PINNACLE FINANCIAL PARTNERS INC - FORM 10-Q - May 5, 2011

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(mark one)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
or
o  TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 000-31225

, Inc.
(Exact name of registrant as specified in its charter)

Tennessee
  
62-1812853
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)

150 Third Avenue South, Suite 800, Nashville, Tennessee
  
37201
(Address of principal executive offices)
  
(Zip Code)

(615) 744-3700
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changes since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x
No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
Yes  o
No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large Accelerated Filer o
Accelerated Filer x
Non-accelerated Filer   o
(do not check if you are a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o
No  x
 
As of May 4, 2011 there were 34,136,278 shares of common stock, $1.00 par value per share, issued and outstanding.
 
 
 
 

Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2011

Page No.
   
PART I – Financial Information:
  
3
30
50
50
   
   
PART II – Other Information:
  
51
Item 1A.  Risk Factors
51
51
51
51
51
Item 6.  Exhibits
52
53

 
Page 1
 
FORWARD-LOOKING STATEMENTS

Certain of the statements in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “anticipate,” “goal,” “objective,” “intend,” “plan,” “believe,” “should,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Such risks include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) the reduction of Pinnacle Financial’s loan balances, and conversely, the inability of Pinnacle Financial to ultimately grow its loan portfolio in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) effectiveness of Pinnacle Financial’s asset management activities in improving, resolving or liquidating lower-quality assets; (vi) increased competition with other financial institutions; (vii) greater than anticipated deterioration or lack of sustained growth in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, particularly in commercial and residential real estate markets; (viii) rapid fluctuations or unanticipated changes in interest rates; (ix) the results of regulatory examinations; (x) the development of any new market other than Nashville or Knoxville; (xi) a merger or acquisition; (xii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiii) the impact of governmental restrictions on entities participating in the Capital Purchase Program, of the U.S. Department of the Treasury (the “Treasury”); (xiv) further deterioration in the valuation of other real estate owned; (xv) inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions; (xvi) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and (xvii) Pinnacle Financial recording a change in the valuation allowance related to its deferred tax asset. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2011, as updated in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q. Many of such factors are beyond Pinnacle Financial's ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this release, whether as a result of new information, future events or otherwise.
 
 
Page 2
 
Item 1.
Part I.  Financial Information
  
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
             
   
March 31, 2011
    
December 31, 2010
  
ASSETS
            
Cash and noninterest-bearing due from banks
   $ 54,182,339     $ 40,154,247  
Interest-bearing due from banks
     71,352,180       140,647,481  
Federal funds sold
     15,236,156       7,284,685  
Short-term discount notes
     -       499,768  
Cash and cash equivalents
     140,770,675       188,586,181  
                 
Securities available-for-sale, at fair value
     980,934,694       1,014,316,831  
Securities held-to-maturity (fair value of $3,336,765 and $4,411,856 at March 31, 2011 and December 31, 2010, respectively)
     3,265,497       4,320,486  
Mortgage loans held-for-sale
     8,781,289       16,206,034  
                 
Loans
     3,217,429,627       3,212,440,190  
Less allowance for loan losses
     (78,987,905 )     (82,575,235 )
Loans, net
     3,138,441,722       3,129,864,955  
                 
Premises and equipment, net
     81,532,475       82,374,228  
Other investments
     42,649,837       42,282,255  
Accrued interest receivable
     16,518,216       16,364,573  
Goodwill
     244,083,193       244,090,311  
Core deposits and other intangible assets
     9,989,201       10,705,105  
Other real estate owned
     55,999,915       59,608,224  
Other assets
     98,023,877       100,284,697  
Total assets
   $ 4,820,990,591     $ 4,909,003,880  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Deposits:
                
Noninterest-bearing
   $ 608,428,298     $ 586,516,637  
Interest-bearing
     614,171,897       573,670,188  
Savings and money market accounts
     1,549,354,342       1,596,306,386  
Time
     959,928,728       1,076,564,179  
Total deposits
     3,731,883,265       3,833,057,390  
Securities sold under agreements to repurchase
     165,132,330       146,294,379  
Federal Home Loan Bank advances
     111,350,749       121,393,026  
Subordinated debt
     97,476,000       97,476,000  
Accrued interest payable
     3,951,497       5,197,925  
Other liabilities
     29,970,374       28,127,875  
Total liabilities
     4,139,764,215       4,231,546,595  
Stockholders’ equity:
                
Preferred stock, no par value; 10,000,000 shares authorized; 95,000 shares issued and outstanding at March 31, 2011, and December 31, 2010
     91,094,656       90,788,682  
Common stock, par value $1.00; 90,000,000 shares authorized; 34,132,256 issued and outstanding at March 31, 2011 and 33,870,380 issued and outstanding at December 31, 2010
     34,132,256       33,870,380  
Common stock warrants
     3,348,402       3,348,402  
Additional paid-in capital
     532,311,827       530,829,019  
Retained earnings
     15,007,452       12,996,202  
Accumulated other comprehensive income, net of taxes
     5,331,783       5,624,600  
Total stockholders’ equity
     681,226,376       677,457,285  
Total liabilities and stockholders’ equity
   $ 4,820,990,591     $ 4,909,003,880  
 
See accompanying notes to consolidated financial statements.
 
 
Page 3
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
March 31,
  
   
2011
    
2010
  
Interest income:
            
Loans, including fees
   $ 38,353,481     $ 41,075,107  
Securities:
                
Taxable
     6,360,899       9,087,588  
Tax-exempt
     1,935,888       2,050,253  
Federal funds sold
     574,006       477,142  
Total interest income
     47,224,274       52,690,090  
                 
Interest expense:
                
Deposits
     9,424,241       13,463,815  
Securities sold under agreements to repurchase
     381,569       552,313  
Federal Home Loan Bank advances and other borrowings
     1,397,831       2,114,055  
Total interest expense
     11,203,641       16,130,183  
Net interest income
     36,020,633       36,559,907  
Provision for loan losses
     6,139,138       13,225,920  
Net interest income after provision for loan losses
     29,881,495       23,333,987  
                 
Noninterest income:
                
Service charges on deposit accounts
     2,261,457       2,365,311  
Investment services
     1,508,086       1,236,383  
Insurance sales commissions
     1,049,232       1,099,019  
Trust fees
     729,988       896,573  
Gain on loans sold, net
     609,377       562,598  
Net (loss) gain on sale of investment securities
     (159,103 )     364,550  
Other noninterest income
     2,325,020       1,961,212  
Total noninterest income
     8,324,057       8,485,646  
                 
Noninterest expense:
                
Salaries and employee benefits
     17,923,622       17,004,526  
Equipment and occupancy
     5,006,710       5,366,187  
Other real estate expense
     4,334,118       5,402,153  
Marketing and other business development
     753,751       753,918  
Postage and supplies
     489,877       733,539  
Amortization of intangibles
     715,904       746,001  
Other noninterest expense
     5,476,846       6,160,231  
Total noninterest expense
     34,700,828       36,166,555  
Income (loss) before income taxes
     3,504,724       (4,346,922 )
Income tax expense (benefit)
     -       (523,697 )
Net income (loss)
     3,504,724       (3,823,225 )
Preferred stock dividends
     1,187,500       1,187,500  
Accretion on preferred stock discount
     305,974       357,994  
Net income (loss) available to common stockholders
   $ 2,011,250     $ (5,368,719 )
Per share information:
                
Basic net income (loss) per common share available to common stockholders
   $ 0.06     $ (0.16 )
Diluted net income (loss) per common share available to common stockholders
   $ 0.06     $ (0.16 )
Weighted average shares outstanding:
                
Basic
     33,366,053       32,558,016  
Diluted
     34,013,810       32,558,016  

See accompanying notes to consolidated financial statements.
 
 
Page 4
 
 PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
         
Common Stock
                                
   
Preferred Stock
Amount
    
Shares
    
Amount
    
Common Stock Warrants
    
Additional Paid-in
Capital
    
Retained Earnings
    
Accumulated Other Comp.
Income, net
    
Total Stockholders’ Equity
  
                                                 
Balances, December 31, 2009
   $ 89,462,633       33,029,719     $ 33,029,719     $ 3,348,402     $ 524,366,603     $ 43,372,743     $ 7,440,081     $ 701,020,181  
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax benefits
     -       70,573       70,573       -       636,726       -       -       707,299  
Issuance of restricted common shares, net of forfeitures
     -       258,705       258,705       -       (258,705 )     -       -       -  
Restricted shares withheld for taxes
     -       (7,879 )     (7,879 )     -       (107,011 )     -       -       (114,890 )
Compensation expense for restricted shares
     -       -       -       -       741,573       -       -       741,573  
Compensation expense for stock options
     -       -       -       -       444,496       -       -       444,496  
Accretion on preferred stock dividend
     357,994       -       -       -       -       (357,994 )     -       -  
Preferred dividends paid
     -       -       -       -       -       (1,187,500 )     -       (1,187,500 )
Comprehensive income (loss):
                                                                
Net loss
     -       -       -       -       -       (3,823,225 )     -       (3,823,225 )
Net unrealized gains on securities available-for-sale, net of deferred tax benefit of $1,596,494
     -       -       -       -       -       -       2,473,080       2,473,080  
Total comprehensive loss
                                                             (1,350,145 )
Balances, March 31, 2010
   $ 89,820,627       33,351,118     $ 33,351,118     $ 3,348,402     $ 525,823,682     $ 38,004,024     $ 9,913,161     $ 700,261,014  
                                                                 
Balances, December 31, 2010
   $ 90,788,682       33,870,380     $ 33,870,380     $ 3,348,402     $ 530,829,019     $ 12,996,202     $ 5,624,600     $ 677,457,285  
Exercise of employee common stock options, and related tax benefits
     -       106,730       106,730       -       610,337       -       -       717,067  
Issuance of restricted common shares, net of forfeitures
     -       165,822       165,822       -       (165,822 )     -       -       -  
Issuance of Salary Stock Units
     -       6,169       6,169       -       90,886       -       -       97,055  
Restricted shares withheld for taxes
     -       (16,845 )     (16,845 )     -       (230,892 )     -       -       (247,737 )
Compensation expense for restricted shares
     -       -       -       -       808,207       -       -       808,207  
Compensation expense for stock options
     -       -       -       -       370,092       -       -       370,092  
Accretion on preferred stock discount
     305,974       -       -       -       -       (305,974 )     -       -  
Preferred dividends paid
     -       -       -       -       -       (1,187,500 )     -       (1,187,500 )
Comprehensive income (loss):
                                                                
Net income
     -       -       -       -       -       3,504,724       -       3,504,724  
Net unrealized losses on securities available-for-sale, net of deferred tax benefit of $115,000
     -       -       -       -       -       -       (292,817 )     (292,817 )
Total comprehensive income
                                                             3,211,907  
Balances, March 31, 2011
   $ 91,094,656       34,132,256     $ 34,132,256     $ 3,348,402     $ 532,311,827     $ 15,007,452     $ 5,331,783     $ 681,226,376  
 
See accompanying notes to consolidated financial statements.
 
 
Page 5
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
Three months ended
March 31,
  
   
2011
    
2010
  
Operating activities:
            
Net income (loss)
   $ 3,504,724     $ (3,823,225 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                
Net amortization/accretion of premium/discount on securities
     2,102,529       1,051,879  
Depreciation and amortization
     2,795,884       2,875,880  
Provision for loan losses
     6,139,138       13,225,920  
Gain on loan sales, net
     (609,377 )     (562,598 )
Loss (gain) on sale of investment securities, net
     159,103       (364,550 )
Stock-based compensation expense
     1,275,354       1,186,069  
Deferred tax expense (benefit)
     -       (1,529,004 )
Losses on foreclosed real estate and other investments
     3,297,185       4,819,280  
Excess tax benefit from stock compensation
     (7,117 )     (2,321 )
Mortgage loans held for sale:
                
Loans originated
     (62,944,534 )     (70,806,622 )
Loans sold
     70,980,585       72,195,961  
Decrease in other assets
     8,577,073       8,397,287  
Increase (decrease)  in other liabilities
     595,804       11,182,734  
Net cash provided by operating activities
     35,866,351       37,846,690  
                 
Investing activities:
                
Activities in securities available-for-sale:
                
Purchases
     (49,158,590 )     (161,445,670 )
Sales
     19,277,990       30,431,826  
Maturities, prepayments and calls
     60,713,289       79,906,149  
Activities in securities held-to-maturity:
                
Sales
     -       954,389  
Maturities, prepayments and calls
     1,049,999       1,764,999  
Decrease (increase) in loans, net
     (21,304,654 )     62,168,779  
Purchases of premises and equipment
     (975,525 )     (4,003,674 )
Other investments
     (238,101 )     (927,235 )
Net cash provided by investing activities
     9,364,408       8,849,563  
                 
Financing activities:
                
Net (decrease) increase in deposits
     (101,153,661 )     12,846,742  
Net (decrease) increase in securities sold under agreements to repurchase
     18,837,951       (74,976,494 )
Advances from Federal Home Loan Bank:
                
Issuances
     -       70,000,000  
Payments
     (10,019,502 )     (125,295,583 )
Preferred dividends paid
     (1,187,500 )     (1,187,500 )
Exercise of common stock options and stock appreciation rights
     469,330       592,409  
Excess tax benefit from stock compensation
     7,117       2,321  
Net cash used in financing activities
     (93,046,265 )     (118,018,105 )
Net  increase in cash and cash equivalents
     (47,815,506 )     (71,321,852 )
Cash and cash equivalents, beginning of period
     188,586,181       166,602,074  
Cash and cash equivalents, end of period
   $ 140,770,675     $ 95,280,222  
 
See accompanying notes to consolidated financial statements.
 
 
Page 6
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.  Summary of Significant Accounting Policies
 
Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle National Bank (Pinnacle National.)  Pinnacle National is a commercial bank headquartered in Nashville, Tennessee. Pinnacle National provides a full range of banking services in its primary market areas of the Nashville-Davidson-Murfreesboro-Franklin, Tennessee and Knoxville, Tennessee Metropolitan Statistical Areas.

Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles.  All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included.  The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in the 2010 Annual Report previously filed on Form 10-K.

These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust II, PNFP Statutory Trust III, PNFP Statutory Trust IV and Collateral Plus, LLC, are affiliates of Pinnacle Financial and are included in these consolidated financial statements pursuant to the equity method of accounting.  Significant intercompany transactions and accounts are eliminated in consolidation.
 
Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, the determination of any impairment of intangible assets, including goodwill, the valuation of other real estate owned, the determination of the valuation of deferred tax assets, and the valuation of our investment portfolio including other-than-temporary impairment.
 
Loans — Loans are reported at their outstanding principal balances less unearned income, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income on loans is accrued based on the principal balance outstanding.  Loan origination fees, net of certain loan origination costs, are deferred and recognized as an adjustment to the related loan yield using a method which approximates the interest method.  At March 31, 2011 and December 31, 2010, net deferred loan fees of $348,000 and $579,000, respectively, were included in loans on the accompanying consolidated balance sheets.

Loans are charged off when management believes that the full collectability of the loan is unlikely.  As such, a loan may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which often is determined when the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection.  Generally, all interest accrued but not collected for loans that are placed on nonaccrual status is reversed against current income.  Interest income is subsequently recognized only to the extent cash payments are received while the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis.  A nonaccrual loan is returned to accruing status once the loan has been brought current and collection is reasonably assured or the loan has been “well-secured” through other techniques.  Past due status is determined based on the contractual due date per the underlying loan agreement.

All loans that are placed on nonaccrual are further analyzed to determine if they should be classified as impaired loans.  At December 31, 2010 and at March 31, 2011, there were no loans classified as nonaccrual that were not also deemed to be impaired.  A loan is considered to be impaired when it is probable Pinnacle Financial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan. This determination is made using a variety of techniques, which include a review of the borrower’s financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results of reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc). Generally, loans with an identified weakness and principal balance of $250,000 or more are subject to individual identification for impairment.  Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a specific valuation allowance is established as a component of the allowance for loan losses or, in the case of collateral dependent loans, the excess is charged off.   Changes to the valuation allowance are recorded as a component of the provision for loan losses.  Any subsequent adjustments to present value calculations for impaired loan valuations as a result of the passage of time, such as changes in the anticipated payback period for repayment, are recorded as a component of the provision for loan losses.  For loans less than $250,000, Pinnacle Financial assigns a valuation allowance to these loans utilizing an allocation rate equal to the allocation rate calculated for loans of a similar type greater than $250,000.  In addition, Pinnacle Financial reviews impaired collateral dependent loans less than $250,000 to determine if any amounts should be charged-off pursuant to regulatory requirements.  At March 31, 2011, the principal balance of these small impaired loans was $8.8 million, which represented 11.5% of all impaired loans.  Pinnacle Financial does not have any loan portfolios that are collectively evaluated for impairment such as credit card or automobile portfolios.
 
 
Page 7
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 Allowance for Loan Losses —The allowance for loan losses is maintained at a level that management believes to be adequate to absorb probable losses in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, volume, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans, historical loan loss factors, loss experience of various loan segments, identified impaired loans and other factors related to the portfolio. This evaluation is performed quarterly and is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on any impaired loans.

In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process.  We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio.  Our loan review process includes the judgment of management, independent loan reviewers, and reviews that may have been conducted by third-party reviewers. We incorporate relevant loan review results in the loan impairment determination. In addition, regulatory agencies, as an integral part of their examination process, will periodically review Pinnacle Financial’s allowance for loan losses, and may require Pinnacle Financial to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

As part of management’s quarterly assessment of the allowance, management divides the loan portfolio into five segments:  commercial, commercial real estate, small business lending, consumer and consumer real estate.  Each segment is then analyzed such that an allocation of the allowance is estimated for each loan segment.  Prior to 2010, because of Pinnacle Financial’s limited loss history, loss estimates were primarily derived from historical loss data by loan categories for comparable peer institutions.  During 2010, we incorporated the results of our proprietary historical loan loss migration analysis into our determination of the allowance for loan losses.  We believe the increased emphasis on our historical loss experience metrics provides a better estimate of losses inherent in our portfolio.  This refinement of our methodology did not result in a material change in our allowance.

The allowance allocation for commercial, commercial real estate loans and small business lending begins with a process of estimating the probable losses inherent for these types of loans.  The estimates for these loans are established by category and based on our internal system of credit risk ratings and historical loss data.  The estimated loan loss allocation rate for our internal system of credit risk grades for commercial and commercial real estate loans is based our historical loss experience adjusted for current factors and industry loss factors.  Our historical loss experience is based on a migration analysis of all loans that were charged-off during prior years.  The migration analysis was based on an eight quarter look-back to capture the recent loan loss experience of the firm.  In this current economic environment, the eight quarter look-back is indicative of the risks inherent in our loan portfolio.  As we move through the economic cycle, we will continue to monitor our look-back period to capture the inherent risks in our portfolio. The migration analysis assists in evaluating loan loss allocation rates for the various risk grades assigned to loans in our portfolio. We compare the migration analysis results to the other factors used to determine the loss allocation rates for the commercial, commercial real estate and small business lending portfolios.  The loss allocation rates from our migration analysis and the industry loss factors are weighted to determine a weighted average loss allocation rate for these portfolios.

The allowance allocation for consumer and consumer real estate loans which includes installment, home equity, consumer mortgages, automobiles and others is established for each of the categories by estimating probable losses inherent in that particular category of consumer and consumer real estate loans.  The estimated loan loss allocation rate for each category is based on consideration of our actual historical loss rates and industry loss rates. Consumer and consumer real estate loans are evaluated as a group by category (i.e. retail real estate, installment, etc.) rather than on a loan credit risk rating basis because these loans are smaller and homogeneous.  We weight the allocation methodologies for the consumer and consumer real estate portfolios and determine a weighted average allocation for these portfolios.
 
 
Page 8
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several environmental factors. The allocation for environmental factors is particularly subjective and does not lend itself to exact mathematical calculation.  This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and is based upon quarterly trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors.  These environmental factors are considered for each of the five loan segments, and the allowance allocation, as determined by the processes noted above for each component, is increased or decreased based on the incremental assessment of these various environmental factors.  The environmental factors accounted for approximately 5.6% of the allowance for loan losses at March 31, 2011 compared to 6.8% of allowance for loan losses at December 31, 2010.  As of March 31, 2011 and December 31, 2010, the environmental allocation was 0.15% and 0.19%, respectively, of the outstanding principal balance of commercial, commercial real estate and small business loans and 0.13% and 0.16%, respectively, of consumer and consumer real estate loans.  The decrease in the environmental allocation between the two periods is based on our analysis of the above factors as of both balance sheet dates.
 
The assessment also includes an unallocated component.  We believe that the unallocated amount is warranted for inherent factors that cannot be practically assigned to individual loan categories, such as the imprecision in the overall loss allocation measurement process, the volatility of the local economies in the markets we serve and imprecision in our credit risk ratings process.

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the three months ended March 31, 2011 and 2010 was as follows:

   
For the three months ended March 31,
  
   
2011
    
2010
  
Cash Transactions:
            
Interest paid
   $ 12,493,306     $ 16,474,470  
Income taxes received
     -       8,189,745  
Noncash Transactions:
                
Loans charged-off to the allowance for loan losses
     11,658,354       15,746,176  
Loans foreclosed upon and transferred to other real estate owned
     6,401,209       6,346,272  

Income (Loss) Per Common Share — Basic net income (loss) per share available to common stockholders (EPS) is computed by dividing net income or loss available to common stockholders by the weighted average common shares outstanding for the period.  Weighted average common shares outstanding for the period include restricted shares that have been issued to associates and outside directors.  Weighted average common shares outstanding also include salary stock units issued to the named executive officers.  Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted.  The difference between basic and diluted weighted average shares outstanding is attributable to common stock options, common stock appreciation rights, warrants and restricted shares with performance based criteria. The dilutive effect of outstanding options, common stock appreciation rights, warrants and restricted shares with performance based criteria is reflected in diluted EPS by application of the treasury stock method.

As of March 31, 2011, there were approximately 1,667,700 stock options and 8,200 stock appreciation rights outstanding to purchase common shares.  Additionally, as of March 31, 2011, there were outstanding warrants to purchase 267,455 shares of Pinnacle Financial common stock.  These warrants were issued in conjunction with Pinnacle Financial’s participation in the U.S. Treasury’s Capital Purchase Program (CPP) as more fully discussed in Note 2. For the three months ended March 31, 2011, approximately 647,757 dilutive stock options, stock appreciation rights and warrants were included in the earnings per share calculation.  As of March 31, 2010, there were 2,050,000 stock options and 10,000 stock appreciation rights outstanding to purchase common shares.  Additionally, as of March 31, 2010, there were outstanding warrants to purchase 552,455 of common shares of Pinnacle Financial common stock.  Due to the net loss attributable to common stockholders for the three months ended March 31, 2010, no potentially dilutive shares related to these stock options, stock appreciation rights, and warrants were included in the loss per share calculations, as including such shares would have an antidilutive effect on the loss per share.
 
 
Page 9
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of the basic and diluted earnings per share calculations for the three months ended March 31, 2011 and 2010:

   
For the three months ended
March 31,
  
   
2011
    
2010
  
Basic earnings per share calculation:
            
Numerator - Net income (loss) available to common stockholders
   $ 2,011,250     $ (5,368,719 )
                 
Denominator - Average common shares outstanding
     33,366,053       32,558,016  
Basic income (loss) per share available to common stockholders
   $ 0.06     $ (0.16 )
                 
Diluted earnings per share calculation:
                
Numerator – Net income (loss) available to common stockholders
   $ 2,011,250     $ (5,368,719 )
                 
Denominator - Average common shares outstanding
     33,366,053       32,558,016  
Dilutive shares contingently issuable
     647,757       -  
Average diluted common shares outstanding
     34,013,810       32,558,016  
Diluted net income (loss) per share available to common stockholders
   $ 0.06     $ (0.16 )

Recently Issued Accounting Pronouncement — In April 2011, FASB issued ASU No. 2011-02 A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered troubled debt restructurings. Pinnacle Financial is continuing to evaluate the impact of adoption of this ASU.

Note 2. Participation in U.S. Treasury Capital Purchase Program and Private Placement of Common Stock
 
On December 12, 2008, Pinnacle Financial issued 95,000 shares of preferred stock to the Treasury for $95 million pursuant to the Treasury’s Capital Purchase Program (CPP) under the Troubled Assets Relief Program (TARP).  The CPP preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% thereafter.  Pinnacle Financial can redeem the preferred shares issued to the Treasury under the CPP at any time subject to a requirement that it must consult with its primary federal regulators before redemption.  Additionally, Pinnacle Financial issued warrants to purchase 534,910 shares of common stock to the Treasury as a condition to its participation in the CPP.  The warrants have an exercise price of $26.64 each, are immediately exercisable and expire 10 years from the date of issuance.  On June 16, 2009, Pinnacle Financial completed the sale of 8,855,000 shares of its common stock in a public offering, resulting in net proceeds to Pinnacle Financial of approximately $109 million.  As a result, and pursuant to the terms of the warrants issued to the U.S. Treasury in connection with Pinnacle Financial’s participation in the CPP, the number of shares issuable upon exercise of the warrants issued to the Treasury in connection with the CPP was reduced by 50%, or 267,455 shares.
 
 
Page 10
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3.  Securities
 
The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2011 and December 31, 2010 are summarized as follows:
 
   
March 31, 2011
  
   
 
    
Gross
    
Gross
    
 
  
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
     Cost    
Gains
    
Losses
      Value  
Securities available-for-sale:
                        
U.S. government agency securities
   $ 80,575,837     $ 242,611     $ 363,235     $ 80,455,213  
Mortgage-backed securities
     671,360,062       14,920,892       1,375,054       684,905,900  
State and municipal securities
     201,251,903       4,847,341       1,200,113       204,899,131  
Corporate notes and other
     9,908,884       766,173       607       10,674,450  
    $ 963,096,686     $ 20,777,017     $ 2,939,009     $ 980,934,694  
Securities held-to-maturity:
                                
State and municipal securities
     3,265,497       80,141       8,873       3,336,765  
    $ 3,265,497     $ 80,141     $ 8,873     $ 3,336,765  
       
   
December 31, 2010
  
   
 
    
Gross
    
Gross
    
 
  
     
Amortized
    
Unrealized
    
Unrealized
      
Fair
  
     
Cost
    
Gains
    
Losses
      
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  
 
During the quarter ended March 31, 2011, Pinnacle Financial realized approximately $612,000 in gains and $365,000 in losses from the sale of $19.0 million of available-for-sale securities. These sales were 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.  During the three months ended March 31, 2010, Pinnacle Financial realized approximately $611,000 in gains and $246,000 in losses from the sale of $30.4 million of available-for-sale securities and approximately $954,000 of held-to-maturity securities.  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. This resulted in a $406,000 impairment charge during the first quarter of 2011 which offset the net gain on the sale of investment securities.

At March 31, 2011, approximately $806.7 million of 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 March 31, 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.
 
 
Page 11
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   
Available-for-sale
    
Held-to-maturity
  
   
Amortized
Cost
    
Fair
Value
    
Amortized
Cost
    
Fair
Value
  
Due in one year or less
   $ 3,235,552     $ 3,266,885     $ 2,056,641     $ 2,092,883  
Due in one year to five years
     52,399,353       53,103,379       1,208,856       1,243,882  
Due in five years to ten years
     122,022,968       125,422,181       -       -  
Due after ten years
     114,078,751       114,236,349       -       -  
Mortgage-backed securities
     671,360,062       684,905,900       -       -  
    $ 963,096,686     $ 980,934,694     $ 3,265,497     $ 3,336,765  

At March 31, 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 March 31, 2011:
                                    
                                     
U.S. government agency securities
   $ 40,473,544     $ 363,235     $ -     $ -     $ 40,476,544     $ 363,235  
Mortgage-backed securities
     209,261,775       1,374,435       254,178       619       209,515,953       1,375,054  
State and municipal securities
     45,926,967       891,968       4,204,042       317,018       50,131,009       1,208,986  
Corporate notes
     257,545       607       -       -       257,545       607  
Total temporarily-impaired securities
   $ 295,919,831     $ 2,630,245     $ 4,458,220     $ 317,637     $ 300,378,051     $ 2,947,882  
                                                 
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 March 31, 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 which would result in the security being classified in the “Investments with an unrealized loss of less than 12 months” category above.
 
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.
 
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 noted in the table above, at March 31, 2011, Pinnacle Financial had unrealized losses of $2.9 million on $300.4 million of available-for-sale securities. Because Pinnacle Financial 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 March 31, 2011.
 
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.
 
 
Page 12
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 4.  Loans and Allowance for Loan Losses

For financial reporting purposes, Pinnacle Financial classifies our 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 with the Federal Deposit Insurance Corporation (FDIC).
 
The composition of loans by primary loan classification as well as impaired and performing loan status at March 31, 2011 and December 31, 2010 is summarized in the table below (in thousands):
 
   
Performing Loans
    
Impaired Loans
    
Total Loans
  
   
March 31,
2011
    
December 31,
2010
    
March 31,
2011
    
December 31,
2010
    
March 31,
2011
    
December 31,
2010
  
Commercial real estate – mortgage
   $ 1,092,055     $ 1,082,073     $ 10,478     $ 12,542     $ 1,102,533     $ 1,094,615  
Consumer real estate – mortgage
     685,987       696,452       12,706       9,035       698,693       705,487  
Construction and land development
     263,798       287,747       36,899       43,514       300,697       331,261  
Commercial and industrial
     1,032,174       997,351       15,580       14,740       1,047,754       1,012,091  
Consumer and other
     67,048       67,954       705       1,032       67,753       68,986  
    $ 3,141,062     $ 3,131,577     $ 76,368     $ 80,863     $ 3,217,430     $ 3,212,440  
 

The following table shows the allowance allocation by loan classification for impaired and performing loans at March 31, 2011 and December 31, 2010 (in thousands):
 
   
Performing Loans
    
Impaired Loans
    
Total Allowance
for Loan Losses
  
   
March 31,
 2011
    
December 31,
 2010
    
March 31,
2011
    
December 31,
2010
    
March 31,
2011
    
December 31,
2010
  
Commercial real estate – mortgage
   $ 21,500     $ 19,076     $ 100     $ 176     $ 21,600     $ 19,252  
Consumer real estate – mortgage
     9,669       9,330       392       568       10,061       9,898  
Construction and land development
     15,828       15,297       2,093       3,825       17,921       19,122  
Commercial and industrial
     16,264       17,428       3,445       3,998       19,709       21,426  
Consumer and other
     1,377       1,484       41       390       1,418       1,874  
Unallocated
     8,279       11,003       -       -       8,279       11,003  
    $ 72,917     $ 73,618     $ 6,071     $ 8,957     $ 78,988     $ 82,575  

The following table details the changes in the allowance for loan losses from December 31, 2010 to March 31, 2011 and December 31, 2009 to December 31, 2010 by loan classification (in thousands):

   
For the quarter ended March 31, 2011
  
   
Commercial real estate –
mortgage
    
Consumer real estate – mortgage
    
Construction and land development
    
Commercial
 and
industrial
    
Consumer
and other
    
Unallocated
    
Total
  
                                           
Beginning balance
   $ 19,252     $ 9,898     $ 19,122     $ 21,426     $ 1,874     $ 11,003     $ 82,575  
Charged-off loans
     (263 )     (702 )     (1,222 )     (8,712 )     (759 )     -       (11,658 )
Recovery of previously charged-off loans
     81       105       805       884       57       -       1,932  
Provision for loan losses
     2,530       760       (784 )     6,111       246       (2,724 )     6,139  
Ending balance
   $ 21,600     $ 10,061     $ 17,921     $ 19,709     $ 1,418     $ 8,279     $ 78,988  
 
 
Page 13
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   
For the year ended December 31, 2010
  
   
Commercial
real estate –
mortgage
    
Consumer
real estate –
mortgage
    
Construction
and land
development
    
Commercial
 and
industrial
    
Consumer
and other
    
Unallocated
    
Total
  
                                           
Beginning balance
   $ 22,505     $ 10,725     $ 23,027     $ 26,332     $ 2,456     $ 6,914     $  91,959  
Charged-off loans
     (9,041 )     (6,769 )     (27,526 )     (23,555 )     (652 )     -       (67,543 )
Recovery of previously charged-off loans
     343       377       2,618       874       252       -       4,464  
Provision for loan losses
     5,445       5,565       21,003       17,775       (182 )     4,089       53,695  
Ending balance
   $ 19,252     $ 9,898     $ 19,122     $ 21,426     $ 1,874     $ 11,003     $ 82,575  

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter.  The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

 Commercial loans receive risk ratings by the assigned financial advisor that are subject to validation by our independent loan review department.  Risk ratings are categorized as pass, special mention, substandard, substandard-impaired or doubtful-impaired.  Pinnacle Financial believes that our categories follow those outlined by our primary regulator.  At March 31, 2011, approximately 75% of our loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating in the allowance for loan loss assessment.  Consumer loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the loan.  However, certain consumer real estate-mortgage loans and certain consumer and other loans do 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.

Risk ratings are subject to continual review by the loan officer.  At least annually and in many cases twice per year, our credit policy requires that each risk-rated loan is subject to a formal credit risk review to be performed by the respective loan officer.  Each loan grade is also subject to review by our independent loan review department.  Currently, our independent loan review department targets reviews of at least 70% of our risk rated portfolio annually.  Included in the 70% coverage are independent loan reviews of loans in targeted portfolio segments such as certain consumer loans, land loans, loans assigned to a particular lending officer and/or loan types in certain geographies.

The following table presents our loan balances by primary loan classification and the amount classified within each risk rating category.  Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:

 
· 
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 sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt.  Substandard loans are characterized by the distinct possibility that Pinnacle Financial will sustain some loss if the deficiencies are not corrected.
 
· 
Substandard-impaired loans are substandard loans that have been place on nonaccrual.
 
· 
Doubtful-impaired loans have all the characteristics of substandard 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.  Pinnacle Financial considers all doubtful loans to be impaired and places the loan on nonaccrual status.
 
 
Page 14
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table outlines the amount of each loan classification categorized into each risk rating class as of March 31, 2011 and December 31, 2010 (in thousands):
 
   
March 31, 2011
  
   
Pass
    
Special Mention
    
Substandard
    
Substandard-Impaired
    
Doubtful-Impaired
    
Total
Loans
  
Commercial real estate – mortgage
   $ 966,948     $ 50,633     $ 74,473     $ 9,485     $ 994     $ 1,102,533  
Consumer real estate – mortgage
     652,652       13,090       20,245       8,766       3,940       698,693  
Construction and land development
     180,542       31,699       51,557       36,672       227       300,697  
Commercial and industrial
     960,718       32,551       38,905       14,619       961       1,047,754  
Consumer and other
     66,251       72       726       564       140       67,753  
    $ 2,827,111     $ 128,045     $ 185,906     $ 70,106     $ 6,262     $ 3,217,430  
                                                 
                                                 
   
December 31, 2010
  
   
Pass
    
Special Mention
    
Substandard
    
Substandard-Impaired
    
Doubtful-Impaired
    
Total
Loans
  
Commercial real estate – mortgage
   $ 947,593     $ 46,520     $ 87,960     $ 11,351     $ 1,191     $ 1,094,615  
Consumer real estate – mortgage
     661,234       12,384       22,834       4,622       4,413       705,487  
Construction and land development
     188,470       29,670       69,607       43,203       311       331,261  
Commercial and industrial
     918,414       13,511       65,426       13,347       1,393       1,012,091  
Consumer and other
     66,916       65       973       879       153       68,986  
    $ 2,782,627     $ 102,150     $ 246,800     $ 73,402     $ 7,461     $ 3,212,440  

The information presented above for December 31, 2010 has been reclassified from the presentation in Form 10-K to conform to the March 31, 2011 presentation. Consumer loans previously classified as performing have been further classified into special mention and substandard.

At March 31, 2011 and December 31, 2010, there were no loans classified as nonaccrual that were not deemed to be impaired. At March 31, 2011 and December 31, 2010, all impaired loans were on nonaccruing interest status.  The principal balance of these nonaccrual loans amounted to $76,368,000 and $80,863,000 at March 31, 2011 and December 31, 2010, respectively and are included in the table above.  For the three months ended March 31, 2011 the average balance of impaired loans was $78,616,000 as compared to $108,426,000 for the twelve months ended December 31, 2010.  At the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings.  Had nonaccruing loans been on accruing status, interest income would have been higher by $1,639,000 and $2,625,000 for the three months ended March 31, 2011 and March 31, 2010, respectively.  Pinnacle Financial’s policy is that once a loan is classified as impaired and placed on nonaccrual status, interest income is subsequently recognized to the extent cash payments are received while the loan is classified as nonaccrual, but is reviewed on a case-by-case basis.  Pinnacle Financial recognized $177,000 and $1,340,000 of interest income from cash payments received during the quarter end March 31, 2011 and the year end December 31, 2010 while the underlying loans were placed on impaired status.

 
Page 15
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table details the recorded investment, unpaid principal balance and related allowance and average recorded investment of our impaired loans at March 31, 2011 and December 31, 2010 by loan category and the amount of interest income recognized on these loans that remain on our balance sheet on a cash basis throughout the quarter and year then ended, respectively (dollars in thousands):

   
At March 31, 2011
    
For the quarter ended
March 31, 2011
  
   
Recorded investment
    
Unpaid principal balance
    
Related allowance(1)
    
Average recorded investment
    
Interest income recognized
  
                               
Impaired loans with no recorded allowance:
                              
Commercial real estate – mortgage
   $ 9,386     $ 15,956     $ -     $ 15,917     $ 22  
Consumer real estate – mortgage
     8,606       17,009       -       17,056       19  
Construction and land development
     27,220       33,592       -       33,848       22  
Commercial and industrial
     2,425       6,951       -       7,064       66  
Consumer and other
     252       412       -       412       -  
Total
   $ 47,889     $ 73,920     $ -     $ 74,297     $ 129  
                                         
                                         
Impaired loans with a recorded allowance:
                                        
Commercial real estate – mortgage
   $ 1,092     $ 1,254     $ 99     $ 1,254     $ 4  
Consumer real estate – mortgage
     4,100       5,964       392       5,979       6  
Construction and land development
     9,679       4,316       2,093       4,316       8  
Commercial and industrial
     13,155       8,414       3,445       8,439       19  
Consumer and other
     453       742       41       743       11  
Total
   $ 28,479     $ 20,690     $ 6,070     $ 20,731     $ 48  
                                         
Total Impaired Loans
   $ 76,368     $ 94,610     $ 6,070     $ 95,028     $ 177  
 
   
At December 31, 2010
    
For the year ended
December 31, 2010
  
   
Recorded investment
    
Unpaid principal balance
    
Related allowance(1)
    
Average recorded investment
    
Interest income recognized
  
                               
Impaired loans with no recorded allowance: