Pinnacle Financial Reports Strong Loan Growth and Earnings of $0.31 Per Fully Diluted Share for Fourth Quarter of 2008

Pinnacle Financial Partners Inc. (Nasdaq/NGS: PNFP) today reported strong earnings and loan growth for the quarter ended Dec. 31, 2008. Fully diluted earnings per common share available to common stockholders were $0.31 for the quarter ended Dec. 31, 2008, compared to $0.33 per fully diluted common share available to common stockholders for the quarter ended Dec. 31, 2007. Excluding merger related expense associated with its Nov. 30, 2007, acquisition of Mid-America Bancshares Inc., fully diluted earnings per common share available to common stockholders were $0.35 for the quarters ended Dec. 31, 2008 and 2007.

Fully diluted earnings per common share available to common stockholders were $1.27 for the year ended Dec. 31, 2008, compared to $1.34 per fully diluted common share available to common stockholders for the year ended Dec. 31, 2007. Excluding merger related expense associated with the Mid-America acquisition, fully diluted earnings per common share available to common stockholders were $1.45 for the year ended Dec. 31, 2008, compared to $1.36 for the same period last year, an increase of 6.6 percent.

On Dec. 12, 2008, Pinnacle issued 95,000 shares of preferred stock to the U.S. Treasury for $95 million pursuant to the U.S. Treasury’s Capital Purchase Program (the "CPP”). Additionally, Pinnacle issued 534,910 common stock warrants to the U.S. Treasury as a condition to Pinnacle’s 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. In addition to the accrued dividend costs and the accretion of the discount recorded on the preferred stock, which totaled $309,000 during the three months and year ended Dec. 31, 2008, Pinnacle also accrued $237,000 in franchise tax expense, which will be paid to the State of Tennessee as a result of the additional capital acquired through the CPP. Pinnacle estimates that the dilutive impact of its participation in the CPP was approximately $0.02 per fully diluted common share in the fourth quarter of 2008.

Pinnacle also reported $152 million in organic loan growth during the fourth quarter of 2008, which approximated the $155 million reported in the same quarter of 2007. At Dec. 31, 2008, Pinnacle’s allowance for loan losses was 1.09 percent of total loans, compared to 1.04 percent at Dec. 31, 2007.

"We are very pleased with our fourth quarter and 2008 results,” said M. Terry Turner, Pinnacle president and chief executive officer. "While 2008 presented many challenges for our industry, we are not only pleased with the continued dramatic growth we experienced this year, but also with our solid credit quality compared to our peers. Our strong results in this difficult period are reflective of the experience of our relationship managers and are a testament to the success of our strategy to hire the best, most experienced financial professionals in our market.”

FOURTH QUARTER 2008 HIGHLIGHTS:

• Strong earnings
  • Net income for the fourth quarter of 2008 was $7.7 million, up 24.1 percent from the prior year's fourth quarter net income of $6.2 million. Excluding after-tax merger related expense of $909,000, primarily related to the accrual of associate retention bonuses, net income was $8.7 million in the fourth quarter of 2008, compared to net income of $6.6 million excluding after-tax merger related expense of $378,000 in the fourth quarter of 2007, an increase of 31.4 percent.
  • Revenue (the sum of net interest income and noninterest income) for the quarter ended Dec. 31, 2008, amounted to $37.93 million, compared to $28.62 million for the same quarter of last year, an increase of 32.5 percent.
• Continued balance sheet growth
  • Loans at Dec. 31, 2008, were $3.35 billion, up $605 million from $2.75 billion at Dec. 31, 2007, representing a growth rate of 22.0 percent.
  • Total deposits at Dec. 31, 2008, were $3.53 billion, up $608 million from $2.93 billion at Dec. 31, 2007, representing a growth rate of 20.8 percent.
• Superior credit quality
  • Net charge-offs as a percentage of average loan balances were 0.25 percent (annualized) for the three months ended Dec. 31, 2008, compared to 0.09 percent (annualized) for the three months ended Dec. 31, 2007. Net charge-offs as a percentage of average loan balances were 0.10 percent for the year ended Dec. 31, 2008, compared to 0.07 percent for the year ended Dec. 31, 2007.
  • Nonperforming assets were 0.86 percent of total loans and other real estate at Dec. 31, 2008, compared to 0.93 percent at Sept. 30, 2008, and 0.78 percent at Dec. 31, 2007. Approximately $15.08 million of the $29.17 million of nonperforming assets at Dec. 31, 2008, were acquired in connection with the Mid-America acquisition.
  • Past due loans over 30 days, excluding nonperforming loans, were 0.60 percent of total loans and other real estate at Dec. 31, 2008, 0.61 percent at Sept. 30, 2008, and 0.45 percent at Dec. 31, 2007.
• Strong capital position
  • At Dec. 31, 2008, Pinnacle’s ratio of tangible common stockholders’ equity to tangible assets was 6.1 percent, compared to 5.8 percent at Dec. 31, 2007. Pinnacle’s tangible book value per common share was $11.62 at Dec. 31, 2008, compared to $9.24 at Dec. 31, 2007.
  • At Dec. 31, 2008, Pinnacle’s total risk based capital ratio was 13.4 percent, compared to 10.4 percent at Dec. 31, 2007.

"Our company’s results reflect the underlying strength of our business model,” Turner said. "Excellent growth in loans, deposits and fee-based businesses demonstrate our competitive strength in Middle Tennessee and Knoxville and provide further evidence of the ongoing opportunity we have in these two valuable banking markets.”

As noted above, Pinnacle issued 95,000 shares of preferred stock to the U.S. Treasury on Dec. 12, 2008. The preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5 percent per annum for the first five years and 9 percent thereafter. The preferred shares are redeemable by Pinnacle only under certain circumstances during the first three years and are redeemable thereafter without restriction. As a result of Pinnacle's participation in the CPP, Pinnacle's capital ratios have been further enhanced. At Dec. 31, 2008, Pinnacle's Tier 1 risk-based capital ratio was 12.1 percent, its total risk-based capital was 13.5 percent, and its leverage ratio was 10.5 percent, compared to 9.6 percent, 10.5 percent and 8.7 percent at Dec. 31, 2007, respectively.

FINANCIAL PERFORMANCE AND BALANCE SHEET GROWTH

• Return on average assets for the fourth quarter 2008 was 0.68 percent, compared to 0.89 percent for the fourth quarter of 2007. Excluding the impact of the Mid-America merger-related expense, return on average assets for the fourth quarter of 2008 approximated 0.76 percent, compared to 0.94 percent during the fourth quarter of 2007.
• Return on average stockholders' equity for the quarter ended Dec. 31, 2008, was 5.70 percent, compared to 8.00 percent for the fourth quarter of 2007. Excluding the impact of the Mid-America merger-related expense, return on average stockholders' equity for the fourth quarter of 2008 approximated 6.37 percent, compared to 8.49 percent for the fourth quarter of 2007.
• Return on average tangible stockholders' equity (average stockholders' equity less goodwill and core deposit intangibles) for the quarter ended Dec. 31, 2008, was 11.05 percent, compared to 17.65 percent for the fourth quarter of 2007. Excluding the impact of the Mid-America merger-related expense, return on average tangible stockholders' equity for the fourth quarter of 2008 approximated 12.35 percent, compared to 18.72 percent for the fourth quarter of 2007.

Total assets grew to $4.76 billion as of Dec. 31, 2008, up $962 million from the $3.79 billion reported at the same time last year.

CREDIT QUALITY

• Allowance for loan losses represented 1.09 percent of total loans at Dec. 31, 2008, compared to 1.04 percent a year ago.
  • The ratio of the allowance for loan losses to nonperforming loans increased to 336 percent at Dec. 31, 2008, compared to 145 percent at Dec. 31, 2007.
• Provision for loan losses was $3.71 million for the fourth quarter of 2008, compared to $2.26 million for the fourth quarter of 2007, a 64.2 percent increase. Provision for loan losses was $11.21 million for the year ended Dec. 31, 2008, compared to $4.72 million for the year ended Dec. 31, 2007, a 137.6 percent increase.
  • During the fourth quarter of 2008, the firm recorded net charge-offs of $2.1 million, compared to net charge-offs of $462,000 during the same period in 2007. Net charge-offs to total average loans were 0.10 percent for the year ended Dec. 31, 2008. Gross charge-offs were $2.69 million during the fourth quarter of 2008, compared to $532,000 for the same period last year. Recoveries for the fourth quarter of 2008 were $624,000, compared to $69,000 during the fourth quarter of 2007.

"Our associates remain focused on growing our client base while at the same time prudently managing risk,” Turner said. "As expected, credit costs trended higher in the fourth quarter, but our nonperforming asset and coverage ratios remained very strong and continue to outperform peer averages. Given the current economic environment, we expect our credit costs will increase in 2009, but we also anticipate that our net charge-off and nonperforming asset ratios will outperform those of our peers.”

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 0.86 percent at Dec. 31, 2008. The following is a summary of the activity in various nonperforming asset categories for the quarter ended Dec. 31, 2008:

REVENUE

• Net interest income for fourth quarter 2008 was $29.89 million, compared to $22.01 million for the same quarter last year, an increase of 35.8 percent.
  • Net interest margin for the fourth quarter of 2008 was 2.96 percent, compared to a net interest margin of 3.49 percent for the same period last year and 3.14 percent for the third quarter of 2008.
• Noninterest income for the fourth quarter 2008 was $8.04 million, a 21.4 percent increase over the $6.61 million recorded during the same quarter in 2007.

"We have traditionally been an asset sensitive institution,” said Harold R. Carpenter, chief financial officer of Pinnacle Financial Partners. "The recent decisions by the Federal Reserve to reduce the target rate to 0.25 percent had a meaningful negative impact on our margins during the fourth quarter of 2008. Although we continue to reposition our balance sheet with interest rate floors on many of our new and renewing loans and with rate decreases on new and renewed time deposits, we believe competitive pressures in both the Nashville and Knoxville MSAs will cause our margins to remain at the current low levels for the next several quarters. However, our loan pipelines remain strong as we continue to win client relationships throughout our franchise.”

"Furthermore, although the capital we obtained through the CPP will be dilutive to our earnings for the next several quarters, we believe that we will be able to rapidly leverage this capital in the Nashville and Knoxville MSAs, as the CPP will provide us with the ability to increase lending in our markets,” Carpenter said.

The 21.4 percent increase in noninterest income between the fourth quarter of 2007 and the fourth quarter of 2008 was due to several factors, including increased fee revenue as a result of the Mid-America merger and gains on the sales of mortgage loans from the firm's mortgage origination unit. During the fourth quarter of 2008, Pinnacle's mortgage origination unit sold $72.10 million of mortgage loans, compared to $40.27 million during the fourth quarter of 2007, an increase of 79.02 percent.

Noninterest income decreased by approximately $1.2 million between the third and fourth quarters of 2008. This decrease is primarily attributable to a $695,000 gain on sale of a commercial loan recorded in the third quarter of 2008, reduced revenues in the fourth quarter of 2008 from Pinnacle’s investment in bank-owned life insurance policies and decreases in other fee revenue categories generally associated with a slowing economy and reduced investment valuations in our asset management units. Noninterest income during the fourth quarter of 2008 represented approximately 21.19 percent of total revenues, compared to 23.10 percent for the same quarter in 2007.

NONINTEREST EXPENSE

• Noninterest expense for the quarter ended Dec. 31, 2008, was $22.59 million ($21.09 million, excluding merger related expense), compared to $23.33 million ($22.16 million, excluding merger related expense) in the third quarter of 2008 and $17.76 million in the fourth quarter of 2007 ($17.14 million, excluding merger related expense).
• Compensation expense was $10.01 million during the fourth quarter of 2008, compared to $13.01 million during the third quarter of 2008 and $9.98 million during the fourth quarter of 2007. The decrease in compensation expense between the third and fourth quarters of 2008 was due to the reversal of previously accrued incentives during the fourth quarter. Total full-time equivalent employees were 719.0 at Dec. 31, 2008, compared to 702.0 at Dec. 31, 2007.
• Merger related expense was $1.50 million during the quarter ended Dec. 31, 2008, and was composed primarily of $1.26 million in retention bonus accruals for associates that had been Mid-America associates.
• The efficiency ratio (noninterest expense divided by net interest income and noninterest income) was 59.5 percent during the fourth quarter of 2008, compared to 60.5 percent for the third quarter of 2008 and 62.1 percent in the fourth quarter of 2007. Excluding merger related expenses, the efficiency ratio was 55.6 percent in the fourth quarter of 2008 and 59.9 percent in the fourth quarter of 2007.

Carpenter noted that the firm will continue to make investments in future growth and, consequently, anticipates increased noninterest expense for the first quarter of 2009 over the amount the firm has experienced during the fourth quarter of 2008. Compensation expense was less in the fourth quarter of 2008 when compared to the third quarter of 2008 because of the reversal of incentives previously accrued that were not ultimately earned. The increased expense in 2009 will be attributable primarily to increasing headcount and other variable costs associated with the organic growth of the firm.

Other noninterest expense increased by approximately $2.0 million between the third and fourth quarters of 2008. This increase is attributable primarily to a $1.1 million increase in expenses related to Pinnacle’s other real estate properties, increases in state franchise tax accruals and other general expense increases.

INVESTMENTS IN FUTURE GROWTH

• Pinnacle has hired 32 highly experienced associates for its denovo expansion to Knoxville that was announced on April 9, 2007. Loans outstanding in Knoxville at Dec. 31, 2008, were $318 million, which is $93 million ahead of the original target disclosed at the time the Knoxville expansion was announced. Pinnacle has negotiated a site for construction of a full-service location in the Fountain City area of Knoxville and currently expects to begin construction during the first quarter of 2009. The Fountain City location is expected to open during the third quarter of 2009.
• Pinnacle completed construction of a new Dickson County location in the Nashville MSA to replace a temporary location. The new facility opened 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 fourth quarter of 2009.
• In the fourth quarter Miller Loughry Beach, Pinnacle’s wholly-owned insurance subsidiary, completed its integration with Beach and Gentry Insurance LLC, another large insurance agency acquired in July 2008. Miller Loughry Beach, one of the largest independent insurance agencies in Middle Tennessee, has 41 associates working with more than 9,500 clients.
• Pinnacle's total associate base at Dec. 31, 2008, was 719.0 full-time equivalents (FTEs), compared to 702.0 at Dec. 31, 2007. Pinnacle anticipates increasing its associate base by 70 associates during 2009.

NASHVILLE HOUSING MARKET UPDATE

The Greater Nashville Realtors Association reported residential closings were down 31.3 percent in the fourth quarter of 2008 in comparison to the same quarter in 2007. For the year ended Dec. 31, 2008, compared to the previous year, residential closings are down approximately 26.8 percent. At Dec. 31, 2008, the inventory of residential homes for sale was 12,900 homes, which was a decrease of approximately 16.8 percent from Sept. 30, 2008. The average median residential home sales price for the three months ended Dec. 31, 2008, averaged $166,250, which was down 5.7 percent from the three months ended Sept. 30, 2008 and 9.9 percent from the three months ended Dec. 31, 2007.

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 $4.8 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) continuation of the historically low short-term interest rate environment, (iii) 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, (iv) increased competition with other financial institutions, (v) deterioration or lack of sustained growth in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, (vi) rapid fluctuations or unanticipated changes in interest rates, (vii) the development any new market other than Nashville or Knoxville, (viii) a merger or acquisition, (ix) any activity in the capital markets that would cause Pinnacle to conclude that there was impairment of any asset including intangible assets and (x) 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.