UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from                      to                     

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		(I.R.S. Employer Identification
organization)		No.)
211 Commerce Street, Suite 300, Nashville, Tennessee		37201
(Address of principal executive offices)		(Zip Code)

(615) 744-3700

Not Applicable

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 þ      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 þ      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 þ

As of April 30, 2007 there were 15,534,975 shares of common stock, $1.00 par value per share, issued and outstanding.

 

 

Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2007

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			22
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			43
Signatures			44
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification
Ex-32.1 Section 906 Certification
Ex-32.2 Section 906 Certification

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, as updated by Item 1A of part II of this Form 10-Q 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 or Knoxville, Tennessee areas, (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 inability of Pinnacle Financial to achieve its targeted expansion goals in the Knoxville, Tennessee market, (vii) the ability of Pinnacle Financial to grow its loan portfolio at historic or planned 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.

Part I. FINANCIAL INFORMATION

Item 1.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

		March 31,				December 31,
		2007				2006
ASSETS
Cash and noninterest-bearing due from banks		$	47,180,452			$	43,611,533
Interest-bearing due from banks			4,847,745				1,041,174
Federal funds sold			35,633,489				47,866,143
Cash and cash equivalents			87,661,686				92,518,850
Securities available-for-sale, at fair value			313,169,577				319,237,428
Securities held-to-maturity (fair value of $26,482,598 and $26,594,235 at March 31, 2007 and December 31, 2006, respectively)			27,085,811				27,256,876
Mortgage loans held-for-sale			11,668,414				5,654,381
Loans			1,553,980,356				1,497,734,824
Less allowance for loan losses			(16,792,017	)			(16,117,978	)
Loans, net			1,537,188,339				1,481,616,846
Premises and equipment, net			37,638,657				36,285,796
Investments in unconsolidated subsidiaries and other entities			16,879,642				16,200,684
Accrued interest receivable			10,785,658				11,019,173
Goodwill			114,287,640				114,287,640
Core deposit intangible, net			10,869,252				11,385,006
Other assets			25,897,746				26,724,183
Total assets		$	2,193,132,422			$	2,142,186,863
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand		$	306,885,434			$	300,977,814
Interest-bearing demand			249,691,538				236,674,425
Savings and money market accounts			499,476,036				485,935,897
Time			644,079,127				598,823,167
Total deposits			1,700,132,135				1,622,411,303
Securities sold under agreements to repurchase			116,951,631				141,015,761
Federal Home Loan Bank advances			26,712,224				53,725,833
Federal funds purchased			19,907,000				—
Subordinated debt			51,548,000				51,548,000
Accrued interest payable			4,484,595				4,952,422
Other liabilities			10,480,316				12,516,523
Total liabilities			1,930,215,901				1,886,169,842
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, par value $1.00; 90,000,000 shares authorized; 15,530,975 issued and outstanding at March 31, 2007 and 15,446,074 issued and outstanding at December 31, 2006			15,530,975				15,446,074
Additional paid-in capital			212,333,180				211,502,516
Retained earnings			36,711,165				31,109,324
Accumulated other comprehensive loss, net			(1,658,799	)			(2,040,893	)
Total stockholders’ equity			262,916,521				256,017,021
Total liabilities and stockholders’ equity		$	2,193,132,422			$	2,142,186,863

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three months ended March 31,
		2007				2006
Interest income:
Loans, including fees		$	28,977,224			$	13,178,830
Securities:
Taxable			3,346,120				2,861,118
Tax-exempt			669,519				400,773
Federal funds sold and other			746,379				369,675
Total interest income			33,739,242				16,810,396
Interest expense:
Deposits			13,537,263				5,850,307
Securities sold under agreements to repurchase			1,712,091				508,788
Federal funds purchased and other borrowings			1,407,460				944,498
Total interest expense			16,656,814				7,303,593
Net interest income			17,082,428				9,506,803
Provision for loan losses			787,966				387,184
Net interest income after provision for loan losses			16,294,462				9,119,619
Noninterest income:
Service charges on deposit accounts			1,797,149				438,269
Investment sales commissions			734,560				513,597
Insurance sales commissions			636,962				264,828
Gain on loans and loan participations sold, net			363,306				324,546
Trust fees			420,290				52,000
Other noninterest income			1,073,316				455,011
Total noninterest income			5,025,583				2,048,251
Noninterest expense:
Compensation and employee benefits			8,266,501				4,448,357
Equipment and occupancy			2,164,702				1,173,353
Marketing and other business development			251,735				190,471
Postage and supplies			454,916				185,409
Amortization of core deposit intangible			515,754				131,682
Other noninterest expense			1,470,083				756,612
Merger related expense			—				443,330
Total noninterest expense			13,123,691				7,329,214
Income before income taxes			8,196,354				3,838,656
Income tax expense			2,594,513				1,226,760
Net income		$	5,601,841			$	2,611,896
Per share information:
Basic net income per common share		$	0.36			$	0.27
Diluted net income per common share		$	0.34			$	0.24
Weighted average shares outstanding:
Basic			15,433,442				9,578,813
Diluted			16,617,484				10,745,626

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)

For the three months ended March 31, 2007 and 2006

		Common Stock
																						Accumulated
										Additional												Other				Total
										Paid-in				Unearned				Retained				Comprehensive				Stockholders’
		Shares				Amount				Capital				Compensation				Earnings				Income (Loss)				Equity
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 common stock options and related tax benefits			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	)
Compensation expense for restricted stock			—				—				34,085				—				—				—				34,085
Compensation expense for stock options			—				—				152,596				—				—				—				152,596
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
Balances, December 31, 2006			15,446,074			$	15,446,074			$	211,502,516			$	—			$	31,109,324			$	(2,040,893	)		$	256,017,021
Exercise of employee common stock options and related tax benefits			58,475				58,475				389,808				—				—				—				448,283
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan			26,426				26,426				(26,426	)			—				—				—				—
Compensation expense for restricted stock			—				—				105,282				—				—				—				105,282
Compensation expense for stock options			—				—				362,000				—				—				—				362,000
Comprehensive income:
Net income			—				—				—				—				5,601,841				—				5,601,841
Net unrealized holding gains on available-for-sale securities, net of deferred tax expense of $234,187			—				—				—				—				—				382,094				382,094
Total comprehensive income																											5,983,935
Balances, March 31, 2007			15,530,975			$	15,530,975			$	212,333,180			$	—			$	36,711,165			$	(1,658,799	)		$	262,916,521

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three months ended
		March 31,
		2007				2006
Operating activities:
Net income		$	5,601,841			$	2,611,896
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net amortization of premium on securities			132,221				244,351
Depreciation and net amortization			1,823,194				725,676
Provision for loan losses			787,966				387,184
Gains on loans and loan participations sold, net			(363,306	)			(324,546	)
Stock-based compensation expense			467,282				186,681
Deferred tax benefit			(1,310,271	)			(357,492	)
Excess tax benefit from stock compensation			(20,742	)			(41,991	)
Mortgage loans held for sale:
Loans originated			(36,739,515	)			(21,034,095	)
Loans sold			31,044,228				20,558,889
Increase in other assets			2,035,596				(898,056	)
Decrease in other liabilities			(2,504,034	)			(11,294,420	)
Net cash provided by (used in) operating activities			954,460				(9,235,923	)
Investing activities:
Activities in securities available-for-sale:
Purchases			(3,355,360	)			(5,916,658	)
Sales			—				—
Maturities, prepayments and calls			10,078,338				7,479,033
			6,722,978				1,562,375
Increase in loans, net			(56,801,579	)			(36,688,382	)
Purchases of premises and equipment and software			(2,292,955	)			(233,346	)
Cash and cash equivalents acquired in merger with Cavalry Bancorp, Inc., net of acquisition costs			—				37,420,210
Investments in unconsolidated subsidiaries and other entities			(718,846	)			—
Purchases of other assets			—				(78,975	)
Net cash provided by (used in) investing activities			(53,090,402	)			1,981,882
Financing activities:
Net increase in deposits			78,001,234				22,167,707
Net decrease in securities sold under agreements to repurchase			(24,064,130	)			(1,922,321	)
Net increase in Federal funds purchased			19,907,000				—
Advances from Federal Home Loan Bank:
Issuances			—				31,000,000
Payments			(27,013,609	)			(23,000,000	)
Exercise of common stock options			427,541				81,301
Excess tax benefit from stock compensation			20,742				41,991
Costs incurred in connection with registration of common stock issued in merger			—				(177,202	)
Net cash provided by financing activities			47,278,778				28,191,476
Net increase (decrease) in cash and cash equivalents			(4,857,164	)			20,937,435
Cash and cash equivalents, beginning of period			92,518,850				58,654,270
Cash and cash equivalents, end of period		$	87,661,686			$	79,591,705

See accompanying notes to consolidated financial statements.

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, Sumner and Bedford Counties.

     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, PNFP Statutory Trust III and Collateral Plus, LLC, are affiliates of Pinnacle Financial and 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 U.S. generally accepted accounting principles 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 include the determination of the allowance for loan losses.

     Impairment — Long-lived assets, including purchased intangible assets subject to amortization, such as Pinnacle Financial’s core deposit intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the excess of the carrying amount over the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

     Goodwill and intangible assets that have indefinite useful lives are tested annually for impairment, and more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Pinnacle Financial’s annual assessment date is as of September 30 such that the assessment will be completed during the fourth quarter of each year. Should Pinnacle Financial determine in a future period that the goodwill recorded in connection with the acquisition of Cavalry Bancorp, Inc. (“Cavalry”) has been impaired, then a charge to earnings will be recorded in the period such determination is made.

     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 three months ended March 31, 2007 and 2006 as follows:

		For the three months ended March 31,
		2007				2006
Cash Payments:
Interest		$	16,469,389			$	7,764,144
Income taxes			1,100,000				400,000
Noncash Transactions:
Loans charged-off to the allowance for loan losses			187,818				43,976
Loans foreclosed upon with repossessions transferred to other assets			110,570				—
Common stock and options issued to acquire Cavalry Bancorp, Inc			—				171,087,572

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     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, warrants and restricted shares. The dilutive effect of outstanding options, warrants and restricted shares is reflected in diluted earnings per share by application of the treasury stock method.

     As of March 31, 2007 and 2006, there were common stock options outstanding to purchase 1,846,000 and 1,602,000 common shares, respectively. Most of these options have exercise prices and 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 the three months ended March 31, 2007 and 2006. There were common stock options of 618,000, and 388,000 outstanding as of March 31, 2007 and 2006, respectively, which were considered anti-dilutive and thus have not been considered in the diluted earnings per share calculations below. Additionally, as of March 31, 2007 and 2006, Pinnacle Financial had outstanding warrants to purchase 395,000 and 406,000, respectively, of common shares which have been considered in the calculation of Pinnacle Financial’s diluted net income per share for three months ended March 31, 2007 and 2006.

     The following is a summary of the basic and diluted earnings per share calculation for the three months ended March 31, 2007 and 2006:

		For the three months ended March 31,
		2007				2006
Basic earnings per share calculation:
Numerator - Net income		$	5,601,841			$	2,611,896
Denominator - Average common shares outstanding			15,433,442				9,578,813
Basic net income per share		$	0.36			$	0.27
Diluted earnings per share calculation:
Numerator - Net income		$	5,601,841			$	2,611,896
Denominator - Average common shares outstanding			15,433,442				9,578,813
Dilutive shares contingently issuable			1,184,042				1,166,813
Average diluted common shares outstanding			16,617,484				10,745,626
Diluted net income per share		$	0.34			$	0.24

     Comprehensive Income — 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 U.S. generally accepted accounting principles are included in comprehensive income but excluded from net income. Currently, Pinnacle Financial’s other comprehensive income consists of unrealized gains and losses, net of deferred income taxes, on securities available-for-sale.

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 of the outstanding shares of 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.

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 $5,102,296			545,598,367
Goodwill			114,287,640
Core deposit intangible			13,168,236
Other assets			42,936,956
Total assets acquired			792,887,587
Deposits			583,992,422
Federal Home Loan Bank advances			17,766,661
Other liabilities			18,851,261
Total liabilities assumed			620,610,344
Total consideration paid for Cavalry		$	172,277,243

     As shown in the table above, total consideration for Cavalry approximates $172.3 million of which $171.1 million was in the form of Pinnacle Financial common shares and options to acquire Pinnacle Financial common shares and $1.2 million in investment banking fees, attorney’s fees and other costs related to the acquisition which have been accounted for as a component of the purchase price. Pinnacle Financial issued 6,856,298 shares of Pinnacle Financial common stock to the former Cavalry shareholders. In accordance with EITF No. 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 from the two days prior to the merger announcement on September 30, 2005 through 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.

     In accordance with SFAS Nos. 141 and 142, Pinnacle Financial recognized $13.2 million as a core deposit intangible in connection with its merger with Cavalry. 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, 2007 and 2006, approximately $516,000 and $132,000 of amortization, respectively, 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 four years with lesser amounts for the remaining two years.

     Pinnacle Financial also recorded other adjustments to the carrying value of Cavalry’s assets and liabilities in order to reflect the fair value of those net assets in accordance with U.S. generally accepted accounting principles, including a $4.8 million discount associated with the loan portfolio, a $2.9 million premium for Cavalry’s certificates of deposit and a $4.6 million premium for Cavalry’s land and buildings. Pinnacle Financial also recorded the corresponding deferred tax assets or liabilities associated with these adjustments. The discounts and premiums related to financial assets and liabilities are being amortized into the statements of income using a method that approximates the level yield method over the anticipated lives of the underlying financial assets or liabilities. For the three months ended March 31, 2007 and 2006, the accretion of the fair value discounts related to the acquired loans and certificates of deposit increased net interest income by approximately $833,000 and $431,000, respectively. Based on the estimated useful lives of the acquired loans and deposits, Pinnacle Financial expects to recognize increases in net interest income related to accretion of these purchase accounting adjustments of $3.2 million for the remainder of 2007 and in subsequent 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

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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. At March 15, 2006, Pinnacle Financial identified $3.9 million in loans to which the application of the provisions of SOP 03-03 was required. The purchase accounting adjustments reflect a reduction in loans and the allowance for loan losses of $1.0 million related to Cavalry’s impaired loans, thus reducing the carrying value of these loans to $2.9 million as of March 15, 2006. At March 31, 2007, the carrying value of these loans had been reduced to $935,000 due to cash payments received from the borrowers.

     The following pro forma income statements assume the merger was consummated on January 1, 2006. 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, except per share information).

		Three months ended March 31,
		2007				2006(1)
Pro Forma Income Statements:
Net interest income		$	17,129			$	15,952
Provision for loan losses			788				1,368
Noninterest income			5,026				4,445
Noninterest expense:
Compensation			8,267				7,089
Other noninterest expense			4,857				5,138
Net income before taxes			8,243				6,802
Income tax expense			2,613				1,706
Net income		$	5,630			$	5,096
Pro Forma Per Share Information:
Basic net income per common share		$	0.36			$	0.33
Diluted net income per common share		$	0.34			$	0.31
Weighted average shares outstanding:
Basic			15,433,442				15,216,214
Diluted			16,617,484				16,383,027

     During the three months ended March 31, 2006, Pinnacle Financial incurred merger integration expense related to the merger with Cavalry of $443,000. These expenses were directly related to the merger, recognized as incurred and reflected on the accompanying consolidated statement of income as merger related expense.

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, 2007 and December 31, 2006 are summarized as follows:

		March 31, 2007
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			37,082,560				9,139				377,336				36,714,363
Mortgage-backed securities			211,507,240				520,839				2,516,494				209,511,585
State and municipal securities			65,534,974				96,026				523,838				65,107,162
Corporate notes and other			1,887,167				—				50,700				1,836,467
		$	316,011,941			$	626,004			$	3,468,368			$	313,169,577
Securities held-to-maturity:
U.S. government agency securities		$	17,747,294			$	—			$	324,369			$	17,422,925
State and municipal securities			9,338,517				—				278,844				9,059,673
		$	27,085,811			$	—			$	603,213			$	26,482,598

		December 31, 2006
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
Securities available-for-sale:		Cost				Gains				Losses				Value
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. Government agency securities			38,076,428				9,739				457,321				37,628,846
Mortgage-backed securities			220,397,093				455,203				3,028,241				217,824,055
State and municipal securities			62,215,952				131,412				388,124				61,959,240
Corporate notes			1,887,475				—				62,188				1,825,287
		$	322,576,948			$	596,354			$	3,935,874			$	319,237,428
Securities held-to-maturity:
U.S. government agency securities		$	17,747,278			$	—			$	378,528			$	17,368,700
State and municipal securities			9,509,648				—				284,113				9,225,535
		$	27,256,876			$	—			$	662,641			$	26,594,235

     At March 31, 2007, approximately $295,092,000 of Pinnacle Financial’s investment portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     At March 31, 2007 and 2006, 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								Investments with an Unrealized								Total Investments with an
		12 months								Loss of 12 months or longer								Unrealized Loss
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
At March 31, 2007:
U.S. government agency securities		$	4,986,000			$	14,000			$	48,142,588			$	687,705			$	53,128,588			$	701,705
Mortgage-backed securities			3,959,040				41,482				151,453,571				2,475,012				155,412,611				2,516,494
State and municipal securities			20,007,372				81,599				38,675,813				721,083				58,683,185				802,682
Corporate notes			—				—				1,836,467				50,700				1,836,467				50,700
Total temporarily-impaired securities		$	28,952,412			$	137,081			$	240,108,439			$	3,934,500			$	269,060,851			$	4,071,581
At December 31, 2006:
U.S. government agency securities		$	—			$	—			$	47,988,246			$	835,849			$	47,988,246			$	835,849
Mortgage-backed securities			13,959,080				68,965				149,496,521				2,959,276				163,455,601				3,028,241
State and municipal securities			13,975,595				47,071				35,660,379				625,166				49,635,974				672,237
Corporate notes			—				—				1,825,286				62,188				1,825,286				62,188
Total temporarily-impaired securities		$	27,934,675			$	116,036			$	234,970,432			$	4,482,479			$	262,905,107			$	4,598,515

     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, 2007 and December 31, 2006 is summarized as follows:

		At March 31,				At December 31,
		2007				2006
Commercial real estate – Mortgage		$	287,498,424			$	284,301,650
Commercial real estate – Construction			160,221,949				161,903,496
Commercial – Other			665,856,898				608,529,830
Total Commercial			1,113,577,271				1,054,734,976
Consumer real estate – Mortgage			301,524,669				299,626,769
Consumer real estate – Construction			92,161,976				91,193,738
Consumer – Other			46,716,440				52,179,341
Total Consumer			440,403,085				442,999,848
Total Loans			1,553,980,356				1,497,734,824
Allowance for loan losses			(16,792,017	)			(16,117,978	)
Loans, net		$	1,537,188,339			$	1,481,616,846

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, 2007 and for the year ended December 31, 2006 are as follows:

		March 31, 2007				December 31, 2006
Balance at beginning of period		$	16,117,978			$	7,857,774
Charged-off loans			(187,818	)			(818,467	)
Recovery of previously charged-off loans			73,891				244,343
Allowance acquired in acquisition of Cavalry (see note 2)			—				5,102,296
Provision for loan losses			787,966				3,732,032
Balance at end of period		$	16,792,017			$	16,117,978

     At March 31, 2007 and at December 31, 2006, Pinnacle Financial had certain impaired loans on nonaccruing interest status. The principal balance of these nonaccrual loans amounted to $4,774,000 and $7,070,000 at March 31, 2007 and December 31, 2006, 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 nonaccruing loans been on accruing status, interest income would have been higher by $102,000 and $18,000 for the three months ended March 31, 2007 and 2006, respectively.

     At March 31, 2007, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $23,035,000 to certain directors, executive officers, and their related entities, of which $17,639,000 had been drawn upon. During the three months ended March 31, 2007, $1,018,000 of new loans to certain directors, executive officers, and their related entities were made and repayments totaled $237,000. At December 31, 2006, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $23,392,000 to certain directors, executive officers, and their related entities, of which approximately $16,858,000 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. None of these loans to certain directors, executive officers, and their related entities, were impaired at March 31, 2007.

     During the three months ended March 31, 2007 and 2006, 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 U.S. generally accepted accounting principles, Pinnacle Financial recognized a net gain on the sale of these participated loans for the three months ended March 31, 2007 and 2006 of approximately $45,000 and $73,000, 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 bank based on their participation in the loans. At March 31, 2007, Pinnacle Financial was servicing $120 million of loans for correspondent banks and other entities, of which $114 million was commercial loans.

Note 5. Income Taxes

     FASB Interpretation 48, “Accounting for Income Tax Uncertainties” (“FIN 48”) was issued in June 2006 and defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN 48 also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties and includes guidance concerning accounting for income tax uncertainties in interim periods. Pinnacle Financial adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007, and determined there was no need to make an adjustment to retained earnings upon adoption of this Interpretation. As of January 1, 2007, Pinnacle Financial has $700,000 of unrecognized tax benefits related to Federal income tax matters. If ultimately recognized, this amount will reduce goodwill associated with the acquisition of Cavalry and therefore would not impact the Company’s effective tax rate. The Company does not anticipate any material increase or decrease in unrecognized tax benefits during 2007 relative to any tax positions taken prior to January 1, 2007.

     As of January 1, 2007, Pinnacle Financial has accrued no interest and no penalties related to uncertain tax positions. It is Pinnacle Financial’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.

     Pinnacle Financial and its subsidiaries file a consolidated U.S. Federal income tax return. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2003 through 2006.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Pinnacle Financial and its subsidiaries’ state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2002 through 2006.

     Income tax expense attributable to income from continuing operations for the three months ended March 31, 2007 and 2006 consists of the following:

		2007				2006
Current tax expense:
Federal		$	3,598,664			$	1,474,215
State			306,120				110,037
Total current tax expense			3,904,784				1,584,252
Deferred tax benefit:
Federal			(1,903,173	)			(311,326	)
State			(217,098	)			(46,166	)
Total deferred tax benefit			(1,310,271	)			(357,492	)
		$	2,594,513			$	1,226,760

     Pinnacle Financial’s income tax expense (benefit) differs from the amounts computed by applying the Federal income tax statutory rates of 35% in 2007 and 34% in 2006 to income before income taxes. A reconciliation of the differences for the three months ended March 31, 2007 and 2006 is as follows:

		2007				2006
Income taxes at statutory rate		$	2,868,724			$	1,305,053
State tax expense, net of Federal tax effect			57,864				39,998
Federal tax credits			(90,000	)			(75,000	)
Tax-exempt securities			(196,607	)			(119,973	)
Other items			(45,468	)			76,682
Income tax expense		$	2,594,513			$	1,226,760

     The effective tax rate for 2007 and 2006 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 the year ended December 31, 2007 is $360,000 and for the year ended December 31, 2006 is $300,000. Pinnacle Financial believes that it will comply with the various regulatory provisions of the New Markets Tax Credit program, and therefore has reflected the impact of the credits in its estimated annual effective tax rate for 2007 and 2006.

     The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at March 31, 2007 and December 31, 2006 are as follows:

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

		2007				2006
Deferred tax assets:
Allowance for loan losses		$	6,918,726			$	6,654,334
Loans			1,154,981				1,337,983
Securities			1,017,449				1,251,636
Accrued liability for supplemental retirement agreements			1,552,598				1,535,688
Deposits			478,668				585,568
Other deferred tax assets			271,361				340,296
			11,394,168				11,705,505
Deferred tax liabilities:
Depreciation and amortization			349,788				1,563,078
Core deposit intangible asset			4,270,772				4,473,076
FHLB dividends			803,435				770,156
Other deferred tax liabilities			435,536				440,642
			5,859,531				7,246,952
Net deferred tax assets		$	5,534,637			$	4,458,553

     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.

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

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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, 2007 is as follows:

Commitments to extend credit		$	510,561,720
Standby letters of credit			54,772,369

     At March 31, 2007, the fair value of Pinnacle Financial’s standby letters of credit was $159,000. 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 March 31, 2007 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 1999 Cavalry Bancorp, Inc. Stock Option 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.

     As of March 31, 2007, of the 1,846,000 stock options outstanding, 1,238,000 of those 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 607,000 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, 2007 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as follows:

										Weighted-
										Average
						Weighted-				Contractual				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Term				Value (1)
		Number				Price				(in years)				(000’s)
Outstanding at December 31, 2006			1,658,459			$	12.93				6.4			$	31,848
Granted			252,443				31.30
Exercised			(58,475	)			7.31
Forfeited			(6,492	)			29.47
Outstanding at March 31, 2007			1,845,935			$	16.56				6.7			$	26,277
Outstanding and expected to vest as of March 31, 2007			1,807,919			$	16.37				6.7			$	26,085
Options exercisable at March 31, 2007			1,009,781			$	8.52				5.0			$	22,209

     During the three months ended March 31, 2007, 142,000 option awards vested at an average exercise price of $15.15 and an intrinsic value of approximately $3.9 million.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     During the three months ended March 31, 2007, the aggregate intrinsic value of options exercised under the equity incentive plans was $1.37 million determined as of the date of option exercise. As of March 31, 2007, there was approximately $5.46 million of total unrecognized compensation cost related to unvested stock options granted under the equity incentive plans. That cost is expected to be recognized over a weighted-average period of 4.1 years.

     During the three months ended March 31, 2007 and 2006, Pinnacle Financial 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. For these awards, Pinnacle Financial has recognized compensation expense using a straight-line amortization method. Stock-based compensation expense has been reduced for estimated forfeitures. The impact on the Company’s results of operations (compensation and employee benefits expense) and earnings per share of recording stock-based compensation in accordance with SFAS No. 123(R) (related to stock option awards) for the three months ended March 31, 2007 and 2006 was as follows:

		Three months ended March 31, 2007
		Awards granted with
		the intention to be				Non-qualified								Three months
		classified				stock								ended March 31,
		as incentive stock options				option awards				Total				2006
Stock-based compensation expense		$	116,000			$	246,000			$	362,000			$	152,000
Deferred income tax benefit			—				97,000				97,000				8,000
Impact of stock-based compensation expense after deferred income tax benefit		$	116,000			$	149,000			$	265,000			$	144,000
Impact on earnings per share:
Basic –weighted average shares outstanding		$	0.008			$	0.010			$	0.017			$	0.015
Fully diluted – weighted average shares outstanding		$	0.007			$	0.009			$	0.016			$	0.013

     For purposes of these calculations, the fair value of options granted for each of the three months ended March 31, 2007 and 2006 was estimated using the Black-Scholes option pricing model and the following assumptions:

		2007				2006
Risk free interest rate			4.78	%			4.40	%
Expected life of options		6.5 years					6.5 years
Expected dividend yield			0.00	%			0.00	%
Expected volatility			20.94	%			23.65	%
Weighted average fair value		$	10.79			$	9.31

     Pinnacle Financial’s computation of expected volatility is based on weekly historical volatility since September of 2002. 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 closing market bid for U.S. Treasury securities 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 or market-based awards, such as stock appreciation rights. There were no market-based awards or stock appreciation rights outstanding as of March 31, 2007. During the three months ended March 31, 2007, Pinnacle Financial awarded 23,196 shares, respectively, of restricted common stock to certain executives of Pinnacle Financial. Of these awards, 7,732 are considered granted for financial reporting purposes. The fair value of these awards as of the date of grant was $31.70 per share. 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. 15,464 of the shares awarded on March 31, 2007 are not yet deemed to be granted for financial reporting purposes because the key terms required to be achieved in order for the forfeiture restrictions to lapse the have not yet been defined.

     Compensation expense associated with all restricted share awards is recognized over the time period that the restrictions associated with the awards lapse based on a graded vesting schedule such that each year’s traunche is amortized separately. For the three months ended March 31, 2007, Pinnacle Financial recognized approximately $102,000 in compensation costs attributable to

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

all awards issued prior to March 31, 2007. Accumulated compensation costs since the date these shares were awarded have amounted to approximately $750,000 through March 31, 2007.

     During 2006, the Board of Directors of Pinnacle Financial awarded 4,400 shares of restricted common stock to the outside members of the board in accordance with their 2006 board compensation package. On March 20, 2007, the Board of Directors of Pinnacle Financial awarded 3,230 shares of restricted common stock to the outside members of the board in accordance with their 2007 board compensation package. Each board member received an award of 323 shares. The restrictions on these shares are expected to lapse on January 18, 2008 if each individual board member meets his or her attendance goals for the various board and board committee meetings to which each member is scheduled to attend during the year ended December 31, 2007. The weighted average fair value of these restricted share awards granted to our directors in 2007 as of the date of grant was $32.30 per share. For the three months ended March 31, 2007, Pinnacle Financial recognized approximately $3,000, in compensation costs attributable to these awards.

     A summary of activity for restricted share awards for the three months ended March 31, 2007 follows:

		Executive Management Awards												Board of Director Awards
(number of share awards)		Vested				Unvested				Totals				Vested				Unvested				Totals
Balances at December 31, 2006			20,769				17,500				38,269				—				4,000				4,000
Granted			—				7,732				7,732				—				3,230				3,230
Forfeited			—				—				—				—				—				—
Vested			12,755				(12,755	)			—				4,000				(4,000	)			—
Balances at March 31, 2007			33,524				12,477				46,001				4,000				3,230				7,230

     A summary of compensation expense, net of the impact of income taxes, related to restricted stock awards for the three months ended March 31, 2007 and 2006, follows:

		2007				2006
Stock-based compensation expense		$	105,000			$	34,000
Income tax benefit			41,000				13,000
Impact of stock-based compensation expense, net of income tax benefit		$	64,000			$	21,000
Impact on earnings per share:
Basic – weighted average shares outstanding		$	0.004			$	0.002
Fully diluted – weighted average shares outstanding		$	0.004			$	0.002

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.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     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, 2007 and December 31, 2006, 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):

																		Minimum
																		To Be Well-Capitalized
										Minimum								Under Prompt
										Capital								Corrective
		Actual								Requirement								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
At March 31, 2007
Total capital to risk weighted assets:
Pinnacle Financial		$	210,559				11.9	%		$	142,162				8.0	%		not applicable
Pinnacle National		$	182,530				10.3	%		$	141,864				8.0	%		$	177,330				10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial		$	193,767				10.9	%		$	71,081				4.0	%		not applicable
Pinnacle National		$	165,738				9.4	%		$	70,932				4.0	%		$	106,398				6.0	%
Tier I capital to average assets (*):
Pinnacle Financial		$	193,767				9.6	%		$	81,161				4.0	%		not applicable
Pinnacle National		$	165,738				8.2	%		$	81,197				4.0	%		$	101,496				5.0	%
At December 31, 2006
Total capital to risk weighted assets:
Pinnacle Financial		$	202,881				11.8	%		$	137,638				8.0	%		not applicable
Pinnacle National		$	175,159				10.2	%		$	137,340				8.0	%		$	171,676				10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial		$	186,763				10.9	%		$	68,819				4.0	%		not applicable
Pinnacle National		$	159,031				9.3	%		$	68,670				4.0	%		$	103,005				6.0	%
Tier I capital to average assets (*):
Pinnacle Financial		$	186,763				9.5	%		$	79,021				4.0	%		not applicable
Pinnacle National		$	159,031				8.1	%		$	79,056				4.0	%		$	98,820				5.0	%

Note 9. Business Segment Information

     Pinnacle Financial has four reporting segments comprised of commercial banking, trust and 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 National’s branch locations. Pinnacle Financial’s segments were changed in 2006 as a result of the acquisition of Cavalry to include Trust with Investment Services segment and to add a new segment for Insurance Services. Trust and investment services include trust services offered by Pinnacle National and 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. Insurance Services reflect the activities of Pinnacle National’s wholly owned subsidiary, Miller and Loughry Insurance Services, Inc. Miller and Loughry is a general insurance agency located in Murfreesboro, Tennessee and is licensed to sell various commercial and consumer insurance products. The following tables present financial information for each reportable segment as of March 31, 2007 and 2006 and for the three months ended March 31, 2007 and 2006 (dollars in thousands):

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

						Trust and
		Commercial				Investment				Mortgage				Insurance				Total
		Banking				Services				Origination				Services				Company
For the three months ended March 31, 2007:
Net interest income		$	17,047			$	—			$	35			$	—			$	17,082
Provision for loan losses			788				—				—				—				788
Noninterest income			2,648				1,114				586				643				5,026
Noninterest expense			11,397				800				487				440				13,124
Income tax expense			2,338				123				53				80				2,594
Net income		$	5,207			$	191			$	81			$	123			$	5,602
End of period assets		$	2,188,750				—				—			$	4,382			$	2,193,132
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