Pinnacle Financial Reports Record Loan Growth, Strong Asset Quality and Earnings of $0.36 Per Fully Diluted Share for Third Quarter of 2008

Pinnacle Financial Partners Inc. (Nasdaq/NGS: PNFP) today reported strong earnings and record loan growth for the quarter ended Sept. 30, 2008. Fully diluted earnings per share were $0.36 for the quarter ended Sept. 30, 2008, compared to $0.35 per fully diluted share for the quarter ended Sept. 30, 2007. Excluding merger-related expense associated with its Nov. 30, 2007, acquisition of Mid-America Bancshares Inc., fully diluted earnings per share were $0.39 for the quarter ended Sept. 30, 2008, compared to $0.35 for the same period last year, an increase of 11.4 percent.

Fully diluted earnings per share were $0.96 for the nine months ended Sept. 30, 2008, compared to $1.01 per fully diluted share for the nine months ended Sept. 30, 2007. Excluding merger-related expense associated with the Mid-America acquisition, fully diluted earnings per share were $1.10 for the nine months ended Sept. 30, 2008, compared to $1.01 for the same period last year, an increase of 8.9 percent.

Pinnacle also reported a record $171 million in organic loan growth in the third quarter of 2008, a 150 percent increase over the $68 million reported in the same quarter of 2007. The growth in loans contributed to a significantly higher provision for loan loss expense for the third quarter of 2008 when compared to the same quarter last year. Also contributing to a higher provision for loan losses during the third quarter of 2008 was an increased allowance for loan losses. At Sept. 30, 2008, Pinnacle increased its allowance for loan losses to 1.09 percent of total loans compared to 1.04 percent at June 30, 2007.

"At a time when many banks have lost their ability to continue the growth of their balance sheet, we are proud that we were not only able to report record earnings and record loan growth, but were also able to augment capital which should enable us to continue to seize the dramatic market share movement opportunities that we believe exist in our markets,” said M. Terry Turner, Pinnacle president and CEO.

THIRD QUARTER 2008 HIGHLIGHTS:

• Strong earnings
  • Net income for the third quarter of 2008 was $8.80 million, up 52.4 percent from the prior year’s third quarter net income of $5.77 million. Excluding after-tax merger-related expense of $708,000, net income was $9.50 million in the third quarter of 2008, up 64.6 percent over the same period last year.

• Revenue (the sum of net interest income and noninterest income) for the quarter ended Sept. 30, 2008, amounted to $38.53 million, compared to $24.29 million for the same quarter of last year, an increase of 58.6 percent.

• Continued balance sheet growth
  • Loans at Sept. 30, 2008, were $3.20 billion, up $1.47 billion from $1.73 billion at Sept. 30, 2007. This 12-month increase in loans includes $864 million in loans acquired in conjunction with the Mid-America merger and organic growth of $608 million, representing an organic growth rate of 35.1 percent.
  • Total deposits at Sept. 30, 2008, were $3.30 billion, up $1.47 billion from $1.83 billion at Sept. 30, 2007. This 12-month increase includes $957 million in deposits acquired in conjunction with the Mid-America merger and organic growth of $511 million, representing an organic growth rate of 28.0 percent.
• Superior credit quality
  • Annualized net charge-offs as a percentage of average loan balances were only 0.01 percent and 0.05 percent for the three and nine months ended Sept. 30, 2008, respectively, compared to 0.04 percent and 0.05 percent for the three and nine months ended Sept. 30, 2007, respectively.
  • Nonperforming assets were 0.93 percent of total loans and other real estate at Sept. 30, 2008, compared to 0.73 percent at June 30, 2008, 0.78 percent at Dec. 31, 2007, and 0.19 percent at Sept. 30, 2007. Approximately $13.03 million of the $29.89 million of nonperforming assets at Sept. 30, 2008, were acquired in connection with the Mid-America acquisition.
  • Past due loans over 30 days, excluding nonperforming loans, were 0.61 percent of total loans and other real estate at Sept. 30, 2008. Past due loans over 30 days excluding nonperforming loans, as a percentage of total loans and other real estate owned were 0.34 percent at June 30, 2008, 0.45 percent at Dec. 31, 2007, and 0.38 percent at Sept. 30, 2007.
• Strong Capital Position
  • During the third quarter of 2008, Pinnacle issued $21.5 million in common stock that will qualify as Tier 1 capital and $15.0 million in subordinated indebtedness that will qualify as Tier 2 capital, subject to certain limitations. These issuances strengthened Pinnacle’s capital position thus positioning it for continued rapid growth in Nashville and Knoxville.
  • At Sept. 30, 2008, Pinnacle’s ratio of tangible stockholders’ equity to tangible assets was 6.2 percent compared to 5.8 percent at Dec. 31, 2007. Pinnacle’s tangible book value per common share was $10.62 at Sept. 30, 2008, compared to $9.24 at Dec. 31, 2007.
  • At Sept. 30, 2008, Pinnacle’s total risk based capital ratio was 11.2 percent compared to 10.4 percent at Dec. 31, 2007.

"We are pleased with another quarter of solid performance, particularly during what is proving to be an extended period of economic stress for our country,” Turner said. "What sets Pinnacle apart is that our associates are not only doing an exceptional job of managing the credit risk of our firm, but they are being very successful in seizing the opportunity to attract more quality client relationships to Pinnacle. Our strategy of hiring the best financial services professionals in the markets we serve has helped us further solidify our position as the most preferred financial services provider in both the Nashville and Knoxville MSAs, as evidenced by the latest FDIC market share data for both markets.”

FINANCIAL PERFORMANCE AND BALANCE SHEET GROWTH

• Return on average assets for third quarter 2008 was 0.83 percent, compared to 0.96 percent for the third quarter of 2007. Excluding the impact of the Mid-America merger-related expense, return on average assets for the third quarter of 2008 approximated 0.90 percent.
• Return on average stockholders’ equity for the quarter ended Sept. 30, 2008, was 6.96 percent, compared to 8.43 percent for the third quarter of 2007. Excluding the impact of the Mid-America merger-related expense, return on average stockholders’ equity for the third quarter of 2008 approximated 7.52 percent.
• Return on average tangible stockholders’ equity (average stockholders’ equity less goodwill and core deposit intangibles) for the quarter ended Sept. 30, 2008, was 14.52 percent, compared to 15.57 percent for the third quarter of 2007. Excluding the impact of the Mid-America merger-related expense, return on average tangible stockholders’ equity for the third quarter of 2008 approximated 15.69 percent.

Total assets grew to $4.34 billion as of Sept. 30, 2008, up $1.97 billion from the $2.37 billion reported at the same time last year. The 12-month increase in assets includes $1.25 billion in assets acquired in conjunction with the Mid-America merger in November of last year and organic growth of $720 million, representing an organic growth rate of 30.4 percent.

CREDIT QUALITY

• Allowance for loan losses represented 1.09 percent of total loans at Sept. 30, 2008, compared to 1.05 percent as of June 30, 2008, and 1.04 percent a year ago.
  • The ratio of the allowance for loan losses to nonperforming loans was 196 percent at Sept. 30, 2008, compared to 145 percent at Dec. 31, 2007, and 761 percent at Sept. 30, 2007.
• Provision for loan losses was $3.12 million for the third quarter of 2008, compared to $772,000 in the third quarter of 2007, a 305 percent increase.
  • During the third quarter of 2008, the firm recorded net charge-offs of only $73,000, compared to net charge-offs of $169,000 during the same period in 2007. Annualized net charge-offs to total average loans were 0.05 percent for the nine months ended Sept. 30, 2008, and the nine months ended Sept. 30, 2007. Gross charge-offs were $656,000 during the third quarter of 2008, compared to $258,000 for the same period last year. Recoveries for the third quarter of 2008 were $583,000, compared to $89,000 during the third quarter of 2007.
  • The increase in provision for loan loss expense between the third quarter of 2008 and the third quarter of 2007 was primarily due to the significant increase in loan balances recorded through the third quarter of 2008 over the amount recorded through the third quarter of 2007. Also contributing to a higher provision for loan losses during the third quarter of 2008 was an increased allowance for loan losses. The annualized provision for loan losses expressed as a percentage of average loans was 0.40 percent for the third quarter of 2008, compared to 0.18 percent for the same quarter last year.

As noted above, Pinnacle reported that nonperforming loans and other real estate as a percentage of total loans and other real estate increased from 0.78 percent at Dec. 31, 2007, to 0.93 percent at Sept. 30, 2008. The following is a summary of the activity in various nonperforming asset categories for the quarter ended Sept. 30, 2008:

"Thus far this year, our net charge-off ratio has amounted to only 0.05 percent of average loans,” Turner said. "Despite this very low charge-off ratio, we increased the ratio of our allowance for loan losses to 1.09 percent of total loans based on our usual quarterly evaluation of the inherent risks in our loan portfolio and the ongoing stress in the economy. At June 30, 2008, this ratio was 1.05 percent, and the 0.04 percent increase represented approximately $1.25 million of increased provisioning for loan losses during the third quarter. Our relationship managers and credit officers have been keenly focused on resolution of our nonperforming assets as well as improving the underlying credit support of all potential problem loans. As a result, I believe we are weathering the downturn in the overall economy and, in particular, residential construction very well. However, we anticipate that the local housing market and the economy in general will continue to under perform, and, as a result, our nonperforming levels will likely remain elevated over the next several quarters.”

REVENUE

• Net interest income for third quarter 2008 was $29.28 million, compared to $18.96 million for the same quarter last year, an increase of 54.4 percent.
  • Net interest margin for the third quarter of 2008 was 3.14 percent, compared to a net interest margin of 3.54 percent for the same period last year and 3.24 percent for the second quarter of 2008.
• Noninterest income for third quarter 2008 was $9.25 million, a 73.5 percent increase over the $5.33 million recorded during the same quarter in 2007.

"Our local deposit markets remain extremely competitive, and several competitors continue to post special deposit rates at levels higher than what would typically be required given this rate environment,” said Harold Carpenter, chief financial officer of Pinnacle Financial Partners. "We have intensified our focus on pricing on both sides of our balance sheet; doing so should produce positive results for us over the longer term. Our core revenue growth continues to be very strong and, given the current volumes in our sales pipelines as well as our current capital position, we believe we are well-positioned to continue to increase market share in both Nashville and Knoxville.”

"On Oct. 8, 2008, the Federal Reserve reduced the federal funds rate by 50 basis points. Coupled with the likelihood of future rate decreases, these actions will cause additional compression of our net interest margin, particularly in the near term. Based on our internal modeling, we remain optimistic that further compression in our margins will be modest for the next few quarters.”

The 73.5 percent increase in noninterest income between the third quarter of 2007 and the third quarter of 2008 was due to several factors, including increased fee revenue as a result of the Mid-America merger; record investment sales commissions from Pinnacle Asset Management; a $695,000 gain from the sale of commercial loans; and record gains on the sales of mortgage loans from the firm’s mortgage origination unit. During the third quarter of 2008, Pinnacle’s mortgage origination unit sold $71.90 million of mortgage loans compared to $42.9 million in 2007, an increase of 67.6 percent.

Noninterest income during the third quarter of 2008 represented approximately 24.01 percent of total revenues, compared to 21.95 percent for the same quarter in 2007.

"It is a testament to the incredible competitive opportunities that exist in our market as well as the quality of our investment and mortgage advisors that we are able to accelerate the volume of investment sales and mortgage originations in this economic environment,” Turner said.

NONINTEREST EXPENSE

• Noninterest expense for the quarter ended Sept. 30, 2008, was $23.33 million ($22.16 million, excluding merger expense), compared to $23.07 million ($21.73 million, excluding merger expense) in the second quarter of 2008 and $15.11 million in the third quarter of 2007.
• Compensation expense was $13.01 million during the third quarter of 2008, compared to $12.5 million during the second quarter of 2008 and $9.11 million during the third quarter of 2007. Total full-time equivalent employees were 723.0 at Sept. 30, 2008, compared to 702.0 at Dec. 31, 2007, and 450.5 at Sept. 30, 2007.
• Merger-related expense was $1.17 million during the quarter ended Sept. 30, 2008, and was composed primarily of $1.02 million in retention bonus accruals for former Mid-America associates.
• The efficiency ratio (noninterest expense divided by net interest income and noninterest income) was 60.5 percent during the third quarter of 2008, compared to 62.8 percent for the second quarter of 2008 and 62.2 percent in the third quarter of 2007. Excluding merger-related expenses, the efficiency ratio was 57.6 percent in the third quarter of 2008.

Carpenter noted that the firm will continue to make investments in future growth and, consequently, anticipates increased noninterest expense for the last quarter of 2008 over the amount the firm has experienced during the first three quarters of 2008. The expense is primarily attributable to increasing headcount and other variable costs associated with the growth of the firm.

INVESTMENTS IN FUTURE GROWTH

• During the third quarter of 2008, Pinnacle sold one million shares of its authorized but unissued common stock via a private placement to mutual funds and certain other institutional accounts managed by T. Rowe Price Associates Inc., at $21.50 per share. Pinnacle also entered into a $15 million subordinated term loan with a regional bank. Proceeds from this sale of common stock and the subordinated term loan will be used for general corporate purposes, including supporting the continued anticipated growth of Pinnacle National Bank.
• According to the Federal Deposit Insurance Corporation Summary of Deposit data for the period from June 30, 2007, through June 30, 2008, Pinnacle continues to be the fastest-growing financial institution in the Nashville-Davidson-Murfreesboro-Franklin MSA. As of June 30, 2008, Pinnacle overtook First Tennessee as the fourth-largest financial institution in the Nashville MSA. Of the top four institutions, Pinnacle was the only bank to post a gain in market share. The three largest regional bank holding companies (Regions, Bank of America and SunTrust) collectively lost in excess of 3 percent in market share.
• Pinnacle has hired 27 highly experienced associates for its denovo expansion to Knoxville that was announced on April 9, 2007. Loans outstanding in Knoxville at Sept. 30, 2008, were $287 million, which is $57 million ahead of the original target disclosed at the time the Knoxville expansion was announced. Pinnacle has negotiated a site for construction of another full service location in the Fountain City area of Knoxville and currently expects to begin construction during the first quarter of 2009.
• Pinnacle also has initiated construction of a new Dickson County location in the Nashville MSA to replace the current temporary location. The new facility is scheduled to open in the fourth quarter of 2008. Additionally, Pinnacle has entered into an agreement to construct a new facility in Brentwood, Tenn. This facility is currently scheduled to open in the first quarter of 2010.
• On July 2, Pinnacle announced the acquisition of Murfreesboro, Tenn.-based Beach and Gentry Insurance LLC. Beach and Gentry has 18 associates and 4,000 clients. Miller & Loughry, Pinnacle’s wholly-owned insurance agency, also located in Murfreesboro, has 22 associates and 6,300 clients. The combined company, Miller Loughry Beach, is the largest independent insurance agency headquartered in Rutherford County.
• Pinnacle’s total associate base at Sept. 30, 2008, was 723.0 full-time equivalents (FTEs), compared to 450.5 at Sept. 30, 2007. Approximately 220 FTEs were added to Pinnacle’s associate base in conjunction with the Mid-America merger. Pinnacle also anticipates hiring 21 associates during the remainder of 2008.

NASHVILLE HOUSING MARKET UPDATE

The Greater Nashville Realtors Association reported residential closings were down 22.8 percent in the third quarter of 2008 in comparison to the same quarter in 2007. For the nine months ended Sept. 30, 2008, compared to the previous year, residential closings are down approximately 20.6 percent. At Sept. 30, 2008, the inventory of residential homes was approximately 8.5 months based on September 2008 closings. The average median residential home sales price for the three months ended Sept. 30, 2008, averaged $175,800, which was down 4.7 percent from the three months ended June 30, 2008.

TREASURY DEPARTMENT’S TROUBLED ASSET RELIEF PROGRAM

On Oct. 14, the U.S. Treasury Department announced a program for direct investment in United States banks, bank holding companies and other entities referred to as the "Troubled Asset Relief Program (TARP).” Turner said that Pinnacle is currently reviewing the details of the program and will be considering the specifics of the program over the next few weeks.

INVESTMENT OUTLOOK

Management has developed several financial forecast scenarios for the next several quarters. Based on anticipated growth trends and future investments in the franchise, including the impact of the Knoxville expansion, Pinnacle estimates its fourth quarter 2008 diluted earnings per share will approximate $0.33 to $0.37 including merger-related expense or $0.37 to $0.40, excluding merger-related expense. Pinnacle lowered its previous guidance for 2008 estimated diluted earnings per share to approximately $1.29 to $1.33 including merger-related expense or $1.47 to $1.50, excluding merger-related expense. The reduction in the guidance range for 2008 estimated fully diluted earnings per share reflects our expectation that loan growth, and our allowance for loan losses will exceed our earlier estimates for 2008 and that we will experience reduced net interest income for the remainder of 2008 as a result of anticipated future Federal funds rate decreases and increased deposit pricing competition.

Merger-related expense should approximate $1.2 million to $1.5 million in the fourth quarter, with substantially the entire amount being attributable to retention awards for former Mid-America associates. Pinnacle anticipates no additional Mid-America merger-related expense after 2008.

As noted previously, management has developed several scenarios under which these estimates can be achieved and believes these estimates to be reasonable based on these scenarios. However, unanticipated events or developments may cause the actual results of Pinnacle to differ materially from these estimates. Such unanticipated events or developments may include, but are not limited to; increased volatility in interest rates; deterioration in national or local economic conditions in excess of expectation; materially adverse developments in our borrowers’ ability to repay their loans; regulatory or legislative developments arising out of current unsettled conditions in the economy; the development of any markets other than metropolitan Nashville or Knoxville; any merger or acquisition; the opportunity to hire more seasoned professionals than anticipated; any activity in the capital markets that would cause Pinnacle to conclude that there was impairment of any asset including intangible assets; or the ability to grow loans significantly in excess of the levels contemplated.

"We have provided quarterly and annual earnings guidance for the past several years as we believed such information was beneficial to the investment community in their efforts to better understand our company. We now have exceptional coverage by several research analysts whose estimates are readily available through various public media. Additionally, Pinnacle has been one of the few small cap banks that has elected to continue to provide such guidance during this time of unprecedented economic uncertainty in which all financial institutions now operate. Given these factors, we currently anticipate that we will discontinue quarterly and annual earnings per share guidance with respect to periods ending after December 31, 2008,” Turner said.

Pinnacle Financial Partners provides a full range of banking, investment, mortgage and insurance products and services designed for small- to mid-sized businesses and their owners, real estate professionals and individuals interested in a comprehensive relationship with their financial institution. Comprehensive wealth management services, such as financial planning and trust, help clients increase, protect and distribute their assets. The firm also has a well-established expertise in commercial real estate.

The firm began operations in a single downtown Nashville location in October 2000 and has since grown to $4.34 billion in assets. In 2007, Pinnacle launched an expansion into Knoxville, another high growth MSA. The addition of Mid-America has made Pinnacle the second-largest bank holding company headquartered in Tennessee, with 31 offices in eight Middle Tennessee counties and two in Knoxville.

Additional information concerning Pinnacle can be accessed at www.pnfp.com.

Certain of the statements in this release may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "expect,” "anticipate,” "intend,” "plan,” "believe,” "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 facts that may cause the actual results, performance or achievements of Pinnacle to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, (i) unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) the inability of Pinnacle to continue to grow its loan portfolio at historic rates in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, (iii) increased competition with other financial institutions, (iv) lack of sustained growth in the economy in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, (v) rapid fluctuations or unanticipated changes in interest rates, and (vi) changes in state and Federal legislation or regulations applicable to Banks and other financial services providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy. Many of such factors are beyond Pinnacle’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle disclaims any obligation to update or revise any forward-looking statements contained in this release, whether as a result of new information, future events or otherwise.