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Loans and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2020

Note 4. Loans and Allowance for Credit 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 by Pinnacle Bank with the Federal Deposit Insurance Corporation (FDIC).

Pinnacle Financial uses the following loan categories for presentation of loan balances and the related allowance for credit losses on loans:

•Owner occupied commercial real estate mortgage loans - Owner occupied commercial real estate mortgage loans are secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. For such loans, repayment is largely dependent upon the operation of the borrower's business.

•Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily dependent on lease income generated from the underlying collateral.

•Consumer real estate mortgage loans - Consumer real estate mortgage consists primarily of loans secured by 1-4 family residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower.

•Construction and land development loans - Construction and land development loans include loans where the repayment is dependent on the successful completion and eventual sale, refinance or 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. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows. Loans amounting to $2.3 billion which were granted under the Paycheck Protection Program are included in this category.

•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, consumer credit cards and loans to finance education, among others. Many consumer loans are unsecured. Repayment is primarily dependent on the personal cash flow of the borrower.

Loans at September 30, 2020 and December 31, 2019 were as follows:


	September 30, 2020		December 31, 2019
Commercial real estate:
Owner occupied	$	2,748,075	$	2,669,766
Non-owner occupied	5,220,452		5,039,452
Consumer real estate – mortgage	3,041,019		3,068,625
Construction and land development	2,728,439		2,430,483
Commercial and industrial	8,395,963		6,290,296
Consumer and other	343,461		289,254
Subtotal	$	22,477,409	$	19,787,876
Allowance for credit losses	(288,645)		(94,777)
Loans, net	$	22,188,764	$	19,693,099

Commercial loans receive risk ratings assigned by a financial advisor subject to validation by Pinnacle Financial's independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pass rated loans include multiple ratings categories representing varying degrees of risk attributes lesser than those of the other defined risk categories further described below. Pinnacle Financial believes its categories follow those used by Pinnacle Bank's primary regulators. At September 30, 2020, approximately 82% of Pinnacle Financial's loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating. 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. Consumer loans that have been placed on nonaccrual but have not otherwise been assigned a risk rating are believed by management to share risk characteristics with loans rated substandard-nonaccrual and have been presented as such in Pinnacle Financial's risk rating disclosures.

Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, Pinnacle Financial's credit procedures require every risk rated loan of $1.0 million or more be subject to a formal credit risk review process. Each loan's risk rating is also subject to review by Pinnacle Financial's independent loan review department, which reviews a substantial portion of Pinnacle Financial's risk rated portfolio annually. Included in the coverage are independent 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. Substantial credit risk review procedures have been performed during the nine months ended September 30, 2020 to assess the impacts of the COVID-19 pandemic on the loan portfolio, and the results of these procedures are reflected in Pinnacle Financial's risk rating disclosures as of September 30, 2020.

Following are the definitions of the risk rating categories used by Pinnacle Financial. Pass rated loans include all credits other than those included within these categories:

•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 net worth and financial 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 could 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 table below presents loan balances classified within each risk rating category by primary loan type and based on year of origination as of September 30, 2020 (in thousands):


September 30, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Commercial real estate- owner occupied
Pass	$	514,127	$	473,410	$	497,269	$	347,792	$	368,441	$	304,692	$	79,208	$	2,584,939
Special Mention	3,349		11,949		23,805		12,775		3,901		5,698		—		61,477
Substandard (1)	21,725		6,251		7,828		15,991		8,986		2,119		28,134		91,034
Substandard-nonaccrual	901		155		989		1,463		1,720		3,592		1,805		10,625
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Commercial real estate - owner occupied	$	540,102	$	491,765	$	529,891	$	378,021	$	383,048	$	316,101	$	109,147	$	2,748,075
Commercial real estate- Non-owner occupied
Pass	$	1,011,392	$	1,035,694	$	765,605	$	560,797	$	509,620	$	403,696	$	54,308	$	4,341,112
Special Mention	165,690		120,702		121,523		157,652		144,731		128,007		11,028		849,333
Substandard (1)	6,696		1,495		5,699		6,120		1,015		2,972		—		23,997
Substandard-nonaccrual	—		437		745		139		840		3,849		—		6,010
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Commercial real estate - Non-owner occupied	$	1,183,778	$	1,158,328	$	893,572	$	724,708	$	656,206	$	538,524	$	65,336	$	5,220,452
Consumer real estate – mortgage
Pass	$	462,452	$	539,068	$	372,363	$	183,725	$	142,646	$	341,108	$	955,781	$	2,997,143
Special Mention	102		2,695		2,929		644		—		1,040		8,739		16,149
Substandard (1)	—		546		—		895		9		2,274		2,108		5,832
Substandard-nonaccrual	169		1,677		1,003		1,426		2,627		11,027		3,966		21,895
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Consumer real estate – mortgage	$	462,723	$	543,986	$	376,295	$	186,690	$	145,282	$	355,449	$	970,594	$	3,041,019
Construction and land development
Pass	$	849,025	$	1,209,363	$	471,069	$	77,146	$	20,229	$	10,394	$	15,858	$	2,653,084
Special Mention	6,924		33,253		26,062		—		4,244		—		—		70,483
Substandard (1)	619		681		29		—		240		150		—		1,719
Substandard-nonaccrual	391		554		77		83		—		2,048		—		3,153
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Construction and land development	$	856,959	$	1,243,851	$	497,237	$	77,229	$	24,713	$	12,592	$	15,858	$	2,728,439
Commercial and industrial
Pass	$	3,566,925	$	1,227,003	$	779,760	$	349,805	$	149,094	$	98,086	$	1,946,224	$	8,116,897
Special Mention	20,986		50,577		8,568		8,385		8,216		2,081		58,186		156,999
Substandard (1)	27,070		19,268		17,377		3,016		579		2,074		23,735		93,119
Substandard-nonaccrual	14,039		5,459		382		4,676		197		258		3,937		28,948
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Commercial and industrial	$	3,629,020	$	1,302,307	$	806,087	$	365,882	$	158,086	$	102,499	$	2,032,082	$	8,395,963
Consumer and other
Pass	$	113,807	$	23,974	$	8,182	$	8,379	$	4,635	$	2,142	$	181,583	$	342,702
Special Mention	—		—		—		—		—		—		—		—
Substandard (1)	—		—		—		—		—		—		—		—
Substandard-nonaccrual	—		—		2		7		12		2		736		759
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total Consumer and other	$	113,807	$	23,974	$	8,184	$	8,386	$	4,647	$	2,144	$	182,319	$	343,461


September 30, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total
Total loans
Pass	$	6,517,728	$	4,508,512	$	2,894,248	$	1,527,644	$	1,194,665	$	1,160,118	$	3,232,962	$	21,035,877
Special Mention	197,051		219,176		182,887		179,456		161,092		136,826		77,953		1,154,441
Substandard (1)	56,110		28,241		30,933		26,022		10,829		9,589		53,977		215,701
Substandard-nonaccrual	15,500		8,282		3,198		7,794		5,396		20,776		10,444		71,390
Doubtful-nonaccrual	—		—		—		—		—		—		—		—
Total loans	$	6,786,389	$	4,764,211	$	3,111,266	$	1,740,916	$	1,371,982	$	1,327,309	$	3,375,336	$	22,477,409

The following table outlines the risk category of loans as of December 31, 2019 (in thousands):


	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Total
December 31, 2019
Pass	$	7,499,725	$	3,019,203	$	2,422,347	$	6,069,757	$	288,361	$	19,299,393
Special Mention	51,147		13,787		2,816		79,819		698		148,267
Substandard (1)	139,518		10,969		3,042		125,035		47		278,611
Substandard-nonaccrual	18,828		24,666		2,278		15,685		148		61,605
Doubtful-nonaccrual	—		—		—		—		—		—
Total loans	$	7,709,218	$	3,068,625	$	2,430,483	$	6,290,296	$	289,254	$	19,787,876

(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 troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $215.7 million at September 30, 2020, compared to $276.0 million at December 31, 2019.

The table below presents the aging of past due balances by loan segment at September 30, 2020 and December 31, 2019 (in thousands):


September 30, 2020	30-59 days past due		60-89 days past due		90 days or more past due				Total past due		Current		Total loans
Commercial real estate:
Owner-occupied	$	3,365	$	415	$	4,226			$	8,006	$	2,740,069	$	2,748,075
Non-owner occupied	1,612		1,928		5,353				8,893		5,211,559		5,220,452
Consumer real estate – mortgage	7,852		1,338		5,971				15,161		3,025,858		3,041,019
Construction and land development	2,417		—		2,031				4,448		2,723,991		2,728,439
Commercial and industrial	6,615		4,743		4,986				16,344		8,379,619		8,395,963
Consumer and other	846		82		1,220				2,148		341,313		343,461
Total	$	22,707	$	8,506	$	23,787			$	55,000	$	22,422,409	$	22,477,409

December 31, 2019
Commercial real estate:
Owner-occupied	$	2,307	$	2,932	$	1,719			$	6,958	$	2,662,808	$	2,669,766
Non-owner occupied	3,156		3,641		3,816				10,613		5,028,839		5,039,452
Consumer real estate – mortgage	11,646		2,157		7,304				21,107		3,047,518		3,068,625
Construction and land development	1,392		711		1,487				3,590		2,426,893		2,430,483
Commercial and industrial	8,474		2,478		6,364				17,316		6,272,980		6,290,296
Consumer and other	1,770		414		570				2,754		286,500		289,254
Total	$	28,745	$	12,333	$	21,260	$	21,260	$	62,338	$	19,725,538	$	19,787,876

The following table details the changes in the allowance for credit losses for the three and nine months ended September 30, 2020 and 2019, respectively, by loan classification (in thousands):


	Commercial real estate - Owner occupied		Commercial real estate - Non-owner occupied		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Unallocated		Total
Three months ended September 30, 2020:
Balance at June 30, 2020	$	38,803	$	68,426	$	29,358	$	41,897	$	100,610	$	6,278	$	—	$	285,372
Charged-off loans	(186)		(222)		(907)		—		(12,984)		(730)		—		(15,029)
Recovery of previously charged-off loans	47		432		297		7		799		391		—		1,973
Provision for credit losses on loans	(2,238)		1,223		3,201		(682)		13,783		1,042		—		16,329
Balance at September 30, 2020	$	36,426	$	69,859	$	31,949	$	41,222	$	102,208	$	6,981	$	—	$	288,645
Three months ended September 30, 2019:
Balance at June 30, 2019	$	12,174	$	18,652	$	8,489	$	11,206	$	37,436	$	2,114	$	182	$	90,253
Charged-off loans	(40)		(62)		(194)		(14)		(5,082)		(1,388)		—		(6,780)
Recovery of previously charged-off loans	135		74		901		97		407		300		—		1,914
Provision for credit losses on loans	(112)		1,796		(1,426)		585		1,814		3,278		2,325		8,260
Balance at September 30, 2019	$	12,157	$	20,460	$	7,770	$	11,874	$	34,575	$	4,304	$	2,507	$	93,647
Nine months ended September 30, 2020:
Balance at December 31, 2019	$	13,406	$	19,963	$	8,054	$	12,662	$	36,112	$	3,595	$	985	$	94,777
Impact of adopting ASC 326	264		(4,740)		21,029		(3,144)		23,040		2,638		(985)		38,102
Charged-off loans	(1,247)		(485)		(3,033)		—		(27,982)		(2,977)		—		(35,724)
Recovery of previously charged-off loans	272		631		971		100		3,798		1,356		—		7,128
Provision for credit losses on loans	23,731		54,490		4,928		31,604		67,240		2,369		—		184,362
Balance at September 30, 2020	$	36,426	$	69,859	$	31,949	$	41,222	$	102,208	$	6,981	$	—	$	288,645
Nine months ended September 30, 2019:
Balance at December 31, 2018	$	11,297	$	15,649	$	7,670	$	11,128	$	31,731	$	5,423	$	677	$	83,575
Charged-off loans	(1,626)		(75)		(1,124)		(18)		(13,842)		(4,643)		—		(21,328)
Recovery of previously charged-off loans	211		962		1,642		238		4,749		959		—		8,761
Provision for credit losses on loans	2,275		3,924		(418)		526		11,937		2,565		1,830		22,639
Balance at September 30, 2019	$	12,157	$	20,460	$	7,770	$	11,874	$	34,575	$	4,304	$	2,507	$	93,647

The following table details the allowance for credit losses on loans and recorded investment in loans by loan classification and by impairment evaluation method as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


	Commercial real estate - mortgage		Consumer real estate - mortgage		Construction and land development		Commercial and industrial		Consumer and other		Unallocated		Total
December 31, 2019
Allowance for Loan Losses:
Collectively evaluated for impairment	$	32,134	$	6,762	$	12,629	$	35,401	$	3,586			$	90,512
Individually evaluated for impairment	1,235		1,292		33		711		9				3,280
Loans acquired with deteriorated credit quality(1)	—		—		—		—		—				—
Total allowance for loan losses	$	33,369	$	8,054	$	12,662	$	36,112	$	3,595	$	985	$	94,777

Loans:
Collectively evaluated for impairment	$	7,681,608	$	3,036,922	$	2,426,901	$	6,274,280	$	289,106			$	19,708,817
Individually evaluated for impairment	18,122		25,018		561		14,295		148				58,144
Loans acquired with deteriorated credit quality	9,488		6,685		3,021		1,721		—				20,915
Total loans	$	7,709,218	$	3,068,625	$	2,430,483	$	6,290,296	$	289,254			$	19,787,876

(1) Prior to the adoption of ASC 326 on January 1, 2020, an allowance for loan losses was recorded on loans acquired with deteriorated credit quality only in the event of additional credit deterioration subsequent to acquisition.

The adequacy of the allowance for credit losses is reviewed by Pinnacle Financial's management 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 payment), 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 level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

As described in Note 1. Summary of Significant Accounting Policies, Pinnacle Financial adopted ASU 2016-13 on January 1, 2020, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset. 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. For all loan segments collectively evaluated, 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. At September 30, 2020, Pinnacle Financial utilized a reasonable and supportable period of eighteen months for all loan segments, followed by a twelve month straight line reversion to long term averages. Upon adoption of ASU 2016-13, the opening balance of the allowance for credit losses was increased by $38.1 million through retained earnings. The additional increase during the nine months ended September 30, 2020 is primarily attributable to the change in projected economic conditions resulting from the COVID-19 pandemic, with elevated levels of the unemployment rate being the most significant driver.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine

expected credit losses:


September 30, 2020	Real Estate		Business Assets		Other		Total
Commercial real estate:
Owner-occupied	14,955		—		—		14,955
Non-owner occupied	11,294		—		—		11,294
Consumer real estate – mortgage	27,122		—		—		27,122
Construction and land development	4,362		—		—		4,362
Commercial and industrial	2,052		28,692		45		30,789
Consumer and other	—		—		21		21
Total	$	59,785	$	28,692	$	66	$	88,543

The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at September 30, 2020 and December 31, 2019. Also presented is the balance of loans on nonaccrual status at September 30, 2020 for which there was no related allowance for credit losses recorded (in thousands):


	September 30, 2020						December 31, 2019
	Total nonaccrual loans		Nonaccrual loans with no allowance for credit losses		Loans past due 90 or more days and still accruing		Total nonaccrual loans		Loans past due 90 or more days and still accruing
Commercial real estate:
Owner-occupied	$	10,625	$	5,704	$	—	$	11,654	$	—
Non-owner occupied	6,010		—		—		7,173		—
Consumer real estate – mortgage	21,895		—		281		24,667		168
Construction and land development	3,152		1,152		—		2,278		—
Commercial and industrial	28,948		7,960		563		15,685		946
Consumer and other	760		—		469		148		501
Total	$	71,390	$	14,816	$	1,313	$	61,605	$	1,615

Pinnacle Financial's policy is the accrual of interest income will be discontinued when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date loans are placed on nonaccrual status, Pinnacle Financial reverses all previously accrued interest income against current year earnings. Pinnacle Financial's policy is 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 no interest income from cash payments received on nonaccrual loans during the three and nine months ended September 30, 2020 and the three months ended September 30, 2019 compared to $176,000 during the nine months ended September 30, 2019, respectively. Had these nonaccruing loans been on accruing status, interest income would have been higher by $910,000 and $2.1 million for the three and nine months ended September 30, 2020, respectively, compared to $1.3 million and $3.5 million higher for the three and nine months ended September 30, 2019, respectively. Approximately $40.7 million and $35.8 million of nonaccrual loans as of September 30, 2020 and December 31, 2019, respectively, were performing pursuant to their contractual terms at those dates.

The following table presents impaired loans at December 31, 2019 as determined under ASC 310 prior to the adoption of ASU 2016-13. Impaired loans generally include nonaccrual loans, troubled debt restructurings, and other loans deemed to be impaired but that continue to accrue interest. Presented are the recorded investment, unpaid principal balance and related allowance of impaired loans at December 31, 2019 by loan classification (in thousands):


	At December 31, 2019
	Recorded investment		Unpaid principal balances		Related allowance
Impaired loans with an allowance:
Commercial real estate – mortgage	$	9,998	$	10,983	$	1,235
Consumer real estate – mortgage	20,996		23,105		1,292
Construction and land development	542		654		33
Commercial and industrial	4,074		5,381		711
Consumer and other	148		182		9
Total	$	35,758	$	40,305	$	3,280

Impaired loans without an allowance:
Commercial real estate – mortgage	$	8,124	$	8,891	$	—
Consumer real estate – mortgage	4,022		4,021		—
Construction and land development	19		17		—
Commercial and industrial	10,221		11,322		—
Consumer and other	—		—		—
Total	$	22,386	$	24,251	$	—

Total impaired loans	$	58,144	$	64,556	$	3,280

The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three and nine months ended September 30, 2019, respectively, of impaired loans by loan classification as determined under ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


	Three months ended				Nine months ended
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Impaired loans with an allowance:
Commercial real estate – mortgage	$	13,050	$	—	$	14,689	$	—
Consumer real estate – mortgage	19,508		—		20,887		—
Construction and land development	451		—		587		—
Commercial and industrial	11,113		—		10,070		—
Consumer and other	143		—		400		—
Total	$	44,265	$	—	$	46,633	$	—

Impaired loans without an allowance:
Commercial real estate – mortgage	$	9,344	$	—	$	12,521	$	176
Consumer real estate – mortgage	7,922		—		8,381		—
Construction and land development	10		—		452		—
Commercial and industrial	12,108		—		13,625		—
Consumer and other	—		—		—		—
Total	$	29,384	$	—	$	34,979	$	176

Total impaired loans	$	73,649	$	—	$	81,612	$	176

Prior to the adoption of ASU 2016-13, loans acquired with deteriorated credit quality, referred to under ASC 310-30 as purchased credit impaired loans and under ASU 2016-13 as purchased credit deteriorated loans, were assigned a credit related purchase discount and non-credit related purchase discount at acquisition. Upon adoption of ASU 2016-13 on January 1, 2020, the remaining credit related discount was re-classified to a component of the allowance for credit losses. The remaining non-credit discount will continue to be accreted into income over the remaining lives of the related loans. The following table provides a rollforward of purchased credit deteriorated loans from December 31, 2019 through September 30, 2020 (in thousands):


	Gross Carrying Value		Accretable Yield		Nonaccretable Yield		Net Carrying Value
December 31, 2019	$	29,544	$	(4,801)	$	(3,828)	$	20,915

Reclassification of discount to allowance for credit losses	—		—		3,828		3,828
Year-to-date settlements	(5,600)		2,240		—		(3,360)
September 30, 2020	$	23,944	$	(2,561)	$	—	$	21,383

The carrying value is adjusted for additional draws, pursuant to contractual arrangements, offset by loan paydowns. Year-to-date settlements include both loans that were charged-off as well as loans that were paid off, typically as a result of refinancings at other institutions.

At September 30, 2020 and December 31, 2019, there were $2.6 million and $4.9 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. Troubled commercial loans are restructured by specialists within Pinnacle Bank's Special Assets Group, and all restructurings are approved by committees and/or 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 and nine months ended September 30, 2020 and 2019 (dollars in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	Number of contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance		Number of contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, net of related allowance
2020
Commercial real estate:
Owner-occupied	—	$	—	$	—	—	$	—	$	—
Non-owner occupied	—	—		—		—	—		—
Consumer real estate – mortgage	—	—		—		1	807		807
Construction and land development	—	—		—		—	—		—
Commercial and industrial	—	—		—		—	—		—
Consumer and other	—	—		—		—	—		—
	—	$	—	$	—	1	$	807	$	807

2019
Commercial real estate:
Owner-occupied	1	$	314	$	297	1	$	314	$	297
Non-owner occupied	—	—		—		—	—		—
Consumer real estate – mortgage	—	—		—		1	712		626
Construction and land development	—	—		—		1	21		19
Commercial and industrial	—	—		—		1	1,397		796
Consumer and other	—	—		—		—	—		—
	1	$	314	$	297	4	$	2,444	$	1,738

There were no troubled debt restructurings made during the three months ended September 30, 2020. During the nine months ended September 30, 2020 and 2019, there were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring.

In response to the COVID-19 pandemic and its economic impact to its customers, Pinnacle Bank implemented a short-term modification program in accordance with interagency regulatory guidance to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due at the time of the modification. This program allows for a deferral of payments for 90 days, which Pinnacle Bank may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. Pursuant to interagency guidance, such short-term deferrals are not deemed to meet the criteria for reporting as troubled debt restructurings.

Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industries. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications. Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at September 30, 2020 with the comparative exposures for December 31, 2019 (in thousands):


	September 30, 2020
	Outstanding Principal Balances		Unfunded Commitments		Total exposure		Total Exposure at December 31, 2019
Lessors of nonresidential buildings	$	3,655,366	$	916,186	$	4,571,552	$	4,578,116
Lessors of residential buildings	1,158,042		795,259		1,953,301		1,599,837
New Housing For-Sale Builders	479,532		613,518		1,093,050		1,090,603
Hotels (except Casino Hotels) and Motels	910,857		127,623		1,038,480		967,771

Pinnacle Financial monitors two ratios regarding construction and commercial real estate lending as part of its concentration management processes. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by Pinnacle Bank’s total risk-based capital. At September 30, 2020 and December 31, 2019, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were 86.7% and 83.6%, respectively. Non-owner occupied commercial

real estate and multifamily loans (including construction and land development loans) as a percentage of total risk-based capital were 268.8% and 268.3% as of September 30, 2020 and December 31, 2019, respectively. Banking regulations have established guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-owner occupied ratio of less than 300% of total risk-based capital. When a bank’s ratios are in excess of one or both of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. At September 30, 2020, 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 below the 100% and 300% thresholds.

At September 30, 2020, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $9.7 million to current directors, executive officers, and their related entities, of which $7.1 million had been drawn upon. At December 31, 2019, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $10.6 million to directors, executive officers, and their related entities, of which approximately $6.8 million had been drawn upon. All loans to directors, executive officers, and their related entities were performing in accordance with contractual terms at September 30, 2020 and December 31, 2019.

At September 30, 2020, Pinnacle Financial had approximately $12.3 million in commercial loans held for sale compared to $17.6 million at December 31, 2019, which primarily included commercial real estate and apartment loans originated for sale to a third-party as part of a multi-family loan program. Such loans are closed under a pass-through commitment structure wherein Pinnacle Bank's loan commitment to the borrower is the same as the third party's take-out commitment to Pinnacle Bank and the third party purchase typically occurs within thirty days of Pinnacle Bank closing with the borrowers.

Residential Lending

At September 30, 2020, Pinnacle Financial had approximately $62.6 million of mortgage loans held-for-sale compared to approximately $61.6 million at December 31, 2019. Total loan volumes sold during the nine months ended September 30, 2020 were approximately $1.3 billion compared to approximately $788.1 million for the nine months ended September 30, 2019. During the three and nine months ended September 30, 2020, Pinnacle Financial recognized $19.5 million and $47.7 million, respectively, in gains on the sale of these loans, net of commissions paid, compared to $7.4 million and $18.3 million, respectively, net of commissions paid, during the three and nine months ended September 30, 2019.

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 of a mortgage loan held-for-sale 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, Pinnacle Bank's liability pursuant to the terms of these representations and warranties has been insignificant to Pinnacle Bank.