Income Taxes

6 Months Ended

Jun. 30, 2022

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 $12.7 million at June 30, 2022 and December 31, 2021, respectively. No change was recorded to the unrecognized tax benefit related to uncertain tax positions in each of the three and six month periods ended June 30, 2022 and 2021.

Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. During the three and six months ended June 30, 2022, Pinnacle Financial recognized $264,000 in interest and penalties. No interest and penalties were recorded in the income statement for the three and six months ended June 30, 2021.

Pinnacle Financial's effective tax rate for the three and six months ended June 30, 2022 was 19.9% and 19.0%, respectively, compared to 18.9% and 18.6%, respectively, for the three and six months ended June 30, 2021. The difference between the effective tax rate and the federal and state income tax statutory rate of 26.14% at June 30, 2022 and 2021 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 and six months ended June 30, 2022 and 2021, Pinnacle Financial recognized excess tax benefits of $282,000 and $2.9 million, respectively, compared to benefits of $302,000 and $1.9 million, respectively, for the three and six months ended June 30, 2021.