Securities

9 Months Ended

Sep. 30, 2022

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 September 30, 2022 and December 31, 2021 are summarized as follows (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2022:
Securities available-for-sale:
U.S. Treasury securities	$	210,655	$	—	$	4,655	$	206,000
U.S. Government agency securities	443,579		—		36,641		406,938
Mortgage-backed securities	1,518,231		231		188,934		1,329,528
State and municipal securities	1,478,698		4,270		133,384		1,349,584
Asset-backed securities	164,901		—		16,260		148,641
Corporate notes and other	109,331		65		7,486		101,910
	$	3,925,395	$	4,566	$	387,360	$	3,542,601
Securities held-to-maturity:
U.S. Treasury securities	$	92,837	$	—	$	6,897	$	85,940
U.S. Government agency securities	354,118		—		28,181		325,937
Mortgage-backed securities	451,854		—		49,642		402,212
State and municipal securities	1,854,612		26		316,607		1,538,031
Asset-backed securities	172,752		—		16,563		156,189
Corporate notes and other	13,851		—		1,190		12,661
	$	2,940,024	$	26	$	419,080	$	2,520,970
Allowance for credit losses - securities held-to-maturity	(1,607)
Securities held-to-maturity, net of allowance for credit losses	$	2,938,417


December 31, 2021:
Securities available-for-sale:
U.S. Treasury securities	$	194,490	$	—	$	881	$	193,609
U.S. Government agency securities	634,611		2,359		4,961		632,009
Mortgage-backed securities	1,908,675		29,874		18,310		1,920,239
State and municipal securities	1,774,119		52,961		3,243		1,823,837
Asset-backed securities	232,294		60		2,785		229,569
Corporate notes and other	114,355		3,082		2,506		114,931
	$	4,858,544	$	88,336	32,686		$	4,914,194
Securities held-to-maturity:
U.S. Government agency securities	11,920		—		37		11,883
Mortgage-backed securities	106,555		86		196		106,445
State and municipal securities	1,037,644		32,966		889		1,069,721
	$	1,156,119	$	33,052	$	1,122	$	1,188,049
Allowance for credit losses - securities held-to-maturity	(161)
Securities held-to-maturity, net of allowance for credit losses	$	1,155,958

During the quarters ended March 31, 2022, March 31, 2020 and September 30, 2018, Pinnacle Financial transferred, at fair value, $1.1 billion, $873.6 million and $179.8 million, respectively, of securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized after tax losses of $1.5 million, 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 are being amortized over the remaining life of the transferred 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 September 30, 2022, approximately $666.4 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 September 30, 2022, repurchase agreements comprised of secured borrowings totaled $190.6 million and were secured by $190.6 million of pledged U.S. government agency securities, mortgage-backed 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 September 30, 2022 by contractual maturity is 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
September 30, 2022:	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	15,616	$	15,574	$	1,986	$	1,965
Due in one year to five years	187,720		189,083		377,940		348,130
Due in five years to ten years	349,217		321,759		84,549		78,621
Due after ten years	1,689,710		1,538,016		1,850,943		1,533,853
Mortgage-backed securities	1,518,231		1,329,528		451,854		402,212
Asset-backed securities	164,901		148,641		172,752		156,189
	$	3,925,395	$	3,542,601	$	2,940,024	$	2,520,970

At September 30, 2022 and December 31, 2021, the following available-for-sale securities 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 September 30, 2022
U.S. Treasury securities	$	196,001	$	4,653	$	9,998	$	2	$	205,999	$	4,655
U.S. Government agency securities	267,400		17,991		139,538		18,650		406,938		36,641
Mortgage-backed securities	659,467		57,377		661,931		131,557		1,321,398		188,934
State and municipal securities	1,096,601		117,016		35,582		16,368		1,132,183		133,384
Asset-backed securities	59,323		4,955		89,319		11,305		148,642		16,260
Corporate notes	68,901		6,040		21,009		1,446		89,910		7,486
Total temporarily-impaired securities	$	2,347,693	$	208,032	$	957,377	$	179,328	$	3,305,070	$	387,360

At December 31, 2021
U.S. Treasury securities	$	178,610	$	881	$	—	$	—	$	178,610	$	881
U.S. Government agency securities	353,951		2,987		54,266		1,974		408,217		4,961
Mortgage-backed securities	744,996		11,663		178,956		6,647		923,952		18,310
State and municipal securities	309,605		2,198		57,270		1,045		366,875		3,243
Asset-backed securities	198,349		2,595		6,513		190		204,862		2,785
Corporate notes	14,991		554		20,270		1,952		35,261		2,506
Total temporarily-impaired securities	$	1,800,502	$	20,878	$	317,275	$	11,808	$	2,117,777	$	32,686

The applicable dates for determining when available-for-sale securities were in an unrealized loss position were September 30, 2022 and December 31, 2021. As such, it is possible that an available-for-sale security had a market value less than its amortized cost on other days during the twelve-month periods ended September 30, 2022 and December 31, 2021, but is not in the "Investments with an Unrealized Loss of less than 12 months" category above.

As shown in the tables above, at September 30, 2022, Pinnacle Financial had approximately $387.4 million in unrealized losses on approximately $3.3 billion of available-for-sale securities. 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 available-for-sale securities that have an unrealized loss at September 30, 2022, 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 of available-for-sale securities 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 available-for-sale securities at September 30, 2022 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 September 30, 2022. 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. Pinnacle Financial has a zero loss expectation for U.S. treasury securities in addition to U.S. Government agency securities and mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and accordingly, no allowance for credit losses is estimated for these securities. Credit losses on held-to-maturity state and municipal securities and corporate notes and other securities are estimated using third-party probability of default and loss given default models driven primarily by macroeconomic factors over a reasonable and supportable period of eighteen months with a twelve month reversion to average loss factors. At September 30, 2022 and December 31, 2021, the estimated allowance for credit losses on these held-to-maturity securities was $1.6 million and $161,000, respectively, with the change driven largely by the increase in the balance of held-to-maturity securities and by changes in macroeconomic forecasts.

Pinnacle Financial utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt securities held-to-maturity. At September 30, 2022, 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 nine months ended September 30, 2022, $29.5 million of available-for-sale securities were sold resulting in gross realized gains of $292,000 and gross realized losses of $136,000. During the nine months ended September 30, 2021, $2.2 million of available-for-sale securities were sold resulting in gross realized gains of $366,000.

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.