Securities

3 Months Ended

Mar. 31, 2021

Investments, Debt and Equity Securities [Abstract]

Note 3. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2021 and December 31, 2020 are summarized as follows (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2021:
Securities available-for-sale:
U.S. Treasury securities	$	83,971	$	22	$	—	$	83,993
U.S. government agency securities	159,613		1,224		3,381		157,456
Mortgage-backed securities	1,583,670		40,921		14,813		1,609,778
State and municipal securities	1,480,691		40,140		8,471		1,512,360
Asset-backed securities	191,005		382		692		190,695
Corporate notes and other	121,766		2,824		1,853		122,737
	$	3,620,716	$	85,513	$	29,210	$	3,677,019
Securities held-to-maturity:
State and municipal securities	$	1,014,543	$	22,320	$	3,114	$	1,033,749
	$	1,014,543	$	22,320	$	3,114	$	1,033,749
Allowance for credit losses - securities held-to-maturity	(198)
Securities held-to-maturity, net of allowance for credit losses	$	1,014,345


December 31, 2020:
Securities available-for-sale:
U.S. Treasury securities	$	82,199	$	10	$	—	$	82,209
U.S. government agency securities	74,916		1,547		60		76,403
Mortgage-backed securities	1,623,759		67,759		2,327		1,689,191
State and municipal securities	1,411,288		44,559		12,484		1,443,363
Asset-backed securities	177,878		715		657		177,936
Corporate notes and other	117,256		2,632		2,309		117,579
	$	3,487,296	$	117,222	17,837		$	3,586,681
Securities held-to-maturity:
State and municipal securities	$	1,028,550	$	38,272	$	291	$	1,066,531
	$	1,028,550	$	38,272	$	291	$	1,066,531
Allowance for credit losses - securities held-to-maturity	(191)
Securities held-to-maturity, net of allowance for credit losses	$	1,028,359

During the quarters ended March 31, 2020 and September 30, 2018, Pinnacle Financial transferred, at fair value, $873.6 million and $179.8 million, respectively, of municipal securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized after tax gains of $69.0 million and net unrealized after tax losses of $2.2 million, respectively, remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer. At March 31, 2021, approximately $609.8 million of securities within Pinnacle Financial's investment portfolio were pledged to secure either public funds and other deposits or securities sold under agreements to repurchase. At March 31, 2021, repurchase agreements comprised of secured borrowings totaled $172.1 million and were secured by $172.1 million of pledged U.S. government agency securities, municipal securities, asset-backed securities, and corporate debentures. As the fair value of securities pledged to secure repurchase agreements may decline, Pinnacle Financial regularly evaluates its need to pledge additional securities to remain adequately secured.

The amortized cost and fair value of debt securities as of March 31, 2021 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage- and asset-backed securities since the mortgages and assets underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary (in thousands):


	Available-for-sale				Held-to-maturity
March 31, 2021:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	88,478	$	88,502	$	—	$	—
Due in one year to five years	13,022		13,266		1,409		1,476
Due in five years to ten years	265,259		278,713		7,152		7,223
Due after ten years	1,479,282		1,496,065		1,005,982		1,025,050
Mortgage-backed securities	1,583,670		1,609,778		—		—
Asset-backed securities	191,005		190,695		—		—
	$	3,620,716	$	3,677,019	$	1,014,543	$	1,033,749

At March 31, 2021 and December 31, 2020, the following investments had unrealized losses. The table below classifies these investments according to the term of the unrealized losses of less than twelve months or twelve months or longer (in thousands):


	Investments with an Unrealized Loss of less than 12 months				Investments with an Unrealized Loss of 12 months or longer				Total Investments with an Unrealized Loss
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
At March 31, 2021
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
U.S. government agency securities	109,710		3,355		5,701		26		115,411		3,381
Mortgage-backed securities	427,992		14,434		30,072		379		458,064		14,813
State and municipal securities	287,208		4,779		253,998		4,379		541,206		9,158
Asset-backed securities	62,619		662		13,228		30		75,847		692
Corporate notes	13,995		5		25,450		1,848		39,445		1,853
Total temporarily-impaired securities	$	901,524	$	23,235	$	328,449	$	6,662	$	1,229,973	$	29,897

At December 31, 2020
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
U.S. government agency securities	9,962		38		6,091		22		16,053		60
Mortgage-backed securities	165,696		1,772		35,997		555		201,693		2,327
State and municipal securities	175,115		2,220		345,435		10,264		520,550		12,484
Asset-backed securities	46,399		207		52,840		450		99,239		657
Corporate notes	9,978		40		23,920		2,269		33,898		2,309
Total temporarily-impaired securities	$	407,150	$	4,277	$	464,283	$	13,560	$	871,433	$	17,837

The applicable dates for determining when securities were in an unrealized loss position were March 31, 2021 and December 31, 2020. As such, it is possible that a security had a market value less than its amortized cost on other days during the past twelve-month periods ended March 31, 2021 and December 31, 2020, but is not in the "Investments with an Unrealized Loss of less than 12 months" category above.

As shown in the tables above, including both available-for-sale and held-to-maturity investment securities, at March 31, 2021, Pinnacle Financial had approximately $29.9 million in unrealized losses on $1.2 billion of securities. The unrealized losses associated with $873.6 million and $179.8 million of municipal securities transferred from the available-for-sale portfolio to the held-to-maturity portfolio during the quarters ended March 31, 2020 and September 30, 2018, respectively, represent unrealized losses since the date of purchase, independent of the impact associated with changes in the cost basis upon transfer between portfolios. For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, Pinnacle Financial assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at March 31, 2021, and it is not more-likely-than-not that Pinnacle Financial will be required to

sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial has determined that no write-down is necessary. In addition, Pinnacle Financial evaluates whether any portion of the decline in fair value is the result of credit deterioration, which would require the recognition of an allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with securities at March 31, 2021 are driven by changes in interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at March 31, 2021. These securities will continue to be monitored as a part of Pinnacle Financial's ongoing evaluation of credit quality. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments.

The allowance for credit losses on held-to-maturity securities is measured on a collective basis by major security type. At March 31, 2021, Pinnacle Financial's held-to-maturity securities consist entirely of municipal securities. The estimates of expected credit losses are based on historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. A reasonable and supportable period of 18 months and reversion period of 12 months was utilized to estimate credit losses on held-to-maturity municipal securities at each of March 31, 2021 and 2020. At March 31, 2021 and December 31, 2020, the estimated allowance for credit losses on these securities was $198,000 and $191,000, respectively, with the change driven largely by changes in macroeconomic projections.

Pinnacle Financial utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt securities held-to-maturity. At March 31, 2021, all debt securities classified as held-to-maturity were rated A or higher by the ratings agencies. Updated credit ratings are obtained as they become available from the ratings agencies.

Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes or preparing for anticipated changes in market interest rates. Additionally, if an available-for-sale security loses its investment grade or tax-exempt status, the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, Pinnacle Financial will consider selling the security, but will review each security on a case-by-case basis as these factors become known. During the three months ended March 31, 2021, no available-for-sale securities were sold and no amounts related to gains or losses on sales of available-for-sale securities were reclassified from accumulated other comprehensive income into net income.

Pinnacle Financial has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the fair values of available for sale securities. See Note 8. Derivative Instruments for disclosure of the gains and losses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities.