Income Taxes

3 Months Ended

Mar. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 5. Income Taxes

ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods.

The unrecognized tax benefit related to uncertain tax positions related to state income tax filings was $9.7 million at March 31, 2021 and December 31, 2020, respectively. No change was recorded to the unrecognized tax benefit related to uncertain tax positions in each of the three month periods ended March 31, 2021 and 2020.

Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For both the three months ended March 31, 2021 and 2020, respectively, there were no interest and penalties recorded in the income statement.

Pinnacle Financial's effective tax rate for the three months ended March 31, 2021 was 18.4% compared to a benefit of 6.2% for the three months ended March 31, 2020. The difference between the effective tax rate and the federal and state income tax statutory rate of 26.14% at March 31, 2021 and 2020 is primarily due to investments in bank qualified municipal securities, tax benefits of Pinnacle Bank's real estate investment trust subsidiary, participation in the Tennessee Community Investment Tax Credit (CITC) program, and tax benefits associated with share-based compensation, bank-owned life insurance and Pinnacle Financial's captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense, non-deductible FDIC premiums and non-deductible executive compensation.

Income tax expense is also impacted by the vesting of equity-based awards and the exercise of employee stock options, which expense or benefit is recorded as a discrete item as a component of total income tax, the amount of which is dependent upon the change in the grant date fair value and the vest date fair value of the underlying award. Accordingly, for the three months ended March 31, 2021 we recognized excess tax benefits of $1.6 million compared to benefits of $862,000 for the three months ended March 31, 2020. For the three months ended March 31, 2020, income tax expense was also meaningfully impacted by provision for credit losses, including provision for credit losses resulting from the COVID-19 pandemic, which was recorded as a discrete item as a component of total income tax and contributed to a tax benefit of $22.4 million for the three months ended March 31, 2020.