Derivative Instruments

3 Months Ended

Mar. 31, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Note 9. Derivative Instruments

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current period earnings.

Non-hedge derivatives

Pinnacle Financial enters into interest rate swaps (swaps) to facilitate customer transactions and meet their financing needs. Upon entering into these instruments to meet customer needs, Pinnacle Financial enters into offsetting positions in order to minimize the risk to Pinnacle Financial. These swaps are derivatives, but are not designated as hedging instruments. A summary of Pinnacle Financial's interest rate swaps related to customers as of March 31, 2018 and December 31, 2017 is included in the following table (in thousands):

		March 31, 2018					December 31, 2017
	Balance Sheet Location	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Interest rate swap agreements:
Pay fixed / receive variable swaps	Other assets	$	836,651	$	18,269		$	748,625	$	13,771
Pay variable / receive fixed swaps	Other liabilities	836,651		(18,384		)	748,625		(13,866		)
Total		$	1,673,302	$	(115	)	$	1,497,250	$	(95	)

		Amount of Gain (Loss) Recognized in Income
	Location of Gain (Loss) Recognized in Income	Three Months Ended March 31,
		2018			2017
Interest rate swap agreements	Other noninterest income	$	(20	)	$	13

Derivatives designated as cash flow hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. Pinnacle Financial uses forward cash flow hedge relationships in an effort to manage future interest rate exposure. The hedging strategy converts the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and is used in an effort to protect Pinnacle Financial from floating interest rate variability. A summary of Pinnacle Financial's cash flow hedge relationships as of March 31, 2018 and December 31, 2017 are as follows (in thousands):

					March 31, 2018					December 31, 2017
	Balance Sheet Location	Weighted Average Remaining Maturity	Weighted Average Pay Rate	Receive Rate	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Liability derivatives
Interest rate swaps	Other liabilities	3.47	2.78%	3 month LIBOR	$	200,000	$	(1,674	)	$	200,000	$	(4,583	)

The effects of Pinnacle Financial's cash flow hedge relationships on the statement of comprehensive income (loss) during the three months ended March 31,2018 and 2017 were as follows:

	Amount of Gain (Loss) Recognized in Other Comprehensive Income
	Three Months Ended March 31,
	2018		2017
Interest rate swap agreements	$	1,579	$	(143	)

The cash flow hedges were determined to be highly effective during the periods presented and as a result qualify for hedge accounting treatment. If a hedge was deemed to be ineffective, the amount included in accumulated other comprehensive (loss) income would be reclassified into a line item within the statement of income that impacts operating results. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or Pinnacle Financial discontinues hedge accounting. Pinnacle Financial expects the hedges to continue to be highly effective and qualify for hedge accounting during the remaining terms of the swaps. No amounts were reclassified from accumulated other comprehensive income into net income related to these derivatives during the three months ended March 31,2018 or 2017, and no amounts are expected to be reclassified from accumulated other comprehensive income into net income over the next twelve months.

Derivatives designated as fair value hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. Pinnacle Financial utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy converts the fixed interest rates on the securities to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. Pinnacle Financial has elected early adoption of FASB ASU 2017-12, which allows such partial term hedge designations. A summary of Pinnacle Financial's fair value hedge relationships as of March 31, 2018 and December 31, 2017 are as follows (in thousands):

					March 31, 2018					December 31, 2017
	Balance Sheet Location	Weighted Average Remaining Maturity	Weighted Average Pay Rate	Receive Rate	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Liability derivatives
Interest rate swap agreements	Other liabilities	7.64	2.89%	3 month LIBOR	$	154,145	$	(1,579	)	$	—	$	—

The effects of Pinnacle Financial's fair value hedge relationships on the income statement during the three months ended March 31,2018 or 2017 were as follows.

	Location of Gain (Loss) on Derivative	Amount of Gain (Loss) Recognized in Income				Hedged Item	Location of Gain (Loss) on Hedged Item	Amount of Gain (Loss) Recognized in Income
		Three Months Ended March 31,						Three Months Ended March 31,
		2018		2017				2018			2017
Interest rate swap agreements	Interest income on securities	$	1,579	$	—	Securities available-for-sale	Interest income on securities	$	(1,579	)	$	—

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at March 31, 2018 and December 31, 2017:

	Carrying Amount of the Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Line item on the balance sheet
Securities available-for-sale	$	150,249	$	—	$	1,579	$	—

In April 2018, Pinnacle Financial executed additional swap transactions with a notional amount of $525 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate prepayable loans. As allowed under FASB ASU 2017-12, a specified portion of the prepayable loans have been designated as the hedged assets under the "last-of-layer" method. Such hedging designations are allowed on the portion of a closed portfolio of prepayable assets that is not expected to be affected by prepayments, defaults, and other factors affecting the timing and amount of cash flows.