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.

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

150 Third Avenue, Suite 800, 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 May 6, 2010 there were 33,358,109 shares of common stock, $1.00 par value per share, issued and outstanding.

 

 

Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2010

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			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			46
Item 4. Controls and Procedures			46
PART II — Other Information:
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3. Defaults Upon Senior Securities			47
Item 4. (Removed and Reserved)			48
Item 5. Other Information			48
Item 6. Exhibits			48
Signatures			49
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD-LOOKING STATEMENTS

Certain of the statements in this release 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,” “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 Partners, Inc. 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 continued 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) 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 matter 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”); (xiii) further deterioration in the valuation of other real estate owned; (xiv) inability to comply with regulatory capital requirements; (xv) 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; and (xvi) Pinnacle Financial recording a 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 26, 2010. 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 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.

Part I. Financial Information

		March 31,				December 31,
		2010				2009
ASSETS
Cash and noninterest-bearing due from banks		$	46,822,867			$	55,651,737
Interest-bearing due from banks			38,764,484				19,338,499
Federal funds sold			9,692,871				41,611,838
U.S. treasury securities			—				50,000,000
Cash and cash equivalents			95,280,222				166,602,074
Securities available-for-sale, at fair value			984,564,511				931,012,091
Securities held-to-maturity (fair value of $4,895,786 and $6,737,336 at March 31, 2010 and December 31, 2009, respectively)			4,760,626				6,542,496
Mortgage loans held-for-sale			11,611,169				12,440,984
Loans			3,479,536,093				3,563,381,741
Less allowance for loan losses			(90,061,570	)			(91,958,789	)
Loans, net			3,389,474,523				3,471,422,952
Premises and equipment, net			82,790,935				80,650,936
Other investments			41,516,674				40,138,660
Accrued interest receivable			18,510,567				19,083,468
Goodwill			244,104,764				244,107,086
Core deposits and other intangible assets			12,940,090				13,686,091
Other real estate owned			24,703,886				29,603,439
Other assets			111,431,377				113,520,727
Total assets		$	5,021,689,344			$	5,128,811,004
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	522,927,520			$	498,087,015
Interest-bearing			499,303,051				483,273,551
Savings and money market accounts			1,266,418,995				1,198,012,445
Time			1,547,711,998				1,644,226,290
Total deposits			3,836,361,564				3,823,599,301
Securities sold under agreements to repurchase			200,488,602				275,465,096
Federal Home Loan Bank advances			157,319,424				212,654,782
Subordinated debt			97,476,000				97,476,000
Accrued interest payable			6,335,771				6,555,801
Other liabilities			23,446,969				12,039,843
Total liabilities			4,321,428,330				4,427,790,823
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 95,000 shares issued and outstanding at March 31, 2010, and December 31, 2009			89,820,627				89,462,633
Common stock, par value $1.00; 90,000,000 shares authorized; 33,351,118 issued and outstanding at March 31, 2010 and 33,029,719 issued and outstanding at December 31, 2009			33,351,118				33,029,719
Common stock warrants			3,348,402				3,348,402
Additional paid-in capital			525,823,682				524,366,603
Retained earnings			38,004,024				43,372,743
Accumulated other comprehensive income, net of taxes			9,913,161				7,440,081
Total stockholders’ equity			700,261,014				701,020,181
Total liabilities and stockholders’ equity		$	5,021,689,344			$	5,128,811,004

See accompanying notes to consolidated financial statements.

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

		Three Months Ended
		March 31,
		2010				2009
Interest income:
Loans, including fees		$	41,075,107			$	38,525,745
Securities:
Taxable			9,087,588				9,087,687
Tax-exempt			2,050,253				1,474,654
Federal funds sold and other			477,142				430,240
Total interest income			52,690,090				49,518,326
Interest expense:
Deposits			13,463,815				17,733,785
Securities sold under agreements to repurchase			552,313				360,787
Federal Home Loan Bank advances and other borrowings			2,114,055				2,723,502
Total interest expense			16,130,183				20,818,074
Net interest income			36,559,907				28,700,252
Provision for loan losses			13,225,920				13,609,535
Net interest income after provision for loan losses			23,333,987				15,090,717
Noninterest income:
Service charges on deposit accounts			2,365,311				2,476,951
Investment services			1,236,383				854,103
Insurance sales commissions			1,099,019				1,305,209
Gain on loan sales and loan participations, net			562,598				1,287,772
Gain on investment sales, net			364,550				4,346,146
Trust fees			896,573				657,708
Other noninterest income			1,961,212				2,207,634
Total noninterest income			8,485,646				13,135,523
Noninterest expense:
Salaries and employee benefits			17,004,526				14,751,049
Equipment and occupancy			5,366,187				4,235,328
Other real estate owned			5,402,153				700,595
Marketing and other business development			753,918				439,516
Postage and supplies			733,539				830,138
Amortization of intangibles			746,001				758,533
Other noninterest expense			6,160,231				3,527,865
Total noninterest expense			36,166,555				25,243,024
(Loss) income before income taxes			(4,346,922	)			2,983,216
Income tax expense (benefit)			(523,697	)			893,008
Net (loss)income			(3,823,225	)			2,090,208
Preferred stock dividends			1,187,500				1,187,500
Accretion on preferred stock discount			357,994				259,342
Net (loss) income available to common stockholders		$	(5,368,719	)		$	643,366
Per share information:
Basic net (loss) income per common share available to common stockholders		$	(0.16	)		$	0.03
Diluted net (loss) income per common share available to common stockholders		$	(0.16	)		$	0.03
Weighted average shares outstanding:
Basic			32,558,016				23,510,994
Diluted			32,558,016				24,814,408

See accompanying notes to consolidated financial statements.

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

     

		Preferred Stock								Common Stock
																														Accumulated
																		Common Stock				Additional Paid-in								Other Comp.				Total Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Capital				Retained Earnings				Income, net				Equity
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			—				—				50,485				50,485				—				570,131				—				—				620,616
Issuance of restricted common shares, net of forfeitures			—				—				249,078				249,078				—				(249,078	)			—				—				—
Restricted shares withheld for taxes			—				—				(984	)			(984	)			—				(20,239	)			—				—				(21,223	)
Compensation expense for restricted shares			—				—				—				—				—				440,748				—				—				440,748
Compensation expense for stock options			—				—				—				—				—				434,314				—				—				434,314
Accretion on preferred stock dividend			—				259,342				—				—				—				—				(259,342	)			—				—
Preferred dividends paid			—				—				—				—				—				—				(831,250	)			—				(831,250	)
Comprehensive income:
Net income			—				—				—				—				—				—				2,090,208				—				2,090,208
Net unrealized holding gains on securities available-for-sale, net of deferred tax benefit of $1,006,524			—				—				—				—				—				—				—				1,614,421				1,614,421
Total comprehensive income																																			3,704,629
Balances, March 31, 2009			95,000			$	88,607,989				24,060,703			$	24,060,703			$	6,696,804			$	418,216,850			$	85,380,063			$	8,683,821			$	631,646,230
Balances, December 31, 2009			95,000			$	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, 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 discount			—				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 holding gains on securities available-for-sale, net of deferred tax expense of $1,596,494			—				—				—				—				—				—				—				2,473,080				2,473,080
Total comprehensive loss																																			(1,350,145	)
Balances, March 31, 2010			95,000			$	89,820,627				33,351,118			$	33,351,118			$	3,348,402			$	525,823,682			$	38,004,024			$	9,913,161			$	700,261,014

See accompanying notes to consolidated financial statements.

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

		Three months ended
		March 31,
		2010				2009
Operating activities:
Net (loss)income		$	(3,823,225	)		$	2,090,208
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities			1,051,879				699,726
Depreciation and amortization			2,875,880				2,650,715
Provision for loan losses			13,225,920				13,609,535
Gain on loan sales and loan participations, net			(562,598	)			(1,287,772	)
Gain on investment sales, net			(364,550	)			(4,346,146	)
Net gains on sale of premises and equipment and software			(4,365	)			(7,899	)
Stock-based compensation expense			1,186,069				875,062
Deferred tax benefit			(1,529,004	)			(3,749,584	)
Losses on foreclosed real estate and other investments			4,819,280				390,390
Excess tax benefit from stock compensation			(2,321	)			(40,595	)
Mortgage loans held for sale:
Loans originated			(70,806,622	)			(191,052,542	)
Loans sold			72,195,961				192,931,675
Increase in other assets			8,397,287				1,135,420
Increase in other liabilities			11,187,099				2,293,669
Net cash provided by operating activities			37,846,690				16,191,862
Investing activities:
Activities in securities available-for-sale:
Purchases			(161,445,670	)			(267,868,777	)
Sales			30,431,826				209,913,423
Maturities, prepayments and calls			79,906,149				45,514,061
Activities in securities held-to-maturity:
Sales			954,389				—
Maturities, prepayments and calls			1,764,999				—
Decrease (increase) in loans, net			62,168,779				(128,853,928	)
Purchases of premises and equipment and software			(4,003,674	)			(1,687,876	)
Proceeds from the sale of premises and equipment and software			4,365				7,899
Other investments			(931,600	)			(1,603,900	)
Net cash provided by (used in) investing activities			8,849,563				(144,579,098	)
Financing activities:
Net increase in deposits			12,846,742				217,854,751
Net (decrease) increase in securities sold under agreements to repurchase			(74,976,494	)			25,293,195
Net decrease in Federal funds purchased			—				(71,246,000	)
Advances from Federal Home Loan Bank:
Issuances			70,000,000				35,000,000
Payments			(125,295,583	)			(15,284,031	)
Preferred dividends paid			(1,187,500	)			(831,250	)
Exercise of common stock options and stock appreciation rights			592,409				599,401
Excess tax benefit from stock compensation			2,321				40,595
Net cash (used in) provided by financing activities			(118,018,105	)			191,426,661
Net (decrease) increase in cash and cash equivalents			(71,321,852	)			63,039,425
Cash and cash equivalents, beginning of period			166,602,074				90,252,755
Cash and cash equivalents, end of period		$	95,280,222			$	153,292,180

See accompanying notes to consolidated financial statements.

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 2009 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, determination of any impairment of intangibles, the valuation of other real estate owned, and the determination of the valuation of deferred tax assets.

     Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the three months ended March 31, 2010 and 2009 was as follows:

		For the three months ended March 31,
		2010				2009
Cash Transactions:
Interest		$	16,474,470			$	19,999,896
Income taxes received			8,189,745				—
Noncash Transactions:
Loans charged-off to the allowance for loan losses			15,746,176				4,852,185
Loans foreclosed upon and transferred to other real estate owned			6,346,272				4,838,298
Net unrealized holding gains on available-for-sale securities, net of deferred taxes			2,473,080				1,614,421

     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 March 31, 2010, there were approximately 2,050,000 stock options and 10,000 stock appreciation rights outstanding to purchase common shares. Additionally, as of March 31, 2010, Pinnacle Financial had outstanding warrants to purchase 552,455 shares of 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 loss per share. As of March 31, 2009, there were 2,171,000 stock options and 11,000 stock appreciation rights outstanding to purchase common shares. Most of these options and stock appreciation rights had at March 31, 2009 exercise prices and compensation costs attributable to current services, which when

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

considered in relation to the average market price of Pinnacle Financial’s common stock, were considered dilutive and were considered in Pinnacle Financial’s diluted earnings per share available to common stockholders calculation for the three months ended March 31, 2009. As of March 31, 2009, Pinnacle Financial had outstanding warrants to purchase 345,000 shares of common stock which have been considered in the calculation of Pinnacle Financial’s diluted earnings per share for the three months ended March 31, 2009.

     The following is a summary of the basic and diluted earnings per share calculations for the three months ended March 31, 2010 and 2009:

		For the three months ended
		March 31,
		2010				2009
Basic earnings per share calculation:
Numerator - Net (loss) income available to common stockholders		$	(5,368,719	)		$	643,366
Denominator - Average common shares outstanding			32,558,016				23,510,994
Basic net (loss) income per share available to common stockholders		$	(0.16	)		$	0.03
Diluted earnings per share calculation:
Numerator - Net(loss) income available to common stockholders		$	(5,368,719	)		$	643,366
Denominator - Average common shares outstanding			32,558,016				23,510,994
Dilutive shares contingently issuable			—				1,303,414
Average diluted common shares outstanding			32,558,016				24,814,408
Diluted net (loss) income per share available to common stockholders		$	(0.16	)		$	0.03

Recently Adopted Accounting Pronouncements

     Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 860 Transfers and Servicing amended previous guidance on accounting for transfers of financial assets. The amended guidance eliminates the concept of qualifying special-purpose entities and requires that these entities be evaluated for consolidation under applicable accounting guidance, and it also removes the exception that permitted sale accounting for certain mortgage securitizations when control over the transferred assets had not been surrendered. Based on this new standard, many types of transferred financial assets that would previously have been derecognized will now remain on the transferor’s financial statements. The guidance also requires enhanced disclosures about transfers of financial assets and the transferor’s continuing involvement with those assets and related risk exposure. Pinnacle Financial adopted this new guidance on January 1, 2010. Adoption of this new guidance did not have a significant impact on the Company’s financial condition or results of operations, given Pinnacle Financial’s limited involvement in financial asset transfer activities.

     Also in June 2009, the FASB issued amended guidance on accounting for variable interest entities (VIEs). This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise might have a controlling financial interest in a VIE. The new, more qualitative evaluation focuses on who has the power to direct the significant economic activities of the VIE and also who has the obligation to absorb losses or rights to receive benefits from the VIE. It also requires an ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE and calls for certain expanded disclosures about

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

an enterprise’s involvement with variable interest entities. The new guidance was adopted by Pinnacle Financial on January 1, 2010. The new guidance did not have a material effect on the Company’s financial position or results of operations.

     In the first quarter of 2010, the Financial Accounting Standards Board updated Accounting Standards Update No. 2010-09, Subsequent Events (Topic 855) — Amendments to Certain Recognition and Disclosure Requirements. This guidance amends FASB ASC Topic 855, Subsequent Events, so that SEC filers no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. SEC filers must evaluate subsequent events through the date the financial statements are issued.

     Also during the first quarter of 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements. This update requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. This guidance was effective for interim and annual reporting periods beginning after December 15, 2009.

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”). 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 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 operations and capital levels 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 Treasury under the CPP at any time subject to a requirement that it must consult with its primary federal regulators before redemption. 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 March 31, 2010 and December 31, 2009 are summarized as follows:

		March 31, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			132,559,347				714,760				480,783				132,793,324
Mortgage-backed securities			618,233,888				13,953,361				1,430,037				630,757,212
State and municipal securities			207,083,631				4,544,752				1,261,924				210,366,459
Corporate notes and other			10,401,324				369,452				123,260				10,647,516
		$	968,278,190			$	19,582,325			$	3,296,004			$	984,564,511
Securities held-to-maturity:
U.S. government agency securities		$	—			$	—			$	—			$	—
State and municipal securities			4,760,626				161,424				26,264				4,895,786
		$	4,760,626			$	161,424			$	26,264			$	4,895,786

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

						December 31, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. Government agency securities			196,927,928				959,805				2,459,428				195,428,305
Mortgage-backed securities			507,443,622				11,799,596				1,551,804				517,691,414
State and municipal securities			204,028,645				4,489,162				1,222,955				207,294,852
Corporate notes			10,411,342				327,975				141,797				10,597,520
		$	918,811,537			$	17,576,538			$	5,375,984			$	931,012,091
Securities held-to-maturity:
U.S. government agency securities		$	—			$	—			$	—			$	—
State and municipal securities			6,542,496				237,300				42,460				6,737,336
		$	6,542,496			$	237,300			$	42,460			$	6,737,336

     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. Pinnacle Financial sold these held to maturity securities as a result of the underlying credit support for these securities being terminated and, after evaluation, we elected to not maintain these securities in our portfolio. At March 31, 2010, approximately $910.9 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 March 31, 2010 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								Fair
		Cost				Value				Amortized Cost				Value
Due in one year or less		$	1,962,710			$	1,993,188			$	1,330,184			$	1,355,620
Due in one year to five years			24,017,498				24,853,287				3,430,442				3,540,166
Due in five years to ten years			120,633,402				122,223,937				—				—
Due after ten years			203,430,692				204,736,887				—				—
			350,044,302				353,807,299				4,760,626				4,895,786
Mortgage-backed securities			618,233,888				630,757,212				507,443,622				517,691,414
		$	968,278,190			$	984,564,511			$	512,204,248			$	522,587,200

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

     At March 31, 2010 and December 31, 2009, 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								Investments with an								Total Investments
		Unrealized Loss of less than								Unrealized Loss of								with an
		12 months								12 months or longer								Unrealized Loss
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
At March 31, 2010:
U.S. government agency securities		$	35,603,254			$	226,887			$	11,985,448			$	253,896			$	47,588,702			$	480,783
Mortgage-backed securities			173,013,274				1,429,212				57,663				825				173,070,937				1,430,037
State and municipal securities			46,436,410				847,215				8,108,943				440,973				54,545,353				1,288,188
Corporate notes			—				—				505,196				123,260				505,196				123,260
Total temporarily-impaired securities		$	255,052,938			$	2,503,314			$	20,657,250			$	818,954			$	275,710,188			$	3,322,268
At December 31, 2009:
U.S. government agency securities		$	132,265,031			$	2,459,428			$	—			$	—			$	132,265,031			$	2,459,428
Mortgage-backed securities			128,404,340				1,551,189				76,958				615				128,481,298				1,551,804
State and municipal securities			43,351,971				672,033				8,379,062				593,382				51,731,033				1,265,415
Corporate notes			473,191				141,797				—				—				473,191				141,797
Total temporarily-impaired securities		$	304,494,533			$	4,824,447			$	8,456,020			$	593,997			$	312,950,553			$	5,418,444

     The applicable date for determining when securities are in an unrealized loss position is March 31, 2010. 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.

     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 rating, tax status, or the underlying credit support is terminated, Pinnacle Financial will generally sell the security, but will review each security on a case by case basis. Pinnacle Financial notes that the sales that took place during the first quarter of 2010 were primarily related to securities that lost their underlying credit support. As noted in the table above, at March 31, 2010, Pinnacle Financial had unrealized losses of $3.3 million on $275.7 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, 2010.

     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 March 31, 2010 and December 31, 2009 is summarized in the table below.

		At March 31,				At December 31,
		2010				2009
Commercial real estate – mortgage		$	1,144,246,006			$	1,118,068,014
Consumer real estate – mortgage			730,247,460				756,015,076
Construction and land development			486,295,880				525,270,527
Commercial and industrial			1,031,512,024				1,071,444,097
Consumer and other			87,234,723				92,584,027
Total loans			3,479,536,093				3,563,381,741
Allowance for loan losses			(90,061,570	)			(91,958,789	)
Loans, net		$	3,389,474,523			$	3,471,422,952
Changes in the allowance for loan losses for the three months ended March 31, 2010 and for the year ended December 31, 2009 are as follows:
		March 31, 2010				December 31, 2009
Balance at beginning of period		$	91,958,789			$	36,484,073
Charged-off loans			(15,746,176	)			(62,598,965	)
Recovery of previously charged-off loans			623,037				1,315,450
Provision for loan losses			13,225,920				116,758,231
Balance at end of period		$	90,061,570			$	91,958,789

     At March 31, 2010, Pinnacle Financial had certain impaired loans of $131,381,000 which were on nonaccruing interest status. At December 31, 2009, Pinnacle Financial had certain impaired loans of $124,709,000 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 $2,625,000 and $690,000 for the three months ended March 31, 2010 and 2009, 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 nonperforming loans. Nonperforming restructured loans will remain as nonperforming until the borrower can demonstrate adherence to the restructured terms for a term of no less than six months and it is otherwise determined that continued adherence is reasonably assured. Some restructured loans continue as accruing loans after restructuring due to the borrower not being past due, adequate collateral valuations supporting the restructured loans and/or the cash flows of the underlying business appear adequate to support the restructured debt service. Once a relationship is classified as a restructured loan and in accordance with industry practice, the relationship will remain classified as a restructured loan until the borrower can demonstrate adherence to the restructured terms through the end of the current fiscal year. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date. At March 31, 2010, there were $9.53 million of accruing restructured loans that remain in a performing status. There were $26.98 million of accruing restructured loans at December 31, 2009.

     Potential problem loans, which are not included in nonperforming assets, amounted to approximately $303.7 million at March 31, 2010, compared to $257.0 million at December 31, 2009. 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, or OCC, Pinnacle National’s primary regulator, for loans classified as substandard, excluding the impact of nonperforming loans.

     At March 31, 2010, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $23,440,000 to directors, executive officers, and their related entities, of which $17,476,000 had been drawn upon. During the three months ended March 31, 2010, $742,000 of loan and other commitment increases and $13,559,000 of principal and other reductions were made by directors, executive officers, and their related entities. Additionally, loans outstanding to directors, executive officers and their related entities decreased from December 31, 2009 to March 31, 2010 due to the resignation of one of Pinnacle Financial’s board members. The terms on these loans and extensions are on substantially the same terms customary for other persons similarly

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

situated for the type of loan involved. None of these loans to directors, executive officers, and their related entities were impaired at March 31, 2010.

     At March 31, 2010, Pinnacle Financial had approximately $11.6 million of mortgage loans held-for-sale compared to approximately $12.4 million at December 31, 2009. 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 three months ended March 31, 2010, Pinnacle Financial recognized $566,000 in gains on the sale of these loans compared to $1,522,000, during the three months ended March 31, 2009.

     At March 31, 2010, Pinnacle Financial owned $24,704,000 in other real estate owned which had been acquired, usually through foreclosure, from borrowers compared to $29,603,000 at December 31, 2009. 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. The other real estate is initially recorded at fair value less costs to sell. These fair values are periodically updated based on new appraisals and other information.

Note 5. Income Taxes

     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. Pinnacle Financial’s effective tax rate differs from the Federal income tax statutory rates of 35% primarily due to investments in bank qualified municipal securities, bank owned life insurance, federal tax credits, state tax expense, and tax savings from our captive insurance subsidiary, PNFP Insurance, Inc.

     Also impacting the effective tax rate for 2010 and 2009 are 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, 2010 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 2010 and 2009.

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.

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

     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 March 31, 2010 is as follows:

Commitments to extend credit		$	968,339,000
Standby letters of credit			89,247,000

     At March 31, 2010, the fair value of Pinnacle Financial’s standby letters of credit was $285,000. 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.

      On May 1-2, 2010, the Middle Tennessee area experienced significant rainfall which caused substantial flooding, in many cases above previously marked flood plain boundaries (i.e., exceeded the 100-year flood plain). Pinnacle National experienced minimal damage to its facilities and equipment and was also required to temporarily relocate personnel to other offices throughout its footprint. These matters are not expected to be material to Pinnacle National’s financial position or results of operations. In addition, Pinnacle National believes that a number of its borrowers, both residential and commercial, have been displaced as a result of flooding. In all likelihood, the real estate that collateralizes Pinnacle National’s loans to these borrowers will have been damaged and, in some cases, completely destroyed. Because some of this collateral was not in a designated flood zone, it is likely that certain borrowers did not carry a valid flood insurance policy to reimburse them for flood losses. Pinnacle National has not identified all affected borrowers or the extent of their losses or the resulting impact of these events on its financial position and results of operations however it anticipates completing a preliminary assessment before June 30, 2010.

     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 March 31, 2010 will not have a material impact on Pinnacle Financial’s financial statements.

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 March 31, 2010, there were approximately 771,000 shares available for issuance under all of these plans.

     During the first quarter of 2006 and in connection with its merger with Cavalry, Pinnacle Financial assumed, 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 March 31, 2010, there were 29,452 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 235,241 Pinnacle Financial shares which could be acquired by the participants in the Mid-America Plans at exercise prices that ranged between $7.52 per share and $20.41 per share. At March 31, 2010, there were approximately 72,000 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 March 31, 2010, there were 2,049,728 stock options and 9,766 stock appreciation rights outstanding to purchase common shares. A summary of the activity within the equity incentive plans during the three months ended March 31, 2010 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, 2009			2,149,774			$	17.54				5.23			$	6,643
Granted			—				—
Exercised (2)			(70,573	)			8.52
Forfeited			(19,707	)			17.64
Outstanding at March 31, 2010			2,059,494			$	17.85				5.07			$	7,003
Outstanding and expected to vest as of March 31, 2010			2,026,505			$	17.74				5.06			$	6,978
Options exercisable at March 31, 2010 (3)			1,697,186			$	14.91				4.62			$	6,875

     During the three months ended March 31, 2010, approximately 364,000 option awards vested at an average exercise price of $22.05 and an intrinsic value of approximately $4.1 million.

     As of March 31, 2010, there was approximately $3.3 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 2.12 years.

     During the three months ended March 31, 2010 and 2009, Pinnacle Financial recorded stock option compensation expense of $445,000 and $434,000, 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 three month period ended March 31, 2010 and 2009.

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 March 31, 2010 under either of these plans. During the three months ended March 31, 2010, Pinnacle Financial awarded 297,769 shares of restricted common stock to certain Pinnacle Financial associates and outside directors.

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

     A summary of activity for unvested restricted share awards for the three months ended March 31, 2010 is as follows:

						Grant Date
		Number				Weighted-Average Cost
Unvested at December 31, 2009			480,884			$	21.03
Shares awarded			297,769				14.45
Restrictions lapsed and shares released to associates/directors			(57,484	)			20.86
Shares forfeited			(46,943	)			24.98
Unvested at March 31, 2010			674,226			$	17.75

     Status of 2010 Restricted Share Awards: There were 297,769 restricted share awards granted during the three months ended March 31, 2010. The following discusses the current status of these awards:

- The forfeiture restrictions on 19,397 restricted share awards granted to named executive officers in 2010 lapse in three installments as follows; 66.6% on the second anniversary date should Pinnacle Financial achieve certain earnings and soundness targets, and 33.4% on the third anniversary date should Pinnacle Financial achieve certain earnings and soundness targets (or, alternatively, the cumulative three-year period).

- The forfeiture restriction on another 58,203 restricted share awards granted to named executive officers lapse in one lump sum on the second anniversary date of the grant so long as Pinnacle Financial is profitable for the fiscal year immediately preceding the vesting date.

- The forfeiture restrictions on 19,853 restricted share awards granted to executive management personnel in 2010 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 59,568 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.

- The forfeiture restrictions on 123,549 restricted share awards lapse in five equal installments on the anniversary date of the grant.

- During the first quarter of 2010, 17,199 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 1,323 shares.

     Compensation expense associated with the performance-based restricted share awards is recognized over the performance period that the restrictions associated with the awards are anticipated to lapse based on a graded vesting schedule such that each performance 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 three months ended March 31, 2010 and 2009, Pinnacle Financial recognized approximately $742,000 and $441,000, respectively, in compensation costs attributable to all restricted share awards issued prior to the end of those periods.

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 OCC. 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. Pursuant to federal banking regulations and due to losses incurred in 2009, beginning in 2010, Pinnacle National had no net retained profits from the previous two years available for dividend payments to Pinnacle Financial. Pinnacle National may not, subsequent to January 1, 2010, without the prior consent of the OCC, pay any dividends to Pinnacle Financial until such time that current year profits exceed the net losses and dividends of the prior two years. Until such time as it may receive dividends from Pinnacle National, Pinnacle Financial anticipates servicing its preferred stock dividend and subordinated indebtedness requirements from its available cash balances.

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

     Pinnacle Financial and its banking subsidiary are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pinnacle Financial and Pinnacle National must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pinnacle Financial’s and Pinnacle National capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

     Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and Pinnacle National to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of March 31, 2010, that Pinnacle Financial and Pinnacle National met all capital adequacy requirements to which they are subject. To be categorized as well-capitalized, Pinnacle National must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. Pinnacle Financial’s and Pinnacle National’s actual capital amounts and ratios are presented in the following table (dollars in thousands):

																		Minimum
																		To Be Well-Capitalized
										Minimum								Under Prompt
										Capital								Corrective
		Actual								Requirement								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
At March 31, 2010
Total capital to risk weighted assets:
Pinnacle Financial		$	582,486				15.02	%		$	309,573				8.0	%		not applicable
Pinnacle National		$	485,222				12.54	%		$	310,311				8.0	%		$	391,143				10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial		$	518,479				13.37	%		$	155,155				4.0	%		not applicable
Pinnacle National		$	421,329				10.89	%		$	154,786				4.0	%		$	234,686				6.0	%
Tier I capital to average assets (*):
Pinnacle Financial		$	518,479				10.64	%		$	194,832				4.0	%		not applicable
Pinnacle National		$	421,329				8.64	%		$	195,024				4.0	%		$	210,664				5.0	%

     In January 2010, Pinnacle National agreed to an OCC requirement to maintain a minimum Tier 1 capital to average assets ratio of 8% and a minimum total capital to risk-weighted assets ratio of 12%. As noted above, Pinnacle National had 8.64% of Tier 1 capital to average assets and 12.54% of total capital to risk-weighted assets ratio at March 31, 2010. Pinnacle Financial has available cash to contribute to Pinnacle National if the Tier I capital ratios fall below the OCC requirements.

Note 9. Derivative Instruments

     Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings. Pinnacle Financial enters into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these instruments to meet customer needs, Pinnacle Financial enters into offsetting positions in order to minimize the risk to Pinnacle Financial. These swaps are derivatives, but are not designated as hedging instruments.

     Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or customer owes Pinnacle Financial, and results in credit risk to Pinnacle Financial. When the fair value of a derivative instrument contract is negative, Pinnacle Financial owes the customer or counterparty and therefore, has no credit risk.

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

     A summary of Pinnacle Financial’s interest rate swaps as of March 31, 2010 is included in the following table (in thousands):

		March 31, 2010
		Notional Amount				Estimated Fair Value
Interest rate swap agreements:
Pay fixed / receive variable swaps		$	247,051			$	12,057
Pay variable / receive fixed swaps			247,051				(11,874	)
Total		$	494,102			$	183

Note 10. Fair Value of Financial Instruments

     FASB ASC 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.

Valuation Hierarchy

     FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

	•		Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•		Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	•		Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

     A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Assets

     Securities available for sale- Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

     Impaired loans — 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 agreement. 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 valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy.

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

     Other investments – Included in other investments are investments in certain nonpublic private equity funds. The valuation of nonpublic private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such assets. These investments are valued initially based upon transaction price. The carrying values of other investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing reviews by senior investment managers. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies, changes in market outlook and the third-party financing environment over time. In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions. These investments are included in Level 3 of the valuation hierarchy.

     Other real estate owned — Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, is initially recorded at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the fair value are recorded as a component of foreclosed real estate expense. Other real estate owned is included in Level 3 of the valuation hierarchy.

     Other assets – Included in other assets are certain assets carried at fair value, including the cash surrender value of bank owned life insurance policies and interest rate swap agreements. The carrying amount of the cash surrender value of bank owned life insurance is based on information received from the insurance carriers indicating the financial performance of the policies and the amount Pinnacle Financial would receive should the policies be surrendered. Pinnacle Financial reflects these assets within Level 3 of the valuation hierarchy. The carrying amount of interest rate swap agreements is based on pricing models obtained from a third party bank. Pinnacle Financial reflects these assets within Level 2 of the valuation hierarchy.

Liabilities

     Other liabilities – Pinnacle Financial has certain liabilities carried at fair value including certain interest rate swap agreements. The fair value of these liabilities is based on pricing models obtained from a third party bank and is reflected within Level 2 of the valuation hierarchy.

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

     The following tables present the financial instruments carried at fair value as of March 31, 2010 and December 31, 2009, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (dollars in thousands):

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2010

														Models with
										Models with				significant
		Total carrying				Quoted market				significant				Unobservable
		value in the				prices in an				observable market				market
		consolidated				active market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Investment securities available for sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			132,793				—				132,793				—
Mortgage-backed securities			630,757				—				630,757				—
State and municipal securities			210,367				—				210,367				—
Corporate notes and other			10,648				—				10,648				—
Total investment securities available for sale			984,565								984,565
Other investments			2,415				—				—				2,415
Other assets			59,690				—				12,057				47,633
Total assets at fair value		$	1,046,640			$	—			$	996,622			$	50,048
Other liabilities		$	11,874			$	—			$	11,874			$	—
Total liabilities at fair value		$	11,874			$	—			$	11,874			$	—
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2009
										Models with				Models with
										significant				significant u
		Total carrying				Quoted market				observable				nobservable
		value in the				prices in an				market				market
		consolidated				active market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Investment securities available for sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			195,428				—				195,428				—
Mortgage-backed securities			517,691				—				517,691				—
State and municipal securities			207,295				—				207,295				—
Corporate notes and other			10,598				—				10,598				—
Total investment securities available for sale			931,012								931,012
Other investments			1,999				—				—				1,999
Other assets			57,391				—				9,872				47,519
Total assets at fair value		$	990,402			$	—			$	940,884			$	49,518
Other liabilities		$	10,054			$	—			$	10,054			$	—
Total liabilities at fair value		$	10,054			$	—			$	10,054			$	—

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

Assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2010

														Models with
		Total carrying								Models with significant				significant
		value in				Quoted market prices				observable market				unobservable market
		the consolidated				in an active market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Other real estate owned		$	24,704			$	—			$	—			$	24,704
Impaired loans, net (1)			114,267				—				—				114,267
Total		$	138,971			$	—			$	—			$	138,971
(1)      Amount is net of a valuation allowance of $17.1 million as required by FASB ASC 310-10,“Receivables.”
Assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2009
										Models with				Models with
										significant				significant
		Total carrying				Quoted market				observable				unobservable
		value in the				prices in an				market				market
		consolidated				active market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Other real estate owned		$	29,603			$	—			$	—			$	29,603
Impaired loans, net (2)			105,425				—				—				105,425
Total		$	135,028			$	—			$	—			$	135,028