UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

Commission File Number: 000-31225

, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Tennessee	62-1812853
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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)

Not Applicable

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

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

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 x Non-accelerated Filer o

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

Yes o No x

As of April 28, 2006 there were 15,327,978 shares of common stock, $1.00 par value per share, issued and outstanding.

Pinnacle Financial Partners, Inc.

Report on Form 10-Q

March 31, 2006

TABLE OF CONTENTS
	Page No.
PART I:
Item 1. Consolidated Financial Statements (Unaudited)	2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	41
Item 4. Controls and Procedures	41
PART II:
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3. Defaults Upon Senior Securities	42
Item 4. Submission of Matters to a Vote of Security Holders	42
Item 5. Other Information	42
Item 6. Exhibits	42
Signatures	43

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 and in Pinnacle Financial’s Form 10-K 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, (vi) the ability to successfully integrate Pinnacle Financial’s operations with the former Cavalry Bancorp, Inc., (vii) the ability of Pinnacle Financial to grow its loan portfolio at historic rates and (viii) 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.

Page 1

Item 1.Part I. FINANCIAL INFORMATION

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2006			December 31, 2005
ASSETS
Cash and noninterest-bearing due from banks	$	41,533,756		$	25,935,948
Interest-bearing due from banks		2,954,669			839,960
Federal funds sold		35,103,280			31,878,362
Cash and cash equivalents		79,591,705			58,654,270
Securities available-for-sale, at fair value		288,160,347			251,749,094
Securities held-to-maturity (fair value of $26,352,705 and $26,546,297 at March 31, 2006 and December 31, 2005, respectively)		27,312,913			27,331,251
Mortgage loans held-for-sale		7,262,679			4,874,323
Loans		1,235,169,993			648,024,032
Less allowance for loan losses		(13,354,496	)		(7,857,774	)
Loans, net		1,221,815,497			640,166,258
Premises and equipment, net		33,989,309			12,915,595
Investments in unconsolidated subsidiaries and other entities		10,099,180			6,622,645
Accrued interest receivable		7,883,211			4,870,197
Goodwill		115,618,320			-
Core deposit intangible		13,102,395			-
Other assets		23,376,815			9,588,097
Total assets	$	1,828,212,371		$	1,016,771,730
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	263,700,581		$	155,811,214
Interest-bearing demand		181,067,846			72,520,757
Savings and money market accounts		470,532,348			304,161,625
Time		500,477,255			277,657,129
Total deposits		1,415,778,031			810,150,725
Securities sold under agreements to repurchase		63,911,911			65,834,232
Federal Home Loan Bank advances		67,266,661			41,500,000
Subordinated debt		30,929,000			30,929,000
Accrued interest payable		3,093,184			1,884,596
Other liabilities		10,906,823			3,036,752
Total liabilities		1,591,885,610			953,335,305
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; 15,300,629 issued and outstanding at March 31, 2006 and 8,426,551 issued and outstanding at December 31, 2005		15,300,629			8,426,551
Additional paid-in capital		208,914,892			44,890,912
Unearned compensation		-			(169,689	)
Retained earnings		15,794,187			13,182,291
Accumulated other comprehensive income (loss), net		(3,682,947	)		(2,893,640	)
Stockholders’ equity		236,326,761			63,436,425
Total liabilities and stockholders’ equity	$	1,828,212,371		$	1,016,771,730

See accompanying notes to consolidated financial statements.

Page 2

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended March 31,
	2006		2005
Interest income:
Loans, including fees	$	13,178,830	$	6,954,365
Securities:
Taxable		2,861,118		2,021,783
Tax-exempt		400,773		201,424
Federal funds sold and other		369,675		92,162
Total interest income		16,810,396		9,269,734
Interest expense:
Deposits		5,850,307		2,153,961
Securities sold under agreements to repurchase		508,788		150,262
Federal funds purchased and other borrowings		944,498		462,537
Total interest expense		7,303,593		2,766,761
Net interest income		9,506,803		6,502,973
Provision for loan losses		387,184		601,250
Net interest income after provision for loan losses		9,119,619		5,901,723
Noninterest income:
Service charges on deposit accounts		438,269		261,700
Investment sales commissions		513,597		437,424
Insurance sales commissions		264,828		-
Gain on loans and loan participations sold, net		324,546		160,555
Gain on sales of investment securities, net		-		114,410
Other noninterest income		507,011		203,710
Total noninterest income		2,048,251		1,177,799
Noninterest expense:
Compensation and employee benefits		4,448,357		2,970,558
Equipment and occupancy		1,173,353		784,026
Marketing and other business development		190,471		113,168
Postage and supplies		185,409		135,538
Other noninterest expense		888,294		577,584
Merger related expense		443,330		-
Total noninterest expense		7,329,214		4,580,874
Income before income taxes		3,838,656		2,498,648
Income tax expense		1,226,760		718,895
Net income	$	2,611,896	$	1,779,753
Per share information:
Basic net income per common share	$	0.27	$	0.21
Diluted net income per common share	$	0.24	$	0.19
Weighted average shares outstanding:
Basic		9,578,813		8,389,256
Diluted		10,745,626		9,437,183

See accompanying notes to consolidated financial statements.

Page 3

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Unaudited)

For the three months ended March 31, 2006 and 2005

	Common Stock
	Shares		Amount		Additional Paid-in Capital			Unearned Compensation			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
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		2,139		2,139		11,971			-			-		-			14,110
Amortization of unearned compensation associated with restricted shares		-		-		-			7,500			-		-			7,500
Comprehensive loss:
Net income		-		-		-			-			1,779,753		-			1,779,753
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit of $1,240,860		-		-		-			-			-		(2,024,558	)		(2,024,558	)
Total comprehensive loss																	(223,195	)
Balances, March 31, 2005		8,391,371	$	8,391,371	$	44,388,278		$	(29,750	)	$	6,906,776	$	(1,999,695	)	$	57,656,980
Balances, December 31, 2005		8,426,551	$	8,426,551	$	44,890,912		$	(169,689	)	$	13,182,291	$	(2,893,640	)	$	63,436,425
Transfer of unearned compensation to additional paid-in capital upon adoption of SFAS No. 123(R)		-		-		(169,689	)		169,689			-		-			-
Exercise of employee incentive common stock options		14,180		14,180		109,112			-			-		-			123,292
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan		3,600		3,600		(3,600	)		-			-		-			-
Merger with Cavalry Bancorp, Inc.		6,856,298		6,856,298		164,231,274			-			-		-			171,087,572
Costs to register common stock issued in connection with the merger with Cavalry Bancorp, Inc.		-		-		(177,202	)		-			-		-			(177,202	)
Stock based compensation expense		-		-		186,681			-			-		-			186,681
Comprehensive income:
Net income		-		-		-			-			2,611,896		-			2,611,896
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit of $487,229		-		-		-			-			-		(789,307	)		(789,307	)
Total comprehensive income																	1,822,589
Balances, March 31, 2006		15,300,629	$	15,300,629	$	209,067,488		$	-		$	15,794,187	$	(3,682,947	)	$	236,479,357

See accompanying notes to consolidated financial statements.

Page 4

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2006			2005
Operating activities:
Net income	$	2,611,896		$	1,779,753
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net amortization of securities		244,351			244,147
Depreciation and amortization		655,793			339,766
Provision for loan losses		387,184			601,250
Gain on sale of investment securities, net		-			(114,410	)
Gains on loans and loan participations sold, net		(324,546	)		(160,555	)
Stock-based compensation expense		186,681			-
Deferred tax benefit		(357,492	)		(331,494	)
Mortgage loans held for sale:
Loans originated		(21,034,095	)		(21,360,167	)
Loans sold		20,558,889			20,332,713
Increase in other assets		(898,056	)		(754,642	)
Decrease in other liabilities		(11,336,411	)		(234,719	)
Net cash provided by (used in) operating activities		(9,305,806	)		341,642
Investing activities:
Activities in securities available-for-sale:
Purchases		(5,916,658	)		(10,285,511	)
Sales		-			6,791,867
Maturities, prepayments and calls		7,479,033			6,045,226
		1,562,375			2,551,582
Net increase in loans		(36,438,055	)		(44,410,044	)
Purchases of premises and equipment and software		(233,346	)		(1,046,404	)
Cash and cash equivalents acquired in merger with Cavalry Bancorp, Inc.		37,420,210			-
Purchases of other assets		(78,975	)		(21,900	)
Net provided by (cash used) in investing activities		2,232,209			(42,926,766	)
Financing activities:
Net increase in deposits		21,987,263			48,293,758
Net increase (decrease) in securities sold under agreements to repurchase		(1,922,321	)		14,460,324
Advances from Federal Home Loan Bank:
Issuances		31,000,000			12,000,000
Payments		(23,000,000	)		(14,000,000	)
Exercise of common stock options		123,292			14,110
Costs incurred in connection with registration of common stock issued in merger		(177,202	)		-
Net cash provided by financing activities		28,011,032			60,768,192
Net increase in cash and cash equivalents		20,937,435			18,183,068
Cash and cash equivalents, beginning of period		58,654,270			26,745,787
Cash and cash equivalents, end of period	$	79,591,705		$	44,928,855

See accompanying notes to consolidated financial statements.

Page 5

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Business  — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle National Bank (Pinnacle National). Pinnacle National is a commercial bank 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 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.

·   Miller and Loughry Insurance and Services, Inc. is a wholly-owned subsidiary of Pinnacle National. Miller and Loughry is a general insurance agency located in Murfreesboro, Tennessee and is licensed to sell various commercial and consumer insurance products.

·   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 the three months ended March 31, 2006 and 2005 as follows:

Page 6

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	For the three months ended March 31,
	2006		2005
Cash Payments:
Interest	$	7,764,144	$	2,598,854
Income taxes		400,000		690,000
Noncash Transactions:
Loans charged-off to the allowance for loan lossses		43,976		67,777
Loans foreclosed upon with repossessions transferred to other assets		-		34,750
Common stock and options issued to acquire Cavalry Bancorp, Inc		171,087,572		-

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. The dilutive effect of outstanding options and warrants is reflected in diluted earnings per share by application of the treasury stock method, which in the current period for stock options includes consideration of stock-based compensation attributable to future services as required by Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No.123(R)”).

As of March 31, 2006 and 2005, there were common stock options outstanding to purchase up to 1.6 million and 1.2 million common shares, respectively. Most of these options have exercise prices (and in 2006, compensation costs attributable to future services), 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 three month periods ended March 31, 2006 and 2005. There were common stock options of 388,000 and 146,000 outstanding as of March 31, 2006 and 2005, respectively, which were considered anti-dilutive and thus have not been considered in the fully-diluted share calculations below. Additionally, as of March 31, 2006 and 2005, 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 three months ended March 31, 2006 and 2005.

The following is a summary of the basic and diluted earnings per share calculation for the three months ended March 31, 2006 and 2005:

	For the three months ended March 31,
	2006		2005
Basic earnings per share calculation:
Numerator - Net income	$	2,611,896	$	1,779,753
Denominator - Average common shares outstanding		9,578,813		8,389,256
Basic net income per share	$	0.27	$	0.21
Diluted earnings per share calculation:
Numerator - Net income	$	2,611,896	$	1,779,753
Denominator - Average common shares outstanding		9,578,813		8,389,256
Dilutive shares contingently issuable		1,166,813		1,047,927
Average diluted common shares outstanding		10,745,626		9,437,183
Diluted net income per share	$	0.24	$	0.19

Page 7

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock-Based Compensation — On January 1, 2006, Pinnacle Financial adopted SFAS No. 123(R), that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for equity instruments. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions, as Pinnacle Financial formerly did, using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the accompanying consolidated statement of income.

Pinnacle Financial adopted SFAS No. 123(R) using the modified prospective method which requires the application of the accounting standard as of January 1, 2006. The accompanying consolidated financial statements as of and for the first quarter of 2006 reflect the impact of adopting SFAS No. 123(R). In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). See Note 7 for further details.

Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the accompanying consolidated statement of income during the first quarter of 2006 included compensation expense for stock-based payment awards granted prior to, but not yet vested, as of December 31, 2005 based on the grant date fair value estimated in accordance with SFAS No. 123(R). As stock-based compensation expense recognized in the accompanying statement of income for the first quarter of 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information for 2005, which is also detailed in Note 7, we accounted for forfeitures as they occurred.

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 — FASB Staff Position on SFAS No. 115-1 and SFAS 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 requires 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 did not have a material impact on Pinnacle Financial’s consolidated financial statements.

Reclassifications - Certain previous amounts have been reclassified to conform to the 2006 presentation. Such reclassifications had no impact on net income or loss during any period.

Note 2. Merger with Cavalry Bancorp, Inc.

On March 15, 2006, Pinnacle Financial consummated its merger with Cavalry Bancorp, Inc. (“Cavalry”), a one-bank holding company located in Murfreesboro, Tennessee. Pursuant to the merger agreement, Pinnacle acquired all Cavalry common stock via a tax-free exchange whereby Cavalry shareholders received a fixed exchange ratio of 0.95 shares of Pinnacle Financial common stock for each share of Cavalry common stock, or approximately 6.9 million Pinnacle Financial shares. The accompanying consolidated financial statements include the activities of the former Cavalry since March 15, 2006.

Page 8

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In accordance with SFAS No. 141, “Accounting for Business Combinations” (“SFAS No. 141”), SFAS No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”) and SFAS No. 147, “Acquisition of Certain Financial Institutions” (“SFAS No. 147”), Pinnacle Financial recorded at fair value the following assets and liabilities of Cavalry as of March 15, 2006:

Cash and cash equivalents	$	37,420,210
Investment securities - available-for-sale		39,476,178
Loans, net of an allowance for loan losses of $5,036,656		545,598,367
Goodwill		115,618,320
Core deposit intangible		13,168,236
Other assets		47,341,524
Total assets acquired		798,622,835
Deposits		583,640,043
Federal Home Loan Bank advances		17,766,661
Other liabilities		25,009,641
Total liabilities assumed		626,416,345
Total consideration paid for Cavalry thru March 31, 2006	$	172,206,490

As discussed more fully below, total consideration is comprised of $168.2 million in Pinnacle Financial common shares issued to former Cavalry shareholders, $2.9 million in Pinnacle Financial options issued to former Cavalry option holders and $1.1 million in acquisition costs. Pinnacle Financial is in the process of finalizing the allocation of the purchase price to the acquired net assets noted above. Accordingly, the above allocations should be considered preliminary as of March 31, 2006.

As noted above, total consideration for Cavalry approximates $172.2 million. Pinnacle Financial issued 6,856,298 shares of Pinnacle Financial common stock to the former Cavalry shareholders. In accordance with EITF 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination”, the consideration shares were valued at $24.53 per common share which represents the average closing price of Pinnacle Financial common stock for the two days prior to the merger announcement on September 30, 2005 and the two days after the merger announcement. Aggregate consideration for the common stock issued was approximately $168.2 million. Additionally, Pinnacle Financial also has assumed the Cavalry Bancorp, Inc. 1999 Stock Incentive Plan (the “Cavalry Plan”) pursuant to which Pinnacle is obligated to issue 195,551 shares of Pinnacle Financial common stock upon exercise of stock options awarded to certain former Cavalry employees who held outstanding options as of March 15, 2006. All of these options were fully vested prior to the merger announcement date and expire at various dates between 2011 and 2012. The exercise prices for these stock options range between $10.26 per share and $13.68 per share. In accordance with SFAS No. 141, Pinnacle Financial has considered the fair value of these options in determining the acquisition cost of Cavalry. The fair value of these vested options approximated $2.9 million which has been included as a component of the aggregate purchase price. Additionally, Pinnacle Financial has incurred approximately $1.1 million in acquisition costs associated with the purchase of Cavalry through March 31, 2006. These costs primarily relate to investment banking and attorney fees.

In accordance with SFAS Nos. 141 and 142, Pinnacle Financial has recognized $13.2 million as a core deposit intangible. This identified intangible is being amortized over seven years using an accelerated method which anticipates the life of the underlying deposits to which the intangible is attributable. For the three months ended March 31, 2006, approximately $66,000 was recognized in the accompanying statement of income as other noninterest expense. Amortization expense associated with this identified intangible will approximate $1.8 million to $2.1 million per year for the next five years.

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 preliminary purchase accounting adjustments reflect a reduction in loans and the allowance for loan losses of $1.1 million related to Cavalry’s impaired loans.

Page 9

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following pro forma income statements assume the merger was consummated on January 1, 2005. The pro forma information does not reflect Pinnacle Financial’s results of operations that would have actually occurred had the merger been consummated on such date (dollars in thousands).

	Three months ended March 31,
	2006		2005(1)
Pro Forma Income Statements:
Net interest income	$	15,762	$	13,103
Provision for loan losses		1,368		662
Noninterest income		4,445		4,149
Noninterest expense (2):
Compensation		7,229		6,282
Other noninterest expense		5,097		4,314
Net income before taxes		6,513		5,994
Income tax expense		2,215		1,670
Net income	$	4,298	$	4,324
Pro Forma Per Share Information:
Basic net income per common share	$	0.28	$	0.28
Diluted net income per common share	$	0.26	$	0.26
Weighted average shares outstanding:
Basic		15,292,395		15,245,943
Diluted		16,459,208		16,396,931

 

(1)  In the first quarter of 2005, Cavalry recorded a tax benefit of $427,000 due to a cash distribution of dividends to the participants in their employee stock ownership plan. Excluding this benefit would have lowered net income for the three months ended March 31, 2005 by $427,000 resulting in net income of $3,897,000 or $0.24 per fully-diluted earnings per share.

(2)    In preparation for the merger during the first quarter of 2006, Cavalry and Pinnacle incurred significant merger related charges of approximately $10.5 million in the aggregate primarily for severance benefits, accelerated vesting of defined compensation agreements, investment banker fees, etc. Including these charges would have decreased net income for the three months ended March 31, 2006 by $6.8 million resulting in a net loss of $2,926,000 and a net loss per share of $0.19.

During the quarter ended March 31, 2006, Pinnacle Financial incurred merger integration expense related to the merger with Cavalry of $433,000. These expenses were directly related to the merger, recognized as incurred and reflected on the accompanying consolidated statement of income as merger related expense.

Page 10

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3. Securities

The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2006 and December 31, 2005 are summarized as follows:

	March 31, 2006
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available-for-sale:
U.S. Treasury securities	$	-	$	-	$	-	$	-
U.S. government agency securities		31,060,324		-		675,968		30,384,356
Mortgage-backed securities		216,580,310		18,999		4,524,069		212,075,240
State and municipal securities		43,963,502		10,200		900,462		43,073,240
Corporate notes and other		2,722,118		-		94,607		2,627,511
	$	294,326,254	$	29,199	$	6,195,106	$	288,160,347
Securities held-to-maturity:
U.S. government agency securities	$	17,746,948	$	-	$	529,798	$	17,217,150
State and municipal securities		9,565,965		-		430,410		9,135,555
	$	27,312,913	$	-	$	960,208	$	26,352,705

	December 31, 2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair 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

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 March 31, 2006, the unamortized amount approximated $217,000.

Pinnacle Financial realized approximately $114,000 in gains from the sale of $6,792,000 of available-for-sale securities during the three months ended March 31, 2005. There were no losses on the sale of securities during the quarter ended March 31, 2005. There were no sales of securities during the three months ended March 31, 2006.

At March 31, 2006, approximately $231,644,000 of Pinnacle Financial’s available-for-sale portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase.

Page 11

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At March 31, 2006 and December 31, 2005, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized loss of less than twelve months or twelve months or longer:

	Investments With an Unrealized Loss of Less than 12 months				Investments With an Unrealized Loss of 12 months or longer				Total Investments With an Unrealized Loss
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
At March 31, 2006:
U.S. government agency securities	$	26,525,756	$	547,923	$	21,075,750	$	657,843	$	47,601,506	$	1,205,766
Mortgage-backed securities		125,555,831		1,710,516		80,514,349		2,813,553		206,076,180		4,524,069
State and municipal securities		33,455,622		650,173		16,186,124		680,699		49,641,746		1,330,872
Corporate notes		-		-		2,202,511		94,607		20,202,511		94,607
Total temporarily-impaired securities	$	185,537,209	$	2,908,612	$	119,978,734	$	4,246,702	$	305,515,943	$	7,155,314
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

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

Note 4. Loans and Allowance for Loan Losses

The composition of loans at March 31, 2006 and December 31, 2005 is summarized as follows:

	At March 31,			At December 31,
	2006			2005
Commercial real estate - Mortgage	$	246,391,185		$	148,102,053
Commercial real estate - Construction		162,867,270			30,295,106
Commercial - Other		410,058,715			239,128,969
Total Commercial		819,317,170			417,526,128
Consumer real estate - Mortgage		283,589,990			169,952,860
Consumer real estate - Construction		84,380,965			37,371,834
Consumer - Other		47,881,868			23,173,210
Total Consumer		415,852,823			230,497,904
Total Loans		1,235,169,993			648,024,032
Allowance for loan losses		(13,354,496	)		(7,857,774	)
Loans, net	$	1,221,815,497		$	640,166,258

Page 12

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Changes in the allowance for loan losses for the three months ended March 31, 2006 and for the year ended December 31, 2005 are as follows:

	2006			2005
Balance at beginning of period	$	7,857,774		$	5,650,014
Charged-off loans		(43,976	)		(207,647	)
Recovery of previously charged-off loans		116,860			263,441
Allowance acquired in acquisition of Cavalry (see note 2)		5,036,654			-
Provision for loan losses		387,184			2,151,966
Balance at end of period	$	13,354,496		$	7,857,774

At March 31, 2006 and 2005, Pinnacle Financial had certain impaired loans on nonaccruing interest status. The principal balance of these nonaccrual loans amounted to $1,202,000 and $561,000 at March 31, 2006 and 2005, respectively. In each case, at the date such loans were placed on nonaccrual, 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 $18,000 and $15,000 for the three months ended March 31, 2006 and 2005, respectively.

At March 31, 2006, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $12,316,000 to certain directors, executive officers, and their related entities, of which $6,719,000 had been drawn upon. 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. The terms on these loans and extensions are on substantially the same terms customary for other persons for the type of loan involved.

During the three months ended March 31, 2006 and 2005, 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 net gain on the sale of these participated loans for the three months ended March 31, 2006 of approximately $73,000, 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 5. Income Taxes

Income tax expense attributable to income from continuing operations for the three months ended March 31, 2006 and 2005 consists of the following:

	2006			2005
Current tax expense:
Federal	$	1,474,215		$	989,854
State		110,037			60,535
Total current tax expense		1,584,252			1,050,389
Deferred tax expense (benefit):
Federal		(311,326	)		(275,561	)
State		(46,166	)		(55,933	)
Total deferred tax expense (benefit)		(357,492	)		(331,494	)
	$	1,226,760		$	718,895

Page 13

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Pinnacle Financial's income tax expense (benefit) differs from the amounts computed by applying the Federal income tax statutory rates of 34% in 2006 and 2005 to income before income taxes. A reconciliation of the differences for the three months ended March 31, 2006 and 2005 is as follows:

	2006			2005
Income taxes at statutory rate	$	1,305,053		$	849,540
State tax expense, net of federal tax effect		39,998			107,192
Federal tax credits		(75,000	)		(75,000	)
Tax-exempt securities		(119,973	)		(53,349	)
Other items		76,682			(109,488	)
Income tax expense	$	1,226,760		$	718,895

The effective tax rate for 2006 and 2005 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, 2006 and 2005 is $300,000. Pinnacle Financial believes that it will comply with the various regulatory provisions of the New Markets Tax Credit program in fiscal 2006, and therefore has reflected the impact of the credits in its estimated annual effective tax rate for 2006. During 2004, Pinnacle National formed a real estate investment trust which provides Pinnacle Financial with an alternative vehicle for raising capital. Additionally, the ownership 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 March 31, 2006 and December 31, 2005 are as follows:

	2006		2005
Deferred tax assets:
Loans and loan loss allowance	$	7,805,845	$	3,019,094
Securities		2,260,750		1,773,521
Merger related deferred deductions		824,941		-
Accrued liability for Cavalry’s salaried executive retirement plan		1,436,719		-
Other deferred tax assets		220,760		174,816
		12,549,015		4,967,431
Deferred tax liabilities:
Depreciation and amortization		2,462,863		417,207
Deposits		4,152,500		-
Other deferred tax liabilities		725,476		139,602
		7,340,839		556,809
Net deferred tax assets	$	5,208,176	$	4,410,622

Page 14

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6. Commitments and Contingent Liabilities

In the normal course of business, Pinnacle Financial has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Standby letters of credit are generally issued on behalf of an applicant (our customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from Pinnacle Financial under certain prescribed circumstances. Subsequently, Pinnacle Financial would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

Pinnacle Financial follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, Pinnacle Financial's maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

A summary of Pinnacle Financial's total contractual amount for all off-balance sheet commitments at March 31, 2006 is as follows:

Commitments to extend credit	$	429,908,000
Standby letters of credit		64,359,000

At March 31, 2006, the fair value of Pinnacle Financial’s standby letters of credit was $244,000. 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 7. Stock Option Plan and Restricted Shares

Pinnacle Financial has two equity incentive plans under which it has granted stock options to its employees to purchase common stock at or above the fair market value on the date of grant and granted restricted share awards to employees and directors. During the first quarter of 2006 and in connection with its merger with Cavalry, Pinnacle Financial assumed a third equity incentive plan, the Cavalry Plan. All options granted under the Cavalry Plan were fully vested prior to Pinnacle Financial’s merger with Cavalry and expire at various dates between January 2011 and June 2012. In connection with the merger, all options to acquire Cavalry common stock were converted to options to acquire Pinnacle Financial common stock at the 0.95 exchange ratio. The exercise price was adjusted using the same conversion ratio. All other terms of the Cavalry options were unchanged. There are 195,551 Pinnacle shares which can be acquired by the participants in the Cavalry Plan at exercise prices that range between $10.26 per share and $13.68 per share.

Page 15

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of March 31, 2006, of the 1,602,000 stock options outstanding, 1,422,000 options were granted with the intention to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment to the option holder while 180,000 options would be deemed non-qualified stock options and thus not subject to favorable tax treatment to the option holder. All stock options under the plans vest in equal increments over five years from the date of grant and are exercisable over a period of ten years from the date of grant.

A summary of the activity within the three equity incentive plans during the three months ended March 31, 2006 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as follows:

	Number			Weighted- Average Exercise Price		Weighted- Average Contractual Remaining Term (in years)		Aggregate Intrinsic Value (1) (000’s)
Outstanding at December 31, 2005		1,242,393		$	9.78
Additional stock option grants resulting from assumption of the Cavalry Plan		195,551			10.80
Granted		180,419			26.30
Exercised		(14,180	)		5.74
Forfeited		(2,562	)		19.75
Outstanding at March 31, 2006		1,601,621		$	11.78		6.7	$	25,070
Outstanding and expected to vest at March 31, 2006		1,583,291		$	11.71		6.7	$	24,905
Options exercisable at March 31, 2006		987,013		$	7.29		5.5	$	19,893

       (1)   The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of Pinnacle Financial common stock of $27.44 per common share for the 1.6 million options that were in-the-money at March 31, 2006.

During the three months ended March 31, 2006 and 2005, the aggregate intrinsic value of options exercised under our equity incentive plans was $281,000 and $33,000, respectively, determined as of the date of option exercise. As of March 31, 2006, there was approximately $3.4 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under our equity incentive plans. That cost is expected to be recognized over a weighted-average period of 4.2 years.

Pinnacle Financial adopted SFAS No. 123(R) using the modified prospective transition method beginning January 1, 2006. Accordingly, during the three-month period ended March 31, 2006, we recorded stock-based compensation expense using the Black-Scholes valuation model for awards granted prior to, but not yet vested, as of January 1, 2006 and for stock-based awards granted after January 1, 2006, based on fair value estimated using the Black-Scholes valuation model. For these awards, we have recognized compensation expense using a straight-line amortization method. As SFAS No. 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the three-month period ended March 31, 2006 has been reduced for estimated forfeitures. The impact on our results of operations (compensation and employee benefits expense) of recording stock-based compensation in accordance with SFAS No. 123(R) (related to stock option awards) for the three-month period ended March 31, 2006 was as follows:

	Awards granted with the intention to be classified as incentive stock options		Non-qualified stock option awards			Totals
Stock-based compensation expense	$	131,378	$	21,218		$	152,596
Deferred income tax benefit		-		(8,323	)		(8,323	)
Impact of stock-based compensation expense, after tax effect	$	131,378	$	12,895		$	144,273

Page 16

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For purposes of these calculations, the fair value of options granted for each of the three months ended March 31, 2006 and 2005 was estimated using the Black-Scholes option pricing model and the following assumptions:

	For the three months ended March 31,
	2006			2005
Risk free interest rate		4.40	%		2.26	%
Expected life of options		6.5 years			6.5 years
Expected dividend yield		0.00	%		0.00	%
Expected volatility		23.65	%		24.14	%
Weighted average fair value	$	9.31		$	7.14

Pinnacle Financial’s computation of expected volatility is based on historical volatility. Pinnacle Financial used the simplified method in determining the estimated life of stock option issuances. The risk free interest rate of the award is based on the U.S. Treasury zero coupon rate corresponding to the expected life of the stock option issuances in effect at the time 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, excluding the impact of merger related expense in 2006. Compensation expense associated with the restricted share awards is recognized over the time period that the restrictions associated with the awards lapse. 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 three months ended March 31, 2006 and 2005, Pinnacle Financial recognized approximately $34,000 and $7,000, respectively, in compensation costs attributable to these awards.

During the first quarter of 2006, the Board of Directors of Pinnacle Financial awarded 3,600 shares of restricted common stock to the nine 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 and board committee meetings to which they are scheduled to attend during the fiscal year ended December 31, 2006.

Prior to January 1, 2006, Pinnacle Financial applied APB Opinion No. 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 had been recognized for such periods. 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 SFAS No. 123(R), Pinnacle Financial’s net income and net income per share would have been adjusted to the pro forma amounts indicated below for the three months ended March 31, 2005:

Page 17

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

		For the three  months ended March 31, 2005
Net income, as reported		$	1,779,753
Add: Compensation expense recognized in the accompanying consolidated statement of income, net of related tax effects			4,633
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects			(164,539	)
Pro forma net income		$	1,619,847
Per share information:
Basic net income	As reported	$	0.21
	Pro forma		0.19
Diluted net income	As reported	$	0.19
	Pro forma		0.17

Note 8. 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 cash dividends since inception, and it does not anticipate that it will consider paying dividends until Pinnacle National generates sufficient capital from operations to support both anticipated asset growth and dividend payments.

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 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 March 31, 2006 and December 31, 2005, that Pinnacle Financial and Pinnacle National met 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):

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	Actual					Minimum Capital Requirement					Minimum To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At March 31, 2006
Total capital to risk weighted assets:
Pinnacle Financial	$	162,594		11.1	%	$	117,060		8.0	%	not applicable
Pinnacle National	$	146,948		10.2	%	$	144,274		8.0	%	$	144,274		10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial	$	149,240		10.2	%	$	58,530		4.0	%	not applicable
Pinnacle National	$	133,584		9.2	%	$	72,137		4.0	%	$	86,564		6.0	%
Tier I capital to average assets (*):
Pinnacle Financial	$	149,240		14.5	%	$	41,283		4.0	%	not applicable
Pinnacle National	$	133,584		12.9	%	$	41,283		4.0	%	$	51,603		5.0	%
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	%

(*) Average assets for the above calculations were based on the most recent quarter.

Note 9. Business Segment Information

Pinnacle Financial has three reporting segments comprised of commercial banking, investment services, mortgage origination and insurance services. 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 the three months ended March 31, 2006 and 2005 (dollars in thousands):

	Commercial Banking		Investment Services		Mortgage Origination		Insurance Services		Total Company
For the three months ended March 31, 2006:
Net interest income	$	9,504	$	-	$	-	$	3	$	9,507
Provision for loan losses		387		-		-		-		387
Noninterest income		1,066		429		288		265		2,048
Noninterest expense		6,716		372		165		76		7,329
Income tax expense		1,083		21		47		76		1,227
Net income	$	2,384	$	36	$	76	$	116	$	2,612
End of period assets	$	1,823,662	$	-	$	-	$	4,550	$	1,828,212
For the three months ended March 31, 2005:
Net interest income	$	6,503	$	-	$	-	$	-	$	6,503
Provision for loan losses		601		-		-		-		601
Noninterest income		448		348		382		-		1,178
Noninterest expense		3,980		277		324		-		4,581
Income tax expense		668		28		23		-		719
Net income	$	1,702	$	43	$	35	$	-	$	1,780
End of period assets	$	787,436	$	-	$	-	$	-	$	787,436

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Note 10. Investments in Affiliated Companies

Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of PNFP Statutory Trust I and PNFP Statutory Trust II, wholly-owned statutory business trusts (collectively, the Trusts). The Trusts were formed on December 30, 2003 and September 15, 2005, respectively.  Combined summary financial information for the Trusts follows (dollars in thousands):

Combined Summary Balance Sheets
	March 31, 2006		December 31 2005
Asset - Investment in subordinated debentures issued by Pinnacle Financial	$	30,929	$	30,929
Liabilities	$	-	$	-
Stockholder’s equity - Trust preferred securities		30,000		30,000
Common stock (100% owned by Pinnacle Financial)		929		929
Total stockholder’s equity		30,929		30,929
Total liabilities and stockholder’s equity	$	30,929	$	30,929

Combined Summary Income Statement
	Three months ended March 31,
	2006		2005
Income - Interest income from subordinated debentures issued by Pinnacle Financial	$	485	$	135
Net Income	$	485	$	135

Combined Summary Statement of Stockholder’s Equity
	Trust Preferred Securities		Total Common Stock		Retained Earnings		Stockholder’s Equity
Beginning balances, December 31, 2005	$	30,000	$	929	$	-	$	30,929
Net income		-		-		485		485
Dividends:
Trust preferred securities		-		-		(470