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

For the quarterly period ended June 30, 2009

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

For the transition period from                      to                     

, Inc.

(Exact name of registrant as specified in its charter)

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

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

(615) 744-3700
(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 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 (do not check if you are a smaller reporting company)

Smaller reporting company o

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

Yes o                    No þ

As of August 3, 2009 there were 32,931,547 shares of common stock, $1.00 par value per share, issued and outstanding.

 

 

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

TABLE OF CONTENTS

		Page No.
PART I — Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			47
Item 4. Controls and Procedures			47
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			55
Item 3. Defaults Upon Senior Securities			55
Item 4. Submission of Matters to a Vote of Security Holders			55
Item 5. Other Information			56
Item 6. Exhibits			56
Signatures			57
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 presentation which may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “goal,” “target,” “should,” “shouldn’t” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) the inability of Pinnacle Financial to continue to grow its loan portfolio at historic rates in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) increased competition with other financial institutions; (vi) greater than anticipated deterioration or lack of sustained growth in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, particularly in commercial and residential real estate markets; (vii) rapid fluctuations or unanticipated changes in interest rates; (viii) the results of regulatory examinations; (ix) the development of any new market other than Nashville or Knoxville; (x) a merger or acquisition; (xi) any activity in the capital markets that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xii) the impact of governmental restrictions on entities participating in the Capital Purchase Program, of the U.S. Department of the Treasury (the “Treasury”); (xiii) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy; and (xiv) the inability of Pinnacle Financial to secure the approval of the Treasury and its bank subsidiary’s primary federal regulator for the redemption by Pinnacle Financial of the Series A preferred stock sold by Pinnacle Financial to the Treasury in the Capital Purchase Program. A more detailed description of these and other risks is contained in Pinnacle’s most recent annual report on Form 10-K and in Part II, Item 1A “Risk Factors” below. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and users are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

Item 1.

Part I. Financial Information
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

		June 30,				December 31,
		2009				2008
ASSETS
Cash and noninterest-bearing due from banks		$	48,244,961			$	68,388,961
Interest-bearing due from banks			53,197,920				8,869,680
Federal funds sold			8,202,688				12,994,114
Cash and cash equivalents			109,645,569				90,252,755
Securities available-for-sale, at fair value			917,387,417				839,229,428
Securities held-to-maturity (fair value of $8,868,642 and $10,642,973 at June 30, 2009 and December 31, 2008, respectively)			8,697,285				10,551,256
Mortgage loans held-for-sale			27,960,291				25,476,788
Loans			3,544,175,900				3,354,907,269
Less allowance for loan losses			(66,075,358	)			(36,484,073	)
Loans, net			3,478,100,542				3,318,423,196
Premises and equipment, net			69,375,573				68,865,221
Other investments			36,931,884				33,616,450
Accrued interest receivable			18,105,853				17,565,141
Goodwill			244,116,260				244,160,624
Core deposits and other intangible assets			15,236,635				16,871,202
Other real estate			18,844,859				18,305,880
Other assets			92,339,377				70,756,823
Total assets		$	5,036,741,545			$	4,754,074,764
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	470,048,740			$	424,756,813
Interest-bearing			360,664,283				375,992,912
Savings and money market accounts			826,467,439				694,582,319
Time			2,104,264,005				2,037,914,307
Total deposits			3,761,444,467				3,533,246,351
Securities sold under agreements to repurchase			215,135,151				184,297,793
Federal Home Loan Bank advances and other borrowings			228,316,728				201,966,181
Federal funds purchased			—				71,643,000
Subordinated debt			97,476,000				97,476,000
Accrued interest payable			9,007,931				8,326,264
Other liabilities			21,589,323				29,820,779
Total liabilities			4,332,969,600				4,126,776,368
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 95,000 shares issued and outstanding at June 30, 2009, and December 31, 2008			88,877,600				88,348,647
Common stock, par value $1.00; 90,000,000 shares authorized; 32,929,747 issued and outstanding at June 30, 2009 and 23,762,124 issued and outstanding at December 31, 2008			32,929,747				23,762,124
Common stock warrants			3,348,402				6,696,804
Additional paid-in capital			522,567,295				417,040,974
Retained earnings			52,147,201				84,380,447
Accumulated other comprehensive income, net of taxes			3,901,700				7,069,400
Total stockholders’ equity			703,771,945				627,298,396
Total liabilities and stockholders’ equity		$	5,036,741,545			$	4,754,074,764

See accompanying notes to consolidated financial statements.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Interest income:
Loans, including fees		$	39,626,873			$	42,227,538			$	78,152,618			$	87,619,700
Securities:
Taxable			8,393,225				4,792,481				17,480,912				9,429,758
Tax-exempt			1,573,470				1,339,732				3,048,124				2,690,769
Federal funds sold and other			434,684				414,118				864,924				1,195,035
Total interest income			50,028,252				48,773,869				99,546,578				100,935,262
Interest expense:
Deposits			16,420,194				17,719,109				34,153,979				38,804,742
Securities sold under agreements to repurchase			423,274				567,090				784,061				1,399,143
Federal Home Loan Bank advances and other borrowings			2,672,595				2,805,541				5,396,097				5,690,127
Total interest expense			19,516,063				21,091,740				40,334,137				45,894,012
Net interest income			30,512,189				27,682,129				59,212,441				55,041,250
Provision for loan losses			65,320,390				2,787,470				78,929,925				4,378,593
Net interest income after provision for loan losses			(34,808,201	)			24,894,659				(19,717,484	)			50,662,657
Noninterest income:
Service charges on deposit accounts			2,568,429				2,684,486				5,045,380				5,258,223
Investment services			1,078,282				1,220,247				1,932,385				2,488,495
Insurance sales commissions			919,342				589,488				2,224,551				1,653,151
Gain on loan sales, net			1,633,342				879,824				2,921,114				1,535,912
Gain on investment sales, net			2,116,095				—				6,462,241				—
Net gain on sale of premises			8,889				1,010,881				8,889				1,010,881
Trust fees			641,646				531,458				1,299,354				1,036,458
Other noninterest income			1,636,401				2,142,101				3,844,035				4,442,768
Total noninterest income			10,602,426				9,058,485				23,737,949				17,425,888
Noninterest expense:
Salaries and employee benefits			12,676,044				12,502,540				27,427,093				26,369,277
Equipment and occupancy			4,310,934				3,226,932				8,546,262				7,503,205
Foreclosed real estate expense			3,913,628				85,654				4,614,223				139,318
Marketing and other business development			466,201				478,507				905,717				854,378
Postage and supplies			829,548				843,287				1,659,686				1,491,627
Insurance including FDIC premiums			3,913,757				775,543				5,110,058				1,503,067
Amortization of intangibles			876,034				758,033				1,634,567				1,524,066
Merger related expense			—				1,349,276				—				4,455,039
Other noninterest expense			3,620,264				3,055,376				5,951,828				4,726,829
Total noninterest expense			30,606,410				23,075,148				55,849,434				48,566,806
Income (loss) before income taxes			(54,812,185	)			10,877,996				(51,828,969	)			19,521,739
Income tax expense (benefit)			(23,036,434	)			2,916,863				(22,143,426	)			5,495,816
Net income (loss)			(31,775,751	)			7,961,133				(29,685,543	)			14,025,923
Preferred stock dividends			1,200,694				—				2,388,195				—
Accretion on preferred stock discount			269,612				—				528,953				—
Net income (loss) available to common stockholders		$	(33,246,057	)		$	7,961,133			$	(32,602,691	)		$	14,025,923
Per share information:
Basic net income (loss) per common share available to common stockholders		$	(1.33	)		$	0.36			$	(1.34	)		$	0.63
Diluted net income (loss) per common share available to common stockholders		$	(1.33	)		$	0.34			$	(1.34	)		$	0.60
Weighted average shares outstanding:
Basic			24,965,291				22,356,667				24,242,160				22,248,292
Diluted			24,965,291				23,629,234				24,242,160				23,519,844

See accompanying notes to consolidated financial statements.

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

																														Accumulated
																		Common				Additional								Other				Total
		Preferred Stock								Common Stock								Stock				Paid-in				Retained				Comprehensive				Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Capital				Earnings				Income (Loss)				Equity
Balances, December 31, 2007			—				—				22,264,817			$	22,264,817				—			$	390,977,308			$	54,150,679			$	(782,510	)		$	466,610,294
Cumulative effect of change in accounting principle due to adoption of EITF 06-4, net of tax			—				—				—				—				—				—				(598,699	)			—				(598,699	)
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax benefits			—				—				176,504				176,504				—				1,895,359				—				—				2,071,863
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan, net of forfeitures			—				—				146,243				146,243				—				(146,243	)			—				—				—
Compensation expense for restricted shares			—				—				—				—				—				42,625				—				—				42,625
Compensation expense for stock options			—				—				—				—				—				973,246				—				—				973,246
Comprehensive income:
Net income			—				—				—				—				—				—				14,025,923				—				14,025,923
Net unrealized holding gains on securities available-for-sale, net of deferred tax benefit of $2,404,397			—				—				—				—				—				—				—				(1,415,818	)			(1,415,818	)
Total comprehensive income																																			12,610,105
Balances, June 30, 2008			—				—				22,587,564			$	22,587,564				—			$	393,742,295			$	67,577,903			$	(2,198,328	)		$	481,709,434
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			—				—				53,219				53,219				—				609,336				—				—				662,555
Issuance of restricted common shares, net of forfeitures			—				—				261,948				261,948				—				(261,948	)			—				—				—
Restricted shares withheld for taxes			—				—				(2,544	)			(2,544	)			—				(49,353	)			—				—				(51,897	)
Issuance of 8,855,000 shares of common stock, net of offering costs of $6,087,215			—				—				8,855,000				8,855,000				—				100,172,785				—				—				109,027,785
Cancellation of 267,455 warrants previously issued to U.S. Treasury			—				—				—				—				(3,348,402	)			3,348,402				—				—				—
Compensation expense for restricted shares			—				—				—				—				—				817,183				—				—				817,183
Compensation expense for stock options			—				—				—				—				—				889,916				—				—				889,916
Accretion on preferred stock discount			—				528,953				—				—				—				—				(528,953	)			—				—
Preferred dividends paid			—				—				—				—				—				—				(2,018,750	)			—				(2,018,750	)
Comprehensive income (loss):
Net income (loss)			—				—				—				—				—				—				(29,685,543	)			—				(29,685,543	)
Net unrealized holding losses on securities available-for-sale, net of deferred tax benefit of $1,825,225			—				—				—				—				—				—				—				(3,167,700	)			(3,167,700	)
Total comprehensive loss																																			(32,853,243	)
Balances, June 30, 2009			95,000			$	88,877,600				32,929,747			$	32,929,747			$	3,348,402			$	522,567,295			$	52,147,201			$	3,901,700			$	703,771,945

See accompanying notes to consolidated financial statements.

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

		Six months ended
		June 30,
		2009				2008
Operating activities:
Net income (loss)		$	(29,685,543	)		$	14,025,923
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities			2,584,300				372,333
Depreciation and amortization			5,233,633				3,013,790
Provision for loan losses			78,929,925				4,378,593
Gain on loan sales			(2,921,114	)			(1,535,912	)
Gain on investment sales, net			(6,462,241	)			—
Net gains on sale of premises			(8,889	)			(1,010,881	)
Stock-based compensation expense			1,707,099				1,015,871
Deferred tax (benefit) expense			(22,539,597	)			636,941
Losses on foreclosed real estate and other investments			3,726,480				—
Other			—				242,260
Excess tax benefit from stock compensation			(44,364	)			(400,435	)
Mortgage loans held for sale:
Loans originated			(409,089,622	)			(143,182,739	)
Loans sold			409,289,300				139,449,854
Decrease in other assets			8,961,281				7,946,519
Decrease in other liabilities			(7,549,790	)			(4,239,365	)
Net cash provided by operating activities			32,130,858				20,712,752
Investing activities:
Activities in securities available-for-sale:
Purchases			(576,211,432	)			(105,649,364	)
Sales			346,895,583				—
Maturities, prepayments and calls			150,188,718				88,719,393
Activities in securities held-to-maturity:
Maturities, prepayments and calls			1,820,000				15,750,000
Increase in loans, net			(249,598,544	)			(297,159,343	)
Purchases of premises and equipment and software			(3,893,617	)			(4,331,291	)
Proceeds from the sale of premises and equipment and software			8,889				2,821,702
Other investments			(3,700,059	)			(2,093,733	)
Net cash used in investing activities			(334,490,462	)			(301,942,636	)
Financing activities:
Net increase in deposits			228,464,906				228,641,510
Net increase in securities sold under agreements to repurchase			30,837,358				27,117,598
Net decrease in Federal funds purchased			(71,643,000	)			(39,862,000	)
Advances from Federal Home Loan Bank:
Issuances			60,000,000				85,225,925
Payments			(15,570,903	)			(8,607,114	)
Net increase (decrease) in borrowings under lines of credit			(18,000,000	)			9,000,000
Preferred dividends paid			(2,018,750	)			—
Issuance of common stock, net of expenses			109,027,785				—
Exercise of common stock options and stock appreciation rights			610,658				2,019,788
Excess tax benefit from stock compensation			44,364				400,435
Net cash provided by financing activities			321,752,418				303,936,142
Net increase in cash and cash equivalents			19,392,814				22,706,258
Cash and cash equivalents, beginning of period			90,252,755				122,503,863
Cash and cash equivalents, end of period		$	109,645,569			$	145,210,121

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, Tennessee and Knoxville, Tennessee Metropolitan Statistical Areas.

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

     Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in the 2008 Annual Report previously filed on Form 10-K.

     These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust II, PNFP Statutory Trust III, PNFP Statutory Trust IV and Collateral Plus, LLC, are affiliates of Pinnacle Financial and are included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

     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 six months ended June 30, 2009 and 2008 was as follows:

		For the six months ended June 30,
		2009				2008
Cash Payments:
Interest		$	39,997,810			$	45,403,484
Income taxes			3,200,000				3,700,000
Noncash Transactions:
Loans charged-off to the allowance for loan losses			49,553,686				1,786,464
Loans foreclosed upon with repossessions, transferred to other real estate			10,749,074				13,880,435
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit			3,167,700				1,415,818

     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 June 30, 2009, there were 2,153,000 stock options and 10,000 stock appreciation rights outstanding to purchase common shares. Most of these options and stock appreciation rights have exercise prices and compensation costs attributable to current services which is less than the average market price of Pinnacle Financial’s common stock. Additionally, as of June 30, 2009,

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

Pinnacle Financial had outstanding warrants to purchase 612,455 of common shares. Due to the net loss attributable to common shareholders for the three and six months ended June 30, 2009, no potentially dilutive shares related to these stock options, stock appreciate rights, and warrants were included in the loss per share calculations, as including such shares would have an antidilutive effect on earnings per share. As of June 30, 2008, there were 2,365,000 stock options and 14,000 stock appreciation rights outstanding to purchase common shares. Most of these options and stock appreciation rights have exercise prices and compensation costs attributable to current services, which when considered in relation to the average market price of Pinnacle Financial’s common stock, are considered dilutive and are considered in Pinnacle Financial’s diluted income per share calculation for the three and six months ended June 30, 2008. As of June 30, 2008, Pinnacle Financial had outstanding warrants to purchase 370,000 of common shares which have been considered in the calculation of Pinnacle Financial’s diluted earnings per share for the three and six months ended June 30, 2008.

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

		For the three months ended								For the six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Basic earnings per share calculation:
Numerator — Net income (loss) available to
common stockholders		$	(33,246,057	)		$	7,961,133			$	(32,602,691	)		$	14,025,923
Denominator — Average common shares outstanding			24,965,291				22,356,667				24,242,160				22,248,292
Basic net income (loss) per share available to common stockholders		$	(1.33	)		$	0.36			$	(1.34	)		$	0.63
Diluted earnings per share calculation:
Numerator — Net income (loss) available to common stockholders		$	(33,246,057	)		$	7,961,133			$	(32,602,691	)		$	14,025,923
Denominator — Average common shares outstanding			24,965,291				22,356,667				24,242,160				22,248,292
Dilutive shares contingently issuable(1)			—				1,272,567				—				1,271,552
Average diluted common shares outstanding			24,965,291				23,629,234				24,242,160				23,519,844
Diluted net income (loss) per share available to common stockholders		$	(1.33	)		$	0.34			$	(1.34	)		$	0.60

Recently Adopted Accounting Pronouncements

     Fair Value Measurement — In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that indicate

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

a transaction is not orderly. The provisions of FSP FAS 157-4 were effective April 1, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Company’s statements of income and condition. These was no impact as a result of adopting FSP FAS 157-4.

     In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Bulletin 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 were effective April 1, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 had no impact to the Company’s financial statements. .

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

     Subsequent Events — We adopted the provisions of SFAS No. 165, “Subsequent Events” (SFAS 165), during the period ended June 30, 2009. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of SFAS 165 did not impact our financial statements. We evaluated all events or transactions that occurred after June 30, 2009, through August 3, 2009, the date we issued these financial statements. During this period we did not have any material recognizable subsequent events that required recognition in our disclosures to the June 30, 2009 financial statements.

     Business combinations — In December 2007, the FASB issued SFAS 141R, “Business Combinations.” SFAS 141R clarifies the definitions of both a business combination and a business. All business combinations will be accounted for under the acquisition method (previously referred to as the purchase method). This standard defines the acquisition date as the only relevant date for recognition and measurement of the fair value of consideration paid. SFAS 141R requires the acquirer to expense all acquisition related costs. SFAS 141R will also require acquired loans to be recorded net of the allowance for loan losses on the date of acquisition. SFAS 141R defines the measurement period as the time after the acquisition date during which the acquirer may make adjustments to the “provisional” amounts recognized at the acquisition date. This period cannot exceed one year, and any subsequent adjustments made to provisional amounts are done retrospectively and restate prior period data. The provisions of this statement are effective for business combinations during fiscal years beginning after December 15, 2008. There was no impact from the adoption of SFAS 141R on Pinnacle Financial’s financial position, results of operations or cash flows.

     Noncontrolling interests in consolidated financial statements — In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in consolidated financial statements — An Amendment of ARB No. 51.” SFAS No. 160 requires noncontrolling interests to be treated as a separate component of equity, not as a liability or other item outside of equity. Disclosure requirements include net income and comprehensive income to be displayed for both the controlling and noncontrolling interests and a separate schedule that shows the effects of any transactions with the noncontrolling interests on the equity attributable to the controlling interest. The provisions of this statement are effective for fiscal years beginning after December 15, 2008. There was no impact from the adoption of SFAS No. 160 on Pinnacle Financial’s financial position, results of operations or cash flows.

     Other-than-temporary impairment — In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s interim period ending on June 30, 2009. There was no impact from the adoption of FSP FAS 115-2 and FAS 124-2 on Pinnacle Financial’s financial position, results of operations or cash flows.

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

Note 2. Participation in U.S. Treasury Capital Purchase Program and Private Placement of Common Stock

     On December 12, 2008, Pinnacle Financial issued 95,000 shares of preferred stock to the U.S. Treasury for $95 million pursuant to the U.S. Treasury’s Capital Purchase Program (“CPP”) under the Troubled Assets Relief Program (“TARP”). Additionally, Pinnacle Financial issued warrants to purchase 534,910 shares of common stock to the U.S. Treasury as a condition to its participation in the CPP. The warrants have an exercise price of $26.64 each and are immediately exercisable and expire 10 years from the date of issuance. Proceeds from this sale of the preferred stock are expected to be used for general corporate purposes, including supporting the continued, anticipated growth of Pinnacle National. The CPP preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% thereafter. Pinnacle Financial can redeem the preferred shares issued to the U.S. Treasury under the CPP at any time subject to a requirement that it must consult with its primary federal regulators before redemption. Pinnacle Financial has sought permission to redeem the $95 million of preferred stock but has not yet received a decision from its primary federal regulators.

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

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

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

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

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

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

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

     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 June 30, 2009 and December 31, 2008 are summarized as follows:

		June 30, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			215,237,736				1,872,289				2,028,391				215,081,634
Mortgage-backed securities			517,938,819				7,015,803				1,293,360				523,661,262
State and municipal securities			167,728,310				2,903,340				1,773,304				168,858,346
Corporate notes and other			10,118,204				78,017				410,046				9,786,175
		$	911,023,069			$	11,869,449			$	5,505,101			$	917,387,417
Securities held-to-maturity:
U.S. government agency securities		$	1,998,164			$	6,259			$	—			$	2,004,423
State and municipal securities			6,699,121				221,186				56,088				6,864,219
		$	8,697,285			$	227,445			$	56,088			$	8,868,642

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

     During the six months ended June 30, 2009, Pinnacle Financial realized approximately $8.45 million in gains and $1.59 in losses from the sale of $347 million of available-for-sale securities. At June 30, 2009, approximately $816.1 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 June 30, 2009 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary.

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

		Available-for-sale								Held-to-maturity
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Due in one year or less		$	11,202,007			$	11,050,901			$	780,589			$	791,686
Due in one year to five years			22,575,797				23,120,750				7,255,016				7,391,622
Due in five years to ten years			91,966,720				92,356,215				661,679				685,334
Due after ten years			267,339,726				267,198,289				—				—
		$	393,084,250			$	393,726,155			$	8,697,285			$	8,868,642

     At June 30, 2009 and December 31, 2008, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized losses of less than twelve months or twelve months or longer:

		Investments with an
		Unrealized Loss of less than								Investments with an Unrealized								Total Investments with an
		12 months								Loss of 12 months or longer								Unrealized Loss
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
At June 30, 2009:
U.S. government agency securities		$	—			$	—			$	123,154,300			$	2,028,391			$	123,154,300			$	2,028,391
Mortgage-backed securities			139,152				2,891				87,765,043				1,290,469				87,904,195				1,293,360
State and municipal securities			29,347,477				1,191,258				30,318,414				638,134				59,665,891				1,829,392
Corporate notes			—				—				7,285,834				410,046				7,285,834				410,046
Total temporarily-impaired securities		$	29,486,629			$	1,194,149			$	248,523,591			$	4,367,040			$	278,010,220			$	5,561,189
At December 31, 2008:
U.S. government agency securities		$	—			$	—			$	—			$	—			$	—			$	—
Mortgage-backed securities			29,622,695				119,315				2,520,127				77,771				32,142,822				197,086
State and municipal securities			28,560,915				1,095,573				32,466,087				2,348,335				61,027,002				3,443,908
Corporate notes			242,520				157,480				859,475				130,472				1,101,995				287,952
Total temporarily-impaired securities		$	58,426,130			$	1,372,368			$	35,845,689			$	2,556,578			$	94,271,819			$	3,928,946

     The applicable date for determining when securities are in an unrealized loss position is June 30, 2009. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month period.

     The unrealized losses associated with these investment securities are primarily driven by changes in interest rates and are not due to the credit quality of the securities. These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments.

     Because Pinnacle Financial does not intend to sell these securities and it is not more likely than not that Pinnacle Financial will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial does not consider these securities to be other-than-temporarily impaired at June 30, 2009.

     The carrying values of Pinnacle Financial’s investment securities could decline in the future if the financial condition of issuers deteriorate and management determines it is probable that Pinnacle Financial will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future given the current economic environment.

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

Note 4. Loans and Allowance for Loan Losses

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

		At June 30,				At December 31,
		2009				2008
Commercial real estate — mortgage		$	1,084,516,450			$	963,530,444
Consumer real estate — mortgage			729,987,952				675,605,596
Construction and land development			631,854,352				658,798,934
Commercial and industrial			987,055,558				966,562,521
Consumer and other			110,761,588				90,409,774
Total loans			3,544,175,900				3,354,907,269
Allowance for loan losses			(66,075,358	)			(36,484,073	)
Loans, net		$	3,478,100,542			$	3,318,423,196

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

		June 30,				December 31,
		2009				2008
Balance at beginning of period		$	36,484,073			$	28,470,207
Charged-off loans			(49,553,686	)			(5,133,274	)
Recovery of previously charged-off loans			215,046				1,933,597
Provision for loan losses			78,929,925				11,213,543
Balance at end of period		$	66,075,358			$	36,484,073

     At June 30, 2009, Pinnacle Financial had certain impaired loans of $100,328,000 which were on nonaccruing interest status. At December 31, 2008, Pinnacle Financial had certain impaired loans of $10,860,000 which were on nonaccruing interest status. In each case, at the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had nonaccruing loans been on accruing status, interest income would have been higher by $2.6 million and $624,000 for the six months ended June 30, 2009 and 2008, respectively.

     Potential problem loans, which are not included in nonperforming assets, amounted to approximately $143.0 million at June 30, 2009 compared to $27.8 million at December 31, 2008. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Office of the Comptroller of the Currency, Pinnacle National’s primary regulator, for loans classified as substandard, excluding the impact of nonperforming loans.

     At June 30, 2009, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $38,905,000 to directors, executive officers, and their related entities, of which $34,544,000 had been drawn upon. During the six months ended June 30, 2009, $3,413,000 of loan and other commitment increases and $2,987,000 of principal and other reductions were made by directors, executive officers, and their related entities. The terms on these loans and extensions are on substantially the same terms customary for other persons similarly situated for the type of loan involved. None of these loans to directors, executive officers, and their related entities were impaired at June 30, 2009.

     At June 30, 2009, Pinnacle Financial had approximately $28.0 million of mortgage loans held-for-sale compared to approximately $25.5 million at December 31, 2008. These loans are marketed to potential investors prior to closing the loan with the borrower such that there is an agreement for the subsequent sale of the loan between the eventual investor and Pinnacle Financial prior to the loan being closed with the borrower. Pinnacle Financial sells loans to investors on a loan-by-loan basis and has not entered into any forward commitments with investors for future loan sales. All of these loan sales transfer servicing rights to the buyer. During the six months ended June 30, 2009, Pinnacle Financial recognized $3,159,000 in gains on the sale of these loans compared to $1,524,000, in the six months ended June 30, 2008.

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

     At June 30, 2009, Pinnacle Financial owned $18,845,000 in other real estate which had been acquired, usually through foreclosure, from borrowers compared to $18,306,000 at December 31, 2008. Substantially all of these amounts relate to homes and residential development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has adequate collateral.

Note 5. Income Taxes

     Pinnacle Financial’s income tax expense (benefit) differs from the amounts computed by applying the Federal income tax statutory rates of 35% to income before income taxes. A reconciliation of the differences for the three and six months ended June 30, 2009 and 2008 is as follows:

		For the three months ended June 30,								For the six months ended June 30,
		2009				2008				2009				2008
Income tax expense (benefit) at statutory rate		$	(19,184,265	)		$	3,807,299			$	(18,140,139	)		$	6,832,609
State tax (benefit) expense, net of Federal tax effect			(2,805,856	)			(143,947	)			(2,796,906	)			(158,804	)
Federal tax credits			(155,866	)			(122,375	)			(180,000	)			(180,000	)
Tax-exempt securities			(946,702	)			(552,903	)			(1,074,835	)			(849,521	)
Bank owned life insurance			(61,945	)			(153,282	)			(80,247	)			(234,379	)
Insurance premiums			(188,902	)			(144,351	)			(212,366	)			(207,535	)
Other items			307,102				226,422				341,067				293,446
Income tax expense (benefit)		$	(23,036,434	)		$	2,916,863			$	(22,143,426	)		$	5,495,816

     Under SFAS 109, “Accounting for Income Taxes,” companies are required to apply their estimated full year tax rate on a year to date basis in each interim period. Under FASB Interpretation No. 18 (“FIN 18”) “Accounting for Income Taxes in Interim Periods” companies should not apply the estimated full year tax rate to interim results if the expected annual effective tax benefit rate exceeds the tax benefit rate based on interim items only. FIN 18 requires that the tax benefit recognized be limited to the benefit calculated on interim items only. As such, Pinnacle Financial recorded a tax benefit through the second quarter based on the actual year-to-date results, in accordance with FIN 18.

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

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

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

the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from Pinnacle Financial under certain prescribed circumstances. Subsequently, Pinnacle Financial would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

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

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

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

Commitments to extend credit		$	886,550,000
Standby letters of credit			95,474,000

     At June 30, 2009, the fair value of Pinnacle Financial’s standby letters of credit was $233,000. This amount represents the unamortized fee associated with these standby letters of credit and is included in the consolidated balance sheet of Pinnacle Financial. This fair value will decrease over time as the existing standby letters of credit approach their expiration dates.

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

     Visa Litigation — Pinnacle National is a member of the Visa USA network. Under Visa USA bylaws, Visa members are obligated to indemnify Visa USA and/or its parent company, Visa, Inc. (Visa), for potential future settlement of, or judgments resulting from, certain litigation, which Visa refers to as the “covered litigation.” Pinnacle National’s indemnification obligation is limited to its membership proportion of Visa USA. On November 7, 2007, Visa announced the settlement of its American Express litigation, and disclosed in its annual report to the SEC on Form 10-K for the year ended September 30, 2007 that Visa had accrued a contingent liability for the estimated settlement of its Discover litigation. Accordingly, Pinnacle National expensed and recognized a contingent liability in the amount of $145,000 as an estimate for its membership proportion of the American Express settlement and the potential Discover settlement, as well as its membership proportion of the amount that Pinnacle National estimates will be required for Visa to settle the remaining covered litigation. During the fourth quarter of 2008, Pinnacle National expensed and recognized an additional $28,000 contingent liability for the revised estimated settlement of Visa’s Discover litigation.

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

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

     Pinnacle Financial has two equity incentive plans. Additionally, Pinnacle Financial has acquired equity plans in connection with acquisitions of Cavalry and Mid-America 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 June 30, 2009, there were 1,028,452 shares available for issue under these plans.

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

     On November 30, 2007 and in connection with its merger with Mid-America, Pinnacle Financial assumed several equity incentive plans, including the Mid-America Bancshares, Inc. 2006 Omnibus Equity Incentive Plan (the “Mid-America Plans”). All options and stock appreciation rights granted under the Mid-America Plans were fully vested prior to Pinnacle Financial’s merger with Mid-America and expire at various dates between June 2011 and July 2017. In connection with the merger, all options and stock appreciation rights to acquire Mid-America common stock were converted to options or stock appreciation rights, as applicable, to acquire Pinnacle Financial common stock at the 0.4655 exchange ratio. The exercise price of the outstanding options and stock appreciation rights under the Mid-America Plans was adjusted using the same exchange ratio with the exercise price also being reduced by $1.50 per share. All other terms of the Mid-America options and stock appreciation rights were unchanged. There were 487,835 Pinnacle Financial 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 June 30, 2009, there were 74,658 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.

Common Stock Options and Stock Appreciation Rights

     As of June 30, 2009, there were 2,153,000 stock options and 10,000 stock appreciation rights outstanding to purchase common shares. A summary of the activity within the equity incentive plans during the six months ended June 30, 2009 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as follows:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Contractual				Intrinsic
						Exercise				Remaining Term				Value (1)
		Number				Price				(in years)				(000’s)
Outstanding at December 31, 2008			2,232,100			$	17.41				5.99			$	28,310
Granted			—				—
Exercised (2)			(53,219	)			10.40
Forfeited			(15,702	)			24.35
Outstanding at June 30, 2009			2,163,179			$	17.51				5.73			$	5,886
Outstanding and expected to vest as of June 30, 2009			2,132,258			$	17.34				5.71			$	5,886
Options exercisable at June 30, 2009 (3)			1,618,809			$	14.07				5.04			$	5,862

     During the six months ended June 30, 2009, approximately 186,000 option awards vested at an average exercise price of $20.91 and an intrinsic value of approximately $1.9 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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     As of June 30, 2009, there was approximately $4.4 million of total unrecognized compensation cost related to unvested stock options granted under our equity incentive plans. That cost is expected to be recognized over a weighted-average period of 3.0 years.

     During the six months ended June 30, 2009 and 2008, Pinnacle Financial recorded stock option compensation expense of $890,000 and $973,000, 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 second quarter of 2009. The fair value of options granted for the six month period ended June 30, 2008 was estimated using the Black-Scholes option pricing model and the following assumptions:

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

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

Restricted Shares

     Additionally, Pinnacle Financial’s 2004 Equity Incentive Plan and the Mid-America Plan provide for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards outstanding as of June 30, 2009 under either of these plans. During the six months ended June 30, 2009, Pinnacle Financial awarded 276,923 shares of restricted common stock awards to certain Pinnacle Financial associates and outside directors.

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

						Grant Date Weighted-
		Number				Average Cost
Unvested at December 31, 2008			231,881			$	24.76
Shares awarded			276,923				19.68
Restrictions lapsed and shares released to associates/directors			(28,778	)			24.12
Shares forfeited			(17,519	)			31.11
Unvested at June 30, 2009			462,507			$	21.60

     Status of 2009 Restricted Share Awards: There were 276,923 restricted share awards granted during the six months ended June 30, 2009. The following discusses the current status of these awards:

•		The forfeiture restrictions on 30,878 restricted share awards granted to executive management personnel in 2009 lapse in three equal installments should Pinnacle Financial achieve certain earnings and soundness targets over each year of the subsequent three-year period (or, alternatively, the cumulative three-year period).
•		The forfeiture restrictions on another 92,669 restricted share awards granted to executive management personnel lapse in equal installments on the anniversary date of the grant over a 10 year period or until the associate is 65 years of age, whichever is earlier so long as Pinnacle Financial is profitable for that year.
•		The forfeiture restrictions on 139,264 restricted share awards lapse in five equal installments on the anniversary date of the grant so long as Pinnacle Financial is profitable for that year.
•		During the first quarter of 2009, 14,112 restricted share awards were issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on the one year anniversary date of the award

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

•

based on each individual board member meeting their attendance goals for the various board and board committee meetings to which each member was scheduled to attend. Each non-employee board member received an award of 1,008 shares.

     Compensation expense associated with the performance based restricted share awards is recognized over the time period that the restrictions associated with the awards are anticipated to lapse based on a graded vesting schedule such that each traunche is amortized separately. Compensation expense associated with the time based restricted share awards is recognized over the time period that the restrictions associated with the awards lapse based on the total cost of the award. For the six months ended June 30, 2009 and 2008, Pinnacle Financial recognized approximately $817,000 and $43,000, respectively, in compensation costs attributable to all restricted share awards issued prior to June 30, 2009 and June 30, 2008.

Note 8. Regulatory Matters

     Pinnacle National is subject to restrictions on the payment of dividends to Pinnacle Financial under federal banking laws and the regulations of the Office of the Comptroller of the Currency. Pinnacle Financial is also subject to limits on payment of dividends to its shareholders by the rules, regulations and policies of federal banking authorities and by its participation in the CPP. Pinnacle Financial has not paid any cash dividends since inception, and it does not anticipate that it will consider paying dividends until Pinnacle Financial generates sufficient capital through net income from operations to support both anticipated asset growth and dividend payments. During the six months ended June 30, 2009, Pinnacle National paid dividend payments of $1.2 million to Pinnacle Financial to fund Pinnacle Financial’s interest payments due on its subordinated indebtedness and an additional $2.0 million to Pinnacle Financial to fund Pinnacle Financial’s preferred stock dividend payable on the shares issued to the U.S. Treasury in the CPP. At June 30, 2009, pursuant to federal banking regulations, Pinnacle National had approximately $23.2 million of net retained profits from the previous two years available for future dividend payments to Pinnacle Financial.

     During the second quarter, Pinnacle Financial sought permission from its primary federal regulators to redeem the preferred shares it sold to the U.S. Treasury through the CPP. As of the date hereof, Pinnacle Financial has yet to receive a decision from the regulators. Pinnacle Financial believes the federal regulators have significant discretion in granting redemption requests for preferred shares issued under the CPP. As a result, Pinnacle Financial can give no assurance that its redemption request will be granted.

     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 its banking subsidiary 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 its banking subsidiary 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 June 30, 2009, 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):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

																		Minimum
																		To Be Well-Capitalized
										Minimum								Under Prompt
										Capital								Corrective
		Actual								Requirement								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
At June 30, 2009
Total capital to risk weighted assets:
Pinnacle Financial		$	590,975				15.02	%		$	316,035				8.0	%		not applicable
Pinnacle National		$	427,954				10.89	%		$	315,792				8.0	%		$	394,740				10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial		$	526,595				13.39	%		$	158,017				4.0	%		not applicable
Pinnacle National		$	363,612				9.25	%		$	157,896				4.0	%		$	236,844				6.0	%
Tier I capital to average assets (*):
Pinnacle Financial		$	526,595				11.09	%		$	189,925				4.0	%		not applicable
Pinnacle National		$	363,612				7.67	%		$	189,611				4.0	%		$	237,013				5.0	%

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.

     A summary of Pinnacle Financial’s interest rate swaps as of June 30, 2009 is included in the following table (in thousands):

		June 30, 2009
		Notional				Estimated
		Amount				Fair Value
Interest rate swap agreements:
Pay fixed / receive variable swaps		$	224,940			$	10,434
Pay variable / receive fixed swaps			224,940				(10,612	)
Total		$	449,880			$	(178	)

Note 10. Fair Value of Financial Instruments

     In September 2006, the 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

     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.
	•		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 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. 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.

     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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     Other real estate — Other real estate, 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 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 information 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 information obtained from a third party bank and is reflected within Level 2 of the valuation hierarchy.

     The following tables present the financial instruments carried at fair value as of June 30, 2009, 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 June 30, 2009

														Models with
										Models with				significant
		Total carrying				Quoted market				significant				unobservable
		value in the				prices in an active				observable market				market
		consolidated				market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Securities available-for-sale		$	917,387			$	—			$	917,387			$	—
Mortgage loans held-for-sale			27,960				—				27,960				—
Other investments			1,586				—				—				1,586
Other assets			57,766				—				10,434				47,332
Total assets at fair value		$	1,004,699			$	—			$	955,781			$	48,918
Other liabilities		$	10,612			$	—			$	10,612			$	—
Total liabilities at fair value		$	10,612			$	—			$	10,612			$	—