Note 11. 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. As of December 31, 2011, Pinnacle Financial had no unrecognized tax benefits related to Federal or State income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to December 31, 2011. As of December 31, 2011, Pinnacle Financial has accrued no interest and no penalties related to uncertain tax positions.

Income tax (benefit) expense attributable to continuing operations for each of the years ended December 31 is as follows (in thousands):

	2011			2010			2009
Current tax expense (benefit):
Federal	$	8,157		$	(13,412	)	$	(4,747	)
State		-			-			-
Total current tax (benefit) expense		8,157			(13,412	)		(4,747	)
Deferred tax expense (benefit):
Federal		(19,646	)		13,482			(18,366	)
State		(3,749	)		4,340			(6,280	)
Total deferred tax (benefit) expense		(23,395	)		17,822			(24,646	)
Total income tax (benefit) expense	$	(15,238	)	$	4,410		$	(29,393	)

Pinnacle Financial's income tax (benefit) expense differs from the amounts computed by applying the Federal income tax statutory rates of 35% to income (loss) before income taxes. A reconciliation of the differences for each of the years in the three-year period ended December 31, 2011 is as follows (in thousands):

	2011			2010			2009

Income tax expense (benefit) at statutory rate	$	9,975		$	(6,962	)	$	(22,712	)
State excise tax (benefit) expense, net of federal tax effect		(255	)		(2,305	)		(4,082	)
Tax-exempt securities		(2,655	)		(3,017	)		(2,303	)
Federal tax credits		-			(360	)		(360	)
Bank owned life insurance		(406	)		(320	)		(181	)
Insurance premiums		(151	)		(301	)		(385	)
Other items		734			600			630
Valuation allowance in continuing operations		(22,480	)		17,075			-
Income tax (benefit) expense	$	(15,238	)	$	4,410		$	(29,393	)

Pinnacle Financial's effective tax rate for 2011 and 2010 differs from the Federal income tax statutory rate of 35% primarily due to a state excise tax (benefit), investments in bank qualified municipal securities, bank owned life insurance, tax savings from our captive insurance subsidiary, PNFP Insurance, Inc., and the full reversal in fiscal 2011 of the beginning of year valuation allowance against net deferred tax assets.

The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at December 31, 2011 and 2010 are as follows (in thousands):

	2011		2010
Deferred tax assets:
Loan loss allowance	$	28,684	$	32,068
Loans		783		268
Insurance		664		624
Accrued liability for supplemental retirement agreements		476		390
Restricted stock and stock options		3,525		2,896
Net operating loss carryforward		4,753		4,091
Alternative minimum tax carryforward		3,341		-
Other real estate owned		2,076		1,416
Other deferred tax assets		1,152		1,930
Gross deferred tax assets		45,454		43,683
Less valuation allowance		-		(22,480	)
Total deferred tax assets		45,454		21,203

Deferred tax liabilities:
Depreciation and amortization		7,522		7,696
Core deposit intangible asset		2,735		3,815
Securities		14,675		7,116
REIT dividends		1,179		259
FHLB related liabilities		3,016		1,783
Other deferred tax liabilities		489		534
Total deferred tax liabilities		29,616		21,203
Net deferred tax assets	$	15,838	$	-

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion of the entire deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. Primarily as a result of credit losses, Pinnacle Financial entered into a three-year cumulative pre-tax loss position in 2010. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset which is difficult to overcome and accordingly, Pinnacle Financial established a valuation allowance against the net deferred tax asset at June 30, 2010. Subsequently, Pinnacle Financial reported increasing profitability in subsequent fiscal quarters, demonstrated an improved ability to produce reliable projections, and realized an improvement in overall asset quality and related credit metrics. Due to these factors, other positive trends and the relatively short period of time in which Pinnacle Financial forecasted to exit a three-year cumulative pre-tax loss position and utilize our net deferred tax asset, Pinnacle Financial determined during the quarter ended September 30, 2011 that sufficient positive evidence, both subjective and objective existed to reverse the beginning of the year deferred tax valuation allowance.