-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ld+gL+S7X7aKO1QwzCi4xISMoIElMtolbQ6bEGB7mNjqja3Fv+HHwG+nAONiqmb1 gEbE3oD/eA3pRcIABEPdzA== 0000950144-06-001500.txt : 20060224 0000950144-06-001500.hdr.sgml : 20060224 20060224160946 ACCESSION NUMBER: 0000950144-06-001500 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060224 DATE AS OF CHANGE: 20060224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINNACLE FINANCIAL PARTNERS INC CENTRAL INDEX KEY: 0001115055 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 621812853 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-31225 FILM NUMBER: 06643080 BUSINESS ADDRESS: STREET 1: 211 COMMERCE STREET STREET 2: SUITE 300 CITY: NASHVILLE STATE: TN ZIP: 37201 BUSINESS PHONE: 6157443742 MAIL ADDRESS: STREET 1: 211 COMMERCE STREET STREET 2: SUITE 300 CITY: NASHVILLE STATE: TN ZIP: 37201 10-K 1 g99783e10vk.htm PINNACLE FINANCIAL PARTNERS, INC. PINNACLE FINANCIAL PARTNERS, INC.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Sections 13 or 15(d)
of the Securities and Exchange Act of 1934
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-31225
Pinnacle Financial Partners, Inc.
(Exact name of registrant as specified in its charter)
     
Tennessee   62-1812853
     
(State of jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
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)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $1.00
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark where the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer þ Non-accelerated Filer o
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of the last business day of the registrant’s most recently completed second fiscal quarter: $173,735,000 as of June 30, 2005.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 8,435,685 shares of common stock as of February 14, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held May 16, 2006, are incorporated by reference into Part III of this Form 10-K.
 
 

 

 

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 EX-10.35 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT
 EX-10.36 NAMED EXECUTIVE OFFICER COMPENSATION SUMMARY
 EX-21.1 SUBSIDIARIES OF REGISTRANT
 EX-23.1 CONSENT OF KPMG LLP
 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

 

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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 below in “Item 1A. Risk Factors” 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, Tennessee area, (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 the legislative and regulatory environment, including compliance with the various provisions of the Sarbanes Oxley Act of 2002. 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. Forward-looking statements made by us in this report are also subject to those risks identified within “Item 1A. Risk Factors”.
PART I
Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Pinnacle Financial Partners” or “Pinnacle Financial” as used herein refer to Pinnacle Financial Partners, Inc. and its subsidiary Pinnacle National Bank, which we sometimes refer to as “Pinnacle National,” “our bank subsidiary” or “our bank” and its other subsidiaries. References herein to the fiscal years 2001, 2002, 2003, 2004 and 2005 mean our fiscal years ended December 31, 2001, 2002, 2003, 2004 and 2005, respectively.
ITEM 1. BUSINESS
OVERVIEW
Pinnacle Financial is a Tennessee corporation that was incorporated on February 28, 2000 to organize and serve as the holding company for Pinnacle National, a national bank chartered under the laws of the United States. Pinnacle National commenced its banking operations on October 27, 2000, and operates as a community bank in an urban market emphasizing personalized banking relationships with individuals and businesses located within the Nashville metropolitan statistical area (MSA). We own 100% of the capital stock of Pinnacle National.
On October 3, 2005, we announced that we had entered into a definitive agreement to merge with Cavalry Bancorp, Inc. (“Cavalry”), a one-bank holding company located in Murfreesboro, Tennessee with approximately $638 million in assets as of December 31, 2005. We are in the process of obtaining the required regulatory approvals to consummate the merger, which is currently anticipated to close before the end of the first quarter of 2006.
Opportunity. We believe there are three major trends in the Nashville MSA that strengthen our strategic market position as a locally managed community bank:
  •   Customers generally perceive that service levels at banks are declining. We believe this is largely attributable to merger-related integration issues resulting from consolidation in the bank and brokerage industries. Additionally, small business owners want a reliable point of contact that is knowledgeable about their business and the financial products and services that are important to the success of their business. In fact, Nashville is dominated by three large regional bank holding companies, which are headquartered elsewhere, all of whom are experiencing declining market share trends over the last six years;

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  •   Client usage of more sophisticated financial products continues to grow, causing traditional banks to lose market share to other types of financial services companies, such as mutual fund companies and securities brokerage firms; and
 
  •   There is significant growth in the demand for convenient access to financial services, particularly through ATMs, telephone banking and Internet banking.
We believe that our primary market segments, which are small businesses with annual sales from $1 million to $50 million and households with investable assets over $250,000, are more likely to be disaffected by the banking industry’s perceived decline in customer service and lack of financial product sophistication. To overcome these customer perceptions and attract business from these market segments, we seek to hire only seasoned professionals, from both the banking and brokerage industries, and have strategically designed our banking, investment and insurance products to meet the expected needs of our targeted market segments. As an example, we consider our consumer brokerage and corporate treasury management products to be at least at parity with the large regional banks that dominate our target segment in the Nashville market. Accordingly, our marketing philosophy is centered on delivering exceptional service and effective financial advice through highly trained personnel who understand and care about the broad financial needs and objectives of our clients.
Business Strategies. To carry out our marketing philosophy, our specific business strategies have been and will continue to be:
  •   Hire and retain highly experienced and qualified banking and financial professionals with successful track records and, for client contact personnel, established books of business with small businesses and affluent households within the Nashville MSA. Since inception, we have attracted 159 associates to our firm. Substantially all of these associates have been highly successful in similar positions in the Nashville MSA for at least 10 years. On average, our senior customer contact personnel have in excess of 20 years experience in Nashville. We have also been successful in maintaining an annual retention ratio of our personnel of approximately 94% at December 31, 2005. We believe we will continue to experience success in attracting new, market-best associates to our firm as well as retaining our highly experienced and successful group of associates.
 
  •   Provide individualized attention with consistent, local decision-making authority.
 
  •   Offer a full line of financial services to include traditional depository and credit products, as well as sophisticated investment and insurance products. As of December 31, 2005, Pinnacle National’s brokerage division, Pinnacle Asset Management, had accumulated approximately $441 million in brokerage assets.
 
  •   Capitalize on customer dissatisfaction that we believe exists and that has been caused by what we believe to be our competitors’ less than satisfactory response to the financial needs of today’s sophisticated consumers and small- to medium-sized businesses. Since we began our company, we have historically surveyed our customers on numerous matters related to their relationship with us. Consistently, these surveys indicate that our service quality is significantly better than their prior banking relationships.
 
  •   Build on our directors’ and officers’ diverse personal and business contacts, community involvement and professional expertise.
 
  •   Establish a distribution strategy designed to prudently expand our physical and virtual market presence, thereby providing convenient banking access for our clients 24 hours a day. We opened one new office in 2005 and intend to open one new office in 2006. Our courier deposit pickup service consistently receives high marks from our small business customers. We now have approximately 43% of our commercial clients utilizing our Internet banking product which we believe to be well over the industry averages.
 
  •   Use technology and strategic alliances, including those established through Pinnacle Asset Management to provide a broad array of sophisticated and convenient products and services.
We believe that our business strategies allow us to effectively distinguish ourselves from other financial institutions operating within the Nashville MSA and successfully attract and retain business relationships with small businesses and affluent households.
Market Area. Pinnacle National’s primary service area, which comprises the Nashville metropolitan statistical area, includes Davidson County and twelve surrounding counties. This area represents a geographic area that covers approximately 4,000 square miles and a population in excess of 1.3 million people. For Pinnacle National, we concentrate our market efforts on the Davidson,

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Williamson, Sumner and Rutherford counties which represent 85% of the Nashville-Davidson-Murfreesboro MSA’s population base.
The economic success of Pinnacle National’s primary service area depends heavily upon the economic viability of the metropolitan Nashville, Tennessee area. Nashville is the capital of Tennessee and a city that we believe is an important transportation, business and tourism center within the United States. Additionally, the metropolitan Nashville area has attracted a number of significant business relocations resulting in an expansion of its labor force into many different industry sectors. In January of 2006, for the second year in a row “Expansion Management” magazine noted that Nashville ranked first among cities in the nation for companies that are looking to expand or relocate. Over the last few years, Nashville has been chosen by such companies as CareMark, Louisiana Pacific, Nissan North America and Dell to relocate their U.S. headquarters or to significantly expand their operations.
Our primary service area’s economic strength comes from its large employer base, which includes several large enterprises such as Vanderbilt University and Medical Center, HCA Inc., Saturn Corporation and Nissan Motor Manufacturing Corporation USA. Additionally, according to the Nashville Area Chamber of Commerce, the regional economy has outperformed the state and national economies during the most recent time periods and continues to benefit from low unemployment, consistent job growth, substantial outside investment and expansion and a well trained and growing labor force. We anticipate that these factors will continue to cause more businesses to relocate to, or start operations in, the Nashville MSA and, in turn, will increase the demand for depository and lending services within our market at a pace faster than national averages.
Pinnacle National’s main office is located in Nashville’s central business district in downtown Nashville. The downtown market consists of a variety of commercial establishments and entertainment venues. We believe that the downtown area is an important location for financial institutions requiring visibility within Nashville’s prominent commercial and private banking markets. Accordingly, we believe that this location is well suited for our bank’s business development efforts. According to FDIC data, the trade areas in which the existing Pinnacle National offices along with Cavalry’s offices are located account for 84.8% of the deposits in the entire thirteen county MSA.
In November 2000, Pinnacle National opened a branch office in Brentwood in Williamson County. In September 2001, Pinnacle National opened a second branch office in the Green Hills area of Nashville. Pinnacle National opened a third branch office in the Rivergate area of Davidson County in April 2003 and a fourth branch office in the Cool Springs area of Williamson County in October 2003. In September 2004, Pinnacle National opened its fifth branch office in the West End area of Nashville. Pinnacle National also opened its sixth branch office in Franklin, Tennessee, which is the county seat of Williamson County in January 2005. Pinnacle National opened one additional branch office in the Nashville MSA in 2005 in Hendersonville, Tennessee in Sumner County. Pinnacle National intends to open one additional branch office in the Nashville MSA in 2006 in the Donelson area of Nashville in Davidson County. Management believes these additional offices will continue to strengthen Pinnacle National’s market presence, allowing it to grow its customer base more rapidly than the market at large.
Competitive Conditions. The Nashville MSA banking market is very competitive, with 20 financial institutions each with over $200 million in deposits in the market as of June 30, 2005. According to FDIC data, bank and thrift deposits in the Nashville MSA grew from approximately $13.7 billion at June 1995 to more than $25.2 billion at June 30, 2005. As of June 30, 2005, approximately 73% of this deposit base was controlled by large, multi-state banks headquartered outside of Nashville, which included the seven largest banks, AmSouth (headquartered in Birmingham, Alabama), Bank of America (headquartered in Charlotte, North Carolina), First Horizon (headquartered in Memphis, Tennessee), US Bancorp (headquartered in Milwaukee, Wisconsin), SunTrust (headquartered in Atlanta, Georgia), Fifth Third (headquartered in Cincinnati, Ohio) and Regions Financial Corporation (headquartered in Birmingham, Alabama). According to FDIC deposit information, the collective market share of deposits in the Nashville MSA of AmSouth (including the acquired First American National Bank), Bank of America and SunTrust declined from 56.6% to 51.7% during the ten years ended June 30, 2005. Consequently, while large, multi-state institutions are well established in our market area, we believe the general trends indicate that a majority of the community banks in the Nashville MSA have been able to increase their deposit market share in recent years at the expense of these larger, multi-state banks.
We also believe that Pinnacle National’s status as a community bank will not be enough to compete in today’s financial industry. In the wake of modern technology and the prosperity of the United States’ financial markets over the past decade, banking clients have generally become more sophisticated in their approach to selecting financial services providers. We believe that the most important criteria to our bank’s targeted clients when selecting a bank is their desire to receive exceptional and personal customer service while being able to enjoy convenient access to a broad array of sophisticated financial products. Additionally, when presented with a choice, we believe that many of our bank’s targeted clients would prefer to deal with a locally-owned institution headquartered in

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Nashville, like Pinnacle National, as opposed to a large, multi-state bank, where many important decisions regarding a client’s financial affairs are made elsewhere.
Lending Services
Pinnacle National offers a full range of lending products, including commercial, real estate and consumer loans to individuals and small-to medium-sized businesses and professional entities. It competes for these loans with competitors who are well established in the Nashville MSA.
Pinnacle National’s loan approval policies provide for various levels of officer lending authority. When the amount of total loans to a single borrower exceeds that individual officer’s lending authority, officers with a higher lending limit, Pinnacle National’s board of directors or the executive committee of the board will determine whether to approve the loan request.
Pinnacle National’s lending activities are subject to a variety of lending limits imposed by federal law. Differing limits apply based on the type of loan or the nature of the borrower, including the borrower’s relationship to Pinnacle National. In general, however, at December 31, 2005, Pinnacle National is able to loan any one borrower a maximum amount equal to approximately $13.1 million plus an additional $8.7 million, or a total of approximately $21.8 million, for loans that meet certain additional federal collateral guidelines. These legal limits will increase or decrease as Pinnacle National’s capital increases or decreases as a result of its earnings or losses, the injection of additional capital or other reasons. In addition to these regulatory limits, Pinnacle National imposes upon itself an internal lending limit of $7 million, which is less than the prescribed legal lending limit, thus further reducing its exposure to any single borrower.
The principal economic risk associated with each category of loans that Pinnacle National expects to make is the creditworthiness of the borrower. General economic factors affecting a commercial or consumer borrower’s ability to repay include interest, inflation and employment rates, as well as other factors affecting a borrower’s assets, clients, suppliers and employees. Many of Pinnacle National’s commercial loans are made to small- to medium-sized businesses that are sometimes less able to withstand competitive, economic and financial pressures than larger borrowers. During periods of economic weakness, these businesses may be more adversely affected than larger enterprises, and may cause increased levels of nonaccrual or other problem loans, loan charge-offs and higher provision for loan losses.
Pinnacle National’s commercial clients borrow for a variety of purposes. The terms of these loans will vary by purpose and by type of any underlying collateral and include equipment loans and working capital loans. Commercial loans may be unsecured or secured by accounts receivable or by other business assets. Pinnacle National also makes a variety of commercial real estate loans, residential real estate loans and real estate construction and development loans.
Pinnacle National also makes a variety of loans to individuals for personal, family, investment and household purposes, including secured and unsecured installment and term loans, residential first mortgage loans, home equity loans and home equity lines of credit.
Investment Securities
In addition to loans, Pinnacle National has other investments primarily in obligations of the United States government, obligations guaranteed as to principal and interest by the United States government and other securities. No investment in any of those instruments exceeds any applicable limitation imposed by law or regulation. The executive committee of the board of directors reviews the investment portfolio on an ongoing basis in order to ensure that the investments conform to Pinnacle National’s asset liability management policy as set by the board of directors.
Asset and Liability Management
Our Asset Liability Management Committee (“ALCO”), composed of senior managers of Pinnacle National, manages Pinnacle National’s assets and liabilities and strives to provide a stable, optimized net interest income and margin, adequate liquidity and ultimately a suitable after-tax return on assets and return on equity. ALCO conducts these management functions within the framework of written policies that Pinnacle National’s board of directors has adopted. ALCO works to maintain a balanced position between rate sensitive assets and rate sensitive liabilities.

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Additionally, we may use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities. We may use derivatives as one tool to manage our interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. At December 31, 2005 and 2004, we had not entered into any derivative contracts.
Deposit Services
Pinnacle National seeks to establish a broad base of core deposits, including savings, checking, interest-bearing checking, money market and certificate of deposit accounts. To attract deposits, Pinnacle National has employed a marketing plan in its overall service area and features a broad product line and competitive rates and services. The primary sources of deposits are residents and businesses located in the Nashville MSA. Pinnacle National generally obtains these deposits through personal solicitation by its officers and directors.
Investment Services
Pinnacle National contracts with Raymond James Financial Service, Inc. (“RJFS”), a registered broker-dealer and investment adviser, to offer and sell various securities and other financial products to the public from Pinnacle National’s locations through Pinnacle National employees that are also RJFS employees. RJFS is a subsidiary of Raymond James Financial, Inc.
Pinnacle National offers, through RJFS, non-FDIC insured investment products in order to assist Pinnacle National’s clients in achieving their financial objectives consistent with their risk tolerances. Pinnacle National’s suite of investment products include:
     
• Mutual Funds
  • Fixed Annuities
• Variable Annuities
  • Stocks
• Money Market Instruments
  • Financial Planning
• Treasury Securities
  • Asset Management Accounts
• Bonds
  • Listed Options
All of the financial products listed above are offered by RJFS from Pinnacle National’s main office and its other offices. Additionally, we believe that the brokerage and investment advisory program offered by RJFS complements Pinnacle National’s general banking business, and further supports its business philosophy and strategy of delivering to our clients those products and services that meet their financial needs. In addition to the compliance monitoring provided by RJFS, Pinnacle National has developed its own compliance-monitoring program to further ensure that Pinnacle National personnel deliver these products in a manner consistent with the various regulations governing such activities.
Pinnacle National receives a minimum lease payment each month for each leased area, plus a percentage of commission credits and fees generated by the program. Pinnacle National remains responsible for various expenses associated with the program, including promotional expenses, furnishings and equipment expenses for the leased areas, and general personnel costs.
Pinnacle Financial has also established Pinnacle Advisory Services, Inc., a registered investment advisor, to provide financial planning services to its clients.
Other Banking Services
Given client demand for increased convenience in accessing banking and investment services, Pinnacle National also offers a broad array of convenience-centered products and services, including 24 hour telephone and Internet banking, debit cards, direct deposit and cash management services for small- to medium-sized businesses. Additionally, Pinnacle National is associated with a nationwide network of automated teller machines of other financial institutions that our clients are able to use throughout Tennessee and other regions. In most cases, Pinnacle National, in contrast to its competitors, reimburses its clients for any fees that may be charged to the client for utilizing the nationwide ATM network which enables us to demonstrate greater convenience as compared to these competitors.
Pinnacle National also offers its targeted commercial clients a courier service which picks up non-cash deposits from the client’s place of business which also enables us to demonstrate convenience greater than most of the larger regional competitors. Pinnacle National provides this service through a third party that is approved by the State of Tennessee Public Service Commission for bank-related work.

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Employees
At February 15, 2006, Pinnacle National employed 159 employees of which 154 were full time. Pinnacle National considers its relationship with all employees to be excellent. Additionally, during 2005, Pinnacle Financial was named by the Nashville Business Journal as the “Best Place to Work in Nashville” among Middle Tennessee’s large companies with more than 100 employees. This is the third consecutive year for Pinnacle to receive top honors in the annual awards program.
We are also one of a relatively small number of financial firms in the country that provide stock options for all associates in a broad-based stock option plan. We believe this broad-based stock option plan directly aligns our employee base with our shareholders, and that our associates have become even more engaged in the creation of shareholder value over the intermediate- and long-terms. Information concerning these plans are included in the “Notes to the Consolidated Financial Statements”.
Additionally, all of our non-commission based employees participate in an annual cash incentive plan whereby they receive a certain percentage of their annual base salary should the firm meet certain soundness and earnings targets for the year. Information concerning this plan is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Available Information
We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically. Our website address is www.pnfp.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.
We have posted our Corporate Governance Guidelines, our Corporate Code of Conduct for directors, officers and employees, and the charters of our Audit and Human Resources, Nominating and Compensation Committees of our board of directors on the Corporate Governance section of our website at www.pnfp.com. Our corporate governance materials are available free of charge upon request to our Corporate Secretary, Pinnacle Financial Partners, Inc., 211 Commerce Street, Suite 300, Nashville, Tennessee 37201.
SUPERVISION AND REGULATION
Both Pinnacle Financial and Pinnacle National are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of Pinnacle Financial’s and Pinnacle National’s operations. These laws and regulations are generally intended to protect depositors and borrowers, not shareholders. The following discussion describes the material elements of the regulatory framework which apply.
Pinnacle Financial
We are a bank holding company under the federal Bank Holding Company Act of 1956. As a result, we are subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve.
Acquisition of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:
  •   Acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;
 
  •   Acquiring all or substantially all of the assets of any bank; or

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  •   Merging or consolidating with any other bank holding company.
Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would substantially lessen competition or otherwise function as a restraint of trade, or result in or tend to create a monopoly, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the communities to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.
Under the Bank Holding Company Act, if adequately capitalized and adequately managed, we or any other bank holding company located in Tennessee may purchase a bank located outside of Tennessee. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Tennessee may purchase a bank located inside Tennessee. In each case, however, state law restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. For example, Tennessee law currently prohibits a bank holding company from acquiring control of a Tennessee-based financial institution until the target financial institution has been in operation for three years.
Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Federal Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:
  •   The bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or
 
  •   No other person owns a greater percentage of that class of voting securities immediately after the transaction.
Our common stock is registered under the Securities Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption.
Permitted Activities. The Gramm-Leach-Bliley Act of 1999 amends the Bank Holding Company Act and expands the activities in which bank holding companies and affiliates of banks are permitted to engage. The Gramm-Leach-Bliley Act eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies, and other financial service providers. Generally, if we qualify and elect to become a financial holding company, which is described below, we may engage in activities that are:
  •   Financial in nature;
 
  •   Incidental to a financial activity; or
 
  •   Complementary to a financial activity and do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.
The Gramm-Leach-Bliley Act expressly lists the following activities as financial in nature:
  •   Lending, trust and other banking activities;
 
  •   Insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state;
 
  •   Providing financial, investment, or advisory services;
 
  •   Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
 
  •   Underwriting, dealing in or making a market in securities;

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  •   Activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident to banking or managing or controlling banks;
 
  •   Activities permitted outside of the United States that the Federal Reserve has determined to be usual in connection with banking or other financial operations abroad;
 
  •   Merchant banking through securities or insurance affiliates; and
 
  •   Insurance company portfolio investments.
The Gramm-Leach-Bliley Act also authorizes the Federal Reserve, in consultation with the Secretary of the Treasury, to determine activities in addition to those listed above that are financial in nature or incidental to such financial activity. In determining whether a particular activity is financial in nature or incidental or complementary to a financial activity, the Federal Reserve must consider (1) the purpose of the Bank Holding Company and Gramm-Leach-Bliley Acts, (2) changes or reasonably expected changes in the marketplace in which financial holding companies compete and in the technology for delivering financial services, and (3) whether the activity is necessary or appropriate to allow financial holding companies to effectively compete with other financial service providers and to efficiently deliver information and services.
To qualify to become a financial holding company, any of our depository institution subsidiaries must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.” Additionally, we must file an election with the Federal Reserve to become a financial holding company and provide the Federal Reserve with 30 days written notice prior to engaging in a permitted financial activity. Although we do not have any immediate plans to file an election with the Federal Reserve to become a financial holding company, one of the primary reasons we selected the holding company structure was to have increased flexibility. Accordingly, if deemed appropriate in the future, we may seek to become a financial holding company.
Under the Bank Holding Company Act, a bank holding company, which has not qualified or elected to become a financial holding company, is generally prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities unless, prior to the enactment of the Gramm-Leach-Bliley Act, the Federal Reserve found those activities to be so closely related to banking as to be a proper incident to the business of banking. Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:
  •   Factoring accounts receivable;
 
  •   Acquiring or servicing loans;
 
  •   Leasing personal property;
 
  •   Conducting discount securities brokerage activities;
 
  •   Performing selected data processing services;
 
  •   Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
 
  •   Performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of any of its bank subsidiaries.
Support of Subsidiary Institutions. Under Federal Reserve policy, we are expected to act as a source of financial strength for our subsidiary, Pinnacle National, and to commit resources to support Pinnacle National. This support may be required at times when, without this Federal Reserve policy, we might not be inclined to provide it. In the unlikely event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of Pinnacle National would be assumed by the bankruptcy trustee and entitled to a priority of payment.

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Pinnacle National
Pinnacle National is a national bank chartered under the federal National Bank Act. As a result, it is subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the Office of the Comptroller of the Currency (the “OCC”). The OCC regularly examines Pinnacle National’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, Pinnacle National’s deposits are insured by the FDIC to the maximum extent provided by law. Pinnacle National also is subject to numerous state and federal statutes and regulations that will affect its business, activities and operations.
Branching. While the OCC has authority to approve branch applications, national banks are required by the National Bank Act to adhere to branching laws applicable to state chartered banks in the states in which they are located. With prior regulatory approval, Tennessee law permits banks based in the state to either establish new or acquire existing branch offices throughout Tennessee. Pinnacle National and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. Tennessee law, with limited exceptions, currently permits branching across state lines either through interstate merger or branch acquisition. Tennessee, however only permits an out-of-state bank, short of an interstate merger, to branch into Tennessee through branch acquisition if the state of the out-of-state bank permits Tennessee based banks to acquire branches there.
FDIC Insurance. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which made certain changes to the Federal deposit insurance program. These changes included merging the Bank Insurance Fund and the Savings Association Insurance Fund, increasing retirement account coverage to $250,000 and providing for inflationary adjustments to general coverage beginning in 2010, providing the FDIC with authority to set the fund’s reserve ratio within a specified range, and requiring dividends to banks if the reserve ratio exceeds certain levels. The new statute grants banks an assessment credit based on their share of the assessment base on December 31, 1996, and the amount of the credit can be used to reduce assessments in any year subject to certain limitations. Because it was not organized until 2000, Pinnacle National will not be eligible to receive this one-time assessment credit.
The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Capital Adequacy
Both Pinnacle Financial and Pinnacle National are required to comply with the capital adequacy standards established by the Federal Reserve, in our case, and the OCC, in the case of Pinnacle National. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. Pinnacle National is also subject to risk-based and leverage capital requirements adopted by the OCC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 capital must equal at least 4% of risk-weighted assets. Tier 2 capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 capital is limited to 100% of Tier 1 capital.

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In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that bank holding companies experiencing high internal growth, as is our case, or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels. Furthermore, the Federal Reserve has indicated that it will consider a bank holding company’s Tier 1 capital leverage ratio, after deducting all intangibles, and other indicators of capital strength in evaluating proposals for expansion or new activities.
Information concerning our regulatory ratios at December 31, 2005 is included in the “Notes to the Consolidated Financial Statements”.
If our growth rate continues, as we presently anticipate, our assets will grow faster than our capital and our capital ratios will decline. In order to maintain capital at Pinnacle National at appropriate levels, we may be required to incur borrowings or issue additional equity securities.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into one of which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital. As of December 31, 2005, we believe Pinnacle National would be considered “well capitalized” by its primary regulator.
Payment of Dividends
We are a legal entity separate and distinct from Pinnacle National. Over time, the principal source of our cash flow, including cash flow to pay dividends to our holders of trust preferred securities and to our common stock shareholders, will be dividends that Pinnacle National pays to us as its sole shareholder. Statutory and regulatory limitations apply to Pinnacle National’s payment of dividends to us as well as to our payment of dividends to our shareholders. Until we require dividends from Pinnacle National, our cash flow requirements will be satisfied through our existing cash balances, additional equity offerings or additional offerings of trust preferred securities.
Pinnacle National is required by federal law to obtain the prior approval of the OCC for payments of dividends if the total of all dividends declared by our board of directors in any year will exceed (1) the total of Pinnacle National’s net profits for that year, plus (2) Pinnacle National’s retained net profits of the preceding two years, less any required transfers to surplus. We do not anticipate that Pinnacle Financial will require any dividends from Pinnacle National in 2006.

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The payment of dividends by Pinnacle National and us may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. If, in the opinion of the OCC, Pinnacle National was engaged in or about to engage in an unsafe or unsound practice, the OCC could require, after notice and a hearing, that Pinnacle National stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See “Prompt Corrective Action” above.
Restrictions on Transactions with Affiliates
Both Pinnacle Financial and Pinnacle National are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:
  •   A bank’s loans or extensions of credit to affiliates;
 
  •   A bank’s investment in affiliates;
 
  •   Assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
 
  •   The amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and
 
  •   A bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. Pinnacle National must also comply with other provisions designed to avoid the taking of low-quality assets.
Pinnacle Financial and Pinnacle National are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
Pinnacle National is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.
Community Reinvestment
The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the OCC or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on Pinnacle National. Additionally, banks are required to publicly disclose the terms of various Community Reinvestment Act-related agreements. During 2005, Pinnacle National received a “satisfactory” CRA rating from the OCC.
Privacy
Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market the institutions’ own products and services. Additionally, financial

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institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers. Pinnacle National has established a privacy policy to ensure compliance with federal requirements.
Other Consumer Laws and Regulations
Interest and other charges collected or contracted for by Pinnacle National are subject to state usury laws and federal laws concerning interest rates. For example, under the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from charging an annual interest rate in excess of 6% on any obligations for which the borrower is a person on active duty with the United States military. Pinnacle National’s loan operations are also subject to federal laws applicable to credit transactions, such as the:
  •   Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
 
  •   Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
 
  •   Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
 
  •   Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
 
  •   Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
 
  •   Bank Secrecy Act, governing how banks and other firms report certain currency transactions which may involve “money laundering” activities;
 
  •   Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and
 
  •   Rules and regulations of the various federal agencies charged with the responsibility of implementing the federal laws.
Pinnacle National’s deposit operations are subject to the:
  •   Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
 
  •   Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Anti-Terrorism Legislation
On October 26, 2001, the President of the United States signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers.
In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above. Pinnacle National currently has policies and procedures in place designed to comply with the USA PATRIOT Act.

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Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
Effect of Governmental Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through the Federal Reserve’s statutory power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.
ITEM 1A. RISK FACTORS
Investing in our common stock involves various risks which are particular to our company, our industry and our market area. Several risk factors regarding investing in our common stock are discussed below. This listing should not be considered as all-inclusive. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted. These matters could cause the trading price of our common stock to decline in future periods.
We are geographically concentrated in the Nashville, Tennessee MSA, and changes in local economic conditions impact our profitability.
We operate primarily in the Nashville, Tennessee MSA, and substantially all of our loan customers and most of our deposit and other customers live or have operations in the Nashville MSA. Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in the Nashville MSA, along with the continued attraction of business ventures to the area. Our profitability is impacted by the changes in general economic conditions in this market. Additionally, unfavorable local or national economic conditions could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.
We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.
Our continued growth may require the need for additional capital and further regulatory approvals which, if not obtained, could adversely impact our profitability and implementation of our current business plan.
To continue to grow, we will need to provide sufficient capital to Pinnacle National through earnings generation, additional equity offerings or borrowed funds or any combination of these sources of funds. Should we incur indebtedness, we are required to obtain certain regulatory approvals beforehand. Should our growth exceed our expectations, as has been the case to-date, we may need to raise additional capital over our projected capital needs. However, our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand and grow our operations could be materially impaired. Additionally, our current plan involves increasing our branch network, which will require capital expenditures. Our expansion efforts may also require certain regulatory approvals. Should we not be able to obtain such approvals or otherwise not be able to grow our asset base, our ability to attain our long-term profitability goals will be more difficult.

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We have a concentration of credit exposure to borrowers in certain industries and we also target small to medium-sized businesses.
At December 31, 2005, we had significant credit exposures to borrowers in the trucking industry; to borrowers that operate nonresidential buildings; and to land subdividers. If any of these industries experience an economic slowdown and, as a result, the borrowers in these industries are unable to perform their obligations under their existing loan agreements, our earnings could be negatively impacted, causing the value of our common stock to decline.
Additionally, a substantial focus of our marketing and business strategy is to serve small to medium-sized businesses in the metropolitan Nashville area. As a result, a relatively high percentage of our loan portfolio consists of commercial loans primarily to small to medium-sized business. At December 31, 2005, our commercial loans accounted for 64% of our total loans. During periods of economic weakness, small to medium-sized businesses may be impacted more severely than larger businesses. Consequently, the ability of such businesses to repay their loans may deteriorate, which would adversely impact our results of operations and financial condition.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
If loan customers with significant loan balances fail to repay their loans according to the terms of these loans, our earnings would suffer. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of any collateral securing the repayment of our loans. We maintain an allowance for loan losses in an attempt to cover the inherent risks associated with lending. In determining the size of this allowance, we rely on an analysis of our loan portfolio based on volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, national and local economic conditions, other factors and other pertinent information. Because we are a relatively young organization, our allowance estimation may be less reflective of our historical loss experience than a more mature organization. If our assumptions are inaccurate, our current allowance may not be sufficient to cover potential loan losses, and additional provisions may be necessary which would decrease our earnings.
In addition, federal and state regulators periodically review our loan portfolio and may require us to increase our allowance for loan losses or recognize loan charge-offs. Their conclusions about the quality of our loan portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on our operating results.
Fluctuations in interest rates could reduce our profitability.
Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rate fluctuations are caused by many factors which, for the most part, are not under our direct control. For example, national monetary policy plays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with our customers also impact the rates we collect on loans and the rates we pay on deposits.
As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work against us, and our earnings may be negatively affected.
Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses.

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Loss of our senior executive officers or other key employees could impair our relationship with our customers and adversely affect our business.
We have assembled a senior management team which has a substantial background and experience in banking and financial services in the Nashville market. Loss of these key personnel could negatively impact our earnings because of their skills, customer relationships and/or the potential difficulty of promptly replacing them.
Competition with other banking institutions could adversely affect our profitability.
A number of banking institutions in the Nashville market have higher lending limits, more banking offices, and a larger market share. In addition, our asset management division competes with numerous brokerage firms and mutual fund companies which are also much larger. In some respects, this may place these competitors in a competitive advantage, although many of our customers have selected us because of service quality concerns at the larger enterprises. This competition may limit or reduce our profitability, reduce our growth and adversely affect our results of operations and financial condition.
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.
In order to maintain our capital at desired or regulatorily-required levels, we may be required to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. We may sell these shares at prices below the current market price of shares, and the sale of these shares may significantly dilute shareholder ownership. We could also issue additional shares in connection with acquisitions of other financial institutions.
Even though our common stock is currently traded on the Nasdaq Stock Market’s National Market, it has less liquidity than the average stock quoted on a national securities exchange.
The trading volume in our common stock on the Nasdaq National Market has been relatively low when compared with larger companies listed on the Nasdaq National Market or the stock exchanges. Although we believe that the shares we will issue in connection with the acquisition of Cavalry, if consummated, will increase the liquidity in our stock, we cannot say with any certainty that a more active and liquid trading market for our common stock will develop. Because of this, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares.
We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.
The market price of our common stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
If a change in control or change in management is delayed or prevented, the market price of our common stock could be negatively affected.
Provisions in our corporate documents, as well as certain federal and state regulations, may make it difficult and expensive to pursue a tender offer, change in control or takeover attempt that our board of directors opposes. As a result, our shareholders may not have an opportunity to participate in such a transaction, and the trading price of our stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. Anti-takeover provisions contained in our charter also will make it more difficult for an outside shareholder to remove our current board of directors or management.

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We may not be able to successfully consummate our merger with Cavalry or if the merger is successfully consummated we may not be able to successfully integrate Cavalry or realize the anticipated benefits of the merger.
Certain conditions to the obligations of Cavalry and us to consummate the merger of the two companies must be satisfied before the merger can be completed, including the receipt of required regulatory approvals. While we currently expect that the merger with Cavalry will be completed before the end of the first quarter, we can give no assurance that the transaction will be closed within that period or at all. If the merger is not completed our stock price may decline because costs incurred by us in connection with the transaction must still be paid or because the current market price of our common stock reflects a market assumption that the merger will be completed. Further, if the merger is not completed we may be unable to achieve our previously announced level of earnings for the 2006 fiscal year which may cause or stock price to decline.
If the merger is consummated, the successful consolidation of our operations with Cavalry will depend substantially on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. We may not be able to combine our and Cavalry’s operations without encountering difficulties, such as:
  •   the loss of key employees and customers;
 
  •   the disruption of operations and business;
 
  •   the inability to maintain and increase competitive presence;
 
  •   deposit attrition, customer loss and revenue loss;
 
  •   possible inconsistencies in standards, control procedures and policies;
 
  •   unexpected problems with costs, operations, personnel, technology and credit; and/or
 
  •   problems from the assimilation of new operations, sites or personnel, which could divert resources from regular banking operations.
Additionally, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit our successful integration of Cavalry.
Further, we entered into the merger agreement with the expectation that the merger will result in various benefits including, among other things, benefits relating to enhanced revenues, a strengthened market position for the combined company, cross selling opportunities, technology, cost savings and operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether we integrate Cavalry in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially impact our business, financial condition and operating results. Finally, any cost savings that are realized may be offset by losses in revenues or other charges to earnings .
The amount of common stock owned by, and other compensation arrangements with, our officers and directors may make it more difficult to obtain shareholder approval of potential takeovers that they oppose.
As of December 31, 2005, directors and executive officers beneficially owned approximately 13% of our common stock. Employment agreements with our senior management also provide for significant payments under certain circumstances following a change in control. These compensation arrangements, together with the common stock, option and warrant ownership of our board and management, could make it difficult or expensive to obtain majority support for shareholder proposals or potential acquisition proposals of us that our directors and officers oppose.
Our business is dependent on technology, and an inability to invest in technological improvements may adversely affect our results of operations and financial condition.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. We have made significant investments in data processing, management information systems and internet banking accessibility. Our future success will depend in part upon our ability to create additional efficiencies in our operations through the use of technology, particularly in light of our past and projected growth strategy. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot make assurances that our technological improvements will increase our operational efficiency or that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

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Our internal control over financial reporting may have weaknesses or inadequacies that may be material.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our internal control over financial reporting and our auditor to attest to such evaluation on an annual basis. Management concluded that our internal control over financial reporting was effective at December 31, 2005 and our independent registered public accounting firm attested to such conclusion. Management’s report on internal control over financial reporting is included on page 47 of this Form 10-K and the report of our independent registered public accounting firm on these matters is included on page 49 of this Form 10-K. Ongoing compliance with these requirements is expected to be expensive and time-consuming and may negatively impact our results of operations. While our management did not identify any material weaknesses in our internal control over financial reporting at December 31, 2005, and concluded that our internal control over financial reporting was effective, we cannot make any assurances that material weaknesses in our internal control over financial reporting will not be identified in the future. If any material weaknesses are identified in the future, we may be required to make material changes in our internal control over financial reporting which could negatively impact our results of operations. In addition, upon such occurrence, our management may not be able to conclude that our internal control over financial reporting is effective or our independent registered public accounting firm may not be able to attest that our internal control over financial reporting was effective. If we cannot conclude that our internal control over financial reporting is effective or if our independent registered public accounting firm is not able to timely attest to such evaluation, we may be subject to regulatory scrutiny, and a loss of public confidence in our internal control over financial reporting which may cause the value of our common stock to decrease.
We are subject to various statutes and regulations that may limit our ability to take certain actions.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Pinnacle Financial’s principal offices are located at 211 Commerce Street in Nashville, Tennessee in Davidson County. Pinnacle Financial leases these offices from an unrelated third party.
Pinnacle National leases the land for its Brentwood branch office building located in Williamson County, Tennessee, from an unrelated third party but owns the building and leasehold improvements. Pinnacle National also leases the land for its Green Hills office location in Davidson County from an unrelated third party, but also owns the building and leasehold improvements. Pinnacle National also leases the land and building for its West End office location in Davidson County from unrelated third parties, but owns the leasehold improvements. Pinnacle National owns the land and buildings and all improvements for its Rivergate, Cool Springs and Franklin branch offices. A summary of Pinnacle Financial’s leased facilities follows:
                                 
    Approximate   2005 Lease   Base Lease   Base Lease Term
Property Description   Sq. Footage   Payments   Expiration Date   with Renewal Periods
Office space at 211 Commerce Street
     30,000     $ 443,000     August 31, 2010   20 years
Brentwood branch office
   Land only     104,000     March 31, 2010   20 years
Green Hills branch office
   Land only     52,000     April 21, 2021   40 years
West End branch office building and land
     8,000       142,000     March 28, 2014   20 years

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Other than normal commercial real estate lending activities of Pinnacle National and its subsidiaries, the acquisition of mortgage-backed securities held in Pinnacle National and its subsidiaries’ investment securities portfolio, the ownership of branch office facilities, and consumer mortgage lending, Pinnacle National and its subsidiaries generally do not invest in real estate, interests in real estate or securities of or interests in persons primarily engaged in real estate activities.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, there are no material pending legal proceedings to which Pinnacle Financial or any of its subsidiaries is a party or of which any of its or its subsidiaries’ properties are subject; nor are there material proceedings known to Pinnacle Financial or any of its subsidiaries to be contemplated by any governmental authority; nor are there material proceedings known to Pinnacle Financial or any of its subsidiaries, pending or contemplated, in which any director, officer or affiliate or any principal security holder of Pinnacle Financial or any of its subsidiaries or any associate of any of the foregoing, is a party adverse to Pinnacle Financial or any of its subsidiaries or has a material interest adverse to Pinnacle Financial or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (a)   A special meeting of Pinnacle Financial’s shareholders was held on December 21, 2005 to vote on the merger agreement with Cavalry Bancorp, Inc.
 
  (c)   Matters voted upon and the results of the voting were as follows:
 
      We held a Special Meeting of Shareholders on December 21, 2005 (the “Special Meeting”) to consider and vote on the following matters:
  §   A proposal to approve the Agreement and Plan of Merger, dated as of September 30, 2005 by and between the Pinnacle Financial and Cavalry (“Proposal #1”); and
 
  §   A proposal to approve the adjournment of the Special Meeting, if necessary, to permit the Pinnacle Financial to solicit additional proxies if there were not sufficient votes at the Special Meeting to constitute a quorum or to approve Proposal #1 (“Proposal #2”).
      The following table sets forth the number of votes cast for, against, and withheld/abstained with respect to each of the proposals, both of which were approved at the Special Meeting:
             
Proposal #1:
   Number of votes cast “For”     5,202,146  
 
   Number of votes cast “Against”     71,543  
 
   Number of abstentions     920  
 
            
Proposal #2:
   Number of votes cast “For”     5,035,632  
 
   Number of votes cast “Against”     227,607  
 
   Number of abstentions     11,370  

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Pinnacle Financial’s common stock is traded on the Nasdaq Stock Market’s National Market under the symbol “PNFP”. The following table shows the high and low bid price information for Pinnacle Financial’s common stock for each quarter in 2005 and 2004 as reported on the Nasdaq National Market. The stock prices set forth below are adjusted to reflect our two-for-one common stock split paid on May 10, 2004.
                 
    Bid Price Per Share  
    High     Low  
2005:
                
First quarter
  $ 24.05     $ 20.72  
Second quarter
    25.14       20.50  
Third quarter
    26.65       22.67  
Fourth quarter
    25.96       21.70  
2004:
                
First quarter
  $ 15.50     $ 11.65  
Second quarter
    18.67       13.50  
Third quarter
    23.70       17.70  
Fourth quarter
    25.10       21.35  
As of February 15, 2006, Pinnacle Financial had approximately 75 shareholders of record and, additionally, approximately 3,200 beneficial owners.
Pinnacle Financial has not paid any cash dividends since inception, and it does not anticipate that it will consider paying dividends until Pinnacle National has achieved a level of profitability appropriate to fund such dividends and support asset growth. See Item 1. “Business – Supervision and Regulation – Payment of Dividends” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on dividend restrictions applicable to Pinnacle Financial.
Pinnacle Financial did not repurchase any shares of its common stock during the quarter ended December 31, 2005.

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ITEM 6. SELECTED FINANCIAL DATA
                                         
    2005   2004   2003   2002   2001
    (in thousands, except per share data, ratios and percentages)
Statement of Financial Condition Data:
                                        
Total assets
   $ 1,016,772     $ 727,139     $ 498,421     $ 305,279     $ 175,439  
Loans, net of unearned income
     648,024       472,362       297,004       209,743       134,440  
Allowance for loan losses
     (7,858 )     (5,650 )     (3,719 )     (2,677 )     (1,832 )
Total securities
     279,080       208,170       139,944       73,980       19,886  
Deposits and securities sold under agreements to repurchase
     875,985       602,655       405,619       249,067       147,917  
Advances from FHLB
     41,500       53,500       44,500       21,500       8,500  
Subordinated debt
     30,929       10,310       10,310       —       —  
Stockholders’ equity
     63,436       57,880       34,336       32,404       18,291  
 
                                        
Income Statement Data:
                                        
Interest income
   $ 46,308     $ 27,679     $ 18,262     $ 12,561     $ 6,069  
Interest expense
     17,270       7,415       5,363       4,362       2,579  
Net interest income
     29,038       20,264       12,899       8,199       3,490  
Provision for loan losses
     2,152       2,948       1,157       938       1,670  
Net interest income after provision for loan losses
     26,886       17,316       11,742       7,261       1,820  
Noninterest income
     5,394       4,978       3,035       1,732       1,341  
Noninterest expense
     21,032       14,803       10,796       7,989       6,363  
Income (loss) before income taxes
     11,248       7,491       3,981       1,004       (3,202 )
Income tax expense (benefit)
     3,193       2,172       1,426       356       (2,065 )
Net income (loss)
   $ 8,055     $ 5,319     $ 2,555     $ 648     $ (1,137 )
 
                                        
Per Share Data:
                                        
Earnings (loss) per share – basic
   $ 0.96     $ 0.69     $ 0.35     $ 0.11     $ (0.29 )
Weighted average shares outstanding – basic
     8,408,663       7,750,943       7,384,106       6,108,942       3,963,196  
Earnings (loss) per share – diluted
   $ 0.85     $ 0.61     $ 0.32     $ 0.10     $ (0.29 )
Weighted average shares outstanding – diluted
     9,464,500       8,698,139       7,876,006       6,236,844       3,963,196  
Book value per share
   $ 7.53     $ 6.90     $ 4.65     $ 4.39     $ 3.96  
Common shares outstanding at end of period
     8,426,551       8,389,232       7,384,106       7,384,106       4,624,106  
 
                                        
Performance Ratios and Other Data:
                                        
Return on average assets
     0.93 %     0.89 %     0.66 %     0.29 %     (1.19 )%
Return on average stockholders’ equity
     13.23 %     12.31 %     7.70 %     2.47 %     (7.8 )%
Net interest margin (1)
     3.60 %     3.62 %     3.53 %     3.81 %     3.95 %
Net interest spread (2)
     3.16 %     3.34 %     3.23 %     3.42 %     3.29 %
Noninterest income to average assets
     0.62 %     0.83 %     0.78 %     0.76 %     1.41 %
Noninterest expense to average assets
     2.42 %     2.48 %     2.78 %     3.50 %     6.70 %
Efficiency ratio (3)
     61.1 %     58.6 %     67.8 %     80.4 %     131.7 %
Average loan to average deposit ratio
     81.3 %     79.0 %     85.5 %     98.5 %     94.9 %
Average interest-earning assets to average interest-bearing liabilities
     120.0 %     120.0 %     118.9 %     119.6 %     122.7 %
Average equity to average total assets ratio
     7.00 %     7.23 %     8.54 %     11.58 %     15.29 %
 
                                        
Asset Quality Ratios:
                                        
Allowance for loan losses to nonperforming assets
     1,708.3 %     1,006.9 %     981.3 %     143.4 %     732.8 %
Allowance for loan losses to total loans
     1.21 %     1.20 %     1.25 %     1.28 %     1.36 %
Nonperforming assets to total assets
     0.05 %     0.08 %     0.08 %     0.61 %     0.14 %
Nonaccrual loans to total loans
     0.07 %     0.12 %     0.13 %     0.89 %     0.19 %
Net loan charge-offs (recoveries) to average loans
     (0.01 )%     0.27 %     0.05 %     0.05 %     0.00 %
Net charge-offs (recoveries) as a percentage of:
                                        
Provision for loan losses
     (2.55 )%     34.49 %     9.94 %     9.91 %     0.00 %
Allowance for loan losses
     (7.00 )%     18.00 %     3.09 %     3.47 %     0.00 %
 
                                        

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    2005   2004   2003   2002   2001
    (in thousands, except per share data, ratios and percentages)
Capital Ratios:
                                        
Leverage (4)
     9.9 %     9.7 %     9.7 %     11.1 %     11.6 %
Tier 1 risk-based capital
     11.7 %     11.7 %     11.8 %     12.7 %     10.1 %
Total risk-based capital
     12.6 %     12.7 %     12.8 %     13.8 %     11.2 %
 
(1)   Net interest margin is the result of net interest income for the period divided by average interest earning assets.
 
(2)   Net interest spread is the result of the difference between the interest yield earned on interest earning assets less the interest paid on interest bearing liabilities.
 
(3)   Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.
 
(4)   Leverage ratio is computed by dividing Tier 1 capital by average total assets for the fourth quarter of each year.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition at December 31, 2005 and 2004 and our results of operations for each of the three years ended December 31, 2005. 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. Pinnacle Financial’s rapid growth from its inception through the fourth quarter of 2005 has had a material impact on Pinnacle Financial’s financial condition and results of operations. This rapid growth resulted in net income for the year ended December 31, 2005 of $0.85 per diluted share as compared to $0.61 and $0.32 per diluted share for 2004 and 2003, respectively. At December 31, 2005, loans totaled $648 million, as compared to $472 million at December 31, 2004, while total deposits increased to $810 million at December 31, 2005 from $571 million at December 31, 2004.
Results of Operations. Pinnacle Financial’s net interest income increased to $29.0 million in 2005 from $20.3 million in 2004. The net interest margin (the ratio of net interest income to average earning assets for the period) was 3.60% for the year ended December 31, 2005 compared to 3.62% for the same period in 2004.
Our provision for loan losses decreased $796,000 in 2005 to $2,152,000 from $2,948,000 in 2004. Although we continued to make provisions due to the increase in loan volumes in 2005, the provision amount was reduced due to a reduction in charge-offs in 2005 compared to 2004, an increase in recoveries of previously charged-off loans in 2005 compared to 2004 and improvement in the overall credit quality of our loan portfolio in 2005 compared to 2004. As our loan portfolio continues to grow, such growth will continue to be a major factor in determining the amount of our provision expense.
Noninterest income for 2005 compared to the same time period in 2004 increased by $416,000, or 8.4%, compared to an increase of 64% between 2004 and 2003. The increase in 2005 was primarily due to increased letter of credit fees, commissions from sales of insurance policies and increased revenues from Pinnacle Financial’s subsidiary, Pinnacle Credit Enhancement, Inc. The increase in 2004 when compared to 2003 was primarily due to Pinnacle National beginning a mortgage origination unit in early 2003, increases in investment services revenues between the periods, and increases in gains on the sales of loan and loan participations and securities available-for-sale.
Our continued growth in 2005 resulted in an increase of $6.2 million in noninterest expense compared to 2004 due to increases in salaries and employee benefits, equipment and occupancy expenses and other operating expenses. Similar increases occurred between 2004 and 2003 as noninterest expense increased $4.0 million between these two periods. The number of full-time equivalent employees increased from 89.5 at December 31, 2003 to 122.0 at December 31, 2004 and 156.5 at December 31, 2005. As a result, we experienced significant increases in compensation and employee benefit expense. We expect to add additional employees throughout 2006 which will cause our compensation and employee benefit expense to increase in future periods. Additionally, our branch expansion efforts during the last three years also increased noninterest expense. The increased operational expenses for the recently opened branches and the additional planned branch in late 2006 will continue to result in increased noninterest expense in future periods. Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 67.8% in 2003; 58.6% in 2004; and 61.1% in 2005.

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We believe that a rising interest rate environment, which we believe is somewhat more likely than a falling rate environment over the next few quarters, should result in greater net interest income for us than a falling or stagnant rate environment. At December 31, 2005, approximately 63.1% of our loan volumes are subject to repricing within the next year with approximately 53.5% classified as floating rate loans that reprice immediately with adjustments to our prime lending rate or other similarly published overnight interest rate indices. We also believe we will continue to increase assets with particular emphasis on floating rate lending. However, the additional revenues provided by these two items may not be sufficient to overcome any immediate increases in funding costs which would also be incurred in a rising rate environment as a result of competitive deposit pricing in our market area.
Conversely, a falling rate environment would serve to have the opposite effect on our net interest income. In a falling rate environment, we may not be able to reduce our deposit funding costs by any meaningful amount due to market pressures, while our interest income would decrease at a more rapid pace.
In the latter half of 2004, the Federal Reserve’s Open Market Committee began increasing its benchmark Fed Funds rate in 25 basis point increments. At the end of 2005, the benchmark Fed Funds rate was 4.25% as compared to 1.00% for substantially the entire first half of 2004. We believe these actions contributed favorably to our 2004 and 2005 results due to the repricing of our floating rate loans concurrently with Fed Funds rate increases. However, our deposit rates also increased during this period, which served to offset the impact of the increase on floating rate loans to a significant degree, especially in 2005. Should the Federal Reserve continue to increase the Fed Funds rates, we believe the impact of such actions will be no more favorable in 2006 than in 2005 due to increased pressure from competitors on deposit pricing.
Financial Condition. The $176 million increase in loans in 2005 contributed to the increase in our net income for 2005 when compared to a similar increase of $175 million in loans for the 2004 fiscal year. As we seek to increase our loan portfolio, we must also continue to monitor the risks inherent in our lending operations. If our allowance for loan losses is not sufficient to cover the estimated loan losses in our loan portfolio, increases to the allowance for loan losses would be required which would decrease our earnings.
We have successfully grown our total deposits to $810 million at December 31, 2005 compared to $571 million at December 31, 2004. This growth in deposits had a higher funding cost due to rising rates and increased deposit pricing competition in 2005 compared to 2004 and 2003. We typically adjust our loan yields at a faster rate than we adjust our deposit rates. As such, unless significant competitive pressures exist, our deposit funding costs do not usually adjust as quickly as do revenues from interest income on floating rate earning assets.
We continue to believe there is broad acceptance of our business model within the Nashville area and in our target markets of small businesses and affluent clients in the Nashville area. As a result, and because our sales pipeline remains strong at the current time, we believe we will continue to increase our loan and deposit balances for the 2006 fiscal year at amounts comparable to prior periods.
Capital and Liquidity. At December 31, 2005, our capital ratios, including our bank’s capital ratios, met regulatory minimum capital requirements. Additionally, at December 31, 2005, our bank would be considered to be “well-capitalized” pursuant to banking regulations.
In the past, we have been successful in procuring additional capital from the capital markets (via public and private offerings). This additional capital was required to support our growth. As of December 31, 2005, we believe we have sufficient capital to support our current growth plans. As a result, we do not foresee the need to consider any additional public or private offerings of common stock at this time.
On September 15, 2005, PNFP Statutory Trust II (“PNFP Trust II”), a Delaware statutory trust subsidiary, issued $20,000,000 of its trust preferred securities to institutional investors. PNFP Trust II purchased $20,619,000 of our Junior Subordinated Debt Securities due September 30, 2035 (the “Subordinated Debentures”) and we guaranteed, pursuant to a guarantee agreement, payment obligations of PNFP Trust II under the trust preferred securities. Proceeds of the issuance will provide additional capital to our bank. The Subordinated Debentures (and PNFP Trust II’s trust preferred securities) will be payable in 2035 and, until September 30, 2010, will bear interest at an annual rate equal to 5.848% per annum and thereafter at a floating rate based on a spread over three-month LIBOR which is set each quarter. We may defer the payment of interest at any time for a period up to twenty consecutive quarters provided the deferral period does not extend past the stated maturity. Except upon the occurrence of certain events resulting in a change in the capital treatment or tax treatment of the Subordinated Debentures or resulting in PNFP Trust II being deemed to be an

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investment company required to register under the Investment Company Act of 1940, we may not redeem the Subordinated Debentures until after September 30, 2010.
On October 3, 2005, we announced that we had entered into a definitive agreement to merge with Cavalry Bancorp, Inc. (“Cavalry”), a one-bank holding company located in Murfreesboro, Tennessee with approximately $638 million in assets as of December 31, 2005. We are in the process of obtaining the required regulatory approvals to consummate the merger, which is currently anticipated to close before the end of the first quarter of 2006.
Critical Accounting Estimates
The accounting principles we follow and our methods of applying these principles conform with United States 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 (ALL), have been critical to the determination of our financial position and results of operations.
Allowance for Loan Losses (ALL). Our management assesses the adequacy of the ALL 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 ALL consists of two portions: (1) an allocated amount representative of specifically identified credit exposure and exposures readily predictable by historical or comparative experience; and (2) an unallocated amount representative of inherent loss which is not readily identifiable. Even though the ALL is composed of two components, the entire ALL is available to absorb any credit losses.
We establish the allocated amount separately for two different risk groups: (1) unique loans (commercial loans, including those loans considered impaired); and (2) homogeneous loans (generally consumer loans). We base the allocation for unique loans primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. We then assign each risk-rating grade a loss ratio, which is determined based on the experience of management, discussions with banking regulators and our independent loan review process. We estimate losses on impaired loans based on estimated cash flows discounted at the loan’s original effective interest rate or based on the underlying collateral value. Based on management’s experience, we also assign loss ratios to our consumer portfolio. These loss ratios are assigned to the various homogenous categories of the consumer portfolio (e.g., automobile, residential mortgage, home equity).
The unallocated amount is particularly subjective and does not lend itself to exact mathematical calculation. The unallocated amount represents estimated inherent credit losses which may exist, but have not yet been identified, as of the balance sheet date. In estimating the unallocated amount, we consider such matters as changes in the local or national economy, the depth or experience in the lending staff, any concentrations of credit in any particular industry group, and new banking laws or regulations. After we assess applicable factors, we evaluate the aggregate unallocated amount based on our management’s experience.
We then test the resulting ALL balance by comparing the balance in the ALL to historical trends 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 ALL in its entirety. The audit committee of our board of directors reviews the assessment prior to the filing of quarterly and annual financial information.
In assessing the adequacy of the ALL, 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 reviewer, who is not an employee of Pinnacle National, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process.
Results of Operations
Our results for fiscal years 2005, 2004 and 2003 were highlighted by the continued growth in loans and other earning assets and deposits, which resulted in increased revenues and expenses. The following is a summary of our results of operations (dollars in thousands):

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    Years ended     2005-2004     Year ended     2004-2003  
    December 31,     Percent     Dec. 31,     Percent  
    2005     2004     Increase     2003     Increase  
Interest income
   $ 46,308     $ 27,679       67.3 %   $ 18,262       51.6 %
Interest expense
     17,270       7,415       132.9 %     5,363       38.3 %
 
                              
Net interest income
     29,038       20,264       43.3 %     12,899       57.1 %
Provision for loan losses
     2,152       2,948       -27.0 %     1,157       154.8 %
 
                              
Net interest income after provision for loan losses
     26,886       17,316       55.3 %     11,742       47.5 %
Noninterest income
     5,394       4,978       8.4 %     3,035       64.0 %
Noninterest expense
     21,032       14,803       42.1 %     10,796       37.1 %
 
                              
Net income before income taxes
     11,248       7,491       50.2 %     3,981       88.2 %
Income tax expense
     3,193       2,172       47.0 %     1,426       52.3 %
 
                              
Net income
   $ 8,055     $ 5,319       51.4 %   $ 2,555       108.2 %
 
                              
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 the most significant component of our earnings. For the year ended December 31, 2005, we recorded net interest income of $29,038,000, which resulted in a net interest margin of 3.60%. For the year ended December 31, 2004, we recorded net interest income of $20,264,000, which resulted in a net interest margin of 3.62%. For the year ended December 31, 2003, we recorded net interest income of $12,899,000, which resulted in a net interest margin of 3.53% for the year.
The following table sets 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 total interest-earning assets and total interest-bearing liabilities, net interest spread and net interest margin for each of the years in the three-year period ended December 31, 2005 (dollars in thousands):

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    2005     2004     2003  
    Average             Rates/     Average             Rates/     Average             Rates/  
    Balances     Interest     Yields     Balances     Interest     Yields     Balances     Interest     Yields  
Interest-earning assets:
                                                                        
Loans (1)
   $ 562,061     $ 35,167       6.26 %   $ 373,287     $ 19,910       5.34 %   $ 254,550     $ 13,709       5.39 %
Securities:
                                                                        
Taxable
     204,532       9,086       4.44 %     162,712       6,936       4.26 %     100,547       4,158       4.14 %
Tax-exempt (2)
     31,578       1,116       4.66 %     13,899       491       4.55 %     6,172       217       4.37 %
Federal funds sold
     20,714       682       3.29 %     14,716       182       1.23 %     6,410       60       0.94 %
Other
     3,827       257       7.69 %     2,894       160       6.26 %     2,174       118       6.06 %
 
                                                      
Total interest-earning assets
     822,712       46,308       5.68 %     567,508       27,679       4.91 %     369,853       18,262       4.96 %
 
                                                            
Nonearning assets
     47,322                       29,872                       18,231                  
 
                                                                  
Total assets
   $ 870,034                     $ 597,380                     $ 388,084                  
 
                                                                  
 
                                                                        
Interest-bearing liabilities:
                                                                        
Interest-bearing deposits:
                                                                        
Interest checking
   $ 65,119     $ 659       1.01 %   $ 38,544     $ 191       0.50 %   $ 19,324     $ 95       0.49 %
Savings and money market
     250,136       4,860       1.94 %     173,318       1,520       0.88 %     100,032       870       0.87 %
Certificates of deposit
     256,056       8,171       3.19 %     182,221       4,118       2.26 %     136,203       3,384       2.48 %
 
                                                      
Total deposits
     571,311       13,690       2.40 %     394,083       5,829       1.48 %     255,559       4,349       1.70 %
Securities sold under agreements to repurchase
     54,811       1,315       2.40 %     20,466       104       0.51 %     14,496       66       0.45 %
Federal funds purchased
     1,607       57       3.51 %     1,705       24       1.43 %     2,926       44       1.51 %
Federal Home Loan Bank advances
     42,326       1,222       2.89 %     46,284       1,027       2.22 %     38,000       904       2.38 %
Subordinated debt
     16,361       986       6.02 %     10,310       431       4.18 %     —       —       —  
 
                                                      
Total interest-bearing liabilities
     686,416       17,270       2.52 %     472,848       7,415       1.57 %     310,981       5,363       1.72 %
Noninterest-bearing deposits
     120,007       —       —       78,616       —       —       42,308       —       —  
 
                                                      
Total deposits and interest-bearing liabilities
     806,423       17,270       2.14 %     551,464       7,415       1.34 %     353,289       5,363       1.52 %
 
                                                            
Other liabilities
     2,730                       2,707                       1,635                  
Stockholders’ equity
     60,881                       43,209                       33,160                  
 
                                                                  
 
   $ 870,034                     $ 597,380                     $ 388,084                  
 
                                                                  
Net interest income
           $ 29,038                     $ 20,264                     $ 12,899          
 
                                                                  
Net interest spread (3)
                     3.16 %                     3.34 %                     3.24 %
Net interest margin
                     3.60 %                     3.62 %                     3.53 %
 
(1)   Average balances of nonperforming loans are included in the above amounts.
 
(2)   Yields based on the carrying value of those tax exempt instruments are shown on a fully tax equivalent basis.
 
(3)   The net interest spread calculation excludes the impact of demand deposits. Had the impact of demand deposits been included the net interest spread for the year ended December 31, 2005 would have been 3.54% compared to a net interest spread for the years ended December 31, 2004 and 2003 of 3.56% and 3.44%, respectively.
As noted above, the net interest margin for 2005 was 3.60% compared to a net interest margin of 3.62% for the same period in 2004. The net change in the net interest margin was relatively small because the net increases in the yield on interest-earning assets between the two periods approximated the increases in the rate paid on interest-bearing liabilities. The net interest margin for 2003 was 3.53%. Other matters related to the changes in net interest income, net interest yields and rates, and net interest margin are presented below:
  •   Our loan yields increased between 2005 and 2004 by 92 basis points. The pricing of a large portion of our loan portfolio is tied to our prime rate. Our weighted average prime rate for 2003 was 4.10% compared to 4.40% in 2004 and 6.25% in 2005. The rates for 2005 were higher due to periodic increases in our prime lending rate.
 
  •   We have been able to grow our funding base significantly. For asset/liability management purposes in 2005, we elected to allocate a greater proportion of such funds to our loan portfolio versus our securities and shorter-term investment portfolio than in 2004. For 2005, average loan balances were 65% of total assets compared to 62% in 2004. Loans generally have higher yields than do securities and other shorter-term investments. This change in allocation contributed to the increase in the overall total interest earning asset yields between 2005 and 2004.
 
  •   During 2005, overall deposit rates were higher than those rates for the comparable period in 2004. Changes in interest rates paid on such products as interest checking, savings and money market accounts, securities sold under agreements to repurchase and Federal funds purchased will generally increase or decrease in a manner that is consistent with changes in the short-term rate environment. During 2005, as was the case

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      with our prime lending rate, short-term rates were higher than in 2004. We also monitor the pricing of similar products by our primary competitors. The changes in the short-term rate environment and the pricing of our primary competitors required us to increase these rates in 2005 compared to the same period in 2004 which resulted in increased pressure on our net interest margin.
 
  •   During 2005, the average balances of noninterest bearing deposit balances, interest bearing transaction accounts, savings and money market accounts and securities sold under agreements to repurchase amounted to 61% of our total funding compared to 56% in 2004. These funding sources generally have lower rates than do other funding sources, such as certificates of deposit and other borrowings. As a result, the average rates on fundings for 2005 were lower than they would have been otherwise due to this change in funding mix.
 
  •   Similarly, the short- and long-term rate environment impacts rates paid on certificates of deposit and advances from the FHLB; however, these items are also impacted by our decisions to alter the mix of maturities of the underlying accounts within these items. Furthermore, the timing of the initial sale of the certificate of deposit or the funding of the FHLB advance also impacts the rates paid on these items. Our results were impacted by certificates of deposit and advances from the FHLB that had been acquired during periods of lower interest rates. Such items matured during the period between 2005 and 2004, and were replaced by certificates of deposit and advances from the FHLB which had higher interest rates. These matters contributed to the increase in the rates paid on certificates of deposit and advances from the FHLB between the two periods.
 
  •   Also impacting the net interest margin during 2005 compared to 2004 was pricing of our floating rate subordinated indebtedness and the incurrence of additional fixed rate subordinated indebtedness. The interest rate charged on this indebtedness is generally higher than other funding sources. The rate charged on the floating rate portion of the indebtedness is determined in relation to the three-month LIBOR index and reprices quarterly. During 2005, the short-term interest rate environment was higher than during 2004, and, as a result, the pricing for this funding source was higher in 2005 than in 2004. Additionally, in September 2005, we issued an additional $20 million in fixed rate subordinated indebtedness at a rate of 5.848% for the first five years with a floating rate determined in relation to three-month LIBOR thereafter.
Rate and Volume Analysis. Net interest income increased by $8,774,000 between the years ended December 31, 2005 and 2004 and by $7,365,000 between the years ended December 31, 2004 and 2003. The following is an analysis of the changes in our net interest income comparing the changes attributable to rates and those attributable to volumes (dollars in thousands):

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    2005 Compared to 2004     2004 Compared to 2003  
    Increase (decrease) due to     Increase (decrease) due to  
    Rate     Volume     Net     Rate     Volume     Net  
Interest-earning assets:
                                                
Loans
   $ 3,891     $ 11,366     $ 15,257     $ (137 )   $ 6,338     $ 6,201  
Securities:
                                                
Taxable
     303       1,847       2,150       132       2,646       2,778  
Tax-exempt
     40       585       625       —       274       274  
Federal funds sold
     407       93       500       23       99       122  
Other
     44       53       97       4       38       42  
 
                                    
Total interest-earning assets
     4,685       13,944       18,629       22       9,395       9,417  
 
                                    
 
Interest-bearing liabilities:
                                                
Interest-bearing deposits:
                                                
Interest checking
   $ 282     $ 186     $ 468     $ 1     $ 95     $ 96  
Savings and money market
     2,447       893       3,340       12       638       650  
Certificates of deposit
     2,044       2,009       4,053       (327 )     1,061       734  
 
                                    
Total deposits
     4,773       3,088       7,861       (314 )     1,794       1,480  
Securities sold under agreements to repurchase
     834       377       1,211       9       29       38  
Federal funds purchased
     34       (1 )     33       (2 )     (18 )     (20 )
Federal Home Loan Bank advances
     288       (93 )     195       (66 )     189       123  
Subordinated debt
     239       316       555       —       431       431  
 
                                    
Total interest-bearing liabilities
     6,168       3,687       9,855       (373 )     2,425       2,052  
 
                                    
Net interest income
   $ (1,483 )   $ 10,257     $ 8,774     $ 395     $ 6,970     $ 7,365  
 
                                    
Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. The change attributed to rates and volumes (change in rate times change in volume) is allocated between volume change and rate change at the ratio of how much each component bears to the absolute value of their total.
Provision for Loan Losses. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in our management’s evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. The provision for loan losses amounted to $2,152,000, $2,948,000 and $1,157,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
Based upon our management’s evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at December 31, 2005. A significant decrease in gross charge-offs, increases in recoveries of previously charged-off loans and improvement in the overall credit quality of our loan portfolio, net of the effect of an increase in loan volumes, were the primary causes for the decrease in our provision for loan losses in 2005 when compared to 2004. Increased loan volumes and increased charge-offs during 2004 were the primary causes for the increased provision expense in 2004 when compared to 2003.
Based upon management’s assessment of the loan portfolio, we adjust our allowance for loan losses to an amount deemed appropriate to adequately cover inherent risks in the loan portfolio. While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by our management and are reviewed from time to time by Pinnacle National’s regulators, they are necessarily approximate and imprecise. There exist factors beyond our control, such as general economic conditions both locally and nationally, which may negatively impact, materially, the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.
Noninterest Income. Our noninterest income is composed of several components, some of which vary significantly between quarterly periods. Service charges on deposit accounts and other noninterest income generally reflect our growth, while investment services and fees from the origination of mortgage loans will often reflect market conditions and fluctuate from

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period to period. The opportunities for recognition of gains on loans and loan participations sold and gains on sales of investment securities may also vary widely from quarter to quarter and year to year.
The following is the makeup of our noninterest income for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands):
                                         
    Years ended     2005-2004     Year ended     2004-2003  
    December 31,     Percent     Dec. 31,     Percent  
    2005     2004     Increase     2003     Increase  
Noninterest income:
                                        
Service charges on deposit accounts
   $ 978     $ 956       2.3 %   $ 513       86.4 %
Investment services
     1,836       1,657       10.8 %     998       66.0 %
Gains on sales of loans and loan participations, net:
                                        
Fees from the origination and sale of mortgage loans, net of sales commissions
     1,096       760       44.2 %     415       83.1 %
Gains on loans and loan participations sold, net
     152       514       -70.4 %     334       53.9 %
Gain on sale of investment securities, net
     114       357       -68.1 %     248       44.0 %
Other noninterest income:
                                        
Letters of credit fees
     527       272       93.8 %     186       46.2 %
Bank-owned life insurance
     74       78       -5.1 %     90       -13.3 %
Equity in earnings of Collateral Plus, LLC
     216       9       2300.0 %     —       —  
Other noninterest income
     401       375       6.9 %     251       49.4 %
 
                              
Total noninterest income
   $ 5,394     $ 4,978       8.4 %   $ 3,035       64.0 %
 
                              
As shown, the largest component of noninterest income is commissions and fees from our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle National. At December 31, 2005, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $441 million in brokerage assets held with Raymond James Financial Services, Inc. compared to $398 million at December 31, 2004 and $319 million at December 31, 2003.
Service charge income for 2005 increased slightly over that of 2004 due to an increase in the number of deposit accounts subject to service charges. However, this increase in service charges in 2005 was offset significantly by the earnings credit rate provided by Pinnacle National to its commercial deposit customers. This earnings credit rate is used by commercial customers to reduce their deposit service charges and is based on the average balances of their checking accounts at Pinnacle National. This earnings credit rate is indexed to a national index. Service charge income for 2004 increased over that of 2003 due to an increase in the number of deposit accounts subject to service charges with only a modest change in the earnings credit rate.
Additionally, mortgage related fees, attributable to Pinnacle National beginning a mortgage origination unit during the first quarter of 2003, also provided for a significant portion of the increase in noninterest income between 2005, 2004 and 2003. These mortgage fees are for loans originated by Pinnacle National and subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage origination fees increase in lower interest rate environments and decrease in rising interest rate environments. As a result, mortgage origination fees may fluctuate greatly in response to a changing rate environment.
We also sell certain loan participations to our correspondent banks. Such sales are primarily related to new lending transactions in excess of internal loan limits or industry concentration limits. At December 31, 2005 and pursuant to participation agreements with these correspondents, we had participated approximately $62.7 million of originated loans to these other banks compared to $57.7 million at December 31, 2004. These participation agreements have various provisions regarding collateral position, pricing and other matters. Many of these agreements provide that we pay the correspondent less than the loan’s contracted interest rate. Pursuant to Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125”, in those transactions whereby the correspondent is receiving a lesser amount of interest than the amount owed by the customer, we record a net gain along with a corresponding asset representing the present value of our net retained cash flows The resulting asset is amortized over the term of the loan. Conversely, should a loan be paid prior to maturity any remaining unamortized asset is charged as a reduction to gains on loan participations sold. We recorded net gains of $152,000, $234,000 and $334,000, for each of the three years ended December 31, 2005, 2004 and 2003, respectively. At

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December 31, 2005, the remaining unamortized asset associated with the previously recognized gains approximated $477,000. We intend to maintain relationships with our correspondents in order to sell participations in future loans to these or other correspondents primarily due to limitations on loans to a single borrower or industry concentrations. In general, the Cavalry merger should result in an increase in capital which we anticipate will increase our lending limits for such items as loans to a single borrower and loans to a single industry such that our need to participate such loans will be reduced. In any event, the timing of participations may cause the level of gains, if any, to vary significantly.
During the third quarter of 2004, we sold a loan to an individual and recorded a gain on the sale of this loan of $280,000 which is included in gains on sale of loans. We had acquired this loan pursuant to a settlement agreement with a borrower for which we had no basis in the loan.
Also included in noninterest income for the year ended December 31, 2005, were net gains of approximately $114,000 realized from the sale of approximately $6.8 million of available-for-sale securities. This compares to $357,000 in gains on the sale of approximately $28.4 million of investment securities for the year ended December 31, 2004 and to $248,000 in gains on the sale of approximately $23.1 million of investment securities for the year ended December 31, 2003.
During the three year period ended December 31, 2005, we also experienced significant growth in fees from the issuance of letters of credit. Over the three year period, we have increased both our pricing and volumes of letters of credit which contributed to the increases in our noninterest income.
During the year ended December 31, 2002, Pinnacle National acquired life insurance policies on five key executives. Pinnacle National is the owner of the policies and the beneficiary of the death proceeds from these policies. To acquire these policies, Pinnacle National paid a one-time premium of $1.8 million and, in return, Pinnacle National was guaranteed an initial crediting rate for the first year of the contracts which is then reset quarterly thereafter. This crediting rate serves to increase the cash surrender value of the policies over the life of the policies and amounted to approximately $74,000, $78,000 and $90,000 during the years ended December 31, 2005, 2004 and 2003, respectively. At December 31, 2005, the aggregate cash surrender value of these policies, which is reflected in other assets on our consolidated balance sheet, was $2.1 million. Pinnacle National has not borrowed any funds against these policies as of December 31, 2005.
At the end of 2004, we formed a wholly-owned subsidiary, Pinnacle Credit Enhancement Holdings, Inc. (“PCEH”). PCEH owns a 24.5% interest in Collateral Plus, LLC. Collateral Plus, LLC serves as an intermediary between investors and borrowers in certain financial transactions whereby the borrowers require enhanced collateral in the form of guarantees or letters of credit issued by the investors for the benefit of banks and other financial institutions. Our equity in the earnings of Collateral Plus, LLC for the years ended December 31, 2005 and 2004 were approximately $216,000 and $9,000, respectively.
Noninterest Expense. Noninterest expense consists of salaries and employee benefits, equipment and occupancy expenses, and other operating expenses. The following is the makeup of our noninterest expense for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands):

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    Years ended     2005-2004     Year ended     2004-2003  
    December 31,     Percent     Dec. 31,     Percent  
    2005     2004     Increase     2003     Increase  
Noninterest expense:
                                        
Salaries and employee benefits:
                                        
Salaries
   $ 8,565     $ 5,942       44.1 %   $ 4,474       32.8 %
Commissions
     714       610       17.0 %     420       45.2 %
Other compensation, primarily incentives
     2,346       1,375       70.6 %     1,318       4.3 %
Employee benefits and other
     1,506       1,119       34.6 %     796       40.6 %
 
                              
Total salaries and employee benefits
     13,131       9,046       45.2 %     7,008       29.1 %
 
                              
Equipment and occupancy
     3,767       2,406       56.6 %     1,827       31.7 %
Marketing and business development
     698       607       15.0 %     387       56.8 %
Postage and supplies
     618       492       25.6 %     348       41.4 %
Other noninterest expense:
                                        
Accounting and auditing
     646       540       19.6 %     173       212.1 %
Consultants, including independent loan review
     123       182       -32.4 %     88       106.8 %
Legal, including borrower-related charges
     245       280       -12.5 %     190       47.4 %
OCC exam fees
     182       131       38.9 %     94       39.4 %
Directors’ fees
     229       138       65.9 %     102       35.3 %
Insurance, including FDIC assessments
     322       256       25.8 %     119       115.1 %
Other noninterest expense
     1,071       725       47.7 %     460       57.6 %
 
                              
Total noninterest expense
     2,818       2,252       25.1 %     1,226       83.7 %
 
                              
Total noninterest expense
   $ 21,032     $ 14,803       42.1 %   $ 10,796       37.1 %
 
                              
Expenses have generally increased between the above periods due to personnel additions occurring throughout each period, the continued development of our branch network and other expenses which increase in relation to our growth rate. We anticipate continued increases in our expenses in the future when compared to 2005 and prior periods for such items as additional personnel, the opening of additional branches, legal and audit expenses and other expenses which tend to increase in relation to our growth. Additionally, we will adopt SFAS Statement 123R (“SFAS 123R) in the first quarter of 2006 which addresses the accounting for employee equity based incentives. We will adopt SFAS 123R using the modified prospective method. As a result, our compensation expense will increase in all future periods as a result of this accounting pronouncement.
At December 31, 2005, we employed 156.5 full time equivalent employees compared to 122.0 at December 31, 2004 and 89.5 at the end of 2003. We intend to continue to add employees to our work force for the foreseeable future, which will cause our salary costs to increase in future periods.
We believe that variable pay incentives are a valuable tool in motivating an employee base that is focused on providing our clients effective financial advice and increasing shareholder value. As a result, and unlike many other financial institutions, substantially all of our employees are eligible to participate in an annual cash incentive plan. Included in the salary and employee benefits amounts for the years ended December 31, 2005, 2004 and 2003, are $2,031,000; $1,135,000 and $1,167,000, respectively, was expense related to variable cash awards. This expense will fluctuate from year to year and quarter to quarter based on the estimation of achievement of performance targets and the increase in the number of associates eligible to receive the award. For 2005, the actual award to be paid to associates equaled 100% of their targeted award compared to 80% in 2004. The incentive plan for 2006 is expected to be structured similarly to prior year plans in that the award is based on the achievement of soundness and earnings objectives. Because of the relative experience of our associates, our compensation costs are, and we expect will continue to be, higher on a per associate basis than other financial institutions; however, we believe the experience and engagement of our associates also allows us to employ fewer people than most financial institutions our size.
During 2003, we opened two offices, one in the Rivergate area of Nashville and one in the Cool Springs area of Williamson County. During 2004, we opened a new branch office in the West End area of Nashville. In January of 2005 we opened an office in Franklin, Tennessee and in the second quarter of 2005 we opened an office in Hendersonville, Tennessee. These branch additions contributed to the increase in our equipment and occupancy expenses throughout the three year period and will contribute to increases in expenses in the future.

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Marketing and other business development and postage and supplies expenses are higher in 2005 compared to 2004 and 2003 due to increases in the number of customers and prospective customers; increases in the number of customer contact personnel and the corresponding increases in customer entertainment; and other business development expenses. Other noninterest expenses are significantly higher in 2005 over 2004 and 2003. Most of these increases are attributable to increased audit and accounting fees, legal fees and insurance expenses. The increase in audit and accounting fees in 2004 was primarily due to costs associated with the Sarbanes-Oxley Act internal control assessment and other related matters. Additionally, we experienced large increases in 2005 related to our increased volumes, such as appraisal related charges. We also increased our contributions and donations expenses in 2005 over that of the previous years.
Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and noninterest income) was 61.1% in 2005 compared to 58.6% in 2004 and to 67.8% in 2003. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue.
Income Taxes. The effective income tax expense rate for the year ended December 31, 2005 was approximately 28.4%, compared to an effective income tax expense rate for years ended December 31, 2004 and 2003 of approximately 29.0% and 35.8%, respectively. The reduction in the effective tax rate between the periods was primarily due to additional tax-exempt investment income and the formation of a real estate investment trust during the fourth quarter of 2004, which provides us with an alternative vehicle for raising capital should we so desire. Additionally, the ownership structure of this real estate investment trust provides certain state income tax benefits which also lowered our effective tax rate.
The effective tax rate was further reduced in 2005 and 2004 due to 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 to be realized thru 2010. The credit is available for each of the years ended December 31, 2005 and 2004 was $300,000. Pinnacle Financial believes that it and its subsidiary has complied with the various regulatory provisions of the New Markets Tax Credit program and has claimed the credit in its 2004 Federal income tax return and will claim the credit in 2005.

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Financial Condition
Our consolidated balance sheet at December 31, 2005 reflects significant growth since December 31, 2004. Total assets grew from $727 million at December 31, 2004 to $1.02 billion at December 31, 2005, a 40% increase. Total deposits grew $239 million during 2005, an increase of 42%. We invested substantially all of the additional deposits and other fundings in loans, which grew by $176 million during 2005, and securities, which increased by $71 million in the same period.
Loans. The composition of loans at December 31 for each of the past five years and the percentage (%) of each classification to total loans are summarized as follows (dollars in thousands):
                                                                                 
    At December 31,  
    2005     2004     2003     2002     2001  
    Amount     Percent     Balances     Percent     Balances     Percent     Balances     Percent     Balances     Percent  
Commercial real estate — Mortgage
   $ 148,102       22.9 %   $ 117,123       24.8 %   $ 68,507       23.1 %   $ 58,965       28.1 %   $ 36,179       26.9 %
Commercial real estate — Construction
     30,295       4.7 %     8,428       1.8 %     8,211       2.8 %     5,397       2.6 %     5,977       4.4 %
Commercial — Other
     239,129       36.9 %     189,456       40.1 %     129,882       43.7 %     98,722       47.1 %     59,839       44.5 %
 
                                                            
Total commercial
     417,526       64.4 %     315,007       66.7 %     206,600       69.6 %     163,084       77.8 %     101,995       75.9 %
 
                                                            
Consumer real estate — Mortgage
     169,953       26.2 %     126,907       26.9 %     76,042       25.6 %     37,533       17.9 %     26,535       19.7 %
Consumer real estate — Construction
     37,372       5.8 %     14,991       3.2 %     3,077       1.0 %     1,971       0.9 %     381       0.3 %
Consumer — Other
     23,173       3.6 %     15,457       3.3 %     11,285       3.8 %     7,155       3.4 %     5,529       4.1 %
 
                                                            
Total consumer
     230,498       35.6 %     157,355       33.3 %     90,404       30.4 %     46,659       22.2 %     32,445       24.1 %
 
                                                            
Total loans
   $ 648,024       100.0 %   $ 472,362       100.0 %   $ 297,004       100.0 %   $ 209,743       100.0 %   $ 134,440       100.0 %
 
                                                            
The following table classifies our fixed and variable rate loans at December 31, 2005 according to contractual maturities of (1) one year or less, (2) after one year through five years, and (3) after five years. The table also classifies our variable rate loans pursuant to the contractual repricing dates of the underlying loans (dollars in thousands):
                                         
    Amounts at December 31, 2005     Percentages to total loans  
    Fixed     Variable             at December 31,  
    Rates     Rates     Totals     2005     2004  
Based on contractual maturity:
                                        
Due within one year
   $ 17,419     $ 206,196     $ 223,615       34.5 %     31.4 %
Due in one year to five years
     147,730       107,905       255,635       39.4 %     40.8 %
Due after five years
     40,759       128,015       168,774       26.0 %     27.8 %
 
                              
Totals
   $ 205,908     $ 442,116     $ 648,024       100.0 %     100.0 %
 
                              
 
                                        
Based on contractual repricing dates:
                                        
Daily floating rate
   $ —     $ 346,784     $ 346,784       53.5 %     56.0 %
Due within one year
     17,419       44,853       62,272       9.6 %     9.1 %
Due in one year to five years
     147,730       38,634       186,364       28.8 %     28.8 %
Due after five years
     40,759       11,845       52,604       8.1 %     6.1 %
 
                              
Totals
   $ 205,908     $ 442,116     $ 648,024       100.0 %     100.0 %
 
                              
The above information does not consider the impact of scheduled principal payments. Daily floating rate loans are tied to Pinnacle National’s prime lending rate or a national interest rate index with the underlying loan rates changing in relation to changes in these indexes.
Non-Performing Assets. The specific economic and credit risks associated with our loan portfolio include, but are not limited to, a general downturn in the economy which could affect employment rates in our market area, general real estate market deterioration, interest rate fluctuations, deteriorated or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of laws and regulations.
We attempt to reduce these economic and credit risks by adherence to loan to value guidelines for collateralized loans, by investigating the creditworthiness of the borrower and by monitoring the borrower’s financial position. Also, we establish and periodically review our lending policies and procedures. Banking regulations limit our exposure by prohibiting loan relationships that exceed 15% of Pinnacle National’s statutory capital in the case of loans that are not fully secured by readily marketable or other permissible types of collateral.

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Pinnacle National discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. At December 31, 2005, we had $460,000 in loans on nonaccrual compared to $561,000 at December 31, 2004.
There were no other loans 90 past due and still accruing interest at December 31, 2005 compared to approximately $146,000 in loans at December 31, 2004 which were 90 days past due and still accruing interest. At December 31, 2005 and 2004, no loans were deemed to be restructured loans. Additionally, we have not had any repossessed real estate properties classified as Other Real Estate Owned at any year-end since inception. The following table is a summary of our nonperforming assets at December 31 for each of the five years we have been in existence (dollars in thousands):
                                         
    At December 31,  
    2005     2004     2003     2002     2001  
Nonaccrual loans (1)
   $ 460     $ 561     $ 379     $ 1,845     $ 250  
Restructured loans
     —       —       —       —       —  
Other real estate owned
     —       —       —       —       —  
 
                              
Total nonperforming assets
     460       561       379       1,845       250  
Accruing loans past due 90 days or more
     —       146       182       22       —  
 
                              
Total nonperforming assets and accruing loans past due 90 days or more
   $ 460     $ 707     $ 561     $ 1,867     $ 250  
 
                              
Total loans outstanding
   $ 648,024     $ 472,362     $ 297,004     $ 209,743     $ 134,440  
 
                              
 
                                        
Ratio of nonperforming assets and accruing loans past due 90 days or more to total loans outstanding at end of period
     0.07 %     0.15 %     0.19 %     0.89 %     0.19 %
 
                              
Ratio of nonperforming assets and accruing loans past due 90 days or more to total allowance for loan losses at end of period
     5.85 %     12.51 %     15.08 %     69.74 %     13.65 %
 
                              
 
(1)   Interest income that would have been recorded in 2005 related to nonaccrual loans was $21,000 compared to $41,000 for the year ended December 31, 2004 and $75,000 for the year ended December 31, 2003, none of which is included in interest income or net income for the applicable periods.
Potential problem assets, which are not included in nonperforming assets, amounted to $1,320,000, or 0.20%, at December 31, 2005 of total loans outstanding, compared to $24,000 at December 31, 2004. Potential problem assets represent those assets with a potential weakness or a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle National’s primary regulator for loans classified as substandard.
Allowance for Loan Losses (ALL). We maintain the ALL at a level that our management deems appropriate to adequately cover the inherent risks in the loan portfolio. As of December 31, 2005 and 2004, our allowance for loan losses was $7,858,000 and $5,650,000, respectively, which our management deemed to be adequate at each of the respective dates. The judgments and estimates associated with our ALL determination are described under “Critical Accounting Estimates” above.
Approximately 64% of our loan portfolio at December 31, 2005 consisted of commercial loans compared to 67% at December 31, 2004. Using standard industry codes, we periodically analyze our loan position with respect to our borrowers’ industries to determine if a concentration of credit risk exists to any one or more industries. We have significant credit exposures arising from loans outstanding and unfunded lines of credit to borrowers in the trucking industry, to operators of nonresidential buildings, and to land subdividers. We evaluate our exposure level to these industry groups periodically in order to determine if additional allowance allocations are warranted. At December 31, 2005 and 2004, we determined that we did not have any excessive exposure to any single industry which would warrant additional allowance allocations.
The following table sets forth, based on management’s best estimate, the allocation of the ALL to types of loans as well as the unallocated portion as of December 31 for each of the past five years and the percentage of loans in each category to the total loans (dollars in thousands):

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    At December 31,  
    2005     2004     2003     2002     2001  
    Amount     Percent     Balances     Percent     Balances     Percent     Balances     Percent     Balances     Percent  
Commercial real estate — Mortgage
   $ 1,488       22.9 %   $ 1,205       24.8 %   $ 723       23.1 %   $ 508       28.1 %   $ 354       26.9 %
Commercial real estate — Construction
     630       4.7 %     188       1.8 %     103       2.8 %     59       2.6 %     191       4.4 %
Commercial — Other
     2,305       36.9 %     1,711       40.1 %     1,236       43.7 %     977       47.1 %     509       44.5 %
 
                                                            
Total commercial
     4,423       64.4 %     3,104       66.7 %     2,062       69.6 %     1,544       77.8 %     1,054       75.9 %
 
                                                            
Consumer real estate — Mortgage
     1,286       26.2 %     869       26.9 %     607       25.6 %     392       17.9 %     109       19.7 %
Consumer real estate — Construction
     60       5.8 %     39       3.2 %     10       1.0 %     13       0.9 %     11       0.3 %
Consumer — Other
     552       3.6 %     396       3.3 %     320       3.8 %     193       3.4 %     201       4.1 %
 
                                                            
Total consumer
     1,898       35.6 %     1,304       33.3 %     937       30.4 %     598       22.2 %     321       24.1 %
 
                                                            
Unallocated
     1,537     NA     1,242     NA     720     NA     535     NA     457     NA
 
                                                            
Total allowance for loan losses
   $ 7,858       100.0 %   $ 5,650       100.0 %   $ 3,719       100.0 %   $ 2,677       100.0 %   $ 1,832       100.0 %
 
                                                            
The following is a summary of changes in the allowance for loan losses for the years ended December 31, 2005, 2004, 2003, 2002, and 2001 and the ratio of the allowance for loan losses to total loans as of the end of each period (dollars in thousands):
                                         
    For the year ended December 31,  
    2005     2004     2003     2002     2001  
Balance at beginning of period
   $ 5,650     $ 3,719     $ 2,677     $ 1,832     $ 162  
Provision for loan losses
     2,152       2,948       1,157       938       1,670  
Charged-off loans:
                                        
Commercial real estate — Mortgage
     —       —       —       —       —  
Commercial real estate — Construction
     —       —       —       (91 )     —  
Commercial — Other
     (61 )     (50 )     —       —       —  
Consumer real estate — Mortgage
     (38 )     (834 )     (123 )     —       —  
Consumer real estate — Construction
     —       —       —       —       —  
Consumer — Other
     (109 )     (148 )     (44 )     (2 )     —  
 
                              
Total charged-off loans
     (208 )     (1,032 )     (167 )     (93 )     —  
 
                              
Recoveries of previously charged-off loans:
                                        
Commercial real estate — Mortgage
     —       —       —       —       —  
Commercial real estate — Construction
     —       2       49       —       —  
Commercial — Other
     3       —       —       —       —  
Consumer real estate — Mortgage
     231       —       —       —       —  
Consumer real estate — Construction
     —       —       —       —       —  
Consumer — Other
     30       13       3       —       —  
 
                              
Total recoveries of previously charged-off loans
     264       15       52       —       —  
 
                              
Net (charge-offs) recoveries
     56       (1,017 )     (115 )     (93 )     —  
 
                              
Balance at end of period
   $ 7,858     $ 5,650     $ 3,719     $ 2,677     $ 1,832  
 
                              
 
                                        
Ratio of allowance for loan losses to total loans outstanding at end of period
     1.21 %     1.20 %     1.25 %     1.28 %     1.36 %
 
                              
Ratio of net charge-offs (recoveries) to average loans outstanding for the period
     (0.01 )%     0.27 %     0.05 %     0.05 %     —  
 
                              
Included in the charged-off loans during 2004 were two loans totaling approximately $884,000, $834,000 of which had been on nonaccrual status since June of 2004. We recovered approximately $231,000 of these particular charge-offs in 2005. During 2003, we charged-off $88,000 related to a particular loan. As a relatively new institution, we do not have loss experience comparable to more mature financial institutions; however, as our loan portfolio matures, we will have additional charge-offs as our losses materialize. We consider the amount and nature of our charge-offs in determining the adequacy of our allowance for loan losses.

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Investments. Our investment portfolio, consisting primarily of Federal agency bonds, state and municipal securities and mortgage-backed securities, amounted to $279.1 million, $208.2 million and $139.9 million at December 31, 2005, 2004 and 2003, respectively.
The following table shows the carrying value of investment securities according to contractual maturity classifications of (1) one year or less, (2) after one year through five years, (3) after five years through ten years, and (4) after ten years. Actual maturities may differ from contractual maturities of mortgage-backed securities because the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories noted below as of December 31, 2005, 2004 and 2003 (dollars in thousands):
                                                                                 
    At December 31,  
    U.S. Treasury     U.S. government     State and Municipal     Corporate        
    securities     agency securities     securities     securities     Totals  
    Amount     Yield     Balances     Percent     Balances     Percent     Balances     Percent     Balances     Percent  
At December 31, 2005:
                                                                                
Securities available-for-sale:
                                                                                
Due in one year or less
   $ —       — %   $ —       — %   $ —       — %   $ 404       3.3 %   $ 404       3.3 %
Due in one year to five years
     —       — %     16,205       4.3 %     5,105       4.5 %     1,802       3.4 %     23,112       4.3 %
Due in five years to ten years
     —       — %     14,315       5.1 %     19,787       5.2 %     —       — %     34,102       5.2 %
Due after ten years
     —       — %     —       — %     7,245       5.5 %     —       — %     7,245       5.5 %
 
                                                            
 
   $ —       — %   $ 30,520       4.7 %   $ 32,137       5.2 %   $ 2,206       3.4 %   $ 64,863       4.9 %
 
                                                            
Securities held-to-maturity:
                                                                                
Due in one year or less
   $ —       — %   $ —       — %   $ —       — %   $ —       — %   $ —       — %
Due in one year to five years
     —       — %     15,750       4.2 %     4,010       5.0 %     —       — %     19,760       4.4 %
Due in five years to ten years
     —       — %     1,997       5.0 %     5,574       5.0 %     —       — %     7,571       5.0 %
Due after ten years
     —       — %     —       — %     —       — %     —       — %     —       — %
 
                                                            
 
   $ —       — %   $ 17,747       4.3 %   $ 9,584       5.0 %   $ —       — %   $ 27,331       4.5 %
 
                                                            
At December 31, 2004:
                                                                                
Securities available-for-sale:
                                                                                
Due in one year or less
   $ —       — %   $ —       — %   $ —       — %   $ —       — %   $ —       — %
Due in one year to five years
     —       — %     2,982       3.5 %     —       — %     2,270       3.4 %     5,252       3.5 %
Due in five years to ten years
     —       — %     23,001       4.7 %     7,409       5.0 %     —       — %     30,410       4.8 %
Due after ten years
     —       — %     1,291       5.5 %     5,094       5.4 %     —       — %     6,385       5.4 %
 
                                                            
 
   $ —       — %   $ 27,274       4.6 %   $ 12,503       5.2 %   $ 2,270       3.4 %   $ 42,047       4.7 %
 
                                                            
Securities held-to-maturity:
                                                                                
Due in one year or less
   $ —       — %   $ —       — %   $ —       — %   $ —       — %   $ —       — %
Due in one year to five years
     —       — %     3,250       4.1 %     844       4.3 %     —       — %     4,094       4.1 %
Due in five years to ten years
     —       — %     14,496       4.3 %     7,953       5.0 %     —       — %     22,449       4.5 %
Due after ten years
     —       — %     —       — %     1,053       5.3 %     —       — %     1,053       5.3 %
 
                                                            
 
   $ —       — %   $ 17,746       4.3 %   $ 9,850       5.0 %   $ —       — %   $ 27,596       4.5 %
 
                                                            
At December 31, 2003:
                                                                                
Securities available-for-sale:
                                                                                
Due in one year or less
   $ —       — %   $ —       — %   $ —       — %   $ —       — %   $ —       — %
Due in one year to five years
     4,036       4.0 %     —       — %     2,005       4.8 %     —       — %     6,041       4.3 %
Due in five years to ten years
     2,316       4.3 %     20,920       4.4 %     7,221       5.0 %     —       — %     30,457       4.5 %
Due after ten years
     —       — %     —       — %     468       5.2 %     —       — %     468       5.2 %
 
                                                            
 
   $ 6,352       4.1 %   $ 20,920       4.4 %   $ 9,694       5.0 %   $ —       — %   $ 36,966       4.5 %
 
                                                            
We computed yields using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. We computed the weighted average yield for each maturity range using the acquisition price of each security in that range. We had no securities classified as held-to-maturity at December 31, 2003.
At December 31, 2005, the fair value of our mortgage-backed securities portfolio approximated $186.9 million compared to $138.5 million at December 31, 2004. All of these securities were included in our securities available-for-sale portfolio. A statistical comparison of our mortgage-backed portfolio at December 31, 2005 and 2004 follows:
                 
    December 31, 2005   December 31, 2004
Weighted average life
  4.81 years   5.01 years
Weighted average coupon
    5.24 %     5.18 %
Tax equivalent yield
    4.74 %     4.46 %
Modified duration (*)
    3.71 %     3.63 %
 
(*)   Modified duration represents an approximation of the change in value of a security for every 100 basis point increase or decrease in market interest rates.

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Deposits and Other Borrowings. We had approximately $810 million of deposits at December 31, 2005 compared to $571 million at December 31, 2004. Our deposits consist of noninterest and interest-bearing demand accounts, savings accounts, money market accounts and time deposits. Additionally, we entered into agreements with certain customers to sell certain of our securities under agreements to repurchase the security the following day. These agreements (which are typically associated with comprehensive treasury management programs for our clients and provide them with short-term returns for their excess funds) amounted to $65.8 million at December 31, 2005 compared to $31.9 million at December 31, 2004. Additionally, at December 31, 2005, we had borrowed $41.5 million in advances from the Federal Home Loan Bank of Cincinnati compared to $53.5 million at December 31, 2004.
Generally, banks classify their funding base as either core funding or non-core funding. Core funding consists of all deposits other than time deposits issued in denominations of $100,000 or greater while all other funding is deemed to be non-core. The following table represents the balances of our deposits and other fundings and the percentage of each type to the total at December 31, 2005 and 2004 (dollars in thousands):
                                 
    At December 31,  
    2005     Percent     2004     Percent  
Core funding:
                                
Noninterest-bearing deposit accounts
   $ 155,811       16.4 %   $ 114,318       17.2 %
Interest-bearing demand accounts
     72,521       7.6 %     51,752       7.8 %
Savings and money market accounts
     304,162       32.1 %     199,058       29.9 %
Time deposit accounts less than $100,000
     31,408       3.3 %     39,805       6.0 %
 
                        
Total core funding
     563,902       59.5 %     404,933       60.8 %
 
                        
Non-core funding:
                                
Time deposit accounts greater than $100,000
                                
Public funds
     106,928       11.3 %     61,377       9.2 %
Brokered deposits
     55,360       5.8 %     43,431       6.5 %
Other time deposits
     83,961       8.9 %     60,986       9.2 %
Securities sold under agreements to repurchase
     65,834       6.9 %     31,928       4.8 %
Federal Home Loan Bank advances
     41,500       4.4 %     53,500       8.0 %
Subordinated debt
     30,929       3.3 %     10,310       1.5 %
 
                        
Total non-core funding
     384,512       40.5 %     261,532       39.2 %
 
                        
Totals
   $ 948,414       100.0 %   $ 666,465       100.0 %
 
                        
The amount of time deposits issued in amounts of $100,000 or more as of December 31, 2005 and 2004 amounted to $246.2 million and $165.8 million, respectively. The following table shows our time deposits over $100,000 by category at December 31, 2005, based on time remaining until maturity of (1) three months or less, (2) over three but less than six months, (3) over six but less than twelve months and (4) over twelve months (dollars in thousands):
         
    At December 31, 2005  
Three months or less
  $ 67,068  
Over three but less than six months
    85,121  
Over six but less than twelve months
    48,115  
Over twelve months
    45,945  
 
      
 
   $ 246,249  
 
      
Subordinated debt. In 2003, we established PNFP Statutory Trust I, and in September of 2005, we established PNFP Statutory Trust II (collectively, the “Trusts”). Both are wholly-owned statutory business trusts. Pinnacle Financial is the sole sponsor of the Trusts and owns $929,000 of the Trusts’ common securities. The Trusts were created for the exclusive purpose of issuing 30-year capital trust preferred securities (“Trust Preferred Securities”) in the aggregate amount of $30,000,000 and using the proceeds from the issuance of the common and preferred securities to purchase $30,929,000 of junior subordinated debentures (“Subordinated Debentures”) issued by

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Pinnacle Financial. The sole assets of the Trusts are the Subordinated Debentures. Our $929,000 investment in the Trusts is included in other assets and the $30,929,000 obligation of Pinnacle Financial is included in subordinated debt.
The Trust Preferred Securities issued in 2003 bear a floating interest rate based on a spread over 3-month LIBOR which is set each quarter and mature on December 30, 2033. The Trust Preferred Securities issued in 2005 bear interest at a fixed rate of 5.848% for the first five years and then at a floating rate based on a spread over 3-month LIBOR which is set each quarter and mature on September 30, 2035. Distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. Pinnacle Financial guarantees the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trusts. Our obligations under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by Pinnacle Financial of the obligations of the Trusts under the Trust Preferred Securities.
Interest on the Subordinated Debentures is payable quarterly on each of the debentures. We may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and our ability to pay dividends on our common shares will be restricted.
The Trust Preferred Securities may be redeemed prior to maturity at our option on or after September 17, 2008 for PNFP Statutory Trust I and on or after September 30, 2010 for PNFP Statutory Trust II. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) the Trusts becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by the parent company on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for the Trusts to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as “Tier I capital” under the Federal Reserve capital adequacy guidelines.
Capital Resources. At December 31, 2005 and 2004, our stockholders’ equity amounted to $63.4 million and $57.9 million, respectively. During 2005, stockholders’ equity increased by $5.5 million due primarily to $8.1 million in net income offset by an other comprehensive loss of $2.9 million attributable to the after tax decrease in the fair value of our available-for-sale securities portfolio. During 2004, stockholders’ equity increased by $23.5 million. The increase was primarily attributable to our completing a follow-on stock offering which contributed approximately $18.2 million in additional capital; our net income for the year ended December 31, 2004 of $5.3 million; and other comprehensive loss of $126,000 attributable to the after tax decrease in fair value of our available-for-sale securities portfolio.
Dividends. Pinnacle National is subject to restrictions on the payment of dividends to Pinnacle Financial under federal banking laws and the regulations of the Office of the Comptroller of the Currency. We, in turn, are also subject to limits on payment of dividends to our shareholders by the rules, regulations and policies of federal banking authorities and the laws of the State of Tennessee. We have not paid any dividends to date, nor do we anticipate paying dividends to our shareholders for the foreseeable future. Future dividend policy will depend on Pinnacle National’s earnings, capital position, financial condition and other factors.
Market and Liquidity Risk Management
Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. Our Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.
Interest Rate Sensitivity. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for

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various types of loans and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off- balance sheet items. Measurements which we use to help us manage interest rate sensitivity include an earnings simulation model, an economic value of equity model, and gap analysis computations. These measurements are used in conjunction with competitive pricing analysis.
Earnings simulation model. We believe that interest rate risk is best measured by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of interest rates for the next 12 months and are combined with other factors in order to produce various earnings simulations. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net income to less than 10 percent for a 200 basis point change up or down in rates from management’s flat interest rate forecast over the next twelve months. The results of our current simulation model would indicate that our net interest income should increase with a gradual rise in interest rates over the next twelve months and decrease should interest rates fall over the same period.
Economic value of equity. Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity. To help limit interest rate risk, we have a guideline stating that for an instantaneous 200 basis point change in interest rates up or down, the economic value of equity will not change by more than 20 percent from the base case.
Gap analysis. An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed; for example, within three months or one year. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities (i.e., “asset sensitive”). A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets (i.e., “liability sensitive). During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal. To assist us in managing our interest rate sensitivity, we have established a targeted guideline such that the cumulative twelve-month interest rate-sensitivity gap ratio of earning assets to interest bearing liabilities of 85% to 100% in this time horizon.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.
We may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities and as one tool to manage our interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. At December 31, 2005 and December 31, 2004, we had not entered into any derivative contracts to assist managing our interest rate sensitivity.

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Liquidity Risk Management. The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.
In addition, Pinnacle National is a member of the Federal Home Loan Bank of Cincinnati. As a result, Pinnacle National receives advances from the Federal Home Loan Bank of Cincinnati, pursuant to the terms of various borrowing agreements, which assist it in the funding of its home mortgage and commercial real estate loan portfolios. Pinnacle National has pledged under the borrowing agreements with the Federal Home Loan Bank of Cincinnati certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral. At December 31, 2005, Pinnacle National had received advances from the Federal Home Loan Bank of Cincinnati totaling $41.5 million at the following rates and maturities (dollars in thousands):
                 
    Amount     Interest Rate  
January 27, 2006
   $ 2,000       2.79  
March 10, 2006
     3,000       1.97  
March 30, 2006
     13,000       4.33  
March 31, 2006
     4,000       2.10  
April 17, 2006
     2,000       2.64  
April 28, 2006
     1,500       2.52  
September 29, 2006
     4,000       2.39  
January 26, 2007
     2,000       3.24  
December 29, 2008
     10,000       4.97  
 
              
Total
   $ 41,500          
 
              
Weighted average interest rate
            3.64 %
 
              
At December 31, 2005, brokered certificates of deposit approximated $55.4 million which represented 5.8% of total fundings compared to $43.4 million and 6.5% at December 31, 2004. We issue these brokered certificates through several different brokerage houses based on competitive bid. Typically, these funds are for varying maturities from six months to two years and are issued at rates which are competitive to rates we would be required to pay to attract similar deposits from the local market as well as rates for Federal Home Loan Bank of Cincinnati advances of similar maturities. We consider these deposits to be a ready source of liquidity under current market conditions.
Our short-term borrowings (borrowings which mature within the next fiscal year) consist primarily of securities sold under agreements to repurchase (these agreements are typically associated with comprehensive treasury management programs for our clients and provide them with short-term returns for their excess funds), Federal Home Loan Bank of Cincinnati advances and Federal funds purchased. Information concerning our short-term borrowings as of and for each of the years in the three-year period ended December 31, 2005 is as follows (dollars in thousands):

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    2005   2004   2003
Amounts outstanding at year-end:
                        
Securities sold under agreements to repurchase
  $ 65,834     $ 31,928     $ 15,050  
Federal Home Loan Bank advances
    29,500       25,000       29,000  
 
                        
Weighted average interest rates at year-end:
                        
Securities sold under agreements to repurchase
    3.16 %     0.90 %     0.42 %
Federal Home Loan Bank advances
    3.21 %     2.52 %     1.81 %
 
                        
Maximum amount of borrowings at any month-end:
                        
Securities sold under agreements to repurchase
  $ 69,767     $ 31,928     $ 22,682  
Federal funds purchased
    18,702       10,000       9,007  
Federal Home Loan Bank advances
    35,500       31,000       32,000  
 
                        
Average balances for the year:
                        
Securities sold under agreements to repurchase
  $ 54,811     $ 20,466     $ 14,496  
Federal funds purchased
    1,607       1,705       2,926  
Federal Home Loan Bank advances
    24,208       18,250       22,208  
 
                        
Weighted average interest rates for the year:
                        
Securities sold under agreements to repurchase
    2.40 %     0.51 %     0.45 %
Federal funds purchased
    3.51 %     1.43 %     1.51 %
Federal Home Loan Bank advances
    2.65 %     2.01 %     2.13 %
At December 31, 2005, we had no significant commitments for capital expenditures. However, we are in the process of developing our branch network in the Nashville MSA. As a result, we anticipate that we will enter into contracts to buy property or construct branch facilities and/or lease agreements to lease facilities in the Nashville MSA.
The following table presents additional information about our contractual obligations as of December 31, 2005, which by their terms have contractual maturity and termination dates subsequent to December 31, 2005 (dollars in thousands):
                                         
    Next 12                     More than 60        
    months     13-36 months     37-60 months     months     Totals  
Contractual obligations:
                                        
Certificates of deposit
   $ 224,279     $ 45,349     $ 8,029     $ —     $ 277,657  
Securities sold under agreements to repurchase
     65,834       —       —       —       65,834  
Federal Home Loan Bank advances
     29,500       12,000       —       —       41,500  
Subordinated debt
     —       10,310       20,619       —       30,929  
Minimum operating lease commitments
     951       1,973       1,970       9,464       14,358  
 
                              
Totals
   $ 320,564     $ 69,632     $ 30,618     $ 9,464     $ 430,278  
 
                              
Our management believes that we have adequate liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements. At December 31, 2005, we had outstanding standby letters of credit of $57.6 million and unfunded loan commitments outstanding of $252.6 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, Pinnacle National has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions. At December 31, 2005, Pinnacle National had accommodations with upstream correspondent banks for unsecured short-term advances. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month. The following table presents additional information about our unfunded commitments as of December 31, 2005, which by their terms have contractual maturity dates subsequent to December 31, 2005 (dollars in thousands):

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    Next 12                     More than 60        
    months     13-36 months     37-60 months     months     Totals  
Unfunded commitments:
                                        
Lines of credit
   $ 141,322     $ 36,911     $ 14,346     $ 60,038     $ 252,617  
Letters of credit
     50,655       4,309       2,586       —       57,550  
 
                              
Totals
   $ 191,977     $ 41,220     $ 16,932     $ 60,038     $ 310,167  
 
                              
Impact of Inflation
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Recent Accounting Pronouncements
Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-03”) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. The SOP does not apply to loans originated by the entity. The SOP was effective for loans acquired in fiscal years beginning after December 15, 2004. Specific transition guidance applies to certain loans that currently are within the scope of Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans. In light of the pending merger with Cavalry, Pinnacle Financial is currently evaluating the impact of SOP 03-03 in future periods on our consolidated financial position or results of income.
FASB Staff Position on FAS No. 115-1 and FAS No. 124-1 (“the FSP”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” was issued in November 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other-than-temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance on Emerging issues Task Force (EITF) Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations. Under the FSP, losses arising from impairment deemed to be other-than-temporary, must be recognized in earnings at an amount equal to the entire difference between the securities cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also required that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The initial adoption of this statement is not expected to have a material impact on Pinnacle Financial’s consolidated financial statements.
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This Statement is a revision to Statement 123 and APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement requires measurement of the cost of employee services received in exchange for stock compensation based on the grant date fair value of the employee stock options. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. Pinnacle Financial will adopt this Standard on January 1, 2006 under the modified prospective method of application. Under that method, Pinnacle Financial will recognize compensation costs for new grants of

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share-based awards, awards modified after the effect date, and the remaining portion of the fair value of the unvested awards at the adoption date. Excluding the impact of employee stock options granted after December 31, 2005, Pinnacle Financial estimates the adoption of SFAS No. 123R will result in the recognition of pre-tax compensation costs for share based awards of approximately $620,000 in 2006.
The FASB issued an FSP on December 15, 2005, “SOP 94-6-1 — Terms of Loan Products That May Give Rise to a Concentration of Credit Risk” which addresses the disclosure requirements for certain nontraditional mortgage and other loan products the aggregation of which may constitute a concentration of credit risk under existing accounting literature. Pursuant to this FSP, the FASB’s intentions were to reemphasize the adequacy of such disclosures and noted that the recent popularity of certain loan products such as negative amortization loans, high loan-to-value loans, interest only loans, teaser rate loans, option adjusted rate mortgage loans and other loan product types may aggregate to the point of being a concentration of credit risk to an issuer and thus may require enhanced disclosures under existing guidance. This FSP was effective immediately. We have evaluated the impact of this FSP and have concluded that the our disclosures are consistent with the objectives of the FSP.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The response to this Item is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 40 through 44 and is incorporated herein by reference.

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ITEM 8. FINANCIAL STATEMENTS
Pinnacle Financial Partners, Inc. and Subsidiary
Consolidated Financial Statements
Table of Contents

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MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Pinnacle Financial Partners, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Pinnacle Financial Partners, Inc.’s internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Pinnacle Financial Partners, Inc.’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment we believe that, as of December 31, 2005, the Company’s internal control over financial reporting is effective based on those criteria.
Pinnacle Financial Partners, Inc.’s independent registered public accounting firm has issued an audit report on Pinnacle Financial Partners Inc.’s management’s assessment of the company’s internal control over financial reporting. This report appears on page 49 of this Annual Report on Form 10-K.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Pinnacle Financial Partners, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pinnacle Financial Partners, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Nashville, Tennessee
February 22, 2006

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Pinnacle Financial Partners, Inc.:
We have audited management’s assessment, included in the accompanying Report on Internal Control Over Financial Reporting, that Pinnacle Financial Partners, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pinnacle Financial Partners, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Pinnacle Financial Partners, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Pinnacle Financial Partners, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 22, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Nashville, Tennessee
February 22, 2006

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    December 31,  
    2005     2004  
ASSETS
                
Cash and noninterest-bearing due from banks
   $ 25,935,948     $ 15,243,796  
Interest-bearing due from banks
     839,960       379,047  
Federal funds sold
     31,878,362       11,122,944  
 
            
Cash and cash equivalents
     58,654,270       26,745,787  
 
                
Securities available-for-sale, at fair value
     251,749,094       180,573,820  
Securities held-to-maturity (fair value of $26,546,297 and $27,134,913 at December 31, 2005 and December 31, 2004, respectively)
     27,331,251       27,596,159  
Mortgage loans held-for-sale
     4,874,323       1,634,900  
 
                
Loans
     648,024,032       472,362,219  
Less allowance for loan losses
     (7,857,774 )     (5,650,014 )
 
            
Loans, net
     640,166,258       466,712,205  
 
                
Premises and equipment, net
     12,915,595       11,130,671  
Investments in unconsolidated subsidiaries and other entities
     6,622,645       4,234,876  
Accrued interest receivable
     4,870,197       2,639,548  
Other assets
     9,588,097       5,871,484  
 
            
Total assets
   $ 1,016,771,730     $ 727,139,450  
 
            
 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
 
                
Deposits:
                
Noninterest-bearing demand
   $ 155,811,214     $ 114,318,024  
Interest-bearing demand
     72,520,757       51,751,320  
Savings and money market accounts
     304,161,625       199,058,240  
Time
     277,657,129       205,599,425  
 
            
Total deposits
     810,150,725       570,727,009  
Securities sold under agreements to repurchase
     65,834,232       31,927,860  
Federal Home Loan Bank advances
     41,500,000       53,500,000  
Subordinated debt
     30,929,000       10,310,000  
Accrued interest payable
     1,884,596       769,300  
Other liabilities
     3,036,752       2,025,106  
 
            
Total liabilities
     953,335,305       669,259,275  
 
                
Stockholders’ equity:
                
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding
     —       —  
Common stock, par value $1.00; 20,000,000 shares authorized; 8,426,551 issued and outstanding at December 31, 2005 and 8,389,232 issued and outstanding at December 31, 2004
     8,426,551       8,389,232  
Additional paid-in capital
    44,890,912       44,376,307  
Unearned compensation
    (169,689 )     (37,250 )
Retained earnings
    13,182,291       5,127,023  
Accumulated other comprehensive income (loss), net
    (2,893,640 )     24,863  
 
            
Total stockholders’ equity
    63,436,425       57,880,175  
 
            
Total liabilities and stockholders’ equity
  $ 1,016,771,730     $ 727,139,450  
 
            
See accompanying notes to consolidated financial statements.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
                         
    For the years ended December 31,  
    2005     2004     2003  
Interest income:
                        
Loans, including fees
  $ 35,166,671     $ 19,909,900     $ 13,709,159  
Securities:
                        
Taxable
    9,086,134       6,935,902       4,158,064  
Tax-exempt
    1,115,486       490,757       217,284  
Federal funds sold and other
    939,369       342,470       177,404  
 
                  
Total interest income
    46,307,660       27,679,029       18,261,911  
 
                  
 
                        
Interest expense:
                        
Deposits
    13,690,649       5,829,395       4,349,365  
Securities sold under agreements to repurchase
    1,315,122       104,085       65,716  
Federal funds purchased and other borrowings
    2,263,851       1,481,072       948,023  
 
                  
Total interest expense
    17,269,622       7,414,552       5,363,104  
 
                  
Net interest income
    29,038,038       20,264,477       12,898,807  
Provision for loan losses
    2,151,966       2,948,423       1,157,280  
 
                  
Net interest income after provision for loan losses
    26,886,072       17,316,054       11,741,527  
 
                        
Noninterest income:
                        
Service charges on deposit accounts
    977,386       955,851       513,074  
Investment services
    1,835,757       1,656,743       998,119  
Gains on loans and loan participations sold
    1,247,898       1,274,331       748,801  
Gains on sales of investment securities, net
    114,410       357,196       247,978  
Other noninterest income
    1,218,123       734,449       527,207  
 
                  
Total noninterest income
    5,393,574       4,978,570       3,035,179  
 
                  
 
                        
Noninterest expense:
                        
Salaries and employee benefits
    13,130,779       9,046,490       7,008,681  
Equipment and occupancy
    3,766,593       2,405,613       1,827,260  
Marketing and other business development
    698,232       606,841       386,905  
Postage and supplies
    618,060       492,254       347,684  
Other noninterest expense
    2,818,352       2,252,233       1,225,791  
 
                  
Total noninterest expense
    21,032,016       14,803,431       10,796,321  
 
                  
Net income before income taxes
    11,247,630       7,491,193       3,980,385  
Income tax expense
    3,192,362       2,172,283       1,425,746  
 
                  
Net income
  $ 8,055,268     $ 5,318,910     $ 2,554,639  
 
                  
 
                        
Per share information:
                        
Basic net income per common share
  $ 0.96     $ 0.69     $ 0.35  
 
                  
Diluted net income per common share
  $ 0.85     $ 0.61     $ 0.32  
 
                  
Weighted average common shares outstanding:
                        
Basic
    8,408,663       7,750,943       7,384,106  
 
                  
Diluted
    9,464,500       8,698,139       7,876,006  
 
                  
See accompanying notes to consolidated financial statements.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
For the each of the years in the three-year period ended December 31, 2005
                                                         
                                    Retained     Accumulated        
                    Additional             Earnings     Other     Total  
    Common Stock     Paid-in     Unearned     (Accumulated     Comprehensive     Stockholders’  
    Shares     Amount     Capital     Compensation     Deficit)     Income (Loss)     Equity  
Balances, December 31, 2002
    7,384,106     $ 7,384,106     $ 26,990,894     $ —     $ (2,743,794 )   $ 772,441     $ 32,403,647  
Comprehensive income:
                                                        
Net income
    —       —       —       —       2,554,639       —       2,554,639  
Net unrealized holding gains on available-for-sale securities, net of deferred tax benefit of $381,171
     —       —       —       —       —       (621,905 )     (621,905 )
 
                                                      
Total comprehensive income
                                                    1,932,734  
 
                                          
Balances, December 31, 2003
    7,384,106     $ 7,384,106     $ 26,990,894     $ —     $ (189,155 )   $ 150,536     $ 34,336,381  
 
                                          
Exercise of employee incentive common stock options
    23,780       23,780       94,333       —       —       —       118,113  
Proceeds from the sale of common stock (less offering expenses of $1,357,833)
    977,500       977,500       17,214,667       —       —       —       18,192,167  
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan
    3,846       3,846       76,413       (80,259 )     —       —       —  
Amortization of unearned compensation associated with restricted shares
    —       —       —       43,009       —       —       43,009  
Dividends paid to minority interest shareholders of PNFP Properties, Inc.
     —       —       —       —       (2,732 )     —       (2,732 )
Comprehensive income:
                                                        
Net income
    —       —       —       —       5,318,910       —       5,318,910  
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit of $77,023
     —       —       —       —       —       (125,673 )     (125,673 )
 
                                                      
Total comprehensive income
                                                    5,193,237  
 
                                          
Balances, December 31, 2004
    8,389,232     $ 8,389,232     $ 44,376,307     $ (37,250 )   $ 5,127,023     $ 24,863     $ 57,880,175  
 
                                          
Exercise of employee incentive common stock options
     20,953       20,953       153,808       —       —       —       174,761  
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan
     16,366       16,366       360,797       (377,163 )     —       —       —  
Amortization of unearned compensation associated with restricted shares
     —       —       —       244,724       —       —       244,724  
Comprehensive income:
                                                        
Net income
    —       —       —       —       8,055,268       —       8,055,268  
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit of $1,788,761
     —       —       —       —       —       (2,918,503 )     (2,918,503 )
 
                                                      
Total comprehensive income
                                                    5,136,765  
 
                                          
Balances, December 31, 2005
    8,426,551     $ 8,426,551     $ 44,890,912     $ (169,689 )   $ 13,182,291     $ (2,893,640 )   $ 63,436,425  
 
                                          
See accompanying notes to consolidated financial statements.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
    For the years ended December 31,  
    2005     2004     2003  
Operating activities:
                        
Net income
  $ 8,055,268     $ 5,318,910     $ 2,554,639  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                        
Net amortization of premiums on securities
    1,130,766       1,050,687       858,412  
Depreciation and amortization
    1,699,380       1,204,446       953,819  
Provision for loan losses
    2,151,966       2,948,423       1,157,280  
Gains on sales of investment securities, net
    (114,410 )     (357,196 )     (247,978 )
Gain on loan participations sold, net
    (152,077 )     (233,646 )     (334,249 )
Amortization of unearned compensation associated with restricted shares
     244,724       43,009       —  
Deferred tax expense (benefit)
    (575,755 )     (922,286 )     569,987  
Mortgage loans held for sale:
                        
Loans originated
    (102,874,134 )     (69,020,758 )     (38,527,408 )
Loans sold
    99,634,711       68,968,458       36,944,808  
Increase in other assets
    (3,155,825 )     (1,397,226 )     (641,998 )
Increase (decrease) in other liabilities
    2,126,942       (860,749 )     1,346,425  
 
                  
Net cash provided by operating activities
    8,171,556       6,742,072       4,633,737  
 
                  
 
                        
Investing activities:
                        
Activities in securities:
                        
Purchases
    (116,361,069 )     (132,755,709 )     (132,340,115 )
Sales
    6,791,867       28,461,405       23,125,263  
Maturities, prepayments and calls
    32,935,215       35,172,378       41,637,158  
Increase in loans, net
    (175,606,019 )     (176,375,116 )     (87,376,399 )
Purchases of premises and equipment and software
    (3,438,916 )     (5,144,869 )     (3,910,748 )
Purchases of capital securities of unconsolidated subsidiaries
     (619,000 )     —       (310,000 )
Purchases of other assets
    (2,089,000 )     (881,719 )     (929,500 )
 
                  
Net cash used in investing activities
    (258,386,922 )     (251,523,630 )     (160,104,341 )
 
                  
 
                        
Financing activities:
                        
Net increase in deposits
    239,423,716       180,157,997       156,552,623  
Net increase (decrease) in repurchase agreements
    33,906,372       16,877,750       (98 )
Advances from Federal Home Loan Bank:
                        
Issuances
    62,000,000       48,000,000       34,500,000  
Payments
    (74,000,000 )     (39,000,000 )     (11,500,000 )
Proceeds from issuance of subordinated debt
    20,619,000       —       10,310,000  
Debt issuance costs related to issuance of subordinated debt
     —       —       (150,000 )
Net proceeds from sale of common stock
    —       18,192,167       —  
Exercise of common stock options
    174,761       118,113       —  
Other
    —       (2,732 )     —  
 
                  
Net cash provided by financing activities
    282,123,849       224,343,295       189,712,525  
 
                  
Net increase (decrease) in cash and cash equivalents
    31,908,483       (20,438,263 )     34,241,921  
Cash and cash equivalents, beginning of period
    26,745,787       47,184,050       12,942,129  
 
                  
Cash and cash equivalents, end of period
  $ 58,654,270     $ 26,745,787     $ 47,184,050  
 
                  
See accompanying notes to consolidated financial statements.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
     Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) was formed on February 28, 2000 and 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 located in Nashville, Tennessee. Pinnacle National provides a full range of banking services in its primary market areas of Davidson, Rutherford, Williamson and Sumner Counties. Pinnacle National commenced its banking operations on October 27, 2000. Pinnacle Financial and Pinnacle National have formed several subsidiaries for various purposes as follows:
  •   PFP Title Company is a wholly-owned subsidiary of Pinnacle National. PFP Title Company is licensed to sell title insurance policies to Pinnacle National customers and others.
 
  •   PNFP Holdings, Inc. is a wholly-owned subsidiary of PFP Title Company and is the parent of PNFP Properties, Inc., which was established as a Real Estate Investment Trust pursuant to Internal Revenue Service regulations.
 
  •   Pinnacle Community Development, Inc. is a wholly-owned subsidiary of Pinnacle National and is certified as a Community Development Entity by the Community Development Financial Institutions Fund of the United States Department of the Treasury.
 
  •   PNFP Statutory Trust I and PNFP Statutory Trust II, wholly-owned subsidiaries of Pinnacle Financial, were created for the exclusive purpose of issuing capital trust preferred securities.
 
  •   Pinnacle Advisory Services, Inc. is a wholly-owned subsidiary of Pinnacle Financial and was established as a registered investment advisor pursuant to regulations promulgated by the Board of Governors of the Federal Reserve System.
 
  •   Pinnacle Credit Enhancement Holdings, Inc. is a wholly-owned subsidiary of Pinnacle Financial and was established to own a 24.5% membership interest in Collateral Plus, LLC. Collateral Plus, LLC serves as an intermediary between investors and borrowers in certain financial transactions whereby the borrowers require enhanced collateral in the form of letters of credit issued by the investors for the benefit of banks and other financial institutions.
     Basis of Presentation — These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust II and Collateral Plus, LLC, 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 accounting principles generally accepted in the United States 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 relate to the determination of the allowance for loan losses.
     Cash and Cash Flows — Cash on hand, cash items in process of collection, amounts due from banks, Federal funds sold and securities purchased under agreements to resell, with original maturities within ninety days, are included in cash and cash equivalents. The following supplemental cash flow information addresses certain cash payments and noncash transactions for each of the years in the three-year period ended December 31, 2005 as follows:
                         
    For the years ended December 31,
    2005   2004   2003
Cash Payments:
                        
Interest
   $ 16,154,326     $ 7,252,494     $ 5,341,687  
Income taxes
     3,802,633       3,681,817       —  
Noncash Transactions:
                        
Transfers of available-for-sale securities to held-to-maturity
     —       27,655,669       —  
Loans charged-off to the allowance for loan losses
     207,647       1,032,378       167,023  
Loans foreclosed upon with repossessions transferred to other assets
     34,750       —       —  

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Securities — Securities are classified based on management’s intention on the date of purchase. All debt securities classified as available-for-sale are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income (loss), net of the deferred income tax effects. Securities that Pinnacle Financial has both the positive intent and ability to hold to maturity are classified as held to maturity and are carried at historical cost and adjusted for amortization of premiums and accretion of discounts.
     A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether impairment is other-than-temporary, management considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee.
     Interest and dividends on securities, including amortization of premiums and accretion of discounts calculated under the effective interest method, are included in interest income. For certain securities, amortization of premiums and accretion of discounts is computed based on the anticipated life of the security which may not be the stated life of the security. Realized gains and losses from the sale of securities are determined using the specific identification method.
     Loans Held for Sale — Loans originated and intended for sale are carried at the lower of cost or estimated fair value as determined on a loan-by-loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Realized gains and losses are recognized when payments have been received from the purchaser and are reflected in the accompanying consolidated statement of income in gains on the sale of loans and loan participations sold.
     Loans — Loans are reported at their outstanding principal balances less unearned income, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income on loans is accrued based on the principal balance outstanding. Loan origination fees, net of certain loan origination costs, are deferred and recognized as an adjustment to the related loan yield using a method which approximates the interest method.
     The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against current income. Interest income is subsequently recognized only to the extent cash payments are received.
     The allowance for loan losses is maintained at a level that management believes to be adequate to absorb losses inherent in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, volume, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans, identified impaired loans and other factors related to the portfolio. This evaluation is performed quarterly and is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on any impaired loans. In addition, regulatory agencies, as an integral part of their examination process, will periodically review Pinnacle Financial’s allowance for loan losses, and may require Pinnacle Financial to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.
     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 is established as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Transfers of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from Pinnacle Financial, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) Pinnacle Financial does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
     Premises and Equipment and Leaseholds — Premises and equipment are carried at cost less accumulated depreciation computed principally by the straight-line method over the estimated useful lives of the assets or the expected lease terms for leasehold improvements, whichever is shorter. Useful lives for all premises and equipment range between three and thirty years.
     Pinnacle National is the lessee with respect to several office locations. All such leases are being accounted for as operating leases within the accompanying consolidated financial statements. Several of these leases include rent escalation clauses which require Pinnacle National to expense the costs associated with these escalating payments over a straight-line basis over the life of the expected lease term. At December 31, 2005, the deferred liability associated with these escalating rentals was approximately $270,000 and is included in other liabilities in the accompanying consolidated balance sheets.
     Investments in unconsolidated subsidiaries and other entities — In addition to investments in unconsolidated subsidiaries, Pinnacle Financial maintains certain investments, at cost, with certain regulatory and other entities in which Pinnacle Financial has an ongoing business relationship. These entities are the Federal Reserve Bank of Atlanta, the Bankers’ Bank of Atlanta and the Federal Home Loan Bank of Cincinnati. At December 31, 2005 and 2004, the cost of these investments was $4,598,000 and $3,269,000, respectively. Pinnacle Financial determined that it is not practicable to estimate the fair value of these investments. Pinnacle Financial has not observed any events or changes in circumstances that would have had an adverse effect on the fair value of the investment.
     Securities sold under agreements to repurchase — Pinnacle National routinely sells securities to certain treasury management customers and then repurchases these securities the next day. Securities sold under agreements to repurchase are reflected as a secured borrowing in the accompanying consolidated balance sheets at the amount of cash received in connection with each transaction.
     Other Assets — Included in other assets as of December 31, 2005 and 2004 is approximately $645,000 and $544,000, respectively, net of amortization, related to amounts paid to certain individuals to secure their employment with Pinnacle Financial. These amounts are subject to certain agreements whereby a certain pro rata amount will be owed Pinnacle Financial should the employee leave the employ of Pinnacle Financial within a predetermined time frame of their employment date. Pinnacle Financial is amortizing the amounts to salaries and employee benefits expense on a straight-line basis over 36 to 84 months.
     Also included in other assets as of December 31, 2005 and 2004, is approximately $742,000 and $357,000, respectively, of computer software related assets, net of amortization. This software supports Pinnacle Financial’s primary data systems and relates to amounts paid to vendors for installation and development of such systems. These amounts are amortized on a straight-line basis over periods of three to seven years. For the years ended December 31, 2005, 2004 and 2003, Pinnacle Financial’s amortization expense was approximately $272,000, $162,000 and $122,000, respectively. Software maintenance fees are capitalized in other assets and amortized over the term of the maintenance agreement.
     During the year ended December 31, 2002, Pinnacle National acquired life insurance policies on five key executives. Pinnacle National is the owner of the policies and is the beneficiary of the death proceeds from these policies. To acquire these policies, Pinnacle National paid a one-time premium of $1.8 million. Pinnacle National increases the value of the polices based on a crediting rate which is then reset quarterly thereafter. This crediting rate serves to increase the cash surrender value of the policies over the life of the policies. At December 31, 2005 and 2004, the aggregate cash surrender value of these policies, which is reflected in other assets, was $2,084,000 and $2,010,000, respectively. Pinnacle National has not borrowed any funds against these policies.
     Also included in other assets at December 31, 2005 and 2004 is $477,000 and $490,000, respectively, which is related to loans which have been sold to correspondent banks. These amounts represent the present value, net of amortization, of the future net cash flows retained by Pinnacle Financial. These amounts are amortized against net

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest income over the life of the loan as the loan is repaid by the borrower. Amortization of these amounts was $165,000, $199,000 and $143,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
     Income Taxes — Income tax expense consists of current and deferred taxes. Current income tax provisions approximate taxes to be paid or refunded for the applicable year. Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Accordingly, the resulting net deferred tax asset or net deferred tax liability is included in the accompanying consolidated balance sheets in either other assets or other liabilities.
     Recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefit associated with certain temporary differences, tax operating loss carryforwards and tax credits will be realized. A valuation allowance is recorded for those deferred tax assets for which it is more likely than not that realization will not occur.
     Pinnacle Financial and its wholly-owned subsidiaries file a consolidated income tax return. Each entity provides for income taxes based on its contribution to income or loss of the consolidated group.
     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 attributable to common stock options and warrants.
     As of December 31, 2005 and 2004, there were common stock options outstanding to purchase up to 1,242,393 and 1,068,350 common shares, respectively. Substantially all of these shares 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 each of the years in the three year period ended December 31, 2005. There were common stock options of 20,700 and 2,000 outstanding as of December 31, 2005 and 2004, respectively, which were considered anti-dilutive and thus have not been considered in the fully-diluted share calculations below. Additionally, as of December 31, 2005 and 2004, Pinnacle Financial had outstanding warrants to purchase 406,000 common shares which have been considered in the calculation of Pinnacle Financial’s diluted income per share for the years ended December 31, 2005 and 2004.
     The following is a summary of the basic and diluted earnings per share calculation for each of the years in the three-year period ended December 31, 2005:
                         
    2005     2004     2003  
Basic earnings per share calculation:
                        
Numerator – Net income
  $ 8,055,268     $ 5,318,910     $ 2,554,639  
 
                        
Denominator – Average common shares outstanding
    8,408,663       7,750,943       7,384,106  
 
                        
Basic earnings per share
  $ 0.96     $ 0.69     $ 0.35  
 
                        
Diluted earnings per share calculation:
                        
Numerator – Net income
  $ 8,055,268     $ 5,318,910     $ 2,554,639  
 
                        
Denominator – Average common shares outstanding
    8,408,663       7,750,943       7,384,106  
Dilutive shares contingently issuable
    1,055,837       947,196       491,900  
 
                  
Average dilutive common shares outstanding
    9,464,500       8,698,139       7,876,006  
 
                        
Diluted earnings per share
  $ 0.85     $ 0.61     $ 0.32  
     On April 20, 2004, the Board of Directors of Pinnacle Financial approved a two for one stock split of the Company’s common stock payable as a 100% stock dividend on May 10, 2004 to shareholders of record on April 30,

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004. Pinnacle Financial has retroactively applied the impact of this stock split in these consolidated financial statements.
     Stock-Based Compensation — Pinnacle Financial applies APB Opinion 25 and related interpretations in accounting for the stock option plan. All option grants carry exercise prices equal to or above the fair value of the common stock on the date of grant. Accordingly, no compensation cost has been recognized. Had compensation cost for Pinnacle Financial’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed in Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” Pinnacle Financial’s net income and net income per share would have been adjusted to the pro forma amounts indicated below for each of the years in the three-year period ended December 31, 2005:
                         
    2005     2004     2003  
Net income, as reported
  $ 8,055,268     $ 5,318,910     $ 2,554,639  
Add: Compensation expense recognized in the accompanying consolidated financial statements, net of related tax effects
     148,731       26,139       —  
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects
     (759,501 )     (436,586 )     (307,343 )
 
                  
Pro forma net income
  $ 7,444,498     $ 4,908,463     $ 2,247,296  
 
                  
 
                        
Per share information:
                        
Basic net income       As reported
   $ 0.96     $ 0.69     $ 0.35  
Pro forma
   $ 0.89     $ 0.63     $ 0.30  
 
                        
Diluted net income    As reported
   $ 0.85     $ 0.61     $ 0.32  
Pro forma
   $ 0.79     $ 0.56     $ 0.29  
     For purposes of these calculations, the fair value of options granted for each of the years in the three-year period ended December 31, 2005 was estimated using the Black-Scholes option pricing model and the following assumptions:
                         
    2005   2004   2003
Risk free interest rate
    2.57 %     1.11 %     1.19 %
Expected life of the options
  6.5 years   6.5 years   6.5 years
Expected dividend yield
    0.00 %     0.00 %     0.00 %
Expected volatility
    24.1 %     21.4 %     18.2 %
Weighted average fair value
  $ 7.30     $ 3.62     $ 1.65  
     In preparation for adoption of SFAS No. 123 (revised 2004), Share-Based Payment, Pinnacle Financial reevaluated all stock option issuances prior to December 31, 2005 and modified its assumptions related to forfeiture rates, option lives, risk free rates and volatility. Pinnacle Financial uses the simplified method in determining the estimated life of stock option issuances. These modifications have been considered in the pro forma information above and did not significantly impact the pro forma net income or per share information for 2004 or 2003.
     Comprehensive Income (Loss) —SFAS No. 130, “Reporting Comprehensive Income” describes comprehensive income as the total of all components of comprehensive income including net income. Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Currently, Pinnacle Financial’s other comprehensive income (loss) consists of unrealized gains and losses, net of deferred income taxes, on available-for-sale securities.
     Recent Accounting Pronouncements —Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-03”) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. The SOP does not apply to loans originated by the entity. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged. Specific transition guidance applies to certain loans that currently are within the scope of Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans. In light of the pending merger with Cavalry, Pinnacle Financial is currently evaluating the impact of SOP 03-03 in future periods on our consolidated financial position or results of income.
     FASB Staff Position on FAS No. 115-1 and FAS No. 124-1 (“the FSP”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” was issued in November 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other-than-temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance on Emerging issues Task Force (EITF) Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations. Under the FSP, losses arising from impairment deemed to be other-than-temporary, must be recognized in earnings at an amount equal to the entire difference between the securities cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also required that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The initial adoption of this statement is not expected to have a material impact on Pinnacle Financial’s consolidated financial statements.
     In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. This Statement is a revision to Statement 123 and APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement requires measurement of the cost of employee services received in exchange for stock compensation based on the grant date fair value of the employee stock options. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. Pinnacle Financial will adopt this Standard on January 1, 2006 under the modified prospective method of application. Under that method, Pinnacle Financial will recognize compensation costs for new grants of share-based awards, awards modified after the effect date, and the remaining portion of the fair value of the unvested awards at the adoption date. Excluding the impact of employee stock options granted after December 31, 2005, Pinnacle Financial estimates the adoption of SFAS No. 123R will result in the recognition of pre-tax compensation costs for share based awards of approximately $620,000 in 2006.
     The FASB issued an FSP on December 15, 2005, “SOP 94-6-1 — Terms of Loan Products That May Give Rise to a Concentration of Credit Risk” which addresses the disclosure requirements for certain nontraditional mortgage and other loan products the aggregation of which may constitute a concentration of credit risk under existing accounting literature. Pursuant to this FSP, the FASB’s intentions were to reemphasize the adequacy of such disclosures and noted that the recent popularity of certain loan products such as negative amortization loans, high loan-to-value loans, interest only loans, teaser rate loans, option adjusted rate mortgage loans and other loan product types may aggregate to the point of being a concentration of credit risk to an issuer and thus may require enhanced disclosures under existing guidance. This FSP was effective immediately. Pinnacle Financial has evaluated the impact of this FSP and has concluded that the disclosures are consistent with the objectives of the FSP.
     Reclassifications – Certain previous amounts have been reclassified to conform to the 2005 presentation. Such reclassifications had no impact on net income or loss during any period.
Note 2. Definitive Merger Agreement with Cavalry Bancorp, Inc.
     On October 3, 2005, Pinnacle Financial announced that it had entered into a definitive agreement to merge with and into Cavalry Bancorp, Inc. (“Cavalry”), a one-bank holding company located in Murfreesboro, Tennessee with approximately $638 million in assets as of December 31, 2005. Pursuant to the agreement, Pinnacle will acquire the Cavalry common stock via a tax-free exchange whereby Cavalry shareholders will receive 0.95 shares of Pinnacle

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial common stock for each share of Cavalry common stock owned by Cavalry shareholders or approximately 6.9 million Pinnacle Financial shares. Pinnacle Financial and Cavalry are in the process of obtaining the required regulatory approvals to consummate the merger. Pinnacle Financial is in the process of obtaining the required regulatory approvals to consummate the merger, which is currently anticipated to close before the end of the first quarter of 2006.
Note 3. Restricted Cash Balances
     Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. At its option, Pinnacle Financial maintains additional balances to compensate for clearing and other services. For the years ended December 31, 2005 and 2004, the average daily balance maintained at the Federal Reserve was approximately $593,000 and $3,230,000, respectively.
Note 4. Securities
     The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2005 and 2004 are summarized as follows:
                                 
    December 31, 2005  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Securities available-for-sale:
                                
U.S. Treasury securities
  $ —     $ —     $ —     $ —  
U.S. government agency securities
    31,054,469       —       534,899       30,519,570  
Mortgage-backed securities
    190,708,007       44,378       3,866,210       186,886,175  
State and municipal securities
    32,583,283       19,044       464,984       32,137,343  
Corporate notes
    2,300,442       —       94,436       2,206,006  
 
                        
 
   $ 256,646,201     $ 63,422     $ 4,960,529     $ 251,749,094  
 
                        
 
                                
Securities held-to-maturity:
                                
U.S. government agency securities
  $ 17,746,883     $ —     $ 441,208     $ 17,305,675  
State and municipal securities
    9,584,368       —       343,746       9,240,622  
 
                        
 
   $ 27,331,251     $ —     $ 784,954     $ 26,546,297  
 
                        
                                 
    December 31, 2004  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Securities available-for-sale:
                                
U.S. Treasury securities
  $ —     $ —     $ —     $ —  
U.S. government agency securities
    27,164,683       129,219       19,727       27,274,175  
Mortgage-backed securities
    138,851,236       348,187       672,189       138,527,234  
State and municipal securities
    12,486,440       71,726       55,481       12,502,685  
Corporate notes
    2,314,831       —       45,105       2,269,726  
 
                        
 
   $ 180,817,190     $ 549,132     $ 792,502     $ 180,573,820  
 
                        
 
                                
Securities held-to-maturity:
                                
U.S. government agency securities
  $ 17,746,555     $ 600     $ 298,605     $ 17,448,550  
State and municipal securities
    9,849,604       —       163,241       9,686,363  
 
                        
 
   $ 27,596,159     $ 600     $ 461,846     $ 27,134,913  
 
                        
     On March 31, 2004, Pinnacle National transferred approximately $27,656,000 of available-for-sale securities to held-to-maturity at fair value. The transfer consisted of substantially all of Pinnacle National’s holdings of Tennessee municipal securities and several of its longer-term agency securities. The net unrealized gain on such securities as of the date of transfer was approximately $325,000. This amount is reflected in the accumulated other comprehensive income, net of tax, and is being amortized over the remaining lives of the respective held-to-maturity securities. At December 31, 2005, the unamortized amount approximated $230,000.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Pinnacle Financial realized approximately $114,000 in net gains from the sale of $6,792,000 of available-for-sale securities during the year ended December 31, 2005. There were no losses on the sale of securities during the year ended December 31, 2005. Pinnacle Financial realized $357,000 in net gains on the sale of $28,461,000 of available-for-sale securities during the year ended December 31, 2004. During the year ended December 31, 2004, gross realized gains amounted to $421,000 on the sale of $14.5 million of available-for-sale securities while gross realized losses amounted to $64,000 on the sale of $13.9 million of available-for-sale securities. During the year ended December 31, 2003, gross realized gains amounted to $263,000 on the sale of $20.5 million of available-for-sale securities while gross realized losses amounted to $15,000 on the sale of $2.6 million of available-for-sale securities.
     At December 31, 2005, approximately $196,803,000 of Pinnacle Financial’s available-for-sale portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase.
     The amortized cost and fair value of debt securities as of December 31, 2005 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary.
                                 
    Available-for-sale     Held-to-maturity  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
Due in one year or less
  $ 411,923     $ 403,880     $ —     $ —  
Due in one year to five years
    23,633,257       23,111,526       19,759,888       19,350,684  
Due in five years to ten years
    34,509,448       34,101,957       7,571,363       7,195,613  
Due after ten years
    7,383,566       7,245,556       —       —  
Mortgage-backed securities
    190,708,007       186,886,175       —       —  
 
                        
 
   $ 256,646,201     $ 251,749,094     $ 27,331,251     $ 26,546,297  
 
                        
     At December 31, 2005 and 2004, 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     Investments With an     Total Investments at  
    Unrealized Loss of     Unrealized Loss of     December 31, 2005 With  
    Less than 12 months     12 months or longer     an Unrealized Loss  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
At December 31, 2005:
                                                
 
                                                
U.S. government agency securities
   $ 28,605,270     $ 463,534     $ 19,219,975     $ 512,573     $ 47,825,245     $ 976,107  
Mortgage-backed securities
     110,636,351       1,586,394       69,512,865       2,279,816       180,149,216       3,866,210  
State and municipal securities
     22,692,062       341,869       14,074,344       466,861       36,766,406       808,730  
Corporate notes
     —       —       2,206,006       94,436       2,206,006       94,436  
 
                                    
Total temporarily-impaired securities
   $ 161,933,683     $ 2,391,797     $ 105,013,190     $ 3,353,686     $ 266,946,873     $ 5,745,483  
 
                                    
 
                                                
At December 31, 2004:
                                                
 
                                                
U.S. government agency securities
   $ 21,426,876     $ 318,332     $ —     $ —     $ 21,426,876     $ 318,332  
Mortgage-backed securities
     78,476,825       450,064       9,852,117       222,125       88,328,942       672,189  
State and municipal securities
     14,856,388       208,074       691,803       10,648       15,548,191       218,722  
Corporate notes
     2,314,831       45,105       —       —       2,314,831       45,105  
 
                                    
Total temporarily-impaired securities
   $ 117,074,920     $ 1,021,575     $ 10,543,920     $ 232,773     $ 127,618,840     $ 1,254,348  
 
                                    
     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 issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Because the declines in fair value noted

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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 5. Loans and Allowance for Loan Losses
     The composition of loans at December 31, 2005 and 2004 is summarized as follows:
                 
    2005     2004  
Commercial real estate – Mortgage
  $ 148,102,053     $ 117,122,607  
Commercial real estate – Construction
    30,295,106       8,427,763  
Commercial – Other
    239,128,969       189,456,385  
 
            
Total Commercial
    417,526,128       315,006,755  
 
            
Consumer real estate – Mortgage
    169,952,860       126,907,581  
Consumer real estate – Construction
    37,371,834       14,990,739  
Consumer – Other
    23,173,210       15,457,144  
 
            
Total Consumer
    230,497,904       157,355,464  
 
            
Total Loans
    648,024,032       472,362,219  
Allowance for loan losses
    (7,857,774 )     (5,650,014 )
 
            
Loans, net
  $ 640,166,258     $ 466,712,205  
 
            
     Pinnacle Financial periodically analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any one or more industries. Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications. During 2005, Pinnacle Financial changed from using the Standard Industry Code classification system to the North American Industry Classification System. Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle National’s total risk-based capital to borrowers in the following industries at December 31, 2005 and 2004:
                 
    2005     2004  
Trucking industry
  $ 50,421,000     $ 43,107,000  
Operators of nonresidential buildings
    60,932,000       27,510,000  
Land subdividers
    37,963,000       12,661,000  
     At December 31, 2005 and 2004, Pinnacle Financial had certain impaired loans on nonaccruing interest status. The principal balance of these nonaccrual loans amounted to $460,000, $561,000 and $379,000 at December 31, 2005, 2004 and 2003, respectively. In each case, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had these loans been on accruing status, interest income would have been higher by $21,000, $41,000 and $75,000 for each of the years in the three-year period ended December 31, 2005. During the years ended December 31, 2005, 2004 and 2003, the average balance of all impaired loans amounted to $387,000, $776,000 and $1,160,000, respectively. As all loans that were deemed impaired were either on nonaccruing interest status during the entire year or were placed on nonaccruing status on the date they were deemed impaired, no interest income has been recognized on any impaired loans during the three-year period ended December 31, 2005.
     Changes in the allowance for loan losses for each of the years in the three-year period ended December 31, 2005 are as follows:
                         
    2005     2004     2003  
Balance at beginning of period
  $ 5,650,014     $ 3,718,598     $ 2,677,043  
Charged-off loans
    (207,647 )     (1,032,378 )     (167,023 )
Recovery of previously charged-off loans
    263,441       15,371       51,298  
Provision for loan losses
    2,151,966       2,948,423       1,157,280  
 
                  
Balance at end of period
  $ 7,857,774     $ 5,650,014     $ 3,718,598  
 
                  
     At December 31, 2005, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $13,223,000 to certain directors, executive officers, and their related entities, of which $6,958,000 had been drawn upon. At December 31, 2004, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $6,565,000 to certain directors, executive officers, and their related entities of which

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$4,437,000 had been drawn upon. The terms on these loans and extensions are on substantially the same terms customary for other persons for the type of loan involved.
     During 2005, 2004 and 2003, 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 generally accepted accounting principles, Pinnacle Financial has reflected a gain on the sale of these participated loans for the years ended December 31, 2005, 2004 and 2003 of approximately $152,000, $234,000 and $334,000, 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 based on their participation in the loan.
Note 6. Premises and Equipment and Lease Commitments
     Premises and equipment at December 31, 2005 and 2004 are summarized as follows:
                         
    Range of              
    Useful Lives     2005     2004  
Land
     —     $ 2,502,524     $ 2,502,525  
Buildings
     15 to 30 years       6,767,518       5,220,088  
Leasehold improvements
     15 to 20 years       1,232,973       810,266  
Furniture and equipment
     3 to 15 years       5,506,469       4,694,769  
 
                    
 
             16,009,484       13,227,648  
Accumulated depreciation
             (3,093,889 )     (2,096,977 )
 
                    
 
           $ 12,915,595     $ 11,130,671  
 
                    
     Depreciation expense was approximately $997,000, $657,000 and $542,000 for each of the years in the three-year period ended December 31, 2005.
     Pinnacle Financial has entered into various operating leases, primarily for office space and branch facilities. Rent expense related to these leases for 2005, 2004 and 2003 totaled $950,000, $636,000 and $449,000, respectively. At December 31, 2005, the approximate future minimum lease payments due under the aforementioned operating leases for their base term is as follows:
         
2006
  $ 951,000  
2007
    973,000  
2008
    1,000,000  
2009
    1,024,000  
2010
    946,000  
Thereafter
    9,464,000  
 
      
 
   $ 14,358,000  
 
      
Note 7. Deposits
     At December 31, 2005, the scheduled maturities of time deposits are as follows:
         
2006
  $ 224,279,128  
2007
    37,034,545  
2008
    8,313,873  
2009
    7,208,920  
2010
    820,663  
 
      
 
   $ 277,657,129  
 
      
     Additionally, at December 31, 2005 and 2004, approximately $246,249,000 and $165,794,000, respectively, of time deposits had been issued in denominations of $100,000 or greater.

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Note 8. Federal Home Loan Bank Advances and Other Borrowings
     During 2001, Pinnacle National became a member of the Federal Home Loan Bank of Cincinnati (“FHLB”). As a result, Pinnacle National is eligible for advances from the FHLB, pursuant to the terms of various borrowing agreements, which assists Pinnacle National in the funding of its home mortgage and commercial real estate loan portfolios. Pinnacle National has pledged certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral under the borrowing agreements with the FHLB.
     At December 31, 2005 and 2004, Pinnacle National had received advances from the FHLB totaling $41,500,000 and $53,500,000, respectively. At December 31, 2005, the scheduled maturities of these advances and interest rates are as follows:
                 
    Scheduled     Interest Rate  
    Maturities     Ranges  
2006
   $ 29,500,000     2.0% to 4.3%
2007
     2,000,000       3.2%  
2008
     10,000,000       5.0%  
 
              
 
   $ 41,500,000          
 
              
Weighted average interest rate
            3.6%  
 
              
     At December 31, 2005, Pinnacle National has accommodations which allow Pinnacle National to purchase Federal funds from several of its correspondent banks on an overnight basis at prevailing overnight market rates. These accommodations are subject to various restrictions as to their term and availability, and in most cases, must be repaid within less than a month. There were no outstanding balances at December 31, 2005 or 2004 under these arrangements.
Note 9. Investments in Unconsolidated Subsidiaries and Subordinated Debt
     On December 29, 2003, we established PNFP Statutory Trust I and on September 15, 2005 we established PNFP Statutory Trust II (“Trust I” and “Trust II” or collectively, the “Trusts”). Both are wholly-owned statutory business trusts. Pinnacle Financial is the sole sponsor of the Trusts and acquired each Trust’s common securities for $310,000 and $619,000, respectively. The Trusts were created for the exclusive purpose of issuing 30-year capital trust preferred securities (“Trust Preferred Securities”) in the aggregate amount of $10,000,000 for Trust I and $20,000,000 for Trust II and using the proceeds to acquire junior subordinated debentures (“Subordinated Debentures”) issued by Pinnacle Financial. The sole assets of the Trusts are the Subordinated Debentures. Pinnacle Financial’s aggregate $929,000 investment in the Trusts is included in investments in unconsolidated subsidiaries in the accompanying consolidated balance sheets and the $30,929,000 obligation of Pinnacle Financial is reflected as subordinated debt.
     The Trust I Preferred Securities bear a floating interest rate based on a spread over 3-month LIBOR (7.297% at December 31, 2005) which is set each quarter and matures on December 30, 2033. The Trust II Preferred Securities bear a fixed interest rate of 5.848% per annum thru September 30, 2010 at which time the securities will bear a floating rate set each quarter based on a spread over 3-month LIBOR. The Trust II securities mature on September 30, 2035. Distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. Pinnacle Financial guarantees the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trusts. Pinnacle Financial’s obligations under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by Pinnacle Financial of the obligations of the Trusts under the Trust Preferred Securities.

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     The Subordinated Debentures are unsecured, bear interest rate at a rate equal to the rates paid by the Trusts on the Trust Preferred Securities and mature on the same dates as those noted above for the Trust Preferred Securities. Interest is payable quarterly. Pinnacle Financial may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and Pinnacle Financial’s ability to pay dividends on our common shares will be restricted.
     Subject to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred Securities may be redeemed prior to maturity at our option on or after September 17, 2008 for Trust I and on or after September 30, 2010 for Trust II. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) the Trust becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by the parent company on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for the Trust to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as “Tier I capital” under the Federal Reserve capital adequacy guidelines.
     The Trust Preferred Securities for both Trusts qualify as Tier I capital under current regulatory definitions subject to certain limitations. Debt issuance costs associated with Trust I of $120,000 consisting primarily of underwriting discounts and professional fees are included in other assets in the accompanying consolidated balance sheet as of December 31, 2005. These debt issuance costs are being amortized over ten years using the straight-line method. There are no debt issuance costs associated with Trust II.
     Included in investment in unconsolidated subsidiaries and other entities are Pinnacle Financial’s investments in Trust I and Trust II. These investments are accounted for under the equity method and consist of 100% of the common stock of Trust I and Trust II. Combined summary financial information for the Trusts on a stand alone basis follows (dollars in thousands):
Combined Summary Balance Sheets
                 
    At December 31,  
    2005     2004  
Asset – Investment in subordinated debentures issued by Pinnacle Financial
   $ 30,929     $ 10,310  
 
            
 
                
Liabilities
  $ —     $ —  
 
                
Stockholder’s equity – Trust preferred securities
    30,000       10,000  
Common stock (100% owned by Pinnacle Financial)
    929       310  
 
            
Total stockholder’s equity
    30,929       10,310  
 
            
Total liabilities and stockholder’s equity
  $ 30,929     $ 10,310  
 
            
Combined Summary Income Statement
                 
    Year ended  
    December 31,  
    2005     2004  
Income – Interest income from subordinated debentures issued by Pinnacle Financial
  $ 986     $ 431  
 
            
Net Income
  $ 986     $ 431  
 
            

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Combined Summary Statement of Stockholder’s Equity
                                 
    Trust                     Total  
    Preferred     Common     Retained     Stockholder’s  
    Securities     Stock     Earnings     Equity  
Beginning balances, December 31, 2003
  $ 10,000     $ 310     $ —     $ 10,310  
Net income
    —       —       431       431  
Dividends:
                                
Trust preferred securities
    —       —       (418 )     (418 )
Common paid to Pinnacle Financial
    —       —       (13 )     (13 )
 
                        
Beginning balances, December 31, 2004
  $ 10,000     $ 310     $ —     $ 10,310  
Net income
    —       —       986       986  
Issuance of Trust II trust preferred securities
    20,000       619       —       20,619  
Dividends:
                                
Trust preferred securities
    —       —       (956 )     (956 )
Common paid to Pinnacle Financial
    —       —       (30 )     (30 )
 
                        
Ending balances, December 31, 2005
  $ 30,000     $ 929     $ —     $ 30,929  
 
                        
Note 10. Income Taxes
     Income tax expense (benefit) attributable to income from continuing operations for each of the years in the three-year period ended December 31, 2005 consists of the following:
                         
    2005     2004     2003  
Current tax expense:
                        
Federal
  $ 3,589,487     $ 2,677,582     $ 710,749  
State
    178,630       416,987       145,010  
 
                  
Total current tax expense
    3,768,117       3,094,569       855,759  
 
                  
Deferred tax expense (benefit):
                        
Federal
    (479,072 )     (765,139 )     473,038  
State
    (96,683 )     (157,147 )     96,949  
 
                  
Total deferred tax expense (benefit)
    (575,755 )     (922,286 )     569,987  
 
                  
 
   $ 3,192,362     $ 2,172,283     $ 1,425,746  
 
                  
     Pinnacle Financial’s income tax expense (benefit) differs from the amounts computed by applying the Federal income tax statutory rates of 34% in 2005, 2004 and 2003 to income before income taxes. A reconciliation of the differences for each of the years in the three-year period ended December 31, 2005 is as follows:
                         
    2005     2004     2003  
Income taxes at statutory rate
  $ 3,824,194     $ 2,547,006     $ 1,353,331  
State tax expense, net of federal tax effect
    54,085       171,494       159,693  
Federal tax credits
    (300,000 )     (300,000 )     —  
Tax-exempt securities
    (339,900 )     (156,354 )     (69,442 )
Other items
    (46,017 )     (89,863 )     (17,836 )
 
                  
Income tax expense (benefit)
  $ 3,192,362     $ 2,172,283     $ 1,425,746  
 
                  
     The effective tax rate for 2005 and 2004 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 thru 2010. Tax benefits related to these credits will be recognized for financial reporting purposes in the same periods that the credits are recognized in the Company’s income tax returns. The credit that is available for each of the years ended December 31, 2005 and 2004 was $300,000. Pinnacle Financial believes that it and its subsidiary has complied with the various regulatory provisions of the New Markets Tax Credit program in 2005 and 2004. Also, during 2004, Pinnacle National formed a real estate investment trust which provides Pinnacle Financial with an alternative vehicle for raising capital. Additionally, the ownership

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structure of this real estate investment trust provides certain state income tax benefits to Pinnacle National and Pinnacle Financial.
     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Pinnacle Financial will realize the benefit of these deductible differences. However, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
     The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at December 31, 2005 and 2004 are as follows:
                 
    2005     2004  
Deferred tax assets:
                
Loan loss allowance
  $ 3,019,094     $ 2,162,332  
Securities
    1,773,521       —  
Other assets
    174,816       136,790  
 
            
 
     4,967,431       2,299,122  
 
                
Deferred tax liabilities:
                
Depreciation and amortization
    417,207       62,390  
Securities
    —       15,240  
Other accruals
    139,602       175,384  
 
            
 
     556,809       253,014  
 
            
Net deferred tax assets
  $ 4,410,622     $ 2,046,108  
 
            
Note 11. 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.

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     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 December 31, 2005 is as follows:
         
Commitments to extend credit
  $ 252,617,000  
Standby letters of credit
    57,550,000  
     At December 31, 2005, the fair value of Pinnacle Financial’s standby letters of credit was $227,000. This amount represents the unamortized fee associated with these standby letters of credit and is included in the consolidated balance sheet of Pinnacle Financial. This fair value will decrease over time as the existing standby letters of credit approach their expiration dates.
     Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of claims outstanding at December 31, 2005 will not have a material effect on Pinnacle Financial’s consolidated financial statements.
Note 12. Common Stock Offerings and Warrants
     During 2004, Pinnacle Financial concluded a follow-on offering of its common stock to the general public. As a result of this offering, Pinnacle Financial, through its underwriters, sold 850,000 shares of common stock to the general public at $20 per share. The underwriters also exercised an over-allotment option and purchased an additional 127,500 shares at $20 per share, less the applicable underwriting discount. Net proceeds from the offering were approximately $18.2 million.
     Three executives of Pinnacle Financial (the Chairman of the Board, the President and Chief Executive Officer and the Chief Administrative Officer) along with nine members of Pinnacle Financial’s Board of Directors and two other organizers of Pinnacle Financial were awarded on August 18, 2000, warrants to acquire 406,000 shares of common stock at $5.00 per share. The warrants are exercisable until August 18, 2010. As of December 31, 2005, all of the warrants were exercisable.
Note 13. Salary Deferral Plan
     Pinnacle Financial has a 401(k) retirement plan covering all employees who elect to participate, subject to certain eligibility requirements. The Plan allows employees to defer up to 15% of their salary subject to regulatory limitations with Pinnacle Financial matching 50% of the first 6% deferred in Pinnacle Financial stock. Pinnacle Financial’s expense associated with the matching component of this plan for each of the years in the three-year period ended December 31, 2005 was approximately $259,000, $199,000 and $143,000, respectively, and is included in the accompanying statements of income in salaries and employee benefits expense.
Note 14. Stock Option Plan and Restricted Shares
     Pinnacle Financial has two equity compensation 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. As of December 31, 2005, all of the options are intended to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment. Options under the plans 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. The shareholders of Pinnacle Financial approved a total allocation of 1,790,000 common shares toward this plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     A summary of the plan changes during each of the years in the three-year period ended December 31, 2005 is as follows:
                 
            Weighted-  
            Average  
            Exercise  
    Number     Price  
Outstanding at December 31, 2002
    724,700     $ 4.84  
Granted
    185,800       7.55  
Exercised
    —       —  
Forfeited
    (3,100 )     5.73  
 
            
Outstanding at December 31, 2003
    907,400     $ 5.39  
Granted
    189,080       14.65  
Exercised
    (23,780 )     4.89  
Forfeited
    (4,350 )     7.86  
 
            
Outstanding at December 31, 2004
    1,068,350     $ 7.03  
Granted
    209,482       23.74  
Exercised
    (20,953 )     5.93  
Forfeited
    (14,486 )     14.93  
 
            
Outstanding at December 31, 2005
    1,242,393     $ 9.78  
 
            
     The following table summarizes information about options granted under Pinnacle Financial’s equity incentive plans at December 31, 2005.
                                 
    Number of     Remaining     Weighted-        
    Remaining     Weighted-Average     Average     Number of  
Grant date   Shares     Contractual     Exercise     Shares  
by year   Outstanding     Life in Years     Price     Exercisable  
 
2000
     353,778       5.0     $ 5.00       353,778  
2001
     89,740       5.2       3.82       71,792  
2002
     240,145       6.1       5.01       144,087  
2003
     173,900       7.3       7.61       69,560  
2004
     180,118       8.1       14.73       36,024  
2005
     204,712       8.7       23.74       —  
 
                        
 
     1,242,393       6.7     $ 9.78       675,241  
 
                        
     On January 18, 2006, Pinnacle Financial granted options to purchase 70,255 common shares to certain employees at an exercise price of $25.07 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.
     Additionally, Pinnacle Financial’s 2004 Equity Incentive Plan provides for the granting of restricted share awards and other performance-based awards, such as stock appreciation rights. During 2005 and 2004, Pinnacle Financial awarded 16,366 shares and 3,846 shares, respectively, of restricted common stock to certain executives of Pinnacle Financial. The forfeiture restrictions on the restricted shares lapse in three separate traunches should Pinnacle Financial achieve certain earnings and soundness targets over the subsequent three year period. Compensation expense associated with the restricted share awards is recognized over the time period that the restrictions associated with the awards lapse. As a result, at each financial reporting date, the restricted shares are marked to fair value and compensation expense is measured based on the anticipated number of shares that will ultimately vest and the timing of the vesting period. Earnings and soundness targets for the 2005 and 2004 fiscal years were achieved and the restrictions related to 6,734 shares and 1,282 shares, respectively, were released. For the years ended December 31, 2005 and 2004, Pinnacle Financial recognized approximately $245,000 and $43,000, respectively, in compensation costs attributable to these awards.
     On January 18, 2006, the Board of Directors of Pinnacle Financial awarded 3,200 shares of restricted common stock to the eight outside members of the board in accordance with their 2006 board compensation package. Each board member received an award of 400 shares. The restrictions on these shares will lapse on the one year anniversary date of the award provided the individual board members meet attendance goals for the various board

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and board committee meetings to which they are scheduled to attend during the fiscal year ended December 31, 2006.
Note 15. Employment Contracts
     Pinnacle Financial has entered into three continuously automatic-renewing three-year employment agreements with three of its senior executives, the President and Chief Executive Officer, the Chairman of the Board and the Chief Administrative Officer. These agreements will always have a three-year term unless any of the parties to the agreements gives notice of intent not to renew the agreement. The agreements specify that in certain defined “Terminating Events”, Pinnacle Financial will be obligated to pay each of the three senior executives a certain amount which is based on their annual salaries and bonuses. These Terminating Events include disability, change of control and other events.
Note 16. Related Party Transactions
     A local public relations company, of which one of Pinnacle Financial’s directors is a principal, provides various services for Pinnacle Financial. For the years ended December 31, 2005, 2004, and 2003, Pinnacle Financial incurred approximately $187,000, $141,000 and $137,000, respectively, in expense for services rendered by this public relations company. Another director is an officer in an insurance firm that serves as an agent in securing insurance in such areas as Pinnacle Financial’s property and casualty insurance and other insurance policies.
     During the fourth quarter of 2004, Pinnacle Financial’s wholly-owned subsidiary, Pinnacle Credit Enhancement Holdings, Inc. (“PCEH”), acquired a 24.5% membership interest in Collateral Plus, LLC. Collateral Plus, LLC serves as an intermediary between investors and borrowers in certain financial transactions whereby the borrowers require enhanced collateral in the form of guarantees or letters of credit issued by the investors for the benefit of banks and other financial institutions. An employee of Pinnacle National also owns a 24.5% interest in Collateral Plus, LLC. PCEH’s 24.5% ownership of Collateral Plus, LLC resulted in pre-tax earnings of $216,000 in 2005. The financial impact of PCEH’s 24.5% ownership of Collateral Plus, LLC to Pinnacle Financial’s financial statements for the year ended December 31, 2004 was $9,000.
Note 17. Fair Value of Financial Instruments
     The following methods and assumptions were used by Pinnacle Financial in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2005 and 2004. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
Cash, Due From Banks and Fed Funds Sold - The carrying amounts of cash, due from banks, and federal funds sold approximate their fair value.
Securities - Fair values for securities are generally based on available quoted market prices.
Loans - For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are equal to carrying values. For fixed rate loans that reprice within one year, fair values are equal to carrying values. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. Fair values

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.
Deposits, Securities Sold Under Agreements to Repurchase, Advances from the Federal Home Loan Bank and Subordinated Debt - The carrying amounts of demand deposits, savings deposits, securities sold under agreements to repurchase and floating rate subordinated debt approximate their fair values. Fair values for certificates of deposit, advances from the Federal Home Loan Bank and fixed rate subordinated debt are estimated using discounted cash flow models, using current market interest rates offered on certificates, advances and other borrowings with similar remaining maturities. For fixed rate subordinated debt, the maturity is assumed to be as of the earliest date that the indebtedness will be repriced.
Off-Balance Sheet Instruments - The fair values of Pinnacle Financial’s off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit and standby letters of credit do not represent a significant value to Pinnacle Financial until such commitments are funded. Pinnacle Financial has determined that the fair value of commitments to extend credit is not significant.
     The carrying amounts and estimated fair values of Pinnacle Financial’s financial instruments at December 31, 2005 and 2004 were as follows (in thousands):
                                 
    December 31, 2005   December 31, 2004
    Carrying   Estimated   Carrying   Estimated
    Amount   Fair Value   Amount   Fair Value
Financial assets:
                                
Cash, due from banks, and Federal funds sold
   $ 58,654     $ 58,654     $ 26,746     $ 26,746  
Securities available-for-sale
    251,749       251,749       180,574       180,574  
Securities held-to-maturity
    27,331       26,546       27,596       27,135  
Mortgage loans held-for-sale
    4,874       4,874       1,635       1,635  
Loans, net
    640,166       630,586       466,712       467,290  
 
                                
Financial liabilities:
                                
Deposits and securities sold under agreements to repurchase
   $ 875,985     $ 873,635     $ 602,655     $ 601,379  
Federal Home Loan Bank advances
    41,500       40,889       53,500       53,183  
Subordinated debt
    30,929       30,427       10,310       10,310  
                                 
    Notional           Notional        
    Amount           Amount        
Off-balance sheet instruments:
                                
Commitments to extend credit
  $ 252,617     $ —     $ 160,849     $ —  
Standby letters of credit
    57,550       227       45,342       188  
Note 18. Regulatory Matters
     Pinnacle National is subject to restrictions on the payment of dividends to Pinnacle Financial under federal banking laws and the regulations of the Office of the Comptroller of the Currency. Pinnacle Financial is also subject to limits on payment of dividends to its shareholders by the rules, regulations and policies of federal banking authorities. Pinnacle Financial has not paid any dividends to date, nor does it anticipate paying dividends to its shareholders for the foreseeable future. Future dividend policy will depend on Pinnacle National’s earnings, capital position, financial condition and other factors.
     Pinnacle Financial and Pinnacle National are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pinnacle Financial and Pinnacle National must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pinnacle

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial’s and Pinnacle National’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
     Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and Pinnacle National to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 2005 and 2004, Pinnacle Financial and Pinnacle National meet all capital adequacy requirements to which they are subject. To be categorized as well-capitalized, Pinnacle National must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. Pinnacle Financial and Pinnacle National’s actual capital amounts and ratios are presented in the following table (dollars in thousands):
                                                 
                                    Minimum  
                                    To Be Well-Capitalized  
                    Minimum     Under Prompt  
                    Capital     Corrective  
    Actual     Requirement     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
At December 31, 2005
                                                
 
                                                
Total capital to risk weighted assets:
                                                
Pinnacle Financial
   $ 105,101       12.6 %   $ 66,521       8.0 %   not applicable  
Pinnacle National
   $ 90,215       10.9 %   $ 66,334       8.0 %   $ 82,917       10.0 %
Tier I capital to risk weighted assets:
                                                
Pinnacle Financial
   $ 97,243       11.7 %   $ 33,261       4.0 %   not applicable  
Pinnacle National
   $ 82,357       9.9 %   $ 33,167       4.0 %   $ 49,751       6.0 %
Tier I capital to average assets (*):
                                                
Pinnacle Financial
   $ 97,243       9.9 %   $ 39,444       4.0 %   not applicable  
Pinnacle National
   $ 82,357       8.4 %   $ 39,444       4.0 %   $ 49,305       5.0 %
 
                                                
At December 31, 2004
                                                
 
                                                
Total capital to risk weighted assets:
                                                
Pinnacle Financial
   $ 73,540       12.7 %   $ 46,410       8.0 %   not applicable  
Pinnacle National
   $ 63,775       11.0 %   $ 46,373       8.0 %   $ 57,967       10.0 %
Tier I capital to risk weighted assets:
                                                
Pinnacle Financial
   $ 67,880       11.7 %   $ 23,205       4.0 %   not applicable  
Pinnacle National
   $ 58,115       10.0 %   $ 23,187       4.0 %   $ 34,780       6.0 %
Tier I capital to average assets (*):
                                                
Pinnacle Financial
   $ 67,880       9.7 %   $ 28,134       4.0 %   not applicable  
Pinnacle National
   $ 58,115       8.3 %   $ 28,116       4.0 %   $ 35,145       5.0 %
 
(*)   Average assets for the above calculations were fourth quarter amounts.
Note 19. Business Segment Information
     Pinnacle Financial has three reporting segments comprised of commercial banking, investment services and mortgage origination. Pinnacle Financial’s primary segment is commercial banking which consists of commercial loan and deposit services as well as the activities of Pinnacle Financial’s branch locations. Investment services include all brokerage and investment activities associated with Pinnacle Asset Management, an operating unit within Pinnacle National. Mortgage origination is also a separate unit within Pinnacle National and focuses on the origination of residential mortgage loans for sale to investors in the secondary residential mortgage market. The following tables present financial information for each reportable segment for each of the years noted (dollars in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 
    Commercial     Investment     Mortgage     Total  
    Banking     Services     Origination     Company  
2005:
                                
Net interest income
  $ 29,038     $ —     $ —     $ 29,038  
Provision for loan losses
    2,152       —       —       2,152  
Noninterest income
    2,675       1,573       1,146       5,394  
Noninterest expense
    19,315       1,171       546       21,032  
Income tax expense
    2,809       154       230       3,193  
 
                        
Net income
  $ 7,437     $ 248     $ 370     $ 8,055  
 
                        
 
                                
End of period assets
  $ 1,016,772     $ —     $ —     $ 1,016,772  
 
                        
 
                                
2004:
                                
Net interest income
  $ 20,264     $ —     $ —     $ 20,264  
Provision for loan losses
    2,948       —       —       2,948  
Noninterest income
    2,348       1,313       1,317       4,978  
Noninterest expense
    12,884       1,004       915       14,803  
Income tax expense
    1,900       118       154       2,172  
 
                        
Net income
  $ 4,880     $ 191     $ 248     $ 5,319  
 
                        
 
                                
End of period assets
  $ 727,139     $ —     $ —     $ 727,139  
 
                        
 
                                
2003:
                                
Net interest income
  $ 12,899     $ —     $ —     $ 12,899  
Provision for loan losses
    1,157       —       —       1,157  
Noninterest income
    1,511       833       691       3,035  
Noninterest expense
    9,483       872       441       10,796  
Income tax expense
    1,347       (15 )     94       1,426  
 
                        
Net income
  $ 2,423     $ (24 )   $ 156     $ 2,556  
 
                        
 
                                
End of period assets
  $ 498,421     $ —     $ —     $ 498,421  
 
                        
Note 20. Parent Company Only Financial Information
     The following information presents the condensed balance sheets, statements of income, and cash flows of Pinnacle Financial as of December 31, 2005 and 2004 and for each of the years in the three-year period ended December 31, 2005:
CONDENSED BALANCE SHEETS
                 
    2005     2004  
Assets:
                
Cash
  $ 12,679,759     $ 8,091,049  
Investments in consolidated subsidiaries:
                
Pinnacle National
    79,463,336       58,140,549  
Pinnacle Advisory Services
     107,086       15,450  
Pinnacle Credit Enhancement Holdings
    123,431       245  
Investment in unconsolidated subsidiaries:
                
PNFP Statutory Trust I
    310,000       310,000  
PNFP Statutory Trust II
    619,000       —  
Income taxes receivable from subsidiaries
    676,886       1,807,272  
Other assets
    618,650       139,175  
 
            
 
   $ 94,598,148     $ 68,503,740  
 
            
 
                
Liabilities and stockholders’ equity:
                
Current income taxes payable
    232,723       312,221  
Subordinated debt
    30,929,000       10,310,000  
Other liabilities
    —       1,344  
Stockholders’ equity
    63,436,425       57,880,175  
 
            
 
   $ 94,598,148     $ 68,503,740  
 
            

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
                         
    2005     2004     2003  
Revenues – Interest income
  $ 133,748     $ 63,121     $ 24,833  
Expenses:
                        
Interest expense – subordinated debentures
     985,645       431,318       —  
Compensation expense – restricted stock
    244,724       43,009       —  
Other expense
    58,772       100,179       23,113  
 
                  
Income (loss) before income taxes and equity in income of subsidiaries
     (1,155,393 )     (511,385 )     1,720  
Income tax (expense) benefit
    438,270       198,516       (657 )
 
                  
Income before equity in income of subsidiaries
     (717,123 )     (312,869 )     1,063  
Equity in income of subsidiaries
    8,772,391       5,631,779       2,553,576  
 
                  
Net income
  $ 8,055,268     $ 5,318,910     $ 2,554,639  
 
                  
CONDENSED STATEMENTS OF CASH FLOWS
                         
    2005     2004     2003  
Operating activities:
                        
Net income
  $ 8,055,268     $ 5,318,910     $ 2,554,639  
Adjustments to reconcile net income to net cash provided (used) by operating activities:
                        
Amortization of compensation expense related to restricted stock awards
     244,724       43,009       —  
Decrease (increase) in income taxes receivable, net
     1,050,887       (1,447,991 )     (47,060 )
Decrease (increase) in other assets
    (479,474 )     12,365       (1,540 )
Increase (decrease) in other liabilities
     (1,344 )     (8,656 )     4,385  
Deferred tax expense
    —       —       47,726  
Equity in income of subsidiaries
    (8,772,391 )     (5,631,779 )     (2,553,576 )
 
                  
Net cash provided (used) by operating activities
     97,670       (1,714,142 )     4,574  
 
                  
 
                        
Investing activities –
                        
Investment in unconsolidated subsidiaries:
    (619,000 )     —       (310,000 )
Investment in consolidated subsidiaries:
                        
Pinnacle National
    (15,500,000 )     (17,556,000 )     (4,244,500 )
Other subsidiaries
    (183,721 )     (57,812 )     —  
 
                  
Net cash used by investing activities
    (16,302,721 )     (17,613,812 )     (4,554,500 )
 
                  
Financing activities –
                        
Proceeds from issuance of subordinated debt
     20,619,000       —       10,310,000  
Debt issuance costs related to issuance of subordinated debt
     —       —       (150,000 )
Net proceeds from sale of common stock
    —       18,192,167       —  
Exercise of common stock options
    174,761       118,113       —  
 
                  
Net cash provided by financing activities
    20,793,761       18,310,280       10,160,000  
 
                  
 
Net increase (decrease) in cash
    4,588,710       (1,017,674 )     5,610,074  
Cash, beginning of year
    8,091,049       9,108,723       3,498,649  
 
                  
Cash, end of year
  $ 12,679,759     $ 8,091,049     $ 9,108,723  
 
                  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Quarterly Financial Results (unaudited)
     A summary of selected consolidated quarterly financial data for the years ended December 31, 2005 and 2004 follows:
                                 
    First   Second   Third   Fourth
(in thousands, except per share data)   Quarter   Quarter   Quarter   Quarter
 
2005
                                
Interest income
  $ 9,270     $ 10,544     $ 12,379     $ 14,118  
Net interest income
    6,503       6,795       7,456       8,287  
Provision for loan losses
    601       483       366       702  
Net income before taxes
    2,499       2,762       2,867       3,119  
Net income
    1,780       1,959       2,078       2,238  
Basic net income per share
  $ 0.21     $ 0.23     $ 0.25     $ 0.27  
Diluted net income per share
  $ 0.19     $ 0.21     $ 0.22     $ 0.24  
 
                                
2004
                                
Interest income
  $ 5,666     $ 6,225     $ 7,214     $ 8,574  
Net interest income
    4,152       4,536       5,299       6,278  
Provision for loan losses
    354       449       1,012       1,134  
Net income before taxes
    1,611       1,655       1,961       2,263  
Net income
    1,071       1,168       1,391       1,689  
Basic net income per share
  $ 0.15     $ 0.16     $ 0.18     $ 0.20  
Diluted net income per share
   $ 0.13     $ 0.14     $ 0.16     $ 0.18  

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
     Evaluation of Disclosure Controls and Procedures
Pinnacle Financial maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to Pinnacle Financial’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Pinnacle Financial carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that Pinnacle Financial’s disclosure controls and procedures were effective.
     Management Report on Internal Control Over Financial Reporting
The report of Pinnacle Financial’s management on Pinnacle Financial’s internal control over financial reporting is set forth on page 47 of this Annual Report on Form 10-K. The attestation of Pinnacle Financial’s independent registered public accounting firm related to the report is set forth on page 49 of this Annual Report on Form 10-K.
     Changes in Internal Controls
There were no changes in Pinnacle Financial’s internal control over financial reporting during Pinnacle Financial’s fiscal quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, Pinnacle Financial’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2006, which will be filed on or before April 30, 2006 under the headings “Corporate Governance,” “Proposal #1 Election of Directors,” “Executive Management Information,” and “Security Ownership of Certain Beneficial Owners and Management” and are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2006, which will be filed on or before April 30, 2006 under the heading, “ Compensation” and are incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2006, which will be filed on or before April 30, 2006 under the headings, “Security Ownership of Certain Beneficial Owners and Management,” and “Proposal #3 Amendment to the Pinnacle Financial Partners, Inc. 2004 Equity Incentive Plan,” and are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2006, which will be filed on or before April 30, 2006 under the headings, “Security Ownership of Certain Beneficial Owners and Management — Certain Relationships and Related Transactions,” and “Compensation” and are incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2006, which will be filed on or before April 30, 2006 under the heading, “Independent Registered Public Accounting Firm” and are incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
     (a) Exhibits
     
Exhibit No.   Description
2.1
  Merger Agreement, dated September 30, 2005, by and between Pinnacle Financial Partners, Inc. and Cavalry Bancorp, Inc. (schedules and exhibits to which been omitted pursuant to Items 601(b)(2) of Regulations S-K (1)
 
    
3.1
  Amended and Restated Charter (2)
 
    
3.2
  Bylaws (3)
 
    
4.1.1
  Specimen Common Stock Certificate (4)
 
    
4.1.2
  See Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining rights of holders of the Common Stock
 
    
10.1
  Lease Agreement by and between TMP, Inc. (former name of Pinnacle Financial Partners, Inc.) and Commercial Street Associates dated March 16, 2000 (main office) (4)
 
    
10.4
  Form of Pinnacle Financial Partners, Inc.’s Organizers’ Warrant Agreement (4)
 
    
10.7
  Employment Agreement dated as of August 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr. (4) *

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Exhibit No.   Description
10.8
  Employment Agreement dated as of April 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and Hugh M. Queener (4) *
 
    
10.9
  Letter Agreement dated March 14, 2000 and accepted March 16, 2000 by and between Pinnacle Financial Corporation (now known as Pinnacle Financial Partners, Inc.) and Atkinson Public Relations (4)
 
    
10.14
  Employment Agreement dated March 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and M. Terry Turner (4) *
 
    
10.15
  Pinnacle Financial Partners, Inc. 2000 Stock Incentive Plan (4) *
 
    
10.16
  Form of Pinnacle Financial Partners, Inc.’s Stock Option Award (4) *
 
    
10.18
  Agreement for Assignment of Lease by and between Franklin National Bank and TMP, Inc., now known as Pinnacle Financial Partners, Inc., effective July 17, 2000 (4)
 
    
10.19
  Form of Assignment of Lease and Consent of Landlord by Franklin National Bank, Pinnacle Financial Partners, Inc., formerly TMP, Inc., and Stearns Investments, Jack J. Stearns and Edna Stearns, General Partners (4)
 
    
10.21
  Green Hills Office Lease (5)
 
    
10.23
  Form of Restricted Stock Award Agreement (6)
 
    
10.24
  Form of Incentive Stock Option Agreement (6)
 
    
10.25
  Lease Agreement for West End Lease (7)
 
    
10.26
  Lease Amendments for Commerce Street location (7)
 
    
10.27
  Pinnacle Financial Partners, Inc. 2004 Equity Incentive Plan (8) *
 
    
10.28
  2005 Annual Cash Incentive Plan (2) *
 
    
10.29
  Fourth Amendment to Commerce Street Lease (2)
 
    
10.30
  Employment Agreement by and between Pinnacle National Bank and Ed C. Loughry, Jr. (9) *
 
    
10.31
  Employment Agreement by and between Pinnacle National Bank and William S. Jones (9) *
 
    
10.32
  Consulting Agreement by and between Pinnacle National Bank and Ronnie F. Knight (9) *
 
    
10.33
  2006 Director Compensation Summary (10) *
 
    
10.34
  Form of Restricted Stock Agreement for non-employee directors (10) *
 
    
10.35
  Form of Non-Qualified Stock Option Agreement *
 
    
10.36
  Named Executive Officer Compensation Summary *
 
    
21.1
  Subsidiaries of Pinnacle Financial Partners, Inc.
 
    
23.1
  Consent of KPMG LLP
 
    
31.1
  Certification pursuant to Rule 13a-14(a)/15d-14(a)
 
    
31.2
  Certification pursuant to Rule 13a-14(a)/15d-14(a)
 
    
32.1
  Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002

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Exhibit No.   Description
32.2
  Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
 
(*)   Management compensatory plan or arrangement
 
(1)   Registrant hereby incorporates by reference to Registrant’s Current Report on Form 8-K filed on October 3, 2005.
 
(2)   Registrant hereby incorporates by reference to Registrant’s Form 10-Q for the quarter ended March 31, 2005.
 
(3)   Registrant hereby incorporates by reference to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2002 as filed with the SEC on March 6, 2003.
 
(4)   Registrant hereby incorporates by reference to the Registrant’s Registration Statement on Form SB-2, as amended (File No. 333-38018).
 
(5)   Registrant hereby incorporates by reference to the Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000 as filed with the SEC on March 29, 2001.
 
(6)   Registrant hereby incorporates by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2004.
 
(7)   Registrant hereby incorporates by reference to Registrant’s Form 10-K for the fiscal year ended December 31, 2004 as filed with the SEC on February 28, 2005.
 
(8)   Registrant hereby incorporates by reference to Registrant’s Current Report on Form 8-K filed on April 19, 2005.
 
(9)   Registrant hereby incorporates by reference to Registrant’s Registration Statement on Form S-4, as amended (File No. 333-129076).
 
(10)   Registrant hereby incorporates by reference to Registrant’s Current Report on Form 8-K filed on January 23, 2006.
Pinnacle Financial is a party to certain agreements entered into in connection with the offering by PNFP Statutory Trust I and PNFP Statutory Trust II of an aggregate of $30,000,000 in trust preferred securities, as more fully described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(ii) of Regulation SB, and because the total amount of the trust preferred securities is not in excess of 10% of Pinnacle Financial’s total assets, Pinnacle Financial has not filed the various documents and agreements associated with the trust preferred securities herewith. Pinnacle Financial has, however, agreed to furnish copies of the various documents and agreements associated with the trust preferred securities to the Securities and Exchange Commission upon request.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
       
 
PINNACLE FINANCIAL PARTNERS, INC.
 
    
Date: February 24, 2006
By:  /s/ M. Terry Turner
 
   
 
  M. Terry Turner
 
  President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
         
Signature   Title   Date
 
/s/ Robert A. McCabe, Jr.
  Chairman of the Board   February 24, 2006
 
        
Robert A. McCabe, Jr.
        
 
        
/s/ M. Terry Turner
  President and Chief   February 24, 2006
M. Terry Turner
     Executive Officer    
 
    (Principal Executive Officer)    
 
        
/s/ Harold R. Carpenter
  Chief Financial Officer   February 24, 2006
Harold R. Carpenter
     (Principal Financial    
    and Accounting Officer)    
 
        
/s/ Sue R. Atkinson
  Director   February 24, 2006
 
        
Sue R. Atkinson
        
 
        
/s/ Gregory L. Burns
  Director   February 24, 2006
 
        
Gregory L. Burns
        
 
        
/s/ Colleen Conway-Welch
  Director   February 24, 2006
 
        
Colleen Conway-Welch
        
 
        
/s/ Clay T. Jackson
  Director   February 24, 2006
 
        
Clay T. Jackson
        
 
        
/s/ John E. Maupin, Jr.
  Director   February 24, 2006
 
        
John E. Maupin, Jr.
        
 
        
  Director    
 
        
Hal N. Pennington
        
 
        
/s/ Dale W. Polley
  Director   February 24 2006
 
        
Dale W. Polley
        
 
        
/s/ James L. Shaub, II
  Director   February 24, 2006
 
        
James L. Shaub, II
        
 
        
/s/ Reese L. Smith, III
  Director   February 24, 2006
 
        
Reese L. Smith, III
        

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EXHIBIT INDEX
     
Exhibit No.   Description
2.1
  Merger Agreement, dated September 30, 2005, by and between Pinnacle Financial Partners, Inc. and Cavalry Bancorp, Inc. (schedules and exhibits to which been omitted pursuant to Items 601(b)(2) of Regulations S-K (1)
 
    
3.1
  Amended and Restated Charter (2)
 
    
3.2
  Bylaws (3)
 
    
4.1.3
  Specimen Common Stock Certificate (4)
 
    
4.1.4
  See Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining rights of holders of the Common Stock
 
    
10.1
  Lease Agreement by and between TMP, Inc. (former name of Pinnacle Financial Partners, Inc.) and Commercial Street Associates dated March 16, 2000 (main office) (4)
 
    
10.4
  Form of Pinnacle Financial Partners, Inc.’s Organizers’ Warrant Agreement (4)
 
    
10.7
  Employment Agreement dated as of August 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr. (4) *
 
    
10.8
  Employment Agreement dated as of April 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and Hugh M. Queener (4) *
 
    
10.9
  Letter Agreement dated March 14, 2000 and accepted March 16, 2000 by and between Pinnacle Financial Corporation (now known as Pinnacle Financial Partners, Inc.) and Atkinson Public Relations (4)
 
    
10.14
  Employment Agreement dated March 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and M. Terry Turner (4) *
 
    
10.15
  Pinnacle Financial Partners, Inc. 2000 Stock Incentive Plan (4) *
 
    
10.16
  Form of Pinnacle Financial Partners, Inc.’s Stock Option Award (4) *
 
    
10.18
  Agreement for Assignment of Lease by and between Franklin National Bank and TMP, Inc., now known as Pinnacle Financial Partners, Inc., effective July 17, 2000 (4)
 
    
10.19
  Form of Assignment of Lease and Consent of Landlord by Franklin National Bank, Pinnacle Financial Partners, Inc., formerly TMP, Inc., and Stearns Investments, Jack J. Stearns and Edna Stearns, General Partners (4)
 
    
10.22
  Green Hills Office Lease (5)
 
    
10.23
  Form of Restricted Stock Award Agreement (6)
 
    
10.24
  Form of Incentive Stock Option Agreement (6)
 
    
10.25
  Lease Agreement for West End Lease (7)
 
    
10.26
  Lease Amendments for Commerce Street location (7)
 
    
10.27
  Pinnacle Financial Partners, Inc. 2004 Equity Incentive Plan (8) *
 
    
10.28
  2005 Annual Cash Incentive Plan (2) *
 
    
10.29
  Fourth Amendment to Commerce Street Lease (2)
 
    
10.30
  Employment Agreement by and between Pinnacle National Bank and Ed C. Loughry, Jr. (9) *

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Exhibit No.   Description
10.31
  Employment Agreement by and between Pinnacle National Bank and William S. Jones (9) *
 
    
10.32
  Consulting Agreement by and between Pinnacle National Bank and Ronnie F. Knight (9) *
 
    
10.33
  2006 Director Compensation Summary (10) *
 
    
10.34
  Form of Restricted Stock Agreement for non-employee directors (10) *
 
    
10.35
  Form of Non-Qualified Stock Option Agreement *
 
    
10.36
  Named Executive Officer Compensation Summary *
 
    
21.1
  Subsidiaries of Pinnacle Financial Partners, Inc.
 
    
23.1
  Consent of KPMG LLP
 
    
31.1
  Certification pursuant to Rule 13a-14(a)/15d-14(a)
 
    
31.2
  Certification pursuant to Rule 13a-14(a)/15d-14(a)
 
    
32.1
  Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
 
    
32.2
  Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
 
(*)   Management compensatory plan or arrangement
 
(1)   Registrant hereby incorporates by reference to Registrant’s Current Report on Form 8-K filed on October 3, 2005.
 
(2)   Registrant hereby incorporates by reference to Registrant’s Form 10-Q for the quarter ended March 31, 2005.
 
(3)   Registrant hereby incorporates by reference to Registrant’s Form 10-KSB for the fiscal year ended December 31, 2002 as filed with the SEC on March 6, 2003.
 
(4)   Registrant hereby incorporates by reference to the Registrant’s Registration Statement on Form SB-2, as amended (File No. 333-38018).
 
(5)   Registrant hereby incorporates by reference to the Registrant’s Form 10-KSB for the fiscal year ended December 31, 2000 as filed with the SEC on March 29, 2001.
 
(6)   Registrant hereby incorporates by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2004.
 
(7)   Registrant hereby incorporates by reference to Registrant’s Form 10-K for the fiscal year ended December 31, 2004 as filed with the SEC on February 28, 2005.
 
(8)   Registrant hereby incorporates by reference to Registrant’s Current Report on Form 8-K filed on April 19, 2005.
 
(9)   Registrant hereby incorporates by reference to Registrant’s Registration Statement on Form S-4, as amended (File No. 333-129076).
 
(10)   Registrant hereby incorporates by reference to Registrant’s Current Report on Form 8-K filed on January 23, 2006.
Pinnacle Financial is a party to certain agreements entered into in connection with the offering by PNFP Statutory Trust I and PNFP Statutory Trust II of an aggregate of $30,000,000 in trust preferred securities, as more fully described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(ii) of Regulation SB, and because the total amount of the trust preferred securities is not in excess of 10% of Pinnacle Financial’s total assets, Pinnacle Financial has not filed the various documents and agreements associated with the trust preferred securities herewith. Pinnacle Financial has, however, agreed to furnish copies of the various documents and agreements associated with the trust preferred securities to the Securities and Exchange Commission upon request.

Page 82

EX-10.35 2 g99783exv10w35.txt EX-10.35 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT EXHIBIT 10.35 PINNACLE FINANCIAL PARTNERS, INC. NON-QUALIFIED STOCK OPTION AGREEMENT THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as of this _____ day of ______, 2006 (the "Grant Date"), by and between Pinnacle Financial Partners, Inc., a Tennessee corporation (together with its Subsidiaries and Affiliates, the "Company"), and __________________ (the "Optionee"). Capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Pinnacle Financial Partners, Inc. 2004 Equity Incentive Plan, as amended (the "Plan"). WHEREAS, the Company has adopted the Plan, which permits the issuance of stock options for the purchase of shares of the common stock, par value $1.00 per share, of the Company (the "Shares"); and WHEREAS, the Company desires to afford the Optionee an opportunity to purchase Shares as hereinafter provided in accordance with the provisions of the Plan; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: Grant of Option. The Company grants as of the date of this Agreement the right and option (the "Option") to purchase __________ Shares, in whole or in part (the "Option Stock"), at an exercise price of $_________ per Share, on the terms and conditions set forth in this Agreement and subject to all provisions of the Plan. The Optionee, holder or beneficiary of the Option shall not have any of the rights of a shareholder with respect to the Option Stock until such person has become a holder of such Shares by the due exercise of the Option and payment of the Option Payment (as defined in Section 3 below) in accordance with this Agreement. The Option shall be a non-qualified stock option. In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it upon the exercise of the Option, and in order to comply with all applicable federal or state tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal, state or other taxes are withheld or collected from the Optionee. Exercise of Option. Optionee may exercise the Option with respect to the percentage and number of shares set forth below from and after the dates specified below:
CUMULATIVE CUMULATIVE PERCENTAGE VESTED DATE OF VESTING OPTIONS EXERCISABLE - ----------------- ------------------------ ------------------- ________ % _______________, _______ __________ ________ % _______________, _______ __________ ________ % _______________, _______ __________ ________ % _______________, _______ __________ ________ % _______________, _______ __________
Notwithstanding the above, each outstanding Option shall vest and become exercisable upon the occurrence of a Change in Control, but only if and to the extent so determined by the Committee, and shall be governed by the provisions of Section 12 of the Plan. Manner of Exercise. The Option may be exercised in whole or in part at any time within the period permitted hereunder for the exercise of the Option, with respect to whole Shares only, by serving written notice of intent to exercise the Option substantially in the form of Exhibit A hereto delivered to the Company at its principal office no earlier than thirty (30) days and no later than ten (10) days prior to the date upon which Optionee desires to exercise all or any portion of the Option, stating the number of Shares to be purchased, the person or persons in whose name the Shares are to be registered and each such person's address and social security number. Such notice shall not be effective unless accompanied by payment in full of the Option Price for the number of Shares with respect to which the Option is then being exercised (the "Option Payment") and cash equal to the required withholding taxes as set forth by Internal Revenue Service and applicable State Page 1 tax guidelines for the employer's minimum statutory withholding. The Option Payment shall be made in cash or cash equivalents or in whole Shares that have been held by the Optionee for at least six months prior to the date of exercise valued at the Shares' Fair Market Value on the date of exercise (or next succeeding trading date if the date of exercise is not a trading date) or the actual sales price of such Shares, together with any applicable withholding taxes, or by a combination of such cash (or cash equivalents) and Shares. The Optionee shall not be entitled to tender Shares pursuant to successive, substantially simultaneous exercises of the Option or any other stock option of the Company. Subject to applicable securities laws, the Optionee may also exercise the Option by delivering a notice of exercise of the Option and by simultaneously selling the Shares of Option Stock thereby acquired pursuant to a brokerage or similar agreement approved in advance by proper officers of the Company, using the proceeds of such sale as payment of the Option Payment, together with any applicable withholding taxes. For purposes of this Agreement, "Fair Market Value" means the closing sales price of the Shares on the Nasdaq Stock Market's National Market or the actual sales price of such Shares. Termination of Option. The Option will expire ten years from the date of grant of the Option (the "Term") with respect to any then unexercised portion thereof, unless terminated earlier as set forth below: Termination by Death. If the Optionee's employment by the Company terminates by reason of death, this Option may thereafter be exercised by the legal representative of the estate or by the legatee of the Optionee under the will of the Optionee, to the extent that the Optionee was entitled to exercise it at the date of the Optionee's death, for a period of one year from the date of death or until the expiration of the Term of the Option, whichever period is the shorter. Termination by Reason of Disability. If the Optionee's employment by the Company terminates by reason of Disability, this Option may thereafter be exercised by the Optionee or personal representative or guardian of the Optionee, as applicable, to the extent the Optionee was entitled to exercise it at the date of the Optionee's Disability, for a period of one year from the date of such termination of employment or until the expiration of the Term of the Option, whichever period is the shorter. Termination by Retirement. If Optionee's employment by the Company terminates by reason of Retirement, this Option may thereafter be exercised by the Optionee, to the extent the Option was exercisable at the time of such termination, for a period of one year from the date of such termination of employment or until the expiration of the Term of the Option, whichever period is the shorter. Termination for Cause or Voluntary Termination. If the Optionee's employment by the Company is voluntarily terminated or terminated for Cause, this Option shall terminate immediately and become void and of no effect. Other Termination. If the Optionee's employment by the Company is involuntarily terminated for any reason other than for Cause, death, Disability or Retirement, this Option may be exercised, to the extent the Option was exercisable at the time of such termination, by the Optionee for a period of three months from the date of such termination of employment or the expiration of the Term of the Option, whichever period is the shorter. No Right to Continued Employment. The grant of the Option shall not be construed as giving Optionee the right to be retained in the employ of the Company, and the Company may at any time dismiss Optionee from employment, free from any liability or any claim under the Plan. Adjustment to Option Stock. The Committee may make adjustments in the terms and conditions of, and the criteria included in, this Option in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.2 of the Plan) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. Amendments to Option. Subject to the restrictions contained in the Plan, the Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, the Option, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or Page 2 termination that would adversely affect the rights of the Optionee or any holder or beneficiary of the Option shall not to that extent be effective without the consent of the Optionee, holder or beneficiary affected. Limited Transferability. During the Optionee's lifetime this Option can be exercised only by the Optionee except as otherwise provided in Sections 4(a) and 4(b) above or in this Section 8. This Option may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by Optionee other than (i) to a Permitted Transferee (as defined in the Plan) or (ii) by will or the laws of descent and distribution. Any attempt to otherwise transfer this Option shall be void. No transfer of this Option by the Optionee by will or by laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and an authenticated copy of the will and/or such other evidence as the Committee may deem necessary or appropriate to establish the validity of the transfer. Any transfer of this Option by the Optionee to a Permitted Transferee must be for no consideration and, after the transfer, the Permitted Transferee shall have the sole responsibility for determining whether and when to exercise the Option. A Permitted Transferee may not transfer any such Option other than by will or the laws of descent and distribution. Reservation of Shares. At all times during the term of this Option, the Company shall use its best efforts to reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of this Agreement. Plan Governs. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. The terms of this Agreement are governed by the terms of the Plan, and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall govern. Severability. If any provision of this Agreement is, or becomes, or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or the Award, or would disqualify the Plan or Award under any laws deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award, and the remainder of the Plan and Award shall remain in full force and effect. Notices. All notices required to be given under this Option shall be deemed to be received if delivered or mailed as provided for herein to the parties at the following addresses, or to such other address as either party may provide in writing from time to time. To the Company: Pinnacle Financial Partners, Inc. 211 Commerce Street, Suite 300 Nashville, Tennessee 37201 Attn: Chief Financial Officer To the Optionee: The address then maintained with respect to the Optionee in the Company's records. Governing Law. The validity, construction and effect of this Agreement shall be determined in accordance with the laws of the State of Tennessee without giving effect to conflicts of laws principles. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way related to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Optionee and the Company for all purposes. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee's legal representative and assignees. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be binding upon the Optionee's heirs, executors, administrators, successors and assignees. IN WITNESS WHEREOF, the parties have caused this Non-Qualified Stock Option Agreement to be duly executed effective as of the day and year first above written. page 3 PINNACLE FINANCIAL PARTNERS, INC. By: __________________________________ Optionee: ______________________________________ Please Print Optionee: ______________________________________ Signature Page 4 EX-10.36 3 g99783exv10w36.txt EX-10.36 NAMED EXECUTIVE OFFICER COMPENSATION SUMMARY EXHIBIT 10.36 PINNACLE FINANCIAL PARTNERS, INC. NAMED EXECUTIVE OFFICER COMPENSATION SUMMARY The following table sets forth the current base salaries paid to the Chief Executive Officer and the four other named executive officers of Pinnacle Financial Partners, Inc. (the "Company") and the amount of the cash bonus paid to these persons in 2006 under the Company's 2005 Cash Incentive Plan.
Executive Officer Current Salary 2005 Cash Bonus ----------------- -------------- --------------- M. Terry Turner - CEO $ 330,000 $165,000 Robert A. McCabe, Jr. - Chairman of the Board $ 313,500 $156,750 Hugh M. Queener - CAO $ 217,000 $ 86,800 Harold R. Carpenter - CFO $ 157,000 $ 62,800 Charles B. McMahan - Sr. Credit Officer $ 154,336 $ 46,300
In addition to their base salaries, these executive officers are also eligible to: - Receive cash bonuses under the Company's 2006 Cash Incentive Plan; - Participate in the Company's equity incentive programs, which currently involves the award of non-qualified stock options and restricted stock pursuant to the Company's 2004 Equity Incentive Plan; and - Participate in the Company's broad-based benefit programs generally available to its employees, including health, disability and life insurance programs and the Company's 401k plan. Additionally, Messrs. Turner, McCabe and Queener receive a monthly car allowance. The foregoing information is summary in nature. Additional information regarding the named executive officer compensation will be provided in the Company's proxy statement to be filed in connection with the 2006 annual meeting of the Company's shareholders. EX-21.1 4 g99783exv21w1.txt EX-21.1 SUBSIDIARIES OF REGISTRANT . . . Exhibit 21.1 LIST OF SUBSIDIARIES
Jurisdiction or State Names Under Which Subsidiaries of Incorporation Subsidiary Does Business (1) ------------ --------------------- ---------------------------- Pinnacle National Bank (2) Tennessee PFP Title Company (3) Tennessee Pinnacle Community Development Corporation (3) Tennessee PNFP Statutory Trust I (4) Connecticut PNFP Statutory Trust II (4) Delaware PNFP Holdings, Inc. (5) Nevada PNFP Properties, Inc. (6) Maryland Pinnacle Advisory Services, Inc. (7) Tennessee Pinnacle Credit Enhancement Services, Inc. (7) Tennessee
- ---------- 1. Unless otherwise noted, each Subsidiary only does business under its legal name as set forth under the heading "Subsidiaries". 2. As a national bank, Pinnacle National Bank is organized under the federal laws of the United States of America. 3. PFP Title Company and Pinnacle Community Development Corporation are wholly-owned subsidiaries of Pinnacle National Bank. 4. PNFP Statutory Trust I and PNFP Statutory Trust II are statutory business trusts which were established to issue capital trust preferred securities. 5. PNFP Holdings, Inc. is a wholly-owned subsidiary of PFP Title Company. 6. PNFP Properties, Inc. is a wholly-owned subsidiary of PNFP Holdings, Inc. 7. Pinnacle Advisory Services, Inc. and Pinnacle Credit Enhancement Services, Inc. are both wholly owned subsidiaries of Pinnacle Financial Partners, Inc. EX-23.1 5 g99783exv23w1.txt EX-23.1 CONSENT OF KPMG LLP Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Pinnacle Financial Partners, Inc.: We consent to the incorporation by reference in the registration statements Nos. 333-49564, 333-68756, 333-114799 and 333-124199 on Form S-8, No. 333-76902 on Form S-3 and No. 333-129076 on Form S-4 of Pinnacle Financial Partners, Inc. of our reports dated February 22, 2006, with respect to the consolidated balance sheets of Pinnacle Financial Partners, Inc. as of December 31, 2005 and 2004, the related consolidated statements of income, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2005, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 annual report on Form 10-K of Pinnacle Financial Partners, Inc. /s/ KPMG LLP Nashville, Tennessee February 22, 2006 EX-31.1 6 g99783exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE CEO Exhibit 31.1 CERTIFICATIONS I, M. Terry Turner, certify that: 1.) I have reviewed this annual report on Form 10-K of Pinnacle Financial Partners, Inc.; 2.) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5.) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 24, 2006 Signature: /s/ M. Terry Turner ------------------------------------ M. Terry Turner, President and Chief Executive Officer EX-31.2 7 g99783exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO Exhibit 31.2 CERTIFICATIONS I, Harold R. Carpenter, certify that: 1.) I have reviewed this annual report on Form 10-K of Pinnacle Financial Partners, Inc.; 2.) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5.) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 24, 2006 Signature: /s/ Harold R. Carpenter -------------------------------------------- Harold R. Carpenter, Chief Financial Officer EX-32.1 8 g99783exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Pinnacle Financial Partners (the "Company") on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, M. Terry Turner, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ M. Terry Turner ------------------------------------ M. Terry Turner President and Chief Executive Officer Pinnacle Financial Partners, Inc. February 24, 2006 EX-32.2 9 g99783exv32w2.txt EX-32.2 SECTION 906 CERTIFICATION OF THE CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Pinnacle Financial Partners (the "Company") on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Harold R. Carpenter, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Harold R. Carpenter ------------------------------------ Harold R. Carpenter Chief Financial Officer Pinnacle Financial Partners, Inc. February 24, 2006 -----END PRIVACY-ENHANCED MESSAGE-----