The following is a discussion of our financial condition at September 30, 2009 and December 31, 2008 and our results of operations for the three and nine months ended September 30, 2009 and 2008. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein. Overview
General. Our continued organic growth, together with continuing deterioration in the economy in our principal markets, particularly the residential real estate market, materially impacted our financial condition and results of operations in 2009 as compared to 2008. Our fully diluted net loss per share for the three months ended September 30, 2009 was $0.15, compared to fully diluted net income per share of $0.36 for the same period in 2008. Our fully diluted net loss per share for the nine months ended September 30, 2009 was $1.39, compared to fully diluted net income per share of $0.96 for the same period in 2008. At September 30, 2009, loans totaled $3.608 billion, as compared to $3.355 billion at December 31, 2008, while total deposits increased to $3.820 billion at September 30, 2009 from $3.533 billion at December 31, 2008.
Results of Operations. Our net interest income increased to $34.5 million for the third quarter of 2009 compared to $29.3 million for the third quarter of 2008. Our net interest income increased to $93.8 million for the first nine months of 2009 compared to $84.3 million for the same period in 2008. The net interest margin (the ratio of net interest income to average earning assets) for the three months ended September 30, 2009 was 3.05% compared to 3.14% for the same period in 2008. The net interest margin for the nine months ended September 30, 2009 was 2.84% compared to 3.24% for the same period in 2008. Our provision for loan losses was $22.1 million for the third quarter of 2009 compared to $3.1 million for the same period in 2008. The provision for loan losses was $101.1 million for the nine months ended September 30, 2009 compared to $7.5 million for the same period in 2008. Impacting the provision for loan losses in any accounting period are several matters including the amount of loan growth during the period, the level of charge-offs or recoveries incurred during the period, the changes in the amount of impaired loans, changes in the risk ratings assigned to our loans and the results of our quarterly assessment of the inherent risks of our loan portfolio. During the third quarter of 2009, we incurred net charge-offs of $5.2 million compared to $73,000 in the third quarter of 2008. Additionally, during the first nine months of 2009, we increased our allowance for loan losses as a percentage of total loans from 1.09% at December 31, 2008 to 2.30% at September 30, 2009 due to these increased levels of charge-offs and nonperforming loans and the continued weakening in the economy.
Noninterest income for the three months ended September 30, 2009 compared to the same period in 2008 decreased by $1.5 million, or 16.4%. Noninterest income for the nine months ended September 30, 2009 compared to the same period in 2008 increased by $4.8 million, or 18.0%. This increase was primarily due to our recording net gains on the sale of investment securities, as a result of restructuring of the bond portfolio, of approximately $6.5 million for the nine months ended September 30, 2009. Excluding gains on the sale of investment securities, Pinnacle's noninterest income for the nine months ended September 30, 2009 compared to the same period in 2008 decreased by 6.2%. The decrease is largely attributable to reduced service charge income and investment services income.
A number of factors contributed to increased noninterest expense for the first nine months of 2009 compared to 2008 including: increases in salaries and employee benefits, increased FDIC insurance assessments, increased costs associated with the disposal and maintenance of other real estate owned, and other operating expenses. The number of full-time equivalent employees increased from 723.0 at September 30, 2008 to 768.0 at September 30, 2009. As a result, we experienced increases in compensation and employee benefit expense. We expect to add additional employees throughout 2009 which should also cause our compensation and employee benefit expense to increase in 2009. Additionally, our branch expansion efforts during the last few years, including ongoing construction of four branch offices, and the addition of the new associates in 2009 will also increase noninterest expense. We also expensed $2.3 million in the second quarter of 2009 related to a special one-time FDIC assessment. Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 64.52% for the third quarter of 2009 compared to 60.53% for the same period in 2008. Our efficiency ratio was 66.38% for the first nine months of 2009 compared with 64.80% for the same period in 2008.

Due to the continued operating losses of the company, the effective tax benefit rate for the three and nine months ended September 30, 2009 was approximately 53.0% and 44.0% respectively, compared to an effective income tax expense rate for the three and nine months ended September 30, 2008 of approximately 27.2% and 27.8%. We anticipate that for the year ending December 31, 2009 that our effective tax benefit rate will approximate 45%. Under FASB ASC 740-270, "Accounting for Income Taxes in Interim Periods" companies should not apply the estimated full year tax rate to interim results if the expected annual effective tax benefit rate exceeds the tax benefit rate based on interim items only. FASB ASC 740-270 requires that the tax benefit recognized be limited to the benefit calculated on interim items only. As such, we recorded a tax benefit through the second quarter based on the actual year-to-date results, in accordance with FASB ASC 740-270.
Net loss available to common stockholders for the third quarter of 2009 was $4.9 million compared to net income available to common stockholders of $8.8 million for the same period in 2008, a decrease of 155.2%. Net loss for the first nine months of 2009 was $37.5 million compared to net income available to common stockholders of $22.8 million for the same period in 2008, a decrease of 264.1%. Included in net loss available to common stockholders for the three and nine months ended September 30, 2009 was approximately $1.5 million and $4.4 million of charges related to preferred stock dividends and accretion of the preferred stock discount related to our participation in the U.S. Department of Treasury's Capital Purchase Program (the "CPP").
Financial Condition. Loans increased $253.0 million during the first nine months of 2009. We have grown our total deposits to $3.820 billion at September 30, 2009 compared to $3.533 billion at December 31, 2008, an increase of $286.7 million. In comparing the composition of the average balances of our deposits between the second quarter of 2009 with the second quarter of 2008, we have experienced increased growth in our higher cost certificate of deposit balances than in any other category. This increase in reliance on higher cost deposits has contributed to a reduced net interest margin between the two periods.
Capital and Liquidity. At September 30, 2009, our capital ratios, including our bank's capital ratios, exceeded regulatory minimum capital requirements. Additionally, at September 30, 2009, our bank would be considered to be "well-capitalized" pursuant to banking regulations. Our bank may require additional capital from us over that which can be earned through operations. We anticipate that we will continue to use various capital raising techniques in order to support the capital needs of our bank.
During the third quarter of 2008, we sold 1.0 million shares of our common stock for $21.5 million. During the fourth quarter of 2008, we further increased our capital through our participation in the CPP, issuing 95,000 shares of preferred stock for $95 million. Additionally, we issued 534,910 common stock warrants to the U.S. Treasury. The warrants have an exercise price of $26.64 each, are immediately exercisable and expire 10 years from the date of issuance. The common stock warrants have been assigned a fair value of $6.7 million, as of December 12, 2008 and that amount has been recorded as the discount on the preferred stock which will be accreted as a reduction in net income available to common stockholders over the next five years at approximately $1.1 million to $1.3 million per year. The resulting $88.3 million has been assigned to the Series A preferred stock issued in the CPP and will be accreted up to the redemption amount of $95 million over the next five years, a further increase of capital.
On June 16, 2009, we issued 8,855,000 shares through a public offering of our common stock resulting in net proceeds to us of approximately $109.0 million. As a result, and pursuant to the terms of the warrants issued to the U.S. Treasury in connection with our participant in the CPP, the number of shares issuable upon exercise of the warrants issued to the U.S. Treasury in connection with the CPP was reduced by 50%, or 267,455 shares. Critical Accounting Estimates
The accounting principles we follow and our methods of applying these principles conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses and the assessment of impairment of the intangibles resulting from our mergers with Mid-America Bancshares, Inc. ("Mid-America") in 2007 and Cavalry Bancorp, Inc. ("Cavalry") in 2006 have been critical to the determination of our financial position and results of operations.
Allowance for Loan Losses ("allowance"). Our management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management's evaluation of the loan portfolios, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a "confirming event" has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, is deemed to be uncollectible.

Larger balance commercial and commercial real estate loans are impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan's effective interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs. Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans.
The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.
In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. We incorporate loan review results in the determination of whether or not it is probable that we will be able to collect all amounts due according to the contractual terms of a loan. As part of management's quarterly assessment of the allowance, management divides the loan portfolio into four segments: commercial, commercial real estate, consumer and consumer real estate. Each segment is then analyzed such that an allocation of the allowance is estimated for each loan segment. The allowance allocation for commercial and commercial real estate loans begins with a process of estimating the probable losses inherent for these types of loans. The estimates for these loans are established by category and based on our internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for our internal system of credit risk grades for commercial and commercial real estate loans is based on management's experience with similarly graded loans, discussions with banking regulators and industry loss factors. Beginning in 2008, we also performed a migration analysis of all loans that were charged-off during the previous two years. A migration analysis assists in evaluating loan loss allocation rates for the various risk grades assigned to loans in our portfolio. We incorporated the migration analysis along with other factors to determine the loss allocation rates for the commercial and commercial real estate portfolios. Subsequently, we weighted the allocation methodologies for the commercial and commercial real estate portfolios and determined a weighted average allocation for these portfolios. The allowance allocation for consumer and consumer real estate loans which includes installment, home equity, consumer mortgages, automobiles and others is established for each of the categories by estimating probable losses inherent in that particular category of consumer and consumer real estate loans. The estimated loan loss allocation rate for each category is based on management's experience, discussions with banking regulators, consideration of our actual loss rates, industry loss rates and loss rates of various peer bank groups. Consumer and consumer real estate loans are evaluated as a group by category (i.e. retail real estate, installment, etc.) rather than on an individual loan basis because these loans are smaller and homogeneous. We weight the allocation methodologies for the consumer and consumer real estate portfolios and determine a weighted average allocation for these portfolios.
The estimated loan loss allocation for all four loan portfolio segments is then adjusted for management's estimate of probable losses for several "environmental" factors. The allocation for environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors. These environmental factors are considered for each of the four loan segments and the allowance allocation, as determined by the processes noted above for each component, is increased or decreased based on the incremental assessment of these various environmental factors.

The assessment also includes an unallocated component. We believe that the unallocated amount is warranted for inherent factors that cannot be practically assigned to individual loan categories. An example is the imprecision in the overall measurement process, in particular the volatility of the national and local economy.
We then test the resulting allowance by comparing the balance in the allowance to historical trends and industry and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the allowance in its entirety. The audit committee of our board of directors reviews and approves the assessment prior to the filing of quarterly and annual financial information.
Impairment of Intangible Assets - Long-lived assets, including purchased intangible assets subject to amortization, such as our core deposit intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.
Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment annually and are evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. That annual assessment date is September 30. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated potential impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill.
Our stock price has historically traded above its book value per common share and tangible book value per common share. At September 30, 2009, our stock price was trading below its book value per common share, but above its tangible book value per common share. We performed our annual evaluation of whether there were indications of potential goodwill impairment as of September 30, 2009. The results of our evaluation determined that there was no indication of potential impairment of goodwill at September 30, 2009. However, should our future earnings and cash flows decline and/or discount rates increase, or should there be a significant decline in our stock price below book value, an impairment charge to goodwill and other intangible assets may be required.

Results of Operations
The following is a summary of our results of operations (dollars in thousands):

                                                         2009-2008                                      2009-2008
                             Three months ended           Percent           Nine months ended            Percent
                               September 30,             Increase             September 30,             Increase
                             2009           2008        (Decrease)         2009           2008         (Decrease)
Interest income           $   52,442      $ 51,873              1.1 %    $ 151,989      $ 152,808             -0.5 %
Interest expense              17,894        22,591            -20.8 %       58,228         68,485            -15.0 %

Net interest income           34,548        29,282             18.0 %       93,761         84,323             11.2 %
Provision for loan
losses                        22,134         3,125            608.3 %      101,064          7,504          1,246.8 %

Net interest income
after provision for
loan losses                   12,414        26,157            -52.5 %       (7,303 )       76,819           -109.5 %
Noninterest income             7,737         9,253            -16.4 %       31,475         26,679             18.0 %
Noninterest expense           27,280        23,327             16.9 %       83,130         71,893             15.6 %

Net income
(loss) before income
taxes                         (7,129 )      12,083           -159.0 %      (58,958 )       31,605           -286.5 %
Income tax expense
(benefit)                     (3,782 )       3,288           -215.0 %      (25,925 )        8,784           -395.1 %

Net income (loss)             (3,347 )       8,795           -138.1 %      (33,033 )       22,821           -244.7 %
Preferred dividends
and preferred stock
discount accretion             1,504             -                -          4,421              -                -

Net income
(loss) available to
common stockholders       $   (4,851 )    $  8,795           -155.2 %    $ (37,454 )    $  22,821           -264.1 %

Basic net income
(loss) per common
share available to
common stockholders       $    (0.15 )    $   0.38           -139.5 %    $   (1.39 )    $    1.01           -237.6 %

Diluted net
income(loss) per
common share available
to common stockholders    $    (0.15 )    $   0.36           -141.7 %    $   (1.39 )    $    0.96           -244.8 %

Net Interest Income. Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest bearing liabilities and is one of the most significant components of our results of operations. For the three months ended September 30, 2009 and 2008, we recorded net interest income of $34.5 million and $29.3 million respectively, which resulted in a net interest margin of 3.05% and 3.14%. For the nine months ended September 30, 2009 and 2008, we recorded net interest income of $93.8 million and $84.3 million respectively, which resulted in a net interest margin of 2.84% and 3.24%.

The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three and nine months ended September 30, 2009 and 2008 (dollars in thousands):

                                     Three months ended                            Three months ended
                                     September 30, 2009                            September 30, 2008
                            Average                        Rates/         Average                        Rates/
                           Balances        Interest        Yields        Balances        Interest        Yields
Interest-earning
assets:
Loans                     $ 3,583,182      $  41,666          4.61 %    $ 3,129,549      $  44,075          5.60 %
Securities:
Taxable                       749,457          8,608          4.56 %        455,945          6,005          5.24 %
Tax-exempt (1)                169,171          1,694          5.24 %        134,198          1,340          5.24 %
Federal funds sold and
other                          74,663            474          2.76 %         45,890            453          4.37 %

Total interest-earning
assets                      4,576,473      $  52,442          4.60 %      3,765,582      $  51,873          5.53 %

Nonearning assets
Intangible assets             259,016                                       261,584
Other nonearning
assets                        193,366                                       175,426

Total assets              $ 5,028,855                                   $ 4,202,592


Interest-bearing
liabilities:
Interest bearing
deposits
Interest checking         $   348,300      $     508          0.58 %    $   373,567      $   1,109          1.18 %
Savings and money
market                        916,669          2,967          1.28 %        706,225          2,856          1.61 %
Time                        2,018,814         11,625          2.28 %      1,689,221         14,814          3.49 %

Total interest bearing
deposits                    3,283,783         15,100          1.82 %      2,769,013         18,779          2.70 %
Securities sold under
agreements to
repurchase                    223,737            363          0.64 %        204,101            682          1.33 %
Federal Home Loan Bank
advances and other
borrowings                    236,660          1,481          2.48 %        215,739          1,845          3.40 %
Subordinated debt              97,476            950          3.86 %         90,465          1,285          5.65 %

Total interest-bearing
liabilities                 3,841,656         17,894          1.85 %      3,279,318         22,591          2.74 %
Noninterest-bearing
deposits                      462,783              -             -          409,850              -             -

Total deposits and
. . .