that once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized approximately $95,000 , $159,000 and $308,000 in interest income from cash payments received on nonaccrual loans during the years ended December 31, 2017 , 2016 , and 2015 , respectively. At December 31, 2017 and 2016 , there were $6.6 million and $15.0 million , respectively, of troubled debt restructurings that were performing as of their restructure date and which are accruing interest. These troubled debt restructurings are considered impaired loans pursuant to U.S. GAAP. Troubled commercial loans are restructured by specialists within Pinnacle Bank's Special Assets Group, and all restructurings are approved by committees and credit officers separate and apart from the normal loan approval process. These specialists are charged with reducing Pinnacle Financial's overall risk and exposure to loss in the event of a restructuring by obtaining some or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral release terms, additional collateral or other similar strategies. The following table outlines the amount of each troubled debt restructuring by loan classification made during the years ended December 31, 2017 , 2016 and 2015 (dollars in thousands): Number of contracts Pre Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment, net of related allowance December 31, 2017 Commercial real estate – mortgage — $ — $ — Consumer real estate – mortgage 1 6 5 Construction and land development — — — Commercial and industrial 2 3,776 3,751 Consumer and other — — — 3 $ 3,782 $ 3,756 December 31, 2016 Commercial real estate – mortgage — $ — $ — Consumer real estate – mortgage — — — Construction and land development — — — Commercial and industrial 6 11,084 11,083 Consumer and other — — — 6 $ 11,084 $ 11,083 Number of contracts Pre Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment, net of related allowance December 31, 2015 Commercial real estate – mortgage 1 $ 223 $ 185 Consumer real estate – mortgage — — — Construction and land development — — — Commercial and industrial 1 434 337 Consumer and other — — — 2 $ 657 $ 522 During the years ended December 31, 2017 , 2016 and 2015 , Pinnacle Financial had no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring. A default is defined as an occurrence which violates the terms of the receivable's contract. At December 31, 2017 and 2016, the allowance for loan losses included no allowance and $21,000, respectively, specifically related to accruing troubled debt restructurings, which are classified as impaired loans pursuant to U.S. GAAP; however, these loans continue to accrue interest at contractual rates. 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 December 31, 2017 with the comparative exposures for December 31, 2016 (in thousands): At December 31, 2017 Outstanding Principal Balances Unfunded Commitments Total exposure Total Exposure at Lessors of nonresidential buildings $ 2,778,454 $ 32,497 $ 2,810,951 $ 1,701,853 Lessors of residential buildings 870,777 13,467 884,244 874,234 Hotels and motels 627,126 1,865 628,991 291,865 Additionally, 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 December 31, 2017 and 2016, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital was 89.4% and 80.3%, respectively. Non-owner occupied commercial real estate and multifamily loans (including construction and loan development loans) was 297.1% and 256.0% for December 31, 2017 and 2016, 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. 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. At both December 31, 2017 and 2016, Pinnacle Bank’s computed ratios were below the applicable regulatory guidelines. Pinnacle Bank believes that it has the appropriate monitoring controls in place should it exceed the regulatory guidelines in a future period. The table below presents past due balances at December 31, 2017 and 2016 , by loan classification and segment allocated between performing and nonperforming status (in thousands): 30-89 days past due and performing 90 days or more past due and performing Total past due and performing Current Purchase credit impaired Nonaccrual (1) Nonaccruing purchase credit impaired Total Loans December 31, 2017 Commercial real estate: Owner-occupied $ 6,772 $ 104 $ 6,876 $ 2,435,819 $ 4,820 $ 11,395 $ 1,105 $ 2,460,015 All other 16,559 — 16,559 4,177,454 12,018 704 2,860 4,209,595 Consumer real estate – mortgage 14,835 1,265 16,100 2,521,748 5,249 9,320 8,797 2,561,214 Construction and land development 4,136 146 4,282 1,894,560 3,478 2,878 3,090 1,908,288 Commercial and industrial 7,406 1,348 8,754 4,114,127 1,154 17,222 84 4,141,341 Consumer and other 6,311 1,276 7,587 345,076 — — — 352,663 $ 56,019 $ 4,139 $ 60,158 $ 15,488,784 $ 26,719 $ 41,519 $ 15,936 $ 15,633,116 December 31, 2016 Commercial real estate: Owner-occupied $ 3,505 $ — $ 3,505 $ 1,347,134 $ — $ 2,297 $ 1,957 $ 1,354,893 All other — — — 1,837,936 — 239 428 1,838,603 Consumer real estate – mortgage 3,838 53 3,891 1,173,953 — 5,553 2,520 1,185,917 Construction and land development 2,210 — 2,210 903,850 — 3,205 3,408 912,673 Commercial and industrial 4,475 — 4,475 2,879,740 — 6,971 524 2,891,710 Consumer and other 7,168 1,081 8,249 257,405 — 475 — 266,129 $ 21,196 $ 1,134 $ 22,330 $ 8,400,018 $ — $ 18,740 $ 8,837 $ 8,449,925 (1) Approximately $45.8 million and $16.7 million of nonaccrual loans as of December 31, 2017 and 2016 , respectively, are currently performing pursuant to their contractual terms. The following table details the changes in the allowance for loan losses from December 31, 2015 to December 31, 2016 to December 31, 2017 by loan classification and the allocation of 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 $ 537 $ 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 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 (276 ) (788 ) (231 ) (5,801 ) (24,016 ) — (31,112 ) Recovery of previously charged-off loans 208 546 545 2,138 2,895 — 6,332 Provision for loan losses (1,790 ) (414 ) 407 4,763 15,025 337 18,328 Balance at December 31, 2016 $ 13,655 $ 6,564 $ 3,624 $ 24,743 $ 9,520 $ 874 $ 58,980 Collectively evaluated for impairment $ 13,595 $ 5,874 $ 3,604 $ 24,648 $ 9,293 $ 57,014 Individually evaluated for impairment 60 690 20 95 227 1,092 Loans acquired with deteriorated credit quality — — — — — — Balance at December 31, 2016 $ 13,655 $ 6,564 $ 3,624 $ 24,743 $ 9,520 $ 874 $ 58,980 Loans: Collectively evaluated for impairment $ 3,188,361 $ 1,174,456 $ 906,053 $ 2,872,855 $ 265,613 $ 8,407,338 Individually evaluated for impairment 2,750 8,941 3,212 18,331 516 33,750 Loans acquired with deteriorated credit quality 2,385 2,520 3,408 524 — 8,837 Balance at December 31, 2016 $ 3,193,496 $ 1,185,917 $ 912,673 $ 2,891,710 $ 266,129 $ 8,449,925 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, 2016 $ 13,655 $ 6,564 $ 3,624 $ 24,743 $ 9,520 $ 874 $ 58,980 Charged-off loans (633 ) (1,461 ) (137 ) (4,297 ) (15,518 ) — (22,047 ) Recovery of previously charged-off loans 671 1,516 1,136 1,317 2,002 — 6,642 Provision for loan losses 7,495 (1,588 ) 4,339 3,100 9,870 448 23,664 Balance at December 31, 2017 $ 21,188 $ 5,031 $ 8,962 $ 24,863 $ 5,874 $ 1,322 $ 67,240 Collectively evaluated for impairment $ 20,753 $ 4,460 $ 8,879 $ 23,181 $ 5,874 $ 63,147 Individually evaluated for impairment 95 410 66 1,627 — 2,198 Loans acquired with deteriorated credit quality 340 161 17 55 — 573 Balance at December 31, 2017 $ 21,188 $ 5,031 $ 8,962 $ 24,863 $ 5,874 $ 1,322 $ 67,240 Loans: Collectively evaluated for impairment $ 6,630,593 $ 2,534,996 $ 1,896,553 $ 4,116,677 $ 352,663 $ 15,531,482 Individually evaluated for impairment 18,214 12,172 5,167 23,426 — 58,979 Loans acquired with deteriorated credit quality 20,803 14,046 6,568 1,238 — 42,655 Balance at December 31, 2017 $ 6,669,610 $ 2,561,214 $ 1,908,288 $ 4,141,341 $ 352,663 $ 15,633,116 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, historical loss experience, 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. At December 31, 2017 , Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $26.4 million to current directors, executive officers, and their related entities, of which $16.1 million had been drawn upon. At December 31, 2016 , Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $22.6 million to directors, executive officers, and their related entities, of which approximately $14.8 million had been drawn upon. These loans and extensions of credit were made in the ordinary course of business. None of these loans to directors, executive officers, and their related entities were impaired at December 31, 2017 or 2016 . Residential Lending At December 31, 2017 , Pinnacle Financial had approximately $103.7 million of mortgage loans held-for-sale compared to approximately $47.7 million at December 31, 2016 . Total loan volumes sold during the year ended December 31, 2017 were approximately $1.1 billion compared to approximately $803.5 million for the year ended December 31, 2016 . During the year ended December 31, 2017 , Pinnacle Financial recognized $18.6 million in gains on the sale of these loans, net of commissions paid, compared to $15.8 million and $7.7 million , respectively, during the years ended December 31, 2016 and 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. |