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, 2012, 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, 2012. As of December 31, 2012, Pinnacle Financial has accrued no interest and no penalties related to uncertain tax positions.

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

	2012		2011			2010
Current tax expense (benefit):
Federal	$	19,096	$	8,157		$	(13,412	)
State		-		-			-
Total current tax expense (benefit)	$	19,096		8,157			(13,412	)
Deferred tax expense (benefit):
Federal		485		(19,646	)		13,482
State		1,063		(3,749	)		4,340
Total deferred tax expense (benefit)		1,548		(23,395	)		17,822
Total income tax expense (benefit)	$	20,644	$	(15,238	)	$	4,410

Pinnacle Financial's income tax expense (benefit) 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, 2012 is as follows (in thousands):

	2012			2011			2010

Income tax expense (benefit) at statutory rate	$	21,885		$	9,975		$	(6,962	)
State excise tax expense (benefit), net of federal tax effect		1,063			(255	)		(2,305	)
Tax-exempt securities		(2,517	)		(2,655	)		(3,017	)
Federal tax credits		-			-			(360	)
Bank owned life insurance		(322	)		(406	)		(320	)
Insurance premiums		(243	)		(151	)		(301	)
Other items		778			734			600
Deferred tax valuation allowance		-			(22,480	)		17,075
Income tax expense (benefit)	$	20,644		$	(15,238	)	$	4,410

Pinnacle Financial's effective tax rate for 2012 and 2011 differs from the Federal income tax statutory rate of 35% primarily due to a state excise tax expense (benefit), investments in bank qualified municipal securities, bank owned life insurance, and tax savings from our captive insurance subsidiary, PNFP Insurance, Inc. Also in fiscal 2011, Pinnacle Financial reversed 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, 2012 and 2011 are as follows (in thousands):

	2012		2011
Deferred tax assets:
Loan loss allowance	$	26,777	$	28,684
Loans		423		783
Insurance		691		664
Accrued liability for supplemental retirement agreements		510		476
Restricted stock and stock options		3,777		3,525
Net operating loss carryforward		3,593		4,753
Alternative minimum tax carryforward		-		3,341
Other real estate owned		3,222		2,076
Other deferred tax assets		1,430		1,152
Total deferred tax assets		40,423		45,454

Deferred tax liabilities:
Depreciation and amortization		7,110		7,522
Core deposit intangible asset		1,700		2,735
Securities		12,024		14,675
REIT dividends		371		1,179
FHLB related liabilities		1,724		3,016
Other deferred tax liabilities		554		489
Total deferred tax liabilities		23,483		29,616
Net deferred tax assets	$	16,940	$	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 deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively determined. Primarily as a result of credit losses, Pinnacle Financial entered into a three-year cumulative pre-tax loss position in 2010. A three-year 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 results, 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.