Note 3. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available-for-sale:
U.S. government agency securities	$	40,095,765	$	356,405	$	16,620	$	40,435,550
Mortgage-backed securities		664,260,000		22,024,846		685,237		685,599,609
State and municipal securities		191,498,612		11,517,501		61,457		202,954,656
Corporate notes and other		9,845,106		1,327,533		-		11,172,639
	$	905,699,483	$	35,226,285	$	763,314	$	940,162,454
Securities held-to-maturity:
State and municipal securities	$	2,589,506	$	55,567	$	4,068	$	2,641,006
	$	2,589,506	$	55,567	$	4,068	$	2,641,006

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available-for-sale:
U.S. Government agency securities	$	90,214,825	$	487,320	$	286,707	$	90,415,438
Mortgage-backed securities		686,938,731		16,742,783		2,419,943		701,261,571
State and municipal securities		208,562,713		4,580,704		1,662,378		211,481,039
Corporate notes and other		10,474,074		761,487		76,778		11,158,783
	$	996,190,343	$	22,572,294	$	4,445,806	$	1,014,316,831
Securities held-to-maturity:
State and municipal securities		4,320,486		104,643		13,273		4,411,856
	$	4,320,486	$	104,643	$	13,273	$	4,411,856

At September 30, 2011, approximately $676.2 million of securities within Pinnacle Financial's investment portfolio were either pledged to secure public funds and other deposits or securities sold under agreements to repurchase.

The amortized cost and fair value of debt securities as of September 30, 2011 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages 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.

	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	3,799,528	$	3,835,204	$	1,960,695	$	1,982,828
Due in one year to five years		57,327,115		58,966,983		628,811		658,178
Due in five years to ten years		75,613,294		81,446,151		-		-
Due after ten years		104,699,546		110,314,507		-		-
Mortgage-backed securities		664,260,000		685,599,609		-		-
	$	905,699,483	$	940,162,454	$	2,589,506	$	2,641,006

At September 30, 2011 and December 31, 2010, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized losses of less than twelve months or twelve months or longer:

	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, 2011:

U.S. government agency securities	$	6,966,399	$	16,620	$	-	$	-	$	6,966,399	$	16,620
Mortgage-backed securities		142,016,634		610,266		22,984,635		74,971		165,001,269		685,237
State and municipal securities		2,790,815		41,159		2,102,623		24,366		4,893,438		65,525
Corporate notes		-		-		-		-		-		-
Total temporarily-impaired securities	$	151,773,848	$	668,045	$	25,087,258	$	99,337	$	176,861,106	$	767,382

At December 31, 2010:

U.S. government agency securities	$	22,011,159	$	286,707	$	-	$	-	$	22,011,159	$	286,707
Mortgage-backed securities		275,389,573		2,418,995		225,984		948		275,615,557		2,419,943
State and municipal securities		53,420,235		880,615		6,979,207		795,036		60,399,442		1,675,651
Corporate notes		258,282		823		424,046		75,955		682,328		76,778
Total temporarily-impaired securities	$	351,079,249	$	3,587,140	$	7,629,237	$	871,939	$	358,708,486	$	4,459,079

The applicable date for determining when securities are in an unrealized loss position is September 30, 2011. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month period, but is not in the “Investments with an Unrealized Loss of less than 12 months” category above.

As shown in the table above, at September 30, 2011, Pinnacle Financial had unrealized losses of $767,000 on $176.9 million of available-for-sale securities. The unrealized losses associated with these investment securities are primarily driven by changes in interest rates and are not due to the credit quality of the securities. These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers. 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. Because Pinnacle Financial currently does not intend to sell these securities 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 does not consider these securities to be other-than-temporarily impaired at September 30, 2011.

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, raising funds for liquidity purposes and in the event of a bank merger where certain investment holdings acquired via the merger are outside of the firm's investment policy. Additionally, if an available-for-sale security loses its investment grade, 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 it becomes known. The table below shows the fair value of securities that have been sold during 2011 and the amount of gain or loss recognized on those securities.

For the quarter ended,	Fair Value of securities sold		Gain recognized		Loss recognized			Net		Other-than-temporary impairment			Gain on the sale of securities, net
March 31, 2011(1)	$	19,300,000	$	612,000	$	(365,000	)	$	247,000	$	(406,000	)	$	(159,000	)
June 30, 2011(2)		31,800,000		650,000		-			650,000		(40,000	)		610,000
September 30, 2011 (3)		107,300,000		606,000		(229,000	)		377,000		-			377,000
Total	$	158,400,000	$	1,868,000	$	(594,000	)	$	1,274,000	$	(446,000	)	$	828,000

(1)

Sales during the first quarter of 2011, included mortgage backed securities where the resulting balance had been paid down to minimal amounts and municipal securities that had fallen outside of the parameters of our Asset/Liability policy due to a change in the quality of the security. Also, during the first quarter of 2011, Pinnacle Financial determined that an available-for-sale security was other-than-temporarily impaired as the credit worthiness of the security had deteriorated and was subsequently sold in the second quarter of 2011.

(2)

Sales during the second quarter of 2011 included the sale of a security which was deemed to be other-than-temporarily impaired during the first quarter of 2011, and mortgage backed and municipal securities that had fallen outside of the parameters of our Asset/Liability policy. Additionally, three securities were deemed to be other-than-temporarily impaired and were subsequently sold in the third quarter of 2011.

(3)

Sales during the third quarter of 2011 consisted of two primary groups of securities: securities identified as other-than-temporarily-impaired in the second quarter of 2011, and mortgage-backed securities in which the pre-payments speeds were expected to accelerate due to the mortgage refinancing expected due to lower rates. The loss recognized during the third quarter of 2011 related to further deterioration of the three securities previously identified as having other-than-temporary impairment.

The carrying values of Pinnacle Financial's investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that Pinnacle Financial will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future.