FASB ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Securities available-for-sale – Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.

Other investments – Included in other investments are investments recorded at fair value primarily in certain nonpublic investments and funds. The valuation of these nonpublic investments requires management judgment due to the absence of observable quoted market prices, inherent lack of liquidity and the long-term nature of such assets. These investments are valued initially based upon transaction price. The carrying values of other investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through financial reports provided by the portfolio managers of the investments. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies and changes in market outlook and the third-party financing environment over time. In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions. These investments are included in Level 3 of the valuation hierarchy if the entities and funds are not widely traded and the underlying investments are in privately-held and/or start-up companies for which market values are not readily available. Certain investments in funds for which the underlying assets of the fund represent publicly traded investments are included in Level 2 of the valuation hierarchy.

Other assets – Included in other assets are certain assets carried at fair value, including interest rate swap agreements to facilitate customer transactions, interest rate swaps designated as fair value hedges, interest rate caps and floors designated as cash flow hedges and interest rate locks associated with the mortgage loan pipeline. The carrying amount of interest rate swap agreements is based on Pinnacle Financial's pricing models that utilize observable market inputs. The fair value of the cash flow hedge agreements is determined by calculating the difference between the discounted fixed rate cash flows and the discounted variable rate cash flows. The fair value of the mortgage loan pipeline is based upon the projected sales price of the underlying loans, taking into account market interest rates and other market factors at the measurement date, net of the projected fallout rate. Pinnacle Financial reflects these assets within Level 2 of the valuation hierarchy as these assets are valued using similar transactions that occur in the market.

Collateral dependent loans – Collateral dependent loans are measured at the fair value of the collateral securing the loan less estimated selling costs. The fair value of real estate collateral is determined based on real estate appraisals which are generally based on recent sales of comparable properties which are then adjusted for property specific factors. Non-real estate collateral is valued based on various sources, including third party asset valuations and internally determined values based on cost adjusted for depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial condition.

Other real estate owned – Other real estate owned (OREO) represents real estate foreclosed upon by Pinnacle Bank through loan defaults by customers or acquired by deed in lieu of foreclosure. A significant portion of these amounts relate to lots, homes and development projects that are either completed or are in various stages of completion for which Pinnacle Financial believes it has adequate collateral. Upon foreclosure, the property is recorded at the lower of cost or fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for credit losses. Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are also reflected in noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value as appraisal values are property-specific and sensitive to the changes in the overall economic environment.

Other liabilities – Pinnacle Financial has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions, interest rate swaps designated as fair value hedges, interest rate caps and floors designated as cash flow hedges and interest rate locks associated with the funding for its mortgage loan originations. The fair value of these liabilities is based on Pinnacle Financial's pricing models that utilize observable market inputs and is reflected within Level 2 of the valuation hierarchy.

The following tables present financial instruments measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):


	Total carrying value in the consolidated balance sheet		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)
September 30, 2023
Investment securities available-for-sale:
U.S. Treasury securities	$	729,156	$	—	$	729,156	$	—
U.S. Government agency securities	255,105		—		255,105		—
Mortgage-backed securities	887,907		—		887,907		—
State and municipal securities	1,411,123		—		1,410,652		471
Agency-backed securities	163,462		—		163,462		—
Corporate notes and other	416,944		—		416,944		—
Total investment securities available-for-sale	3,863,697		—		3,863,226		471
Other investments	178,040		—		21,377		156,663
Other assets	264,118		—		264,118		—
Total assets at fair value	$	4,305,855	$	—	$	4,148,721	$	157,134

Other liabilities	$	154,119	$	—	$	154,119	$	—


	Total carrying value in the consolidated balance sheet		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)
Total liabilities at fair value	$	154,119	$	—	$	154,119	$	—

December 31, 2022
Investment securities available-for-sale:
U.S. Treasury securities	$	194,184	$	—	$	194,184	$	—
U.S. Government agency securities	396,157		—		396,157		—
Mortgage-backed securities	971,576		—		971,576		—
State and municipal securities	1,412,306		—		1,411,677		629
Agency-backed securities	117,403		—		117,403		—
Corporate notes and other	467,244		—		467,244		—
Total investment securities available-for-sale	3,558,870		—		3,558,241		629
Other investments	153,011		—		22,029		130,982
Other assets	190,629		—		190,629		—
Total assets at fair value	$	3,902,510	$	—	$	3,770,899	$	131,611

Other liabilities	$	96,483	$	—	$	96,483	$	—
Total liabilities at fair value	$	96,483	$	—	$	96,483	$	—

The following table presents assets measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022 (in thousands):


September 30, 2023	Total carrying value in the consolidated balance sheet		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)
Other real estate owned	$	2,555	$	—	$	—	$	2,555

Collateral dependent loans (1)	60,284		—		—		60,284
Total	$	62,839	$	—	$	—	$	62,839

December 31, 2022
Other real estate owned	$	7,952	$	—	$	—	$	7,952
Collateral dependent loans (1)	33,767		—		—		33,767
Total	$	41,719	$	—	$	—	$	41,719

In the case of the available-for-sale investment securities portfolio, Pinnacle Financial monitors the portfolio to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the nine months ended September 30, 2023, there were no transfers between Levels 1, 2 or 3.

The table below includes a rollforward of the balance sheet amounts for the three and nine months ended September 30, 2023 and 2022 (including the change in fair value) for financial instruments classified by Pinnacle Financial within Level 3 of the valuation hierarchy measured at fair value on a recurring basis including changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):


	For the Three months ended September 30,									For the Nine months ended September 30,
	2023				2022					2023	2022
	Available-for-sale Securities		Other investments			Available-for-sale Securities		Other investments			Available-for-sale Securities		Other investments		Available-for-sale Securities		Other investments
Fair value, beginning of period	$	479	$	151,762		$	656	$	121,611		$	629	$	130,982	$	828	$	100,996
Total realized gains included in income	1		(77)			2		725			3		3,597		5		9,104
Changes in unrealized gains/losses included in other comprehensive income (loss)	(9)		—			(28)		—			(2)		—		(45)		—
Purchases	—		8,015			—		8,481			—		27,947		—		27,244
Issuances	—		—			—		—			—		—		—		—
Settlements	—		(3,037)			—		(5,638)			(159)		(5,863)		(158)		(12,165)
Transfers out of Level 3	—		—			—		—			—		—		—		—
Fair value, end of period	$	471	$	156,663		$	630	$	125,179		$	471	$	156,663	$	630	$	125,179
Total realized gains included in income	$	1	$	(77)		$	2	$	725		$	3	$	3,597	$	5	$	9,104

The following tables present the carrying amounts, estimated fair value and placement in the fair value hierarchy of Pinnacle Financial's financial instruments at September 30, 2023 and December 31, 2022. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash, cash equivalents, and restricted cash, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as non-interest bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity (in thousands):


	Carrying Amount		Estimated Fair Value (1)		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)
September 30, 2023
Financial assets:
Securities purchased with agreement to resell	$	500,000	$	449,620	$	—	$	—	$	449,620
Securities held-to-maturity	3,018,579		2,581,232		—		2,581,232		—
Loans, net	31,597,092		30,375,663		—		—		30,375,663
Consumer loans held-for-sale	119,489		119,678		—		119,678		—
Commercial loans held-for-sale	20,513		20,545		—		20,545		—

Financial liabilities:
Deposits and securities sold under
agreements to repurchase	38,491,808		37,240,824		—		—		37,240,824
Federal Home Loan Bank advances	2,110,598		2,114,924		—		—		2,114,924
Subordinated debt and other borrowings	424,718		457,802		—		—		457,802


	Carrying Amount		Estimated Fair Value (1)		Quoted market prices in an active market (Level 1)		Models with significant observable market parameters (Level 2)		Models with significant unobservable market parameters (Level 3)

December 31, 2022
Financial assets:
Securities purchased with agreement to resell	$	513,276	$	440,390	$	—	$	—	$	440,390
Securities held-to-maturity	3,079,050		2,744,946		—		2,744,946		—
Loans, net	28,740,940		27,901,662		—		—		27,901,662
Consumer loans held-for-sale	42,237		42,353		—		42,353		—
Commercial loans held-for-sale	21,093		21,151		—		21,151		—

Financial liabilities:
Deposits and securities sold under
agreements to repurchase	35,156,148		34,435,447		—		—		34,435,447
Federal Home Loan Bank advances	464,436		477,673		—		—		477,673
Subordinated debt and other borrowings	424,055		430,884		—		—		430,884