Regulatory Matters

9 Months Ended

Sep. 30, 2020

Broker-Dealer, Net Capital Requirement, SEC Regulation [Abstract]

Regulatory Matters

Note 10. Regulatory Matters

Pursuant to Tennessee banking law, Pinnacle Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (TDFI), pay any dividends to Pinnacle Financial in a calendar year in excess of the total of Pinnacle Bank's retained net income for that year plus the retained net income for the preceding two years. Under Tennessee corporate law, Pinnacle Financial is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, Pinnacle Financial's board of directors must consider its and Pinnacle Bank's current and prospective capital, liquidity, and other needs. In addition to state law limitations on Pinnacle Financial's ability to pay dividends, the Federal Reserve imposes limitations on Pinnacle Financial's ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if Pinnacle Financial's regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.

In addition, the Federal Reserve has issued supervisory guidance advising bank holding companies to eliminate, defer or reduce dividends paid on common stock and other forms of Tier 1 capital where the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, the company’s prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition or the company will not meet, or is in danger of not meeting, minimum regulatory capital adequacy ratios. Recent supplements to this guidance reiterate the need for bank holding companies to inform their applicable reserve bank sufficiently in advance of the proposed payment of a dividend in certain circumstances.

During the nine months ended September 30, 2020, Pinnacle Bank paid $119.1 million in dividends to Pinnacle Financial. As of September 30, 2020, Pinnacle Bank could pay approximately $675.7 million of additional dividends to Pinnacle Financial without prior approval of the Commissioner of the TDFI. Since the fourth quarter of 2018, Pinnacle Financial has paid a quarterly common stock dividend of $0.16 per share. The amount and timing of all future dividend payments by Pinnacle Financial, if any, is subject to discretion of Pinnacle Financial's board of directors and will depend on Pinnacle Financial's receipt of dividends, including dividends on Pinnacle Financial's 6.75% fixed rate non-cumulative perpetual preferred stock, Series B (the Series B Preferred Stock) from Pinnacle Bank, earnings, capital position, financial condition and other factors, including regulatory capital requirements, as they

become known to Pinnacle Financial and receipt of any regulatory approvals that may become required as a result of each of Pinnacle Financial's or Pinnacle Bank's financial results.

Pinnacle Financial and Pinnacle Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pinnacle Financial and Pinnacle Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pinnacle Financial's and Pinnacle Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and its banking subsidiary to maintain minimum amounts and ratios of common equity Tier 1 capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, total risk-based capital to risk-weighted assets and Tier 1 capital to average assets.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, each of Pinnacle Bank and Pinnacle Financial has elected the option to delay the estimated impact on regulatory capital of Pinnacle Financial's and Pinnacle Bank's adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 (collectively the “transition adjustments”), will be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three year period, with 75% recognized in year three, 50% recognized in year four, and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.

Management believes, as of September 30, 2020, that Pinnacle Financial and Pinnacle Bank met all capital adequacy requirements to which they are subject. To be categorized as well-capitalized under applicable banking regulations, Pinnacle Bank must maintain certain total risk-based, Tier 1 risk-based, common equity Tier 1 and Tier 1 leverage ratios as set forth in the following table and not be subject to a written agreement, order or directive to maintain a higher capital level. The capital conservation buffer is not included in the required ratios of the table presented below. Pinnacle Financial's and Pinnacle Bank's actual capital amounts and resulting ratios, not including the capital conservation buffer, are presented in the following table (in thousands):

	Actual				Minimum Capital Requirement				Minimum To Be Well-Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
At September 30, 2020
Total capital to risk weighted assets:
Pinnacle Financial	$	3,578,436	14.2	%	$	2,015,196	8.0	%	$	2,518,994	10.0	%
Pinnacle Bank	$	3,146,468	12.6	%	$	2,005,334	8.0	%	$	2,506,667	10.0	%
Tier 1 capital to risk weighted assets:
Pinnacle Financial	$	2,702,540	10.7	%	$	1,511,397	6.0	%	$	2,015,196	8.0	%
Pinnacle Bank	$	2,819,572	11.3	%	$	1,504,000	6.0	%	$	2,005,334	8.0	%
Common equity Tier 1 capital to risk weighted assets
Pinnacle Financial	$	2,485,291	9.9	%	$	1,133,547	4.5	%	NA		NA
Pinnacle Bank	$	2,819,450	11.3	%	$	1,128,000	4.5	%	$	1,629,333	6.5	%
Tier 1 capital to average assets (*):
Pinnacle Financial	$	2,702,540	8.5	%	$	1,273,124	4.0	%	NA		NA
Pinnacle Bank	$	2,819,572	8.9	%	$	1,269,171	4.0	%	$	1,586,464	5.0	%
At December 31, 2019
Total capital to risk weighted assets:
Pinnacle Financial	$	3,159,375	13.2	%	$	1,912,885	8.0	%	$	2,391,106	10.0	%
Pinnacle Bank	$	2,906,853	12.2	%	$	1,906,839	8.0	%	$	2,383,549	10.0	%
Tier 1 capital to risk weighted assets:
Pinnacle Financial	$	2,319,234	9.7	%	$	1,434,664	6.0	%	$	1,912,885	8.0	%
Pinnacle Bank	$	2,679,713	11.2	%	$	1,430,129	6.0	%	$	1,906,839	8.0	%

	Actual				Minimum Capital Requirement				Minimum To Be Well-Capitalized Under Prompt Corrective Action Regulations
Common equity Tier 1 capital to risk weighted assets
Pinnacle Financial	$	2,319,112	9.7	%	$	1,075,998	4.5	%	NA		NA
Pinnacle Bank	$	2,679,590	11.2	%	$	1,072,597	4.5	%	$	1,549,307	6.5	%
Tier 1 capital to average assets (*):
Pinnacle Financial	$	2,319,234	9.1	%	$	1,021,836	4.0	%	NA		NA
Pinnacle Bank	$	2,679,713	10.5	%	$	1,019,210	4.0	%	$	1,274,012	5.0	%

(*) Average assets for the above calculations were based on the most recent quarter.

During the second quarter of 2020, Pinnacle Financial issued 9.0 million depositary shares, each representing a 1/40th interest in a share of Series B preferred stock in a registered public offering to both retail and institutional investors. Net proceeds from the transaction were approximately $217.1 million after deducting the underwriting discounts and offering expenses payable by Pinnacle Financial. The net proceeds were retained by Pinnacle Financial and are available to support the capital needs of Pinnacle Financial and Pinnacle Bank, to support Pinnacle Financial's obligations, including interest payments on its outstanding indebtedness, and for other general corporate purposes.