UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

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

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

Commission File Number: 000-31225

, Inc.

(Exact name of registrant as specified in its charter)

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

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

(615) 744-3700

Not Applicable

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

Yes þ		No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).

Yes o		No o

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

Large Accelerated Filer o		Accelerated Filer þ		Non-accelerated Filer o (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 July 20, 2010 there were 33,431,881 shares of common stock, $1.00 par value per share, issued and outstanding.

 

 

Pinnacle Financial Partners, Inc.
Report on Form 10-Q
June 30, 2010

TABLE OF CONTENTS		Page No.
PART I — Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures about Market Risk		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		49
Item 3. Defaults Upon Senior Securities		49
Item 4. (Removed and Reserved)		49
Item 5. Other Information		49
Item 6. Exhibits		49
Signatures		50
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD-LOOKING STATEMENTS

Certain of the statements in this release may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “should, ” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Pinnacle Financial Partners, Inc. to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) the continued reduction of Pinnacle Financial’s loan balances and, conversely, the inability of Pinnacle Financial to ultimately grow its loan portfolio in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) increased competition with other financial institutions; (vi) greater than anticipated deterioration or lack of sustained growth in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, particularly in commercial and residential real estate markets; (vii) rapid fluctuations or unanticipated changes in interest rates; (viii) the results of regulatory examinations; (ix) the development of any new market other than Nashville or Knoxville; (x) a merger or acquisition; (xi) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets, such as goodwill; (xii) the impact of governmental restrictions on entities participating in the Capital Purchase Program of the U.S. Department of the Treasury (the “Treasury”); (xiii) further deterioration in the valuation of other real estate owned; (xiv) inability to comply with regulatory capital requirements or to secure any regulatory approvals for capital actions; (xv) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy; (xvi) Pinnacle Financial further increasing the valuation allowance related to its deferred tax asset and (xvii) impact of passage and implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A more detailed description of these and other risks is contained in Pinnacle Financial’s most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2010. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle disclaims any obligation to update or revise any forward-looking statements contained in this release, whether as a result of new information, future events or otherwise.

Item 1.

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

		June 30,				December 31,
		2010				2009
ASSETS
Cash and noninterest-bearing due from banks		$	58,740,749			$	55,651,737
Interest-bearing due from banks			154,124,605				19,338,499
Federal funds sold			5,839,609				41,611,838
Short-term discount notes			19,999,527				50,000,000
Cash and cash equivalents			238,704,490				166,602,074
Securities available-for-sale, at fair value			902,795,231				931,012,091
Securities held-to-maturity (fair value of $4,634,598 and $6,737,336 at June 30, 2010 and December 31, 2009, respectively)			4,500,354				6,542,496
Mortgage loans held-for-sale			21,816,946				12,440,984
Loans			3,333,899,762				3,563,381,741
Less allowance for loan losses			(87,106,983	)			(91,958,789	)
Loans, net			3,246,792,779				3,471,422,952
Premises and equipment, net			82,739,008				80,650,936
Other investments			41,199,644				40,138,660
Accrued interest receivable			17,390,199				19,083,468
Goodwill			244,096,729				244,107,086
Core deposits and other intangible assets			12,194,089				13,686,091
Other real estate owned			42,615,866				29,603,439
Other assets			103,632,928				113,520,727
Total assets		$	4,958,478,263			$	5,128,811,004
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	529,867,447			$	498,087,015
Interest-bearing			527,143,944				483,273,551
Savings and money market accounts			1,339,161,225				1,198,012,445
Time			1,457,227,769				1,644,226,290
Total deposits			3,853,400,385				3,823,599,301
Securities sold under agreements to repurchase			159,490,197				275,465,096
Federal Home Loan Bank advances			131,477,454				212,654,782
Subordinated debt			97,476,000				97,476,000
Accrued interest payable			5,855,440				6,555,801
Other liabilities			28,863,650				12,039,843
Total liabilities			4,276,563,126				4,427,790,823
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 95,000 shares issued and outstanding at June 30, 2010, and December 31, 2009			90,127,092				89,462,633
Common stock, par value $1.00; 90,000,000 shares authorized; 33,421,741 issued and outstanding at June 30, 2010 and 33,029,719 issued and outstanding at December 31, 2009			33,421,741				33,029,719
Common stock warrants			3,348,402				3,348,402
Additional paid-in capital			527,003,530				524,366,603
Retained earnings			10,146,029				43,372,743
Accumulated other comprehensive income, net of taxes			17,868,343				7,440,081
Total stockholders’ equity			681,915,137				701,020,181
Total liabilities and stockholders’ equity		$	4,958,478,263			$	5,128,811,004

See accompanying notes to consolidated financial statements.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Interest income:
Loans, including fees		$	40,323,693			$	39,626,873			$	81,398,800			$	78,152,618
Securities:
Taxable			8,058,265				8,393,225				17,145,853				17,480,912
Tax-exempt			1,985,946				1,573,470				4,036,199				3,048,124
Federal funds sold and other			560,611				434,684				1,037,753				864,924
Total interest income			50,928,515				50,028,252				103,618,605				99,546,578
Interest expense:
Deposits			12,925,139				16,420,194				26,388,954				34,153,979
Securities sold under agreements to repurchase			364,648				423,274				916,961				784,061
Federal Home Loan Bank advances and other borrowings			1,941,437				2,672,595				4,055,492				5,396,097
Total interest expense			15,231,224				19,516,063				31,361,407				40,334,137
Net interest income			35,697,291				30,512,189				72,257,198				59,212,441
Provision for loan losses			30,508,685				65,320,390				43,734,605				78,929,925
Net interest income (loss) after provision for loan losses			5,188,606				(34,808,201	)			28,522,593				(19,717,484	)
Noninterest income:
Service charges on deposit accounts			2,429,200				2,568,429				4,794,511				5,045,380
Investment services			1,315,263				1,078,282				2,551,646				1,932,385
Insurance sales commissions			904,359				919,342				2,003,378				2,224,551
Gain on loan sales and loan participations, net			918,703				1,633,342				1,481,301				2,921,114
Gain on investment sales, net			2,259,124				2,116,095				2,623,674				6,462,241
Trust fees			754,515				641,646				1,651,088				1,299,354
Other noninterest income			1,987,990				1,645,290				3,949,202				3,852,924
Total noninterest income			10,569,154				10,602,426				19,054,800				23,737,949
Noninterest expense:
Salaries and employee benefits			15,847,121				12,676,044				32,851,647				27,427,093
Equipment and occupancy			5,492,406				4,310,934				10,858,593				8,546,262
Other real estate owned			7,411,206				3,913,628				12,813,359				4,614,223
Marketing and other business development			793,696				466,201				1,547,614				905,717
Postage and supplies			700,505				829,548				1,434,044				1,659,686
Amortization of intangibles			746,001				1,164,534				1,492,002				1,923,067
Other noninterest expense			5,500,424				7,245,521				11,660,655				10,773,386
Total noninterest expense			36,491,359				30,606,410				72,657,914				55,849,434
Loss before income taxes			(20,733,599	)			(54,812,185	)			(25,080,521	)			(51,828,969	)
Income tax expense (benefit)			5,630,431				(23,036,434	)			5,106,734				(22,143,426	)
Net loss			(26,364,030	)			(31,775,751	)			(30,187,255	)			(29,685,543	)
Preferred stock dividends			1,200,694				1,200,694				2,388,194				2,388,195
Accretion on preferred stock discount			306,466				269,612				664,459				528,953
Net loss available to common stockholders		$	(27,871,190	)		$	(33,246,057	)		$	(33,239,908	)		$	(32,602,691	)
Per share information:
Basic net loss per common share available to common stockholders		$	(0.85	)		$	(1.33	)		$	(1.02	)		$	(1.34	)
Diluted net loss per common share available to common stockholders		$	(0.85	)		$	(1.33	)		$	(1.02	)		$	(1.34	)
Weighted average shares outstanding:
Basic			32,675,221				24,965,291				32,616,943				24,242,160
Diluted			32,675,221				24,965,291				32,616,943				24,242,160

See accompanying notes to consolidated financial statements.

																														Accumulated
		Preferred Stock								Common Stock								Common Stock				Additional Paid-in								Other Comp.				Total Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Capital				Retained Earnings				Income, net				Equity
Balances, December 31, 2008			95,000			$	88,348,647				23,762,124			$	23,762,124			$	6,696,804			$	417,040,974			$	84,380,447			$	7,069,400			$	627,298,396
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax benefits			—				—				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 dividend			—				528,953				—				—				—				—				(528,953	)			—				—
Preferred dividends paid			—				—				—				—				—				—				(2,018,750	)			—				(2,018,750	)
Comprehensive income (loss):
Net loss			—				—				—				—				—				—				(29,685,543	)			—				(29,685,543	)
Net unrealized losses on securities available-for-sale, net of deferred tax benefit of $1,825,225			—				—				—				—				—				—				—				(3,167,700	)			(3,167,000	)
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
Balances, December 31, 2009			95,000			$	89,462,633				33,029,719			$	33,029,719			$	3,348,402			$	524,366,603			$	43,372,743			$	7,440,081			$	701,020,181
Exercise of employee common stock options, and related tax benefits			—				—				135,664				135,664				—				974,901				—				—				1,110,565
Issuance of restricted common shares, net of forfeitures			—				—				265,360				265,360				—				(265,360	)			—				—				—
Restricted shares withheld for taxes			—				—				(9,002	)			(9,002	)			—				(121,305	)			—				—				(130,307	)
Compensation expense for restricted shares			—				—				—				—				—				1,191,571				—				—				1,191,571
Compensation expense for stock options			—				—				—				—				—				857,120				—				—				857,120
Accretion on preferred stock discount			—				664,459				—				—				—				—				(664,459	)			—				—
Preferred dividends paid			—				—				—				—				—				—				(2,375,000	)			—				(2,375,000	)
Comprehensive income (loss):
Net loss			—				—				—				—				—				—				(30,187,255	)			—				(30,187,255	)
Net unrealized gains on securities available-for-sale, net of deferred tax expense of $6,731,952			—				—				—				—				—				—				—				10,428,262				10,428,262
Total comprehensive loss																																			(19,758,993	)
Balances, June 30, 2010			95,000			$	90,127,092				33,421,741			$	33,421,741			$	3,348,402			$	527,003,530			$	10,146,029			$	17,868,343			$	681,915,137

See accompanying notes to consolidated financial statements.

		Six months ended
		June 30,
		2010				2009
Operating activities:
Net loss		$	(30,187,255	)		$	(29,685,543	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities			2,095,570				2,584,300
Depreciation and amortization			5,967,863				5,233,633
Provision for loan losses			43,734,605				78,929,925
Gain on loan sales and loan participations, net			(1,481,301	)			(2,921,114	)
Gain on investment sales, net			(2,623,674	)			(6,462,241	)
Net gains on sale of premises and equipment and software			(5,035	)			(8,889	)
Stock-based compensation expense			2,048,691				1,707,099
Deferred tax expense (benefit)			16,820,918				(22,539,597	)
Losses on foreclosed real estate and other investments			11,672,034				3,726,480
Excess tax benefit from stock compensation			(10,358	)			(44,364	)
Mortgage loans held for sale:
Loans originated			(172,250,210	)			(409,089,622	)
Loans sold			164,340,327				409,289,300
Decrease in other assets			723,307				8,961,281
Increase (decrease) in other liabilities			16,123,447				(7,549,790	)
Net cash provided by operating activities			56,968,482				32,130,858
Investing activities:
Activities in securities available-for-sale:
Purchases			(246,633,539	)			(576,211,432	)
Sales			147,036,923				346,895,583
Maturities, prepayments and calls			145,523,934				150,188,718
Activities in securities held-to-maturity:
Sales			954,388				—
Maturities, prepayments and calls			1,065,613				1,820,000
Decrease (increase) in loans, net			142,806,911				(249,598,544	)
Purchases of premises and equipment and software			(6,151,116	)			(3,893,617	)
Proceeds from the sale of premises and equipment and software			5,035				8,889
Other investments			(953,676	)			(3,700,059	)
Net cash provided by (used in) investing activities			183,654,473				(334,490,462	)
Financing activities:
Net increase in deposits			29,949,521				228,464,906
Net (decrease) increase in securities sold under agreements to repurchase			(115,974,899	)			30,837,358
Net decrease in Federal funds purchased			—				(71,643,000	)
Advances from Federal Home Loan Bank:
Issuances			70,000,000				60,000,000
Payments			(151,110,778	)			(15,570,903	)
Net increase (decrease) in borrowings under lines of credit			—				(18,000,000	)
Preferred dividends paid			(2,375,000	)			(2,018,750	)
Issuance of common stock, net of expenses			—				109,027,785
Exercise of common stock options and stock appreciation rights			980,259				610,658
Excess tax benefit from stock compensation			10,358				44,364
Net cash (used in) provided by financing activities			(168,520,539	)			321,752,418
Net (decrease) increase in cash and cash equivalents			72,102,416				19,392,814
Cash and cash equivalents, beginning of period			166,602,074				90,252,755
Cash and cash equivalents, end of period		$	238,704,490			$	109,645,569

See accompanying notes to consolidated financial statements.

Note 1. Summary of Significant Accounting Policies

     Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle National Bank “Pinnacle National.” Pinnacle National is a commercial bank headquartered in Nashville, Tennessee. Pinnacle National provides a full range of banking services in its primary market areas of the Nashville-Davidson-Murfreesboro-Franklin, Tennessee and Knoxville, Tennessee Metropolitan Statistical Areas.

     Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in the 2009 Annual Report previously filed on Form 10-K.

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

     Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, determination of any impairment of intangible assets, including goodwill, the valuation of other real estate owned, and the determination of the valuation of deferred tax assets.

     Cash Flow Information —Supplemental cash flow information addressing certain cash and noncash transactions for each of the six months ended June 30, 2010 and 2009 was as follows:

		For the six months ended June 30,
		2010				2009
Cash Transactions:
Interest		$	32,276,757			$	39,997,810
Income taxes received			100,000				3,200,000
Noncash Transactions:
Loans charged-off to the allowance for loan losses			50,224,878				49,553,686
Loans foreclosed upon and transferred to other real estate owned			37,645,241				10,749,074
Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes			10,428,262				(3,167,000	)

     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, 2010, there were approximately 2,038,000 stock options and 9,500 stock appreciation rights outstanding to purchase common shares. Additionally, as of June 30, 2010, Pinnacle Financial had outstanding warrants to purchase 495,455 shares of common stock. Due to the net loss attributable to common stockholders for the three and six months ended June 30, 2010, no potentially dilutive shares related to these stock options, stock appreciation rights, and warrants were included in the loss per share calculations, as including such shares would have an anti-dilutive effect on loss per share. 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 had at June 30, 2009 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, were considered dilutive and were considered in Pinnacle Financial’s diluted earnings per share available to common stockholders calculation for the three and six months ended June 30, 2009. As of June 30, 2009, Pinnacle Financial had outstanding warrants to purchase 612,455 shares of common stock which have been considered in the calculation of Pinnacle Financial’s diluted earnings per share for the three and six months ended June 30, 2009.

     The following is a summary of the basic and diluted earnings per share calculations for the three and six months ended June 30, 2010 and 2009:

		For the three months ended								For the six months ended
		June 30,								June 30,
		2010				2009				2010				2009
Basic earnings per share calculation:
Numerator - Net loss available to common stockholders		$	(27,871,190	)		$	(33,246,057	)		$	(33,239,908	)		$	(32,602,691	)
Denominator - Average common shares outstanding			32,675,221				24,965,291				32,616,943				24,242,160
Basic loss per share available to common stockholders		$	(0.85	)		$	(1.33	)		$	(1.02	)		$	(1.34	)
Diluted earnings per share calculation:
Numerator - Loss available to common stockholders		$	(27,871,190	)		$	(33,246,057	)		$	(33,239,908	)		$	(32,602,691	)
Denominator - Average common shares outstanding			32,675,221				24,965,291				32,616,943				24,242,160
Dilutive shares contingently issuable			—				—				—				—
Average diluted common shares outstanding			32,675,221				24,965,291				32,616,943				24,242,160
Diluted net loss per share available to common stockholders		$	(0.85	)		$	(1.33	)		$	(1.02	)		$	(1.34	)

Recently Adopted Accounting Pronouncements

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

     Also in June 2009, the FASB issued amended guidance on accounting for variable interest entities (VIEs). This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise might have a controlling financial interest in a VIE. The new, more qualitative evaluation focuses on who has the power to direct the significant economic activities of the VIE and also who has the obligation to absorb losses or rights to receive benefits from the VIE. It also requires an ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE and calls for certain expanded disclosures about an enterprise’s involvement with variable interest entities. The new guidance was adopted by Pinnacle Financial on January 1, 2010. The new guidance did not have a material effect on the Company’s financial position or results of operations.

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

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

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

     On December 12, 2008, Pinnacle Financial issued 95,000 shares of preferred stock to the Treasury for $95 million pursuant to the Treasury’s Capital Purchase Program (“CPP”) under the Troubled Assets Relief Program (“TARP”). Additionally, Pinnacle Financial issued warrants to purchase 534,910 shares of common stock to the Treasury as a condition to its participation in the CPP. The warrants have an exercise price of $26.64 each, are immediately exercisable and expire 10 years from the date of issuance. The CPP preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% thereafter. Pinnacle Financial can redeem the preferred shares issued to the Treasury under the CPP at any time subject to a requirement that it must consult with its primary federal regulators before redemption. On June 16, 2009, Pinnacle Financial completed the sale of 8,855,000 shares of its common stock in a public offering, resulting in net proceeds to Pinnacle Financial of approximately $109 million. As a result, and pursuant to the terms of the warrants issued to the U.S. Treasury in connection with Pinnacle Financial’s participation in the CPP, the number of shares issuable upon exercise of the warrants issued to the Treasury in connection with the CPP was reduced by 50%, or 267,455 shares.

Note 3. Securities

     The amortized cost and fair value of securities available-for-sale and held-to-maturity at June 30, 2010 and December 31, 2009 are summarized as follows:

		June 30, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			116,648,228				1,247,641				11				117,895,858
Mortgage-backed securities			541,122,783				21,408,311				169,721				562,361,373
State and municipal securities			205,410,912				6,863,527				730,274				211,544,165
Corporate notes and other			10,232,390				846,333				84,888				10,993,835
		$	873,414,313			$	30,365,812			$	984,894			$	902,795,231
Securities held-to-maturity:
U.S. government agency securities		$	—			$	—			$	—			$	—
State and municipal securities			4,500,354				155,959				21,715				4,634,598
		$	4,500,354			$	155,959			$	21,715			$	4,634,598

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

     During the three months ended June 30, 2010, Pinnacle Financial realized approximately $2.3 million in gains and no losses from the sale of $110.9 million of available-for-sale securities. Also during the second quarter of 2010, Pinnacle Financial realized a loss of approximately $20,000 related to the sale of an available-for-sale corporate note for which the bond issuer had recently experienced financial distress. During the three months ended March 31, 2010, Pinnacle Financial realized approximately $611,000 in gains and $246,000 in losses from the sale of $30.4 million of available-for-sale securities and approximately $954,000 of held to maturity securities. Pinnacle Financial sold these held to maturity securities as a result of the underlying credit support for these securities being terminated and, after evaluation electing not to maintain these securities in its portfolio. At June 30, 2010, approximately $812.4 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, 2010 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary.

		Available-for-sale								Held-to-maturity
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
|		| | |
Due in one year or less		$	3,134,270			$	3,178,593			$	1,610,310			$	1,641,899
Due in one year to five years			26,013,256				27,013,130				2,890,044				2,992,699
Due in five years to ten years			117,077,563				120,604,715				—				—
Due after ten years			186,066,441				189,637,420				—				—
			332,291,530				340,433,858				4,500,354				4,634,598
Mortgage-backed securities			541,122,783				562,361,373				—				—
		$	873,414,313			$	902,795,231			$	4,500,354			$	4,634,598

     At June 30, 2010 and December 31, 2009, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized losses of less than twelve months or twelve months or longer:

										Investments with an								Total Investments
		Investments with an Unrealized								Unrealized Loss of								with an
		Loss of less than 12 months								12 months or longer								Unrealized Loss
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
At June 30, 2010:
U.S. government agency securities		$	199,800			$	11			$	—			$	—			$	199,800			$	11
Mortgage-backed securities			34,262,393				167,590				232,508				2,131				34,494,901				169,721
State and municipal securities			17,820,505				405,975				7,246,583				346,014				25,067,088				751,989
Corporate notes			—				—				417,644				84,888				417,644				84,888
Total temporarily-impaired securities		$	52,282,698			$	573,576			$	7,896,735			$	433,033			$	60,179,433			$	1,006,609
At December 31, 2009:
U.S. government agency securities		$	132,265,031			$	2,459,428			$	—			$	—			$	132,265,031			$	2,459,428
Mortgage-backed securities			128,404,340				1,551,189				76,958				615				128,481,298				1,551,804
State and municipal securities			43,351,971				672,033				8,379,062				593,382				51,731,033				1,265,415
Corporate notes			473,191				141,797				—				—				473,191				141,797
Total temporarily-impaired securities		$	304,494,533			$	4,824,447			$	8,456,020			$	593,997			$	312,950,553			$	5,418,444

     The applicable date for determining when securities are in an unrealized loss position is June 30, 2010. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month period.

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

     Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements, raising funds for liquidity purposes and in the event of a bank merger where certain investment holdings acquired via the merger are outside of the firm’s investment policy. Additionally, if an available-for-sale security loses its investment grade , tax-exempt status,

the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, Pinnacle Financial will generally sell the security, but will review each security on a case by case basis. Pinnacle Financial notes that the $20,000 loss realized during the second quarter of 2010 was due to concerns over the future financial stability of the bond issuer. The sales during the first quarter of 2010 were primarily related to securities that lost their underlying credit support. The sales during the second quarter of 2010 were to reposition our portfolio due to current economic conditions. As noted in the table above, at June 30, 2010, Pinnacle Financial had unrealized losses of $1.0 million on $60.2 million of available-for-sale securities. Because Pinnacle Financial does not intend to sell these securities and it is not more likely than not that Pinnacle Financial will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial does not consider these securities to be other-than-temporarily impaired at June 30, 2010.

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

Note 4. Loans and Allowance for Loan Losses

     The composition of loans at June 30, 2010 and December 31, 2009 is summarized in the table below.

		At June 30,				At December 31,
		2010				2009
Commercial real estate – mortgage		$	1,125,823,280			$	1,118,068,014
Consumer real estate – mortgage			709,121,389				756,015,076
Construction and land development			411,454,952				525,270,527
Commercial and industrial			1,009,990,592				1,071,444,097
Consumer and other			77,509,549				92,584,027
Total loans			3,333,899,762				3,563,381,741
Allowance for loan losses			(87,106,983	)			(91,958,789	)
Loans, net		$	3,246,792,779			$	3,471,422,952

     Changes in the allowance for loan losses for the six months ended June 30, 2010 and for the year ended December 31, 2009 are as follows:

		June 30, 2010				December 31, 2009
Balance at beginning of period		$	91,958,789			$	36,484,073
Charged-off loans			(50,224,878	)			(62,598,965	)
Recovery of previously charged-off loans			1,638,467				1,315,450
Provision for loan losses			43,734,605				116,758,231
Balance at end of period		$	87,106,983			$	91,958,789

     At June 30, 2010, Pinnacle Financial had certain impaired loans of $118,331,000 which were on nonaccruing interest status. At December 31, 2009, Pinnacle Financial had certain impaired loans of $124,709,000 which were on nonaccruing interest status. In each case, at the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had nonaccruing loans been on accruing status, interest income would have been higher by $5.5 million and $2.6 million for the six months ended June 30, 2010 and 2009, respectively.

     Impaired loans also include loans that Pinnacle National may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that Pinnacle National may have to otherwise incur. These loans are classified as impaired loans and, if on nonaccruing status as of the date of restructuring, the loans are included in nonperforming loans. Nonperforming restructured loans will remain as nonperforming until the borrower can demonstrate adherence to the restructured terms for a term of no less than six months and it is otherwise determined that continued adherence is reasonably assured. Some restructured loans continue as accruing loans after restructuring due to the borrower not being past due, adequate collateral valuations supporting the restructured loans and/or the cash flows of the underlying business appearing adequate to support the restructured debt service. Once a relationship is classified as a restructured loan and in accordance with industry practice, the relationship will remain classified as a restructured loan until the borrower can demonstrate adherence to the restructured terms through the end of the current fiscal year. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date. At June 30, 2010, there were $10.86 million of accruing restructured loans that remain in a performing status. There were $26.98 million of accruing restructured loans at December 31, 2009.

     Potential problem loans, which are not included in nonperforming assets, amounted to approximately $317.9 million at June 30, 2010, compared to $257.0 million at December 31, 2009. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Office of the Comptroller of the Currency, or OCC, Pinnacle National’s primary regulator, for loans classified as substandard, excluding the impact of nonperforming loans.

     At June 30, 2010, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $23,727,000 to directors, executive officers, and their related entities, of which $18,005,000 had been drawn upon. 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, 2010.During the six months ended June 30, 2010, $1,741,000 of loan and other commitment increases and $14,029,000 of principal and other reductions were made by directors, executive officers, and their related entities. Additionally, loans outstanding to directors, executive officers and their related entities decreased from December 31, 2009 to June 30, 2010 due to the resignation of one of Pinnacle Financial’s board members.

     At June 30, 2010, Pinnacle Financial had approximately $21.8 million of mortgage loans held-for-sale compared to approximately $12.4 million at December 31, 2009. These loans are marketed to potential investors prior to closing the loan with the borrower such that there is an agreement for the subsequent sale of the loan between the eventual investor and Pinnacle Financial prior to the loan being closed with the borrower. Pinnacle Financial sells loans to investors on a loan-by-loan basis and has not entered into any forward commitments with investors for future loan sales. All of these loan sales transfer servicing rights to the buyer. During the three and six months ended June 30, 2010, Pinnacle Financial recognized $931,000 and $1,496,000, respectively, in gains on the sale of these loans compared to $1,637,000 and $3,159,000, respectively, during the three and six months ended June 30, 2009.

     At June 30, 2010, Pinnacle Financial had $42,616,000 in other real estate owned which had been acquired, usually through foreclosure, from borrowers compared to $29,603,000 at December 31, 2009. Substantially all of these amounts relate to homes and residential development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has adequate collateral based on recent appraisals. The other real estate is initially recorded at fair value less costs to sell. These fair values are periodically updated based on new appraisals and other information.

Note 5. Income Taxes

     Under FASB ASC 740, “Income Taxes,” companies are required to apply their estimated full year tax rate on a year to date basis in each interim period. However, 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. ASC 740 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 of 2009 based on the actual year-to-date results.

     Pinnacle Financial’s effective tax rate in 2009 differs from the Federal income tax statutory rate of 35% primarily due to investments in bank qualified municipal securities, bank owned life insurance, federal tax credits, state tax expense, and tax savings from our captive insurance subsidiary, PNFP Insurance, Inc. Also impacting the effective tax rate for 2009 are Federal tax credits related to the New Markets Tax Credit program whereby a subsidiary of Pinnacle National has been awarded approximately $2.3 million in future Federal tax credits which are available through 2010. Tax benefits related to these credits will be recognized for financial reporting purposes in the same periods that the credits are recognized in the Company’s income tax returns. The credit that is available for the year ending December 31, 2010 is $360,000. Pinnacle Financial believes that it will comply with the various regulatory provisions of the New Markets Tax Credit program. The effective tax rate in 2010 differs from the Federal income tax statutory rate due primarily to the recognition of a valuation allowance against deferred tax assets during the three months ended June 30, 2010.

     During the three months ended June 30, 2010, Pinnacle Financial performed its quarterly assessment of net deferred tax assets. Companies are required to assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As a result of increased credit losses, Pinnacle Financial is now in a three-year cumulative pre-tax loss position as of June 30, 2010. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset which is difficult to overcome. Pinnacle Financial did not consider future taxable

income in determining the realizability of its deferred tax assets. Pinnacle Financial’s estimate of the realization of its deferred tax assets was solely based on future reversals of existing taxable temporary differences and taxable income in prior carry back years. This resulted in the recognition of a deferred tax asset valuation allowance of approximately $17.4 million during the three months ended June 30, 2010. The valuation allowance was recorded within income tax expense. We expect our income tax expense (benefit) will be negligible for the next several quarters until profitability has been restored for a reasonable time and such profitability is considered sustainable. At which time, the valuation allowance would be reversed. Reversal of the valuation allowance requires a great deal of judgment and will be based on the circumstances that exist as of that future date.

Note 6. Commitments and Contingent Liabilities

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

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

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

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

     A summary of Pinnacle Financial’s total contractual amount for all off-balance sheet commitments at June 30, 2010 is as follows:

Commitments to extend credit		$	980,854,000
Standby letters of credit			78,293,000

     At June 30, 2010, the fair value of Pinnacle Financial’s standby letters of credit was $354,000. This amount represents the unamortized fee associated with these standby letters of credit and is included in the consolidated balance sheet of Pinnacle Financial. This fair value will decrease over time as the existing standby letters of credit approach their expiration dates.

     On May 1-2, 2010, the Middle Tennessee area experienced significant rainfall which caused substantial flooding, in many cases above previously mapped flood plain boundaries (i.e., exceeded the 100-year flood plain). Pinnacle National experienced minimal damage to its facilities and equipment and was also required to temporarily relocate personnel to other offices throughout its footprint. These matters are not expected to be material to Pinnacle National’s financial position or results of operations. In addition, Pinnacle National believes that a number of its borrowers, both residential and commercial, were displaced as a result of flooding. In all likelihood, the real estate that collateralizes Pinnacle National’s loans to these borrowers will have been damaged and, in some cases, completely destroyed. Because some of this collateral was not in a designated flood zone, it is likely that certain borrowers did not carry a valid flood insurance policy to reimburse them for flood losses. Pinnacle National has conducted a preliminary assessment of the impact on affected borrowers. Based on our current assessment and the extent of their losses or the resulting impact of these events, we have allocated an allowance of $1.5 million as of June 30, 2010 as a component of our allowance for loan losses.

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

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

     Pinnacle Financial has two equity incentive plans. Additionally, Pinnacle Financial has acquired equity plans in connection with acquisitions of Cavalry Bancorp, Inc. (“Cavalry”) and Mid-America Bancshares, Inc. (“Mid-America”) under which it has granted stock options and stock appreciation rights to its employees to purchase common stock at or above the fair market value on the date of grant and granted restricted share awards to employees and directors. At June 30, 2010, there were approximately 769,000 shares available for issuance under all of these plans.

     During the first quarter of 2006 and in connection with its merger with Cavalry, Pinnacle Financial assumed, the 1999 Cavalry Bancorp, Inc. Stock Option Plan (the “Cavalry Plan”). All options granted under the Cavalry Plan were fully vested prior to Pinnacle Financial’s merger with Cavalry and expire at various dates between January 2011 and June 2012. In connection with the merger, all options to acquire Cavalry common stock were converted to options to acquire Pinnacle Financial’s common stock at the 0.95 exchange ratio. The exercise price of the outstanding options under the Cavalry Plan was adjusted using the same exchange ratio. All other terms of the Cavalry options were unchanged. At June 30, 2010, there were 29,452 Pinnacle Financial shares remaining to be acquired by the participants in the Cavalry Plan at exercise prices that ranged between $10.26 per share and $13.68 per share.

     On November 30, 2007 and in connection with its merger with Mid-America, Pinnacle Financial assumed several equity incentive plans, including the Mid-America Bancshares, Inc. 2006 Omnibus Equity Incentive Plan (the “Mid-America Plans”). All options and stock appreciation rights granted under the Mid-America Plans were fully vested prior to Pinnacle Financial’s merger with Mid-America and expire at various dates between June 2011 and July 2017. In connection with the merger, all options and stock appreciation rights to acquire Mid-America common stock were converted to options or stock appreciation rights, as applicable, to acquire Pinnacle Financial common stock at the 0.4655 exchange ratio. The exercise price of the outstanding options and stock appreciation rights under the Mid-America Plans was adjusted using the same exchange ratio with the exercise price also being reduced by $1.50 per share. All other terms of the Mid-America options and stock appreciation rights were unchanged. At June 30, 2010, there were 228,027 Pinnacle Financial shares which could be acquired by the participants in the Mid-America Plans at exercise prices that ranged between $7.52 per share and $20.41 per share. At June 30, 2010, there were approximately 72,000 shares available for issue under the Mid-America Plans, which shares may only be issued to Pinnacle associates that were Mid-America associates prior to the merger.

Common Stock Options and Stock Appreciation Rights

     As of June 30, 2010, there were 2,038,146 stock options and 9,535 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, 2010 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, 2009			2,149,775			$	17.54				5.23			$	6,643
Granted			—				—
Exercised (2)			(78,887	)			9.11
Forfeited			(23,207	)			19.64
Outstanding at June 30, 2010			2,047,681			$	17.84				4.82			$	5,077
Outstanding and expected to vest as of June 30, 2010			2,014,796			$	17.73				4.80			$	5,065
Options exercisable at June 30, 2010 (3)			1,710,792			$	15.07				4.38			$	5,077

     During the six months ended June 30, 2010, approximately 385,000 option awards vested at an average exercise price of $26.02 and an intrinsic value of approximately $20,000.

     As of June 30, 2010, there was approximately $2.6 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 1.91 years.

     During the three and six months ended June 30, 2010, Pinnacle Financial recorded stock option compensation expense of $413,000 and $857,000, 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, compared to $366,000 and $890,000 for the three and six months ended June 30, 2009. 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 six month periods ended June 30, 2010 and 2009.

Restricted Shares

     Additionally, Pinnacle Financial’s 2004 Equity Incentive Plan and the Mid-America Plans provide for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards outstanding as of June 30, 2010 under either of these plans. During the six months ended June 30, 2010, Pinnacle Financial awarded 305,819 shares of restricted common stock to certain Pinnacle Financial associates and outside directors.

     A summary of activity for unvested restricted share awards for the six months ended June 30, 2010 is as follows:

						Grant Date
						Weighted-Average
		Number				Cost
Unvested at December 31, 2009			480,884			$	21.03
Shares awarded			305,819				14.45
Restrictions lapsed and shares released to associates/directors			(61,788	)			20.60
Shares forfeited			(49,461	)			24.57
Unvested at June 30, 2010			675,454			$	17.88

     Status of 2010 Restricted Share Awards: There were 305,819 restricted share awards granted during the six months ended June 30, 2010. The following discusses the current status of these awards:

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

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

• The forfeiture restrictions on 19,853 restricted share awards granted to executive management personnel, other than the named executive officers, in 2010 lapse in three equal installments should Pinnacle Financial achieve certain earnings and soundness targets over each year of the subsequent three-year period (or, alternatively, the cumulative three-year period).

• The forfeiture restrictions on another 59,568 restricted share awards granted to executive management personnel, other than the named executive officers, lapse in equal installments on the anniversary date of the grant over a 10 year period or until the associate is 65 years of age, whichever is earlier.

• The forfeiture restrictions on 131,599 restricted share awards granted to non-management level associates lapse in five equal installments on the anniversary date of the grant.

• During the first quarter of 2010, 17,199 restricted share awards were issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on the one year anniversary date of the award based on each individual board member meeting their attendance goals for the various board and board committee meetings to which each member was scheduled to attend. Each non-employee board member received an award of 1,323 shares.

     Compensation expense associated with the performance-based restricted share awards is recognized over the performance period that the restrictions associated with the awards are anticipated to lapse based on a graded vesting schedule such that each performance traunche is amortized separately. Compensation expense associated with the time-based restricted share awards is recognized over the time period that the restrictions associated with the awards lapse based on the total cost of the award. For the three and six months ended June 30, 2010, Pinnacle Financial recognized approximately $450,000 and $1,192,000, respectively, in compensation costs attributable to all restricted share awards issued prior to the end of those periods, compared to $467,000 and $817,000, respectively, for the three and six months ended June 30, 2009.

Note 8. Regulatory Matters

     Pinnacle National is subject to restrictions on the payment of dividends to Pinnacle Financial under federal banking laws and the regulations of the OCC. Pinnacle Financial is also subject to limits on payment of dividends to its shareholders by the rules, regulations and policies of federal banking authorities and by its participation in the CPP. Pinnacle Financial has not paid any cash dividends on its common stock since inception, and it does not anticipate that it will consider paying dividends on its common stock until Pinnacle Financial generates sufficient capital through net income from operations to support both anticipated asset growth and dividend payments. Pursuant to federal banking regulations and due to losses incurred in 2009, beginning in 2010, Pinnacle National had no net retained profits from the previous two years available for dividend payments to Pinnacle Financial. Accordingly, Pinnacle National may not, subsequent to January 1, 2010, without the prior consent of the OCC, pay any dividends to Pinnacle Financial until such time that current year profits exceed the net losses and dividends of the prior two years. Until such time as it may receive dividends from Pinnacle National, Pinnacle Financial anticipates servicing its preferred stock dividend and subordinated indebtedness requirements from its available cash balances. Pinnacle Financial has agreed to obtain prior approval of the Federal Reserve Bank of Atlanta before making such dividend and subordinated debt payments.

     Pinnacle Financial and its banking subsidiary are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pinnacle Financial and Pinnacle National must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pinnacle Financial’s and Pinnacle National’s 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, 2010, that Pinnacle Financial and Pinnacle National met all capital adequacy requirements to which they are subject. To be categorized as well-capitalized, Pinnacle National must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. Pinnacle Financial’s and Pinnacle National’s actual capital amounts and ratios are presented in the following table (dollars in thousands):

																		Minimum
																		To Be Well-Capitalized
										Minimum								Under Prompt
										Capital								Corrective
		Actual								Requirement								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
At June 30, 2010
Total capital to risk weighted assets:
Pinnacle Financial		$	555,003				14.81	%		$	299,880				8.0	%		not applicable
Pinnacle National		$	483,097				12.92	%		$	299,112				8.0	%		$	377,957				10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial		$	492,640				13.14	%		$	149,940				4.0	%		not applicable
Pinnacle National		$	420,852				11.26	%		$	149,556				4.0	%		$	226,774				6.0	%
Tier I capital to average assets (*):
Pinnacle Financial		$	492,640				10.38	%		$	189,798				4.0	%		not applicable
Pinnacle National		$	420,852				8.89	%		$	189,341				4.0	%		$	236,676				5.0	%

     In January 2010, Pinnacle National agreed to an OCC requirement to maintain a minimum Tier 1 capital to average assets ratio of 8% and a minimum total capital to risk-weighted assets ratio of 12%. As noted above, Pinnacle National had 8.89% of Tier 1 capital to average assets and 12.92% of total capital to risk-weighted assets ratio at June 30, 2010. Pinnacle Financial contributed approximately $25 million to Pinnacle National as of the quarter ending June 30, 2010, and has $65.9 million of cash available, if required, for further capital support of Pinnacle National.

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, 2010 is included in the following table (in thousands):

		June 30, 2010
		Notional Amount				Estimated Fair Value
Interest rate swap agreements:
Pay fixed / receive variable swaps		$	244,783			$	17,112
Pay variable / receive fixed swaps			244,783				(16,929	)
Total		$	489,566			$	183

Note 10. Fair Value of Financial Instruments

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

Valuation Hierarchy

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

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

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

Assets

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

     Impaired loans — A loan is considered to be impaired when it is probable Pinnacle Financial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy.

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

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

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

Liabilities

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

     The following tables present the financial instruments carried at fair value as of June 30, 2010 and December 31, 2009, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above) (dollars in thousands):

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2010

														Models with
										Models with				significant
		Total carrying				Quoted market				significant				unobservable
		value in the				prices in an				observable market				market
		consolidated				active market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Investment securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			117,896				—				117,896				—
Mortgage-backed securities			562,361				—				562,361				—
State and municipal securities			211,544				—				211,544				—
Corporate notes and other			10,994				—				10,994				—
Total investment securities available-for-sale			902,795								902,795				—
Other investments			2,463				—				—				2,463
Other assets			64,564				—				16,747				47,817
Total assets at fair value		$	969,822			$	—			$	919,542			$	50,280
Other liabilities		$	16,930			$	—			$	16,930			$	—
Total liabilities at fair value		$	16,930			$	—			$	16,930			$	—
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2009
										Models with				Models with
										significant				significant
		Total carrying				Quoted market				observable				unobservable
		value in the				prices in an				market				market
		consolidated				active market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Investment securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			195,428				—				195,428				—
Mortgage-backed securities			517,691				—				517,691				—
State and municipal securities			207,295				—				207,295				—
Corporate notes and other			10,598				—				10,598				—
Total investment securities available-for-sale			931,012								931,012
Other investments			1,999				—				—				1,999
Other assets			57,391				—				9,872				47,519
Total assets at fair value		$	990,402			$	—			$	940,884			$	49,518
Other liabilities		$	10,054			$	—			$	10,054			$	—
Total liabilities at fair value		$	10,054			$	—			$	10,054			$	—