PINNACLE FINANCIAL PARTNERS, INC. The following is a discussion of our financial condition atJune 30, 2021 andDecember 31, 2020 and our results of operations for the three and six months endedJune 30, 2021 and 2020. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein and the risk factors discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (Form 10-K) and the other reports we have filed with theSecurities and Exchange Commission since we filed that Form 10-K.
Impact of COVID-19 Pandemic
The outbreak and continued spread of a novel strain of the coronavirus or, 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 inthe 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% onMarch 15, 2020 . This action followed a prior reduction of the targeted federal funds rate to a range of 1.0% to 1.25% onMarch 3, 2020 . We have been intentional in our response throughout the COVID-19 pandemic to ensure strength in our balance sheet, including, initially, increases in liquidity and reserves. As a part of this intentional response, we conducted an extensive loan review and re-risk grading process in 2020 of various types, sizes and grades of loans. 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. During the third quarter of 2020, our focus broadened to include the other segments of the portfolio that are risk rated that we did not re-risk grade during the second quarter. This extensive re-underwriting effort included our pass grade loans with exposures greater than$2.0 million and watch list, criticized or classified loans with exposures greater than$500,000 . During the fourth quarter of 2020 and again in the first quarter of 2021, we performed a follow-up in-depth review of hotel loans$1.0 million and greater, all non-pass grade exposures greater than$500,000 and a comprehensive review of loans with a low pass risk grade known to be impacted by the COVID-19 pandemic. During the second quarter of 2021, we again performed a follow-up in-depth review of hotel loans$1.0 million and greater and all non-pass grade exposures greater than$500,000 . We intend to continue our very disciplined level of re-risk grading the hotel portfolio and our focus on COVID-impacted low pass graded loans throughout the remainder of 2021. Additionally throughout 2020 and into the first half of 2021 in response to the pandemic, we adjusted our business practices, including restricting employee travel, encouraging employees to work from home where possible, offering, untilApril 2021 , drive-thru only service at certain of our locations with specific needs facilitated by appointment, implementing social distancing guidelines within our offices and continuing to hold regular meetings of our pandemic response team. Many of these measures remain in place due to the continued prevalence of the virus, though, inApril 2021 , we began re-opening our customer locations and bringing employees back into the office with a phased approach. As ofSeptember 1, 2021 , our phased approach should be complete with substantially all employees back in offices barring no change to circumstances surrounding the virus or its variants in our markets. As ofJuly 13, 2021 , under the Paycheck Protection Program, we had submitted applications and received funding of approximately$3.4 billion , of which, approximately$2.0 billion had received forgiveness or had been paid down as of that date. We believe that we were effective in each round of the PPP in assisting the small businesses in our markets that have been, and in certain cases continue to be, impacted by the pandemic. Inclusive of fees from the SBA, our yield on PPP loans during the three and six months endedJune 30, 2021 were 5.47% and 4.98%, respectively. As a result of the pandemic, we also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers. This program allowed for a deferral of principal and/or interest payments for 90 days, which may have been extended for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. For borrowers requiring a longer-term modification following the short-term loan modification program, we worked with eligible borrowers to modify such loans under Section 4013 of the CARES Act. The outstanding balance atJune 30, 2021 of loans which have received these Section 4013 modifications was approximately$817.4 million compared to approximately$825.6 million atDecember 31, 2020 . We continue to believe our response to the pandemic has allowed and continues to allow us to appropriately support our associates and clients and their communities. The COVID-19 pandemic along with the implementation of CECL contributed to an increased provision for credit losses in 2020 and an extended duration of economic disruption resulting from the virus could lead to increased net charge-offs and further elevated levels of provisioning expense. We continue to monitor the impact of COVID-19 and the effect new variants or mutations may have, the administration, efficacy and public acceptance of COVID-19 vaccines, the effects of the 36 -------------------------------------------------------------------------------- Table of Cont e n t s CARES Act, Coronavirus Relief Act, American Relief Act and the prospects for additional fiscal stimulus programs closely. Accordingly, the COVID-19 pandemic continues to impact our operations and the operations of certain of our customers, though in the second quarter of 2021 the impact appeared to be lessening as the average number of cases, hospitalizations and deaths in most of our markets continued to be below the levels experienced at the height of the pandemic, and the number of residents in our markets that have been vaccinated against the virus continued to rise and economic activity increased; however, our ability and the ability of our customers to recover from the pandemic remains uncertain and will depend on continued decline in the severity of COVID-19 and emergence of other variants of the virus in our markets (including the Delta variant) and government responses thereto, as well as continued improvement in economic conditions in those markets.
Overview
Our diluted net income per common share for the three and six months endedJune 30, 2021 was$1.69 and$3.30 , respectively, compared to$0.83 and$1.20 , respectively, for the same periods in 2020. AtJune 30, 2021 , loans increased to$22.9 billion , as compared to$22.4 billion atDecember 31, 2020 , and total deposits increased to$28.2 billion atJune 30, 2021 from$27.7 billion atDecember 31, 2020 . Results of Operations. Our net interest income increased to$233.2 million and$456.1 million , respectively, for the three and six months endedJune 30, 2021 compared to$200.7 million and$394.2 million , respectively, for the same periods in the prior year, representing an increase of$32.5 million and$61.9 million , respectively. For the three and six months endedJune 30, 2021 when compared to the comparable periods in 2020, this increase was largely the result of lower cost of funds, the impact of both interest and fees related to PPP loans and our pay down of a portion of the additional liquidity we acquired in 2020 in response to the economic uncertainty resulting from the COVID-19 pandemic, as well as organic loan growth when comparing the comparable periods. The net interest margin (the ratio of net interest income to average earning assets) for the three and six months endedJune 30, 2021 was 3.08% and 3.05%, respectively, compared to 2.87% and 3.06%, respectively, for the same periods in 2020 and reflects the impact of loans made and fees recognized pursuant to the PPP and our acquisition and subsequent pay down 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. Our provision for credit losses was$2.8 million and$10.1 million , respectively, for the three and six months endedJune 30, 2021 compared to$68.3 million and$168.2 million , respectively, for the same periods in 2020. The decrease in provision expense in the first and second quarters of 2021 as compared to the same periods in 2020 is primarily due to improvements in current and projected economic conditions throughJune 30, 2021 , as compared to the economic deterioration that occurred or was anticipated during the first six months of 2020 as a result of COVID-19. Also contributing to the provision expense for the three and six months endedJune 30, 2021 were net charge-offs totaling$10.0 million and$21.4 million , respectively, compared to$5.4 million and$15.5 million , respectively, for the same periods in 2020. AtJune 30, 2021 , our allowance for credit losses as a percentage of total loans, inclusive of PPP loans, was 1.20% compared to 1.27% atDecember 31, 2020 . The decrease in the allowance for credit losses is largely the result of improvements in the macroeconomic forecasts utilized by our CECL models to estimate future credit losses. Noninterest income increased by$25.3 million , or 34.6%, and$47.6 , or 33.2%, respectively, during the three and six months endedJune 30, 2021 compared to the same periods in 2020. The growth in noninterest income was in large part attributable to an increase in income from our equity method investment in BHG of$14.9 million , or 86.4%, and$28.2 , or 86.0%, respectively, during the three and six months endedJune 30, 2021 compared to the same periods in the prior year as well as an increase in wealth management revenues which were$16.5 million and$32.6 million , respectively, for the three and six months endedJune 30, 2021 compared to$12.2 million and$28.8 million , respectively, in the same periods in the prior year. These increases were offset by a decline in gains on mortgage loans sold, net, which decreased by$12.9 million and$7.8 million , respectively, for the three and six months endedJune 30, 2021 as compared to the same periods in the prior year as rate environment fluctuations and declines in housing inventory in our markets negatively impacted originations. Additionally, we had$366,000 in net gains on sales of securities, respectively, during both the three and six months endedJune 30, 2021 compared to$128,000 in net losses and$335,000 in net gains, respectively, in the same periods in the 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 endedJune 30, 2021 by$16.5 million and$22.1 million , respectively, when compared to the same periods in the prior year. This increase is largely the result of significant gains in the value of other equity investments which are up due to updated market valuations for certain of these investments as well as increases in SBA loan sales revenue which is up due to increased volumes and premiums which are at historically high levels for these types of loan sales. Noninterest expense increased by$34.5 million , or 26.2%, and$51.9 million , or 19.3%, respectively, during the three and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 . Impacting noninterest expense for the three and six months endedJune 30, 2021 as compared to the same prior year periods was a$36.9 million and$59.2 million , respectively, increase 37 -------------------------------------------------------------------------------- Table of Cont e n t s in salaries and employee benefits. The change in salaries and employee benefits was primarily the result of the accrual at above-target levels for both our cash and equity incentive plans during the three and six months endedJune 30, 2021 versus an accrual at below-target payout under such plans during the same periods in 2020. Also impacting salaries and employee benefits was an increase in our associate base in 2021 versus 2020 as well as annual merit increases effective inJanuary 2021 . Additionally, noninterest expense in the three and six months endedJune 30, 2020 was impacted by lending related costs related to an increase in our off-balance sheet reserves. The higher level of expense related to off-balance sheet reserves is due to the effect that macroeconomic factors impacted by the COVID-19 pandemic had on our CECL models during the three and six months endedJune 30, 2020 subsequent to the implementation of CECL effectiveJanuary 1, 2020 . No such additional expense related to off-balance sheet reserves was recorded in the first six months of 2021. Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 50.1% and 49.6%, respectively, for the three and six months endedJune 30, 2021 compared to 48.1% and 50.0%, respectively, for the same periods in 2020. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue. During the three and six months endedJune 30, 2021 , we recorded income tax expense of$30.7 million and$58.9 million , respectively, compared to$11.2 million and$9.6 million , respectively, for the three and six months endedJune 30, 2020 . Our effective tax rate for the three and six months endedJune 30, 2021 was 18.9% and 18.6%, respectively, compared to 15.2% and 9.5%, respectively, for the three and six months endedJune 30, 2020 . Our tax expense in the first six months of 2020 was impacted by the increased provision for credit losses we recorded during that time period as discussed above, a portion of which was recorded as a discrete item of total income tax in the first quarter of 2020. Our tax rate in each period was also impacted by the vesting and exercise of equity-based awards previously granted under our equity-based compensation program, resulting in the recognition of tax benefits of$302,000 and$1.9 million , respectively, for the three and six months endedJune 30, 2021 compared to tax expense of$272,000 and a tax benefit of$590,000 , respectively, for the three and six months endedJune 30, 2020 . Financial Condition. Loans increased$473.4 million , or 2.1%, during the six months endedJune 30, 2021 , when compared toDecember 31, 2020 . The increase is primarily the result of loans made to borrowers that principally operate or are located in our core markets, increases in the number of relationship advisors we employ and continued focus on attracting new customers to our company offset in part by a decrease in the number of PPP loans in our portfolio as these loans are paid down or forgiven by the SBA. Total deposits were$28.2 billion atJune 30, 2021 , compared to$27.7 billion atDecember 31, 2020 , an increase of$512.0 million , or 1.8%. Deposit growth during the period was likely aided by our clients' continued desire to hold onto liquidity as they support their businesses through the continued economic uncertainty as a result of the COVID-19 pandemic, proceeds from the PPP and other government stimulus programs not yet deployed and current stock market conditions, but was also due in part to our intentional emphasis on gathering low-cost core deposits during both periods. Capital and Liquidity. AtJune 30, 2021 andDecember 31, 2020 , our capital ratios, including our bank's capital ratios, exceeded regulatory minimum capital requirements and those necessary to be considered well-capitalized under applicable federal regulations. See Note 10. Regulatory Matters in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q for additional information regarding our capital ratios. From time to time we may be required to support the capital needs of our bank (Pinnacle Bank). AtJune 30, 2021 , we had approximately$263.5 million of cash at the parent company that could be used to support our bank. 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$217.1 million . The net proceeds were retained atPinnacle Financial and the remaining portion thereof is 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, such as a subordinated debt offering or entering into a new revolving credit facility with another financial institution. We also periodically evaluate capital markets conditions to identify opportunities to access those markets if necessary or prudent to support our capital levels. During the quarter endedMarch 31, 2020 , we repurchased approximately 1.0 million shares of our common stock at an aggregate cost of$50.8 million under our previously authorized share repurchase agreement. Our last purchase of shares of our common stock under the prior share repurchase program occurred onMarch 19, 2020 , as we suspended the program due to uncertainty surrounding the COVID-19 pandemic and it remained suspended until its expiration onDecember 31, 2020 . OnJanuary 19, 2021 , our board of directors authorized a share repurchase program for up to$125.0 million of our outstanding common stock. The authorization for this program will remain in effect throughMarch 31, 2022 . We did not repurchase any shares under our current share repurchase program during the six months endedJune 30, 2021 . 38 -------------------------------------------------------------------------------- Table of Cont e n t s Critical Accounting Estimates The accounting principles we follow and our methods of applying these principles conform withU.S. GAAP and with general practices within the banking industry. OnJanuary 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. There have been no other significant changes to our Critical Accounting Estimates as described in our Form 10-K.
Selected Financial Information
The following is a summary of certain financial information for the three and
six month periods ended
Three Months Ended Six Months Ended
June 30, 2021 - 2020 Percent June 30, 2021 - 2020 Percent
2021 2020 Increase (Decrease) 2021 2020 Increase (Decrease)
Income Statement:
Interest income $ 259,236 $ 251,738 3.0 % $ 511,153 $ 514,807 (0.7) %
Interest expense 26,011 51,081 (49.1) % 55,058 120,598 (54.3) %
Net interest income 233,225 200,657 16.2 % 456,095 394,209 15.7 %
Provision for credit losses 2,834 68,332 (95.9) % 10,069 168,221 (94.0) %
Net interest income after provision for
credit losses 230,391 132,325 74.1 % 446,026 225,988 97.4 %
Noninterest income 98,207 72,954 34.6 % 190,916 143,331 33.2 %
Noninterest expense 166,140 131,605 26.2 % 320,836 268,954 19.3 %
Net income before income taxes 162,458 73,674 > 100% 316,106 100,365 > 100%
Income tax expense 30,668 11,230 > 100% 58,888 9,565 > 100%
Net income 131,790 62,444 > 100% 257,218 90,800 > 100%
Preferred stock dividends (3,798) - 100.0 % (7,596) - 100.0 %
Net income available to common shareholders
> 100% $ 249,622 $ 90,800 > 100%
Per Share Data:
Basic net income per common share $ 1.70 $ 0.83 > 100% $ 3.31 $ 1.20 > 100%
Diluted net income per common share $ 1.69 $ 0.83 > 100% $ 3.30 $ 1.20 > 100%
Performance Ratios:
Return on average assets (1) 1.46 % 0.77 % 89.6 % 1.44 % 0.60 % > 100%
Return on average shareholders' equity (2) 10.19 % 5.58 % 82.6 % 10.07 % 4.10 % > 100%
Return on average common shareholders'
equity (3) 10.65 % 5.66 % 88.2 % 10.53 % 4.12 % > 100%
June 30,
2021 December 31, 2020
Balance Sheet:
Loans, net of allowance for credit losses $ 22,624,188 $ 22,139,451 2.2%
Deposits $ 28,217,603 $ 27,705,575 1.8%
(1) Return on average assets is the result of net income available to common
shareholders for the reported period on an annualized basis, divided by average
assets for the period.
(2) Return on average shareholders' equity is the result of net income available
to common shareholders for the reported period on an annualized basis, divided
by average shareholders' equity for the period.
(3) Return on average common shareholders' equity is the result of net income
available to common shareholders for the reported period on an annualized basis,
divided by average common shareholders' equity for the period.
39--------------------------------------------------------------------------------
Table of Cont e n t s
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$233.2 million and$456.1 million , respectively, for the three and six months endedJune 30, 2021 compared to$200.7 million and$394.2 million , respectively, for the same periods in the prior year, representing increases of$32.6 million and$61.9 million , respectively. For the three and six months endedJune 30, 2021 when compared to the comparable periods in 2020, this increase was largely the result of lower cost of funds, the impact of both interest and fees related to the PPP and our pay down of a portion of the additional liquidity we acquired in 2020 in response to the economic uncertainty resulting from the COVID-19 pandemic as well as organic loan growth during the comparable periods offset in part by yield compression in our earning asset portfolio. The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three and six months endedJune 30, 2021 and 2020 (dollars in thousands): Three Months Ended Three Months Ended June 30, 2021 June 30, 2020 Average Balances Interest Rates/ Yields Average Balances Interest Rates/ Yields Interest-earning assets: Loans (1)(2)$ 23,179,803 $ 232,788 4.11 %$ 22,257,168 $ 226,281 4.16 % Securities: Taxable 2,581,063 8,359 1.30 % 2,157,081 9,589 1.79 % Tax-exempt (2) 2,455,723 16,546 3.25 % 2,037,730 14,596 3.44 % Federal funds sold and other 3,143,078 1,543 0.20 % 2,618,832 1,272 0.20 % Total interest-earning assets 31,359,667$ 259,236 3.42 % 29,070,811$ 251,738 3.58 % Nonearning assets Intangible assets 1,859,170 1,868,231 Other nonearning assets 1,834,935 1,846,349 Total assets$ 35,053,772 $ 32,785,391 Interest-bearing liabilities: Interest-bearing deposits: Interest checking 5,453,520 2,407 0.18 % 4,639,729 4,256 0.37 % Savings and money market 11,288,119 5,658 0.20 % 9,181,266 8,904 0.39 % Time 2,771,555 5,796 0.84 % 4,554,027 20,567 1.82 % Total interest-bearing deposits 19,513,194 13,861 0.28 % 18,375,022 33,727 0.74 % Securities sold under agreements to repurchase 173,268 56 0.13 % 191,084 94 0.20 % Federal Home Loan Bank advances 888,184 4,501 2.03 % 2,213,769 9,502 1.73 % Subordinated debt and other borrowings 674,162 7,593 4.52 % 706,657 7,758 4.42 % Total interest-bearing liabilities 21,248,808 26,011 0.49 % 21,486,532 51,081 0.96 % Noninterest-bearing deposits 8,500,465 - 0.00 % 6,432,010 - 0.00 % Total deposits and interest-bearing liabilities 29,749,273$ 26,011 0.35 % 27,918,542$ 51,081 0.74 % Other liabilities 264,891 367,411 Stockholders' equity 5,039,608 4,499,438
Total liabilities and stockholders' equity
$ 32,785,391 Net interest income$ 233,225 $ 200,657 Net interest spread (3) 2.93 % 2.62 % Net interest margin (4) 3.08 % 2.87 % (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$7.9 million of taxable equivalent income for the three months endedJune 30, 2021 compared to$6.9 million for the three months endedJune 30, 2020 . The tax-exempt benefit has been reduced by the projected impact of tax-exempt income that will be disallowed pursuant toIRS Regulations as of and for the period presented. 40 -------------------------------------------------------------------------------- Table of Cont e n t s (3) Yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. The net interest spread calculation excludes the impact of demand deposits. Had the impact of demand deposits been included, the net interest spread for the three months endedJune 30, 2021 would have been 3.07% compared to a net interest spread of 2.84% for the three months endedJune 30, 2020 . (4) Net interest margin is the result of annualized net interest income calculated on a tax-equivalent basis divided by average interest-earning assets for the period. Six Months Ended Six Months Ended June 30, 2021 June 30, 2020 Average Balances Interest Rates/ Yields Average Balances Interest Rates/ Yields Interest-earning assets: Loans (1)(2)$ 23,014,861 $ 460,160 4.11 %$ 21,133,228 $ 462,701 4.48 % Securities: Taxable 2,427,050 16,087 1.34 % 2,040,855 19,857 1.96 % Tax-exempt (2) 2,425,501 32,044 3.20 % 1,963,822 28,420 3.47 % Federal funds sold and other 3,249,050 2,862 0.18 % 1,713,314 3,829 0.45 % Total interest-earning assets 31,116,462$ 511,153 3.41 % 26,851,219$ 514,807 3.96 % Nonearning assets Intangible assets 1,860,272 1,869,147 Other nonearning assets 1,880,809 1,791,150 Total assets$ 34,857,543 $ 30,511,516 Interest-bearing liabilities: Interest-bearing deposits: Interest checking 5,459,919 5,007 0.18 % 4,192,505 12,723 0.61 % Savings and money market 11,304,640 12,371 0.22 % 8,639,407 29,339 0.68 % Time 2,990,753 13,951 0.94 % 4,315,462 42,363 1.97 % Total interest-bearing deposits 19,755,312 31,329 0.32 % 17,147,374 84,425 0.99 % Securities sold under agreements to repurchase 158,509 128 0.16 % 166,138 209 0.25 % Federal Home Loan Bank advances 911,295 8,995 1.99 % 2,121,828 19,909 1.89 % Subordinated debt and other borrowings 673,913 14,606 4.37 % 690,036 16,055 4.68 % Total interest-bearing liabilities 21,499,029 55,058 0.52 % 20,125,376 120,598 1.21 % Noninterest-bearing deposits 8,062,995 - 0.00 % 5,595,869 - 0.00 % Total deposits and interest-bearing liabilities 29,562,024$ 55,058 0.38 % 25,721,245$ 120,598 0.94 % Other liabilities 298,649 331,975 Stockholders' equity 4,996,870 4,458,296
Total liabilities and stockholders' equity
$ 30,511,516 Net interest income$ 456,095 $ 394,209 Net interest spread (3) 2.89 % 2.76 % Net interest margin (4) 3.05 % 3.06 % (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$15.2 million of taxable equivalent income for the six months endedJune 30, 2021 compared to$14.0 million for the six months endedJune 30, 2020 . The tax-exempt benefit has been reduced by the projected impact of tax-exempt income that will be disallowed pursuant toIRS Regulations as of and for the 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 endedJune 30, 2021 would have been 3.04% compared to a net interest spread of 3.02% for the six months endedJune 30, 2020 . (4) Net interest margin is the result of annualized net interest income calculated on a tax-equivalent basis divided by average interest-earning assets for the period. For the three and six months endedJune 30, 2021 , our net interest margin was 3.08% and 3.05%, respectively, compared to 2.87% and 3.06%, respectively, for the same periods in 2020. Our net interest margin for the three and six months endedJune 30, 2021 reflects the impact of loans made, and fees recognized, pursuant to the PPP and our acquisition and subsequent pay down of additional on-balance sheet liquidity as noted above, the continued historically low levels for short-term interest rates, declining levels of positive impact from purchase 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 portfolio due to a historically low macroeconomic interest rate environment, the result of a 150 basis points reduction in the federal funds rate inMarch 2020 . During the three and six months endedJune 30, 2021 , our earning asset yield decreased by 16 basis points and 55 basis points, respectively, from 41 -------------------------------------------------------------------------------- Table of Cont e n t s the same periods in the prior year. Our total funding rates decreased by 39 basis points and 56 basis points during the three and six months endedJune 30, 2021 , respectively, compared to the same periods in the prior year. We continue to deploy various asset liability management strategies to manage our risk to interest rate fluctuations. 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 believe this challenging competitive environment will continue throughout the remainder of 2021, even during a time of economic uncertainty due to COVID-19. Our strategy of adding additional on-balance sheet liquidity to aid in managing through the early uncertainties of COVID-19, as well as the meaningful increase in core deposit inflows we experienced in 2020 and the first half of 2021 has and will continue to negatively impact the net interest margin until on-balance sheet liquidity returns to more normalized levels. Provision for Credit Losses. The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management's evaluation, is adequate to provide coverage for all expected credit losses. The provision for credit losses amounted to$2.8 million and$10.1 million , respectively, for the three and six months endedJune 30, 2021 compared to$68.3 million and$168.2 million , respectively, for the three and six months endedJune 30, 2020 . Provision expense is impacted by growth in our loan portfolio, recent historical and projected future economic conditions, our internal assessment of the credit quality of the loan portfolio, and net charge-offs. The lower provision expense during the first six months of 2021 as compared to the first six months of 2020 is the result of improvements in the current and projected economic conditions as compared to the economic deterioration which occurred during the first six months of 2020 related to the COVID-19 pandemic. Also contributing to provision expense in all periods are net charge-offs, which totaled$10.0 million and$21.4 million , respectively, for the three and six months endedJune 30, 2021 compared to$5.4 million $15.5 million , respectively, for the same periods in 2020. Noninterest Income. Our noninterest income is composed of several components, some of which vary significantly between quarterly and annual periods. Service charges on deposit accounts and other noninterest income generally reflect customer growth trends, while fees from our wealth management departments, gains on mortgage loans sold, gains and losses on the sale of securities and gains or losses related to our efforts to mitigate risks associated with interest rate volatility will often reflect financial market conditions or our asset/liability management efforts and fluctuate from period to period.
The following is a summary of our noninterest income for the three and six
months ended
Three Months Ended Six Months Ended
June 30, 2021 - 2020 June 30, 2021 - 2020
Increase Increase
2021 2020 (Decrease) 2021 2020 (Decrease)
Noninterest income:
Service charges on deposit accounts $ 8,906 $ 6,910 28.9% $ 17,213 $ 15,942 8.0%
Investment services 8,997 5,971 50.7% 17,188 15,210 13.0%
Insurance sales commissions 2,406 2,231 7.8% 5,631 5,471 2.9%
Gains on mortgage loans sold, net 6,700 19,619 (65.8)% 20,366 28,202 (27.8)%
Investment gains (losses) on sales of
securities, net 366 (128) >100% 366 335 9.3%
Trust fees 5,062 3,958 27.9% 9,749 8,128 19.9%
Income from equity method investment 32,071 17,208 86.4% 61,021 32,800 86.0%
Other noninterest income:
Interchange and other consumer fees 14,136 8,323 69.8% 26,728 18,292 46.1%
Bank-owned life insurance 4,743 4,726 0.4% 9,469 9,378 1.0%
Loan swap fees 985 614 60.4% 1,888 2,801 (32.6)%
SBA loan sales 3,834 941 > 100% 5,689 2,282 > 100%Gains (losses) on other equity investments 6,956 (278) > 100%
10,396 (452) > 100%
Other noninterest income 3,045 2,859 6.5% 5,212 4,942 5.5%
Total other noninterest income 33,699 17,185 96.1% 59,382 37,243 59.4%
Total noninterest income $ 98,207 $ 72,954 34.6% $ 190,916 $ 143,331 33.2%
The increase in service charges on deposit accounts in the three and six months
ended June 30, 2021 compared to the three and six months ended June 30, 2020
relates to an increase in analysis fees, including fee waivers, and increased
transaction volumes in commercial checking accounts which we believe is the
result of the increased economic activity in our markets from the closures that
were the result of the COVID-19 pandemic.
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Table of Cont e n t s
Income from our wealth management groups (investments, insurance and trust) is also included in noninterest income. For the three and six months endedJune 30, 2021 , commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, and fees from our wealth advisory group,PNFP Capital Markets, Inc. , increased by$3.0 million and$2.0 million , respectively, when compared to the three and six months endedJune 30, 2020 . AtJune 30, 2021 and 2020, Pinnacle Asset Management was receiving commissions and fees in connection with approximately$6.3 billion and$4.5 billion , respectively, in brokerage assets. These fees increased$4.3 million during the six months endedJune 30, 2021 when compared to the six months endedJune 30, 2020 and were offset by a decline in investment advisory fees fromPNFP Capital Markets, Inc. which decreased$2.3 million for the six months endedJune 30, 2021 when compared to the six months endedJune 30, 2020 . Revenues from the sale of insurance products by our insurance subsidiaries for the three and six months endedJune 30, 2021 increased by$175,000 and$160,000 , respectively, compared to the same periods in the prior year. Included in insurance revenues for the six months endedJune 30, 2021 was$927,000 of contingent income received in the first quarter of 2021 that was based on 2020 sales production and claims experience compared to$1.1 million recorded in the same period in the prior year. Additionally, atJune 30, 2021 , our trust department was receiving fees on approximately$3.6 billion of managed assets compared to$2.9 billion atJune 30, 2020 , reflecting organic growth and increased market valuations. We believe the change in our wealth management businesses during the three and six months endedJune 30, 2021 when compared to the comparable periods in 2020 is primarily attributable to market volatility resulting from the uncertainty surrounding the COVID-19 pandemic and its ongoing impact. 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$6.7 million and$20.4 million , respectively, for the three and six months endedJune 30, 2021 compared to$19.6 million and$28.2 million , respectively, for the same periods in the prior year. This decrease is the direct result of the fluctuations in the rate environment and the decrease in housing inventory in the markets we operate negatively impacting originations. 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. AtJune 30, 2021 , the mortgage pipeline included$180.8 million in loans expected to close in 2021 compared to$340.7 million in loans atJune 30, 2020 expected to close in 2020. 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 three and six months endedJune 30, 2021 ,$2.2 million of securities were sold for a net gain of$366,000 compared to the three and six months endedJune 30, 2020 , when we sold approximately$69.9 million and$100.1 million , respectively, of securities for a net loss of$128,000 and net gain of$335,000 , respectively. 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 throughoutthe 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$32.1 million and$61.0 million , respectively, for the three and six months endedJune 30, 2021 compared to$17.2 million and$32.8 million , respectively, for the same periods last year. Historically, BHG has sold the majority of the loans it originates to a network of bank purchasers through a combination of online auctions, direct sales and its direct purchase option. In 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, throughout 2020 and through the second quarter of 2021, sold more loans through its auction platform than we had previously anticipated and will likely continue to slow its transition to holding more loans on its balance sheet as the effects of COVID-19 are monitored. In the third quarter of 2020 and second quarter of 2021, BHG completed its first and second securitization issuances of approximately$160 million and$375 million , respectively, in notes backed by commercial and consumer loans on its balance sheet to provide additional funding. Income from equity-method investment is recorded net of amortization expense associated with customer lists and other intangible assets of$188,000 and$376,000 , respectively, for the three and six months endedJune 30, 2021 compared to$293,000 and$587,000 , respectively, for the three and six months endedJune 30, 2020 . AtJune 30, 2021 , there were$7.2 million of these intangible assets that are expected to be amortized in lesser amounts over the next 14 years. Also included in income from equity-method investment is accretion income associated with the fair valuation of certain of BHG's liabilities of$395,000 and$846,000 , respectively, for the three 43 -------------------------------------------------------------------------------- Table of Cont e n t s and six months endedJune 30, 2021 , compared to$541,000 and$1.1 million , respectively, for the three and six months endedJune 30, 2020 . AtJune 30, 2021 , there were$1.8 million of these liabilities that are expected to accrete into income in lesser amounts over the next five years. During the three and six months endedJune 30, 2021 ,Pinnacle Financial and Pinnacle Bank received$39.4 million and$49.4 million , respectively, in dividends from BHG in the aggregate. During the three months endedJune 30, 2020 ,Pinnacle Financial and Pinnacle Bank received no dividends from BHG. During the six months endedJune 30, 2020 ,Pinnacle Financial and Pinnacle Bank received$8.0 million in dividends from BHG in the aggregate. Dividends from BHG during such periods reduced the carrying amount of our investment in BHG, while earnings from BHG during such periods increased the carrying amount of our investment in BHG. Profits from intercompany transactions are eliminated. Our proportionate share of earnings from BHG is included in our consolidated tax return. During the three and six months endedJune 30, 2021 , Pinnacle Bank purchased$50.3 million and$124.9 million , respectively, in loans from BHG at par pursuant to BHG's joint venture loan program whereby BHG and Pinnacle share proportionately in the credit risk of the acquired loans based on the rate on the loan and the rate of the purchase. The yield on this portfolio to Pinnacle Bank is anticipated to be 4.75% per annum. No loans were purchased from BHG by Pinnacle Bank for the three and six months endedJune 30, 2020 . For the three and six months endedJune 30, 2021 , BHG reported$179.0 million and$336.6 million , respectively, in revenues, net of substitution losses of$25.0 million and$53.5 million , respectively, compared to revenues of$92.8 million and$190.7 million , respectively, for the three and six months endedJune 30, 2020 , net of substitution losses of$28.1 million and$44.4 million , respectively. Earnings from BHG are likely to fluctuate from period-to-period. Approximately$127.5 million and$243.5 million , respectively, of BHG's revenues for the three and six months endedJune 30, 2021 related to gains on the sale of commercial loans compared to$67.3 million and$136.9 million , respectively, for the three and six months endedJune 30, 2020 . These loans have typically been sold by BHG with no recourse to a network of community banks and other financial institutions at a premium to the par value of the loan. 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. AtJune 30, 2021 and 2020, there were$4.0 billion and$3.2 billion , respectively, of these loans previously sold by BHG that were being actively serviced by BHG's network of bank purchasers. BHG, at its sole option, may also provide purchasers of these loans the ability to substitute the acquired loan with another more recently-issued BHG loan should the previously-acquired loan become at least 90-days past due as to its monthly payments. As a result, BHG maintained a liability as ofJune 30, 2021 and 2020 of$267.1 million and$229.3 million , respectively, that represents an estimate of the future inherent losses for the outstanding core portfolio that may be subject to future substitution due to payment default or loan prepayment. This liability represents 6.7% and 7.2%, respectively, of core product loans previously sold by BHG that remain outstanding as ofJune 30, 2021 and 2020, respectively. The decrease in this liability in the six months endedJune 30, 2021 compared to the period endedJune 30, 2020 was principally the result of a partial release of the reserve BHG recorded in 2020 related to the economic disruption associated with the COVID-19 pandemic which adversely impacted physician and dental practices in a material manner. In addition to these loans that BHG sells into its auction market, atJune 30, 2021 , BHG reported loans that remained on BHG's balance sheet totaling$1.6 billion compared to$839.3 million as ofJune 30, 2020 . A portion of these loans do not qualify for sale accounting and accordingly an offsetting secured borrowing liability has been recorded. AtJune 30, 2021 and 2020, BHG had$1.1 billion and$310.4 million , respectively, of secured borrowings associated with loans held for investment which did not qualify for sale accounting. AtJune 30, 2021 and 2020, BHG reported allowance for loan losses totaling$33.7 million and$9.5 million , respectively, with respect to the loans on its balance sheet. Interest income and fees amounted to$44.0 million and$78.6 million , respectively, for the three and six months endedJune 30, 2021 compared to$22.0 million and$46.1 million , respectively, for the three and six months endedJune 30, 2020 . Included in our other noninterest income are interchange and other consumer fees, gains from bank-owned life insurance, swap fees earned for the facilitation of derivative transactions for our clients, SBA loan sales, gains or losses on other equity investments and other noninterest income items. Interchange revenues increased 69.8% and 46.1%, respectively, during the three and six months endedJune 30, 2021 as compared to the same periods in 2020 due to increased debit and credit card transactions period-over-period and unused line fees during the first half of 2021 as compared to the same period in 2020. Other noninterest income included changes in the cash surrender value of bank-owned life insurance which was$4.7 million and$9.5 million , respectively, for each of the three and six months endedJune 30, 2021 compared to$4.7 million and$9.4 million , respectively, in the same periods in the prior year. The assets that support these policies are administered by the life insurance carriers and the income we recognize (i.e., increases or decreases in the cash surrender value of the policies) on these policies is dependent upon the crediting rates applied by the insurance carriers, which are subject to change at the discretion of the carriers, subject to any applicable floors. Earnings on these policies generally are not taxable. SBA loan sales are included in other noninterest income and increased by$2.9 million and$3.4 million , respectively, during the three and six months endedJune 30, 2021 when compared to the same periods in the prior year. The increase is due to increased volumes as well as historically high premiums. Additionally, the carrying values of other equity investments are 44 -------------------------------------------------------------------------------- Table of Cont e n t s 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 related to these investments increased$7.2 million and$10.8 million , respectively, during the three and six months endedJune 30, 2021 when compared to the same periods in the prior year, as a result of increased valuations with respect to certain investments. Loan swap fees increased by$371,000 and decreased by$913,000 , respectively, during the three and six months endedJune 30, 2021 as compared to the same periods in 2020 due primarily to a change in the volume of activity resulting from the current interest rate environment. The other components of other noninterest income increased only slightly during the three and six months endedJune 30, 2021 as compared to the same periods in 2020 and includes all other noninterest income not included in the above noted categories.
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
Three Months Ended Six Months Ended
June 30, 2021 - 2020 June 30, 2021 - 2020
Increase Increase
2021 2020 (Decrease) 2021 2020 (Decrease)
Noninterest expense:
Salaries and employee benefits:
Salaries $ 58,622 $ 54,645 7.3% $ 116,211 $ 106,821 8.8%
Commissions 5,452 3,611 51.0% 10,176 7,594 34.0%
Cash and equity incentives 31,293 4,824 >100% 54,934 15,104 >100%
Employee benefits and other 15,457 10,807 43.0% 32,231 24,848 29.7%Total salaries and employee benefits 110,824 73,887 50.0%
213,552 154,367 38.3%
Equipment and occupancy 23,321 22,026 5.9% 46,541 43,004 8.2%
Other real estate expense, net (657) 2,888 (>100%) (670) 5,303 (>100%)
Marketing and other business
development 2,652 2,142 23.8% 5,001 5,393 (7.3%)
Postage and supplies 2,115 2,070 2.2% 3,921 4,060 (3.4%)
Amortization of intangibles 2,167 2,479 (12.6%) 4,373 4,999 (12.5%)
Other noninterest expense:
Deposit related expense 7,041 5,677 24.0% 13,845 10,915 26.8%
Lending related expense 9,634 10,476 (8.0%) 17,416 22,544 (22.7%)
Wealth management related expense 509 499 2.0% 945 1,057 (10.6%)
Other noninterest expense 8,534 9,461 (9.8%) 15,912 17,312 (8.1%)
Total other noninterest expense 25,718 26,113 (1.5%) 48,118 51,828 (7.2%)
Total noninterest expense $ 166,140 $ 131,605 26.2% $ 320,836 $ 268,954 19.3%
Total salaries and employee benefits expenses increased $36.9 million and $59.2
million , respectively, for the three and six months ended June 30, 2021 compared
to the same periods in 2020. The change in salaries and employee benefits was
the largely the result of the accrual of our cash and equity incentive plans at
above-target levels during the three and six months ended June 30, 2021 compared
to an accrual at below-target levels due to the effects of COVID-19 on our
anticipated earnings and performance during the same periods in the prior year.
Also impacting salaries and employee benefits was an increase in our associate
base in 2021 versus 2020 as well as annual merit increases effective in January
2021 . Our associate base increased to 2,706.0 full-time equivalent associates at
June 30, 2021 from 2,577.5 at June 30, 2020 . We expect salary and benefit
expenses will rise in 2021 compared to 2020 as we continue our focus on hiring
experienced bankers in all of our markets, particularly if we continue to accrue
cash and equity incentives at above-target payout based on anticipated earnings
and performance in 2021.
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 2021 annual cash
incentive plan, the targeted level of incentive payments requires achievement of
a certain soundness threshold and a targeted level of quarterly pre-tax,
pre-provision net revenue (PPNR) and annual earnings per common share (subject
to certain adjustments). To the extent that the soundness threshold is met and
PPNR and earnings per common share are above or below the targeted amount, the
aggregate incentive payments are increased or decreased. Historically, we have
paid between 0% and 125% of our targeted incentives.
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Table of Cont e n t s
For 2021, maximum payouts under the plan could reach 160% of target. Through the
second quarter of 2021, we have accrued incentive costs for the cash incentive
plan in 2021 at maximum payout of our targeted awards.
Also included in employee benefits and other expense for the three and six
months ended June 30, 2021 were approximately $5.7 million and $11.1 million ,
respectively, of compensation expenses related to equity-based awards for
restricted shares, restricted stock unit and performance stock unit awards,
compared to $4.1 million and $9.6 million , respectively, for the three and six
months ended June 30, 2020 . 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, 2021 changed only modestly when compared to the three and six
months ended June 30, 2020 . Our compensation expense associated with equity
awards with time-based vesting criteria is likely to continue to increase during
the remainder of 2021 when compared to 2020 as a result of the increased number
of associates and our intention to hire additional experienced financial
advisors. Compensation expense associated with our performance-based vesting
awards will continue to be impacted by our performance in 2021 and will likely
be higher than the comparable prior year period during the remainder of 2021 as
beginning in the second quarter of 2020 and for the remainder of the year we
accrued for those awards at below-target levels. Through the first six months of
2021, we have accrued for those awards at above-target levels.
Employee benefits and other expenses were $15.5 million and $32.2 million ,
respectively, for the three and six months ended June 30, 2021 compared to $10.8
million and $24.8 million , respectively, for the three and six months ended June
30, 2020 and include costs associated with our 401k plan, health insurance and
payroll taxes. These costs fluctuate based on changes in our associate base and
the level of participation in these programs by our associates. Costs associated
with our health insurance and 401k plan programs increased $2.8 million and $4.8
million , respectively, in the aggregate during the three and six months ended
June 30, 2021 when compared to the same periods in 2020.
Equipment and occupancy expenses for the three and six months ended June 30,
2021 were $23.3 million and $46.5 million , respectively, compared to $22.0
million and $43.0 million , respectively, for the three and six months ended June
30, 2020 . These costs were generally consistent between periods. We expect to
incur additional costs in future periods as we continue to enhance both our
current locations and our technology infrastructure. During the first half of
2021, two new office locations were opened, one in the North Carolina market and
the other in the Middle Tennessee market. Additionally, during the second
quarter of 2021, we announced our intention to move our corporate headquarters
to a newly announced office tower in Nashville , where we will be a founding
partner and sponsor of the project. This move is currently planned for 2025 and
will impact equipment and occupancy costs as we plan for this move.
Other real estate income and expenses, net, for the three and six months ended
June 30, 2021 was income of $657,000 and $670,000 , respectively, as compared to
expenses of $2.9 million and $5.3 million , respectively, for the same periods in
the prior year. Included in the three and six months ended June 30, 2020 were
writedowns of previously foreclosed upon properties to market value based on
updated appraisals obtained during that same time period of $3.2 million and
$5.4 million , respectively.
Marketing and business development expense for the three and six months ended
June 30, 2021 was $2.7 million and $5.0 million , respectively, compared to $2.1
million and $5.4 million , respectively, for the three and six months ended June
30, 2020 . The primary source of both the increase for the three months ended
June 30, 2021 and the decrease for the six months ended June 30, 2021 as
compared to the same periods in 2020 is the result of limited in-person client
meetings and business development expenses that began at the end of the first
quarter of 2020 and continued through the first quarter of 2021 as a result of
the restrictions resulting from the COVID-19 pandemic. As was the case for many
companies, as we began to see more restrictions lift in the second quarter of
2021 in our markets, marketing and business development expense began to
correspondingly increase. We expect these costs to rise modestly and return to
more normalized levels through the second half of 2021 taking into account
anticipated increases associated with the associates we have hired over the last
eighteen months.
Intangible amortization expense was $2.2 million and $4.4 million , respectively,
for the three and six months ended June 30, 2021 compared to $2.5 million and
$5.0 million , respectively, for the same periods in 2020. The following table
outlines our amortizing intangible assets, their initial valuation and
amortizable lives at June 30, 2021 :
Initial Amortizable
Year Valuation Life Remaining Value
acquired (in millions) (in years) (in millions)
Core Deposit Intangible:
CapitalMark 2015 $ 6.2 7 $ 0.1
Magna Bank 2015 3.2 6 0.1
Avenue 2016 8.8 9 1.8
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Table of Cont e n t s
Initial Amortizable
Year Valuation Life Remaining Value
acquired (in millions) (in years) (in millions)
BNC 2017 48.1 10 22.9
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 1.1
Advocate Capital 2019 13.6 13 9.2
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
Other noninterest expenses, which consists primarily of deposit, lending, wealth management and administrative expenses decreased by$395,000 and$3.7 million , respectively, for the three and six months endedJune 30, 2021 when compared to the three and six months endedJune 30, 2020 . Deposit related expense increased by$1.4 million and$2.9 million , respectively, during the three and six months endedJune 30, 2021 when compared to the same periods in 2020 largely the result of increasedFDIC assessment costs primarily due to the firm's increased asset base. Lending-related expenses decreased$842,000 and$5.1 million , respectively, during the three and six months endedJune 30, 2021 when compared to the same periods in 2020. This decrease is primarily the result of the effect that macroeconomic factors related to the COVID-19 pandemic had on expenses related to the reserve for off-balance sheet credit losses during the three and six months endedJune 30, 2020 . As a result of improving economic conditions, we did not build additional reserves for off-balance sheet credit losses during the three and six months endedJune 30, 2021 . Other noninterest expenses decreased in the three and six months endedJune 30, 2021 as compared to the same periods in 2020 due to$2.9 million in FHLB prepayment penalties resulting from our prepayment of$392.5 million in FHLB borrowings during the second quarter of 2020. Wealth management related expenses remained relatively flat for the three and six months endedJune 30, 2021 when compared to the same periods in 2020. Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 50.1% and 49.6%, respectively, for the three and six months endedJune 30, 2021 compared to 48.1% and 50.0%, respectively, for the same periods in 2020. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue. The efficiency ratio for the three and six months endedJune 30, 2021 compared to the same periods in 2020 was impacted in part by increased noninterest expense during the periods as a result of increased salaries and employee benefits resulting from the accrual of our cash and equity incentives at above target levels during the quarter, a decrease in the amount of gains on mortgage loans sold and income from our equity method investment in BHG. Income Taxes. During the three and six months endedJune 30, 2021 , we recorded income tax expense of$30.7 million and$58.9 million , respectively, compared to$11.2 million and$9.6 million , respectively, for the three and six months endedJune 30, 2020 . Our effective tax rate for the three and six months endedJune 30, 2021 was 18.9% and 18.6%, respectively, compared 15.2% and 9.5%, respectively, for the three and six months endedJune 30, 2020 . 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 inTennessee'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-deductibleFDIC insurance premiums and non-deductible executive compensation. Our tax expense in the six months endedJune 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 and exercise of equity-based awards previously granted under our equity-based compensation program, resulting in the recognition of tax benefits of$302,000 and$1.9 million , respectively, for the three and six months endedJune 30, 2021 compared to tax expense of$272,000 and tax benefits of$590,000 , respectively, for the three and six months endedJune 30, 2020 .
Financial Condition
Our consolidated balance sheet atJune 30, 2021 reflects an increase in total loans outstanding to$22.9 billion compared to$22.4 billion atDecember 31, 2020 . Total deposits increased by$512.0 million betweenDecember 31, 2020 andJune 30, 2021 . Total assets were$35.4 billion atJune 30, 2021 compared to$34.9 billion atDecember 31, 2020 . 47
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Table of Cont e n t s
Loans. The composition of loans atJune 30, 2021 and atDecember 31, 2020 and the percentage (%) of each classification to total loans are summarized as follows (in thousands): June 30, 2021 December 31, 2020 Amount Percent Amount Percent Commercial real estate: Owner occupied$ 2,817,689 12.3 %$ 2,802,227 12.5 % Non-owner occupied 5,368,804 23.4 % 5,203,384 23.2 % Consumer real estate - mortgage 3,335,537 14.6 % 3,099,172 13.8 % Construction and land development 2,791,611 12.2 % 2,901,746 12.9 % Commercial and industrial 8,144,170 35.6 % 8,038,457 35.9 % Consumer and other 440,124 1.9 % 379,515 1.7 % Total loans$ 22,897,935 100.0 %$ 22,424,501 100.0 % AtJune 30, 2021 , our loan portfolio composition had changed modestly from the composition atDecember 31, 2020 principally as a result of the PPP loans, which are classified as commercial and industrial loans, though commercial real estate and commercial and industrial lending generally continue to make up the largest segments of our portfolio. AtJune 30, 2021 , approximately 34.4% of the outstanding principal balance of our commercial real estate loans was secured by owner-occupied commercial real estate properties, compared to 35.0% atDecember 31, 2020 . Owner occupied commercial real estate is similar in many ways to our commercial and industrial lending in that these loans are generally made to businesses on the basis of the cash flows of the business rather than on the valuation of the real estate. Additionally, the construction and land development loan segment continues to be a meaningful portion of our portfolio and reflects the development and growth of the local communities in which we operate and is diversified between commercial, residential and land. Banking regulations have established guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-owner occupied ratio of less than 300% of total risk-based capital. Should a bank's ratios be in excess of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by Pinnacle Bank's total risk-based capital. AtJune 30, 2021 , Pinnacle Bank's construction and land development loans as a percentage of total risk-based capital was 80.1% compared to 89.0% atDecember 31, 2020 . Construction and land development, non-owner occupied commercial real estate and multifamily loans as a percentage of total risk-based capital were 248.8% and 264.0% as ofJune 30, 2021 andDecember 31, 2020 , respectively. AtJune 30, 2021 , 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 atJune 30, 2021 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 (in thousands): Amounts at June 30, 2021 Percentage Percentage Fixed Variable Rates Rates Totals At June 30, 2021 At December 31, 2020 Based on contractual maturity: Due within one year$ 3,637,622 $ 1,163,598 $ 4,801,220 21.0% 18.6% Due in one year to five years 7,928,947 3,633,840 11,562,787 50.5% 54.4% Due after five years 4,843,502 1,690,426 6,533,928 28.5% 27.0% Totals$ 16,410,071 $ 6,487,864 $ 22,897,935 100.0% 100.0% Based on contractual repricing dates: Daily floating rate $ -$ 902,024 $ 902,024 4.0% 4.3% Due within one year 3,637,622 5,023,779 8,661,401 37.8% 37.7% Due in one year to five years 7,928,947 269,411 8,198,358 35.8% 37.7% Due after five years 4,843,502 292,650 5,136,152 22.4% 20.3% Totals$ 16,410,071 $ 6,487,864 $ 22,897,935 100.0% 100.0%
The above information does not consider the impact of scheduled principal payments.
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Table of Cont e n t s
Loans in Past Due Status. The following table is a summary of our loans that
were past due at least 30 days but less than 89 days and 90 days or more past
due as of June 30, 2021 and December 31, 2020 (in thousands):
June 30, December 31,
Loans past due 30 to 89 days: 2021 2020
Commercial real estate:
Owner occupied $ 2,203 $ 3,606
Non-owner occupied 2,031 6,946
Consumer real estate - mortgage 8,125 9,187
Construction and land development - 696
Commercial and industrial 4,636 26,079
Consumer and other 1,203 1,088
Total loans past due 30 to 89 days $
18,198
Loans past due 90 days or more: Commercial real estate: Owner occupied$ 997 $ 1,860 Non-owner occupied 1,966 3,861 Consumer real estate - mortgage 3,370 6,274 Construction and land development 135 736 Commercial and industrial 5,511 4,408 Consumer and other 286 304 Total loans past due 90 days or more $
12,265
Ratios:
Loans past due 30 to 89 days as a percentage of total loans 0.08 % 0.21 % Loans past due 90 days or more as a percentage of total loans 0.05 % 0.08 % Total loans in past due status as a percentage of total loans 0.13 % 0.29 % Potential Problem Loans. Potential problem loans, which are not included in nonperforming assets, amounted to approximately$169.3 million , or 0.7% of total loans atJune 30, 2021 , compared to$173.5 million , or 0.8% of total loans atDecember 31, 2020 . 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. Approximately$2.7 million of potential problem loans were past due at least 30 days but less than 90 days as ofJune 30, 2021 . Nonperforming Assets and Troubled Debt Restructurings. AtJune 30, 2021 , we had$62.7 million in nonperforming assets compared to$86.2 million atDecember 31, 2020 . Included in nonperforming assets were$53.1 million in nonaccrual loans and$9.6 million in OREO and other nonperforming assets atJune 30, 2021 and$73.8 million in nonaccrual loans and$12.4 million in OREO and other nonperforming assets atDecember 31, 2020 . AtJune 30, 2021 andDecember 31, 2020 , there were$2.4 million and$2.5 million , respectively, of troubled debt restructurings, all of which were accruing as of the restructured date and remain on accrual status. Section 4013 of the CARES Act and bank regulatory interagency guidance gave entities temporary relief from the accounting and disclosure requirements for TDRs indicating that a lender could conclude that the modifications are not a troubled debt restructuring if the borrower was less than 30 days past due as ofDecember 31, 2019 . We have followed the guidance under the CARES Act and the interagency guidance related to these loan modifications. AtJune 30, 2021 , we had approximately$817.4 million in loans modified under Section 4013 of the CARES Act, compared to approximately$825.6 million atDecember 31, 2020 . Allowance for Credit Losses on Loans (allowance). OnJanuary 1, 2020 , we adopted FASB ASU 2016-13, which introduced the current expected credit losses (CECL) methodology and required us to estimate all expected credit losses over the remaining life of our loan portfolio. Accordingly, the 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 ofJune 30, 2021 andDecember 31, 2020 , our allowance for credit losses was approximately$273.7 million and$285.1 million , respectively, which our management believed to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans, inclusive of PPP loans, was 1.20% atJune 30, 2021 , down from 1.27% atDecember 31, 2020 . No allowance for credit losses has been recorded for PPP loans as they are fully guaranteed by the SBA. 49 -------------------------------------------------------------------------------- Table of Cont e n t s The decrease in the allowance for credit losses is largely the result of the improvements in the macroeconomic forecast. Our CECL models rely largely on recent historical and projected future macroeconomic conditions to estimate future credit losses. Macroeconomic factors used in the model include the national unemployment rate, gross domestic product, the commercial real estate price index and certainU.S. Treasury interest rates. Projections of these macroeconomic factors, obtained from an independent third party, are utilized to predict quarterly rates of default. These macroeconomic factors experienced significant deterioration during the first six months of 2020, resulting in a significant increase in our allowance for credit losses during the same period. Though these factors improved during the second half of 2020 and through the first two quarters of 2021 resulting in a reduction in the level of our allowance, should they deteriorate in future periods our modeling may require increased levels of provision expense over those recorded during the three and six months endedJune 30, 2021 . Under the CECL methodology the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. AtJune 30, 2021 , reasonable and supportable periods of 18 months were utilized for all loan segments followed by a 12 month straight line reversion period to long term averages. The following table sets forth, based on management's estimate, the allocation of the allowance for credit losses to categories of loans as ofJune 30, 2021 andDecember 31, 2020 and the percentage of loans in each category to total loans (in thousands): June 30, 2021 December 31, 2020 Amount Percent Amount Percent Commercial real estate: Owner occupied$ 19,311 12.3 %$ 23,298 12.5 % Non-owner occupied 79,081 23.4 % 79,132 23.2 % Consumer real estate - mortgage 30,445 14.6 % 33,304 13.8 % Construction and land development 33,487 12.2 % 42,408 12.9 % Commercial and industrial 102,101 35.6 % 98,423 35.9 % Consumer and other 9,322 1.9 % 8,485 1.7 % Total allowance for credit losses on loans$ 273,747 100.0 %$ 285,050 100.0 % The following is a summary of changes in the allowance for credit losses on loans for the six months endedJune 30, 2021 and for the year endedDecember 31, 2020 and the ratio of the allowance for credit losses on loans to total loans as of the end of each period (in thousands): Six Months Ended Year ended June 30, 2021 December 31, 2020 Balance at beginning of period $ 285,050 $ 94,777 Impact of adopting ASC 326 - 38,102 Provision for credit losses on loans 10,062 191,542 Charged-off loans: Commercial real estate: Owner occupied (703) (2,598) Non-owner occupied (472) (546) Consumer real estate - mortgage (532) (3,478) Construction and land development (367) - Commercial and industrial (22,721) (38,718) Consumer and other loans (2,234) (3,993) Total charged-off loans (27,029) (49,333) Recoveries of previously charged-off loans: Commercial real estate: Owner occupied 1,078 1,317 Non-owner occupied 159 911 Consumer real estate - mortgage 913 1,493 Construction and land development 237 147 Commercial and industrial 1,851 4,540 Consumer and other loans 1,426 1,554 Total recoveries of previously charged-off loans 5,664 9,962 50
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Six Months Ended Year ended
June 30, 2021 December 31, 2020
Net charge-offs (21,365) (39,371)
Balance at end of period $
273,747
1.20 % 1.27 %
Ratio of net charge-offs to average total loans outstanding for the period (1)
0.19 % 0.18 %
(1) Net charge-offs for the year-to-date period ended
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 the loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off. Based upon our evaluation of the loan portfolio, we believe the allowance for credit losses to be adequate to absorb our estimate of expected future credit losses on loans outstanding atJune 30, 2021 . While our policies and procedures used to estimate the allowance for credit losses as well as the resultant provision for credit losses charged to operations are considered adequate by management, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, local real estate market or a particular industry or borrower which may negatively impact, materially, our asset quality and the adequacy of our allowance for credit losses and, thus, the resulting provision for credit losses. In particular, 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 in the markets in which we operate or additional variants of the virus become more wide-spread, 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$5.3 billion and$4.6 billion atJune 30, 2021 andDecember 31, 2020 , 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 atJune 30, 2021 andDecember 31, 2020 follows: June 30, 2021 December 31, 2020 Weighted average life 6.56 years 6.51 years Effective duration* 4.29% 4.35% Tax equivalent yield 2.25% 2.28% (*) 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 ofJune 30, 2021 andDecember 31, 2020 was 5.54% and 5.45%, respectively. Restricted Cash. Our restricted cash balances totaled approximately$155.3 million atJune 30, 2021 , compared to$223.8 million atDecember 31, 2020 . This restricted cash is maintained at other financial institutions as collateral primarily for our derivative portfolio. The decrease in restricted cash is attributable primarily to a decrease in collateral requirements on certain derivative instruments for which the fair value has increased. See Note 8. Derivative Instruments in the Notes to our Consolidated Financial Statements elsewhere in this Form 10-Q. Securities Purchased with Agreement to Resell. AtJune 30, 2021 we had$500.0 million in securities purchased in agreement to resell. This balance is the result of repurchase agreement transactions with financial institution counterparties. These investments deploy some of our liquidity position into an instrument that improves the return on those funds in the current low rate environment. Additionally, we believe it positions us more favorably for a potential rising interest rate environment in the future. During the three and six months endedJune 30, 3021 , we purchased$50.0 million and$500.0 million , respectively, of these types of securities. No securities were purchased with agreement to resell prior to 2021. Deposits and Other Borrowings. We had approximately$28.2 billion of deposits atJune 30, 2021 compared to$27.7 billion atDecember 31, 2020 . Our deposits consist of noninterest and interest-bearing demand accounts, savings accounts, money market accounts and time deposits. Additionally, we routinely enter into agreements with certain customers to sell certain securities under agreements to repurchase the security the following day. These agreements (which are typically associated with comprehensive treasury management programs for our clients and provide them with short-term returns for their excess funds) amounted to$177.7 million atJune 30, 2021 and$128.2 million atDecember 31, 2020 . Additionally, atJune 30, 2021 andDecember 31, 2020 , Pinnacle Bank had borrowed$888.3 million and$1.1 billion , respectively, in advances from theFederal Home Loan Bank of Cincinnati (FHLB). AtJune 30, 2021 , Pinnacle Bank had approximately$3.0 billion in additional availability with the FHLB; however, incremental borrowings are subject to applicable collateral requirements and are made in a formal request by Pinnacle Bank and the subsequent approval by the FHLB. 51
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Generally, we have classified our funding base as either core funding or noncore funding as shown in the table below. The following table represents the balances of our deposits and other funding and the percentage of each type to the total atJune 30, 2021 andDecember 31, 2020 : June 30, 2021 Percent December 31, 2020 Percent Core funding: Noninterest-bearing deposit accounts$ 8,926,200 29.8%$ 7,392,325 25.0% Interest-bearing demand accounts 4,106,264 13.7% 4,055,259 13.7% Savings and money market accounts 8,914,209 29.8% 8,303,911 28.1% Time deposit accounts less than$250,000 1,134,581 3.8% 1,295,765 4.4% Reciprocating demand deposit accounts (1) 966,023 3.2% 884,450 3.0% Reciprocating savings accounts (1) 1,586,361 5.3% 1,358,154 4.6% Reciprocating CD accounts (1) 224,001 0.7% 221,019 0.7% Total core funding 25,857,639 86.3% 23,510,883 79.5% Noncore funding: Relationship based noncore funding: Other time deposits 680,923 2.3% 722,609 2.4% Securities sold under agreements to repurchase 177,661 0.6% 128,164 0.4% Total relationship based noncore funding 858,584 2.9% 850,773 2.8% Wholesale funding: Brokered deposits 1,087,959 3.6% 2,186,844 7.4% Brokered time deposits 591,082 2.0% 1,285,239 4.3% Federal Home Loan Bank advances 888,304 3.0% 1,087,927 3.7% Paycheck Protection Program liquidity facility - -% - -% Subordinated debt and other funding 671,994 2.2% 670,575 2.3% Total wholesale funding 3,239,339 10.8% 5,230,585 17.7% Total noncore funding 4,097,923 13.7% 6,081,358 20.5% Totals$ 29,955,562 100.0%$ 29,592,241 100.0%
(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
As noted in the table above, our core funding as a percentage of total funding increased from 79.5% atDecember 31, 2020 to 86.3% atJune 30, 2021 , primarily as a result of the significant increase in deposits estimated to have been funded, in part, by PPP loans and other government stimulus payments, and our release of wholesale funding that was intentionally acquired to build on-balance sheet liquidity as we prepared for the initial impact of the COVID-19 pandemic but that we began releasing in the first six months of 2021 based on our view of then current market conditions. Competition for core deposits in our markets remains very competitive and we continue to anticipate that our percentage of non-core funding is likely to increase as PPP loan funds and stimulus monies 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 wholesale funding reliance and on brokered deposit exposure specifically. Both our overall reliance on wholesale funding and exposure to brokered deposits and brokered time deposits were within those policy limitations as ofJune 30, 2021 . Our funding policies impose limits on the amount of non-core funding we can utilize based on the 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. AtJune 30, 2021 andDecember 31, 2020 , we were in compliance with our core funding policies. Though growing our core deposit base is a key strategic objective of our firm and we experienced meaningful growth in core deposits in the first six months of 2021, we may increase our 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 for total levels of non-core funding. 52 -------------------------------------------------------------------------------- Table of Cont e n t s The amount of time deposits as ofJune 30, 2021 amounted to$2.6 billion . The following table shows our time deposits in denominations of less than$250,000 and in denominations of$250,000 and greater by category based on time remaining until maturity and the weighted average rate for each category as ofJune 30, 2021 (in thousands): Balances Weighted Avg. Rate Denominations less than$250,000 Three months or less$ 524,230 0.72 % Over three but less than six months 440,910 0.66 % Over six but less than twelve months 554,312 0.73 % Over twelve months 366,329 0.65 %$ 1,885,781 0.70 % Denominations$250,000 and greater Three months or less$ 251,021 0.79 % Over three but less than six months 162,126 0.53 % Over six but less than twelve months 207,669 0.86 % Over twelve months 123,990 0.55 %$ 744,806 0.71 % Totals$ 2,630,587 0.70 % Subordinated debt and other borrowings. We have established, or through acquisition acquired, twelve statutory business trusts which were established to issue 30-year trust preferred securities and certain other subordinated debt agreements. These securities qualify as Tier 2 capital subject to annual phase outs beginning five years from maturity. OnApril 22, 2020 , we established a credit facility with theFederal Reserve Bank in conjunction with the PPP, with available borrowing capacity equal to the outstanding balance of PPP loans, which totaled approximately$1.4 billion atJune 30, 2021 . There were no amounts outstanding under this facility atJune 30, 2021 . These instruments are outlined below (in thousands): Date Total Debt Interest Rate at Name Established Maturity Outstanding June 30, 2021 Coupon Structure Trust preferred securities Pinnacle Statutory Trust I December 29, 2003 December 30, 2033$ 10,310 2.92 % 30-day LIBOR + 2.80% Pinnacle Statutory Trust II September 15, 2005 September 30, 2035 20,619 1.55 % 30-day LIBOR + 1.40% Pinnacle Statutory Trust III September 7, 2006 September 30, 2036 20,619 1.80 % 30-day LIBOR + 1.65% Pinnacle Statutory Trust IV October 31, 2007 September 30, 2037 30,928 2.97 % 30-day LIBOR + 2.85% BNC Capital Trust I April 3, 2003 April 15, 2033 5,155 3.49 % 30-day LIBOR + 3.25% BNC Capital Trust II March 11, 2004 April 7, 2034 6,186 3.03 % 30-day LIBOR + 2.85% BNC Capital Trust III September 23, 2004 September 23, 2034 5,155 2.58 % 30-day LIBOR + 2.40% BNC Capital Trust IV September 27, 2006 December 31, 2036 7,217 1.85 % 30-day LIBOR + 1.70% Valley Financial Trust I June 26, 2003 June 26, 2033 4,124 3.25 % 30-day LIBOR + 3.10% Valley Financial Trust II September 26, 2005 December 15, 2035 7,217 1.61 % 30-day LIBOR + 1.49% Valley Financial Trust III December 15, 2006 January 30, 2037 5,155 1.92 % 30-day LIBOR + 1.73% Southcoast Capital Trust III August 5, 2005 September 30, 2035 10,310 1.65 % 30-day LIBOR + 1.50% Subordinated Debt Pinnacle Bank Subordinated July 30, 2015 July 30, 2025 3-month LIBOR + 3.128% Notes 60,000 3.33 % Pinnacle Bank Subordinated March 10, 2016 July 30, 2025 3-month LIBOR + 3.128% Notes 70,000 3.33 % Pinnacle Financial November 16, 2016 November 16, 2026 Subordinated Notes 120,000 5.25 % Fixed (1) Pinnacle Financial September 11, 2019 September 15, 2029 Subordinated Notes 300,000 4.13 % Fixed (2) Debt issuance costs and fair value adjustments (11,001) Total subordinated debt and other borrowings$ 671,994 (1) Migrates to three month LIBOR + 3.884% beginningNovember 16, 2021 through the end of the term. (2) Migrates to three month LIBOR + 2.775% beginningSeptember 15, 2024 through the end of the term. We redeemed the$130.0 million aggregate principal amount of subordinated notes dueJuly 30, 2025 issued by Pinnacle Bank listed in the table above effectiveJuly 30, 2021 . This redemption was funded with existing cash on hand. We also currently intend to redeem 53 -------------------------------------------------------------------------------- Table of Cont e n t s the$120.0 million aggregate principal amount of subordinated notes issued byPinnacle Financial listed in the table above later this year when they first become eligible for redemption. The redemption of thePinnacle Financial subordinated notes is subject to receipt of any required regulatory permissions and our ultimate determination to redeem such notes.Pinnacle Financial is under no obligation to redeem these subordinated notes. Capital Resources. AtJune 30, 2021 , our shareholders' equity amounted to$5.1 billion compared to$4.9 billion atDecember 31, 2020 . 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 institutional investors. Net proceeds from the transaction after underwriting discounts and offering costs were approximately$217.1 million . The net proceeds were initially retained byPinnacle Financial and the remaining net proceeds are available to support our obligations including payments related to our outstanding indebtedness and dividend payments on the Series B Preferred Stock, to support the capital needs of our company and our bank, and for other general corporate purposes. 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. Share Repurchase Program. During the quarter endedMarch 31, 2020 , we repurchased approximately 1.0 million shares of our common stock at an aggregate cost of$50.8 million under our previously authorized share repurchase agreement. Our last purchase of shares of our common stock under the prior share repurchase program occurred onMarch 19, 2020 , as we suspended the program due to uncertainty surrounding the COVID-19 pandemic and it remained suspended until its expiration onDecember 31, 2020 . OnJanuary 19, 2021 , our board of directors authorized a new share repurchase program for up to$125.0 million of our outstanding common stock. The authorization for this program will remain in effect throughMarch 31, 2022 . We purchased no shares under our current program in the first six months of 2021. Dividends. Pursuant toTennessee banking law, our bank may not, without the prior consent of the Commissioner of the TDFI, pay any dividends to us in a calendar year in excess of the total of our bank's retained net profits for that year plus the retained net profits for the preceding two years, which was$681.9 million atJune 30, 2021 . During the six months endedJune 30, 2021 , the bank paid dividends of$23.3 million to us which is within the limits allowed by the TDFI. During the three and six months endedJune 30, 2021 , we paid$13.9 million and$27.8 million , respectively, in dividends to our common shareholders and$3.8 million and$7.6 million , respectively, in dividends on our Series B Preferred Stock. OnJuly 20, 2021 , our board of directors declared a$0.18 per share quarterly cash dividend to common shareholders which should approximate$14.0 million in aggregate dividend payments that are expected to be paid onAug. 27, 2021 to common shareholders of record as of the close of business onAug. 6, 2021 . 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 onSept. 1, 2021 to shareholders of record at the close of business onAug. 17, 2021 . The amount and timing of all future dividend payments, if any, is subject to board discretion and will depend on our earnings, capital position, financial condition and other factors, including, if necessary, our receipt of dividends from Pinnacle Bank, regulatory capital requirements, as they become known to us and receipt of any regulatory approvals that may become required as a result of our and our bank subsidiary's financial results.
Market and Liquidity Risk Management
Our objective is to manage assets and liabilities to provide a satisfactory,
consistent level of profitability within the framework of established liquidity,
loan, investment, borrowing, and capital policies. Our Asset Liability
Management Committee (ALCO) is charged with the responsibility of monitoring
these policies, which are designed to ensure acceptable composition of
asset/liability mix. Two critical areas of focus for ALCO are interest rate
sensitivity and liquidity risk management.
Interest Rate Sensitivity. In the normal course of business, we are exposed to
market risk arising from fluctuations in interest rates. ALCO measures and
evaluates the interest rate risk so that we can meet customer demands for
various types of loans and deposits. ALCO determines the most appropriate
amounts of on-balance sheet and off-balance sheet items. Measurements which we
use to help us manage interest rate sensitivity include an earnings simulation
model and an economic value of equity (EVE) model.
Our interest rate sensitivity modeling incorporates a number of assumptions for
both earnings simulation and EVE, including loan and deposit re-pricing
characteristics, the rate of loan prepayments, etc. ALCO periodically reviews
these assumptions for accuracy based on historical data and future expectations.
Our ALCO policy requires that the base scenario assumes rates remain flat and is
the scenario to which all others are compared in order to measure the change in
net interest income and EVE. Policy limits are applied to the results of certain
modeling scenarios. While the primary policy scenarios focus is on a twelve
month time frame for the earnings simulations model, longer time horizons are
also modeled. All policy scenarios assume a static volume forecast where the
balance sheet is held constant, although other scenarios are modeled.
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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, 2021 *
Instantaneous Rate Change
100 bps increase 1.9 %
200 bps increase 4.9 %
100 bps decrease (2.1 %)
*: Negative interest rates are not contemplated in these scenarios. The
While an instantaneous shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, we believe that a gradual shift in interest rates would have a more modest impact. Further, the earnings simulation model does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, hedging activities we might take and changing product spreads that could mitigate any potential adverse impact of changes in interest rates. The behavior of our deposit portfolio in the baseline forecast and in alternate interest rate scenarios set out in the table above is a key assumption in our projected estimates of net interest income. The projected impact on net interest income in the table above assumes no change in deposit portfolio size or mix from the baseline forecast in alternative rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher-yielding deposits or market-based funding would reduce the assumed benefit of those deposits. The projected impact on net interest income in the table above also assumes a "through-the-cycle" non-maturity deposit beta which may not be an accurate predictor of actual deposit rate changes realized in scenarios of smaller and/or non-parallel interest rate movements. AtJune 30, 2021 , 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. 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. AtJune 30, 2021 , our EVE modeling calculated the following estimated changes in EVE due to instantaneous upward and downward changes in rates:June 30, 2021 * Instantaneous Rate Change 100 bps increase (1.3 %) 200 bps increase (5.7 %) 100 bps decrease (7.7 %)
*: Negative interest rates are not contemplated in these scenarios. The
While an instantaneous 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
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
55
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Table of Cont e n t s
management. Separate growth assumptions are developed for loans, investments,
deposits, etc. Other interest rate scenarios analyzed by management may include
delayed rate shocks, yield curve steepening or flattening, or other variations
in rate movements to further analyze or stress our balance sheet under various
interest rate scenarios. Each scenario is evaluated by management. These
processes assist management to better anticipate our financial results and, as a
result, management may determine the need to invest in other operating
strategies and tactics which might enhance results or better position our
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 our asset liability modeling
software, it is difficult, at best, to compare our results to other firms.
ALCO may determine that Pinnacle Financial should over time become more or less
asset or liability sensitive depending on the underlying balance sheet
circumstances and our conclusions as to anticipated interest rate fluctuations
in future periods. At present, ALCO has determined that its "most likely" rate
scenario considers no change in short-term interest rates throughout the
remainder of 2021. Our "most likely" rate forecast is based primarily on
information we acquire from a service which includes a consensus forecast of
numerous interest rate benchmarks. We may implement additional actions designed
to achieve our desired sensitivity position which could change from time to
time.
We have in the past used, and may in the future continue to use, derivative
financial instruments as one tool to manage our interest rate sensitivity,
including in our mortgage lending program, while continuing to meet the credit
and deposit needs of our customers. For further details on the derivatives we
currently use, see Note 8. Derivative Instruments in the Notes to our
Consolidated Financial Statements elsewhere in this Form 10-Q.
We may also enter into interest rate swaps to facilitate customer transactions
and meet their financing needs. These swaps qualify as derivatives, even though
they are not designated as hedging instruments.
Liquidity Risk Management. The purpose of liquidity risk management is to
ensure that there are sufficient cash flows to satisfy loan demand, deposit
withdrawals, and our other needs. Traditional sources of liquidity for a bank
include asset maturities and growth in core deposits. A bank may achieve its
desired liquidity objectives from the management of its assets and liabilities
and by internally generated funding through its operations. Funds invested in
marketable instruments that can be readily sold and the continuous maturing of
other earning assets are sources of liquidity from an asset perspective. The
liability base provides sources of liquidity through attraction of increased
deposits and borrowing funds from various other institutions.
To assist in determining the adequacy of our liquidity, we perform a variety of
liquidity stress tests including idiosyncratic, systemic and combined scenarios
for both moderate and severe events. Liquidity is defined as the ability to
convert assets into cash or cash equivalents without significant loss and to
raise additional funds by increasing liabilities. Liquidity management involves
maintaining our ability to meet the daily cash flow requirements of our
customers, both depositors and borrowers. We seek to maintain
a sufficiently liquid asset balance to ensure our ability to meet our
obligations. The amount of the appropriate minimum liquid asset balance is
determined through severe liquidity stress testing as measured by our liquidity
coverage ratio calculation. At June 30, 2021 , we were in compliance with our
internal policies related to liquidity coverage ratio.
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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 deposits, could occur which would negatively affect our liquidity position. Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis. In addition, our bank is a member of the FHLB 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 FHLBCincinnati as a source of liquidity depending on its ALCO strategies. Additionally, we may pledge additional qualifying assets, 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 FHLBCincinnati . AtJune 30, 2021 , we estimate we had approximately$3.0 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. AtJune 30, 2021 , our bank had received advances from the FHLB Cincinnati totaling$888.3 million . AtJune 30, 2021 , the scheduled maturities of Pinnacle Bank's FHLB Cincinnati advances and interest rates are as follows (in thousands): Scheduled Maturities Amount Interest Rates (1) 2021 $ - -% 2022 - -% 2023 - -% 2024 - -% 2025 116,250 0.60% Thereafter 775,013 2.15% 891,263 Deferred costs (2,959)
1.94%
(1)Some FHLB Cincinnati advances include variable interest rates and could
increase in the future. The table reflects rates in effect as of
Pinnacle Bank also has accommodations with upstream correspondent banks available for unsecured short-term advances which aggregate$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 atJune 30, 2021 under these agreements. Our bank also had approximately$2.7 billion in availableFederal Reserve discount window lines of credit atJune 30, 2021 . AtJune 30, 2021 , excluding reciprocating time and money market deposits issued through the Promontory Network, we had$1.7 billion of brokered deposits. Historically, we have issued brokered certificates of deposit through several different brokerage houses based on competitive bid. During 2020, and in response to the uncertainty resulting from the COVID-19 pandemic, we intentionally increased our levels of on-balance sheet liquidity. During the first quarter of 2020, this increase was funded by a combination of increased core deposits, increased borrowings from the FHLB Cincinnati and increases in brokered time deposits. Core deposit growth during the remainder of 2020 and through the first half of 2021 increased such that we were able to prepay certain wholesale maturities during the first six months of 2021 while maintaining an appropriate level of on-balance sheet liquidity. We intend to continue to prepay and/or let mature wholesale funding as core deposit growth allows over the next couple of quarters. During the second quarter of 2021, we announced our intention to move our corporate headquarters to a newly announced office tower inNashville , where we will be a founding partner and sponsor of the project. This move is currently planned for 2025 and will impact equipment and occupancy costs as we plan for this move. Additionally, we believe the number of our locations, including non-branch locations, will increase over an extended period of time across our 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. Off-Balance Sheet Arrangements. AtJune 30, 2021 , we had outstanding standby letters of credit of$243.8 million and unfunded loan commitments outstanding of$10.6 billion . Because these commitments generally have fixed expiration dates and many will expire 57 -------------------------------------------------------------------------------- Table of Cont e n t s 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 withU.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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