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		(I.R.S. Employer Identification No.)
organization)
150 Third Avenue South, Suite 900, Nashville, Tennessee		37201
(Address of principal executive offices)		(Zip Code)

(615) 744-3700

Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes o No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 19, 2010 there were 33,660,462 shares of common stock, $1.00 par value per share, issued and outstanding.

 

 

Pinnacle Financial Partners, Inc.
Report on Form 10-Q
September 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			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			49
Item 4. Controls and Procedures			49
PART II — Other Information:
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			51
Item 4. (Removed and Reserved)			51
Item 5. Other Information			51
Item 6. Exhibits			51
Signatures			52
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 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,” “goal,” “objective,” “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 to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, the following; (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) the continued reduction of Pinnacle Financial’s loan balances, and conversely, the inability of Pinnacle Financial to ultimately grow its loan portfolio in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) increased competition with other financial institutions; (vi) greater than anticipated deterioration or lack of sustained growth in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, particularly in commercial and residential real estate markets; (vii) rapid fluctuations or unanticipated changes in interest rates; (viii) the results of regulatory examinations; (ix) the development of any new market other than Nashville or Knoxville; (x) a merger or acquisition; (xi) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xii) the impact of governmental restrictions on entities participating in the Capital Purchase Program, of the U.S. Department of the Treasury (the “Treasury”); (xiii) further deterioration in the valuation of other real estate owned; (xiv) inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions; and (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, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and (xvi) Pinnacle Financial recording a further valuation allowance related to its deferred tax asset. A more detailed description of these and other risks is contained in Pinnacle Financial’s most recent annual report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2010 and most recent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on May 7, 2010 and July 21, 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 Financial disclaims any obligation to update or revise any forward-looking statements contained in this release, whether as a result of new information, future events or otherwise.

Part I. Financial Information

Item 1.

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

		September 30,				December 31,
		2010				2009
ASSETS
Cash and noninterest-bearing due from banks		$	59,038,190			$	55,651,737
Interest-bearing due from banks			142,990,988				19,338,499
Federal funds sold			3,549,454				41,611,838
Short-term discount notes			44,995,432				50,000,000
Cash and cash equivalents			250,574,064				166,602,074
Securities available-for-sale, at fair value			964,206,124				931,012,091
Securities held-to-maturity (fair value of $4,456,899 and $6,737,336 at September 30, 2010 and December 31, 2009, respectively)			4,325,401				6,542,496
Mortgage loans held-for-sale			21,804,306				12,440,984
Loans			3,251,923,355				3,563,381,741
Less allowance for loan losses			(84,550,007	)			(91,958,789	)
Loans, net			3,167,373,348				3,471,422,952
Premises and equipment, net			82,528,409				80,650,936
Other investments			42,466,941				40,138,660
Accrued interest receivable			16,921,996				19,083,468
Goodwill			244,096,729				244,107,086
Core deposits and other intangible assets			11,449,597				13,686,091
Other real estate owned			48,710,475				29,603,439
Other assets			107,145,887				113,520,727
Total assets		$	4,961,603,277			$	5,128,811,004
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	581,181,037			$	498,087,015
Interest-bearing			526,164,256				483,273,551
Savings and money market accounts			1,439,594,226				1,198,012,445
Time			1,278,694,666				1,644,226,290
Total deposits			3,825,634,185				3,823,599,301
Securities sold under agreements to repurchase			191,392,048				275,465,096
Federal Home Loan Bank advances			121,435,261				212,654,782
Subordinated debt			97,476,000				97,476,000
Accrued interest payable			5,766,337				6,555,801
Other liabilities			33,370,673				12,039,843
Total liabilities			4,275,074,504				4,427,790,823
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 95,000 shares issued and outstanding at September 30, 2010, and December 31, 2009			90,455,129				89,462,633
Common stock, par value $1.00; 90,000,000 shares authorized; 33,660,462 issued and outstanding at September 30, 2010 and 33,029,719 issued and outstanding at December 31, 2009			33,660,462				33,029,719
Common stock warrants			3,348,402				3,348,402
Additional paid-in capital			528,956,550				524,366,603
Retained earnings			10,721,466				43,372,743
Accumulated other comprehensive income, net of taxes			19,386,764				7,440,081
Total stockholders’ equity			686,528,773				701,020,181
Total liabilities and stockholders’ equity		$	4,961,603,277			$	5,128,811,004

See accompanying notes to consolidated financial statements.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Interest income:
Loans, including fees		$	41,105,351			$	41,665,915			$	122,504,151			$	119,818,533
Securities:
Taxable			7,004,256				8,607,924				24,150,109				26,088,836
Tax-exempt			1,942,650				1,694,323				5,978,849				4,742,447
Federal funds sold and other			598,181				473,663				1,635,934				1,338,587
Total interest income			50,650,438				52,441,825				154,269,043				151,988,403
Interest expense:
Deposits			12,306,145				15,099,627				38,695,099				49,253,606
Securities sold under agreements to repurchase			435,054				363,302				1,352,015				1,147,363
Federal Home Loan Bank advances and other borrowings			1,849,300				2,430,839				5,904,792				7,826,936
Total interest expense			14,590,499				17,893,768				45,951,906				58,227,905
Net interest income			36,059,939				34,548,057				108,317,137				93,760,498
Provision for loan losses			4,789,322				22,134,025				48,523,927				101,063,950
Net interest income after provision for loan losses			31,270,617				12,414,032				59,793,210				(7,303,452	)
Noninterest income:
Service charges on deposit accounts			2,444,077				2,559,394				7,238,588				7,604,774
Investment services			1,234,421				1,112,059				3,786,067				3,044,444
Insurance sales commissions			954,015				906,298				2,957,393				3,130,849
Gain on loan sales and loan participations, net			1,310,169				977,662				2,733,977				4,386,467
Gain on investment sales, net			—				—				2,623,674				6,462,241
Trust fees			726,094				585,737				2,377,182				1,885,091
Other noninterest income			1,925,459				1,595,942				5,932,154				4,961,175
Total noninterest income			8,594,235				7,737,092				27,649,035				31,475,041
Noninterest expense:
Salaries and employee benefits			16,069,360				14,245,485				48,921,007				41,672,578
Equipment and occupancy			5,230,730				4,445,666				16,089,323				12,991,928
Other real estate owned			8,522,346				1,250,152				21,335,705				5,864,375
Marketing and other business development			748,206				512,063				2,295,820				1,417,780
Postage and supplies			636,492				515,110				2,070,536				2,174,796
Amortization of intangibles			744,492				776,784				2,236,494				2,411,351
Other noninterest expense			5,822,252				5,535,079				17,482,907				16,596,965
Total noninterest expense			37,773,878				27,280,339				110,431,792				83,129,773
Income (loss) before income taxes			2,090,974				(7,129,215	)			(22,989,547	)			(58,958,184	)
Income tax (benefit) expense			—				(3,782,045	)			5,106,734				(25,925,471	)
Net income (loss)			2,090,974				(3,347,170	)			(28,096,281	)			(33,032,713	)
Preferred stock dividends			1,213,889				1,213,889				3,602,083				3,602,083
Accretion on preferred stock discount			328,037				290,105				992,496				819,059
Net income (loss) available to common stockholders		$	549,048			$	(4,851,164	)		$	(32,690,860	)		$	(37,453,855	)
Per share information:
Basic net income (loss) per common share available to common stockholders		$	0.02			$	(0.15	)		$	(1.00	)		$	(1.39	)
Diluted net income (loss) per common share available to common stockholders		$	0.02			$	(0.15	)		$	(1.00	)		$	(1.39	)
Weighted average shares outstanding:
Basic			32,857,428				32,460,614				32,697,985				27,011,749
Diluted			33,576,963				32,460,614				32,697,985				27,011,749

See accompanying notes to consolidated financial statements.

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

																		Common				Additional								Accumulated				Total
		Preferred Stock								Common Stock								Stock				Paid-in				Retained				Other Comp.				Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Capital				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			—				—				59,319				59,319				—				641,191				—				—				700,510
Issuance of restricted common shares, net of forfeitures			—				—				283,488				283,488				—				(283,488	)			—				—				—
Restricted shares withheld for taxes			—				—				(3,194	)			(3,194	)			—				(58,531	)			—				—				(61,725	)
Issuance of 8,855,000 shares of common stock, net of offering costs of $6,087,215			—				—				8,855,000				8,855,000				—				100,172,785												109,027,785
Cancellation of 267,455 warrants previously issued to U.S. Treasury			—				—				—				—				(3,348,402	)			3,348,402												—
Compensation expense for restricted shares			—				—				—				—				—				1,009,611				—				—				1,009,611
Compensation expense for stock options			—				—				—				—				—				1,361,938				—				—				1,361,938
Accretion on preferred stock dividend			—				819,059				—				—				—				—				(819,059	)			—				—
Preferred dividends paid			—				—				—				—				—				—				(3,206,249	)			—				(3,206,249	)
Comprehensive income (loss):
Net loss			—				—				—				—				—				—				(33,032,713	)			—				(33,032,713	)
Net unrealized gains on securities available-for-sale, net of deferred tax benefit of $4,734,374			—				—				—				—				—				—				—				6,993,575				6,993,575
Total comprehensive loss																																			(26,039,138	)
Balances, September 30, 2009			95,000			$	89,167,706				32,956,737			$	32,956,737			$	3,348,402			$	523,232,882			$	47,322,426			$	14,062,975			$	710,091,128
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			—				—				329,558				329,558				—				1,992,279				—				—				2,321,837
Issuance of restricted common shares, net of forfeitures			—				—				312,219				312,219				—				(312,219	)			—				—				—
Restricted shares withheld for taxes			—				—				(11,034	)			(11,034	)			—				(137,744	)			—				—				(148,778	)
Compensation expense for restricted shares			—				—				—				—				—				1,774,345				—				—				1,774,345
Compensation expense for stock options			—				—				—				—				—				1,273,286				—				—				1,273,286
Accretion on preferred stock discount			—				992,496				—				—				—				—				(992,496	)			—				—
Preferred dividends paid			—				—				—				—				—				—				(3,562,500	)			—				(3,562,500	)
Comprehensive income (loss):
Net loss			—				—				—				—				—				—				(28,096,281	)			—				(28,096,281	)
Net unrealized gains on securities available-for-sale, net of deferred tax expense of $7,712,167			—				—				—				—				—				—				—				11,946,683				11,946,683
Total comprehensive loss																																			(16,149,598	)
Balances, September 30, 2010			95,000			$	90,455,129				33,660,462			$	33,660,462			$	3,348,402			$	528,956,550			$	10,721,466			$	19,386,764			$	686,528,773

See accompanying notes to consolidated financial statements.

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

		Nine months ended
		September 30,
		2010				2009
Operating activities:
Net loss		$	(28,096,281	)		$	(33,032,713	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities			3,445,502				3,631,779
Depreciation and amortization			8,757,803				7,833,796
Provision for loan losses			48,523,927				101,063,950
Gain on loan sales and loan participations, net			(3,067,581	)			(3,820,667	)
Gain on investment sales, net			(2,623,674	)			(6,462,241	)
Net gains on sale of premises and equipment and software			(5,035	)			(22,784	)
Stock-based compensation expense			3,047,631				2,371,549
Deferred tax expense (benefit)			17,812,548				(25,140,069	)
Losses on foreclosed real estate and other investments			19,334,546				4,517,522
Excess tax benefit from stock compensation			(10,358	)			(44,364	)
Mortgage loans held for sale:
Loans originated			(307,729,185	)			(509,606,923	)
Loans sold			301,434,231				523,338,574
Decrease in other assets			11,887,367				17,377,317
Increase (decrease) in other liabilities			20,541,366				(9,573,279	)
Net cash provided by operating activities			93,252,807				72,431,447
Investing activities:
Activities in securities available-for-sale:
Purchases			(422,982,104	)			(614,690,009	)
Sales			146,082,535				346,895,583
Maturities, prepayments and calls			262,564,699				195,745,788
Activities in securities held-to-maturity:
Sales			954,388				—
Maturities, prepayments and calls			1,240,565				3,960,000
Decrease (increase) in loans, net			186,760,840				(332,879,425	)
Purchases of premises and equipment and software			(7,674,801	)			(10,419,279	)
Proceeds from the sale of premises and equipment and software			5,035				14,885
Other investments			(1,878,676	)			(4,709,089	)
Net cash provided by (used in) investing activities			165,072,481				(416,081,546	)
Financing activities:
Net increase in deposits			2,229,029				287,043,453
Net (decrease) increase in securities sold under agreements to repurchase			(84,073,048	)			31,376,107
Net decrease in Federal funds purchased			—				(71,643,000	)
Advances from Federal Home Loan Bank:
Issuances			90,000,000				70,000,000
Payments			(181,130,196	)			(30,860,649	)
Net decrease in borrowings under lines of credit			—				(18,000,000	)
Preferred dividends paid			(3,562,500	)			(3,206,249	)
Issuance of common stock, net of expenses			—				109,027,785
Exercise of common stock options and stock appreciation rights			2,173,059				638,785
Excess tax benefit from stock compensation			10,358				44,364
Net cash (used in) provided by financing activities			(174,353,298	)			374,420,596
Net increase in cash and cash equivalents			83,971,990				30,770,497
Cash and cash equivalents, beginning of period			166,602,074				90,252,755
Cash and cash equivalents, end of period		$	250,574,064			$	121,023,252

See accompanying notes to consolidated financial statements.

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

Note 1. Summary of Significant Accounting Policies

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

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

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

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, determination of any impairment of 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 nine months ended September 30, 2010 and 2009 was as follows:

		For the nine months ended September 30,
		2010				2009
Cash Transactions:
Interest		$	47,024,839			$	59,036,422
Income taxes received			100,000				3,200,000
Noncash Transactions:
Loans charged-off to the allowance for loan losses			58,729,862				55,120,618
Loans foreclosed upon and transferred to other real estate owned			68,087,450				24,706,149
Net unrealized gains on available-for-sale securities, net of deferred taxes			11,946,683				6,993,575

Income (Loss) Per Common Share — Basic net income (loss) per share available to common stockholders (“EPS”) is computed by dividing net income or loss available to common stockholders by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average shares outstanding is attributable to common stock options, common stock appreciation rights, warrants and restricted shares. The dilutive effect of outstanding options, common stock appreciation rights, warrants and restricted shares is reflected in diluted EPS by application of the treasury stock method.

As of September 30, 2010, there were approximately 2,015,000 stock options and 8,800 stock appreciation rights outstanding to purchase common shares. Additionally, as of September 30, 2010, Pinnacle Financial had outstanding warrants to purchase 267,455 shares of common stock. 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. For the three months ended September 30, 2010, approximately 720,000 dilutive stock options, stock appreciation rights and warrants were included in the earnings per share calculation. Due to the net loss attributable to common stockholders for the nine months ended September 30, 2010, no potentially dilutive shares related to 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 September 30, 2009, there were 2,149,000 stock options and 10,000 stock appreciation rights outstanding to purchase common shares. Additionally, as of September 30, 2009, Pinnacle Financial had outstanding warrants to purchase 612,455 of common shares. Due to the net loss attributable to common stockholders for the nine months ended September 30, 2009, no potentially dilutive shares related to these stock options, stock appreciation rights, and warrants were included in the loss per share calculations, as including such shares would have an antidilutive effect on earnings per share.

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

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

		For the three months ended								For the nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
Basic earnings per share calculation:
Numerator — Net income (loss) available to common stockholders		$	549,048			$	(4,851,164	)		$	(32,690,860	)		$	(37,453,855	)
Denominator — Average common shares outstanding			32,857,428				32,460,614				32,697,985				27,011,749
Basic income (loss) per share available to common stockholders		$	0.02			$	(0.15	)		$	(1.00	)		$	(1.39	)
Diluted earnings per share calculation:
Numerator — Income (loss) available to common stockholders		$	549,048			$	(4,851,164	)		$	(32,690,860	)		$	(37,453,855	)
Denominator — Average common shares outstanding			32,857,428				32,460,614				32,697,985				27,011,749
Dilutive shares contingently issuable			719,535				—				—				—
Average diluted common shares outstanding			33,576,963				32,460,614				32,697,985				27,011,749
Diluted net income (loss) per share available to common stockholders		$	0.02			$	(0.15	)		$	(1.00	)		$	(1.39	)

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.

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

In the first quarter of 2010, the FASB updated Accounting Standards Update (“ASU”) 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 ASU 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. The new guidance did not have an impact on the Company’s financial position or results of operations.

Recently Issued Accounting Standards

In March 2010, the FASB issued ASU 2010-11, Scope Exception Related to Embedded Credit Derivatives. ASU 2010-11 amends ASC 815 to provide clarifying language regarding when embedded credit derivative features are not considered embedded derivatives subject to potential bifurcation and separate accounting. The provisions of ASU 2010-11 are effective for periods beginning after June 15, 2010 and require re-evaluation of certain preexisting contracts to determine whether the accounting for such contracts is consistent with the amended guidance in ASU 2010-11. If the fair value option is elected for an instrument upon adoption of the amendments to ASC 815, re-evaluation of such preexisting contracts is not required. Pinnacle Financial is currently assessing the effects of adopting the provisions of ASU 2010-20.

In July 2010, the FASB issued Accounting Standards Update 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 provides enhanced disclosures related to the credit quality of financing receivables and the allowance for credit losses, and provides that new and existing disclosures should be disaggregated based on how an entity develops its allowance for credit losses and how it manages credit exposures. Under the provisions of ASU 2010-20, additional disclosures required for financing receivables include information regarding the aging of past due receivables, credit quality indicators, and modifications of financing receivables. The provisions of ASU 2010-20 are effective for periods ending after December 15, 2010, with the exception of the amendments to the rollforward of the allowance for credit losses and the disclosures about modifications which are effective for periods beginning after December 15, 2010. Comparative disclosures are required only for periods ending subsequent to initial adoption. Pinnacle Financial is currently assessing the effects of adopting the provisions of ASU 2010-20 and will provide the required disclosure in the 2010 Annual Report.

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.

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

Note 3. Securities

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

		September 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			61,127,951				1,074,696				—				62,202,647
Mortgage-backed securities			657,909,980				18,313,514				712,045				675,511,449
State and municipal securities			203,059,912				12,192,151				169,809				215,082,254
Corporate notes and other			10,222,798				1,255,471				68,495				11,409,774
		$	932,320,641			$	32,835,832			$	950,349			$	964,206,124
Securities held-to-maturity:
U.S. government agency securities		$	—			$	—			$	—			$	—
State and municipal securities			4,325,401				148,965				17,467				4,456,899
		$	4,325,401			$	148,965			$	17,467			$	4,456,899

		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

There were no security sales during the three months ended September 30, 2010. During the nine months ended September 30, 2010, Pinnacle Financial realized approximately $2.9 million in gains and $246,000 in losses from the sale of $146.1 million of available-for-sale securities and $954,000 of held-to-maturity securities. Also during the nine month period ended September 30, 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. At September 30, 2010, approximately $779.6 million of Pinnacle Financial’s investment portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase.

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

The amortized cost and fair value of debt securities as of September 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		$	3,166,583			$	3,198,435			$	1,570,268			$	1,594,338
Due in one year to five years			36,743,566				38,068,123				2,755,133				2,862,561
Due in five years to ten years			93,412,169				98,773,386				—				—
Due after ten years			141,088,343				148,654,731				—				—
Mortgage-backed securities			657,909,980				675,511,449				—				—
		$	932,320,641			$	964,206,124			$	4,325,401			$	4,456,899

At September 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								Investments with an								Total Investments
		Unrealized Loss of								Unrealized Loss of								with an
		less than 12 months								12 months or longer								Unrealized Loss
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
At September 30, 2010:
U.S. government agency securities		$	—			$	—			$	—			$	—			$	—			$	—
Mortgage-backed securities			160,292,983				710,142				228,890				1,903				160,521,873				712,045
State and municipal securities			5,113,843				59,132				3,987,527				128,144				9,101,370				187,276
Corporate notes			—				—				431,505				68,495				431,505				68,495
Total temporarily-impaired securities		$	165,406,826			$	769,274			$	4,647,922			$	198,542			$	170,054,748			$	967,816
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 September 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 consider selling 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 September 30, 2010, Pinnacle Financial had unrealized losses of $968,000 on $170 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 September 30, 2010.

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

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 September 30, 2010 and December 31, 2009 is summarized in the table below.

		At September 30,				At December 31,
		2010				2009
Commercial real estate — mortgage		$	1,103,260,724			$	1,118,068,014
Consumer real estate — mortgage			720,139,725				756,015,076
Construction and land development			359,728,140				525,270,527
Commercial and industrial			995,742,999				1,071,444,097
Consumer and other			73,051,767				92,584,027
Total loans			3,251,925,355				3,563,381,741
Allowance for loan losses			(84,550,007	)			(91,958,789	)
Loans, net		$	3,167,373,348			$	3,471,422,952

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

		September 30, 2010				December 31, 2009
Balance at beginning of period		$	91,958,789			$	36,484,073
Charged-off loans			(58,729,862	)			(62,598,965	)
Recovery of previously charged-off loans			2,797,153				1,315,450
Provision for loan losses			48,523,927				116,758,231
Balance at end of period		$	84,550,007			$	91,958,789

At September 30, 2010 and December 31, 2010, Pinnacle Financial had certain impaired loans of $103,127,000 and $124,709,000, respectively, 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 $7.6 million and $4.6 million for the nine months ended September 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. 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 September 30, 2010, there were $13.47 million of accruing restructured loans that remain in a performing status. There were $26.98 million of accruing restructured loans at December 31, 2009.

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

Potential problem loans, which are not included in nonperforming assets, amounted to approximately $267.6 million at September 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 September 30, 2010, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $21,902,000 to directors, executive officers, and their related entities, of which $18,067,000 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 September 30, 2010. During the nine months ended September 30, 2010, $2,506,000 of loan and other commitment increases and $14,592,000 of principal and other reductions were made by directors, executive officers, and their related entities. Loans outstanding to directors, executive officers and their related entities decreased from December 31, 2009 to September 30, 2010 due to the resignation of one of Pinnacle Financial’s board members.

At September 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 nine months ended September 30, 2010, Pinnacle Financial recognized $1,311,000 and $2,734,000, respectively, in gains on the sale of these loans compared to $978,000 and $4,386,000, respectively, during the three and nine months ended September 30, 2009.

At September 30, 2010, Pinnacle Financial had $48,710,000 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 or development for which Pinnacle Financial believes it has adequate collateral based on recent appraisals. The other real estate owned 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 third 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.

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

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 entered into 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’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. Pinnacle Financial did not consider future taxable income in determining the realizability of its deferred tax assets. 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. During the three months ended September 30, 2010, Pinnacle Financial increased the amount of the deferred tax valuation allowance by approximately $400,000. The valuation allowance was recorded within income tax expense and was offset by our current period benefit. Once profitability has been restored for a reasonable time and such profitability is considered sustainable, the valuation allowance will 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 September 30, 2010 is as follows:

Commitments to extend credit		$	893,600,000
Standby letters of credit			76,671,000

At September 30, 2010, the fair value of Pinnacle Financial’s standby letters of credit was $357,000. 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.

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

On May 2-3, 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 did not have a material impact on Pinnacle National’s financial position or results of operations. In addition, a number of Pinnacle National’s borrowers, both residential and commercial, were displaced as a result of flooding. In some cases, the real estate that collateralizes Pinnacle National’s loans to these borrowers was 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. Based on our current assessment and the extent of borrower’s losses or the resulting impact of these events, we have established an allowance for loan losses of approximately $1 million as of September 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 September 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 September 30, 2010, there were approximately 782,000 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 September 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 September 30, 2010, there were 224,911 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 September 30, 2010, there were approximately 78,000 shares available for issue under the Mid-America Plans, which shares may only be issued to Pinnacle associates that were Mid-America associates prior to the merger.

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

Common Stock Options and Stock Appreciation Rights

As of September 30, 2010, there were 2,014,633 stock options and 8,792 stock appreciation rights outstanding to purchase common shares. A summary of the activity within the equity incentive plans during the nine months ended September 30, 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)			(93,027	)			8.49
Forfeited			(33,323	)			20.24
Outstanding at September 30, 2010			2,023,425			$	17.91				4.59			$	2,494
Outstanding and expected to vest as of September 30, 2010			1,990,739			$	17.80				4.57			$	2,490
Options exercisable at September 30, 2010 (3)			1,712,646			$	15.35				4.19			$	2,494

During the nine months ended September 30, 2010, approximately 405,000 option awards vested at an average exercise price of $26.32 and an intrinsic value of approximately $5,000.

As of September 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 1.73 years.

During the three and nine months ended September 30, 2010, Pinnacle Financial recorded stock option compensation expense of $416,000 and $1,273,000, 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 $461,000 and $1,362,000 for the three and nine months ended September 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 nine month periods ended September 30, 2010 and 2009.

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

Restricted Shares

Additionally, Pinnacle Financial’s 2004 Equity Incentive Plan and the Mid-America Plans provide for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards outstanding as of September 30, 2010 under either of these plans. During the nine months ended September 30, 2010, Pinnacle Financial awarded 312,219 shares of restricted common stock to certain Pinnacle Financial associates and outside directors.

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

						Grant Date Weighted-
		Number				Average Cost
Unvested at December 31, 2009			480,884			$	21.03
Shares awarded			312,219				14.35
Restrictions lapsed and shares released to associates/directors			(71,963	)			20.44
Shares forfeited			(58,920	)			23.65
Unvested at September 30, 2010			662,220			$	17.77

Status of 2010 Restricted Share Awards: There were 312,219 restricted share awards granted during the nine months ended September 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 in each of these periods (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 137,999 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 nine months ended September 30, 2010, Pinnacle Financial recognized approximately $583,000 and $1,774,000, respectively, in compensation costs attributable to all restricted share awards issued prior to the end of those periods, compared to $203,000 and $1,010,000, respectively, for the three and nine months ended September 30, 2009.

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

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 cash 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 September 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 September 30, 2010
Total capital to risk weighted assets:
Pinnacle Financial		$	554,763				15.05	%		$	294,975				8.0	%		not applicable
Pinnacle National		$	482,745				13.12	%		$	294,355				8.0	%		$	371,841				10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial		$	496,187				13.46	%		$	147,488				4.0	%		not applicable
Pinnacle National		$	424,265				11.53	%		$	147,177				4.0	%		$	223,104				6.0	%
Tier I capital to average assets (*):
Pinnacle Financial		$	496,187				10.45	%		$	190,013				4.0	%		not applicable
Pinnacle National		$	424,265				8.95	%		$	189,691				4.0	%		$	237,114				5.0	%