UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

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.)
211 Commerce Street, Suite 300, Nashville, Tennessee		37201
(Address of principal executive offices)		(Zip Code)

(615) 744-3700

Not Applicable

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 þ 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 þ		Non-accelerated Filer o		Smaller reporting company o
			(do not check if you are a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of October 23, 2009 there were 32,956,737 shares of common stock, $1.00 par value per share, issued and outstanding.

 

 

Pinnacle Financial Partners, Inc.
Report on Form 10-Q
September 30, 2009

TABLE OF CONTENTS

		Page No.
PART I — Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures about Market Risk			49
Item 4. Controls and Procedures			49
PART II — Other Information:
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3. Defaults Upon Senior Securities			57
Item 4. Submission of Matters to a Vote of Security Holders			57
Item 5. Other Information			57
Item 6. Exhibits			57
Signatures			58
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

FORWARD-LOOKING STATEMENTS

Pinnacle Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make written or oral statements, including statements contained in this report which 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,” “intend,” “plan,” “believe,” “seek,” “estimate,” “goal,” “target,” “should,” “shouldn’t” 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 facts 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 factors 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 inability of Pinnacle Financial to continue to 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) increased competition with other financial institutions; (vi) 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; (vii) rapid fluctuations or unanticipated changes in interest rates; (viii) the results of regulatory examinations; (ix) the development of any new market other than Nashville or Knoxville; (x) a merger or acquisition; (xi) any activity in the capital markets that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xii) the impact of governmental restrictions on entities participating in the Capital Purchase Program, of the U.S. Department of the Treasury (the “Treasury”); and (xiii) 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. A more detailed description of these and other risks is contained in Pinnacle Financial’s most recent annual report on Form 10-K as updated by its Current Report on Form 8-K filed with the Securities and Exchange Commission on October 21, 2009, its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2009 and in Part II Item 1A Risk Factors below. Many of such factors are beyond Pinnacle’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle disclaims any obligation to update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

Part I. Financial Information

Item 1.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

		September 30,				December 31,
		2009				2008
ASSETS
Cash and noninterest-bearing due from banks		$	50,524,482			$	68,388,961
Interest-bearing due from banks			55,914,345				8,869,680
Federal funds sold			14,584,425				12,994,114
Cash and cash equivalents			121,023,252				90,252,755
Securities available-for-sale, at fair value			925,888,875				839,229,428
Securities held-to-maturity (fair value of $6,766,695 and $10,642,973 at September 30, 2009 and December 31, 2008, respectively)			6,550,727				10,551,256
Mortgage loans held-for-sale			15,334,959				25,476,788
Loans			3,607,886,366				3,354,907,269
Less allowance for loan losses			(82,981,386	)			(36,484,073	)
Loans, net			3,524,904,980				3,318,423,196
Premises and equipment, net			74,105,789				68,865,221
Other investments			37,960,842				33,616,450
Accrued interest receivable			18,008,909				17,565,141
Goodwill			244,116,260				244,160,624
Core deposits and other intangible assets			14,459,850				16,871,202
Other real estate			22,768,379				18,305,880
Other assets			89,587,040				70,756,823
Total assets		$	5,094,709,862			$	4,754,074,764
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	504,480,992			$	424,756,813
Interest-bearing			356,390,529				375,992,912
Savings and money market accounts			948,874,564				694,582,319
Time			2,010,162,777				2,037,914,307
Total deposits			3,819,908,862				3,533,246,351
Securities sold under agreements to repurchase			215,673,900				184,297,793
Federal Home Loan Bank advances and other borrowings			222,986,207				201,966,181
Federal funds purchased			—				71,643,000
Subordinated debt			97,476,000				97,476,000
Accrued interest payable			8,018,015				8,326,264
Other liabilities			20,555,750				29,820,779
Total liabilities			4,384,618,734				4,126,776,368
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 95,000 shares issued and outstanding at September 30, 2009, and December 31, 2008			89,167,706				88,348,647
Common stock, par value $1.00; 90,000,000 shares authorized; 32,956,737 issued and outstanding at September 30, 2009 and 23,762,124 issued and outstanding at December 31, 2008			32,956,737				23,762,124
Common stock warrants			3,348,402				6,696,804
Additional paid-in capital			523,232,882				417,040,974
Retained earnings			47,322,426				84,380,447
Accumulated other comprehensive income, net of taxes			14,062,975				7,069,400
Total stockholders’ equity			710,091,128				627,298,396
Total liabilities and stockholders’ equity		$	5,094,709,862			$	4,754,074,764

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Interest income:
Loans, including fees		$	41,665,915			$	44,075,167			$	119,818,533			$	131,694,867
Securities:
Taxable			8,607,924				6,005,024				26,088,836				15,434,782
Tax-exempt			1,694,323				1,339,930				4,742,447				4,030,699
Federal funds sold and other			473,663				452,690				1,338,587				1,647,725
Total interest income			52,441,825				51,872,811				151,988,403				152,808,073
Interest expense:
Deposits			15,099,627				18,778,955				49,253,606				57,583,697
Securities sold under agreements to repurchase			363,302				681,912				1,147,363				2,081,055
Federal Home Loan Bank advances and other borrowings			2,430,839				3,130,448				7,826,936				8,820,575
Total interest expense			17,893,768				22,591,315				58,227,905				68,485,327
Net interest income			34,548,057				29,281,496				93,760,498				84,322,746
Provision for loan losses			22,134,025				3,124,819				101,063,950				7,503,412
Net interest income after provision for loan losses			12,414,032				26,156,677				(7,303,452	)			76,819,334
Noninterest income:
Service charges on deposit accounts			2,559,394				2,778,097				7,604,774				8,036,320
Investment services			1,112,059				1,271,284				3,044,444				3,759,779
Insurance sales commissions			906,298				959,104				3,130,849				2,612,225
Gain on loan sales and loan participations, net			899,553				1,460,478				3,820,667				2,996,390
Gain on investment sales, net			—				—				6,462,241				—
Net gain on sale of premises			13,895				—				22,784				1,010,881
Trust fees			585,737				584,927				1,885,091				1,621,385
Other noninterest income			1,660,156				2,199,051				5,504,191				6,641,819
Total noninterest income			7,737,092				9,252,941				31,475,041				26,678,829
Noninterest expense:
Salaries and employee benefits			14,245,485				13,013,116				41,672,578				39,382,393
Equipment and occupancy			4,445,666				3,731,932				12,991,928				11,235,137
Foreclosed real estate expense			1,250,152				95,255				5,864,375				285,061
Marketing and other business development			512,063				380,555				1,417,780				1,234,933
Postage and supplies			515,110				761,744				2,174,796				2,253,371
Amortization of intangibles			776,784				788,267				2,411,351				2,312,333
Insurance, including FDIC premiums			2,587,973				712,351				7,698,031				2,215,418
Merger related expense			—				1,165,177				—				5,620,216
Other noninterest expense			2,947,106				2,677,975				8,898,934				7,354,316
Total noninterest expense			27,280,339				23,326,372				83,129,773				71,893,178
Income (loss) before income taxes			(7,129,215	)			12,083,246				(58,958,184	)			31,604,985
Income tax expense (benefit)			(3,782,045	)			3,288,104				(25,925,471	)			8,783,920
Net income (loss)			(3,347,170	)			8,795,142				(33,032,713	)			22,821,065
Preferred stock dividends			1,213,889				—				3,602,083				—
Accretion on preferred stock discount			290,105				—				819,059				—
Net income (loss) available to common stockholders		$	(4,851,164	)		$	8,795,142			$	(37,453,855	)		$	22,821,065
Per share information:
Basic net income (loss) per common share available to common stockholders		$	(0.15	)		$	0.38			$	(1.39	)		$	1.01
Diluted net income (loss) per common share available to common stockholders		$	(0.15	)		$	0.36			$	(1.39	)		$	0.96
Weighted average shares outstanding:
Basic			32,460,614				23,174,998				27,011,749				22,559,449
Diluted			32,460,614				24,439,642				27,011,749				23,826,368

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

																														Accumulated
																		Common				Additional								Other Comp.				Total
		Preferred Stock								Common Stock								Stock				Paid-in				Retained				Income				Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Capital				Earnings				(Loss), net				Equity
Balances, December 31, 2007			—				—				22,264,817			$	22,264,817			$	—			$	390,977,308			$	54,150,679			$	(782,510	)		$	466,610,294
Cumulative effect of change in accounting principle due to adoption of EITF 06-4, net of tax			—				—				—				—				—				—				(598,699	)			—				(598,699	)
Proceeds from the sale of common stock (less offering expenses of $45,242)			—				—				1,000,000				1,000,000				—				20,454,758				—				—				21,454,758
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax benefits			—				—				267,403				267,403				—				3,134,699				—				—				3,402,102
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan, net of forfeitures			—				—				167,570				167,570				—				(167,570	)			—				—				—
Compensation expense for restricted shares			—				—				—				—				—				260,439				—				—				260,439
Compensation expense for stock options			—				—				—				—				—				1,446,089				—				—				1,446,089
Comprehensive income:
Net income			—				—				—				—				—				—				22,821,065				—				22,821,065
Net unrealized holding losses on securities available-for-sale, net of deferred tax benefit of $1,712,941			—				—				—				—				—				—				—				(2,827,340	)			(2,827,340	)
Total comprehensive income																																			19,993,725
Balances, September 30, 2008			—				—				23,699,790			$	23,699,790			$	—			$	416,105,723			$	76,373,045			$	(3,609,850	)		$	512,568,708
Balances, December 31, 2008			95,000			$	88,348,647				23,762,124			$	23,762,124			$	6,696,804			$	417,040,974			$	84,380,447			$	7,069,400			$	627,298,396
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax benefits			—				—				59,319				59,319				—				641,191				—				—				700,510
Issuance of restricted common shares, net of forfeitures			—				—				283,488				283,488				—				(283,488	)			—				—				—
Restricted shares withheld for taxes			—				—				(3,194	)			(3,194	)			—				(58,531	)			—				—				(61,725	)
Issuance of 8,855,000 shares of common stock, net of offering costs of $6,087,215			—				—				8,855,000				8,855,000				—				100,172,785				—				—				109,027,785
Cancellation of 267,455 warrants previously issued to U.S. Treasury			—				—				—				—				(3,348,402	)			3,348,402				—				—				—
Compensation expense for restricted shares			—				—				—				—				—				1,009,611				—				—				1,009,611
Compensation expense for stock options			—				—				—				—				—				1,361,938				—				—				1,361,938
Accretion on preferred stock discount			—				819,059				—				—				—				—				(819,059	)			—				—
Preferred dividends paid			—				—				—				—				—				—				(3,206,249	)			—				(3,206,249	)
Comprehensive income (loss):
Net loss			—				—				—				—				—				—				(33,032,713	)			—				(33,032,713	)
Net unrealized holding gains on securities available-for-sale, net of deferred tax expense of $4,734,374			—				—				—				—				—				—				—				6,993,575				6,993,575
Total comprehensive loss																																			(26,039,138	)
Balances, September 30, 2009			95,000			$	89,167,706				32,956,737			$	32,956,737			$	3,348,402			$	523,232,882			$	47,322,426			$	14,062,975			$	710,091,128

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine months ended
		September 30,
		2009				2008
Operating activities:
Net income (loss)		$	(33,032,713	)		$	22,821,065
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities			3,631,779				526,022
Depreciation and amortization			7,833,796				4,788,550
Provision for loan losses			101,063,950				7,503,412
Gain on loan sales			(3,820,667	)			(2,996,390	)
Gain on investment sales, net			(6,462,241	)			—
Net gains on sale of premises			(22,784	)			(1,010,881	)
Stock-based compensation expense			2,371,549				1,706,528
Deferred tax (benefit) expense			(25,140,069	)			(1,274,403	)
Losses on foreclosed real estate and other investments			4,517,522				194,558
Excess tax benefit from stock compensation			(44,364	)			(805,414	)
Mortgage loans held for sale:
Loans originated			(509,606,923	)			(212,279,309	)
Loans sold			523,338,574				211,353,184
Decrease in other assets			17,377,317				7,912,982
Increase (decrease) in other liabilities			(9,573,279	)			2,672,391
Net cash provided by operating activities			72,431,447				41,112,295
Investing activities:
Activities in securities available-for-sale:
Purchases			(614,690,009	)			(233,008,882	)
Sales			346,895,583				—
Maturities, prepayments and calls			195,745,788				105,725,683
Activities in securities held-to-maturity:
Maturities, prepayments and calls			3,960,000				16,080,000
Increase in loans, net			(332,879,425	)			(472,054,326	)
Purchases of premises and equipment and software			(10,419,279	)			(6,198,441	)
Proceeds from the sale of premises and equipment and software			14,885				2,821,702
Cash used for acquisition			—				(3,800,000	)
Other investments			(4,709,089	)			(2,583,983	)
Net cash used in investing activities			(416,081,546	)			(593,018,247	)
Financing activities:
Net increase in deposits			287,043,453				371,825,090
Net increase in securities sold under agreements to repurchase			31,376,107				42,736,082
Net decrease in Federal funds purchased			(71,643,000	)			(39,682,000	)
Advances from Federal Home Loan Bank:
Issuances			70,000,000				110,478,047
Payments			(30,860,649	)			(13,882,995	)
Net increase (decrease) in borrowings under lines of credit			(18,000,000	)			9,000,000
Preferred dividends paid			(3,206,249	)			—
Proceeds from the issuance of subordinated debt			—				15,000,000
Issuance of common stock, net of expenses			109,027,785				21,454,758
Exercise of common stock options and stock appreciation rights			638,785				3,246,298
Excess tax benefit from stock compensation			44,364				805,414
Net cash provided by financing activities			374,420,596				520,800,694
Net increase (decrease) in cash and cash equivalents			30,770,497				(31,105,258	)
Cash and cash equivalents, beginning of period			90,252,755				122,503,863
Cash and cash equivalents, end of period		$	121,023,252			$	91,398,605

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

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-Rutherford-Franklin, Tennessee and Knoxville, Tennessee Metropolitan Statistical Areas.

In addition to Pinnacle National, Pinnacle Financial, for the time period following its merger with Mid-America Bancshares, Inc. (“Mid-America”) on November 30, 2007 through February 29, 2008, conducted banking operations through the two banks formerly owned by Mid-America: PrimeTrust Bank in Nashville, Tennessee and Bank of the South in Mt. Juliet, Tennessee.

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 2008 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.

Accounting Standards Codification — In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the Securities and Exchange Commission (“SEC”). Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. FASB ASC 105-10, “Generally Accepted Accounting Principles,” became applicable beginning in third quarter 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references except for SFAS references that have not been integrated into the codification.

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, determination of any impairment of intangibles and the valuation of other real estate.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

Cash Flow Information — Supplemental cash flow information addressing certain cash payments and noncash transactions for each of the nine months ended September 30, 2009 and 2008 was as follows:

		For the nine months ended
		September 30,
		2009				2008
Cash Payments:
Interest		$	59,036,422			$	72,581,518
Income taxes			3,200,000				7,500,000
Noncash Transactions:
Loans charged-off to the allowance for loan losses			55,120,618				2,442,259
Loans foreclosed upon with repossessions, transferred to other real estate			24,706,149				18,195,935
Net unrealized holding losses (gains) on available-for-sale securities, net of deferred taxes			6,993,575				(2,827,340	)

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. 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. The dilutive effect of outstanding options, common stock appreciation rights, warrants and restricted shares is reflected in diluted EPS by application of the treasury stock method.

As of September 30, 2009, there were 2,149,000 stock options and 10,000 stock appreciation rights outstanding to purchase common shares. Most of these options and stock appreciation rights have exercise prices and compensation costs attributable to current services, which is less than the average market price of Pinnacle Financial’s common stock. Additionally, as of September 30, 2009, Pinnacle Financial had outstanding warrants to purchase 612,455 of common shares. Due to the net loss attributable to common stockholders for the three and nine months ended September 30, 2009, 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 earnings per share. As of September 30, 2008, there were 2,253,000 stock options and 12,000 stock appreciation rights outstanding to purchase common shares. Most of these options and stock appreciation rights have exercise prices and compensation costs attributable to current services, which when considered in relation to the average market price of Pinnacle Financial’s common stock, are considered dilutive and are considered in Pinnacle Financial’s diluted income per share calculation for the three and nine months ended September 30, 2008. As of September 30, 2008, Pinnacle Financial had outstanding warrants to purchase 370,000 of common shares which have been considered in the calculation of Pinnacle Financial’s diluted earnings per share for the three and nine months ended September 30, 2008.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

The following is a summary of the basic and diluted earnings per share calculations for the three and nine months ended September 30, 2009 and 2008:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Basic earnings per share calculation:
Numerator — Net income (loss) available to common stockholders		$	(4,851,164	)		$	8,795,142			$	(37,453,855	)		$	22,821,065
Denominator — Average common shares outstanding			32,460,614				23,174,998				27,011,749				22,559,449
Basic net income (loss) per share available to common stockholders		$	(0.15	)		$	0.38			$	(1.39	)		$	1.01
Diluted earnings per share calculation:
Numerator — Net income (loss) available to common stockholders		$	(4,851,164	)		$	8,795,142			$	(37,453,855	)		$	22,821,065
Denominator — Average common shares outstanding			32,460,614				23,174,998				27,011,749				22,559,449
Dilutive shares contingently issuable			—				1,264,644				—				1,266,919
Average diluted common shares outstanding			32,460,614				24,439,642				27,011,749				23,826,368
Diluted net income (loss) per share available to common stockholders		$	(0.15	)		$	0.36			$	(1.39	)		$	0.96

Recently Adopted Accounting Pronouncements

Fair Value Measurement — In April 2009, the FASB issued ASC 820-10-65-4, “Fair Value Measurements and Disclosures.” FASB ASC 820-10-65-4 provides additional guidance for estimating fair value in accordance with FASB ASC 820 when the volume and level of activity for the asset or liability have decreased significantly. FASB ASC 820-10-65-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FASB ASC 820-10-65-4 were effective April 1, 2009. There was no impact as a result of adopting FASB ASC 820-10-65-4.

In April 2009, the FASB issued ASC 825-10-65-1, “Financial Instruments,” which requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FASB ASC 825-10-65-1 were effective April 1, 2009. As FASB ASC 825-10-65-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FASB ASC 825-10-65-1 had no impact to Pinnacle Financial’s financial condition or results of operations.

Pinnacle Financial has an established process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models or processes that use primarily market-based or independently-sourced market data, including interest rate yield curves, option volatilities and third party information. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. Furthermore, while Pinnacle Financial believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Subsequent Events — We adopted the provisions of FASB ASC 855, “Subsequent Events”, during the period ended June 30, 2009. FASB ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of FASB ASC 855 did not impact our financial statements. We evaluated all events or transactions that occurred after September 30, 2009, through October 28, 2009, the date we issued these financial statements. During this period we did not have any material recognizable subsequent events that required recognition in our disclosures to the September 30, 2009 financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

Other-than-temporary impairment — In April 2009, the FASB issued ASC 320-10-65-1, “Investments — Debt and Equity Securities,” that amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This ASC does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of FASB ASC 320-10-65-1 are effective for the Company’s interim period ending on June 30, 2009. There was no impact from the adoption of FASB ASC 320-10-65-1 on Pinnacle Financial’s financial position, results of operations or cash flows.

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 U.S. Treasury for $95 million pursuant to the U.S. Treasury’s Capital Purchase Program (“CPP”) under the Troubled Assets Relief Program (“TARP”). Additionally, Pinnacle Financial issued warrants to purchase 534,910 shares of common stock to the U.S. Treasury as a condition to its participation in the CPP. The warrants have an exercise price of $26.64 each and are immediately exercisable and expire 10 years from the date of issuance. Proceeds from this sale of the preferred stock are expected to be used for general corporate purposes, including supporting the continued, anticipated growth of Pinnacle National. 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 U.S. Treasury under the CPP at any time subject to a requirement that it must consult with its primary federal regulators before redemption.

Management used a cost of capital model to calculate the fair value of the Series A preferred stock issued to the U.S. Treasury in connection with the CPP. The cost of capital model involved estimating a reasonable return for a similar $95 million capital investment in Pinnacle Financial. The model incorporated a risk free rate (Long Term U.S. Treasury bond rate) added to a market premium for Pinnacle Financial’s common stock. For the market premium for Pinnacle Financial’s common stock, Pinnacle Financial multiplied its beta factor as reported on the Nasdaq Global Select Markets’ website as of December 11, 2008 by 5% (the result of which was the estimated market risk premium). Additionally, due to the relatively small size of the offering, Pinnacle Financial added an additional risk premium of 2.3% to the total. The result was a cost of capital calculation of 8.3%. Pinnacle Financial believed 8.3% was a reasonable after-tax return to an investor who might be willing to acquire a $95 million interest in Pinnacle Financial. Pinnacle Financial then forecasted the cash outflows of the preferred stock issuance at the 5% dividend rate assuming a terminal payment of $95 million five years from issuance prior to the dividend payment rate’s increase from 5% to 9%. Using a discounted cash flow model with a discount rate of 8.3%, the result was a fair value for the Series A preferred stock of $83.7 million.

The fair value of the common stock warrants issued in tandem with the Series A preferred stock was determined to be approximately $6.3 million. The fair value of the common stock warrants as of December 12, 2008 was estimated using the Black-Scholes option pricing model and the following assumptions:

Risk free interest rate			2.64	%
Expected life of warrants			10 years
Expected dividend yield			0.00	%
Expected volatility			30.3	%
Weighted average fair value		$	11.86

Pinnacle Financial’s computation of expected volatility is based on weekly historical volatility since September of 2002. The risk free interest rate of the warrants were based on the closing market bid for U.S. Treasury securities corresponding to the expected life of the common stock warrants in effect at the time of grant.

The fair value of the Series A preferred stock and the fair value of the common stock warrants were summed and the initial carrying amounts for the Series A preferred stock and the common stock warrants were calculated based on an allocation of the two fair value components. The aggregate fair value result for both the Series A preferred stock and the common stock warrants was calculated to be $90.0 million, with 7% of this aggregate total allocated to the warrants and 93% allocated to the Preferred Stock. As a result of this allocation, the $95 million issuance resulted in the warrants having a value of $6.7 million and the Series A preferred stock having an initial value of $88.3 million.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Management calculated the accretion amount of the Series A preferred stock discount using the effective interest method which resulted in an effective rate of 6.51%. That is, to accrete the $6.7 million discount on the Series A preferred stock over the next five years on an effective interest method resulted in a calculation of 6.51% for the five year period. The $6.7 million will be accreted as a reduction in net income available for common stockholders over the next five years at approximately $1.1 million to $1.3 million per year.

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 $109.0 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 U.S. Treasury in connection with the CPP was reduced by 50%, or 267,455 shares.

Note 3. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at September 30, 2009 and December 31, 2008 are summarized as follows:

		September 30, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			225,374,270				3,385,210				304,927				228,454,553
Mortgage-backed securities			492,873,681				12,398,370				231,431				505,040,620
State and municipal securities			174,439,130				7,931,076				486,088				181,884,118
Corporate notes and other			10,109,707				547,039				147,162				10,509,584
		$	902,796,788			$	24,261,695			$	1,169,608			$	925,888,875
Securities held-to-maturity:
U.S. government agency securities		$	—			$	—			$	—			$	—
State and municipal securities			6,550,727				265,190				49,222				6,766,695
		$	6,550,727			$	265,190			$	49,222			$	6,766,695

		December 31, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. Government agency securities			62,861,379				1,561,974				—				64,423,353
Mortgage-backed securities			626,414,161				12,140,209				197,086				638,357,284
State and municipal securities			136,727,876				1,454,803				3,357,443				134,825,236
Corporate notes			1,907,722				3,785				287,952				1,623,555
		$	827,911,138			$	15,160,771			$	3,842,481			$	839,229,428
Securities held-to-maturity:
U.S. government agency securities		$	1,997,967			$	5,593			$	—			$	2,003,560
State and municipal securities			8,553,289				172,589				86,465				8,639,413
		$	10,551,256			$	178,182			$	86,465			$	10,642,973

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

During the nine months ended September 30, 2009, Pinnacle Financial realized approximately $8.45 million in gains and $1.59 million in losses from the sale of $347 million of available-for-sale securities. During the second quarter of 2009, we determined that an available-for-sale corporate security was other than temporarily impaired as the credit worthiness of the security had deteriorated. This impairment analysis resulted in a $400,000 charge during the second quarter of 2009 with this amount offsetting the gain on the sale of investment securities. At September 30, 2009, approximately $850.7 million of Pinnacle Financial’s investment portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase.

The amortized cost and fair value of debt securities as of September 30, 2009 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				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Due in one year or less		$	1,600,110			$	1,610,302			$	765,305			$	775,906
Due in one year to five years			22,092,294				22,927,066				5,124,377				5,301,843
Due in five years to ten years			112,233,165				115,232,296				661,045				688,946
Due after ten years			273,997,538				281,078,591				—				—
		$	409,923,107			$	420,848,255			$	6,550,727			$	6,766,695

At September 30, 2009 and December 31, 2008, 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								Investments with an Unrealized								Total Investments with an
		12 months								Loss of 12 months or longer								Unrealized Loss
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
At September 30, 2009:
U.S. government agency securities		$	32,137,459			$	304,927			$	—			$	—			$	32,137,459			$	304,927
Mortgage-backed securities			27,374,928				223,564				371,915				7,867				27,746,843				231,431
State and municipal securities			4,786,793				193,618				8,007,632				341,692				12,794,425				535,310
Corporate notes			363,160				147,162				—				—				363,160				147,162
Total temporarily-impaired securities		$	64,662,340			$	869,270			$	8,379,547			$	349,559			$	73,041,887			$	1,218,830
At December 31, 2008:
U.S. government agency securities		$	—			$	—			$	—			$	—			$	—			$	—
Mortgage-backed securities			29,622,695				119,315				2,520,127				77,771				32,142,822				197,086
State and municipal securities			28,560,915				1,095,573				32,466,087				2,348,335				61,027,002				3,443,908
Corporate notes			242,520				157,480				859,475				130,472				1,101,995				287,952
Total temporarily-impaired securities		$	58,426,130			$	1,372,368			$	35,845,689			$	2,556,578			$	94,271,819			$	3,928,946

The applicable date for determining when securities are in an unrealized loss position is September 30, 2009. 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.

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 insurers. 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 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, 2009.

The carrying values of Pinnacle Financial’s investment securities could decline in the future if the financial condition of issuers deteriorate 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 given the current economic environment.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4. Loans and Allowance for Loan Losses

The composition of loans at September 30, 2009 and December 31, 2008 is summarized in the table below.

		At September 30,				At December 31,
		2009				2008
Commercial real estate — mortgage		$	1,136,134,348			$	963,530,444
Consumer real estate — mortgage			754,411,678				675,605,596
Construction and land development			583,948,510				658,798,934
Commercial and industrial			1,034,971,292				966,562,521
Consumer and other			98,420,538				90,409,774
Total loans			3,607,886,366				3,354,907,269
Allowance for loan losses			(82,981,386	)			(36,484,073	)
Loans, net		$	3,524,904,980			$	3,318,423,196

Changes in the allowance for loan losses for the nine months ended September 30, 2009 and for the year ended December 31, 2008 are as follows:

		September 30, 2009				December 31, 2008
Balance at beginning of period		$	36,484,073			$	28,470,207
Charged-off loans			(55,120,618	)			(5,133,274	)
Recovery of previously charged-off loans			553,981				1,933,597
Provision for loan losses			101,063,950				11,213,543
Balance at end of period		$	82,981,386			$	36,484,073

At September 30, 2009, Pinnacle Financial had certain impaired loans of $121,726,000 which were on nonaccruing interest status. At December 31, 2008, Pinnacle Financial had certain impaired loans of $10,860,000 which were on nonaccruing interest status. In each case, 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 $4.6 million and $794,000 for the nine months ended September 30, 2009 and 2008, respectively.

Impaired loans also include loans that Pinnacle National may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that Pinnacle National may have to otherwise incur. These loans are classified as impaired loans and, if on nonaccruing status as of the date of restructuring, the loans are included in the nonperforming loan balances noted above. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date. At September 30, 2009, there were $12.83 million of accruing restructured loans that remain in a performing status. There were no accruing restructured loans at December 31, 2008.

Potential problem loans, which are not included in nonperforming assets, amounted to approximately $259.5 million at September 30, 2009 compared to $27.8 million at December 31, 2008. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Office of the Comptroller of the Currency, Pinnacle National’s primary regulator, for loans classified as substandard, excluding the impact of nonperforming loans.

At September 30, 2009, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $27,319,000 to directors, executive officers, and their related entities, of which $21,220,000 had been drawn upon. During the nine months ended September 30, 2009, $2,587,000 of loan and other commitment increases and $3,390,000 of principal and other reductions were made by directors, executive officers, and their related entities. The terms on these loans and extensions are on substantially the same terms customary for other persons similarly situated for the type of loan involved. None of these loans to directors, executive officers, and their related entities were impaired at September 30, 2009.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

At September 30, 2009, Pinnacle Financial had approximately $15.3 million of mortgage loans held-for-sale compared to approximately $25.5 million at December 31, 2008. These loans are marketed to potential investors prior to closing the loan with the borrower such that there is an agreement for the subsequent sale of the loan between the eventual investor and Pinnacle Financial prior to the loan being closed with the borrower. Pinnacle Financial sells loans to investors on a loan-by-loan basis and has not entered into any forward commitments with investors for future loan sales. All of these loan sales transfer servicing rights to the buyer. During the nine months ended September 30, 2009, Pinnacle Financial recognized $4,052,000 in gains on the sale of these loans compared to $2,289,000, in the nine months ended September 30, 2008.

At September 30, 2009, Pinnacle Financial owned $22,768,000 in other real estate which had been acquired, usually through foreclosure, from borrowers compared to $18,306,000 at December 31, 2008. Substantially all of these amounts relate to homes and residential development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has adequate collateral.

Note 5. Income Taxes

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 the three and nine months ended September 30, 2009 and 2008 is as follows:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Income tax expense (benefit) at statutory rate		$	(2,495,225	)		$	4,229,136			$	(20,635,364	)		$	11,061,745
State tax (benefit) expense, net of Federal tax effect			(602,022	)			(103,272	)			(3,398,928	)			(262,076	)
Federal tax credits			(90,000	)			(90,000	)			(270,000	)			(270,000	)
Tax-exempt securities			(587,134	)			(397,123	)			(1,661,969	)			(1,246,644	)
Bank owned life insurance			(50,322	)			(78,750	)			(130,569	)			(313,129	)
Insurance premiums			(84,420	)			(83,007	)			(296,786	)			(290,542	)
Other items			127,078				(188,880	)			468,145				104,566
Income tax expense (benefit)		$	(3,782,045	)		$	3,288,104			$	(25,925,471	)		$	8,783,920

Under FASB ASC 740, “Income Taxes,” companies are required to apply their estimated full year tax rate on a year to date basis in each interim period. Under FASB ASC 740-270 “Accounting for Income Taxes in Interim Periods” companies should not apply the estimated full year tax rate to interim results if the expected annual effective tax benefit rate exceeds the tax benefit rate based on interim items only. FASB ASC 740-270 requires that the tax benefit recognized be limited to the benefit calculated on interim items only. As such, Pinnacle Financial recorded a tax benefit through the third quarter based on the actual year-to-date results, in accordance with FASB ASC 740-270.

The effective tax rate for 2009 and 2008 is impacted by Federal tax credits related to the New Markets Tax Credit program whereby a subsidiary of Pinnacle National has been awarded approximately $2.3 million in future Federal tax credits which are available through 2010. Tax benefits related to these credits will be recognized for financial reporting purposes in the same periods that the credits are recognized in the Company’s income tax returns. The credit that is available for the year ending December 31, 2009 and for the year ended December 31, 2008 is $360,000. Pinnacle Financial believes that it will comply with the various regulatory provisions of the New Markets Tax Credit program, and therefore has reflected the impact of the credits in its estimated annual effective tax rate for 2009 and 2008.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6. Commitments and Contingent Liabilities

In the normal course of business, Pinnacle Financial has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Standby letters of credit are generally issued on behalf of an applicant (our customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from Pinnacle Financial under certain prescribed circumstances. Subsequently, Pinnacle Financial would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

Pinnacle Financial follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, Pinnacle Financial’s maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

A summary of Pinnacle Financial’s total contractual amount for all off-balance sheet commitments at September 30, 2009 is as follows:

Commitments to extend credit		$	935,147,000
Standby letters of credit			92,427,000

At September 30, 2009, the fair value of Pinnacle Financial’s standby letters of credit was $312,000. This amount represents the unamortized fee associated with these standby letters of credit and is included in the consolidated balance sheet of Pinnacle Financial. This fair value will decrease over time as the existing standby letters of credit approach their expiration dates.

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at September 30, 2009 will not have a material impact on Pinnacle Financial’s financial statements.

Visa Litigation — Pinnacle National is a member of the Visa USA network. Under Visa USA bylaws, Visa members are obligated to indemnify Visa USA and/or its parent company, Visa, Inc. (Visa), for potential future settlement of, or judgments resulting from, certain litigation, which Visa refers to as the “covered litigation.” Pinnacle National’s indemnification obligation is limited to its membership proportion of Visa USA. On November 7, 2007, Visa announced the settlement of its American Express litigation, and disclosed in its annual report to the SEC on Form 10-K for the year ended September 30, 2007 that Visa had accrued a contingent liability for the estimated settlement of its Discover litigation. Accordingly, Pinnacle National expensed and recognized a contingent liability in the amount of $145,000 as an estimate for its membership proportion of the American Express settlement and the potential Discover settlement, as well as its membership proportion of the amount that Pinnacle National estimates will be required for Visa to settle the remaining covered litigation. During the fourth quarter of 2008, Pinnacle National expensed and recognized an additional $28,000 contingent liability for the revised estimated settlement of Visa’s Discover litigation. There have been no material changes to the contingent liability as of September 30, 2009.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Visa completed an initial public offering (IPO) in March 2008. Visa used a portion of the proceeds from the IPO to establish a $3.0 billion escrow for settlement of covered litigation and used substantially all of the remaining portion to redeem class B and class C shares held by Visa issuing members. During the three months ended March 31, 2008, Pinnacle Financial recognized a pre-tax gain of $140,000 on redemption proceeds received from Visa, Inc. and reversed $63,000 of the $145,000 litigation expense recognized as its pro-rata share of the $3.0 billion escrow funded by Visa, Inc. The timing for ultimate settlement of all covered litigation is not determinable at this time.

Note 7. Stock Options, Stock Appreciation Rights and Restricted Shares

Pinnacle Financial has two equity incentive plans. Additionally, Pinnacle Financial has acquired equity plans in connection with acquisitions of Cavalry Bancorp, Inc. (“Cavalry”) and Mid-America Bancshares, Inc. (“Mid-America”) under which it has granted stock options and stock appreciation rights to its employees to purchase common stock at or above the fair market value on the date of grant and granted restricted share awards to employees and directors. At September 30, 2009, there were 1,005,721 shares available for issue under these plans.

During the first quarter of 2006 and in connection with its merger with Cavalry, Pinnacle Financial assumed a third equity incentive plan, the 1999 Cavalry Bancorp, Inc. Stock Option Plan (the “Cavalry Plan”). All options granted under the Cavalry Plan were fully vested prior to Pinnacle Financial’s merger with Cavalry and expire at various dates between January 2011 and June 2012. In connection with the merger, all options to acquire Cavalry common stock were converted to options to acquire Pinnacle Financial’s common stock at the 0.95 exchange ratio. The exercise price of the outstanding options under the Cavalry Plan was adjusted using the same exchange ratio. All other terms of the Cavalry options were unchanged. At September 30, 2009, there were 71,590 Pinnacle Financial shares remaining to be acquired by the participants in the Cavalry Plan at exercise prices that ranged between $10.26 per share and $13.68 per share.

On November 30, 2007 and in connection with its merger with Mid-America, Pinnacle Financial assumed several equity incentive plans, including the Mid-America Bancshares, Inc. 2006 Omnibus Equity Incentive Plan (the “Mid-America Plans”). All options and stock appreciation rights granted under the Mid-America Plans were fully vested prior to Pinnacle Financial’s merger with Mid-America and expire at various dates between June 2011 and July 2017. In connection with the merger, all options and stock appreciation rights to acquire Mid-America common stock were converted to options or stock appreciation rights, as applicable, to acquire Pinnacle Financial common stock at the 0.4655 exchange ratio. The exercise price of the outstanding options and stock appreciation rights under the Mid-America Plans was adjusted using the same exchange ratio with the exercise price also being reduced by $1.50 per share. All other terms of the Mid-America options and stock appreciation rights were unchanged. There were 487,834 Pinnacle Financial shares which could be acquired by the participants in the Mid-America Plans at exercise prices that ranged between $6.63 per share and $21.37 per share. At September 30, 2009, there were 75,132 shares available for issue under the Mid-America Plans, which shares may only be issued to Pinnacle associates that were Mid-America associates prior to the merger.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Common Stock Options and Stock Appreciation Rights

As of September 30, 2009, there were 2,149,000 stock options and 10,000 stock appreciation rights outstanding to purchase common shares. A summary of the activity within the equity incentive plans during the nine months ended September 30, 2009 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as follows:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Contractual				Intrinsic
						Exercise				Remaining Term				Value (1)
		Number				Price				(in years)				(000’s)
Outstanding at December 31, 2008			2,232,100			$	17.41				5.99			$	28,310
Granted			—				—
Exercised (2)			(59,319	)			9.87
Forfeited			(13,861	)			27.84
Outstanding at September 30, 2009			2,158,920			$	17.53				5.49			$	5,304
Outstanding and expected to vest as of September 30, 2009			2,128,069			$	17.36				5.47			$	5,304
Options exercisable at September 30, 2009 (3)			1,643,182			$	14.36				4.84			$	5,304

During the nine months ended September 30, 2009, approximately 214,000 option awards vested at an average exercise price of $22.00 and an intrinsic value of approximately $2.2 million.

As of September 30, 2009, there was approximately $3.9 million of total unrecognized compensation cost related to unvested stock options granted under our equity incentive plans. That cost is expected to be recognized over a weighted-average period of 3.0 years.

During the nine months ended September 30, 2009 and 2008, Pinnacle Financial recorded stock option compensation expense of $1,362,000 and $1,446,000, respectively, using the Black-Scholes valuation model for awards granted prior to, but not yet vested, as of January 1, 2006 and for awards granted after January 1, 2006. For these awards, Pinnacle Financial has recognized compensation expense using a straight-line amortization method. Stock-based compensation expense has been reduced for estimated forfeitures.

There were no options granted in the nine month period ended September 30, 2009. The fair value of options granted for the nine month period ended September 30, 2008 was estimated using the Black-Scholes option pricing model and the following assumptions:

		2008
Risk free interest rate			3.20	%
Expected life of options			6.5 years
Expected dividend yield			0.00	%
Expected volatility			28.5	%
Weighted average fair value		$	7.76

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Pinnacle Financial’s computation of expected volatility is based on weekly historical volatility since September 2002. Pinnacle Financial used the simplified method in determining the estimated life of stock option issuances. The risk free interest rate of the award is based on the closing market bid for U.S. Treasury securities corresponding to the expected life of the stock option issuances in effect at the time of grant.

Restricted Shares

Additionally, Pinnacle Financial’s 2004 Equity Incentive Plan and the Mid-America Plans provide for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards outstanding as of September 30, 2009 under either of these plans. During the nine months ended September 30, 2009, Pinnacle Financial awarded 300,873 shares of restricted common stock to certain Pinnacle Financial associates and outside directors.

A summary of activity for unvested restricted share awards for the nine months ended September 30, 2009 is as follows:

						Grant Date Weighted-
		Number				Average Cost
Unvested at December 31, 2008			231,881			$	24.76
Shares awarded			300,873				19.31
Restrictions lapsed and shares released to associates/directors			(34,123	)			23.99
Shares forfeited			(20,579	)			29.89
Unvested at September 30, 2009			478,052			$	21.25

Status of 2009 Restricted Share Awards: There were 300,873 restricted share awards granted during the nine months ended September 30, 2009. The following discusses the current status of these awards:

•

The forfeiture restrictions on 30,878 restricted share awards granted to executive management personnel in 2009 lapse in three equal installments should Pinnacle Financial achieve certain earnings and soundness targets over each year of the subsequent three-year period (or, alternatively, the cumulative three-year period).

•

The forfeiture restrictions on another 92,669 restricted share awards granted to executive management personnel lapse in equal installments on the anniversary date of the grant over a 10 year period or until the associate is 65 years of age, whichever is earlier so long as Pinnacle Financial is profitable for that year.

•

The forfeiture restrictions on 163,214 restricted share awards lapse in five equal installments on the anniversary date of the grant.

•

During the first quarter of 2009, 14,112 restricted share awards were issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on the one year anniversary date of the award based on each individual board member meeting their attendance goals for the various board and board committee meetings to which each member was scheduled to attend. Each non-employee board member received an award of 1,008 shares.

Compensation expense associated with the performance based restricted share awards is recognized over the time period that the restrictions associated with the awards are anticipated to lapse based on a graded vesting schedule such that each traunche is amortized separately. Compensation expense associated with the time based restricted share awards is recognized over the time period that the restrictions associated with the awards lapse based on the total cost of the award. For the nine months ended September 30, 2009 and 2008, Pinnacle Financial recognized approximately $1,010,000 and $260,000, respectively, in compensation costs attributable to all restricted share awards issued prior to September 30, 2009 and September 30, 2008.

Note 8. Regulatory Matters

Pinnacle National is subject to restrictions on the payment of dividends to Pinnacle Financial under federal banking laws and the regulations of the Office of the Comptroller of the Currency. Pinnacle Financial is also subject to limits on payment of dividends to its shareholders by the rules, regulations and policies of federal banking authorities and by its participation in the CPP. Pinnacle Financial has not paid any cash dividends since inception, and it does not anticipate that it will consider paying dividends until Pinnacle Financial generates sufficient capital through net income from operations to support both anticipated asset growth and dividend payments. During the nine months ended September 30, 2009, Pinnacle National paid dividend payments of $3.5 million to Pinnacle Financial to fund Pinnacle Financial’s interest payments due on its subordinated indebtedness and an additional $3.6 million to Pinnacle Financial to fund Pinnacle Financial’s preferred stock dividend payable on the shares issued to the U.S. Treasury in the CPP. At September 30, 2009, pursuant to federal banking regulations, Pinnacle National had approximately $16.8 million of net retained profits from the previous two years available for future dividend payments to Pinnacle Financial.