UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008
or

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		(I.R.S. Employer Identification No.)
incorporation or organization)

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

(615) 744-3700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changes since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                                     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o		Accelerated Filer x
Non-accelerated Filer o		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 x

As of October 31, 2008 there were 23,708,607 shares of common stock, $1.00 par value per share, issued and outstanding.

Pinnacle Financial Partners, Inc.
Report on Form 10-Q
September 30, 2008

TABLE OF CONTENTS

		Page No.
PART I — Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)			2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			46
Item 4. Controls and Procedures			46
PART II — Other Information:
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3. Defaults Upon Senior Securities			48
Item 4. Submission of Matters to a Vote of Security Holders			48
Item 5. Other Information			48
Item 6. Exhibits			49
Signatures			50
EX-31.1
EX-31.2
EX-32.1
EX-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 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Pinnacle Financial’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors are described in “Item 1A. Risk Factors” of Pinnacle Financial’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and include, without limitation, (i) unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) the inability of Pinnacle to continue to grow its loan portfolio at historic rates in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, (iii) increased competition with other financial institutions, (iv) lack of sustained growth in the economy in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, (v) rapid fluctuations or unanticipated changes in interest rates, and (vi) changes in state and Federal legislation or regulations applicable to Banks and other financial services providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy.. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to Pinnacle Financial.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

		September 30,				December 31,
		2008				2007
ASSETS
Cash and noninterest-bearing due from banks		$	58,670,045			$	76,941,931
Interest-bearing due from banks			3,688,622				24,706,966
Federal funds sold			29,039,938				20,854,966
Cash and cash equivalents			91,398,605				122,503,863
Securities available-for-sale, at fair value			617,909,350				495,651,939
Securities held-to-maturity (fair value of $10,813,596 and $26,883,473 at September 30, 2008 and December 31, 2007, respectively)			10,897,923				27,033,356
Mortgage loans held-for-sale			15,161,830				11,251,652
Loans			3,202,909,472				2,749,640,689
Less allowance for loan losses			(34,840,853	)			(28,470,207	)
Loans, net			3,168,068,619				2,721,170,482
Premises and equipment, net			67,296,594				68,385,946
Other investments			25,660,787				22,636,029
Accrued interest receivable			17,125,958				18,383,004
Goodwill			243,250,854				243,573,636
Core deposit and other intangible assets			17,659,468				17,325,988
Other assets			63,122,391				46,254,566
Total assets		$	4,337,552,379			$	3,794,170,461
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest-bearing		$	457,542,942			$	400,120,147
Interest-bearing			331,706,748				410,661,187
Savings and money market accounts			677,367,407				742,354,465
Time			1,828,546,046				1,372,183,317
Total deposits			3,295,163,143				2,925,319,116
Securities sold under agreements to repurchase			198,806,912				156,070,830
Federal Home Loan Bank advances and other borrowings			207,239,268				141,666,133
Subordinated debt			97,476,000				82,476,000
Accrued interest payable			8,419,326				10,374,538
Other liabilities			17,879,022				11,653,550
Total liabilities			3,824,983,671				3,327,560,167
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, par value $1.00; 90,000,000 shares authorized; 23,699,790 issued and outstanding at September 30, 2008 and 22,264,817 issued and outstanding at December 31, 2007			23,699,790				22,264,817
Additional paid-in capital			416,105,723				390,977,308
Retained earnings			76,373,045				54,150,679
Accumulated other comprehensive loss, net of taxes			(3,609,850	)			(782,510	)
Total stockholders’ equity			512,568,708				466,610,294
Total liabilities and stockholders’ equity		$	4,337,552,379			$	3,794,170,461

See accompanying notes to consolidated financial statements.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Interest income:
Loans, including fees		$	44,075,167			$	32,750,403			$	131,694,867			$	92,283,516
Securities:
Taxable			6,005,024				3,387,464				15,434,782				10,127,943
Tax-exempt			1,339,930				743,921				4,030,699				2,106,857
Federal funds sold and other			452,690				1,464,795				1,647,725				3,075,372
Total interest income			51,872,811				38,346,583				152,808,073				107,593,688
Interest expense:
Deposits			18,778,955				16,043,425				57,583,697				44,037,317
Securities sold under agreements to repurchase			681,912				2,061,333				2,081,055				5,664,167
Federal Home Loan Bank advances and other borrowings			3,130,448				1,282,159				8,820,575				4,189,055
Total interest expense			22,591,315				19,386,917				68,485,327				53,890,539
Net interest income			29,281,496				18,959,666				84,322,746				53,703,149
Provision for loan losses			3,124,819				772,064				7,503,412				2,460,028
Net interest income after provision for loan losses			26,156,677				18,187,602				76,819,334				51,243,121
Noninterest income:
Service charges on deposit accounts			2,778,097				1,965,965				8,036,320				5,683,199
Investment services			1,271,284				868,738				3,759,779				2,453,505
Insurance sales commissions			959,104				563,367				2,612,255				1,829,282
Gain on loan sales, net			1,460,478				378,682				2,996,390				1,380,883
Net gain on sale of premises			—				—				1,010,881				56,078
Trust fees			584,927				466,581				1,621,385				1,312,076
Other noninterest income			2,199,051				1,088,430				6,641,819				3,193,840
Total noninterest income			9,252,941				5,331,763				26,678,829				15,908,863
Noninterest expense:
Salaries and employee benefits			13,013,116				9,106,256				39,382,393				26,167,610
Equipment and occupancy			3,731,932				2,632,747				11,235,137				7,209,977
Marketing and other business development			380,555				375,066				1,234,933				1,057,092
Postage and supplies			761,744				474,083				2,253,371				1,453,197
Amortization of intangibles			788,267				515,754				2,312,333				1,547,262
Other noninterest expense			3,485,581				2,005,752				9,854,795				5,282,516
Merger related expense			1,165,177				—				5,620,216				—
Total noninterest expense			23,326,372				15,109,658				71,893,178				42,717,654
Income before income taxes			12,083,246				8,409,707				31,604,985				24,434,330
Income tax expense			3,288,104				2,637,897				8,783,920				7,634,815
Net income		$	8,795,142			$	5,771,810			$	22,821,065			$	16,799,515
Per share information:
Basic net income per common share		$	0.38			$	0.37			$	1.01			$	1.09
Diluted net income per common share		$	0.36			$	0.35			$	0.96			$	1.01
Weighted average shares outstanding:
Basic			23,174,998				15,503,284				22,559,449				15,477,339
Diluted			24,439,642				16,609,328				23,826,368				16,630,311

See accompanying notes to consolidated financial statements.

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

		Common Stock
																		Accumulated
										Additional								Other				Total
										Paid-in				Retained				Comprehensive				Stockholders’
		Shares				Amount				Capital				Earnings				Loss				Equity
Balances, December 31, 2006			15,446,074			$	15,446,074			$	211,502,516			$	31,109,324			$	(2,040,893	)		$	256,017,021
Exercise of employee common stock options and related tax benefits			78,437				78,437				645,118				—				—				723,555
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan, net of forfeitures			28,526				28,526				(28,526	)			—				—				—
Compensation expense for restricted shares			—				—				272,260				—				—				272,260
Compensation expense for stock options			—				—				1,252,638				—				—				1,252,638
Comprehensive income:
Net income			—				—				—				16,799,515				—				16,799,515
Net unrealized holding losses on securities available-for-sale , net of deferred tax benefit of $1,285,456			—				—				—				—				(428,559	)			(428,559	)
Total comprehensive income																							16,370,956
Balances, September 30, 2007			15,553,037			$	15,553,037			$	213,644,006			$	47,908,839			$	(2,469,452	)		$	274,636,430
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 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

See accompanying notes to consolidated financial statements.

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

		Nine months ended
		September 30,
		2008				2007
Operating activities:
Net income		$	22,821,065			$	16,799,515
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities			526,022				376,450
Depreciation and amortization			4,788,550				2,010,487
Provision for loan losses			7,503,412				2,460,028
Gains on loans and loan participations sold, net			(2,996,390	)			(1,380,883	)
Net gains on sale of premises			(1,010,881	)			56,078
Stock-based compensation expense			1,706,528				1,524,898
Deferred tax (benefit) expense			(1,274,403	)			1,587,523
Other non-cash operating activities			194,558				—
Excess tax benefit from stock compensation			(805,414	)			(128,678	)
Mortgage loans held for sale:
Loans originated			(212,279,309	)			(125,018,617	)
Loans sold			211,353,184				126,137,833
Decrease in other assets			7,912,982				1,672,572
Increase (decrease) in other liabilities			2,672,391				(3,461,145	)
Net cash provided by operating activities			41,112,295				22,636,061
Investing activities:
Activities in securities available-for-sale:
Purchases			(233,008,882	)			(36,988,675	)
Sales			—				—
Maturities, prepayments and calls			105,725,683				30,193,241
Activities in securities held-to-maturity:
Purchases			—				—
Sales			—				—
Maturities, prepayments and calls			16,080,000				—
Increase in loans, net			(472,054,326	)			(232,911,778	)
Purchases of premises and equipment and software			(6,198,441	)			(5,097,092	)
Proceeds from the sale of premises and equipment			2,821,702				—
Cash used for acquisition			(3,800,000	)			—
Investments in unconsolidated subsidiaries and other entities			(2,583,983	)			(1,222,570	)
Net cash used in investing activities			(593,018,247	)			(246,026,874	)
Financing activities:
Net increase in deposits			371,825,090				205,095,262
Net increase in securities sold under agreements to repurchase			42,736,082				4,313,965
Net (decrease) increase in Federal funds purchased			(39,862,000	)			19,986,000
Advances from Federal Home Loan Bank:
Issuances			110,478,047				35,000,000
Payments			(13,882,995	)			(53,040,828	)
Net increase in borrowings under lines of credit			9,000,000				—
Proceeds from issuance of subordinated debt			15,000,000				—
Proceeds from the sale of common stock, net of expenses			21,454,758				—
Exercise of common stock options			3,246,298				594,877
Excess tax benefit from stock compensation			805,414				128,678
Net cash provided by financing activities			520,800,694				212,079,954
Net decrease in cash and cash equivalents			(31,105,258	)			(11,310,859	)
Cash and cash equivalents, beginning of period			122,503,863				92,518,850
Cash and cash equivalents, end of period		$	91,398,605			$	81,207,991

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-Rutherford-Franklin and Knoxville 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. On February 29, 2008, Pinnacle National purchased all of the assets and assumed all of the liabilities of PrimeTrust Bank and contemporaneously, through a series of transactions, sold the PrimeTrust Bank charter and rights to operate a branch in Tennessee to an unaffiliated out-of-state third party for $500,000. Pinnacle Financial also merged Bank of the South into Pinnacle National on that date. References to Pinnacle National as of December 31, 2007 include PrimeTrust Bank and Bank of the South.

     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 2007 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.

     Cash Flow Information —Supplemental cash flow information addressing certain cash payments and noncash transactions for each of the nine months ended September 30, 2008 and 2007 was as follows:

		For the nine months ended September 30,
		2008				2007
Cash Payments:
Interest		$	72,581,518			$	53,491,752
Income taxes			7,500,000				7,850,000
Noncash Transactions:
Loans charged-off to the allowance for loan losses			2,442,259				809,703
Loans foreclosed upon with repossessions transferred to other assets			18,195,935				240,878
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit			(2,827,340	)			(428,559	)

     Income Per Common Share — Basic earnings per share (“EPS”) is computed by dividing net income 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

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

common stock were exercised or converted. The difference between basic and diluted weighted average shares outstanding was 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 earnings per share by application of the treasury stock method.

     As of September 30, 2008, there were 2,253,000 stock options and 12,000 stock appreciation rights outstanding to purchase common shares. As of September 30, 2007, there were 1,929,000 stock options outstanding to purchase common shares. Most of these options and stock appreciation rights have exercise prices, 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 and 2007. There were common stock options of 418,000 and 352,000 outstanding as of September 30, 2008 and 2007, respectively, which were considered anti-dilutive and thus have not been considered in the diluted earnings per share calculations below. Additionally, as of September 30, 2008 and 2007, Pinnacle Financial had outstanding warrants to purchase 370,000 and 395,000, respectively, common shares which have been considered in the calculation of Pinnacle Financial’s diluted net income per share for the three and nine months ended September 30, 2008 and 2007.

     The following is a summary of the basic and diluted earnings per share calculation for the three and nine months ended September 30, 2008 and 2007:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
Basic earnings per share calculation:
Numerator - Net income		$	8,795,142			$	5,771,810			$	22,821,065			$	16,799,515
Denominator - Average common shares outstanding			23,174,998				15,503,284				22,559,449				15,477,339
Basic net income per share		$	0.38			$	0.37			$	1.01			$	1.09
Diluted earnings per share calculation:
Numerator - Net income		$	8,795,142			$	5,771,810			$	22,821,065			$	16,799,515
Denominator - Average common shares outstanding			23,174,998				15,503,284				22,559,449				15,477,339
Dilutive shares contingently issuable			1,264,644				1,106,044				1,266,919				1,152,972
Average diluted common shares outstanding			24,439,642				16,609,328				23,826,368				16,630,311
Diluted net income per share		$	0.36			$	0.35			$	0.96			$	1.01

Newly Adopted Accounting Pronouncements

     Split-Dollar Life Insurance Arrangements — Pinnacle Financial acquired Cavalry Banking, Inc. in March of 2006. Certain executives and directors of Cavalry Banking, Inc. were participants in a deferred compensation arrangement which included split-dollar life insurance arrangements. In September 2006, the FASB ratified the consensuses reached by the Task Force on Issue No. 06-4 (EITF 06-4) “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The EITF concluded that deferred compensation or postretirement benefit aspects of an endorsement split-dollar life insurance arrangement should be recognized as a liability by the employer and the obligation is not effectively settled by the purchase of a life insurance policy. The effective date was for fiscal years beginning after December 15, 2007. On January 1, 2008, we adopted this EITF as a change in accounting principle and recorded a liability of $985,000 along with a corresponding adjustment to beginning retained earnings of $599,000, net of tax.

     Accounting for the Sale of Real Estate including Buy-Sell Clauses — In December 2007, the EITF reached a consensus on EITF Issue No. 07-6, “Accounting for Sales of Real Estate Subject to the Requirements of FASB Statement No. 66, ‘Accounting for Sales of Real Estate,’ When the Agreement Includes a Buy-Sell Clause” (“EITF 07-6”). EITF 07-6 clarifies whether a buy-sell clause is a

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

prohibited form of continuing involvement that would preclude partial sales treatment under FAS No. 66. EITF 07-6 is effective for new arrangements entered into and assessments of existing transactions originally accounted for under the deposit, profit-sharing, leasing, or financing methods for reasons other than the exercise of a buy-sell clause performed in fiscal years beginning after December 15, 2007.

     Fair Value Measurement - In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157, 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. SFAS 157 applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those 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. The effective date for SFAS No. 157 was for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Pinnacle Financial partially adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities. The partial adoption of SFAS 157 had no impact on the consolidated financial statements of Pinnacle Financial. SFAS 157 has not been applied to nonfinancial assets and liabilities pursuant to Financial Statement Position, (FSP) FAS 157-2. This standard is applicable for nonfinancial assets and liabilities for fiscal periods beginning after November 30, 2008. There was no cumulative adjustment required upon partial adoption of SFAS 157.

     In February of 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”, which gives entities the option to measure eligible financial assets and financial liabilities at fair value, on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement was effective as of January 1, 2008; however, it had no impact on the consolidated financial statements of Pinnacle Financial because Pinnacle Financial did not elect the fair value option for any financial instrument not presently being accounted for at fair value.

     In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” This FSP clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective for the Company upon issuance, including prior periods for which financial statements have not been issued; and, therefore was effective for the Company’s financial statements as of and for the three and nine month periods ended September 30, 2008. Adoption of FSP No. FAS 157-3 did not have a significant impact on the Company’s financial position 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.

Valuation Hierarchy

     SFAS 157 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.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
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•		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 instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets

     Securities — 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 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.

     Mortgage loans held-for-sale - Mortgage loans held-for-sale are carried at the lower of cost or fair value and are classified within level 2 of the valuation hierarchy. The inputs for valuation of these assets are based on the anticipated sales price of these loans as the loans are usually sold within a few weeks of their origination.

     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. Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses. Impaired loans are classified within level 3 of the hierarchy.

     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 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 information obtained from a third party bank. Pinnacle Financial reflects these assets within level 2 of the valuation hierarchy.

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

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 information obtained from a third party bank and is reflected within level 2 of the valuation hierarchy.

     The following table presents the financial instruments carried at fair value as of September 30, 2008, by caption on the consolidated balance sheets and by SFAS 157 valuation hierarchy (as described above) (dollars in thousands):

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2008

										Internal
		Total								models with				Internal models
		carrying				Quoted				significant				with significant
		value in the				market prices				observable				unobservable
		consolidated				in an active				market				market
		balance sheet				market				parameters				parameters
						(Level 1)				(Level 2)				(Level 3)
Securities available-for-sale		$	617,909			$	—			$	617,909			$	—
Mortgage loans held-for-sale			15,162				—				15,162				—
Other investments			1,667				—				—				1,667
Other assets			37,341				—				2,099				35,242
Total assets at fair value		$	672,079			$	—			$	635,170			$	36,909
Other liabilities			2,192				—				2,192				—
Total liabilities at fair value		$	2,192			$	—			$	2,192			$	—

Assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2008

										Internal
		Total								models with				Internal models
		carrying				Quoted				significant				with significant
		value in the				market prices				observable				unobservable
		consolidated				in an active				market				market
		balance sheet				market				parameters				parameters
						(Level 1)				(Level 2)				(Level 3)
Impaired loans		$	17,743			$	—			$	—			$	17,743
Total assets at fair value		$	17,743			$	—			$	—			$	17,743
Other liabilities			—				—				—				—
Total liabilities at fair value		$	—			$	—			$	—			$	—

Changes in level 3 fair value measurements

     The table below includes a rollforward of the balance sheet amounts for the third quarter of 2008 (including the change in fair value) for financial instruments classified by Pinnacle Financial within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 financial instruments typically include, in addition to the unobservable or level 3 components,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

Nine months ended September 30, 2008 (in thousands)		Assets				Liabilities
Fair value, January 1, 2008		$	35,336			$	—
Total realized and unrealized gains included in income			633				—
Purchases, issuances and settlements, net			940				—
Transfers in and/or out of level 3			—				—
Fair value, September 30, 2008		$	36,909			$	—
Total unrealized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at September 30, 2008		$	633			$	—

Note 2. Mergers and Acquisitions

     On November 30, 2007, Pinnacle Financial consummated its merger with Mid-America, a two-bank holding company headquartered in Nashville, Tennessee.

     In accordance with SFAS No. 141, “Accounting for Business Combinations” (“SFAS No. 141”), SFAS No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”) and SFAS No. 147, “Acquisition of Certain Financial Institutions” (“SFAS No. 147”), Pinnacle Financial recorded at fair value the following assets and liabilities of Mid-America as of November 30, 2007. The table below details the amounts reported in our consolidated financial statements as of December 31, 2007 and the updated amounts as of September 30, 2008 for changes in the purchase price allocation recorded during the nine months ended September 30, 2008 (in thousands):

						Changes in
						purchase price
		November 30, 2007				allocation
		purchase price				recorded during				Final purchase
Mid-America Purchase Price Allocation		allocation				2008				price allocation
Cash and cash equivalents		$	60,795			$	—			$	60,795
Investment securities — available-for-sale			147,766				—				147,766
Loans, net of an allowance for loan losses of $8,695			855,887				—				855,887
Goodwill			129,334				2,298				131,632
Core deposit intangible			8,085				1,351				9,436
Other assets			49,854				139				49,993
Total assets acquired			1,251,721				3,788				1,255,509
Deposits			957,076				—				957,076
Federal Home Loan Bank advances			61,383				—				61,383
Other liabilities			27,107				79				27,186
Total liabilities assumed			1,045,566				79				1,045,645
Total consideration paid for Mid-America		$	206,155			$	3,709			$	209,864

     In accordance with SFAS Nos. 141 and 142, Pinnacle Financial has recognized $9.4 million as a core deposit intangible. This identified intangible is being amortized over ten years using an accelerated method which anticipates the life of the underlying deposits to which the intangible is attributable. For the three and nine months ended September 30, 2008, approximately $283,000 and $850,000 of amortization was recognized in the accompanying consolidated statements of income as other noninterest expense,

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

related to this intangible. Amortization expense associated with this identified intangible will approximate $700,000 to $1.1 million per year for the next ten years.

     Pinnacle Financial also recorded other adjustments to the carrying value of Mid-America’s assets and liabilities in order to reflect the fair value at the date of acquisition. The discounts and premiums related to financial assets and liabilities are being accreted and amortized into the consolidated statements of income using a method that approximates the level yield over the anticipated lives of the underlying financial assets or liabilities. For the three and nine months ended September 30, 2008, the accretion and amortization of the fair value discounts and premiums related to the acquired assets and liabilities increased net interest income by approximately $426,000 and $2.2 million, respectively. Based on the estimated useful lives of the acquired loans, deposits and FHLB advances, Pinnacle Financial will recognize increases in net interest income related to amortization and accretion of these purchase accounting adjustments of approximately $2.1 million over the next ten years.

     The following pro forma income statements assume the merger was consummated on January 1, 2007 and thus the amounts in the pro forma information below will differ from the actual results as presented in the accompanying consolidated statements of income. The pro forma information does not reflect Pinnacle Financial’s results of operations that would have actually occurred had the merger been consummated on such date (dollars in thousands).

		Nine months ended September 30,
		2008				2007
		(unaudited)
Pro Forma Income Statements:
Net interest income		$	82,665			$	80,692
Provision for loan losses			7,503				3,692
Noninterest income			26,679				21,775
Noninterest expense			71,869				65,306
Net income before taxes			29,972				33,469
Income tax expense			8,153				10,735
Net income		$	21,819			$	22,734
Pro Forma Per Share Information:
Basic net income per common share		$	0.97			$	1.03
Diluted net income per common share		$	0.92			$	0.98
Weighted average shares outstanding:
Basic			22,559,449				22,153,919
Diluted			23,826,368				23,306,891

     During the three and nine months ended September 30, 2008, Pinnacle Financial incurred expenses related to the merger with Mid-America of $1,165,000 and $5,620,000, respectively. These expenses were directly related to the merger and consisted primarily of retention awards and costs to integrate systems and are reflected on the accompanying consolidated statements of income as merger related expense.

     Following the merger with Mid-America, on February 29, 2008, Pinnacle National purchased all of the assets and assumed all of the liabilities of PrimeTrust Bank and simultaneously sold the charter of PrimeTrust Bank to an unaffiliated third party for $500,000. Goodwill was reduced for the proceeds of the sale of the charter, and therefore no gain was recorded. Pinnacle Financial also merged Bank of the South into Pinnacle National on that date, leaving Pinnacle National as the sole banking subsidiary of Pinnacle Financial.

     Additionally, during the third quarter of 2008 Pinnacle National acquired Murfreesboro, Tenn.-based Beach & Gentry Insurance LLC (Beach & Gentry). Concurrently, Beach & Gentry merged with Miller & Loughry Insurance & Services Inc., a wholly-owned subsidiary of Pinnacle National, also located in Murfreesboro. In connection with this acquisition we recorded a customer list intangible of $1,270,000 which is being amortized over 20 years on an accelerated basis. Amortization of this intangible amounted to $30,000 during the three months ended September 30, 2008. Additionally, if certain performance thresholds

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

are met over the next three years following the date of acquisition, Pinnacle National will be required to pay up to an additional $1.0 million to the former principal of Beach & Gentry.

Note 3. Securities

     The amortized cost and fair value of securities available-for-sale and held-to-maturity at September 30, 2008 and December 31, 2007 are summarized as follows:

		September 30, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			54,462,796				168,371				844,920				53,786,247
Mortgage-backed securities			440,946,820				1,962,453				1,770,346				441,138,927
State and municipal securities			126,505,072				253,013				5,483,414				121,274,671
Corporate notes and other			1,910,267				9,884				210,646				1,709,505
		$	623,824,955			$	2,393,721			$	8,309,326			$	617,909,350
Securities held-to-maturity:
U.S. government agency securities		$	1,997,859			$	—			$	38,335			$	1,959,524
State and municipal securities			8,900,064				6,691				52,683				8,854,072
		$	10,897,923			$	6,691			$	91,018			$	10,813,596

		December 31, 2007
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. Government agency securities			69,481,328				220,833				39,598				69,662,563
Mortgage-backed securities			297,909,174				1,237,807				1,441,635				297,705,346
State and municipal securities			127,220,978				206,102				1,521,273				125,905,807
Corporate notes			2,415,783				—				37,560				2,378,223
		$	497,027,263			$	1,664,742			$	3,040,066			$	495,651,939
Securities held-to-maturity:
U.S. government agency securities		$	17,747,589			$	4,436			$	—			$	17,752,025
State and municipal securities			9,285,767				4,242				158,561				9,131,448
		$	27,033,356			$	8,678			$	158,561			$	26,883,473

     At September 30, 2008, approximately $584.9 million of Pinnacle Financial’s investment portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     At September 30, 2008 and December 31, 2007, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized loss 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, 2008:
U.S. government agency securities		$	36,202,253			$	883,255			$	—			$	—			$	36,202,253			$	883,255
Mortgage-backed securities			169,658,031				1,440,885				19,573,225				329,461				189,231,256				1,770,346
State and municipal securities			99,241,374				5,246,285				4,560,036				289,812				103,801,410				5,536,097
Corporate notes			273,760				126,240				905,600				84,406				1,179,360				210,646
Total temporarily-impaired securities		$	305,375,418			$	7,696,665			$	25,038,861			$	703,679			$	330,414,279			$	8,400,344
At December 31, 2007:
U.S. government agency securities		$	13,942,078			$	25,198			$	2,985,600			$	14,400			$	16,927,678			$	39,598
Mortgage-backed securities			51,240,090				181,098				97,593,453				1,260,537				148,833,543				1,441,635
State and municipal securities			54,467,544				1,193,763				35,481,739				486,071				89,949,283				1,679,834
Corporate notes			527,115				300				1,451,108				37,260				1,978,223				37,560
Total temporarily-impaired securities		$	120,176,827			$	1,400,359			$	137,511,900			$	1,798,268			$	257,688,727			$	3,198,627

     Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of Pinnacle Financial to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value. Because the declines in fair value noted above were attributable to increases in interest rates and not attributable to credit quality and because Pinnacle Financial has the ability and intent to hold all of these investments until a market price recovery or maturity, the impairment of these investments is not deemed to be other-than-temporary.

Note 4. Loans and Allowance for Loan Losses

     The composition of loans at September 30, 2008 and December 31, 2007 is summarized in the table below. Certain loans have been reclassified at December 31, 2007 to be consistent with the September 30, 2008 classification.

		At September 30,				At December 31,
		2008				2007
Commercial real estate — Mortgage		$	907,289,656			$	710,545,533
Consumer real estate — Mortgage			631,460,709				539,768,302
Construction and land development			651,802,960				582,958,584
Commercial and industrial			924,753,114				794,419,213
Consumer and other			87,603,033				121,949,057
Total Loans			3,202,909,472				2,749,640,689
Allowance for loan losses			(34,840,853	)			(28,470,207	)
Loans, net		$	3,168,068,619			$	2,721,170,482

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

     Changes in the allowance for loan losses for the nine months ended September 30, 2008 and for the year ended December 31, 2007 are as follows:

		September 30, 2008				December 31, 2007
Balance at beginning of period		$	28,470,207			$	16,117,978
Charged-off loans			(2,442,259	)			(1,341,890	)
Recovery of previously charged-off loans			1,309,493				279,491
Allowance from Mid-America acquisition			—				8,694,787
Provision for loan losses			7,503,412				4,719,841
Balance at end of period		$	34,840,853			$	28,470,207

     At September 30, 2008 and at December 31, 2007, Pinnacle Financial had impaired loans on nonaccruing interest status. The principal balance of these nonaccrual loans amounted to $17,743,000 and $19,677,000 at September 30, 2008 and December 31, 2007, respectively. 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 $794,000 and $108,000 for the nine months ended September 30, 2008 and 2007, respectively.

     At September 30, 2008, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $33,374,000 to directors, executive officers, and their related entities, of which $25,708,000 had been drawn upon. During the nine months ended September 30, 2008, $11,163,000 of loan and other commitment increases and $4,925,000 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 for the type of loan involved. None of these loans to directors, executive officers, and their related entities were impaired at September 30, 2008.

     During the three and nine months ended September 30, 2008 and 2007, Pinnacle Financial sold participations in certain loans to correspondent banks and other investors at an interest rate that was less than that of the borrower’s rate of interest. In accordance with U.S. generally accepted accounting principles, Pinnacle Financial recognized a net gain on the sale of these participated loans for the nine months ended September 30, 2008 and 2007 of approximately $12,000 and $230,000, respectively, which is attributable to the present value of the future net cash flows of the difference between the interest payments the borrower is projected to pay Pinnacle Financial and the amount of interest that will be owed the correspondent bank based on their participation in the loans. Net gains recognized for the three months ended September 30, 2008 and 2007 were $695,000 and $19,000, respectively. The gain recognized for the three months ended September 30, 2008 of $695,000 resulted from the sale of four related impaired loans to a group of outside investors. At September 30, 2008, Pinnacle Financial was servicing $143.6 million of loans for correspondent banks and other entities, of which $136.1 million were commercial loans.

     At September 30, 2008, Pinnacle Financial had $15,162,000 of mortgage loans held-for-sale compared to $11,252,000 at December 31, 2007. 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 National 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 and nine months ended September 30, 2008, Pinnacle Financial recognized $765,000 and $2,289,000 gains on the sale of these loans, respectively, compared to $360,000 and $1,151,000 gains on the sale of these loans for the three and nine months ended September 30, 2007, respectively.

     At September 30, 2008, Pinnacle Financial owned $12,143,000 in other real estate which had been acquired, usually through foreclosure, from borrowers compared to $1,673,000 at December 31, 2007. 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. Other real estate is included in Other assets on the consolidated balance sheet.

Note 5. Stockholders’ Equity and Subordinated Debt

     On July 22, 2008, Pinnacle Financial issued one million shares of its authorized but unissued common stock via a private placement to mutual funds and certain other institutional accounts managed by T. Rowe Price Associates, Inc. at $21.50 per share.

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

Proceeds from this sale of common stock are expected to be used for general corporate purposes, including supporting the continued, anticipated growth of Pinnacle National.

     On August 5, 2008, Pinnacle National entered into a subordinated term loan agreement with a regional bank for $15 million. The loan will bear interest at 90-day Libor plus 3.5%, mature in seven years and borrowings under the loan qualify as Tier 2 capital for regulatory capital purposes. Proceeds from this issuance of subordinated debt are expected to be used for the anticipated growth of Pinnacle National.

Note 6. Income Taxes

     Pinnacle Financial’s income tax expense differs from the amounts computed by applying the Federal income tax statutory rates of 35% to income before income taxes. A reconciliation of the differences for the three and nine months ended September 30, 2008 and 2007 is as follows:

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
Income taxes at statutory rate		$	4,229,136			$	2,943,397			$	11,061,745			$	8,552,015
State tax (benefit) expense, net of Federal tax effect			(103,272	)			45,352				(262,076	)			135,762
Federal tax credits			(90,000	)			(90,000	)			(270,000	)			(270,000	)
Tax-exempt securities			(397,123	)			(217,167	)			(1,246,644	)			(615,896	)
Bank owned life insurance			(78,750	)			(46,248	)			(313,129	)			(141,066	)
Insurance premiums			(83,007	)			(103,130	)			(290,542	)			(307,291	)
Other items			(188,880	)			105,693				104,566				281,291
Income tax expense		$	3,288,104			$	2,637,897			$	8,783,920			$	7,634,815

     The effective tax rate for 2008 and 2007 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 was available for the years ended December 31, 2008 and 2007 was $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 2008 and 2007.

Note 7. 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 PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     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, 2008 is as follows:

Commitments to extend credit		$	954,825,000
Standby letters of credit			93,971,000

     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, 2008 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.

     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 8. Equity Compensation

     Pinnacle Financial has two equity incentive plans under which it has granted stock options 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, 2008, there were 442,186 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. There were 195,551 Pinnacle shares which could 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

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

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 were 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 487,835 Pinnacle shares which could be acquired by the participants in the Mid-America Plan at exercise prices that ranged between $6.63 per share and $21.37 per share. At September 30, 2008, there were 88,435 shares available for issue under the Mid-America Plans.

     As of September 30, 2008, of the approximately 2,253,000 stock options and 12,000 stock appreciation rights outstanding, 1,264,000 options were granted with the intention to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment to the option holder while 989,000 options would be deemed non-qualified stock options or stock appreciation rights and thus not subject to favorable tax treatment to the option holder. All stock options granted under the Pinnacle equity incentive plans vest in equal increments over five years from the date of grant and are exercisable over a period of ten years from the date of grant. All stock options and stock appreciation rights granted under the Cavalry Plan and Mid-America Plans were fully vested at the date of those mergers.

     A summary of the stock option and stock appreciation rights activity during the nine months ended September 30, 2008 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as follows:

										Weighted-
										Average
						Weighted-				Contractual				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Term				Value (1)
		Number				Price				(in years)				(000’s)
Outstanding at December 31, 2007			2,398,823			$	16.84				6.9			$	23,784
Granted			163,360				21.51
Exercised (2)			(244,815	)			13.02
Forfeited			(51,917	)			26.53
Outstanding at September 30, 2008			2,265,451			$	17.36				6.3			$	30,868
Outstanding and expected to vest as of September 30, 2008			2,232,966			$	17.19				6.2			$	30,784
Options exercisable at September 30, 2008 (3)			1,503,119			$	12.50				5.3			$	26,464