Note 4. Loans and Allowance for Loan Losses

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

Pinnacle Financial uses five loan categories: commercial real estate mortgage, consumer real estate mortgage, construction and land development, commercial and industrial, consumer and other.

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

·	Consumer real-estate mortgage loans. Consumer real-estate mortgage consists primarily of loans secured by 1-4 residential properties including home equity lines of credit.

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

·	Commercial and industrial loans. Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes.

·	Consumer and other loans. Consumer and other loans include all loans issued to individuals not included in the consumer real-estate mortgage classification. Examples of consumer and other loans are automobile loans, credit cards and loans to finance education, among others.

Commercial loans receive risk ratings assigned by a financial advisor and approved by a senior credit officer subject to validation by Pinnacle Financial's independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pinnacle Financial believes that its categories follow those used by Pinnacle Bank's primary regulators. At March 31, 2015, approximately 73% of our loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating in the allowance for loan loss assessment. Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans. However, certain consumer real-estate mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature.

Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, our credit procedures require that every risk rated loan of $500,000 or more be subject to a formal credit risk review process by the assigned financial advisor. Each loan's risk rating is also subject to review by our independent loan review department, which reviews a substantial portion of our risk rated portfolio annually. Included in the coverage are independent loan reviews of loans in targeted higher-risk portfolio segments such as certain commercial and industrial loans, land loans and/or loan types in certain geographies.

The following table presents our loan balances by primary loan classification and the amount within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard, substandard-nonaccrual and doubtful-nonaccrual which are defined as follows:

	Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit position at some future date.



Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize collection of the debt. Substandard loans are characterized by the distinct possibility that Pinnacle Financial will sustain some loss if the deficiencies are not corrected.

	Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.

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

The following table outlines the amount of each loan classification categorized into each risk rating category as of March 31, 2015 and December 31, 2014 (in thousands):

	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
March 31, 2015
Accruing loans
Pass	$	1,521,269	$	702,047	$	308,778	$	1,711,829	$	224,165	$	4,468,088
Special Mention		12,659		2,213		6,386		38,997		-		60,255
Substandard ⁽¹⁾		20,929		11,279		5,230		53,850		-		91,288
Total		1,554,857		715,539		320,394		1,804,676		224,165		4,619,631
Impaired loans
Nonaccrual loans
Substandard-nonaccrual		5,826		4,483		3,636		1,963		1,007		16,915
Doubtful-nonaccrual		-		-		-		-		-		-
Total nonaccrual loans		5,826		4,483		3,636		1,963		1,007		16,915
Troubled debt restructurings⁽²⁾
Pass		-		419		432		563		30		1,444
Special Mention		-		447		-		-		200		647
Substandard		-		3,019		-		3,616		-		6,635
Total troubled debt restructurings		-		3,885		432		4,179		230		8,726
Total impaired loans		5,826		8,368		4,068		6,142		1,237		25,641
Total loans	$	1,560,683	$	723,907	$	324,462	$	1,810,818	$	225,402	$	4,645,272

	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
December 31, 2014
Accruing loans
Pass	$	1,510,718	$	697,607	$	295,645	$	1,704,910	$	216,155	$	4,425,035
Special Mention		7,353		2,536		15,215		31,733		-		56,837
Substandard ⁽¹⁾		21,707		12,631		5,997		42,704		-		83,039
Total		1,539,778		712,774		316,857		1,779,347		216,155		4,564,911
Impaired loans
Nonaccrual loans
Substandard-nonaccrual		4,313		4,458		5,173		1,609		1,152		16,705
Doubtful-nonaccrual		-		-		-		-		-		-
Total nonaccrual loans		4,313		4,458		5,173		1,609		1,152		16,705
Troubled debt restructurings⁽²⁾
Pass		-		62		436		575		75		1,148
Special Mention		-		811		-		-		201		1,012
Substandard		-		3,053		-		3,198		-		6,251
Total troubled debt restructurings		-		3,926		436		3,773		276		8,411
Total impaired loans		4,313		8,384		5,609		5,382		1,428		25,116
Total loans	$	1,544,091	$	721,158	$	322,466	$	1,784,729	$	217,583	$	4,590,027

(1)

Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators for loans classified as substandard, excluding the impact of nonaccrual loans and troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $91.3 million at March 31, 2015, compared to $83.0 million at December 31, 2014.

(2)	Troubled debt restructurings are presented as impaired loans; however, they continue to accrue interest at contractual rates.

At March 31, 2015 and December 31, 2014, all loans classified as nonaccrual were deemed to be impaired. The principal balances of these nonaccrual loans amounted to $16.9 million and $16.7 million at March 31, 2015 and December 31, 2014, respectively, and are included in the tables above. For both the three months ended March 31, 2015 and the twelve months ended December 31, 2014, the average balance of nonaccrual loans was $17.5 million. At the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Pinnacle Financial's policy is that once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized approximately $84,000 in interest income from cash payments received on nonaccrual loans during the three months ended March 31, 2015 and $256,000 interest income from cash payments received on nonaccrual loans during the year ended December 31, 2014. Had these remaining nonaccrual loans been on accruing status, interest income would have been higher by $333,000 for the three months ended March 31, 2015 and by $283,000 for the three months ended March 31, 2014. A nonaccrual loan may be returned to accruing status once the loan has been brought current as to the principal and interest and collection is reasonably assured or the loan has been "well-secured" through other techniques.

The following table details the recorded investment, unpaid principal balance and related allowance and average recorded investment of our nonaccrual loans at March 31, 2015 and December 31, 2014 by loan classification and the amount of interest income recognized on a cash basis throughout the fiscal year-to-date period then ended, respectively, on these loans that remain on the balance sheets (in thousands):

	At March 31, 2015						For the three months ended March 31, 2015
	Recorded investment		Unpaid principal balance		Related allowance⁽¹⁾		Average recorded investment		Interest income recognized
Collateral dependent nonaccrual loans:
Commercial real estate – mortgage	$	3,997	$	4,630	$	-	$	4,419	$	-
Consumer real estate – mortgage		1,438		1,594		-		1,453		-
Construction and land development		3,335		3,335		-		3,335		84
Commercial and industrial		1,279		1,564		-		1,295		-
Consumer and other		-		-		-		-		-
Total	$	10,049	$	11,123	$	-	$	10,502	$	84

Cash flow dependent nonaccrual loans:
Commercial real estate – mortgage	$	1,829	$	2,066	$	99	$	1,843	$	-
Consumer real estate – mortgage		3,045		3,302		656		3,071		-
Construction and land development		301		393		65		302		-
Commercial and industrial		684		696		147		688		-
Consumer and other		1,007		1,079		217		1,042		-
Total	$	6,866	$	7,536	$	1,184	$	6,946	$	-
Total nonaccrual loans	$	16,915	$	18,659	$	1,184	$	17,448	$	84

	At December 31, 2014						For the year ended December 31, 2014
	Recorded investment		Unpaid principal balance		Related allowance⁽¹⁾		Average recorded investment		Interest income recognized
Collateral dependent nonaccrual loans:
Commercial real estate – mortgage	$	2,422	$	2,641	$	-	$	2,624	$	-
Consumer real estate – mortgage		1,472		1,901		-		1,552		-
Construction and land development		4,810		4,810		-		5,016		256
Commercial and industrial		1,325		1,804		-		1,561		-
Consumer and other		-		-		-		-		-
Total	$	10,029	$	11,156	$	-	$	10,753	$	256

Cash flow dependent nonaccrual loans:
Commercial real estate – mortgage	$	1,891	$	2,107	$	108	$	1,958	$	-
Consumer real estate – mortgage		2,986		3,205		654		3,080		-
Construction and land development		363		406		79		384		-
Commercial and industrial		284		294		62		316		-
Consumer and other		1,152		1,184		252		972		-
Total	$	6,676	$	7,196	$	1,155	$	6,710	$	-
Total nonaccrual loans	$	16,705	$	18,352	$	1,155	$	17,463	$	256

(1)	Collateral dependent loans are typically charged-off to their net realizable value and no specific allowance is carried related to those loans.

Impaired loans also include loans that Pinnacle Bank has elected to formally restructure due to the weakening credit status of a borrower. The restructuring may facilitate a repayment plan that seeks to minimize the potential losses that Pinnacle Bank may otherwise incur. If on nonaccrual status as of the date of restructuring, the loans are included in nonaccrual loans. Loans that have been restructured that were performing as of the restructure date and continue to perform in accordance with the restructured terms are reported separately as troubled debt restructurings.

At March 31, 2015 and December 31, 2014, there were $8.7 million and $8.4 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. These troubled debt restructurings are considered impaired loans pursuant to U.S. GAAP. Troubled commercial loans are restructured by specialists within our Special Assets Group, and all restructurings are approved by committees and credit officers separate and apart from the normal loan approval process. These specialists are charged with reducing Pinnacle Financial's overall risk and exposure to loss in the event of a restructuring by obtaining some or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral release terms, additional collateral or other similar strategies.

The following table outlines the amount of each loan category where troubled debt restructurings were made during the three months ended March 31, 2015 and 2014 (dollars in thousands):

March 31, 2015	Number of contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance
Commercial real estate – mortgage	-	$	-	$	-
Consumer real estate – mortgage	-		-		-
Construction and land development	-		-		-
Commercial and industrial	1		434		337
Consumer and other	-		-		-
	1	$	434	$	337

March 31, 2014
Commercial real estate – mortgage	-	$	-	$	-
Consumer real estate – mortgage	-		-		-
Construction and land development	-		-		-
Commercial and industrial	6		2,584		565
Consumer and other	-		-		-
	6	$	2,584	$	565

During the three months ended March 31, 2015 and 2014, Pinnacle Financial did not have any troubled debt restructurings that subsequently defaulted within twelve months of the restructuring.

The table below presents past due balances at March 31, 2015 and December 31, 2014, by loan classification and segment allocated between accruing and nonaccrual status (in thousands):

March 31, 2015	30-89 days past due and accruing		90 days or more past due and accruing		Total past due and accruing		Nonaccrual⁽¹⁾		Current and accruing		Total Loans
Commercial real estate:
Owner-occupied	$	3,187	$	1,568	$	4,755	$	3,855	$	758,682	$	767,292
All other		133		-		133		1,971		791,287		793,391
Consumer real estate – mortgage		1,163		-		1,163		4,483		718,261		723,907
Construction and land development		59		-		59		3,636		320,767		324,462
Commercial and industrial		1,005		12		1,017		1,963		1,807,838		1,810,818
Consumer and other		8,588		29		8,617		1,007		215,778		225,402
	$	14,135	$	1,609	$	15,744	$	16,915	$	4,612,613	$	4,645,272

December 31, 2014	30-89 days past due and accruing		90 days or more past due and accruing		Total past due and accruing		Nonaccrual⁽¹⁾		Current and accruing		Total Loans
Commercial real estate:
Owner-occupied	$	-	$	-	$	-	$	4,313	$	760,207	$	764,520
All other		2,232		-		2,232		-		777,339		779,571
Consumer real estate – mortgage		2,391		146		2,537		4,458		714,163		721,158
Construction and land development		421		-		421		5,173		316,872		322,466
Commercial and industrial		3,431		5		3,436		1,609		1,779,684		1,784,729
Consumer and other		9,532		172		9,704		1,152		206,727		217,583
	$	18,007	$	323	$	18,330	$	16,705	$	4,554,992	$	4,590,027

(1)	Approximately $13.9 million and $10.2 million of nonaccrual loans as of March 31, 2015 and December 31, 2014, respectively, were performing pursuant to their contractual terms at those dates.

The following table shows the allowance allocation by loan classification and accrual status at March 31, 2015 and December 31, 2014 (in thousands):

					Impaired Loans
	Accruing Loans				Nonaccrual Loans				Troubled Debt Restructurings⁽¹⁾				Total Allowance for Loan Losses
	March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014
Commercial real estate –mortgage	$	19,544	$	22,094	$	99	$	108	$	-	$	-	$	19,643	$	22,202
Consumer real estate – mortgage		3,155		3,963		656		654		547		807		4,358		5,424
Construction and land development		5,299		5,555		65		79		30		90		5,394		5,724
Commercial and industrial		30,267		28,329		147		62		1,080		776		31,494		29,167
Consumer and other		1,424		1,261		217		252		45		57		1,686		1,570
Unallocated		-		-		-		-		-		-		3,667		3,272
	$	59,689	$	61,202	$	1,184	$	1,155	$	1,702	$	1,730	$	66,242	$	67,359

(1)	Troubled debt restructurings of $8.7 million and $8.4 million as of March 31, 2015 and December 31, 2014, respectively, are classified as impaired loans pursuant to U.S. GAAP; however, these loans continue to accrue interest at contractual rates.

The following table details the changes in the allowance for loan losses from December 31, 2013 to December 31, 2014 to March 31, 2015 by loan classification and the allocation of the allowance for loan losses (in thousands):

	Commercial real estate – mortgage			Consumer real estate – mortgage			Construction and land development			Commercial and industrial			Consumer and other			Unallocated			Total
Allowance for Loan Losses:
Balance at December 31, 2013	$	21,372		$	8,355		$	7,235		$	25,134		$	1,632		$	4,242		$	67,970
Charged-off loans		(875	)		(1,621	)		(301	)		(3,095	)		(1,811	)		-			(7,703	)
Recovery of previously charged-off loans		538			671			277			1,484			487			-			3,457
Provision for loan losses		1,167			(1,981	)		(1,487	)		5,644			1,262			(970	)		3,635
Balance at December 31, 2014	$	22,202		$	5,424		$	5,724		$	29,167		$	1,570		$	3,272		$	67,359

Collectively evaluated for impairment	$	22,094		$	3,963		$	5,555		$	28,329		$	1,261					$	61,202
Individually evaluated for impairment		108			1,461			169			838			309						2,885
Loans acquired with deteriorated credit quality		-			-			-			-			-						-
Balance at December 31, 2014	$	22,202		$	5,424		$	5,724		$	29,167		$	1,570					$	67,359

Loans:
Collectively evaluated for impairment	$	1,539,778		$	712,774		$	316,857		$	1,779,347		$	216,155					$	4,564,911
Individually evaluated for impairment		4,313			8,384			5,609			5,382			1,428						25,116
Loans acquired with deteriorated credit quality		-			-			-			-			-						-
Balance at December 31, 2014	$	1,544,091		$	721,158		$	322,466		$	1,784,729		$	217,583					$	4,590,027

	Commercial real estate - mortgage			Consumer real estate - mortgage			Construction and land development			Commercial and industrial			Consumer and other			Unallocated			Total
Allowance for Loan Losses:
Balance at December 31, 2014	$	22,202		$	5,424		$	5,724		$	29,167		$	1,570		$	3,272		$	67,359
Charged-off loans		(350	)		(134	)		(126	)		(430	)		(1,610	)		-			(2,650	)
Recovery of previously charged-off loans		6			74			567			92			479			-			1,218
Provision for loan losses		(2,122	)		(963	)		(752	)		2,491			2,447			(786	)		315
Balance at March 31, 2015	$	19,736		$	4,401		$	5,413		$	31,320		$	2,886		$	2,486		$	66,242

Collectively evaluated for impairment	$	19,637		$	3,198		$	5,318		$	30,093		$	2,624					$	59,689
Individually evaluated for impairment		99			1,203			95			1,227			262						2,886
Loans acquired with deteriorated credit quality		-			-			-			-			-						-
Balance at March 31, 2015	$	19,736		$	4,401		$	5,413		$	31,320		$	2,886					$	66,242

Loans:
Collectively evaluated for impairment	$	1,554,857		$	715,539		$	320,394		$	1,804,676		$	224,165					$	4,619,631
Individually evaluated for impairment		5,826			8,368			4,068			6,142			1,237						25,641
Loans acquired with deteriorated credit quality		-			-			-			-			-						-
Balance at March 31, 2015	$	1,560,683		$	723,907		$	324,462		$	1,810,818		$	225,402					$	4,645,272

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter using a migration analysis compiled using loss data over the previous 24 quarters, which began in the first quarter of 2009. The migration analysis utilized in the second quarter of 2015 allowance for loan losses will include our historical loss experience for the time period from the second quarter of 2009 through the first quarter of 2015. More recent quarters in the period are more heavily weighted that the earliest quarters. The level of the allowance is based upon evaluation of the loan portfolio, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industry. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications. Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at March 31, 2015 with the comparative exposures for December 31, 2014 (in thousands):

	At March 31, 2015:
	Outstanding Principal Balances			Unfunded Commitments			Total exposure			Total Exposure at December 31, 2014

Lessors of nonresidential buildings		$	518,962		$	69,708		$	588,670		$	572,620
Lessors of residential buildings			297,283			52,613			349,896			335,399

At March 31, 2015, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $6.6 million to current directors, executive officers, and their related entities, of which $3.5 million had been drawn upon. At December 31, 2014, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $6.4 million to directors, executive officers, and their related entities, of which approximately $2.9 million had been drawn upon. These loans and extensions of credit were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to persons not related to Pinnacle Bank and did not involve more than the normal risk of collectability or present other unfavorable features. None of these loans to directors, executive officers, and their related entities were impaired at March 31, 2015 or December 31, 2014.

Residential Lending

At March 31, 2015, Pinnacle Financial had approximately $18.9 million of mortgage loans held-for-sale compared to approximately $14.0 million at December 31, 2014. Total loan volumes sold during the three months ended March 31, 2015 were approximately $95.8 million compared to approximately $61.3 million for the three months ended ended March 31, 2014. During the three months ended March 31, 2015, Pinnacle Financial recognized $1.9 million in gains on the sale of these loans, net of commissions paid, compared to $1.2 million during the three months ended March 31, 2014.

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

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