Derivative Instruments

3 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 8. 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 and classification as either a cash flow hedge or fair value hedge for those derivatives which are designated as part of a hedging relationship.

Non-hedge derivatives

For derivatives not designated as hedges, the gain or loss is recognized in current period earnings. 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 qualify as derivatives, but are not designated as hedging instruments. The income statement impact of the offsetting positions is limited to changes in the reserve for counterparty credit risk. A summary of Pinnacle Financial's interest rate swaps to facilitate customers' transactions as of March 31, 2021 and December 31, 2020 is included in the following table (in thousands):


	March 31, 2021				December 31, 2020
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Interest rate swap agreements:
Assets	$	1,618,283	$	67,351	$	1,565,916	$	101,602
Liabilities	1,618,283		(68,218)		1,565,916		(102,919)
Total	$	3,236,566	$	(867)	$	3,131,832	$	(1,317)

The effects of Pinnacle Financial's interest rate swaps to facilitate customers' transactions on the income statement during the three months ended March 31, 2021 and 2020 were as follows (in thousands):


		Amount of Gain (Loss) Recognized in Income
	Location of Loss Recognized in Income	Three Months Ended March 31,
		2021		2020
Interest rate swap agreements	Other noninterest income	$	450	$	(343)

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 (loss), 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, 2021 and December 31, 2020 is as follows (in thousands):


					March 31, 2021				December 31, 2020
	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)	Weighted Average Pay Rate	Receive Rate	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Asset derivatives
Interest rate floor	Other assets	3.69	—%	2.25% minus one-month LIBOR	$	1,500,000	$	100,564	$	1,500,000	$	124,585

The effects of Pinnacle Financial's cash flow hedge relationships on the statement of comprehensive income (loss) during the three months ended March 31, 2021 and 2020 were as follows, net of tax (in thousands):


	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
	Three Months Ended March 31,
Asset derivatives	2021		2020
Interest rate floor - loans	$	(15,274)	$	65,349
Liability derivatives
Interest rate swaps - borrowings	$	—	$	(1,580)
	$	(15,274)	$	63,769

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 income (loss) 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 at March 31, 2021 to continue to be highly effective and qualify for hedge accounting during the remaining terms of the original hedging transactions. Losses on cash flow hedges totaling $504,000 and $1.8 million, net of tax, were reclassified from accumulated other comprehensive income (loss) into net income during the three months ended March 31, 2021 and 2020, respectively. During the first quarter of 2020, loan interest rate floors with a notional amount totaling $1.3 billion and unrealized gains totaling $16.5 million were terminated. These unrealized gains are being amortized into income on a straight line basis through October 2021. Approximately $4.7 million in unrealized gains, net of tax, are expected to be reclassified from accumulated other comprehensive income (loss) into net income over the next twelve months related to terminated cash flow hedges.

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 available-for-sale securities. The hedging strategy converts the fixed interest rates 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.

A summary of Pinnacle Financial's fair value hedge relationships as of March 31, 2021 and December 31, 2020 is as follows (in thousands):


					March 31, 2021				December 31, 2020
	Balance Sheet Location	Weighted Average Remaining Maturity (In Years)	Weighted Average Pay Rate	Receive Rate	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Asset Derivatives
Interest rate swaps - securities	Other assets	8.34	0.58%	Federal Funds	$	231,421	$	17,181	$	231,421	$	4,696
Liability derivatives
Interest rate swaps - securities	Other liabilities	5.79	3.08%	3 month LIBOR	$	477,510	$	(49,729)	$	477,510	$	(72,010)
					$	708,931	$	(32,548)	$	708,931	$	(67,314)

Notional amounts of $477.5 million included in the table receive a variable rate of interest based on three month LIBOR and notional amounts totaling $231.4 million receive a variable rate of interest based on the daily compounded federal funds rate.

The effects of Pinnacle Financial's securities fair value hedge relationships on the income statement during the three months ended March 31, 2021 and 2020 were as follows (in thousands):


	Location of Gain (Loss)	Amount of Gain (Loss) Recognized in Income
		Three Months Ended March 31,
		2021		2020
Interest rate swaps - securities	Interest income on securities	$	34,766	$	(38,873)
Securities available-for-sale	Interest income on securities	$	(34,766)	$	38,873

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at March 31, 2021 and December 31, 2020 (in thousands):


	Carrying Amount of the Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Line item on the balance sheet
Securities available-for-sale	$	804,207	$	841,543	$	32,548	$	67,314

During the three months ended March 31, 2021 and 2020, amortization expense totaling $924,000 and $1.1 million, respectively, related to previously terminated fair value hedges was recognized as a reduction to interest income on loans.