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Loans and Allowance for Credit Losses
 3 Months Ended
Mar. 31, 2023
Receivables [Abstract]  
Loans and Allowance for Credit Losses
Note 4. Loans and Allowance for Credit Losses

For financial reporting purposes, Pinnacle Financial classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by Pinnacle Bank with the Federal Deposit Insurance Corporation (FDIC).

Pinnacle Financial uses the following loan categories for presentation of loan balances and the related allowance for credit losses on loans:
•Owner occupied commercial real estate mortgage loans - Owner occupied commercial real estate mortgage loans are secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. For such loans, repayment is largely dependent upon the operation of the borrower's business.
•Non-owner occupied commercial real estate loans - These loans represent investment real estate loans secured by office buildings, industrial buildings, warehouses, retail buildings, and multifamily residential housing. Repayment is primarily dependent on lease income generated from the underlying collateral.
•Consumer real estate mortgage loans - Consumer real estate mortgage consists primarily of loans secured by 1-4 family residential properties, including home equity lines of credit. Repayment is primarily dependent on the personal cash flow of the borrower.
•Construction and land development loans - Construction and land development loans include loans where the repayment is dependent on the successful completion and eventual sale, refinance or operation of the related real estate project. Construction and land development loans include 1-4 family construction projects and commercial construction endeavors such as warehouses, apartments, office and retail space and land acquisition and development.
•Commercial and industrial loans - Commercial and industrial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. These loans are generally secured by equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on business cash flows.
•Consumer and other loans - Consumer and other loans include all loans issued to individuals not included in the consumer real estate mortgage classification. Examples of consumer and other loans are automobile loans, consumer credit cards and loans to finance education, among others. Many consumer loans are unsecured. Repayment is primarily dependent on the personal cash flow of the borrower.

Loans at March 31, 2023 and December 31, 2022 were as follows (in thousands):
March 31, 2023December 31, 2022
Commercial real estate:
Owner occupied$3,686,796 $3,587,257
Non-owner occupied6,887,733 6,542,619
Consumer real estate – mortgage4,531,285 4,435,046
Construction and land development3,909,024 3,679,498
Commercial and industrial10,723,327 10,241,362
Consumer and other559,706 555,823
Subtotal$30,297,871 $29,041,605 
Allowance for credit losses(313,841)(300,665)
Loans, net$29,984,030 $28,740,940 

Commercial loans receive risk ratings assigned by a financial advisor subject to validation by Pinnacle Financial's independent loan review department. Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual. Pass rated loans include multiple ratings categories representing varying degrees of risk attributes that are less than those of the other defined risk categories further described below. Pinnacle Financial believes its categories follow those used by Pinnacle Bank's primary regulators. At March 31, 2023, approximately 78.9% of Pinnacle Financial's loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating. Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans. However, certain consumer real estate-mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature. Consumer loans that have been placed on nonaccrual but have not otherwise been assigned a risk rating are believed by management to share risk characteristics with loans rated substandard-nonaccrual and have been presented as such in Pinnacle Financial's risk rating disclosures.
 
Risk ratings are subject to continual review by a financial advisor and a senior credit officer. At least annually, Pinnacle Financial's credit procedures require every risk rated loan of $1.5 million or more be subject to a formal credit risk review process. Each loan's risk rating is also subject to review by Pinnacle Financial's independent loan review department, which reviews a substantial portion of Pinnacle Financial's risk rated portfolio annually. Included in the coverage are independent reviews of loans in targeted higher-risk portfolio segments such as certain commercial and industrial loans, land loans and/or loan types in certain geographies.

Following are the definitions of the risk rating categories used by Pinnacle Financial. Pass rated loans include all credits other than those included within these categories:

•Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial's credit position at some future date.
•Substandard loans are inadequately protected by the current net worth and financial capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize collection of the
debt. Substandard loans are characterized by the distinct possibility that Pinnacle Financial could sustain some loss if the deficiencies are not corrected.
•Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.
•Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.


The table below presents loan balances classified within each risk rating category and the current period gross charge-offs by primary loan type and year of origination or most recent renewal as of March 31, 2023 (in thousands):
March 31, 202320232022202120202019PriorRevolving LoansTotal
Commercial real estate - Owner occupied
Pass$196,470 $1,116,857 $854,009 $569,810 $318,310 $476,339 $56,495 $3,588,290 
Special Mention5,528 33,658 9,231 7,768 5,883 7,547 — 69,615 
Substandard (1)
999 10,859 2,816 3,834 1,030 1,951 5,096 26,585 
Substandard-nonaccrual— 674 — 514 94 1,024 — 2,306 
Doubtful-nonaccrual— — — — — — — — 
Total Commercial real estate - Owner occupied$202,997 $1,162,048 $866,056 $581,926 $325,317 $486,861 $61,591 $3,686,796 
Current period gross charge-offs$— — — — — — — $— 
Commercial real estate - Non-owner occupied
Pass$284,596 $2,482,638 $1,660,667 $965,296 $693,967 $623,402 $97,500 $6,808,066 
Special Mention10,594 26,458 — 16,776 17,972 5,011 — 76,811 
Substandard (1)
— — — — 1,256 848 — 2,104 
Substandard-nonaccrual— — — — — 752 — 752 
Doubtful-nonaccrual— — — — — — — — 
Total Commercial real estate - Non-owner occupied$295,190 $2,509,096 $1,660,667 $982,072 $713,195 $630,013 $97,500 $6,887,733 
Current period gross charge-offs$— — — — — — — $— 
Consumer real estate – mortgage
Pass$177,959 $1,038,013 $1,106,640 $480,438 $228,820 $366,864 $1,115,282 $4,514,016 
Special Mention204 — — — — 158 — 362 
Substandard (1)
— — — — — — — — 
Substandard-nonaccrual— 664 1,621 2,284 7,051 4,911 376 16,907 
Doubtful-nonaccrual— — — — — — — — 
Total Consumer real estate – mortgage$178,163 $1,038,677 $1,108,261 $482,722 $235,871 $371,933 $1,115,658 $4,531,285 
Current period gross charge-offs$— — (32)— — — (98)$(130)
Construction and land development
Pass$303,786 $1,998,380 $1,320,902 $200,318 $21,042 $10,499 $40,845 $3,895,772 
Special Mention— 10,270 2,765 — — — — 13,035 
Substandard (1)
— — — — — 87 — 87 
Substandard-nonaccrual— — 130 — — — — 130 
Doubtful-nonaccrual— — — — — — — — 
Total Construction and land development$303,786 $2,008,650 $1,323,797 $200,318 $21,042 $10,586 $40,845 $3,909,024 
Current period gross charge-offs$— — — — — — — $— 
Commercial and industrial
Pass$1,777,610 $2,757,756 $1,549,405 $407,926 $284,347 $255,139 $3,484,273 $10,516,456 
Special Mention850 34,872 4,974 7,996 26,473 5,200 68,210 148,575 
Substandard (1)
4,060 7,248 7,849 219 5,024 415 16,651 41,466 
Substandard-nonaccrual605 10,694 3,637 64 163 603 1,061 16,827 
Doubtful-nonaccrual3 — — — — — — 3 
 Total Commercial and industrial$1,783,128 $2,810,570 $1,565,865 $416,205 $316,007 $261,357 $3,570,195 $10,723,327 
Current period gross charge-offs$— (4,176)(2,466)(210)— (129)(3,668)$(10,649)
Consumer and other
March 31, 202320232022202120202019PriorRevolving LoansTotal
Pass$118,750 $49,044 $94,075 $49,803 $1,481 $1,244 $245,246 $559,643 
Special Mention— — — — — — — — 
Substandard (1)
— — — — — — — — 
Substandard-nonaccrual— 22 — 41 — — — 63 
Doubtful-nonaccrual— — — — — — — — 
Total Consumer and other$118,750 $49,066 $94,075 $49,844 $1,481 $1,244 $245,246 $559,706 
Current period gross charge-offs$— (143)(1,509)(632)(3)(33)(923)$(3,243)
Total loans
Pass$2,859,171 $9,442,688 $6,585,698 $2,673,591 $1,547,967 $1,733,487 $5,039,641 $29,882,243 
Special Mention17,176 105,258 16,970 32,540 50,328 17,916 68,210 308,398 
Substandard (1)
5,059 18,107 10,665 4,053 7,310 3,301 21,747 70,242 
Substandard-nonaccrual605 12,054 5,388 2,903 7,308 7,290 1,437 36,985 
Doubtful-nonaccrual3 — — — — — — 3 
Total loans$2,882,014 $9,578,107 $6,618,721 $2,713,087 $1,612,913 $1,761,994 $5,131,035 $30,297,871 
Current period gross charge-offs$— (4,319)(4,007)(842)(3)(162)(4,689)$(14,022)
(1) Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle Bank's primary regulators for loans classified as substandard, excluding loan modifications made to borrowers experiencing financial difficulty. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $67.8 million at March 31, 2023, compared to $53.8 million at December 31, 2022.

The table below presents the aging of past due balances by loan segment at March 31, 2023 and December 31, 2022 (in thousands):

March 31, 202330-59 days past due60-89 days past due90 days or more past dueTotal
past due		CurrentTotal loans
Commercial real estate:
Owner occupied$1,075 $— $1,789 $2,864 $3,683,932 $3,686,796 
Non-owner occupied405 272 206 883 6,886,850 6,887,733 
Consumer real estate – mortgage12,803 1,325 4,844 18,972 4,512,313 4,531,285 
Construction and land development52 — 130 182 3,908,842 3,909,024 
Commercial and industrial12,427 4,933 12,401 29,761 10,693,566 10,723,327 
Consumer and other4,213 2,353 954 7,520 552,186 559,706 
Total$30,975 $8,883 $20,324 $60,182 $30,237,689 $30,297,871 
December 31, 2022
Commercial real estate:
Owner occupied$2,112 $615 $1,139 $3,866 $3,583,391 $3,587,257 
Non-owner occupied359 48 1,681 2,088 6,540,531 6,542,619 
Consumer real estate – mortgage13,635 83 9,094 22,812 4,412,234 4,435,046 
Construction and land development221 102 130 453 3,679,045 3,679,498 
Commercial and industrial15,457 13,713 9,428 38,598 10,202,764 10,241,362 
Consumer and other4,056 1,688 746 6,490 549,333 555,823 
Total$35,840 $16,249 $22,218 $74,307 $28,967,298 $29,041,605 
The following table details the changes in the allowance for credit losses for the three months ended March 31, 2023 and 2022, respectively, by loan classification (in thousands):
 Commercial real estate - Owner occupiedCommercial real estate - Non-owner occupiedConsumer
 real estate - mortgage		Construction and land developmentCommercial and industrialConsumer
and other		Total
Three months ended March 31, 2023:      
Balance at December 31, 2022$26,617 $40,479 $36,536 $36,114 $144,353 $16,566 $300,665 
Charged-off loans— — (130)— (10,649)(3,243)(14,022)
Recovery of previously charged-off loans8 30 671 221 3,711 2,091 6,732 
Provision for credit losses on loans(3,027)1,405 2,083 1,264 16,214 2,527 20,466 
Balance at March 31, 2023$23,598 $41,914 $39,160 $37,599 $153,629 $17,941 $313,841 
Three months ended March 31, 2022:      
Balance at December 31, 2021$19,618 $58,504 $32,104 $29,429 $112,340 $11,238 $263,233 
Charged-off loans(86)— (162)— (4,380)(1,884)(6,512)
Recovery of previously charged-off loans127 63 294 74 1,924 1,072 3,554 
Provision for credit losses on loans(154)(2,489)84 320 2,528 1,054 1,343 
Balance at March 31, 2022$19,505 $56,078 $32,320 $29,823 $112,412 $11,480 $261,618 

The adequacy of the allowance for credit losses is reviewed by Pinnacle Financial's management on a quarterly basis. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay the loan (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

Under the CECL methodology the allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics, and for loans that do not share similar risk characteristics with the collectively evaluated pools, evaluations are performed on an individual basis.

For commercial real estate, consumer real estate, construction and land development, and commercial and industrial loans, Pinnacle Financial primarily utilizes a probability of default and loss given default modeling approach. These models utilize historical correlations between default experience and certain macroeconomic factors as determined through a statistical regression analysis. All loan segments modeled using this approach consider changes in the national unemployment rate. In addition to the national unemployment rate, GDP and the three month treasury rate are considered for owner occupied commercial real estate, the commercial real estate price index and the five year treasury rate are considered for construction loans, and the three month treasury rate is considered for commercial and industrial loans. For the consumer and other loan segment, a non-statistical approach based on historical charge off rates is utilized.

Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by Pinnacle Financial and are dependent on the current economic environment among other factors. A reasonable and supportable period of 24 months was utilized for all loan segments at March 31, 2023 and December 31, 2022, followed by a 12 month straight line reversion to long term averages at each measurement date.

The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. These adjustments are based upon quarterly trend assessments in portfolio concentrations, policy exceptions, associate retention, independent loan review results, collateral considerations, risk ratings, competition and peer group credit quality trends. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors.
Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. Individual evaluations are generally performed for loans greater than $1.0 million which have experienced significant credit deterioration. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral.

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, as of March 31, 2023 and December 31, 2022 (in thousands):
Real EstateBusiness AssetsOtherTotal
March 31, 2023
Commercial real estate:
Owner occupied$5,218 $— $— $5,218 
Non-owner occupied3,339 — — 3,339 
Consumer real estate – mortgage19,805 — — 19,805 
Construction and land development196 — — 196 
Commercial and industrial— 13,581 7,206 20,787 
Consumer and other— — — — 
Total $28,558 $13,581 $7,206 $49,345 
December 31, 2022
Commercial real estate:
Owner occupied$10,804 $— $— $10,804 
Non-owner occupied4,795 — — 4,795 
Consumer real estate – mortgage22,466 — — 22,466 
Construction and land development299 — — 299 
Commercial and industrial— 12,327 — 12,327 
Consumer and other— — 2 2 
Total $38,364 $12,327 $2 $50,693 

The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. Pinnacle Financial uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, a loan modification will be granted by providing principal forgiveness on certain loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, a loan restructuring will result in providing multiple types of modifications. Typically, one type of modification, such as a payment delay or term extension, is granted initially. If the borrower continues to experience financial difficulty, another modification, such as principal forgiveness or an interest rate reduction, may be granted. Additionally, multiple types of modifications may be made on the same loan within the current reporting period. The combination is at least two of the following: a payment delay, term extension, principal forgiveness, and interest rate reduction. Upon determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
The following table shows the amortized cost basis as of March 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of loans and type of modification granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty (in thousands):
Payment Delay
Amortized Cost Basis% of Total Loan TypeFinancial Effect
March 31, 2023
Commercial real estate:
Owner occupied$— $— 
Non-owner occupied— — 
Consumer real estate – mortgage— — 
Construction and land development— — 
Commercial and industrial2,403 0.02 %Provided a 90 day forbearance period for payoff
Consumer and other— — 
Total $2,403 

None of the loans included in the table above were subsequently past due in the months following modification. Additionally, none had a payment default in the three months ended March 31, 2023 and none had been modified within the previous twelve months.

The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at March 31, 2023 and December 31, 2022. Also presented is the balance of loans on nonaccrual status at March 31, 2023 for which there was no related allowance for credit losses recorded (in thousands):
March 31, 2023December 31, 2022
Total nonaccrual loansNonaccrual loans with no allowance for credit lossesLoans past due 90 or more days and still accruingTotal nonaccrual loansNonaccrual loans with no allowance for credit lossesLoans past due 90 or more days and still accruing
Commercial real estate:
Owner occupied$2,306 $— $— $1,882 $— $— 
Non-owner occupied752 — — 2,244 1,040 — 
Consumer real estate – mortgage16,907 — — 17,330 — — 
Construction and land development130 — — 231 — — 
Commercial and industrial16,830 8,254 4,330 16,345 8,003 3,663 
Consumer and other63 — 954 84 — 743 
Total$36,988 $8,254 $5,284 $38,116 $9,043 $4,406 
Pinnacle Financial's policy is the accrual of interest income will be discontinued when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. As such, at the date loans are placed on nonaccrual status, Pinnacle Financial reverses all previously accrued interest income against current year earnings. Pinnacle Financial's policy is once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized no interest income from cash payments received on nonaccrual loans during the three months ended March 31, 2023 and 2022, respectively. Had these loans been on accruing status, an additional $1.1 million of interest income would have been recognized for the three months ended March 31, 2023 compared to an additional $529,000 for the three months ended March 31, 2022. Approximately $18.7 million and $6.4 million of nonaccrual loans were performing pursuant to their contractual terms as of March 31, 2023 and December 31, 2022, respectively.

Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industries. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications. Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle Bank's total risk-based capital to borrowers in the following industries at March 31, 2023 with the comparative exposures for December 31, 2022 (in thousands):
 March 31, 2023 
 Outstanding Principal BalancesUnfunded CommitmentsTotal exposureTotal Exposure at December 31, 2022
Lessors of nonresidential buildings$4,436,203 $1,980,583 $6,416,786 $7,058,045 
Lessors of residential buildings1,484,693 1,591,855 3,076,548 3,725,186 
New Housing For-Sale Builders599,664 922,963 1,522,627 1,763,089 
Music Publishers615,510 485,947 1,101,457 1,127,636 

Among other data, Pinnacle Financial monitors two ratios regarding construction and commercial real estate lending as part of its concentration management processes. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by Pinnacle Bank’s total risk-based capital. At March 31, 2023 and December 31, 2022, Pinnacle Bank’s construction and land development loans as a percentage of total risk-based capital were 88.5% and 85.9%, respectively. Non-owner occupied commercial real estate and multifamily loans (including construction and land development loans) as a percentage of total risk-based capital were 261.1% and 249.6% as of March 31, 2023 and December 31, 2022, respectively. Banking regulations have established guidelines for the construction ratio of less than 100% of total risk-based capital and for the non-owner occupied ratio of less than 300% of total risk-based capital. When a bank’s ratios are in excess of one or both of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. At March 31, 2023, Pinnacle Bank was within the 100% and 300% guidelines and has established what it believes to be appropriate monitoring of its lending in these areas as it aims to keep the level of these loans below the 100% and 300% thresholds.

At March 31, 2023, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $21.0 million to current directors, executive officers, and their related interests, of which $16.7 million had been drawn upon. At December 31, 2022, Pinnacle Bank had granted loans and other extensions of credit amounting to approximately $20.9 million to directors, executive officers, and their related interests, of which approximately $16.0 million had been drawn upon. All loans to directors, executive officers, and their related interests were performing in accordance with contractual terms at March 31, 2023 and December 31, 2022.

Loans Held for Sale

At March 31, 2023, Pinnacle Financial had approximately $23.1 million in commercial loans held for sale compared to $21.1 million at December 31, 2022. These include commercial real estate and apartment loans originated for sale to a third-party as part of a multi-family loan program. Such loans are closed under a pass-through commitment structure wherein Pinnacle Bank's loan commitment to the borrower is the same as the third party's take-out commitment to Pinnacle Bank and the third party purchase typically occurs within thirty days of Pinnacle Bank closing with the borrowers. Also included are commercial loans originated for sale to BHG as part of BHG's alternative financing portfolio.

At March 31, 2023, Pinnacle Financial had approximately $15.6 million of mortgage loans held-for-sale compared to approximately $12.9 million at December 31, 2022. Total mortgage loan volumes sold during the three months ended March 31, 2023 were approximately $120.1 million compared to approximately $270.8 million for the three months ended March 31, 2022. During the three months ended March 31, 2023, Pinnacle Financial recognized $2.1 million in gains on the sale of these loans, net of commissions paid, compared to $4.1 million during the three months ended March 31, 2022.

These residential mortgage loans held-for-sale are originated internally and are primarily to borrowers in Pinnacle Bank's geographic markets. These sales are typically on a mandatory basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines.
 
Each purchaser of a residential mortgage loan held-for-sale has specific guidelines and criteria for sellers of loans and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require Pinnacle Bank to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties, Pinnacle Bank has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan. To date, Pinnacle Bank's liability pursuant to the terms of these representations and warranties has been insignificant.