UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

     (mark one)

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

For the quarterly period ended June 30, 2008

or

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

For the transition period from ____ to ____

Commission File Number: 000-31225

, Inc.

 

(Exact name of registrant as specified in its charter)

Tennessee		62-1812853
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
211 Commerce Street, Suite 300, Nashville, Tennessee		37201
(Address of principal executive offices)		(Zip Code)

(615) 744-3700

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Yes x		No o

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

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

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

Yes o		No x

As of July 31, 2008 there were 23,597,090 shares of common stock, $1.00 par value per share, issued and outstanding.

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

TABLE OF CONTENTS

		Page No.
PART I — Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)			2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			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			48
Item 3. Defaults Upon Senior Securities			48
Item 4. Submission of Matters to a Vote of Security Holders			48
Item 5. Other Information			49
Item 6. Exhibits			49
Signatures			50
EX-31.1 Section 302 Certification of the CEO
EX-31.2 Section 302 Certification of the CFO
EX-32.1 Section 906 Certification of the CEO
EX-32.2 Section 906 Certification of the CFO

FORWARD-LOOKING STATEMENTS

Pinnacle Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make written or oral statements, including statements contained in this report which may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Pinnacle Financial’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors are described in “Item 1A. Risk Factors” of Pinnacle Financial’s Annual Report on Form 10K for the fiscal year ended December 31, 2007 and include, without limitation, (i) unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) increased competition with other financial institutions, (iii) lack of sustained growth in the economy in the Nashville and Knoxville, Tennessee MSA’s, (iv) rapid fluctuations or unanticipated changes in interest rates, (v) the inability of our bank subsidiary, Pinnacle National Bank, to satisfy regulatory requirements for its expansion plans, and (vi) changes in state or federal legislation or regulations applicable to financial service providers, including banks. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to Pinnacle Financial.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2008				2007
ASSETS
Cash and noninterest-bearing due from banks		$	77,109,394			$	76,941,931
Interest-bearing due from banks			1,758,085				24,706,966
Federal funds sold			66,342,642				20,854,966
Cash and cash equivalents			145,210,121				122,503,863
Securities available-for-sale, at fair value			509,972,917				495,651,939
Securities held-to-maturity (fair value of $11,161,323 and $26,883,473 at June 30, 2008 and December 31, 2007, respectively)			11,241,469				27,033,356
Mortgage loans held-for-sale			16,507,630				11,251,652
Loans			3,032,272,183				2,749,640,689
Less allowance for loan losses			(31,788,776	)			(28,470,207	)
Loans, net			3,000,483,407				2,721,170,482
Premises and equipment, net			67,096,558				68,385,946
Other investments			25,208,539				22,636,029
Accrued interest receivable			16,185,503				18,383,004
Goodwill			241,988,969				243,573,636
Core deposit intangible, net			17,177,922				17,325,988
Other assets			54,981,917				46,254,566
Total assets		$	4,106,054,952			$	3,794,170,461
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest-bearing		$	438,458,200			$	400,120,147
Interest-bearing			390,956,511				410,661,187
Savings and money market accounts			719,961,996				742,354,465
Time			1,603,136,919				1,372,183,317
Total deposits			3,152,513,626				2,925,319,116
Securities sold under agreements to repurchase			183,188,428				156,070,830
Federal Home Loan Bank advances and other borrowings			187,314,802				141,666,133
Subordinated debt			82,476,000				82,476,000
Accrued interest payable			8,328,868				10,374,538
Other liabilities			10,523,794				11,653,550
Total liabilities			3,624,345,518				3,327,560,167
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, par value $1.00; 90,000,000 shares authorized; 22,587,564 issued and outstanding at June 30, 2008 and 22,264,817 issued and outstanding at December 31, 2007			22,587,564				22,264,817
Additional paid-in capital			393,742,295				390,977,308
Retained earnings			67,577,903				54,150,679
Accumulated other comprehensive loss, net of taxes			(2,198,328	)			(782,510	)
Total stockholders’ equity			481,709,434				466,610,294
Total liabilities and stockholders’ equity		$	4,106,054,952			$	3,794,170,461

See accompanying notes to consolidated financial statements.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Interest income:
Loans, including fees		$	42,227,538			$	30,555,889			$	87,619,700			$	59,533,113
Securities:
Taxable			4,792,481				3,394,359				9,429,758				6,740,479
Tax-exempt			1,339,732				693,417				2,690,769				1,362,936
Federal funds sold and other			414,118				864,198				1,195,035				1,610,577
Total interest income			48,773,869				35,507,863				100,935,262				69,247,105
Interest expense:
Deposits			17,719,109				14,456,629				38,804,742				27,993,892
Securities sold under agreements to repurchase			567,090				1,890,743				1,399,143				3,602,834
Federal funds purchased and other borrowings			2,805,541				1,499,436				5,690,127				2,906,896
Total interest expense			21,091,740				17,846,808				45,894,012				34,503,622
Net interest income			27,682,129				17,661,055				55,041,250				34,743,483
Provision for loan losses			2,787,470				899,998				4,378,593				1,687,964
Net interest income after provision for loan losses			24,894,659				16,761,057				50,662,657				33,055,519
Noninterest income:
Service charges on deposit accounts			2,684,486				1,920,085				5,258,223				3,717,234
Investment sales commissions			1,220,247				850,207				2,488,495				1,584,767
Insurance sales commissions			589,488				628,953				1,653,151				1,265,915
Gain on loans and loan participations sold, net			879,824				638,895				1,535,912				1,002,201
Net gain on sale of premises			1,010,881				—				1,010,881				56,078
Trust fees			531,458				425,205				1,036,458				845,495
Other noninterest income			2,142,101				1,088,172				4,442,768				2,105,410
Total noninterest income			9,058,485				5,551,517				17,425,888				10,577,100
Noninterest expense:
Compensation and employee benefits			12,502,540				8,794,853				26,369,277				17,061,354
Equipment and occupancy			3,226,932				2,412,528				7,503,205				4,577,230
Marketing and other business development			478,507				430,291				854,378				682,026
Postage and supplies			843,287				524,197				1,491,627				979,114
Amortization of core deposit intangible			758,033				515,755				1,524,066				1,031,508
Other noninterest expense			3,916,573				1,806,680				6,369,214				3,276,764
Merger related expense			1,349,276				—				4,455,039				—
Total noninterest expense			23,075,148				14,484,304				48,566,806				27,607,996
Income before income taxes			10,877,996				7,828,270				19,521,739				16,024,623
Income tax expense			2,916,863				2,402,405				5,495,816				4,996,918
Net income		$	7,961,133			$	5,425,865			$	14,025,923			$	11,027,705
Per share information:
Basic net income per common share		$	0.36			$	0.35			$	0.63			$	0.71
Diluted net income per common share		$	0.34			$	0.33			$	0.60			$	0.66
Weighted average shares outstanding:
Basic			22,356,667				15,494,522				22,248,292				15,464,151
Diluted			23,629,234				16,664,213				23,519,844				16,640,977

See accompanying notes to consolidated financial statements.

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

																		Accumulated
		Common Stock								Additional								Other				Total
										Paid-in				Retained				Comprehensive				Stockholders’
		Shares				Amount				Capital				Earnings				Loss				Equity
Balances, December 31, 2006			15,446,074			$	15,446,074			$	211,502,516			$	31,109,324			$	(2,040,893	)		$	256,017,021
Exercise of employee common stock options and related tax benefits			70,981				70,981				525,216				—				—				596,197
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan			28,526				28,526				(28,526	)			—				—				—
Compensation expense for restricted shares			—				—				121,747				—				—				121,747
Compensation expense for stock options			—				—				801,705				—				—				801,705
Comprehensive income:
Net income			—				—				—				11,027,705				—				11,027,705
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit of $1,285,456			—				—				—				—				(3,369,881	)			(3,369,881	)
Total comprehensive income																							7,657,824
Balances, June 30, 2007			15,545,581			$	15,545,581			$	212,922,658			$	42,137,029			$	(5,410,774	)		$	265,194,494
Balances, December 31, 2007			22,264,817			$	22,264,817			$	390,977,308			$	54,150,679			$	(782,510	)		$	466,610,294
Cumulative effect of change in accounting principle due to adoption of EITF 06-4, net of tax			—				—				—				(598,699	)			—				(598,699	)
Exercise of employee common stock options and stock appreciation rights and common stock warrants and related tax benefits			176,504				176,504				1,895,359				—				—				2,071,863
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan			146,243				146,243				(146,243	)			—				—				—
Compensation expense for restricted shares			—				—				42,625				—				—				42,625
Compensation expense for stock options			—				—				973,246				—				—				973,246
Comprehensive income:
Net income			—				—				—				14,025,923				—				14,025,923
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit of $862,728			—				—				—				—				(1,415,818	)			(1,415,818	)
Total comprehensive income																							12,610,105
Balances, June 30, 2008			22,587,564			$	22,587,564			$	393,742,295			$	67,577,903			$	(2,198,328	)		$	481,709,434

See accompanying notes to consolidated financial statements.

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

		Six months ended
		June 30,
		2008				2007
Operating activities:
Net income		$	14,025,923			$	11,027,705
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net amortization of premium on securities			372,333				256,167
Depreciation and net amortization			3,013,790				1,040,380
Provision for loan losses			4,378,593				1,687,964
Gains on loans and loan participations sold, net			(1,535,912	)			(1,002,201	)
Net gains on sale of premises			(1,010,881	)			(56,078	)
Stock-based compensation expense			1,015,871				923,452
Deferred tax expense (benefit)			636,941				(328,621	)
Other			242,260				—
Excess tax benefit from stock compensation			(400,435	)			(94,640	)
Mortgage loans held for sale:
Loans originated			(143,182,739	)			(81,770,437	)
Loans sold			139,449,854				83,242,466
Decrease in other assets			7,946,519				1,263,176
Decrease in other liabilities			(4,239,365	)			(3,561,695	)
Net cash provided by operating activities			20,712,752				12,627,638
Investing activities:
Activities in securities available-for-sale:
Purchases			(105,649,364	)			(19,457,551	)
Sales			—				—
Maturities, prepayments and calls			88,719,393				20,329,160
Activities in securities held-to-maturity:
Purchases			—				—
Sales			—				—
Maturities, prepayments and calls			15,750,000				150,000
Increase in loans, net			(297,159,343	)			(164,558,472	)
Purchases of premises and equipment and software			(4,331,291	)			(3,647,382	)
Proceeds from the sale of premises and equipment and software			2,821,702				278,278
Investments in unconsolidated subsidiaries and other entities			(2,093,733	)			(823,474	)
Net cash used in investing activities			(301,942,636	)			(167,729,441	)
Financing activities:
Net increase in deposits			228,641,510				175,588,408
Net increase (decrease) in securities sold under agreements to repurchase			27,117,598				(573,178	)
Net (decrease) increase in Federal funds purchased			(39,862,000	)			20,000,000
Advances from Federal Home Loan Bank:
Issuances			85,225,925				45,000,000
Payments			(8,607,114	)			(72,027,219	)
Net increase in borrowings under lines of credit			9,000,000				—
Exercise of common stock options			2,019,788				501,557
Excess tax benefit from stock compensation			400,435				94,640
Net cash provided by financing activities			303,936,142				168,584,208
Net increase in cash and cash equivalents			22,706,258				13,482,405
Cash and cash equivalents, beginning of period			122,503,863				92,518,850
Cash and cash equivalents, end of period		$	145,210,121			$	106,001,255

See accompanying notes to consolidated financial statements.

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

Note 1. Summary of Significant Accounting Policies

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

     In addition to Pinnacle National, Pinnacle Financial, for the time period following its merger with Mid-America Bancshares, Inc. (“Mid-America”) on November 30, 2007 through February 29, 2008, conducted banking operations through the two banks formerly owned by Mid-America: PrimeTrust Bank in Nashville, Tennessee and Bank of the South in Mt. Juliet, Tennessee. On February 29, 2008, Pinnacle National purchased all of the assets and assumed all of the liabilities of PrimeTrust Bank and contemporaneously, through a series of transactions, sold the PrimeTrust Bank charter and rights to operate a branch in Tennessee to an unaffiliated out-of-state third party for $500,000. Pinnacle Financial also merged Bank of the South into Pinnacle National on that date. References to Pinnacle National as of December 31, 2007 include PrimeTrust Bank and Bank of the South.

     Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in the 2007 Annual Report previously filed on Form 10-K.

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

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

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

		For the six months ended June 30,
		2008				2007
Cash Payments:
Interest		$	45,403,484			$	35,975,282
Income taxes			3,700,000				7,850,000
Noncash Transactions:
Loans charged-off to the allowance for loan losses			1,786,464				552,180
Loans foreclosed upon with repossessions transferred to other assets			13,880,435				110,570
Net unrealized holding gains on available-for-sale securities, net of deferred tax benefit			1,415,818				3,369,881

     Income Per Common Share — Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average shares outstanding was

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

attributable to common stock options, common stock appreciation rights, warrants and restricted shares. The dilutive effect of outstanding options, common stock appreciation rights, warrants and restricted shares is reflected in diluted earnings per share by application of the treasury stock method.

     As of June 30, 2008, there were 2,365,000 stock options and 14,000 stock appreciation rights outstanding to purchase common shares. As of June 30, 2007, there were 1,902,000 stock options outstanding to purchase common shares. Most of these options and stock appreciation rights have exercise prices, which when considered in relation to the average market price of Pinnacle Financial’s common stock, are considered dilutive and are considered in Pinnacle Financial’s diluted income per share calculation for the three and six months ended June 30, 2008 and 2007. There were common stock options of 633,000 and 221,000 outstanding as of June 30, 2008 and 2007, respectively, which were considered anti-dilutive and thus have not been considered in the diluted earnings per share calculations below. Additionally, as of June 30, 2008 and 2007, Pinnacle Financial had outstanding warrants to purchase 370,000 and 395,000, respectively, of common shares which have been considered in the calculation of Pinnacle Financial’s diluted net income per share for three and six months ended June 30, 2008 and 2007.

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

		For the three months ended June 30,								For the six months ended June 30,
		2008				2007				2008				2007
Basic earnings per share calculation:
Numerator - Net income		$	7,961,133			$	5,425,865			$	14,025,923			$	11,027,705
Denominator - Average common shares outstanding			22,356,667				15,494,522				22,248,292				15,464,151
Basic net income per share		$	0.36			$	0.35			$	0.63			$	0.71
Diluted earnings per share calculation:
Numerator - Net income		$	7,961,133			$	5,425,865			$	14,025,923			$	11,027,705
Denominator - Average common shares outstanding			22,356,667				15,494,522				22,248,292				15,464,151
Dilutive shares contingently issuable			1,272,567				1,169,691				1,271,552				1,176,826
Average diluted common shares outstanding			23,629,234				16,664,213				23,519,844				16,640,977
Diluted net income per share		$	0.34			$	0.33			$	0.60			$	0.66

Newly Adopted Accounting Pronouncements

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

     Fair Value Measurement - In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157 (“SFAS 157”), “Fair Value Measurements” — SFAS 157, which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. The definition of fair value focuses on the

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

exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The effective date for SFAS No. 157 is for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Pinnacle Financial partially adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities. The partial adoption of SFAS 157 had no impact on the consolidated financial statements of Pinnacle Financial. SFAS 157 has not been applied to nonfinancial assets and liabilities pursuant to FSP FAS 157-2. This standard is applicable for nonfinancial assets and liabilities for fiscal periods beginning after November 30, 2008. There was no cumulative adjustment required upon partial adoption of SFAS 157.

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

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

Valuation Hierarchy

     SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.

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

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

Assets

     Securities — Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or

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

discounted cash flows. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy.

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

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

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

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

Liabilities

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

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

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

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

										Internal
		Total								models with				Internal models
		carrying				Quoted				significant				with significant
		value in the				market prices				observable				unobservable
		consolidated				in an active				market				market
		balance sheet				market				parameters				parameters
						(Level 1)				(Level 2)				(Level 3)
Available-for-sale securities		$	509,973			$	—			$	509,973			$	—
Mortgage loans held-for-sale			16,508				—				16,508				—
Other investments			1,476				—				—				1,476
Other assets			35,870				—				808				35,062
Total assets at fair value		$	563,827			$	—			$	527,289			$	36,538
Other liabilities			865				—				865				—
Total liabilities at fair value		$	865			$	—			$	865			$	—

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

										Internal
		Total								models with				Internal models
		carrying				Quoted				significant				with significant
		value in the				market prices				observable				unobservable
		consolidated				in an active				market				market
		balance sheet				market				parameters				parameters
						(Level 1)				(Level 2)				(Level 3)
Impaired loans		$	13,067			$	—			$	—			$	13,067
Total assets at fair value		$	13,067			$	—			$	—			$	13,067
Other liabilities			—				—				—				—
Total liabilities at fair value		$	—			$	—			$	—			$	—

Changes in level 3 fair value measurements

     The table below includes a rollforward of the balance sheet amounts for the second quarter of 2008 (including the change in fair value) for financial instruments classified by Pinnacle Financial within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

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

Six months ended June 30, 2008 (in thousands)		Assets				Liabilities
Fair value, January 1, 2008		$	35,336			$	—
Total realized and unrealized gains included in income			437				—
Purchases, issuances and settlements, net			765				—
Transfers in and/or out of level 3			—				—
Fair value, June 30, 2008		$	36,538			$	—
Total unrealized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at June 30, 2008		$	437			$	—

Note 2. Merger with Mid-America Bancshares, Inc.

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

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

						Changes in
						purchase price
		November 30, 2007				allocation				Revised November
		purchase price				recorded during				30, 2007 purchase
Mid-America Purchase Price Allocation (1)		allocation				first half of 2008				price allocation
Cash and cash equivalents		$	60,795			$	—			$	60,795
Investment securities — available-for-sale			147,766				—				147,766
Loans, net of an allowance for loan losses of $8,695			855,887				—				855,887
Goodwill			129,334				(1,585	)			127,749
Core deposit intangible			8,085				1,351				9,436
Other assets			49,854				139				49,993
Total assets acquired			1,251,721				(95	)			1,251,626
Deposits			957,076				—				957,076
Federal Home Loan Bank advances			61,383				—				61,383
Other liabilities			27,107				79				27,186
Total liabilities assumed			1,045,566				79				1,045,645
Total consideration paid for Mid-America		$	206,155			$	(174	)		$	205,981

     In accordance with SFAS Nos. 141 and 142, Pinnacle Financial has preliminarily recognized $9.4 million as a core deposit intangible through June 30, 2008. This identified intangible is being amortized over ten years using an accelerated method which anticipates the life of the underlying deposits to which the intangible is attributable. For the three and six months ended June 30, 2008, approximately $264,000 and $537,000 was recognized in the accompanying consolidated statement of income as other

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

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

     At November 30, 2007, Pinnacle Financial also recorded other adjustments to the carrying value of Mid-America’s assets and liabilities in order to reflect the fair value at the date of acquisition. The discounts and premiums related to financial assets and liabilities are being accreted and amortized into the consolidated statements of income using a method that approximates the level yield over the anticipated lives of the underlying financial assets or liabilities. For the three and six months ended June 30, 2008, the accretion and amortization of the fair value discounts and premiums related to the acquired assets and liabilities increased net interest income by approximately $700,000 and $1.8 million, respectively. Based on the estimated useful lives of the acquired loans, deposits and FHLB advances, Pinnacle Financial will recognize increases in net interest income related to accretion of these purchase accounting adjustments of $2.11 million in future periods.

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

		Six months ended June 30,
		2008				2007
		(unaudited)
Pro Forma Income Statements:
Net interest income		$	53,640			$	52,570
Provision for loan losses			4,379				2,288
Noninterest income			17,426				14,538
Noninterest expense			48,551				42,677
Net income before taxes			18,136				22,143
Income tax expense			4,952				7,114
Net income		$	13,184			$	15,029
Pro Forma Per Share Information:
Basic net income per common share		$	0.59			$	0.68
Diluted net income per common share		$	0.56			$	0.64
Weighted average shares outstanding:
Basic			22,248,292				22,140,731
Diluted			23,519,844				23,317,557

     During the three and six months ended June 30, 2008, Pinnacle Financial incurred merger integration expense related to the merger with Mid-America of $1,349,000 and $4,455,000, respectively. These expenses were directly related to the merger and consisted primarily of retention awards and costs to integrate systems and are reflected on the accompanying consolidated statement of income as merger related expense.

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

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 June 30, 2008 and December 31, 2007 are summarized as follows:

		June 30, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			48,508,439				197,150				208,772				48,496,817
Mortgage-backed securities			338,351,273				1,102,364				3,803,162				335,650,475
State and municipal securities			124,849,787				870,640				1,767,631				123,952,796
Corporate notes and other			1,912,623				581				40,375				1,872,829
		$	513,622,122			$	2,170,735			$	5,819,940			$	509,972,917
Securities held-to-maturity:
U.S. government agency securities		$	1,997,776			$	—			$	15,198			$	1,982,578
State and municipal securities			9,243,693				7,325				72,273				9,178,745
		$	11,241,469			$	7,325			$	87,471			$	11,161,323

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

     At June 30, 2008, approximately $502.3 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)

     At June 30, 2008 and December 31, 2007, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized loss of less than twelve months or twelve months or longer:

		Investments with an
		Unrealized Loss of less than								Investments with an Unrealized								Total Investments with an
		12 months								Loss of 12 months or longer								Unrealized Loss
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
At June 30, 2008:
U.S. government agency securities		$	25,839,975			$	221,754			$	—			$	—			$	25,839,975			$	221,754
Mortgage-backed securities			217,684,301				3,227,306				22,780,968				578,342				240,465,269				3,805,648
State and municipal securities			84,722,135				1,643,846				4,881,467				196,058				89,603,602				1,839,904
Corporate notes			—				—				949,605				40,375				949,605				40,375
Total temporarily-impaired securities		$	328,246,411			$	5,092,906			$	28,612,040			$	814,775			$	356,858,451			$	5,907,681
At December 31, 2007:
U.S. government agency securities		$	13,942,078			$	25,198			$	2,985,600			$	14,400			$	16,927,678			$	39,598
Mortgage-backed securities			51,240,090				181,098				97,593,453				1,260,537				148.833.543				1.441.635
State and municipal securities			54,467,544				1,193,763				35,481,739				486,071				89,949,283				1,679,834
Corporate notes			527,115				300				1,451,108				37,260				1,978,223				37,560
Total temporarily-impaired securities		$	120,176,827			$	1,400,359			$	137,511,900			$	1,798,268			$	257,688,727			$	3,198,627

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

Note 4. Loans and Allowance for Loan Losses

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

		At June 30,				At December 31,
		2008				2007
Commercial real estate — Mortgage		$	831,828,849			$	710,545,533
Consumer real estate — Mortgage			587,025,080				539,768,302
Construction and land development			632,764,382				582,958,584
Commercial and industrial			886,655,914				794,419,213
Consumer and other			93,997,958				121,949,057
Total Loans			3,032,272,183				2,749,640,689
Allowance for loan losses			(31,788,776	)			(28,470,207	)
Loans, net		$	3,000,483,407			$	2,721,170,482

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

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

		June 30, 2008				December 31, 2007
Balance at beginning of period		$	28,470,207			$	16,117,978
Charged-off loans			(1,786,464	)			(1,341,890	)
Recovery of previously charged-off loans			726,440				279,491
Allowance from Mid-America acquisition			—				8,694,787
Provision for loan losses			4,378,593				4,719,841
Balance at end of period		$	31,788,776			$	28,470,207

     At June 30, 2008 and at December 31, 2007, Pinnacle Financial had impaired loans on nonaccruing interest status. The principal balance of these nonaccrual loans amounted to $13,067,000 and $19,677,000 at June 30, 2008 and December 31, 2007, respectively. In each case, at the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had nonaccruing loans been on accruing status, interest income would have been higher by $624,000 and $230,000 for the six months ended June 30, 2008 and 2007, respectively.

     At June 30, 2008, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $28,730,000 to directors, executive officers, and their related entities, of which $20,618,000 had been drawn upon. During the six months ended June 30, 2008, $2,340,000 of loan and other commitment increases and $1,263,000 of principal and other reductions were made by directors, executive officers, and their related entities. The terms on these loans and extensions are on substantially the same terms customary for other persons for the type of loan involved. None of these loans to directors, executive officers, and their related entities, were impaired at June 30, 2008.

     During the three and six months ended June 30, 2008 and 2007, Pinnacle Financial sold participations in certain loans to correspondent banks at an interest rate that was less than that of the borrower’s rate of interest. In accordance with U.S. generally accepted accounting principles, Pinnacle Financial recognized a net gain on the sale of these participated loans for the six months ended June 30, 2008 and 2007 of approximately $13,000 and $212,000, respectively, which is attributable to the present value of the future net cash flows of the difference between the interest payments the borrower is projected to pay Pinnacle Financial and the amount of interest that will be owed the correspondent bank based on their participation in the loans. Net gains recognized for the three months ended June 30, 2008 and 2007 were $8,000 and $167,000, respectively. At June 30, 2008, Pinnacle Financial was servicing $132 million of loans for correspondent banks and other entities, of which $125 million were commercial loans.

Note 5. Income Taxes

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

		For the three months								For the six months
		ended June 30,								ended June 30,
		2008				2007				2008				2007
Income taxes at statutory rate		$	3,807,299			$	2,739,894			$	6,832,609			$	5,608,618
State tax (benefit) expense, net of Federal tax effect			(143,947	)			32,546				(158,804	)			90,410
Federal tax credits			(122,375	)			(90,000	)			(180,000	)			(180,000	)
Tax-exempt securities			(552,903	)			(202,123	)			(849,521	)			(398,730	)
Bank owned life insurance			(153,282	)			(46,654	)			(234,379	)			(94,788	)
Insurance premiums			(144,351	)			(102,431	)			(207,535	)			(204,861	)
Other items			226,422				71,173				293,446				176,269
Income tax expense		$	2,916,863			$	2,402,405			$	5,495,816			$	4,996,918

     The effective tax rate for 2008 and 2007 is impacted by Federal tax credits related to the New Markets Tax Credit program whereby a subsidiary of Pinnacle National has been awarded approximately $2.3 million in future Federal tax credits which are available through 2010. Tax benefits related to these credits will be recognized for financial reporting purposes in the same periods

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

that the credits are recognized in the Company’s income tax returns. The credit that was available for the years ended December 31, 2008 and 2007 was $360,000. Pinnacle Financial believes that it will comply with the various regulatory provisions of the New Markets Tax Credit program, and therefore has reflected the impact of the credits in its estimated annual effective tax rate for 2008 and 2007.

Note 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, 2008 is as follows:

Commitments to extend credit		$	823,752,000
Standby letters of credit			89,153,000

     Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at June 30, 2008 will not have a material impact on Pinnacle Financial’s financial statements.

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

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

     Visa completed an initial public offering (IPO) in March 2008. Visa used a portion of the proceeds from the IPO to establish a $3.0 billion escrow for settlement of covered litigation and used substantially all of the remaining portion to redeem class B and class C shares held by Visa issuing members. During the three months ended March 31, 2008, Pinnacle Financial recognized a pre-tax gain of $140,000 on redemption proceeds received from Visa, Inc. and reversed $63,000 of the $145,000 litigation expense recognized as its pro-rata share of the $3.0 billion escrow funded by Visa, Inc. The timing for ultimate settlement of all covered litigation is not determinable at this time. There were no further developments during the three months ended June 30, 2008.

Note 7. Equity Compensation

     Pinnacle Financial has two equity incentive plans under which it has granted stock options to its employees to purchase common stock at or above the fair market value on the date of grant and granted restricted share awards to employees and directors. At June 30, 2008, there were 448,183 shares available for issue under these plans.

     During the first quarter of 2006 and in connections with its merger with Cavalry, Pinnacle Financial assumed a third equity incentive plan, the 1999 Cavalry Bancorp, Inc. Stock Option Plan (the “Cavalry Plan”). All options granted under the Cavalry Plan were fully vested prior to Pinnacle Financial’s merger with Cavalry and expire at various dates between January 2011 and June 2012. In connection with the merger, all options to acquire Cavalry common stock were converted to options to acquire Pinnacle Financial’s common stock at the 0.95 exchange ratio. The exercise price of the outstanding options under the Cavalry Plan was adjusted using the same exchange ratio. All other terms of the Cavalry options were unchanged. There were 195,551 Pinnacle shares which could be acquired by the participants in the Cavalry Plan at exercise prices that ranged between $10.26 per share and $13.68 per share.

     On November 30, 2007 and in connection with its merger with Mid-America, Pinnacle Financial assumed several equity incentive plans, including the Mid-America Bancshares, Inc. 2006 Omnibus Equity Incentive Plan (the “Mid-America Plans”). All options and stock appreciation rights granted under the Mid-America Plans were fully vested prior to Pinnacle Financial’s merger with Mid-America and expire at various dates between June 2011 and July 2017. In connection with the merger, all options and stock appreciation rights to acquire Mid-America common stock were converted to options or stock appreciation rights, as applicable, to acquire Pinnacle Financial common stock at the 0.4655 exchange ratio. The exercise price of the outstanding options and stock appreciation rights under the Mid-America Plans were adjusted using the same exchange ratio with the exercise price also being reduced by $1.50 per share. All other terms of the Mid-America options and stock appreciation rights were unchanged. There were 487,835 Pinnacle shares which could be acquired by the participants in the Mid-America Plan at exercise prices that ranged between $6.63 per share and $21.37 per share. At June 30, 2008, there were 88,435 shares available for issue under the Mid-America Plans.

     As of June 30, 2008, of the approximately 2,366,000 stock options and 14,000 stock appreciation rights outstanding, 1,345,587 options were granted with the intention to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment to the option holder while 1,034,281 options would be deemed non-qualified stock options or stock appreciation rights and thus not subject to favorable tax treatment to the option holder. All stock options granted under the Pinnacle equity incentive plans vest in equal increments over five years from the date of grant and are exercisable over a period of ten years from the date of grant. All stock options and stock appreciation rights granted under the Cavalry Plan and Mid-America Plans were fully vested at the date of those mergers.

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

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

										Weighted-
										Average
						Weighted-				Contractual				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Term				Value (1)
		Number				Price				(in years)				(000’s)
Outstanding at December 31, 2007			2,398,823			$	16.84				6.9			$	23,784
Granted			163,360				21.51
Exercised (2)			(153,190	)			7.58
Forfeited			(29,125	)			27.68
Outstanding at June 30, 2008			2,379,868				17.28				6.6			$	14,450
Outstanding and expected to vest as of June 30, 2008			2,340,014				17.11				6.6			$	14,419
Options exercisable at June 30, 2008			1,636,615				12.27				5.7			$	13,431

     During the six months ended June 30, 2008, 184,628 option awards vested at an average exercise price of $23.08 and an intrinsic value of approximately $3.4 million. On January 18, 2008, Pinnacle Financial granted options to purchase 163,360 common shares to certain employees at an exercise price of $21.51 per share. These options, which were issued as non-qualified stock options, will vest in varying increments over five years beginning one year after the date of the grant and are exercisable over a period of ten years from the date of grant. Pursuant to SAB 110, “Share-Based Payment,” Pinnacle Financial will continue to use the simplified method for estimating the expense of stock compensation during 2008.

     During the six months ended June 30, 2008, the aggregate intrinsic value of options and stock appreciation rights exercised was $2.4 million determined as of the date of exercise. As of June 30, 2008, there was approximately $6.4 million of total unrecognized compensation cost related to unvested stock options granted. That cost is expected to be recognized over a weighted-average period of 2.9 years.

     During the six months ended June 30, 2008 and 2007, Pinnacle Financial recorded stock-based compensation expense of $1,016,000 and $923,000, respectively using the Black-Scholes valuation model for awards granted prior to, but not yet vested, as of January 1, 2006 and for stock-based awards granted after January 1, 2006. For these awards, Pinnacle Financial has recognized compensation expense using a straight-line amortization method. Stock-based compensation expense has been reduced for estimated forfeitures.

     The fair value of options granted for each of the six month periods ended June 30, 2008 and 2007 was estimated using the Black-Scholes option pricing model and the following assumptions:

		2008				2007
Risk free interest rate			3.20	%			4.63	%
Expected life of options		6.50 years				6.50 years
Expected dividend yield			0.00	%			0.00	%
Expected volatility			24.6	%			20.8	%
Weighted average fair value		$	7.07			$	10.13