10-K 1 g93498e10vk.htm PINNACLE FINANCIAL PARTNERS, INC. Pinnacle Financial Partners, Inc.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For Annual and Transition Reports Pursuant to Sections 13 or 15(d)
of the Securities and Exchange Act of 1934

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

For the fiscal year ended December 31, 2004

OR

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

For the Transition Period from ____________ to ____________

Commission File No: 000-31225

Pinnacle Financial Partners, Inc.


(Name of small business issuer in its charter)
     
Tennessee   62-1812853
     
(State of jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

The Commerce Center, 211 Commerce Street, Suite 300, Nashville, Tennessee 37201
(Address of principal executive offices)

(615) 744-3700
(Issuer’s telephone number)

Securities registered pursuant to Section 12 (b) of the Exchange Act: NONE

Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $1.00

Indicate by check mark where the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity as of the last business day of the registrant’s most recently completed second fiscal quarter: $115,345,000 as of June 30, 2004.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 8,389,232 shares of common stock as of February 15, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held April 19, 2005, are incorporated by reference into Part III of this Form 10-K.

 
 

 


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 Ex-10.25 Lease Agreement for West End Lease
 Ex-10.26 Lease Amendments for Commerce Street
 Ex-21.1 Subsidiaries of Pinnacle Financial Partners, Inc.
 Ex-23.1 Consent of KPMG LLP
 Ex-31.1 Section 302 Certification of the CEO
 Ex-31.2 Section 302 Certification of the CFO
 Ex-32.1 Section 906 Certification of the CEO
 Ex-32.2 Section 906 Certification of the CFO

 


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FORWARD-LOOKING STATEMENTS

Pinnacle Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make written or oral statements, including statements contained in this report which may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect”, “anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”, “should”, “estimate”, and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Pinnacle Financial’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors are described below and include, without limitation, (i) unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) increased competition with other financial institutions, (iii) lack of sustained growth in the economy in the Nashville, Tennessee area, (iv) rapid fluctuations or unanticipated changes in interest rates, (v) the inability of our bank subsidiary, Pinnacle National Bank — to satisfy regulatory requirements for its expansion plans, and (vi) changes in the legislative and regulatory environment, including compliance with the various provisions of the Sarbanes Oxley Act of 2002. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to Pinnacle Financial. Forward-looking statements made by us in this report are also subject to those risks identified within the section entitled “Risk Factors” beginning on page 16.

PART I

Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Pinnacle Financial Partners” or “Pinnacle Financial” as used herein refer to Pinnacle Financial Partners, Inc. and its subsidiary Pinnacle National Bank, which we sometimes refer to as “Pinnacle National,” “our bank subsidiary” or “our bank” and its other subsidiaries. References herein to the fiscal years 2000, 2001, 2002, 2003 and 2004 mean our fiscal years ended December 31, 2000, 2001, 2002, 2003 and 2004 respectively.

ITEM 1. BUSINESS

OVERVIEW

Pinnacle Financial is a Tennessee corporation that was incorporated on February 28, 2000 to organize and serve as the holding company for Pinnacle National, a national bank chartered under the laws of the United States. Pinnacle National commenced its banking operations on October 27, 2000, and operates as a community bank in an urban market emphasizing personalized banking relationships with individuals and businesses located within the Nashville metropolitan statistical area (MSA). We own 100% of the capital stock of Pinnacle National.

PFP Title Company is a wholly-owned subsidiary of Pinnacle National. PFP Title Company sells 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. The primary mission of Pinnacle Community Development, Inc., is serving, or providing investment capital for, low-income communities or low-income persons. PNFP Statutory Trust I, a wholly-owned subsidiary of Pinnacle Financial, was created for the exclusive purpose of issuing capital trust preferred securities. Pinnacle Advisory Services, Inc., a wholly-owned subsidiary of Pinnacle Financial, was established as a registered investment advisor pursuant to regulations promulgated by the Board of Governors of the Federal Reserve System. Pinnacle Credit Enhancement Holdings, Inc., a wholly-owned subsidiary of Pinnacle Financial, was established as a holding company 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.

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FDIC information as of September 30, 2004, reflects that there are 179 commercial banks which are currently active and were also chartered in the United States in 2000, excluding those institutions that appear to have transferred an existing charter to a new charter. Based on this information, Pinnacle National was the largest and fastest growing of these banks in terms of total assets. We believe that one of the principal factors contributing to our rapid growth thus far has been our ability to effectively position ourselves as a locally managed community bank committed to providing outstanding service and trusted financial advice.

Opportunity. We believe there are three major trends in the Nashville MSA that strengthen our strategic market position as a locally managed community bank:

  •   Customers generally perceive that service levels at banks are declining. We believe this is largely attributable to integration issues resulting from consolidation in the bank and brokerage industries. Additionally, small business owners want a reliable point of contact that is knowledgeable about their business and the financial products and services that are important to the success of their business. In fact, Nashville is dominated by three large regional bank holding companies, all of whom are experiencing declining market share trends over the last six years.

  •   Client usage of more sophisticated financial products continues to grow, causing traditional banks to lose market share to other types of financial services companies, such as mutual fund companies and securities brokerage firms.

  •   There is significant growth in the demand for convenient access to financial services, particularly through ATMs, telephone banking and Internet banking.

We believe that our primary market segments, which are small businesses with annual sales from $1 million to $50 million and affluent households with investable assets over $250,000, are more likely to be disaffected by the banking industry’s perceived decline in customer service and lack of financial product sophistication. To overcome these customer perceptions and attract business from these market segments, we seek to hire only seasoned professionals, from both the banking and brokerage industries, and strategically designed our banking, investment and insurance products to meet the expected needs of our targeted market segments. As an example, we consider our consumer brokerage and corporate treasury management products to be at least at parity with the large regional banks that dominate our target segment in the Nashville market. Accordingly, our marketing philosophy is centered on delivering exceptional service and effective financial advice through highly trained personnel who understand and care about the broad financial needs and objectives of our clients.

Business Strategies. To carry out our marketing philosophy, our specific business strategies have been and will continue to be:

  •   Hire and retain highly experienced and qualified banking and financial professionals with successful track records and, for client contact personnel, established books of business with small businesses and affluent households within the Nashville MSA. Since inception, we have attracted 126 associates to our firm, including 32 during 2004. Substantially all of these associates have been employed in similar positions in the Nashville MSA for at least 10 years. Many of our senior customer contact personnel have in excess of 20 years experience in Nashville. We have also been successful in maintaining an annual retention ratio of our personnel of approximately 98% at December 31, 2004. We believe we will continue to experience success in attracting new associates and retaining associates to our firm.

  •   Provide individualized attention with consistent, local decision-making authority.

  •   Offer a full line of financial services to include traditional depository and credit products, as well as, sophisticated investment and insurance products. As of December 31, 2004, Pinnacle National’s brokerage division, Pinnacle Asset Management, had accumulated approximately $398 million in brokerage assets.

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  •   Capitalize on customer dissatisfaction that we believe exists and that has been caused by what we believe to be our competitors’ less than satisfactory response to the financial needs of today’s sophisticated consumers and small- to medium-sized businesses. Since we began our company, we have historically surveyed our customers on numerous matters related to their relationship with us. Consistently, these surveys indicate that our service quality is significantly better than their prior banking relationships.

  •   Build on our directors’ and officers’ diverse personal and business contacts, community involvement and professional expertise.

  •   Establish a distribution strategy designed to prudently expand our physical and virtual market presence, thereby providing convenient banking access for our clients 24 hours a day. We opened two new offices in 2004 and intend to open two more offices in 2005. Our courier deposit pickup service consistently receives high marks from our small business customers. We now have approximately 49% of our commercial clients utilizing our Internet banking product which we believe to be well over the industry averages.

  •   Use technology and strategic alliances, including those established through Pinnacle Asset Management to provide a broad array of sophisticated and convenient products and services.

We believe that our business strategies allow us to effectively distinguish ourselves from other financial institutions operating within the Nashville MSA and successfully attract and retain business relationships with small businesses and affluent households.

Market Area. Pinnacle National’s primary service area, which comprises the Nashville metropolitan statistical area, includes Davidson County and thirteen surrounding counties. This area represents a geographic area that covers approximately 4,000 square miles and a population in excess of 1.3 million people. For Pinnacle National, we concentrate our market efforts on the Davidson, Williamson, Sumner and Rutherford counties.

The economic success of Pinnacle National’s primary service area depends heavily upon the economic viability of the metropolitan Nashville, Tennessee area. Nashville is the capital of Tennessee and a city that we believe is an important transportation, business and tourism center within the United States. Additionally, the metropolitan Nashville area has attracted a number of significant business relocations resulting in an expansion of its labor force into many different industry sectors. In January of 2005, “Expansion Management” magazine noted that Nashville ranked first among cities in the nation for companies that are looking to expand or relocate.

Our primary service area’s economic strength comes from its large employer base, which includes several large enterprises such as Vanderbilt University and Medical Center, HCA Inc., Saturn Corporation and Nissan Motor Manufacturing Corporation USA. Additionally, according to the Nashville Area Chamber of Commerce, the regional economy has outperformed the state and national economies during the most recent time periods and continues to benefit from low unemployment, consistent job growth, substantial outside investment and expansion and a well trained and growing labor force. We anticipate that these factors will continue to cause more businesses to relocate to, or start operations in, the Nashville MSA and, in turn, will increase the demand for depository and lending services within our market at a pace faster than national averages.

Pinnacle National’s main office is located in Nashville’s central business district in downtown Nashville. The downtown market consists of a variety of commercial establishments and entertainment venues. We believe that the downtown area is an important location for financial institutions requiring visibility within Nashville’s prominent commercial and private banking markets. Accordingly, we believe that this location is well suited for our bank’s business development efforts. According to FDIC data, the trade areas in which the existing seven offices are located account for 66.8% of the deposits in the entire fourteen county MSA.

In November 2000, Pinnacle National opened a branch office in Brentwood in Williamson County. In September 2001, Pinnacle National opened a second branch office in the Green Hills area of Nashville. Pinnacle National opened a third branch office in the Rivergate area of Davidson County in April of 2003 and a fourth branch office in the Cool Springs area of Williamson County in October of 2003. In September 2004, Pinnacle National opened its fifth branch office in the West End area of Nashville. Pinnacle National also opened its sixth branch office in

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Franklin, Tennessee, which is the county seat of Williamson County in January of 2005. Pinnacle National intends to open two additional branch offices in the Nashville MSA in 2005, one of which is expected to be in Hendersonville, Tennessee in Sumner County and the second is expected to be located in the Rutherford County area of the Nashville MSA. Management believes these additional offices will continue to strengthen Pinnacle National’s market presence, allowing it to grow its customer base more rapidly.

Competition. According to FDIC data, bank and thrift deposits in the Nashville MSA grew from approximately $13.7 billion at June 1995 to more than $23.1 billion at June 2004. As of June 30, 2004, approximately 76% of this deposit base was controlled by large, multi-state banks headquartered outside of Nashville, which included AmSouth (headquartered in Birmingham, Alabama), Bank of America (headquartered in Charlotte, North Carolina), USBancorp (headquartered in Milwaukee, Wisconsin), SunTrust (headquartered in Atlanta, Georgia) and Regions Financial Corporation (headquartered in Birmingham, Alabama). According to FDIC deposit information, the collective market share of deposits in the Nashville MSA of AmSouth (including the acquired First American National Bank), Bank of America and SunTrust declined from 58.8% to 52.0% during the nine years ended June 30, 2004. Consequently, while large, multi-state institutions are well established in our market area, we believe the general trends indicate that a majority of the community banks in the Nashville MSA have been able to increase their deposit market share in recent years at the expense of these larger, multi-state banks.

We also believe that Pinnacle National’s status as a community bank will not be enough to compete in today’s financial industry. In the wake of modern technology and the prosperity of the United States’ financial markets over the past decade, banking clients have generally become more sophisticated in their approach to selecting financial services providers. We believe that the most important criteria to our bank’s targeted clients when selecting a bank is their desire to receive exceptional and personal customer service while being able to enjoy convenient access to a broad array of sophisticated financial products. Additionally, when presented with a choice, we believe that many of our bank’s targeted clients would prefer to deal with a locally-owned institution headquartered in Nashville, like Pinnacle National, as opposed to a large, multi-state bank, where many important decisions regarding a client’s financial affairs are made elsewhere.

Lending Services

Pinnacle National offers a full range of lending products, including commercial, real estate and consumer loans to individuals and small-to medium-sized businesses and professional entities. It competes for these loans with competitors who are well established in the Nashville MSA.

Pinnacle National’s loan approval policies provide for various levels of officer lending authority. When the amount of total loans to a single borrower exceeds that individual officer’s lending authority, officers with a higher lending limit, Pinnacle National’s board of directors or the executive committee of the board will determine whether to approve the loan request.

Pinnacle National’s lending activities are subject to a variety of lending limits imposed by federal law. Differing limits apply based on the type of loan or the nature of the borrower, including the borrower’s relationship to Pinnacle National. In general, however, at December 31, 2004, Pinnacle National is able to loan any one borrower a maximum amount equal to approximately $9.6 million plus an additional $6.3 million, or a total of approximately $15.9 million, for loans that meet certain additional federal collateral guidelines. These legal limits will increase or decrease as Pinnacle National’s capital increases or decreases as a result of its earnings or losses, the injection of additional capital or other reasons. In addition to these regulatory limits, Pinnacle National imposes upon itself an internal lending limit of $5 million, which is less than the prescribed legal lending limit, thus further reducing its exposure to any single borrower.

The principal economic risk associated with each category of loans that Pinnacle National expects to make is the creditworthiness of the borrower. General economic factors affecting a commercial or consumer borrower’s ability to repay include interest, inflation and employment rates, as well as other factors affecting a borrower’s assets, clients, suppliers and employees. Many of Pinnacle National’s commercial loans are made to small- to medium-sized businesses that are sometimes less able to withstand competitive, economic and financial pressures than larger borrowers. During periods of economic weakness, these businesses may be more adversely affected than larger

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enterprises, and may cause increased levels of nonaccrual or other problem loans, loan charge-offs and higher provision for loan losses.

Pinnacle National’s commercial clients borrow for a variety of purposes. The terms of these loans will vary by purpose and by type of any underlying collateral and include equipment loans and working capital loans. Commercial loans may be unsecured or secured by accounts receivable or by other business assets. Pinnacle National also makes a variety of commercial real estate loans, residential real estate loans and real estate construction and development loans.

Pinnacle National also makes a variety of loans to individuals for personal, family, investment and household purposes, including secured and unsecured installment and term loans, residential first mortgage loans, home equity loans and home equity lines of credit.

Investment Securities

In addition to loans, Pinnacle National has other investments primarily in obligations of the United States government, obligations guaranteed as to principal and interest by the United States government and other securities. No investment in any of those instruments exceeds any applicable limitation imposed by law or regulation. The executive committee of the board of directors reviews the investment portfolio on an ongoing basis in order to ensure that the investments conform to Pinnacle National’s asset liability management policy as set by the board of directors.

Asset and Liability Management

Our Asset Liability Management Committee (“ALCO”), composed of senior managers of Pinnacle National, manages Pinnacle National’s assets and liabilities and strives to provide a stable, optimized net interest income and margin, adequate liquidity and ultimately a suitable after-tax return on assets and return on equity. ALCO conducts these management functions within the framework of written policies that Pinnacle National’s board of directors has adopted. ALCO works to maintain a balanced position between rate sensitive assets and rate sensitive liabilities.

Additionally, we may use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities. We may use derivatives as one tool to manage our interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. At December 31, 2004 and 2003, we had not entered into any derivative contracts to assist managing our interest rate sensitivity.

Deposit Services

Pinnacle National seeks to establish a broad base of core deposits, including savings, checking, interest-bearing checking, money market and certificate of deposit accounts. To attract deposits, Pinnacle National has employed a marketing plan in its overall service area and features a broad product line and competitive rates and services. The primary sources of deposits are residents of, and businesses and their employees located in the Nashville MSA. Pinnacle National generally obtains these deposits through personal solicitation by its officers and directors.

Investment Services

Pinnacle National contracts with Raymond James Financial Service, Inc. (“RJFS”), a registered broker-dealer and investment adviser, to offer and sell various securities and other financial products to the public from Pinnacle National’s locations through Pinnacle National employees that are also RJFS employees. RJFS is a subsidiary of Raymond James Financial, Inc. Prior to the alliance with RJFS, Pinnacle National entered into a similar arrangement in 2000 with LM Financial Partners, or LMFP, an affiliate of Legg Mason Wood Walker, Inc., the principal broker-dealer subsidiary of Legg Mason, Inc. During 2002, RJFS acquired LMFP from Legg Mason Wood Walker, Inc.

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Pinnacle National offers, through RJFS, non-FDIC insured investment products in order to assist Pinnacle National’s clients in achieving their financial objectives consistent with their risk tolerances. Pinnacle National’s suite of investment products include:

             
  • Mutual Funds
• Variable Annuities
• Money Market Instruments
• Treasury Securities
• Bonds
      • Fixed Annuities
• Stocks
• Financial Planning
• Asset Management Accounts
• Listed Options

All of the financial products listed above are offered by RJFS from Pinnacle National’s main office and its other offices. Additionally, we believe that the brokerage and investment advisory program offered by RJFS complements Pinnacle National’s general banking business, and further supports its business philosophy and strategy of delivering to our clients those products and services that meet their financial needs. In addition to the compliance monitoring provided by RJFS, Pinnacle National has developed its own compliance-monitoring program to further ensure that Pinnacle National personnel deliver these products in a manner consistent with the various regulations governing such activities.

Pinnacle National receives a minimum lease payment each month for each leased area, plus a percentage of commission credits and fees generated by the program. Pinnacle National remains responsible for various expenses associated with the program, including promotional expenses, furnishings and equipment expenses for the leased areas, and general personnel costs.

Pinnacle Financial recently established Pinnacle Advisory Services, Inc., a registered investment advisor, to provide financial planning services to its clients.

Other Banking Services

Given client demand for increased convenience in accessing banking and investment services, Pinnacle National also offers a broad array of convenience-centered products and services, including 24 hour telephone and Internet banking, debit cards, direct deposit and cash management services for small- to medium-sized businesses. Additionally, Pinnacle National is associated with a nationwide network of automated teller machines of other financial institutions that our clients are able to use throughout Tennessee and other regions. In most cases, Pinnacle National, in contrast to its competitors, reimburses its clients for any fees that may be charged to the client for utilizing the nationwide ATM network which enables us to demonstrate greater convenience as compared to these competitors. Pinnacle National does not plan to exercise trust powers during its initial years of operation, but may do so in the future subject to the approval of the Office of the Comptroller of the Currency.

Pinnacle National also offers its targeted commercial clients a courier service which picks up non-cash deposits from the client’s place of business which also enables us to demonstrate convenience greater than most of the larger regional competitors. Pinnacle National provides this service through a third party that is approved by the State of Tennessee Public Service Commission for bank-related work.

Employees

At February 15, 2005, Pinnacle National employed 126 employees of which 124 were full time. Pinnacle National considers its relationship with all employees to be excellent. Additionally, during 2004, Pinnacle Financial was named by the Nashville Business Journal as the “Best Place to Work in Nashville” among Middle Tennessee’s large companies with more than 100 employees. This is the second consecutive year for Pinnacle to receive top honors in the annual awards program.

We are also one of a relatively small number of financial firms in the country that provide stock options for all associates in a broad-based stock option plan. We believe this broad-based stock option plan directly aligns our employee base with our shareholders, and that our associates have become even more engaged toward the creation of shareholder value over the intermediate- and long-terms. Information concerning these plans are included in the

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“Notes to the Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Additionally, all of our non-commission based employees participate in an annual cash incentive plan whereby they receive a certain percentage of their salary should the firm meet certain soundness and performance targets for the year. Information concerning this plan is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Available Information

We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically. Our website address is www.pnfp.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

We have posted our Corporate Governance Guidelines, our Corporate Code of Conduct for directors, officers and employees, and the charters of our Audit and Human Resources, Nominating and Compensation Committees of our board of directors on the Corporate Governance section of our website at www.pnfp.com. Our corporate governance materials are available free of charge upon request to our Corporate Secretary, Pinnacle Financial Partners, Inc., 211 Commerce Street, Suite 300, Nashville, Tennessee 37201.

SUPERVISION AND REGULATION

Both Pinnacle Financial and Pinnacle National are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of Pinnacle Financial’s and Pinnacle National’s operations. These laws and regulations are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework which apply.

Pinnacle Financial

We are a bank holding company under the federal Bank Holding Company Act of 1956. As a result, we are subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve.

Acquisition of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:

  •   Acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

  •   Acquiring all or substantially all of the assets of any bank; or

  •   Merging or consolidating with any other bank holding company.

Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would substantially lessen competition or otherwise function as a restraint of trade, or result in or

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tend to create a monopoly, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the communities to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under the Bank Holding Company Act, if adequately capitalized and adequately managed, we or any other bank holding company located in Tennessee may purchase a bank located outside of Tennessee. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Tennessee may purchase a bank located inside Tennessee. In each case, however, state law restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. For example, Tennessee law currently prohibits a bank holding company from acquiring control of a Tennessee-based financial institution until the target financial institution has been in operation for three years.

Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Federal Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

  •   The bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or

  •   No other person owns a greater percentage of that class of voting securities immediately after the transaction.

Our common stock is registered under the Securities Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption.

Permitted Activities. The Gramm-Leach-Bliley Act of 1999 amends the Bank Holding Company Act and expands the activities in which bank holding companies and affiliates of banks are permitted to engage. The Gramm-Leach-Bliley Act eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies, and other financial service providers. Generally, if we qualify and elect to become a financial holding company, which is described below, we may engage in activities that are:

  •   Financial in nature;

  •   Incidental to a financial activity; or

  •   Complementary to a financial activity and do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.

The Gramm-Leach-Bliley Act expressly lists the following activities as financial in nature:

  •   Lending, trust and other banking activities;

  •   Insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state;

  •   Providing financial, investment, or advisory services;

  •   Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;

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  •   Underwriting, dealing in or making a market in securities;

  •   Activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident to banking or managing or controlling banks;

  •   Activities permitted outside of the United States that the Federal Reserve has determined to be usual in connection with banking or other financial operations abroad;

  •   Merchant banking through securities or insurance affiliates; and

  •   Insurance company portfolio investments.

The Gramm-Leach-Bliley Act also authorizes the Federal Reserve, in consultation with the Secretary of the Treasury, to determine activities in addition to those listed above that are financial in nature or incidental to such financial activity. In determining whether a particular activity is financial in nature or incidental or complementary to a financial activity, the Federal Reserve must consider (1) the purpose of the Bank Holding Company and Gramm-Leach-Bliley Acts, (2) changes or reasonably expected changes in the marketplace in which financial holding companies compete and in the technology for delivering financial services, and (3) whether the activity is necessary or appropriate to allow financial holding companies to effectively compete with other financial service providers and to efficiently deliver information and services.

To qualify to become a financial holding company, any of our depository institution subsidiaries must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.” Additionally, we must file an election with the Federal Reserve to become a financial holding company and provide the Federal Reserve with 30 days written notice prior to engaging in a permitted financial activity. Although we do not have any immediate plans to file an election with the Federal Reserve to become a financial holding company, one of the primary reasons we selected the holding company structure was to have increased flexibility. Accordingly, if deemed appropriate in the future, we may seek to become a financial holding company.

Under the Bank Holding Company Act, a bank holding company, which has not qualified or elected to become a financial holding company, is generally prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities unless, prior to the enactment of the Gramm-Leach-Bliley Act, the Federal Reserve found those activities to be so closely related to banking as to be a proper incident to the business of banking. Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

  •   Factoring accounts receivable;
 
  •   Acquiring or servicing loans;
 
  •   Leasing personal property;
 
  •   Conducting discount securities brokerage activities;
 
  •   Performing selected data processing services;
 
  •   Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
 
  •   Performing selected insurance underwriting activities.

Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe

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that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of any of its bank subsidiaries.

Support of Subsidiary Institutions. Under Federal Reserve policy, we are expected to act as a source of financial strength for our subsidiary, Pinnacle National, and to commit resources to support Pinnacle National. This support may be required at times when, without this Federal Reserve policy, we might not be inclined to provide it. In the unlikely event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of Pinnacle National would be assumed by the bankruptcy trustee and entitled to a priority of payment.

Pinnacle National

Pinnacle National is a national bank chartered under the federal National Bank Act. As a result, it is subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the Office of the Comptroller of the Currency (the “OCC”). The OCC regularly examines Pinnacle National’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, Pinnacle National’s deposits are insured by the FDIC to the maximum extent provided by law. Pinnacle National also is subject to numerous state and federal statutes and regulations that will affect its business, activities and operations.

Branching. While the OCC has authority to approve branch applications, national banks are required by the National Bank Act to adhere to branching laws applicable to state chartered banks in the states in which they are located. With prior regulatory approval, Tennessee law permits banks based in the state to either establish new or acquire existing branch offices throughout Tennessee. Pinnacle National and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. Tennessee law, with limited exceptions, currently permits branching across state lines either through interstate merger or branch acquisition. Tennessee, however only permits an out-of-state bank, short of an interstate merger, to branch into Tennessee through branch acquisition if the state of the out-of-state bank permits Tennessee based banks to acquire branches there.

FDIC Insurance. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described below, with the “undercapitalized” category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution’s primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Capital Adequacy

Both Pinnacle Financial and Pinnacle National are required to comply with the capital adequacy standards established by the Federal Reserve, in our case, and the OCC, in the case of Pinnacle National. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. Pinnacle National is also subject to risk-based and leverage capital requirements adopted by the OCC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and

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unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 capital must equal at least 4% of risk-weighted assets. Tier 2 capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 capital is limited to 100% of Tier 1 capital.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. The guidelines also provide that bank holding companies experiencing high internal growth, as is our case, or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels. Furthermore, the Federal Reserve has indicated that it will consider a bank holding company’s Tier 1 capital leverage ratio, after deducting all intangibles, and other indicators of capital strength in evaluating proposals for expansion or new activities.

Information concerning our regulatory ratios at December 31, 2004 is included in the “Notes to the Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

If our growth rate continues, as we presently anticipate, our assets will grow faster than our capital and our capital ratios will decline. In order to maintain capital at Pinnacle National at appropriate levels, we may be required to incur borrowings or issue additional equity securities. We have committed to the Federal Reserve Bank of Atlanta that we will obtain its approval before Pinnacle Financial incurs any indebtedness. In 2003, the Federal Reserve Bank of Atlanta granted such an approval in connection with Pinnacle Financial’s issuance of trust preferred securities. In connection with such approval, Pinnacle Financial’s Chairman of the Board, President and Chief Executive Officer and Chief Administrative Officer committed to the Federal Reserve Bank of Atlanta that, if required, to enable Pinnacle Financial to make interest payments in 2004 on its subordinated debentures under certain circumstances, they would exercise up to 185,000 warrants to acquire Pinnacle Financial common stock held by them to provide funds for such payment. Pinnacle Financial made all interest payments on the trust preferred securities pursuant to the terms of the trust preferred securities. As a result, no such exercise of common stock warrants was required and this additional commitment of these executive officers expired at December 31, 2004. Thus, we believe that we have met the Federal Reserve Bank of Atlanta’s requirements as of December 31, 2004 in connection with this matter.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into one of which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

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An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital. As of December 31, 2004, we believe Pinnacle National would be considered “well capitalized” by its primary regulator.

Payment of Dividends

We are a legal entity separate and distinct from Pinnacle National. Over time, the principal source of our cash flow, including cash flow to pay dividends to our holders of Trust Preferred Securities and to our common stock shareholders, will be dividends that Pinnacle National pays to us as its sole shareholder. Statutory and regulatory limitations apply to Pinnacle National’s payment of dividends to us as well as to our payment of dividends to our shareholders. Until we require dividends from Pinnacle National, our cash flow requirements will be satisfied through our existing cash balances.

Pinnacle National is required by federal law to obtain the prior approval of the OCC for payments of dividends if the total of all dividends declared by our board of directors in any year will exceed (1) the total of Pinnacle National’s net profits for that year, plus (2) Pinnacle National’s retained net profits of the preceding two years, less any required transfers to surplus. We do not anticipate that Pinnacle Financial will require any dividends from Pinnacle National in 2005.

The payment of dividends by Pinnacle National and us may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. If, in the opinion of the OCC, Pinnacle National was engaged in or about to engage in an unsafe or unsound practice, the OCC could require, after notice and a hearing, that Pinnacle National stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See “Prompt Corrective Action” above.

Restrictions on Transactions with Affiliates

Both Pinnacle Financial and Pinnacle National are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

  •   A bank’s loans or extensions of credit to affiliates;
 
  •   A bank’s investment in affiliates;
 
  •   Assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
 
  •   The amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and
 
  •   A bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

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The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. Pinnacle National must also comply with other provisions designed to avoid the taking of low-quality assets.

Pinnacle Financial and Pinnacle National are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Pinnacle National is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Community Reinvestment

The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the OCC or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on Pinnacle National. Additionally, banks are required to publicly disclose the terms of various Community Reinvestment Act-related agreements. During 2004, Pinnacle National received a “satisfactory” CRA rating from the OCC.

Privacy

Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market the institutions’ own products and services. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers. Pinnacle National has established a privacy policy to ensure compliance with federal requirements.

Other Consumer Laws and Regulations

Interest and other charges collected or contracted for by Pinnacle National are subject to state usury laws and federal laws concerning interest rates. For example, under the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from charging an annual interest rate in excess of 6% on any obligations for which the borrower is a person on active duty with the United States military. Pinnacle National’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

  •   Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
 
  •   Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
 
  •   Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
 
  •   Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

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  •   Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
 
  •   Bank Secrecy Act, governing how banks and other firms report certain currency transactions which may involve “money laundering” activities;
 
  •   Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and
 
  •   Rules and regulations of the various federal agencies charged with the responsibility of implementing the federal laws.

Pinnacle National’s deposit operations are subject to the:

  •   Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

  •   Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Anti-Terrorism Legislation

On October 26, 2001, the President of the United States signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers.

In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above. Pinnacle National currently has policies and procedures in place designed to comply with the USA PATRIOT Act.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through the Federal Reserve’s statutory power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

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RISK FACTORS

Investing in our common stock involves various risks which are particular to our company, our industry and our market area. Several risk factors regarding investing in our common stock are discussed below. This listing should not be considered as all-inclusive. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted. These matters could cause the trading price of our common stock to decline in future periods.

We are geographically concentrated in the Nashville, Tennessee MSA, and changes in local economic conditions impact our profitability.

We operate primarily in the Nashville, Tennessee MSA, and substantially all of our loan customers and most of our deposit and other customers live or have operations in the Nashville MSA. Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in the Nashville MSA, along with the continued attraction of business ventures to the area. Our profitability is impacted by the changes in general economic conditions in this market. Additionally, unfavorable local or national economic conditions could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.

We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

Our continued growth may require the need for additional capital and further regulatory approvals which, if not obtained, could adversely impact our profitability and implementation of our current business plan.

To continue to grow, we will need to provide sufficient capital to Pinnacle National through earnings generation, additional equity offerings or borrowed funds or any combination of these sources of funds. Should we incur indebtedness, we are required to obtain certain regulatory approvals beforehand. Should our growth exceed our expectations, as has been the case to-date, we may need to raise additional capital over our projected capital needs. However, our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand and grow our operations could be materially impaired. Additionally, our current plan involves increasing our branch network, which will require capital expenditures. Our expansion efforts may also require certain regulatory approvals. Should we not be able to obtain such approvals or otherwise not be able to grow our asset base, our ability to attain our long-term profitability goals will be more difficult.

We have a concentration of credit exposure to borrowers in the trucking industry and to operators of nonresidential buildings and we also target small to medium-sized businesses.

At December 31, 2004, we had total credit exposure to borrowers in the trucking industry and to borrowers that operate nonresidential buildings equal to $43.1 million and $27.5 million, respectively. As a percentage of our total loans outstanding as of December 31, 2004, these amounts were 9.1% and 5.8%, respectively. If either of these industries experience an economic slowdown and, as a result, the borrowers in these industries are unable to perform their obligations under their existing loan agreements, our earnings could be negatively impacted, causing the value of our common stock to decline.

Additionally, a substantial focus of our marketing and business strategy is to serve small to medium-sized businesses in the metropolitan Nashville area. As a result, a relatively high percentage of our loan portfolio consists of commercial loans to small to medium-sized business. At December 31, 2004, our commercial loans accounted for

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67% of our total loans. During periods of economic weakness, small to medium-sized businesses may be impacted more severely than larger businesses. Consequently, the ability of such businesses to repay their loans may deteriorate, which would adversely impact our results of operations and financial condition.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

If loan customers with significant loan balances fail to repay their loans according to the terms of these loans, our earnings would suffer. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of any collateral securing the repayment of our loans. We maintain an allowance for loan losses in an attempt to cover the inherent risks associated with lending. In determining the size of this allowance, we rely on an analysis of our loan portfolio based on volume and types of loans, internal loan classifications, trends in classifications, volume and trends in delinquencies, nonaccruals and charge-offs, national and local economic conditions, other factors and other pertinent information. Because we are a relatively young organization, our allowance estimation may be less reflective of our historical loss experience than a more mature organization. If our assumptions are inaccurate, our current allowance may not be sufficient to cover potential loan losses, and additional provisions may be necessary which would decrease our earnings.

In addition, federal and state regulators periodically review our loan portfolio and may require us to increase our allowance for loan losses or recognize loan charge-offs. Their conclusions about the quality of our loan portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on our operating results.

Fluctuations in interest rates could reduce our profitability.

Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rate fluctuations are caused by many factors which, for the most part, are not under our direct control. For example, national monetary policy plays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with our customers also impact the rates we collect on loans and the rates we pay on deposits.

As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work against us, and our earnings may be negatively affected.

Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds or result in our lenders requiring additional collateral from us under our loan agreements. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses.

We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.

In order to maintain our capital at desired or regulatorily-required levels, we may be required to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. We may sell these shares at prices below the public offering price of the shares offered by this prospectus, and the sale of these shares may significantly dilute shareholder ownership. We could also issue additional shares in connection with acquisitions of other financial institutions.

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Even though our common stock is currently traded on the Nasdaq Stock Market’s National Market System, it has less liquidity than the average stock quoted on a national securities exchange.

The trading volume in our common stock on the Nasdaq National Market has been relatively low when compared with larger companies listed on the Nasdaq National Market or the stock exchanges. We cannot say with any certainty that a more active and liquid trading market for our common stock will develop. Because of this, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares.

We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We, therefore, can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.

The market price of our common stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

Loss of our senior executive officers or other key employees could impair our relationship with our customers and adversely affect our business.

We have assembled a senior management team which has a substantial background and experience in banking and financial services in the Nashville market. Loss of these key personnel could negatively impact our earnings because of their skills, customer relationships and/or the potential difficulty of promptly replacing them.

Competition with other banking institutions could adversely affect our profitability.

A number of banking institutions in the Nashville market have higher lending limits, more banking offices, and a larger market share. In addition, our asset management division competes with numerous brokerage firms and mutual fund companies which are also much larger. In some respects, this may place these competitors in a competitive advantage, although many of our customers have selected us because of service quality concerns at the larger enterprises. This competition may limit or reduce our profitability, reduce our growth and adversely affect our results of operations and financial condition.

If a change in control or change in management is delayed or prevented, the market price of our common stock could be negatively affected.

Provisions in our corporate documents, as well as certain federal and state regulations, may make it difficult and expensive to pursue a tender offer, change in control or takeover attempt that our board of directors opposes. As a result, our shareholders may not have an opportunity to participate in such a transaction, and the trading price of our stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. Anti-takeover provisions contained in our charter also will make it more difficult for an outside shareholder to remove our current board of directors or management.

The amount of common stock owned by, and other compensation arrangements with, our officers and directors may make it more difficult to obtain shareholder approval of potential takeovers that they oppose.

As of December 31, 2004, directors and executive officers beneficially owned approximately 15% of our common stock. Employment agreements with our senior management also provide for significant payments under certain circumstances following a change in control. These compensation arrangements, together with the common stock, option and warrant ownership of our board and management, could make it difficult or expensive to obtain majority support for shareholder proposals or potential acquisition proposals of us that our directors and officers oppose.

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Our business is dependent on technology, and an inability to invest in technological improvements may adversely affect our results of operations and financial condition.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. We have made significant investments in data processing, management information systems and internet banking accessibility. Our future success will depend in part upon our ability to create additional efficiencies in our operations through the use of technology, particularly in light of our past and projected growth strategy. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot make assurances that our technological improvements will increase our operational efficiency or that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

Our internal controls over financial reporting may have weaknesses or inadequacies that may be material.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our internal control over financial reporting and our auditor to attest to such evaluation on an annual basis. Management concluded that our internal control over financial reporting was effective at December 31, 2004 and our registered accounting firm attested to such conclusion. Management’s report on internal control over financial reporting is included on page 47 of this Form 10-K and the report of our registered accounting firm on these matters is included on page 49 of this Form 10-K. Ongoing compliance with these requirements is expected to be expensive and time-consuming and may negatively impact our results of operations. While our management did not identify any material weaknesses in our internal control over financial reporting at December 31, 2004, and concluded that our internal control over financial reporting was effective, we cannot make any assurances that we will not discover material weaknesses in our internal control over financial reporting in the future. If we discover any material weaknesses in the future, we may be required to make material changes in our internal control over financial reporting which could negatively impact our results of operations. In addition, if we discover such material weaknesses, our management may not be able to conclude that our internal control over financial reporting is effective or our registered public accounting firm may not be able to attest that our internal control over financial reporting was effective. If we cannot conclude that our internal controls over financial reporting is effective or if our registered accounting firm is not able to timely attest to such evaluation, we may be subject to regulatory scrutiny, and a loss of public confidence in our internal control over financial reporting which may cause the value of our common stock to decrease.

We are subject to various statutes and regulations that may limit our ability to take certain actions.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

ITEM 2. PROPERTIES

Pinnacle Financial’s principal offices are located at 211 Commerce Street in Nashville, Tennessee in Davidson County. Pinnacle Financial leases these offices from an unrelated third party.

Pinnacle National leases the land for its Brentwood branch office building located in Williamson County, Tennessee, from an unrelated third party but owns the building and leasehold improvements. Pinnacle National also leases the land for its Green Hills office location in Davidson County from an unrelated third party, but also owns the building and leasehold improvements. Pinnacle National also leases the land and building for its West End

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office location in Davidson County from unrelated third parties, but owns the leasehold improvements. Pinnacle National owns the land and buildings and all improvements for its Rivergate, Cool Springs and Franklin branch offices. A summary of Pinnacle Financial’s leased facilities follows:

                     
    Approximate   2004 Lease     Base Lease   Base Lease Term
Property Description   Sq. Footage   Amount     Expiration Date   with Renewal Periods
Office space at 211 Commerce Street
  30,000   $ 150,000     August 31, 2010   20 years
Brentwood branch office
  Land only     104,000     March 31, 2010   20 years
Green Hills branch office
  Land only     52,000     April 21, 2021   40 years
West End branch office building and land
  8,000     142,000     March 28, 2014   20 years

Other than normal real estate commercial lending activities of Pinnacle National and its subsidiaries, the acquisition of mortgage-backed securities held in Pinnacle National and its subsidiaries’ investment securities portfolio, the ownership of branch office facilities, and consumer mortgage lending, Pinnacle National and its subsidiaries generally do not invest in real estate, interests in real estate or securities of or interests in persons primarily engaged in real estate activities.

ITEM 3. LEGAL PROCEEDINGS

As of the date hereof, there are no material pending legal proceedings to which Pinnacle Financial or any of its subsidiaries is a party or of which any of its or its subsidiaries’ properties are subject; nor are there material proceedings known to Pinnacle Financial or any of its subsidiaries to be contemplated by any governmental authority; nor are there material proceedings known to Pinnacle Financial or any of its subsidiaries, pending or contemplated, in which any director, officer or affiliate or any principal security holder of Pinnacle Financial or any of its subsidiaries or any associate of any of the foregoing, is a party adverse to Pinnacle Financial or any of its subsidiaries or has a material interest adverse to Pinnacle Financial or any of its subsidiaries.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Pinnacle Financial’s common stock is traded on the Nasdaq Stock Market’s National Market System under the symbol “PNFP”. The following table shows the high and low bid price information for Pinnacle Financial’s common stock for each quarter in 2004 and 2003 as reported on the Nasdaq National Market System. The stock prices set forth below are adjusted to reflect our two-for-one common stock split paid on May 10, 2004.

                 
    Bid Price Per Share  
    High     Low  
2004:
               
First quarter
  $ 15.50     $ 11.65  
Second quarter
    18.67       13.50  
Third quarter
    23.70       17.70  
Fourth quarter
    25.10       21.35  
                 
2003:
               
First quarter
  $ 14.14     $ 12.76  
Second quarter
    17.00       13.05  
Third quarter
    19.94       16.00  
Fourth quarter
    25.90       19.35  

As of February 15, 2005, Pinnacle Financial had approximately 70 shareholders of record and, additionally, approximately 2,600 beneficial owners.

Pinnacle Financial has not paid any cash dividends since inception, and it does not anticipate that it will consider paying dividends until Pinnacle National has achieved a level of profitability appropriate to fund such dividends and support asset growth. See Item 1. “Description of Business – Supervision and Regulation – Payment of Dividends” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on dividend restrictions applicable to Pinnacle Financial.

Pinnacle Financial did not repurchase any shares of its common stock during the quarter ended December 31, 2004.

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ITEM 6. SELECTED FINANCIAL DATA

                                         
    2004     2003     2002     2001     2000  
    (in thousands, except per share data, ratios and percentages)  
Statement of Financial Condition Data:
                                       
Total assets
  $ 727,139     $ 498,421     $ 305,279     $ 175,439     $ 39,042  
Loans, net of unearned income
    472,362       297,004       209,743       134,440       12,407  
Allowance for loan losses
    (5,650 )     (3,719 )     (2,677 )     (1,832 )     (162 )
Total securities
    208,170       139,944       73,980       19,886       7,116  
Deposits and securities sold under agreements to repurchase
    602,655       405,619       249,067       147,917       22,945  
Advances from FHLB
    53,500       44,500       21,500       8,500        
Subordinated debt
    10,310       10,310                    
Stockholders’ equity
    57,880       34,336       32,404       18,291       15,771  
 
                                       
Income Statement Data:
                                       
Interest income
  $ 27,679     $ 18,262     $ 12,561     $ 6,069     $ 506  
Interest expense
    7,415       5,363       4,362       2,579       125  
Net interest income
    20,264       12,899       8,199       3,490       381  
Provision for loan losses
    2,948       1,157       938       1,670       162  
Net interest income after provision for loan losses
    17,316       11,742       7,261       1,820       219  
Noninterest income
    5,473       3,287       1,732       1,341       115  
Noninterest expense
    15,298       11,049       7,989       6,363       2,589  
Income (loss) before income taxes
    7,491       3,980       1,004       (3,202 )     (2,255 )
Income tax expense (benefit)
    2,172       1,425       356       (2,065 )      
Net income (loss)
  $ 5,319     $ 2,555     $ 648     $ (1,137 )   $ (2,255 )
 
                                       
Per Share Data (1):
                                       
Earnings (loss) per share – basic
  $ 0.69     $ 0.35     $ 0.11     $ (0.29 )   $ (1.39 )
Weighted average shares outstanding – basic
    7,750,943       7,384,106       6,108,942       3,963,196       1,617,616  
Earnings (loss) per share – diluted
  $ 0.61     $ 0.32     $ 0.10     $ (0.29 )   $ (1.39 )
Weighted average shares outstanding – diluted
    8,698,139       7,876,006       6,236,844       3,963,196       1,617,616  
Book value per share
  $ 6.90     $ 4.65     $ 4.39     $ 3.96     $ 4.13  
Common shares outstanding at end of period
    8,389,232       7,384,106       7,384,106       4,624,106       3,820,000  
 
                                       
Performance Ratios and Other Data:
                                       
Return on average assets
    0.89 %     0.66 %     0.29 %     (1.19 )%     (4.70 )%
Return on average stockholders’ equity
    12.31 %     7.70 %     2.47 %     (7.8 )%     (7.7 )%
Net interest margin
    3.62 %     3.53 %     3.81 %     3.95 %     5.71 %
Net interest spread
    3.34 %     3.23 %     3.42 %     3.29 %     2.33 %
Noninterest income to average assets
    0.92 %     0.85 %     0.76 %     1.41 %     0.42 %
Noninterest expense to average assets
    2.56 %     2.85 %     3.50 %     6.70 %     5.92 %
Efficiency ratio
    59.4 %     68.3 %     80.4 %     131.7 %     402.5 %
Average loan to average deposit ratio
    79.0 %     85.5 %     98.5 %     94.9 %     98.6 %
Average interest-earning assets to average interest-bearing liabilities
    120.0 %     118.9 %     119.6 %     122.7 %     248.0 %
 
                                       
Asset Quality Ratios:
                                       
Allowance for loan losses to nonperforming assets
    1,006.9 %     981.3 %     143.4 %     732.8 %     0.00 %
Allowance for loan losses to total loans
    1.20 %     1.25 %     1.28 %     1.36 %     1.31 %
Nonperforming assets to total assets
    0.08 %     0.08 %     0.61 %     0.14 %     0.00 %
Nonaccrual loans to total loans
    0.12 %     0.13 %     0.89 %     0.19 %     0.00 %
Net loan charge-offs to average loans
    0.27 %     0.05 %     0.05 %     0.00 %     0.00 %
Net charge-offs as a percentage of:
                                       
Provision for loan losses
    34.49 %     9.94 %     9.91 %     0.00 %     0.00 %
Allowance for loan losses
    18.00 %     3.09 %     3.47 %     0.00 %     0.00 %
 
                                       
Capital Ratios:
                                       
Leverage (2)
    9.7 %     9.7 %     11.1 %     11.6 %     82.5 %
Tier 1 risk-based capital
    11.7 %     11.8 %     12.7 %     10.1 %     58.8 %
Total risk-based capital
    12.7 %     12.8 %     13.8 %     11.2 %     59.4 %


(1)   Earnings per share information reflects the impact of a two for one stock split which was effective on May 10, 2004.
 
(2)   Leverage ratio is computed by dividing Tier 1 capital by average total assets for the fourth quarter of each year.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our financial condition at December 31, 2004 and 2003 and our results of operations for the years ended December 31, 2004, 2003 and 2002. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.

Overview

General. Pinnacle Financial’s rapid growth from its inception through the fourth quarter of 2004 has had a material impact on Pinnacle Financial’s financial condition and results of operations. This rapid growth resulted in net income for the year ended December 31, 2004 of $0.61 per diluted share as compared to $0.32 per diluted share for the twelve months ended December 31, 2003 and $0.10 per diluted share for 2002. At December 31, 2004, loans totaled $472 million, as compared to $297 million at December 31, 2003, while total deposits increased to $571 million at December 31, 2004 from $391 million at December 31, 2003.

Results of Operations. Pinnacle Financial’s net interest income increased to $20.3 million in 2004 from $12.9 million in 2003. The net interest margin (the ratio of net interest income to average earning assets for the period) was 3.62% for the year ended December 31, 2004 compared to 3.53% for the same period in 2003.

Our provision for loan losses increased $1.8 million in 2004 to $2,948,000 from $1,157,000 in 2003. The increase in loan volumes and net charge-off’s during 2004 were the primary causes for the increase. As our loan portfolio continues to grow, Pinnacle Financial expects that such growth will be considered in establishing the allowance for loan losses.

Noninterest income for 2004 compared to the same time period in 2003 increased by $2,187,000, or 66%. The increase was primarily due to Pinnacle National beginning a mortgage origination unit in early 2003, increases in investment services revenues between the periods, and increases in gains on the sales of loan and loan participations and securities available-for-sale.

Our growth in 2004 resulted in an increase of $4.2 million in noninterest expense compared to 2003 as a result of increases in salaries and employee benefits, equipment and occupancy expenses and other operating expenses. We also increased the number of full-time equivalent employees from 89.5 at December 31, 2003 to 122.0 at December 31, 2004. As a result, we experienced a $2,280,000 increase in compensation and employee benefit expense. We expect to add additional employees throughout 2005 which will cause our compensation and employee benefit expense to increase in future periods. Additionally, our branch expansion efforts in 2003 and 2004 also resulted in increased noninterest expense for 2004. The increased operational expenses for two branches opened in 2003 and the opening of one additional branch in 2004 will continue to result in increased noninterest expense in future periods. Although our expenses increased in 2004 when compared to 2003, our efficiency ratio, the ratio of noninterest expense to the sum of net interest income and noninterest income, decreased from 68.3% for 2003 to 59.4% for 2004.

We believe that a rising interest rate environment, which we also believe is somewhat more likely than a falling rate environment over the next few quarters, should result in greater net interest income for us than a falling or stagnant rate environment. At December 31, 2004, approximately 56.0% of our loan volumes are floating rate loans that

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reprice immediately with adjustments to our prime lending rate or other similarly published overnite interest rate indices. We also believe we will continue to increase assets with continued emphasis on floating rate lending. However, the additional revenues provided by these two items may not be sufficient to overcome any immediate increases in funding costs which would also be incurred in a rising rate environment.

Conversely, a falling rate environment would serve to have the opposite effect on our net interest income. In a falling rate environment, we may not be able to reduce our deposit funding costs by any meaningful amount due to market pressures, while our interest income would decrease at a more rapid pace.

In the latter half of 2004, the Federal Reserve’s Open Market Committee began increasing its benchmark Fed Funds rate in 25 basis point increments. At the end of 2004, the benchmark Fed Funds rate was 2.25% as compared to 1.00% for substantially the entire first half of 2004. We believe these actions contributed favorably to our 2004 results due to the repricing of our floating rate loans concurrently with Fed Funds rate increases. Conversely, our deposit rates also increased during this period, but did not offset the impact of the increase on floating rate loans to a significant degree. Should the Federal Reserve continue to increase Fed Funds rates, we believe the impact of such actions will not be as favorable in 2005 due to increased pressure from competitors on deposit pricing.

Financial Condition. The $175 million increase in loans in 2004 contributed to the increase in our net income for 2004 when compared to an increase of $87 million in loans for the similar period in 2003. This increase in loan volume offset the slight decrease in average yields on loans between 2004 and 2003. As we seek to increase our loan portfolio, we must also continue to monitor the risks inherent in our lending operations. If our allowance for loan losses is not sufficient to cover loan losses in our loan portfolio, increases to the allowance for loan losses would be required which would decrease our earnings.

We have successfully grown our total deposits to $571 million at December 31, 2004. This growth in deposits has allowed us to fund our asset growth at a lower cost in 2004 than in 2003. While rates paid on deposits decreased during 2004 compared to the same period in 2003, we typically adjust our loan yields at a faster rate than we adjust our deposit rates. As such, our deposit funding costs did not decrease as quickly as did revenues from interest income on floating rate earning assets.

Capital and Liquidity. On December 30, 2003, we issued $10 million in subordinated debt which bears interest at a floating rate based on a spread over 3-month LIBOR, which is set each quarter, and matures on December 30, 2033. Pursuant to current regulatory guidelines, all of this issuance is classified as Tier 1 capital for regulatory capital purposes. At December 31, 2004, our capital ratios, including Pinnacle National’s capital ratios, met regulatory minimum capital requirements and all requirements Pinnacle Financial has committed to regulators to maintain. Additionally, at December 31, 2004, Pinnacle National would be considered to be “well-capitalized” pursuant to banking regulations.

During the third quarter of 2004, we concluded a follow-on offering of our common stock to the general public. As a result of this offering, Pinnacle Financial, through its underwriters, sold 850,000 shares of common stock to the general public at $20 per share. The underwriters also exercised an over-allotment option and purchased an additional 127,500 shares at $20 per share, less the applicable underwriting discount. Net proceeds from the offering were approximately $18.2 million.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses (ALL), have been critical to the determination of our financial position and results of operations.

Allowance for Loan Losses (ALL). Our management assesses the adequacy of the ALL prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The ALL consists of two portions (1) an allocated amount representative of specifically identified credit exposure and exposures readily predictable by historical or comparative experience;

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and (2) an unallocated amount representative of inherent loss which is not readily identifiable. Even though the ALL is composed of two components, the entire ALL is available to absorb any credit losses.

We establish the allocated amount separately for two different risk groups (1) unique loans (commercial loans, including those loans considered impaired); and (2) homogeneous loans (generally consumer loans). We base the allocation for unique loans primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. We then assign each risk-rating grade a loss ratio, which is determined based on the experience of management, discussions with banking regulators and our independent loan review process. We estimate losses on impaired loans based on estimated cash flows discounted at the loan’s original effective interest rate or based on the underlying collateral value. Based on management’s experience, we also assign loss ratios to our consumer portfolio. These loss ratios are assigned to the various homogenous categories of the consumer portfolio (e.g., automobile, residential mortgage, home equity).

The unallocated amount is particularly subjective and does not lend itself to exact mathematical calculation. The unallocated amount represents estimated inherent credit losses which may exist, but have not yet been identified, as of the balance sheet date. In estimating the unallocated amount, such matters as changes in the local or national economy, the depth or experience in the lending staff, any concentrations of credit in any particular industry group, and new banking laws or regulations. After we assess applicable factors, we evaluate the aggregate unallocated amount based on our management’s experience.

We then test the resulting ALL balance by comparing the balance in the ALL to historical trends and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the ALL in its entirety. The audit committee of our board of directors reviews the assessment prior to the filing of quarterly and annual financial information.

In assessing the adequacy of the ALL, we also rely on an ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, the input from our independent loan reviewer, who is not an employee of Pinnacle National, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process.

Results of Operations

Our results for fiscal years 2004, 2003 and 2002 were highlighted by the continued growth in loans and other earning assets and deposits, which resulted in increased revenues and expenses. The following is a summary of our results of operations (dollars in thousands):

                                         
    Years ended     2004-2003     Year ended     2003-2002  
    December 31,     Percent     December 31,     Percent  
    2004     2003     Increase     2002     Increase  
Interest income
  $ 27,679     $ 18,262       52 %   $ 12,561       45 %
Interest expense
    7,415       5,363       38       4,362       23  
 
                             
Net interest income
    20,264       12,899       57       8,199       57  
Provision for loan losses
    2,948       1,157       155       938       23  
 
                             
Net interest income after provision for loan losses
    17,316       11,742       47       7,261       62  
Noninterest income
    5,473       3,287       67       1,732       90  
Noninterest expense
    15,298       11,049       38       7,989       38  
 
                             
Net income before taxes
    7,491       3,980       88       1,004       296  
Income tax expense
    2,172       1,425       52       356       300  
 
                             
Net income
  $ 5,319     $ 2,555       108 %   $ 648       294 %
 
                             

Net Interest Income. Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest bearing liabilities and is the most significant component of our earnings. For the year ended December 31, 2004, we recorded net interest income of $20,264,000, which resulted in a net interest margin of 3.62%. For the year ended December 31, 2003, we recorded net interest income of

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$12,899,000, which resulted in a net interest margin of 3.53% for the year. For the year ended December 31, 2002, we recorded net interest income of $8,199,000, which resulted in a net interest margin of 3.81% for the year.

The activities of the Federal Reserve’s Open Market Committee have a significant influence on our net interest income and margin. During 2002, the Open Market Committee lowered the Federal funds rate 50 basis points to 1.25% in an effort to provide stimulus to the national economy. During the first quarter of 2003, the Federal Reserve Open Market Committee lowered the Federal funds rate from 1.25% to 1.00% and it remained 1.00% until June 30, 2004 when the Open Market Committee increased the Federal funds rate to 1.25%. Subsequently, the Open Market Committee increased the Federal funds rate to 1.75% during the third quarter of 2004 and to 2.25% in the fourth quarter of 2004. Our management believes this historically low interest rate environment had a negative impact on our net interest income, particularly during the periods prior to June 30, 2004, before the Open Market Committee began to initiate several Federal funds rate increases, as a significant number of our customers are adjustable rate borrowers with their lines of credit tied primarily to our prime lending rate which declined in lock-step with the Federal funds rate declines.

The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets for each of the years in the three-year period ended December 31, 2004 (dollars in thousands):

                                                                         
    2004     2003     2002  
    Average             Yields/     Average             Yields/     Average             Yields/  
    Balances     Interest     Rates (1)     Balances     Interest     Rates     Balances     Interest     Rates  
Interest-earning assets:
                                                                       
Loans (2)
  $ 373,287     $ 19,910       5.34 %   $ 254,550     $ 13,709       5.39 %   $ 170,943     $ 10,510       6.15 %
Securities:
                                                                       
Taxable
    162,712       6,936       4.26       100,547       4,158       4.14       36,475       1,838       5.04  
Tax exempt
    13,899       491       4.55       6,172       217       4.37       892       35       4.71  
Federal funds sold and other
    14,716       342       2.01       8,584       178       2.07       7,011       178       2.64  
 
                                                     
Total interest-earning assets
    564,614       27,679       4.91       369,853       18,262       4.96       215,321       12,561       5.84  
 
                                                           
Nonearning assets
    32,766                       18,231                       12,627                  
 
                                                                 
Total assets
  $ 597,380                     $ 388,084                     $ 227,948                  
 
                                                                 
 
                                                                       
Interest-bearing liabilities:
                                                                       
Interest-bearing deposits:
                                                                       
Interest checking
  $ 38,544     $ 191       0.50 %   $ 19,324     $ 95       0.49 %   $ 9,844     $ 99       1.94 %
Savings and money market
    173,318       1,520       0.88       100,032       870       0.87       59,274       1,002       3.32  
Certificates of deposit
    182,221       4,118       2.26       136,203       3,384       2.48       83,873       2,712       3.23  
 
                                                     
Total interest-bearing deposits
    394,083       5,829       1.48       255,559       4,349       1.70       152,991       3,813       2.49  
Securities sold under agreements to repurchase
    20,466       104       0.51       14,496       66       0.45       12,728       91       0.71  
Federal funds purchased
    1,705       24       1.43       2,926       44       1.51       1,163       23       1.98  
Federal Home Loan Bank advances
    46,284       1,027       2.22       38,000       904       2.38       13,088       435       3.32  
Subordinated debt
    10,310       431       4.18                                      
 
                                                     
Total interest-bearing liabilities
    472,848       7,415       1.57       310,981       5,363       1.72       179,970       4,362       2.42  
 
                                                     
Noninterest-bearing liabilities:
                                                                       
Demand deposits
    78,616                       42,308                       20,480                  
Other liabilities
    2,707                       1,635                       1,095                  
Stockholders’ equity
    43,209                       33,160                       26,403                  
 
                                                                 
Total liabilities and stockholders’ equity
  $ 597,380                     $ 388,084                     $ 227,948                  
 
                                                                 
 
                                                                       
Net interest income
          $ 20,264                     $ 12,899                     $ 8,199          
 
                                                                 
Net interest spread (3)
                    3.34 %                     3.24 %                     3.42 %
Net interest margin
                    3.62 %                     3.53 %                     3.81 %


(1)   We computed yields based on the carrying value of those tax exempt instruments on a fully tax equivalent basis.
 
(2)   Average balances of nonperforming loans are included in the above amounts.
 
(3)   The net interest spread calculation excludes the impact of demand deposits. Had the impact of demand deposits been included the net interest spread for the year ended December 31, 2004 would have been 3.56% compared to a net interest spread for the years ended December 31, 2003 and 2002 of 3.44% and 3.67%, respectively.

As noted above, the net interest margin for 2004 was 3.62% compared to a net interest margin of 3.53% for the same period in 2003, an increase of 9 basis points. The net change in the net interest margin was relatively small because the net decrease in the yield on interest-earning assets between the two periods approximated the net decrease in the

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rate paid on interest-bearing liabilities. The net interest margin for 2002 was 3.81%, compared to the 3.53% margin in 2003, a decrease of 28 basis points. The net change in the net interest margin was more significant between these two periods because the net decrease in the yield on interest-earning assets between the two periods was 88 basis points compared to the net decrease in the rate paid on interest-bearing liabilities of only 70 basis points. Other matters related to the changes in net interest income, net interest yields and rates, and net interest margin are presented below:

  •   Our loan yields decreased slightly from 2003 to 2004. For asset/liability management purposes, we have emphasized floating rate loans over the last several years such that approximately 56.0% of our loans are floating rate loans at December 31, 2004 compared to 52.7% at December 31, 2003 and 45.7% at December 31, 2002. Floating rate loans generally have lower yields than do fixed or variable rate loans, thus as our percentage of floating rate loans increases this serves to lower the overall yield of the portfolio.
 
  •   During 2004, we were able to grow our funding base significantly. For asset/liability management purposes in 2004, we elected to allocate a greater proportion of such funds to our securities portfolio and shorter-term securities versus our loan portfolio than in 2003. The average balance of investment securities and shorter-term investments to total assets for 2004 was 31% compared to 29% in 2003 and 17% in 2002. These types of assets generally have lower yields than do loans.
 
  •   During 2004, overall deposit rates were less than those rates for the comparable period in 2003 and 2002. In some cases, rates during 2004 decreased to such levels that further decreases in deposit rates approached what we termed “embedded floors” or rates where it was not reasonable or practical for us to go below, such that further decreases in our deposit rates would have placed us in a competitive disadvantage as customers seek higher returns on their balances. Changes in interest rates paid on such products as interest checking, savings and money market accounts, securities sold under agreements to repurchase and Federal funds purchased will generally increase or decrease in a manner that is consistent with changes in the short-term rate environment. We also monitor the pricing of similar products by our primary competitors. The changes in the short-term rate environment and the pricing of our primary competitors allowed us to reduce on average these rates in 2004 compared to 2003. These rates began to increase in late 2004 such that we anticipate a more rapid increase in funding rates on these types of deposits in 2005 .
 
  •   During 2004, the average balances of noninterest bearing deposit balances, interest bearing transaction accounts, savings and money market accounts and securities sold under agreements to repurchase amounted to 56% of our total funding compared to 50% in 2003 and 44% in 2002. These funding sources generally have lower rates than do other funding sources, such as certificates of deposit and other borrowings.
 
  •   Also impacting the net interest margin during 2004 was the issuance of subordinated indebtedness. This indebtedness was issued at the end of 2003, thus it did not impact the prior period’s results. The interest rate charged on this indebtedness is generally higher than other funding sources. The rate charged on this indebtedness is computed in relation to the three-month LIBOR index and is repriced quarterly.

In December 2003, we acquired, for $500,000, a $1,500,000 loan which we had previously sold to another financial institution. Through June 30, 2004, we accounted for the discount under the cost-recovery method pursuant to Practice Bulletin Number 6, “Amortization of Discounts on Certain Acquired Loans”, issued by the Accounting Standards Executive Committee (AcSEC). Under the cost-recovery method of accounting, cash collections are first applied against the $500,000 recorded amount of the loan; when the loan has been reduced to zero, any additional amounts received are recognized as income. During the second quarter of 2004, we collected the remaining net book value of the loan and an additional $260,000, of which $217,000 was recognized as interest income and $43,000 was credited to other expense as a recovery of legal expenses incurred by us. As a result of a settlement agreement entered into with the borrower, Pinnacle Financial received $80,000 during the third quarter from the sale of certain assets related to this borrower which was recognized as interest income. As a result of these

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transactions, our net interest income was $297,000 higher during 2004 than it would have been otherwise. Excluding these transactions from our net interest margin calculation would have yielded a net interest margin of 3.57%. Management believes excluding these items from our net interest margin calculation is more meaningful under the circumstances as the increase in net interest income from these particular transactions is not expected to reoccur and the modified presentation of net interest margin is more comparable to prior periods. Additionally, during the third quarter of 2004, Pinnacle National subsequently sold to a third party a loan to this borrower, which resulted from the settlement agreement, and recognized a $280,000 gain on sale of loans.

Rate and Volume Analysis. Net interest income increased by $7,365,000 million between the years ended December 31, 2004 and 2003 and by $4,700,000 between the years ended December 31, 2003 and 2002. The following is an analysis of the changes in our net interest income comparing the changes attributable to rates and those attributable to volumes (dollars in thousands):

                                                 
    2004 Compared to 2003     2003 Compared to 2002  
    Increase (Decrease) due to     Increase (Decrease) due to  
    Rate     Volume     Net     Rate     Volume     Net  
Interest-earning assets:
                                               
Loans
  $ (137 )   $ 6,338     $ 6,201     $ (396 )   $ 3,595     $ 3,199  
Securities, available-for-sale:
                                               
Taxable
    132       2,646       2,778       (85 )     2,405       2,320  
Nontaxable
          274       274             182       182  
Federal funds sold and other
    29       135       164       (52 )     52        
 
                                   
Total interest-earning assets
    24       9,393       9,417       (533 )     6,234       5,701  
 
                                   
 
                                               
Interest-bearing liabilities:
                                               
Interest checking
  $ 1     $ 95     $ 96     $ (35 )   $ 31     $ (4 )
Savings and money market
    12       638       650       (339 )     207       (132 )
Certificates of deposit
    (327 )     1,061       734       (276 )     948       672  
 
                                   
Total interest-bearing deposits
    (314 )     1,794       1,480       (650 )     1,186       536  
Securities sold under agreements to repurchase
    9       29       38       (28 )     3       (25 )
Federal funds purchased
    (2 )     (18 )     (20 )     (2 )     23       21  
Federal Home Loan Bank advances
    (66 )     189       123       (46 )     515       469  
Subordinated debt
          431       431                    
 
                                   
Total interest-bearing liabilities
    (373 )     2,425       2,052       (726 )     1,727       1,001  
 
                                   
Net interest income
  $ 397     $ 6,968     $ 7,365     $ 193     $ 4,507     $ 4,700  
 
                                   


Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. The change attributed to rates and volumes (change in rate times change in volume) is allocated between volume change and rate change at the ratio of how much each component bears to the absolute value of their total.

Provision for Loan Losses. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in our management’s evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. The provision for loan losses amounted to $2,948,000; $1,157,000 and $938,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Based upon our management’s evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at the balance sheet date. The increase in the provision for loan losses for the year ended December 31, 2004 when compared to the year ended December 31, 2003 was primarily due to the increase in loan volumes throughout 2004 when compared to 2003 and an increase in net charge-offs in 2004 compared to both 2003 and 2002. Based upon management’s assessment of the loan portfolio, we adjust our allowance for loan losses to an amount deemed appropriate to adequately cover inherent risks in the loan portfolio. While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by our management and are reviewed from time to time by Pinnacle National’s regulators, they are necessarily approximate and imprecise. There exist factors beyond our control, such as general economic

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conditions both locally and nationally, which may negatively impact, materially, the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.

Noninterest Income. Our noninterest income is composed of several components, some of which vary significantly between quarterly periods. Service charges on deposit accounts and other noninterest income generally reflect our growth, while investment services and fees from the origination of mortgage loans will often reflect market conditions and fluctuate from period to period. The opportunities for recognition of gains on loan participations sold and gains on sales of investment securities may also vary widely from quarter to quarter and year to year.

The following is the makeup of our noninterest income for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):

                                         
    Years ended     2004-2003     Year ended     2003-2002  
    Dec. 31,     Percent     Dec. 31,     Percent  
    2004     2003     Increase     2002     Increase  
Noninterest income:
                                       
Service charges on deposit accounts
  $ 956     $ 513       86 %   $ 281       83 %
Investment sales commissions
    1,657       998       66       810       23  
Fees from origination of mortgage loans
    1,255       667       88              
Gain on loans and loan participations sold
    514       334       54       120       178  
Gain on sale of investment securities, net
    357       248       44              
Other noninterest income
    734       527       39       521       1  
 
                             
Total noninterest income
  $ 5,473     $ 3,287       67 %   $ 1,732       90 %
 
                             

As shown, the largest component of noninterest income is commissions and fees from our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle National. At December 31, 2004, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $398 million in brokerage assets held with Raymond James Financial Services, Inc. compared to $319 million at December 31, 2003 and $171 million at December 31, 2002.

Service charge income for 2004 increased over that of 2003 due to an increase in the number of deposit accounts subject to service charges. Additionally, mortgage related fees, attributable to Pinnacle National beginning a mortgage origination unit during the first quarter of 2003, also provided for a significant portion of the increase in noninterest income between 2004 and 2003. These mortgage fees are for loans originated by Pinnacle National and subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage origination fees increase in lower interest rate environments and decrease in rising interest rate environments. As a result, mortgage origination fees may fluctuate greatly in response to a changing rate environment.

Another noninterest income item for the years ended December 31, 2004, 2003 and 2002 was related to our sale of certain loan participations to our correspondent banks. These sales primarily related to new lending transactions in excess of internal loan limits. At December 31, 2004 and pursuant to participation agreements with these correspondents, we had participated approximately $57.7 million of originated loans to these other banks. These participation agreements have various provisions regarding collateral position, pricing and other matters. Many of these agreements provide that we pay the correspondent less than the loan’s contracted interest rate. Pursuant to Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125,” we recorded $234,000, which represents the net present value of these future net revenues, as a gain on sale of participations in our results of operations during the year ended December 31, 2004 compared to $334,000 and $120,000 during the years ended December 31, 2003 and 2002, respectively. We intend to maintain relationships with our correspondents in order to participate future loans to these correspondents in a similar manner. However, the timing of participations may cause the level of gains, if any, to vary significantly between periods.

As noted above, during the third quarter of 2004, we sold a loan to an individual and recorded a gain on the sale of this loan of $280,000 which is included in gains on sale of loans. We had acquired this loan pursuant to a settlement agreement with a borrower for which we had no basis in the loan.

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Also included in noninterest income for 2004 were net gains of approximately $357,000 realized from the sale of approximately $28 million of available-for-sale securities. This compares to $248,000 in net gains on the sale of investment securities for the same period in the prior year.

During the year ended December 31, 2002, Pinnacle National acquired life insurance policies on five key executives. Pinnacle National is the beneficiary of the death proceeds from these policies. To acquire these policies, Pinnacle National paid a one-time premium of $1.8 million and, in return, Pinnacle National was guaranteed an initial crediting rate for the first year of the contracts which is then reset quarterly thereafter. This crediting rate serves to increase the cash surrender value of the policies over the life of the policies and amounted to approximately $79,000 and $90,000 during the years ended December 31, 2004 and 2003, respectively. At December 31, 2004, the aggregate cash surrender value of these policies, which is reflected in other assets on our consolidated balance sheet, was $2.0 million. Pinnacle National has not borrowed any funds against these policies as of December 31, 2004.

Noninterest Expense. Noninterest expense consists of salaries and employee benefits, equipment and occupancy expenses, and other operating expenses. The following is the makeup of our noninterest expense for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):

                                         
    Years ended     2004-2003     Year ended     2003-2002  
    Dec. 31,     Percent     Dec. 31,     Percent  
    2004     2003     Increase     2002     Increase  
Noninterest expense:
                                       
Salaries and employee benefits:
                                       
Salaries
  $ 5,942     $ 4,474       33 %   $ 3,368       33 %
Commissions
    1,105       673       64       438       54  
Other compensation, primarily incentives
    1,375       1,318       4       830       59  
Employee benefits and other
    1,119       796       41       601       32  
 
                             
Total salaries and employee benefits
    9,541       7,261       31       5,237       39  
 
                             
Equipment and occupancy
    2,406       1,827       32       1,442       27  
Marketing and business development
    607       387       57       244       59  
Postage and supplies
    492       348       41       256       36  
Other noninterest expense:
                                       
Accounting and auditing
    540       173       212       80       116  
Consultants, including independent loan review
    182       88       107       69       28  
Legal, including borrower related charges
    280       190       47       81       135  
OCC exam fees
    131       94       39       65       45  
Directors’ fees
    138       102       35       64       59  
Insurance, including FDIC
    256       119       115       70       70  
Other
    725       460       58       381       21  
 
                             
Total other noninterest expense
    2,252       1,226       84       810       51  
 
                             
Total noninterest expense
  $ 15,298     $ 11,049       38 %   $ 7,989       38 %
 
                             

Expenses have increased during the above periods due to personnel additions occurring throughout the periods, incentive compensation, the continued development of our branch network and other expenses which increase in relation to our growth rate. We anticipate increases in our expenses during 2005 for such items as additional personnel, the opening of additional branches, and other expenses which tend to increase in relation to our growth.

At the end of 2004, we employed 122.0 full time equivalent employees compared to 89.5 at the end of 2003 and 55.5 at the end of 2002. We intend to continue to add employees to our work force during 2005, which will cause our salary costs to increase in future periods.

We believe that variable pay incentives are a valuable tool in motivating an employee base that is focused on providing our clients effective financial advice and increasing shareholder value. As a result, and unlike other financial institutions, substantially all of our employees are eligible to participate in an annual cash incentive plan. Included in the years ended December 31, 2004, 2003 and 2002 salary and employee benefits amounts above are $1,163,000, $1,167,000 and $720,000 in costs related to these variable pay awards. The awards will fluctuate from year to year based on the achievement of performance targets and the increase in the number of

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associates eligible to receive the award. For 2004, the award equaled approximately 80% of a targeted award compared to 2003 when the award exceeded the targeted award. The incentive plan for 2005 is structured similarly to that of the prior year plans. Because of the relative experience of our associates, our compensation costs are and will continue to be higher on a per associate basis than other financial institutions, however, we believe the experience of our associates also allows us to employ fewer people than most financial institutions our size.

During 2003, we opened two new branch offices in the Rivergate area of Nashville and in the Cool Springs area of Williamson County. The additional costs to operate these branches served to increase our occupancy and equipment expenses in 2004 over that of 2003 due to the branches only being open for partial years in 2003. Additionally, we opened a new branch office in the West End area of Nashville during the third quarter of 2004, which also contributed to the increase in our equipment and occupancy expenses in 2004 over 2003 and will also cause these expenses to increase in 2005 over those of 2004 due to this branch only being open for a partial year in 2004. Our intent is to open two additional branch offices in 2005 which will also cause equipment and occupancy expenses to increase in future periods.

Marketing and other business development expenses are higher in 2004 compared to 2003 and 2002 due to an increase in the number of customer contact personnel and increased customer entertainment and community relations expenses. Other noninterest expenses are significantly higher in 2004 over 2003 and 2002. Most of these increases are attributable to increased audit and accounting fees, legal fees and insurance expenses. The increase in audit and accounting fees in 2004 was primarily due to costs associated with Sarbanes Oxley internal control assessment and other related matters.

Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and noninterest income) was 59.4% in 2004 compared to 68.3% in 2003 and 80.4% in 2002. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue. Although our absolute expense level increased between the three periods, the efficiency ratio improved as a result of our revenues growing at a faster rate than our expenses.

Income Taxes. The effective income tax expense rate for 2004 was approximately 29.0% compared to an effective income tax expense rate for 2003 of approximately 35.8% and 35.5% in 2002. The reduction in the effective tax rate between 2004 and 2003 was 6.8% and was primarily due to Federal tax credits related to the New Markets Tax Credit program whereby a subsidiary of Pinnacle National has been awarded approximately $2.3 million in future Federal tax credits to be realized over the next seven years. The credit that is available for the year ended December 31, 2004 is $300,000 and accounted for 60% of the reduction in the effective tax rate for 2004 when compared to 2003. Pinnacle Financial believes that it and its subsidiary will be able to comply with the various regulatory provisions of the New Markets Tax Credit program during 2004 and future periods such that it will be able to claim the credit in its 2004 Federal income tax return. Also, during the fourth quarter of 2004, we formed a real estate investment trust which provides us with an alternative vehicle for raising capital should we so desire. Additionally, the ownership structure of this real estate investment trust provides certain income tax benefits to us. Also serving to reduce the effective tax rate for 2004 was the recording of additional benefits from our municipal securities portfolio. These benefits amounted to approximately $47,000 in reduced income tax expense in 2004.

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Quarterly Information. The following is a summary of quarterly balance sheet and results of operations information for the last six quarters (dollars in thousands, except per share data).

                                                 
    December     September     June     March     December     September  
    2004     2004     2004     2004     2003     2003  
Balance sheet data, at quarter end:
                                               
Total assets
  $ 727,139       685,408       586,313       541,052       498,421       440,693  
Total loans
    472,362       434,909       355,267       323,416       297,004       279,702  
Allowance for loan losses
    (5,650 )     (5,434 )     (4,466 )     (4,042 )     (3,719 )     (3,492 )
Total securities
    208,170       191,323       165,528       162,315       139,944       115,421  
Total deposits
    570,727       541,859       467,321       437,601       390,569       347,191  
Securities sold under agreements to repurchase
    31,928       22,958       23,772       14,699       15,050       19,291  
Advances from FHLB
    53,500       51,500       47,500       40,500       44,500       39,500  
Subordinated debt
    10,310       10,310       10,310       10,310       10,310        
Total stockholders’ equity
    57,880       56,668       35,125       36,266       34,336       33,245  
 
                                               
Balance sheet data, quarterly averages:
                                               
Total assets
  $ 707,131       618,694       555,437       508,260       454,700       406,142  
Total loans
    448,611       392,220       343,974       306,549       283,387       269,703  
Total securities
    203,728       183,721       169,192       149,802       137,243       107,162  
Total earning assets
    670,839       589,554       527,070       482,572       432,691       386,823  
Total deposits
    562,936       485,300       439,964       402,603       356,030       314,302  
Securities sold under agreements to repurchase
    23,520       25,953       17,523       14,868       16,013       16,136  
Advances from FHLB
    48,022       49,000       45,736       42,379       43,630       40,239  
Subordinated debt
    10,310       10,310       10,310       10,310       655        
Total stockholders’ equity
    57,721       43,868       35,542       35,705       33,935       32,542  
 
                                               
Statement of operations data, for the three months ended:
                                               
Interest income
  $ 8,574       7,214       6,225       5,666       5,244       4,702  
Interest expense
    2,296       1,915       1,689       1,514       1,351       1,317  
 
                                   
Net interest income
    6,278       5,299       4,536       4,152       3,893       3,385  
Provision for loan losses
    1,134       1,012       449       354       204       318  
 
                                   
Net interest income after provision for loan losses
    5,144       4,287       4,087       3,798       3,689       3,067  
Noninterest income
    1,386       1,678       1,183       1,225       924       1,024  
Noninterest expense
    4,267       4,004       3,615       3,412       3,268       2,863  
 
                                   
Income before taxes
    2,263       1,961       1,655       1,611       1,345       1,228  
Income tax expense
    574       570       487       540       487       441  
 
                                   
Net income
  $ 1,689       1,391       1,168       1,071       858       787  
 
                                   
 
                                               
Per share data (1):
                                               
Earnings – basic
  $ 0.20       0.18       0.16       0.15       0.12       0.11  
Earnings – diluted
  $ 0.18       0.16       0.14       0.13       0.11       0.10  
Book value at quarter end
  $ 6.90       6.75       4.74       4.91       4.65       4.50  
 
                                               
Weighted avg. shares – basic
    8,389,232       7,832,512       7,397,920       7,384,106       7,384,106       7,384,106  
Weighted avg. shares – diluted
    9,448,696       8,857,015       8,279,114       8,213,730       8,114,888       7,944,654  
Common shares outstanding
    8,389,232       8,389,232       7,404,586       7,384,106       7,384,106       7,384,106  


(1)   Per share information reflects the impact of a two for one stock split which was effective on May 10, 2004.

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Financial Condition

Our consolidated balance sheet at December 31, 2004 reflects significant growth since December 31, 2003. Total assets grew from $498 million at December 31, 2003 to $727 million at December 31, 2004, a 46% increase. Total deposits grew $180 million during 2004, an increase of 46%. We invested substantially all of the additional deposits and other fundings in loans, which grew by $175 million during 2004, and securities, which increased by $68 million in the same period.

Loans. The composition of loans at December 31 for each of the past five years and the percentage (%) of each classification to total loans are summarized as follows (dollars in thousands):

                                                                                 
    2004     2003     2002     2001     2000  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  
Commercial real estate – Mortgage
  $ 117,123       24.8 %   $ 68,507       23.1 %   $ 58,965       28.1 %   $ 36,179       26.9 %   $ 32       0.3 %
Commercial real estate – Construction
    8,428       1.8       8,211       2.8       5,397       2.6       5,977       4.4              
Commercial – Other
    189,456       40.1       129,882       43.7       98,722       47.1       59,839       44.5       11,618       93.6  
 
                                                           
Total commercial
    315,007       66.7       206,600       69.6       163,084       77.8       101,995       75.8       11,650       93.9  
 
                                                           
Consumer real estate – Mortgage
    126,907       26.9       76,042       25.6       37,533       17.9       26,535       19.7       92       0.7  
Consumer real estate – Construction
    14,991       3.2       3,077       1.0       1,971       0.9       381       0.3              
Consumer – Other
    15,457       3.3       11,285       3.8       7,155       3.4       5,529       4.2       665       5.4  
 
                                                           
Total consumer
    157,355       33.3       90,404       30.4       46,659       22.2       32,445       24.2       757       6.1  
 
                                                           
Total loans
  $ 472,362       100.0 %   $ 297,004       100.0 %   $ 209,743       100.0 %   $ 134,440       100.0 %   $ 12,407       100.0 %
 
                                                           

The following table classifies our fixed and variable rate loans at December 31, 2004 according to contractual maturities of (1) one year or less, (2) after one year through five years, and (3) after five years. The table also classifies our variable rate loans pursuant to the contractual repricing dates of the underlying loans (dollars in thousands):

                                         
    Amounts at December 31, 2004     Percentages to total loans  
    Fixed     Variable             at Dec. 31,     at Dec. 31,  
    Rates     Rates     Total     2004     2003  
Based on contractual maturities:
                                       
Due within one year
  $ 7,533     $ 140,776     $ 148,309       31.4 %     31.7 %
Due in one year through five years
    100,815       91,788       192,603       40.8       44.0  
Due after five years
    24,514       106,936       131,450       27.8       24.3  
 
                             
 
  $ 132,862     $ 339,500     $ 472,362       100.0 %     100.0 %
 
                             
 
                                       
Based on contractual repricing dates:
                                       
Daily floating rate
  $     $ 264,586     $ 264,586       56.0 %     52.7 %
Reprice within one year
    7,533       35,612       43,145       9.1       8.6  
Reprice in one year through five years
    100,815       35,120       135,935       28.8       35.2  
Reprice after five years
    24,514       4,182       28,696       6.1       3.5  
 
                             
 
  $ 132,862     $ 339,500     $ 472,362       100.0 %     100.0 %
 
                             


The above information does not consider the impact of scheduled principal payments. Daily floating rate loans are tied to Pinnacle National’s prime lending rate or a national interest rate index with the underlying loan rates changing in relation to changes in these indexes.

Non-Performing Assets. The specific economic and credit risks associated with our loan portfolio include, but are not limited to, a general downturn in the economy which could affect employment rates in our market area, general real estate market deterioration, interest rate fluctuations, deteriorated or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of banking laws and regulations.

We attempt to reduce these economic and credit risks by adherence to loan to value guidelines for collateralized loans, by investigating the creditworthiness of the borrower and by monitoring the borrower’s financial position. Also, we establish and periodically review our lending policies and procedures. Banking regulations limit our exposure by prohibiting loan relationships that exceed 15% of Pinnacle National’s statutory capital in the case of loans that are not fully secured by readily marketable or other permissible types of collateral.

Pinnacle National discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or

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interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. At December 31, 2004, we had $561,000 in loans on nonaccrual compared to $379,000 at December 31, 2003.

There were approximately $146,000 in other loans at December 31, 2004 which were 90 days past due and still accruing interest. At December 31, 2004, no loans were deemed to be restructured loans. Additionally, we have not had any repossessed real estate properties classified as Other Real Estate Owned at any year-end since inception. The following table is a summary of our nonperforming assets at December 31 for each of the five years we have been in existence (dollars in thousands):

                                         
    2004     2003     2002     2001     2000  
Nonaccrual loans (1)
  $ 561     $ 379     $ 1,845     $ 250     $  
Restructured loans
                             
Other real estate owned
                             
 
                             
Total nonperforming assets
    561       379       1,845       250        
Accruing loans past due 90 days or more
    146       182       22              
 
                             
Total nonperforming assets and accruing loans past due 90 days or more
  $ 707     $ 561     $ 1,867     $ 250     $  
 
                             
Total loans outstanding
  $ 472,362     $ 297,004     $ 209,743     $ 134,440     $ 12,407  
 
                             
 
                                       
Ratio of total nonperforming assets and accruing loans past due 90 days or more to total loans outstanding at end of period
    0.15 %     0.19 %     0.89 %     0.19 %      
 
                             
Ratio of total nonperforming assets and accruing loans past due 90 days or more to total allowance for loan losses at end of period
    12.5 %     15.08 %     69.74 %     13.65 %      
 
                             


(1)   Interest income that would have been recorded in 2004 related to nonaccrual loans was $41,000 compared to $75,000 for the year ended December 31, 2003 and $43,000 for the year ended December 31, 2002, none of which is included in interest income or net income for the applicable periods.

Potential problem assets, which are not included in nonperforming assets, amounted to $24,000, or less than one tenth of one percent of total loans at December 31, 2004, compared to $1,687,000 or 0.57% at December 31, 2003. Potential problem assets represent those assets with a potential weakness or a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle National’s primary regulator for loans classified as substandard.

Allowance for Loan Losses (ALL). We maintain the ALL at a level that our management deems appropriate to adequately cover the inherent risks in the loan portfolio. As of December 31, 2004 and 2003, our allowance for loan losses was $5,650,000 and $3,719,000, respectively. Our management deemed these amounts to be adequate. The judgments and estimates associated with our ALL determination are described under “Critical Accounting Estimates” above.

Approximately 67% of our loan portfolio at December 31, 2004 consisted of commercial loans compared to 70% at December 31, 2003. Using standard industry codes, we periodically analyze our loan position with respect to our borrowers’ industries to determine if a concentration of credit risk exists to any one or more industries. We have a significant credit exposure of loans outstanding plus unfunded lines of credit to borrowers in the trucking industry and to operators of nonresidential buildings at December 31, 2004 and 2003. Credit exposure to the trucking industry approximated $43.1 million at December 31, 2004 and $35.0 million at December 31, 2003. Credit exposure to operators of nonresidential buildings approximated $27.5 million at December 31, 2004 and $16.6 million at December 31, 2003. We evaluate our exposure level to these industry groups periodically in order to determine if additional allowance allocations are warranted. At December 31, 2004 and 2003, we determined that we did not have any excessive exposure to any single industry which would warrant additional allowance allocations.

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The following table sets forth, based on management’s best estimate, the allocation of the ALL to types of loans as well as the unallocated portion as of December 31 for each of the past five years and the percentage (%) of loans in each category to the total loans (dollars in thousands):

                                                                                 
    2004     2003     2002     2001     2000  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  
Commercial real estate – Mortgage
  $ 1,205       24.8 %   $ 723       23.1 %   $ 508       28.1 %   $ 354       26.9 %   $ 2       0.3 %
Commercial real estate – Construction
    188       1.8       103       2.8       59       2.6       191       4.4              
Commercial – Other
    1,711       40.1       1,236       43.7       977       47.1       509       44.5       89       93.6  
 
                                                           
Total commercial
    3,104       66.7       2,062       69.6       1,544       77.8       1,054       75.8       91       93.9  
 
                                                           
Consumer real estate – Mortgage
    869       26.9       607       25.6       392       17.9       109       19.7       1       0.7  
Consumer real estate – Construction
    39       3.2       10       1.0       13       0.9       11       0.3              
Consumer – Other
    396       3.3       320       3.8       193       3.4       201       4.2       11       5.4  
 
                                                           
Total consumer
    1,304       33.3       937       30.4       598       22.2       321       24.2       12       6.1  
 
                                                           
Unallocated
    1,242     NA     720     NA     535     NA     457     NA     59     NA
 
                                                           
Total loans
  $ 5,650       100.0 %   $ 3,719       100.0 %   $ 2,677       100.0 %   $ 1,832       100.0 %   $ 162       100.0 %
 
                                                           

The following is a summary of changes in the allowance for loan losses for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 and the ratio of the allowance for loan losses to total loans as of the end of each period (dollars in thousands):

                                         
    2004     2003     2002     2001     2000  
Balance at beginning of period
  $ 3,719     $ 2,677     $ 1,832     $ 162     $  
Provision for loan losses
    2,948       1,157       938       1,670       162  
Charged-off loans:
                                       
Commercial real estate – Mortgage
                             
Commercial real estate – Construction
                (91 )            
Commercial – Other
                             
Consumer real estate – Mortgage
    (884 )     (123 )                  
Consumer real estate – Construction
                             
Consumer – Other
    (148 )     (44 )     (2 )            
 
                             
Total charged-off loans
    (1,032 )     (167 )     (93 )            
 
                             
Recoveries of previously charged-off loans:
                                       
Commercial real estate – Mortgage
                             
Commercial real estate – Construction
    2       49                    
Commercial – Other
                             
Consumer real estate – Mortgage
                             
Consumer real estate – Construction
                             
Consumer – Other
    13       3                    
 
                             
Total recoveries of previously charged-off loans
    15       52                    
 
                             
Balance at end of period
  $ 5,650     $ 3,719     $ 2,677     $ 1,832     $ 162  
 
                             
Ratio of the allowance for loan losses to total loans outstanding at end of period
    1.20 %     1.25 %     1.28 %     1.36 %     1.31 %
 
                             
Ratio of net charge-offs to average loans outstanding for the period
    0.27 %     0.05 %     0.05 %            
 
                             

Included in the charged-off loans during 2004, were two commercial loans for approximately $884,000; $834,000 of which had been on nonaccrual status since June of 2004. The remaining charge-off’s during 2004 related to several consumer loans. During 2003, we charged-off $88,000 related to a particular commercial loan. Additionally, we charged-off $79,000 related to several other consumer loans. As a relatively new institution, we do not have loss experience comparable to more mature financial institutions; however, as our loan portfolio matures, we will have additional charge-offs, and we will consider the amount and nature of our charge-offs in determining the adequacy of our allowance for loan losses.

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Investments. Our investment portfolio, consisting primarily of Federal agency bonds and mortgage-backed securities, amounted to $208.2 million, $139.9 million and $74.0 million at December 31, 2004, 2003 and 2002, respectively. The following table summarizes the amortized cost and fair value of our securities at those dates, all of which we classify as available-for-sale (dollars in thousands):

                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
     
December 31, 2004:
                               
Securities available-for-sale:
                               
U.S. Treasury securities
  $     $     $     $  
U.S. government agency securities
    27,165       129       (20 )     27,274  
Mortgage-backed securities
    138,851       348       (672 )     138,527  
State and municipal securities
    12,486       72       (55 )     12,503  
Corporate notes
    2,315             (45 )     2,270  
 
                       
 
  $ 180,817     $ 549     $ (792 )   $ 180,574  
 
                       
 
                               
Securities held-to-maturity:
                               
U.S. government agency securities
  $ 17,746     $ 1     $ (299 )   $ 17,448  
State and municipal securities
    9,850             (163 )     9,687  
 
                       
 
  $ 27,596     $ 1     $ (462 )   $ 27,135  
 
                       
 
                               
December 31, 2003 (1):
                               
Securities available-for-sale:
                               
U.S. Treasury securities
  $ 6,126     $ 266     $ (40 )   $ 6,352  
U.S. government agency securities
    20,897       87       (64 )     20,920  
Mortgage-backed securities
    103,088       507       (617 )     102,978  
State and municipal securities
    9,590       143       (39 )     9,694  
 
                       
 
  $ 139,701     $ 1,003     $ (760 )   $ 139,944  
 
                       
 
                               
December 31, 2002 (1):
                               
Securities available-for-sale:
                               
U.S. Treasury securities
  $ 6,089     $ 415     $ (18 )   $ 6,486  
U.S. government agency securities
    8,499       40             8,539  
Mortgage-backed securities
    54,566       816       (8 )     55,374  
State and municipal securities
    3,580       13       (12 )     3,581  
 
                       
 
  $ 72,734     $ 1,284     $ (38 )   $ 73,980  
 
                       


(1)   At December 31, 2003 and 2002, Pinnacle National had no securities classified as “held-to-maturity”.

On March 31, 2004, we transferred approximately $27.7 million of available-for-sale securities to held-to-maturity at fair value. The transfer consisted of substantially all of our holdings of Tennessee municipal securities and several of our longer-term agency securities. The net unrealized gain on such securities as of the date of transfer was approximately $325,000. At December 31, 2004, the net unrealized gain amounted to approximately $283,000. 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.

We realized approximately $357,000 in net gains from the sale of $28.5 million of available-for-sale securities during the year ended December 31, 2004. Gross realized gains amounted to $421,000 on the sale of $14.5 million of available-for-sale securities while gross realized losses amounted to $64,000 on the sale of $13.9 million of available-for-sale securities during the year ended December 31, 2004. We realized $248,000 in net gains on the sale of $23.1 million of available-for-sale securities during the year ended December 31, 2003. During the year ended December 31, 2003, gross realized gains amounted to $263,000 on the sale of $20.5 million of available-for-sale securities while gross realized losses amounted to $15,000 on the sale of $2.6 million of available-for-sale securities. We did not sell any securities during the year ended December 31, 2002.

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The following table shows the carrying value of investment securities according to contractual maturity classifications of (1) one year or less, (2) after one year through five years, (3) after five years through ten years, and (4) after ten years. Actual maturities may differ from contractual maturities of mortgage-backed securities because the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories noted below as of December 31, 2004, 2003 and 2002 (dollars in thousands):

                                                                                 
                    U.S. government     State and              
    U.S. Treasury     agency     municipal     Corporate        
    securities     securities     securities     securities     Totals  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
     
December 31, 2004:
                                                                               
Securities available-for-sale:
                                                                               
Due in one year or less
  $       %   $       %   $       %   $       %   $       %
Due in one year to five years
                2,982       3.5 %                 2,270       3.4 %     5,252       3.5 %
Due in five years to ten years
                23,001       4.7 %     7,408       5.0 %                 30,410       4.7 %
Due after ten years
                1,291       5.5 %     5,094       5.4 %                 6,385       5.4 %
 
                                                           
 
  $       %   $ 27,274       4.6 %   $ 12,503       5.2 %   $ 2,270       3.4 %   $ 42,047       4.5 %
 
                                                           
 
                                                                               
Securities held-to-maturity:
                                                                               
Due in one year or less
  $       %   $       %   $       %   $       %   $       %
Due in one year to five years
                3,250       4.1 %     844       4.3 %                 4,094       4.2 %
Due in five years to ten years
                14,546       4.3 %     7,953       5.0 %                 22,450       4.6 %
Due after ten years
                      %     1,053       5.3 %                 1,052       5.3 %
 
                                                           
 
  $       %   $ 17,746       4.3 %   $ 9,850       5.0 %   $       %   $ 27,596       4.5 %
 
                                                           
 
                                                                               
December 31, 2003:
                                                                               
Securities available-for-sale:
                                                                               
Due in one year or less
  $       %   $       %   $       %   $       %   $       %
Due in one year to five years
    4,036       4.0 %                 2,005       4.8 %                 6,041       4.3 %
Due in five years to ten years
    2,316       4.3 %     20,920       4.4 %     7,221       5.0 %                 30,457       4.6 %
Due after ten years
                      %     468       5.2 %                 468       5.2 %
 
                                                           
 
  $ 6,352       4.1 %   $ 20,920       4.4 %   $ 9,694       4.9 %   $       %   $ 36,966       4.5 %
 
                                                           
 
                                                                               
December 31, 2002:
                                                                               
Securities available-for-sale –
                                                                               
Due in one year or less
  $       %   $       %   $       %   $       %   $       %
Due in one year to five years
    2,212       4.5 %     1,005       4.5 %     165       4.3 %                 3,382       4.4 %
Due in five years to ten years
    4,274       4.7 %     7,534       4.5 %     2,923       5.4 %                 14,731       4.9 %
Due after ten years
                      %     493       5.8 %                 493       5.8 %
 
                                                           
 
  $ 6,486       4.6 %   $ 8,539       4.5 %   $ 3,581       5.4 %   $       %   $ 18,606       4.8 %
 
                                                           


We computed yields using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. We computed the weighted average yield for each maturity range using the acquisition price of each security in that range. We had no securities classified as held-to-maturity at December 31, 2003 or 2002.

At December 31, 2004, the fair value of our mortgage-backed securities portfolio approximated $138.5 million compared to $103.0 million at December 31, 2003. All of these securities were included in our securities available-for-sale portfolio. A statistical comparison of our mortgage-backed portfolio at December 31, 2004 and December 31, 2003 follows:

         
    December 31, 2004   December 31, 2003
Weighted average life
  5.01 years   4.75 years
Weighted average coupon
  5.18 %   5.24 %
Tax equivalent yield
  4.46 %   4.44 %
Modified duration (*)
  3.63 %   3.95 %


(*) Modified duration represents an approximation of the change in value of a security for every 100 basis point increase or decrease in market interest rates.

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At December 31, 2004, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized loss of less than twelve months or twelve months or longer:

                                                 
    Investments With an     Investments With an     Total Investments at  
    Unrealized Loss of     Unrealized Loss of     December 31, 2004 With  
    Less than 12 months     12 months or longer     an Unrealized Loss  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
U.S. government agency securities
  $ 21,426,876     $ 318,332     $     $     $ 21,426,876     $ 318,332  
Mortgage-backed securities
    78,476,825       450,064       9,852,117       222,125       88,328,942       672,189  
State and municipal securities
    14,856,388       208,074       691,803       10,648       15,548,191       218,722  
Corporate notes
    2,314,831       45,105                   2,314,831       45,105  
 
                                   
Total temporarily-impaired securities
  $ 117,074,920     $ 1,021,575     $ 10,543,920     $ 232,773     $ 127,618,840     $ 1,254,348  
 
                                   

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At December 31, 2004, we had six issuances (three mortgage backed-securities in the available-for-sale portfolio and three municipal securities in the held-to-maturity portfolio) that had been in an unrealized loss position for more than twelve months. At December 31, 2004, the amortized cost of these securities was approximately $10.8 million compared to a fair value of $10.5 million. Because the declines in fair value noted above were attributable to increases in interest rates and not attributable to credit quality and because we have the ability and intent to hold all of these investments until a market price recovery or maturity, these investments were not considered other-than-temporarily impaired.

Deposits and Other Borrowings. We had approximately $570.7 million of deposits at December 31, 2004 compared to $390.6 million at December 31, 2003. Our deposits consist of noninterest and interest-bearing demand accounts, savings, money market and time deposits. Additionally, we entered into agreements with certain customers to sell certain of our securities under agreements to repurchase the security the following day. These agreements (which provide customers with short-term returns for their excess funds) amounted to $31.9 million and $15.1 million at both December 31, 2004 and 2003. Additionally, at December 31, 2004, we had borrowed $53.5 million in advances from the Federal Home Loan Bank of Cincinnati compared to $44.5 million at December 31, 2003.

Generally, banks classify their funding base as either core funding or non-core funding. Core funding consists of all deposits other than time deposits issued in denominations of $100,000 or greater while all other funding is deemed to be non-core. The following table represents the balances of our deposits and other fundings and the percentage of each type to the total at December 31, 2004, 2003 and 2002 (dollars in thousands):

                                                 
    2004     2003     2002  
    Amount     Percentage     Amount     Percentage     Amount     Percentage  
Core funding:
                                               
Noninterest-bearing demand deposits
  $ 114,318       17.2 %   $ 60,796       13.2 %   $ 31,600       11.7 %
Interest-bearing demand deposits
    51,752       7.8       31,407       6.8       13,235       4.9  
Savings and money market deposits
    199,058       29.9       140,384       30.5       75,996       28.1  
Time deposits less than $100,000
    39,805       5.9       43,996       9.6       25,746       9.5  
 
                                   
Total core funding
    404,933       60.8       276,583       60.1       146,577       54.2  
 
                                   
Non-core funding:
                                               
Time deposits greater than $100,000
                                               
Public funds
    61,377       9.2       26,812       5.8       14,423       5.3  
Brokered deposits
    43,431       6.5       39,364       8.5       42,700       15.8  
Other time deposits
    60,986       9.2       47,810       10.4       30,316       11.2  
Securities sold under agreements to repurchase
    31,928       4.8       15,050       3.3       15,050       5.6  
Federal Home Loan Bank advances
    53,500       8.0       44,500       9.7       21,500       7.9  
Subordinated debt
    10,310       1.5       10,310       2.2              
 
                                   
Total non-core funding
    261,532       39.2       183,846       39.9       123,989       45.8  
 
                                   
 
  $ 666,465       100.0 %   $ 460,429       100.0 %   $ 270,566       100.0 %
 
                                   

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The amount of time deposits issued in amounts of $100,000 or more as of December 31, 2004, 2003 and 2002 amounted to $165.8 million, $114.0 million and $87.4 million, respectively. The following table shows our time deposits over $100,000 by category at December 31, 2004, 2003 and 2002, based on time remaining until maturity of (1) three months or less, (2) over three but less than six months, (3) over six but less than twelve months and (4) over twelve months (dollars in thousands):

                         
    2004     2003     2002  
Three months or less
  $ 54,274     $ 32,054     $ 20,470  
Over three but less than six months
    35,824       28,109       22,288  
Over six but less than twelve months
    27,627       28,502       25,386  
Over twelve months
    48,069       25,321       19,295  
 
                 
 
  $ 165,794     $ 113,986     $ 87,439  
 
                 

Subordinated debt. On December 29, 2003, we established PNFP Statutory Trust I (“Trust”), a wholly-owned statutory business trust. We are the sole sponsor of the trust and own $310,000 of the Trust’s common securities. The Trust was created for the exclusive purpose of issuing 30-year capital trust preferred securities (“Trust Preferred Securities”) in the aggregate amount of $10,000,000 and using the proceeds from the issuance of the common and preferred securities to purchase $10,310,000 of junior subordinated debentures (“Subordinated Debentures”) issued by Pinnacle Financial. The sole assets of the Trust are the Subordinated Debentures. Pinnacle Financial’s $310,000 investment in the Trust is included in investments in unconsolidated subsidiary and other entities and the $10,310,000 obligation of Pinnacle Financial is included in subordinated debt.

The Trust Preferred Securities bear a floating interest rate based on a spread over 3-month LIBOR which is set each quarter and matures on December 30, 2033. Distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. Pinnacle Financial guarantees the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trust. Pinnacle Financial’s obligations under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by Pinnacle Financial of the obligations of the Trust under the Trust Preferred Securities.

The Subordinated Debentures are unsecured, bear an interest rate based on a spread over 3-month LIBOR (equal to the spread paid by the Trust on the Trust Preferred Securities) which is set each quarter and matures on December 30, 2033. Interest is payable quarterly. We may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and Pinnacle Financial’s ability to pay dividends on our common shares will be restricted.

Subject to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred Securities may be redeemed prior to maturity at our option on or after September 17, 2008. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) the Trust becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by the parent company on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for the Trust to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as “Tier I capital” under the Federal Reserve capital adequacy guidelines.

The Trust Preferred Securities qualify as Tier I capital under current regulatory interpretations. The Federal Reserve has proposed regulations which will allow continued inclusion of outstanding and prospective issuances of trust preferred securities as Tier 1 capital subject to stricter quantitative and qualitative limits than present regulations. The new limits will phase in over a proposed three-year transition period. The proposal would permit our Trust Preferred Securities to be treated as Tier 1 capital. Should the banking regulators ultimately determine that treatment of trust preferred securities shall not be treated as Tier 1 capital, such determination would have an impact on Pinnacle Financial; however Pinnacle Financial’s capital structure, at the present time and based on our current growth projections, is such that utilization of the Trust Preferred Securities as Tier II capital is more critical to Pinnacle Financial than the Trust Preferred Securities maintaining their present Tier I capital treatment. To our

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knowledge, there has been no serious consideration given by banking regulators to disqualify trust preferred securities as Tier II capital.

Capital Resources. At December 31, 2004 and 2003, our stockholders’ equity amounted to $57.9 million and $34.3 million, respectively. The change in stockholders’ equity was primarily attributable to a follow-on stock offering completed during the third quarter of 2004 which realized approximately $18.2 million in additional capital; our net income for the year ended December 31, 2004 of $5.3 million; and the net decrease in comprehensive income of $125,673 attributable to the decrease in fair value of our available-for-sale securities portfolio.

Generally, banking laws and regulations require banks and bank holding companies to maintain certain minimum capital ratios in order to engage in certain activities or be eligible for certain types of regulatory relief. At December 31, 2004 and 2003, our capital ratios, including Pinnacle National’s capital ratios, met regulatory minimum capital requirements. At December 31, 2004 and 2003, Pinnacle National was categorized as “well-capitalized”. 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. Additionally, Pinnacle Financial and Pinnacle National must maintain certain minimum capital ratios for regulatory purposes. The following table presents actual, minimum and “well-capitalized” capital amounts and ratios at December 31, 2004 and 2003:

                                                 
                                    Minimum  
                                    To Be “Well-Capitalized”  
                    Minimum     Under Prompt  
                    Capital     Corrective  
    Actual     Requirement     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
At December 31, 2004
                                               
                                                 
Total capital to risk weighted assets:
                                               
Pinnacle Financial
  $ 73,540       12.7 %   $ 46,410       8.0 %   not applicable        
Pinnacle National
  $ 63,775       11.0 %   $ 46,373       8.0 %   $ 57,967       10.0 %
Tier I capital to risk weighted assets:
                                               
Pinnacle Financial
  $ 67,880       11.7 %   $ 23,205       4.0 %   not applicable        
Pinnacle National
  $ 58,115       10.0 %   $ 23,187       4.0 %   $ 34,780       6.0 %
Tier I capital to average assets (*):
                                               
Pinnacle Financial
  $ 67,880       9.7 %   $ 28,134       4.0 %   not applicable        
Pinnacle National
  $ 58,115       8.3 %   $ 28,116       4.0 %   $ 35,145       5.0 %
                                                 
At December 31, 2003
                                               
                                                 
Total capital to risk weighted assets:
                                               
Pinnacle Financial
  $ 47,914       12.8 %   $ 29,981       8.0 %   not applicable        
Pinnacle National
  $ 38,617       10.3 %   $ 29,944       8.0 %   $ 37,430       10.0 %
Tier I capital to risk weighted assets:
                                               
Pinnacle Financial
  $ 44,185       11.8 %   $ 14,990       4.0 %   not applicable        
Pinnacle National
  $ 34,888       9.3 %   $ 14,972       4.0 %   $ 22,458       6.0 %
Tier I capital to average assets (*):
                                               
Pinnacle Financial
  $ 44,185       9.7 %   $ 18,188       4.0 %   not applicable        
Pinnacle National
  $ 34,888       7.7 %   $ 18,188       4.0 %   $ 22,735       5.0 %


(*)   Average assets for the above calculations were fourth quarter amounts.

In connection with approving our issuance of Trust Preferred Securities, the Federal Reserve Bank of Atlanta (“FRB-Atlanta”) required us to maintain a Total capital to risk-weighted assets ratio of 10%, a Tier 1 capital to risk-weighted assets ratio of 6% and a Tier 1 capital to average-assets ratio of 5% during the year ended December 31, 2004. Furthermore, and in order to provide additional assurance to the FRB-Atlanta as to the maintenance of these ratios, our President and Chief Executive Officer, Chairman and Chief Administrative Officer agreed to exercise their common stock warrant agreements should it become apparent that maintenance of the ratios at the required levels would not occur otherwise during the year ended December 31, 2004. During the year ended December 31, 2004, no such exercise of common stock warrants was required and this additional commitment of these executive officers expired at December 31, 2004. Thus, we believe that we have met the Federal Reserve Bank of Atlanta’s requirements as of December 31, 2004 in connection with this matter.

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\

Dividends. Pinnacle National is subject to restrictions on the payment of dividends to Pinnacle Financial under federal banking laws and the regulations of the Office of the Comptroller of the Currency, or the “OCC”. We, in turn, are also subject to limits on payment of dividends to our shareholders by the rules, regulations and policies of federal banking authorities and the laws of the State of Tennessee. We have not paid any dividends to date, nor do we anticipate paying dividends to our shareholders for the foreseeable future. Future dividend policy will depend on Pinnacle National’s earnings, capital position, financial condition and other factors.

Return on Assets and Stockholders’ Equity. The following table shows return on average assets (net income divided by average total assets), return on average equity (net income divided by average stockholders’ equity), dividend payout ratio (dividends declared per share divided by net income per share) and stockholders’ equity to asset ratio (average stockholders’ equity divided by average total assets) for each year in the three-year period ended December 31, 2004.

                         
    2004     2003     2002  
Return on average assets
    0.89 %     0.66 %     0.29 %
Return on average equity
    12.31 %     7.70 %     2.47 %
Dividend payout ratio
    %     %     %
Average equity to average assets ratio
    7.23 %     8.54 %     11.58 %

Market and Liquidity Risk Management

Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. Our Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.

Interest Rate Sensitivity. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. Measurements which we use to help us manage interest rate sensitivity include an earnings simulation model, an economic value of equity model, and gap analysis computations. These measurements are used in conjunction with competitive pricing analysis.

Earnings simulation model. We believe that interest rate risk is best measured by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of interest rates for the next 12 months and with other factors in order to produce various earnings simulations. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net income to less than 10 percent for a 200 basis point change up or down in rates from management’s most likely interest rate forecast over the next twelve months. The results of our current simulation model would indicate that our net interest income should increase with a gradual rise in interest rates over the next twelve months and decrease should interest rates fall over the same period.

Economic value of equity. Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity. To help limit interest rate risk, we have a guideline stating that for an instantaneous 200 basis point change in interest rates up or down, the economic value of equity will not change by more than 20 percent from the base case.

Gap analysis. An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed; for example, within three months or one year. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the

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amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal. To assist us in managing our interest rate sensitivity, we have established a cumulative twelve-month interest rate-sensitivity gap ratio of earning assets to interest bearing liabilities of 75% to 125% in this time horizon.

Each of the above analyses may not, on their own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.

We may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities and as one tool to manage our interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. At December 31, 2004 and December 31, 2003, we had not entered into any derivative contracts to assist managing our interest rate sensitivity.

Liquidity Risk Management. The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.

Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.

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In addition, Pinnacle National is a member of the Federal Home Loan Bank of Cincinnati. As a result, Pinnacle National receives advances from the Federal Home Loan Bank of Cincinnati, pursuant to the terms of various borrowing agreements, which assist it in the funding of its home mortgage and commercial real estate loan portfolios. Pinnacle National has pledged under the borrowing agreements with the Federal Home Loan Bank of Cincinnati certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral. At December 31, 2004, Pinnacle National had received advances from the Federal Home Loan Bank of Cincinnati totaling $53.5 million at the following rates and maturities (dollars in thousands):

                 
    Amount     Interest Rate  
January 3, 2005 (1)
  $ 12,000       2.42 %
January 28, 2005 (1)
    2,000       2.18  
September 15, 2005
    5,000       2.60  
October 14, 2005
    3,000       3.10  
December 30, 2005
    3,000       2.40  
January 27, 2006
    2,000       2.79  
March 12, 2006
    3,000       1.97  
March 31, 2006
    4,000       2.10  
April 17, 2006
    2,000       2.64  
April 28, 2006
    1,500       2.52  
May 19, 2006
    10,000       2.45  
September 30, 2006
    4,000       2.39  
January 26, 2007
    2,000       3.24  
 
             
 
  $ 53,500          
 
             
Weighted average interest rate
            2.47 %
 
             


(1)   Subsequent to December 31, 2004, the January 3, 2005 advance was refinanced and the January 28, 2005 advance was paid on their maturity dates.

At December 31, 2004, brokered certificates of deposit approximated $43.4 million which represented 6.5% of total fundings compared to $39.4 million and 8.5% at December 31, 2003. We issue these brokered certificates through several different brokerage houses based on competitive bids. Typically, these funds are for varying maturities from six months to two years and are issued at rates which are competitive to rates we would be required to pay to attract similar deposits from the local market as well as rates for Federal Home Loan Bank of Cincinnati advances of similar maturities. We consider these deposits to be a ready source of liquidity under current market conditions.

At December 31, 2004, we had no significant commitments for capital expenditures. However, we are in the process of developing our branch network in Davidson, Williamson and Sumner counties. As a result, we anticipate that we will enter into contracts to buy property or construct branch facilities and/or lease agreements to lease property and/or rent currently constructed facilities in Davidson, Williamson and Sumner counties.

The following table presents additional information about our contractual obligations as of December 31, 2004, which by their terms have contractual maturity and termination dates subsequent to December 31, 2004 (dollars in thousands):

                                         
    Next 12     13-36     37-60     More than        
    Months     Months     Months     60 Months     Totals  
Contractual obligations:
                                       
Certificates of deposit
  $ 146,349     $ 51,840     $ 7,410     $     $ 205,599  
Securities sold under agreements to repurchase
    31,928                         31,928  
Federal Home Loan Bank advances
    25,000       28,500                   53,500  
Subordinated debt
                      10,310       10,310  
Minimum operating lease commitments
    784       1,650       1,742       2,263       6,439  
 
                             
Totals
  $ 204,061     $ 81,990     $ 9,152     $ 12,573     $ 307,776  
 
                             

Our management believes that we have adequate liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.

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Off-Balance Sheet Arrangements. At December 31, 2004, we had outstanding standby letters of credit of $45.3 million and unfunded loan commitments outstanding of $160.8 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, Pinnacle National has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions. At December 31, 2004, Pinnacle National had accommodations with upstream correspondent banks for unsecured short-term advances. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month. The following table presents additional information about our unfunded commitments as of December 31, 2004, which by their terms have contractual maturity dates subsequent to December 31, 2004 (dollars in thousands):

                                         
    Next 12     13-36     37-60     More than        
    Months     Months     Months     60 Months     Totals  
Unfunded commitments:
                                       
Letters of credit
  $ 41,853     $ 885     $ 2,604     $     $ 45,342  
Lines of credit
    98,495       15,823       12,283       34,248       160,849  
 
                             
Totals
  $ 140,348     $ 16,708     $ 14,887     $ 34,248     $ 206,191  
 
                             

Impact of Inflation

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

Recent Accounting Pronouncements

In March 2004, the SEC issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. Current accounting guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. Its adoption did not have a material impact on the consolidated financial position or results of operations of Pinnacle Financial.

In March 2004, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and Pinnacle Financial began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance. Due to the recognition and measurement provisions being suspended and the final rule delayed, we are not able to determine whether the adoption of these new provisions will have a material impact on our consolidated financial position or results of income.

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Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-03) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. The SOP does not apply to loans originated by the entity. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged. Specific transition guidance applies to certain loans that currently are within the scope of Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans. Its adoption is not expect to have a material impact on the consolidated financial position or results of operations of Pinnacle Financial.

In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. The revised statement is effective as of the first interim period beginning after June 15, 2005. We are currently evaluating the provisions of SFAS No. 123R and will adopt it on July 1, 2005 as required.

ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The response to this Item is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 41 through 44 and is incorporated herein by reference.

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ITEM 8. FINANCIAL STATEMENTS

Pinnacle Financial Partners, Inc. and Subsidiary

Consolidated Financial Statements

Table of Contents

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MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Pinnacle Financial Partners, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Pinnacle Financial Partners, Inc.’s internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Pinnacle Financial Partners, Inc.’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment we believe that, as of December 31, 2004, the Company’s internal control over financial reporting is effective based on those criteria.

Pinnacle Financial Partners, Inc.’s independent registered public accounting firm has issued an audit report on Pinnacle Financial Partners Inc.’s management’s assessment of the company’s internal control over financial reporting. This report appears on page 49 of this Annual Report on Form 10-K.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Pinnacle Financial Partners, Inc.:

We have audited the accompanying consolidated balance sheets of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pinnacle Financial Partners, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Nashville, Tennessee
February 25, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Pinnacle Financial Partners, Inc.:

We have audited management’s assessment, included in the accompanying Report on Internal Control Over Financial Reporting, that Pinnacle Financial Partners, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pinnacle Financial Partners, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Pinnacle Financial Partners, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Pinnacle Financial Partners, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pinnacle Financial Partners, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 25, 2005 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Nashville, Tennessee
February 25, 2005

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
                 
    December 31,  
    2004     2003  
ASSETS
               
Cash and noninterest-bearing due from banks
  $ 15,243,796     $ 13,768,278  
Interest-bearing due from banks
    379,047       1,180,371  
Federal funds sold
    11,122,944       32,235,401  
 
           
Cash and cash equivalents
    26,745,787       47,184,050  
 
               
Securities available-for-sale, at fair value
    180,573,820       139,944,238  
Securities held-to-maturity (fair value of $27,134,913)
    27,596,159        
 
               
Mortgage loans held-for-sale
    1,634,900       1,582,600  
                 
Loans
    472,362,219       297,004,110  
Less allowance for loan losses
    (5,650,014 )     (3,718,598 )
 
           
Loans, net
    466,712,205       293,285,512  
 
               
Premises and equipment, net
    11,130,671       6,911,359  
Investments in unconsolidated subsidiary and other entities
    3,907,807       2,714,886  
Accrued interest receivable
    2,639,548       1,686,380  
Other assets
    6,198,553       5,111,633  
 
           
Total assets
  $ 727,139,450     $ 498,420,658  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Deposits:
               
Noninterest-bearing demand
  $ 114,318,024     $ 60,796,396  
Interest-bearing demand
    51,751,320       31,407,213  
Savings and money market accounts
    199,058,240       140,383,878  
Time
    205,599,425       157,981,525  
 
           
Total deposits
    570,727,009       390,569,012  
Securities sold under agreements to repurchase
    31,927,860       15,050,110  
Federal Home Loan Bank advances
    53,500,000       44,500,000  
Subordinated debt
    10,310,000       10,310,000  
Accrued interest payable
    769,300       607,242  
Other liabilities
    2,025,106       3,047,913  
 
           
Total liabilities
    669,259,275       464,084,277  
 
               
Stockholders’ equity:
               
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding
           
Common stock, par value $1.00; 20,000,000 shares authorized; 8,389,232 issued and outstanding at December 31, 2004 and 7,384,106 issued and outstanding at December 31, 2003
    8,389,232       7,384,106  
Additional paid-in capital
    44,376,307       26,990,894  
Unearned compensation
    (37,250 )      
Retained earnings (accumulated deficit)
    5,127,023       (189,155 )
Accumulated other comprehensive income, net
    24,863       150,536  
 
           
Total stockholders’ equity
    57,880,175       34,336,381  
 
           
Total liabilities and stockholders’ equity
  $ 727,139,450     $ 498,420,658  
 
           

See accompanying notes to consolidated financial statements.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
                         
    For the years ended December 31,  
    2004     2003     2002  
Interest income:
                       
Loans, including fees
  $ 19,909,900     $ 13,709,159     $ 10,509,655  
Securities:
                       
Taxable
    6,935,902       4,158,064       1,837,574  
Tax-exempt
    490,757       217,284       35,085  
Federal funds sold and other
    342,470       177,404       178,618  
 
                 
Total interest income
    27,679,029       18,261,911       12,560,932  
 
                 
 
                       
Interest expense:
                       
Deposits
    5,829,395       4,349,365       3,813,019  
Securities sold under agreements to repurchase
    104,085       65,716       91,034  
Federal funds purchased and other borrowings
    1,481,072       948,023       457,576  
 
                 
Total interest expense
    7,414,552       5,363,104       4,361,629  
 
                 
Net interest income
    20,264,477       12,898,807       8,199,303  
Provision for loan losses
    2,948,423       1,157,280       938,000  
 
                 
Net interest income after provision for loan losses
    17,316,054       11,741,527       7,261,303  
 
                       
Noninterest income:
                       
Service charges on deposit accounts
    955,851       513,074       281,009  
Investment sales commissions
    1,656,743       998,119       809,837  
Fees from origination of mortgage loans
    1,254,836       666,853        
Gains on loans and loan participations sold
    513,646       334,249       120,297  
Gains on sales of investment securities, net
    357,196       247,978        
Other noninterest income
    734,449       527,207       520,800  
 
                 
Total noninterest income
    5,472,721       3,287,480       1,731,943  
 
                 
 
                       
Noninterest expense:
                       
Salaries and employee benefits
    9,540,641       7,260,982       5,236,792  
Equipment and occupancy
    2,405,613       1,827,260       1,442,288  
Marketing and other business development
    606,841       386,905       244,500  
Postage and supplies
    492,254       347,684       255,624  
Other noninterest expense
    2,252,233       1,225,791       809,858  
 
                 
Total noninterest expense
    15,297,582       11,048,622       7,989,062  
 
                 
Net income before income taxes
    7,491,193       3,980,385       1,004,184  
Income tax expense
    2,172,283       1,425,746       356,124  
 
                 
Net income
  $ 5,318,910     $ 2,554,639     $ 648,060  
 
                 
 
                       
Per share information:
                       
Basic net income per common share
  $ 0.69     $ 0.35     $ 0.11  
 
                 
Diluted net income per common share
  $ 0.61     $ 0.32     $ 0.10  
 
                 
Weighted average common shares outstanding:
                       
Basic
    7,750,943       7,384,106       6,108,942  
 
                 
Diluted
    8,698,139       7,876,006       6,236,844  
 
                 

See accompanying notes to consolidated financial statements.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

For the each of the years in the three-year period ended December 31, 2004

                                                         
                                    Retained     Accumulated        
                    Additional             Earnings     Other     Total  
    Common Stock     Paid-in     Unearned     (Accumulated     Comprehensive     Stockholders’  
    Shares     Amount     Capital     Compensation     Deficit)     Income (Loss)     Equity  
Balances, December 31, 2001
    4,624,106     $ 4,624,106     $ 17,005,894     $     $ (3,391,854 )   $ 52,656     $ 18,290,802  
Proceeds from the sale of stock (less offering expenses of $1,400,000)
    2,760,000       2,760,000       9,985,000                         12,745,000  
Comprehensive income:
                                                       
Net income
                            648,060             648,060  
Net unrealized holding gains on available-for-sale securities, net of deferred tax expense of $445,078
                                  719,785       719,785  
 
                                                     
Total comprehensive income
                                                    1,367,845  
 
                                         
Balances, December 31, 2002
    7,384,106     $ 7,384,106     $ 26,990,894     $     $ (2,743,794 )   $ 772,441     $ 32,403,647  
 
                                         
Comprehensive income:
                                                       
Net income
                            2,554,639             2,554,639  
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit of $381,171
                                  (621,905 )     (621,905 )
 
                                                     
Total comprehensive income
                                                    1,932,734  
 
                                         
Balances, December 31, 2003
    7,384,106     $ 7,384,106     $ 26,990,894     $     $ (189,155 )   $ 150,536     $ 34,336,381  
 
                                         
Exercise of employee incentive common stock options
    23,780       23,780       94,333                         118,113  
Proceeds from the sale of common stock (less offering expenses of $1,357,833)
    977,500       977,500       17,214,667                         18,192,167  
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan
    3,846       3,846       76,413       (80,259 )                  
Amortization of unearned compensation associated with restricted shares
                      43,009                   43,009  
Dividends paid to minority interest shareholders of Pinnacle Properties, Inc.
                            (2,732 )           (2,732 )
Comprehensive income:
                                                       
Net income
                            5,318,910             5,318,910  
Net unrealized holding losses on available- for-sale securities, net of deferred tax benefit of $77,023
                                  (125,673 )     (125,673 )
 
                                                     
Total comprehensive income
                                                    5,193,237  
 
                                         
Balances, December 31, 2004
    8,389,232     $ 8,389,232     $ 44,376,307     $ (37,250 )   $ 5,127,023     $ 24,863     $ 57,880,175  
 
                                         

See accompanying notes to consolidated financial statements.

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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
    For the years ended December 31,  
    2004     2003     2002  
Operating activities:
                       
Net income
  $ 5,318,910     $ 2,554,639     $ 648,060  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                       
Net amortization of premiums on securities
    1,050,687       858,412       256,471  
Depreciation and amortization
    1,247,455       953,819       693,663  
Provision for loan losses
    2,948,423       1,157,280       938,000  
Gains on sales of investment securities, net
    (357,196 )     (247,978 )      
Gain on loans and loan participations sold
    (233,646 )     (334,249 )     (120,297 )
Deferred tax expense (benefit)
    (922,286 )     569,987       356,124  
Mortgage loans held for sale:
                       
Loans originated
    (69,020,758 )     (38,527,408 )      
Loans sold
    68,968,458       36,944,808        
Increase in other assets
    (1,397,226 )     (641,998 )     (509,006 )
Increase (decrease) in other liabilities
    (860,749 )     1,346,425       1,131,837  
 
                 
Net cash provided by (used in) operating activities
    6,742,072       4,633,737       3,394,852  
 
                 
                         
Investing activities:
                       
Activities in securities:
                       
Purchases
    (132,755,709 )     (132,340,115 )     (67,909,017 )
Sales
    28,461,405       23,125,263        
Maturities, prepayments and calls
    35,172,378       41,637,158       14,723,189  
 
                 
 
    (69,121,926 )     (67,577,694 )     (53,185,828 )
 
                 
Increase in loans, net
    (176,375,116 )     (87,376,399 )     (75,396,751 )
Purchases of premises and equipment and software
    (5,144,869 )     (3,910,748 )     (677,323 )
Purchases of capital securities of unconsolidated subsidiary
          (310,000 )      
Purchases of life insurance policies
                (1,800,000 )
Purchases of other assets
    (881,719 )     (929,500 )     (869,750 )
 
                 
Net cash used in investing activities
    (251,523,630 )     (160,104,341 )     (131,929,652 )
 
                 
                         
Financing activities:
                       
Net increase in deposits
    180,157,997       156,552,623       100,757,338  
Net increase (decrease) in repurchase agreements
    16,877,750       (98 )     392,515  
Advances from Federal Home Loan Bank:
                       
Issuances
    48,000,000       34,500,000       13,000,000  
Payments
    (39,000,000 )     (11,500,000 )      
Proceeds from issuance of subordinated debt
          10,310,000        
Debt issuance costs related to issuance of subordinated debt
          (150,000 )      
Dividends paid to preferred shareholders of PNFP Properties, Inc.
    (2,732 )            
Net proceeds from sale of common stock
    18,192,167             12,745,000  
Exercise of common stock options
    118,113              
 
                 
Net cash provided by financing activities
    224,343,295       189,712,525       126,894,853  
 
                 
Net increase (decrease) in cash and cash equivalents
    (20,438,263 )     34,241,921       (1,639,947 )
Cash and cash equivalents, beginning of period
    47,184,050       12,942,129       14,582,076  
 
                 
Cash and cash equivalents, end of period
  $ 26,745,787     $ 47,184,050     $ 12,942,129  
 
                 

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

     Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) was formed on February 28, 2000 (inception) and is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle National Bank (Pinnacle National). Pinnacle National is a commercial bank located in Nashville, Tennessee. Pinnacle National provides a full range of banking services in its primary market area of Davidson County and the surrounding counties. Pinnacle National commenced its banking operations on October 27, 2000. PFP Title Company is a wholly-owned subsidiary of Pinnacle National. PFP Title Company sells 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, a wholly-owned subsidiary of Pinnacle Financial, was created for the exclusive purpose of issuing capital trust preferred securities. Pinnacle Advisory Services, Inc. was established as a registered investment advisor pursuant to regulations promulgated by the Board of Governors of the Federal Reserve System. Pinnacle Credit Enhancement Holdings, Inc. was established as a holding company 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 subsidiaries. Significant intercompany transactions and accounts are eliminated in consolidation, other than the accounts of PNFP Statutory Trust I which are included in these consolidated financial statements pursuant to the equity method of accounting.

     Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.

     Cash and Cash Flows — Cash on hand, cash items in process of collection, amounts due from banks, Federal funds sold and securities purchased under agreements to resell, with original maturities within ninety days, are included in cash and cash equivalents. The following supplemental cash flow information addresses certain cash payments and noncash transactions for each of the years in the three-year period ended December 31, 2004 was as follows:

                         
    For the years ended December 31,  
    2004     2003     2002  
CASH PAYMENTS:
                       
Interest
  $ 7,252,494     $ 5,341,687     $ 4,245,453  
Income taxes
    3,681,817              
NONCASH TRANSACTIONS:
                       
Transfers of available-for-sale securities to held-to-maturity
    27,655,669              
Loans charged-off to the allowance for loan losses
    1,032,378       167,023       92,957  
Loans foreclosed upon with repossessions transferred to other assets
                 

     Securities — Securities are classified based on management’s intention on the date of purchase. All debt securities classified as available-for-sale are recorded at fair value with any unrealized gains and losses reported in other comprehensive income (loss), net of the deferred income tax effects. Securities that Pinnacle Financial has both the positive intent and ability to hold to maturity are classified as held to maturity and are carried at historical cost and adjusted for amortization of premiums and accretion of discounts unless there is a decline in value which is considered to be other than temporary, in which case the cost basis of the security is written down to fair value and the amount of the write-down included in the statement of income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Interest and dividends on securities, including amortization of premiums and accretion of discounts calculated under the effective interest method, are included in interest income. Realized gains and losses from the sale of securities are determined using the specific identification method.

     Loans Held for Sale — Loans originated and intended for sale are carried at the lower of cost or estimated fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

     Loans — Loans are reported at their outstanding principal balances less unearned income, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income on loans is accrued based on the principal balance outstanding. Loan origination fees, net of certain loan origination costs, are deferred and recognized as an adjustment to the related loan yield using the interest method.

     The accrual of interest on loans is discontinued when there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against current income. Interest income is subsequently recognized only to the extent cash payments are received.

     The allowance for loan losses is maintained at a level that management believes to be adequate to absorb losses inherent in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, volume, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans, identified impaired loans and other factors related to the portfolio. This evaluation is performed quarterly and is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on any impaired loans. In addition, regulatory agencies, as an integral part of their examination process, will periodically review Pinnacle Financial’s allowance for loan losses, and may require Pinnacle Financial to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

     A loan is considered to be impaired when it is probable Pinnacle Financial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.

     Transfers of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from Pinnacle Financial, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) Pinnacle Financial does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

     Premises and Equipment — Premises and equipment are carried at cost less accumulated depreciation computed principally by the straight-line method over the estimated useful lives of the assets or the lease terms for leasehold improvements, whichever is shorter. Useful lives for all premises and equipment range between three and thirty years.

     Investments in unconsolidated subsidiary and other entities — Pinnacle Financial maintains certain investments, at cost, with certain regulatory and other entities in which Pinnacle Financial has an ongoing business relationship. These entities are the Federal Reserve Bank of Atlanta, the Bankers’ Bank of Atlanta and the Federal Home Loan Bank of Cincinnati. At December 31, 2004 and 2003, the cost of these investments was $3,269,000 and $2,391,000, respectively.

     Other Assets — Included in other assets as of December 31, 2004 and 2003 is approximately $544,000 and $535,000, respectively, net of amortization, related to amounts paid to certain individuals to secure their employment with Pinnacle Financial. These amounts are subject to certain agreements whereby a certain pro rata amount will be owed Pinnacle Financial should the employee leave the employ of Pinnacle Financial within six years of their

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

employment date. Pinnacle Financial is amortizing the amounts to salaries and employee benefits expense on a straight-line basis over 36 to 72 months.

     Also included in other assets as of December 31, 2004 and 2003, is approximately $357,000 and $250,000, respectively, of computer software related assets, net of amortization. This software supports Pinnacle Financial’s primary data systems and relates to amounts paid to vendors for installation and development of such systems. These amounts are amortized on a straight-line basis over periods of three to seven years. For the years ended December 31, 2004, 2003 and 2002, Pinnacle Financial amortized approximately $162,000, $122,000, and $102,000, respectively, related to these costs. Software maintenance fees are capitalized in other assets and amortized over the term of the maintenance agreement.

     During the year ended December 31, 2002, Pinnacle National acquired life insurance policies on five key executives. Pinnacle National is the beneficiary of the death proceeds from these policies. To acquire these policies, Pinnacle National paid a one-time premium of $1.8 million. Pinnacle National increases the value of the polices based on a crediting rate which is then reset quarterly thereafter. This crediting rate serves to increase the cash surrender value of the policies over the life of the policies. At December 31, 2004 and 2003, the aggregate cash surrender value of these policies, which is reflected in other assets, was $2,010,000 and $1,931,000, respectively. Pinnacle National has not borrowed any funds against these policies.

     Also included in other assets at December 31, 2004 and 2003 is $490,000 and $456,000, respectively, which is related to loans which have been sold to correspondent banks. These amounts represent the present value, net of amortization, of the future net cash flows 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. Amortization of these amounts was $199,000 and $143,000 for the years ended December 31, 2004 and 2003, respectively.

     Income Taxes — Income tax expense consists of current and deferred taxes. Current income tax provisions approximate taxes to be paid or refunded for the applicable year. Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Accordingly, the resulting net deferred tax asset or net deferred tax liability is included in the accompanying consolidated balance sheets in either other assets or other liabilities.

     Recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefit associated with certain temporary differences, tax operating loss carryforwards and tax credits will be realized. A valuation allowance is recorded for those deferred tax assets for which it is more likely than not that realization will not occur.

     Pinnacle Financial and its subsidiaries file a consolidated income tax return. Each entity provides for income taxes based on its contribution to income or loss of the consolidated group.

     Income Per Common Share — Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average shares outstanding was attributable to common stock options and warrants.

     As of December 31, 2004 and 2003, there were common stock options outstanding to purchase up to 1,068,350 and 907,400 common shares, respectively. Substantially all of these shares have exercise prices, which when considered in relation to the average market price of Pinnacle Financial’s common stock, are considered dilutive and are considered in Pinnacle Financial’s diluted income per share calculation for each of the years in the three year period ended December 31, 2004. Additionally, as of December 31, 2004 and 2003, Pinnacle Financial had outstanding warrants to purchase 406,000 common shares which have been considered in the calculation of Pinnacle Financial’s diluted income per share for the years ended December 31, 2004 and 2003.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following is a summary of the basic and diluted earnings per share calculation for each of the years in the three-year period ended December 31, 2004:

                         
    2004     2003     2002  
Basic earnings per share calculation:
                       
Numerator – Net income
  $ 5,318,910     $ 2,554,639     $ 648,060  
 
                       
Denominator – Average common shares outstanding
    7,750,943       7,384,106       6,108,942  
 
                       
Basic earnings per share
  $ 0.69     $ 0.35     $ 0.11  
 
                       
Diluted earnings per share calculation:
                       
Numerator – Net income
  $ 5,318,910     $ 2,554,639     $ 648,060  
 
                       
Denominator – Average common shares outstanding
    7,750,943       7,384,106       6,108,942  
Dilutive shares contingently issuable
    947,196       491,900       127,902  
 
                 
Average dilutive common shares outstanding
    8,698,139       7,876,006       6,236,844  
 
                       
Diluted earnings per share
  $ 0.61     $ 0.32     $ 0.10  

     On April 20, 2004, the Board of Directors of Pinnacle Financial approved a two for one stock split of the Company’s common stock payable as a 100% stock dividend on May 10, 2004 to shareholders of record on April 30, 2004. Pinnacle Financial has retroactively applied the impact of this stock split in these consolidated financial statements.

     Stock-Based Compensation — In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123”. This Statement amends Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included below.

     Pinnacle Financial applies APB Opinion 25 and related interpretations in accounting for the stock option plan. All option grants carry exercise prices equal to or above the fair value of the common stock on the date of grant. Accordingly, no compensation cost has been recognized. Had compensation cost for Pinnacle Financial’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed in SFAS No. 123, “Accounting for Stock-Based Compensation,” Pinnacle Financial’s net income and net income per share would have been adjusted to the pro forma amounts indicated below for each of the years in the three-year period ended December 31, 2004:

                         
    2004     2003     2002  
Net income, as reported
  $ 5,318,910     $ 2,554,639     $ 648,060  
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects
    (300,634 )     (197,320 )     (152,905 )
 
                 
Pro forma net income
  $ 5,018,276     $ 2,357,319     $ 495,155  
 
                 
 
                       
Per share information:
                       
Basic net income            As reported
  $ 0.69     $ 0.35     $ 0.11  
                                       Pro forma
  $ 0.65     $ 0.32     $ 0.08  
 
                       
Diluted net income        As reported
  $ 0.61     $ 0.32     $ 0.10  
                                       Pro forma
  $ 0.58     $ 0.30     $ 0.08  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     For purposes of these calculations, the fair value of options granted for each of the years in the three-year period ended December 31, 2004 was estimated using the Black-Scholes option pricing model and the following assumptions:

                         
    2004     2003     2002  
Risk free interest rate
    1.15 %     1.18 %     1.74 %
Expected life of the options
  5.0 years   5.0 years   5.0 years
Expected dividend yield
    0.00 %     0.00 %     0.00 %
Expected volatility
    29.9 %     41.6 %     69.7 %
Weighted average fair value
  $ 4.26     $ 2.88     $ 2.85  

     Business Segments — Pinnacle Financial operates in one business segment, commercial banking, and has no individually significant business segments.

     Comprehensive Income (Loss) — Statement of Financial Accounting Standards (“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. The following is a summary of other comprehensive income for each of the years in the three-year period ended December 31, 2004.

                         
    2004     2003     2002  
Net income, as reported
  $ 5,318,910     $ 2,554,639     $ 648,060  
Other comprehensive income – Net unrealized holding gains (losses) from available-for- sale securities
    (125,673 )     (621,905 )     719,785  
 
                 
Total comprehensive income
  $ 5,193,237     $ 1,932,734     $ 1,367,845  
 
                 

     Recent Accounting Pronouncements — In March 2004, the SEC issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. Current accounting guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 was effective for commitments to originate mortgage loans to be held for sale entered into after March 31, 2004. Its adoption did not have a material impact on the consolidated financial position or results of income of Pinnacle Financial.

     In March 2004, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and Pinnacle Financial began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance. Due to the recognition and measurement provisions being suspended and the final rule delayed, Pinnacle Financial is not able to determine whether the adoption of these new provisions will have a material impact on its consolidated financial position or results of income..

     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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

an investor’s initial investment in loans or debt securities loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. The SOP does not apply to loans originated by the entity. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged. Specific transition guidance applies to certain loans that currently are within the scope of Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans. Its adoption is not expected to have a material impact on the consolidated financial position or results of income of Pinnacle Financial.

     In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. The revised statement is effective as of the first interim period beginning after June 15, 2005. Pinnacle Financial is currently evaluating the provisions of SFAS No. 123R and will adopt it on July 1, 2005 as required.

     Reclassifications – Certain previous amounts have been reclassified to conform to the 2004 presentation. Such reclassifications had no impact on net income or loss during any period.

Note 2. Restricted Cash Balances

     Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. At its option, Pinnacle Financial maintains additional balances to compensate for clearing and other services. For the years ended December 31, 2004 and 2003, the average daily balance maintained at the Federal Reserve was approximately $3,230,000 and $1,703,000, respectively.

Note 3. Securities

     The amortized cost and fair value of securities available-for-sale and held-to-maturity at December 31, 2004 and 2003 are summarized as follows:

                                 
    December 31, 2004  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Securities available-for-sale:
                               
U.S. Treasury securities
  $     $     $     $  
U.S. government agency securities
    27,164,683       129,219       19,727       27,274,175  
Mortgage-backed securities
    138,851,236       348,187       672,189       138,527,234  
State and municipal securities
    12,486,440       71,726       55,481       12,502,685  
Corporate notes
    2,314,831             45,105       2,269,726  
 
                       
 
  $ 180,817,190     $ 549,132     $ 792,502     $ 180,573,820  
 
                       
 
                               
Securities held-to-maturity:
                               
U.S. government agency securities
  $ 17,746,555     $ 600     $ 298,605     $ 17,448,550  
State and municipal securities
    9,849,604             163,241       9,686,363  
 
                       
 
  $ 27,596,159     $ 600     $ 461,846     $ 27,134,913  
 
                       
                                 
    December 31, 2003  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Securities available-for-sale:
                               
U.S. Treasury securities
  $ 6,125,689     $ 266,442     $ 39,698     $ 6,352,433  
U.S. government agency securities
    20,897,437       86,762       64,656       20,919,543  
Mortgage-backed securities
    103,087,958       506,881       616,953       102,977,886  
State and municipal securities
    9,590,357       142,970       38,951       9,694,376  
 
                       
 
  $ 139,701,441     $ 1,003,055     $ 760,258     $ 139,944,238  
 
                       

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

     On March 31, 2004, Pinnacle National transferred approximately $27,656,000 of available-for-sale securities to held-to-maturity at fair value. The transfer consisted of substantially all of Pinnacle National’s holdings of Tennessee municipal securities and several of its longer-term agency securities. The net unrealized gain on such securities as of the date of transfer was approximately $325,000. This amount is reflected in the accumulated other comprehensive income, net of tax, and is being amortized over the remaining lives of the respective held-to-maturity securities. At December 31, 2004, the unamortized amount approximated $283,000.

     Pinnacle Financial realized approximately $357,000 in net gains from the sale of $28,461,000 of available-for-sale securities during the year ended December 31, 2004. Gross realized gains amounted to $421,000 on the sale of $14.5 million of available-for-sale securities while gross realized losses amounted to $64,000 on the sale of $13.9 million of available-for-sale securities during the year ended December 31, 2004. Pinnacle Financial realized $248,000 in net gains on the sale of $23,125,000 of available-for-sale securities during the year ended December 31, 2003. During the year ended December 31, 2003, gross realized gains amounted to $263,000 on the sale of $20.5 million of available-for-sale securities while gross realized losses amounted to $15,000 on the sale of $2.6 million of available-for-sale securities. Pinnacle Financial realized no gains or losses from the sale of securities during the year ended December 31, 2002 as no such transactions occurred.

     At December 31, 2004, approximately $135,820,000 of Pinnacle Financial’s available-for-sale portfolio was pledged to secure public fund and other deposits and securities sold under agreements to repurchase.

     The amortized cost and fair value of debt securities as of December 31, 2004 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage-backed securities since the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary.

                                 
    Available-for-sale     Held-to-maturity  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
Due in one year or less
  $     $     $     $  
Due in one year to five years
    5,314,831       5,252,026       4,094,495       4,065,099  
Due in five years to ten years
    30,273,785       30,409,978       22,450,042       22,033,015  
Due after ten years
    6,377,338       6,384,582       1,051,622       1,036,799  
Mortgage-backed securities
    138,851,236       138,527,234              
 
                       
 
  $ 180,817,190     $ 180,573,820     $ 27,596,159     $ 27,134,913  
 
                       

     At December 31, 2004, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized loss of less than twelve months or twelve months or longer:

                                                 
    Investments With an     Investments With an     Total Investments at  
    Unrealized Loss of     Unrealized Loss of     December 31, 2004 With  
    Less than 12 months     12 months or longer     an Unrealized Loss  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
U.S. government agency securities
  $ 21,426,876     $ 318,332     $     $     $ 21,426,876$       318,332  
Mortgage-backed securities
    78,476,825       450,064       9,852,117       222,125       88,328,942       672,189  
State and municipal securities
    14,856,388       208,074       691,803       10,648       15,548,191       218,722  
Corporate notes
    2,314,831       45,105                   2,314,831       45,105  
                                     
ATotal temporarily-impaired securities
  $ 117,074,920     $ 1,021,575     $ 10,543,920     $ 232,773     $ 127,618,840     $ 1,254,348  
                                     

     Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of Pinnacle Financial to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At December 31, 2004, Pinnacle Financial had six issuances (three mortgage backed-securities in the available-for-sale portfolio and three municipal securities in the held-to-maturity portfolio) that had been in an unrealized loss position for more than twelve months.

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

At December 31, 2004, the amortized cost of these securities was approximately $10,777,000 compared to a fair value of $10,544,000. 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, these investments were not considered other-than-temporarily impaired.

Note 4. Loans and Allowance for Loan Losses

     The composition of loans at December 31, 2004 and 2003 is summarized as follows:

                 
    2004     2003  
Commercial real estate – Mortgage
  $ 117,122,607     $ 68,507,350  
Commercial real estate – Construction
    8,427,763       8,210,646  
Commercial – Other
    189,456,385       129,881,732  
 
           
Total Commercial
    315,006,755       206,599,728  
 
           
Consumer real estate – Mortgage
    126,907,581       76,041,526  
Consumer real estate – Construction
    14,990,739       3,077,656  
Consumer – Other
    15,457,144       11,285,200  
 
           
Total Consumer
    157,355,464       90,404,382  
 
           
Total Loans
    472,362,219       297,004,110  
Allowance for loan losses
    (5,650,014 )     (3,718,598 )
 
           
Loans, net
  $ 466,712,205     $ 293,285,512  
 
           

     Using standard industry codes, Pinnacle Financial periodically analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any one or more industries. Pinnacle Financial has a meaningful credit exposure (loans outstanding plus unfunded lines of credit) to borrowers in the trucking industry and to operators of nonresidential buildings. Credit exposure to the trucking industry approximated $43.1 million and $35.0 million, while credit exposure to operators of nonresidential buildings approximated $27.5 million and $16.6 million at December 31, 2004 and 2003, respectively. Levels of exposure to these industry groups are periodically evaluated in order to determine if additional allowance allocations are warranted.

     At December 31, 2004 and 2003, Pinnacle Financial had certain impaired loans on nonaccruing interest status. The principal balance of these nonaccrual loans amounted to $561,000; $379,000 and $1,845,000 at December 31, 2004, 2003 and 2002, respectively. In each case, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had these loans been on accruing status, interest income would have been higher by $41,000; $75,000 and $43,000 for each of the years in the three-year period ended December 31, 2004. During the years ended December 31, 2004, 2003 and 2002, the average balance of all impaired loans amounted to $776,000, $1,160,000 and $144,000, respectively. As all loans that were deemed impaired were either on nonaccruing interest status during the entire year or were placed on nonaccruing status on the date they were deemed impaired, no interest income has been recognized on any impaired loans during the three-year period ended December 31, 2004.

     Changes in the allowance for loan losses for each of the years in the three-year period ended December 31, 2004 are as follows:

                         
    2004     2003     2002  
Balance at beginning of period
  $ 3,718,598     $ 2,677,043     $ 1,832,000  
Charged-off loans
    (1,032,378 )     (167,023 )     (92,957 )
Recovery of previously charged-off loans
    15,371       51,298        
Provision for loan losses
    2,948,423       1,157,280       938,000  
 
                 
Balance at end of period
  $ 5,650,014     $ 3,718,598     $ 2,677,043  
 
                 

     At December 31, 2004, Pinnacle Financial has granted loans and other extensions of credit amounting to approximately $6,565,000 to certain directors, executive officers, and their related entities, of which $4,437,000 had been drawn upon. At December 31, 2003, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $6,484,000 to certain directors, executive officers, and their related entities of which $3,522,000 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.

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

     In December 2003, Pinnacle Financial acquired for $500,000, a $1,500,000 loan that it had previously sold to another financial institution. Pinnacle Financial accounted for the discount under the cost-recovery method pursuant to Practice Bulletin Number 6, Amortization of Discounts on Certain Acquired Loans, issued by the Accounting Standards Executive Committee (AcSEC). Under the cost-recovery method of accounting, cash collections were first applied against the $500,000 recorded amount of the loan; when the loan had been reduced to zero, additional amounts received were recognized as income. During the second quarter of 2004, Pinnacle National collected the remaining net book value of the loan and an additional $260,000, of which $217,000 was recognized as interest income and $43,000 was credited to other expense as a recovery of legal expenses incurred by Pinnacle Financial. As a result of a settlement agreement entered into with the borrower, Pinnacle Financial received $80,000 during the third quarter from the sale of certain assets related to this borrower which was recognized as interest income. During the third quarter of 2004, Pinnacle National subsequently sold to a third party a loan to this borrower, which resulted from the settlement agreement, and recognized a $280,000 gain on sale of loans in the accompanying statement of income during the year ended December 31, 2004.

     During 2004, 2003 and 2002, Pinnacle Financial sold participations in certain loans to correspondent banks at an interest rate that was less than that of the borrower’s rate of interest. In accordance with generally accepted accounting principles, Pinnacle Financial has reflected a gain on the sale of these participated loans for the years ended December 31, 2004, 2003 and 2002 of approximately $234,000; $334,000 and $120,000, respectively, which is attributable to the present value of the future net cash flows of the difference between the interest payments the borrower is projected to pay Pinnacle Financial and the amount of interest that will be owed the correspondent based on their participation in the loan.

Note 5. Premises and Equipment and Lease Commitments

     Premises and equipment at December 31, 2004 and 2003 are summarized as follows:

                         
    Range of              
    Useful Lives     2004     2003  
Land
        $ 2,502,525     $ 1,239,552  
Buildings and leasehold improvements
    15 to 30 years       6,030,354       3,809,939  
Furniture and equipment
    3 to 15 years       4,694,769       3,301,777  
 
                   
 
            13,227,648       8,351,268  
Accumulated depreciation
            (2,096,977 )     (1,439,909 )
 
                   
 
          $ 11,130,671     $ 6,911,359  
 
                   

     Depreciation expense was approximately $657,000; $542,000 and $461,000 for each of the years in the three-year period ended December 31, 2004.

     Pinnacle Financial has entered into various operating leases, primarily for office space and branch facilities. Rent expense related to these leases for 2004, 2003 and 2002 totaled $636,000; $449,000 and $399,000, respectively. At December 31, 2004, the approximate future minimum lease payments due under the aforementioned operating leases for their initial term is as follows:

         
2005
  $ 784,000  
2006
    815,000  
2007
    835,000  
2008
    859,000  
2009
    883,000  
Thereafter
    2,263,000  
 
     
 
  $ 6,439,000  
 
     

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Note 6. Deposits

     At December 31, 2004, the scheduled maturities of time deposits are as follows:

         
2005
  $ 146,453,000  
2006
    46,854,000  
2007
    4,883,000  
2008
    308,000  
2009
    7,101,000  
 
     
 
  $ 205,599,000  
 
     

     Additionally, at December 31, 2004 and 2003, approximately $165,794,000 and $113,986,000, respectively, of time deposits had been issued in denominations of $100,000 or greater.

Note 7. Federal Home Loan Bank Advances and Other Borrowings

     During 2001, Pinnacle National became a member of the Federal Home Loan Bank of Cincinnati (“FHLB”). As a result, Pinnacle National is eligible for advances from the FHLB, pursuant to the terms of various borrowing agreements, which assists Pinnacle National in the funding of its home mortgage and commercial real estate loan portfolios. Pinnacle National has pledged certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral under the borrowing agreements with the FHLB.

     At December 31, 2004 and 2003, Pinnacle National had received advances from the FHLB totaling $53,500,000 and $44,500,000, respectively. At December 31, 2004, the scheduled maturities of these advances and interest rates are as follows:

             
    Scheduled     Interest Rate
    Maturities     Range
2005
  $ 25,000,000     2.2% to 3.1%
2006
    26,500,000     2.0% to 2.8%
2007
    2,000,000     3.2%
 
         
 
  $ 53,500,000      
 
         
Weighted average interest rate
          2.5%
 
         

     Subsequent to December 31, 2004, the Pinnacle National refinanced a $12,000,000 advance which matured on January 5, 2005 and paid off a $2,000,000 advance which matured on January 28, 2005.

     On December 29, 2003, we established PNFP Statutory Trust I (“Trust”), a wholly-owned statutory business trust. Pinnacle Financial is the sole sponsor of the trust and acquired the Trust’s common securities for $310,000. The Trust was created for the exclusive purpose of issuing 30-year capital trust preferred securities (“Trust Preferred Securities”) in the aggregate amount of $10,000,000 and using the proceeds to purchase $10,310,000 of junior subordinated debentures (“Subordinated Debentures”) issued by Pinnacle Financial. The sole assets of the Trust are the Subordinated Debentures. Pinnacle Financial’s $310,000 investment in the Trust is included in other assets in the accompanying consolidated balance sheets and the $10,310,000 obligation of Pinnacle Financial is included in subordinated debt.

     The Trust Preferred Securities bear a floating interest rate based on a spread over 3-month LIBOR (5.30% at December 31, 2004) which is set each quarter and matures on December 30, 2033. Distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. Pinnacle Financial guarantees the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trust. Pinnacle Financial’s obligations under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by Pinnacle Financial of the obligations of the Trust under the Trust Preferred Securities.

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

     The Subordinated Debentures are unsecured, bear an interest rate based on a spread over 3-month LIBOR (equal to the spread paid by the Trust on the Trust Preferred Securities) which is set each quarter and matures on December 30, 2033. Interest is payable quarterly. Pinnacle Financial may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and Pinnacle Financial’s ability to pay dividends on our common shares will be restricted.

     Subject to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred Securities may be redeemed prior to maturity at our option on or after September 17, 2008. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) the Trust becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by the parent company on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for the Trust to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as “Tier I capital” under the Federal Reserve capital adequacy guidelines.

     The Trust Preferred Securities qualify as Tier I capital under current regulatory definitions. Debt issuance costs of $135,000 consisting primarily of underwriting discounts and professional fees are included in other assets in the accompanying consolidated balance sheet as of December 31, 2004. These debt issuance costs are being amortized over ten years using the straight-line method.

     At December 31, 2004, Pinnacle National has accommodations which allow Pinnacle National to purchase Federal funds from several of its correspondent banks on an overnight basis at prevailing overnight market rates. These accommodations are subject to various restrictions as to their term and availability, and in most cases, must be repaid within less than a month. There were no outstanding balances at December 31, 2004 or 2003 under these arrangements.

Note 8. Income Taxes

     Income tax expense (benefit) attributable to income from continuing operations for each of the years in the three-year period ended December 31, 2004 consists of the following:

                         
    2004     2003     2002  
Current tax expense:
                       
Federal
  $ 2,677,582     $ 710,749     $  
State
    416,987       145,010        
 
                 
Total current tax expense
    3,094,569       855,759        
 
                 
Deferred tax expense (benefit):
                       
Federal
    (765,139 )     473,038       295,874  
State
    (157,147 )     96,949       60,250  
 
                 
Total deferred tax expense (benefit)
    (922,286 )     569,987       356,124  
 
                 
 
  $ 2,172,283     $ 1,425,746     $ 356,124  
 
                 

     Pinnacle Financial’s income tax expense (benefit) differs from the amounts computed by applying the Federal income tax statutory rates of 34% in 2004, 2003 and 2002 to income before income taxes. A reconciliation of the differences for each of the years in the three-year period ended December 31, 2004 is as follows:

                         
    2004     2003     2002  
Income taxes at statutory rate
  $ 2,547,006     $ 1,353,331     $ 341,423  
State tax expense, net of federal tax effect
    171,494       159,693       39,765  
Federal tax credits
    (300,000 )            
Tax-exempt securities
    (156,354 )     (69,442 )     (11,213 )
Other items
    (89,863 )     (17,836 )     (13,851 )
 
                 
Income tax expense (benefit)
  $ 2,172,283     $ 1,425,746     $ 356,124  
 
                 

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

     The effective tax rate for 2004 is impacted by Federal tax credits related to the New Markets Tax Credit program whereby a subsidiary of Pinnacle National has been awarded approximately $2.3 million in future Federal tax credits to be realized over the next seven years. 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, 2004 is $300,000. Pinnacle Financial believes that it and its subsidiary has and will continue to comply with the various regulatory provisions of the New Markets Tax Credit program such that it will be able to claim the credit in its 2004 Federal income tax return. Also, during 2004, Pinnacle National formed a real estate investment trust which provides Pinnacle Financial with an alternative vehicle for raising capital. Additionally, the ownership structure of this real estate investment trust provides certain income tax benefits to Pinnacle National and Pinnacle Financial.

     In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Pinnacle Financial will realize the benefit of these deductible differences. However, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

     The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at December 31, 2004 and 2003 are as follows:

                 
    2004     2003  
Deferred tax assets:
               
Loan loss allowance
  $ 2,162,332     $ 1,402,434  
Other assets
    136,790       109,026  
 
           
 
    2,299,122       1,511,460  
 
               
Deferred tax liabilities:
               
Depreciation and amortization
    62,390       231,524  
Other accruals
    175,384       140,874  
Securities
    15,240       92,263  
 
           
 
    253,014       464,661  
 
           
Net deferred tax assets
  $ 2,046,108     $ 1,046,799  
 
           

Note 9. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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 December 31, 2004 is as follows:

         
Commitments to extend credit
  $ 160,849,000  
Standby letters of credit
    45,342,000  

     At December 31, 2004, the fair value of Pinnacle Financial’s standby letters of credit was $188,000. 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, claims outstanding at December 31, 2004 have no material effect on Pinnacle Financial’s consolidated financial statements.

Note 10. Common Stock Offerings and Warrants

     During June 2002, Pinnacle Financial concluded a follow-on offering of its common stock to the general public. As a result of this offering, Pinnacle Financial, through its underwriters, sold 2.4 million shares of common stock to the general public at $5.125 per share. The underwriters also exercised an over-allotment option and purchased an additional 360,000 shares at $5.125 per share, less the applicable underwriting discount. Net proceeds from the offering were approximately $12.7 million.

     During 2004, Pinnacle Financial concluded another follow-on offering of its common stock to the general public. As a result of this offering, Pinnacle Financial, through its underwriters, sold 850,000 shares of common stock to the general public at $20 per share. The underwriters also exercised an over-allotment option and purchased an additional 127,500 shares at $20 per share, less the applicable underwriting discount. Net proceeds from the offering were approximately $18.2 million.

     Three executives of Pinnacle Financial (the Chairman of the Board, the President and Chief Executive Officer and the Chief Administrative Officer) along with nine members of Pinnacle Financial’s Board of Directors and two other organizers of Pinnacle Financial were awarded on August 18, 2000, warrants to acquire 406,000 shares of common stock at $5.00 per share. The warrants are exercisable until August 18, 2010. As of December 31, 2004, all of the warrants were exercisable.

Note 11. Salary Deferral Plan

     Pinnacle Financial has a 401(k) retirement plan covering all employees who elect to participate, subject to certain eligibility requirements. The Plan allows employees to defer up to 15% of their salary subject to regulatory limitations with Pinnacle Financial matching 50% of the first 6% deferred in Pinnacle Financial stock. Pinnacle

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

Financial’s expense associated with the matching component of this plan for each of the years in the three-year period ended December 31, 2004 was approximately $199,000; $143,000 and $100,000, respectively, and is included in the accompanying statements of income in salaries and employee benefits expense.

Note 12. Stock Option Plan and Restricted Shares

     Pinnacle Financial has a stock option plan under which it has granted options to its employees to purchase common stock at or above the fair market value on the date of grant. All of the options are intended to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment. Options under the plan vest in varying increments over five years beginning one year after the date of the grant and are exercisable over a period of ten years from the date of grant. The shareholders of Pinnacle Financial approved an allocation of 520,000 common shares toward this plan.

     A summary of the plan changes during each of the years in the three-year period ended December 31, 2004 is as follows:

                 
            Weighted-  
            Average  
            Exercise  
    Number     Price  
Outstanding at December 31, 2001
    478,400     $ 4.74  
Granted
    259,400       5.01  
Exercised
           
Forfeited
    (13,100 )     4.54  
 
           
Outstanding at December 31, 2002
    724,700     $ 4.84  
Granted
    185,800       7.55  
Exercised
           
Forfeited
    (3,100 )     5.73  
 
           
Outstanding at December 31, 2003
    907,400     $ 5.39  
Granted
    189,080       14.65  
Exercised
    (23,780 )     4.89  
Forfeited
    (4,350 )     7.86  
 
           
Outstanding at December 31, 2004
    1,068,350     $ 7.03  
 
           

     The following table summarizes information about Pinnacle Financial’s stock option plan at December 31, 2004.

                                 
    Number of     Remaining     Weighted-        
    Remaining     Weighted-Average     Average     Number of  
Grant date   Shares     Contractual     Exercise     Shares  
   by year   Outstanding     Life in Years     Price     Exercisable  
2000
    359,400       6.0     $ 5.00       287,520  
2001
    94,540       6.2       3.82       56,724  
2002
    245,480       7.1       5.01       98,192  
2003
    181,100       8.4       7.55       36,220  
2004
    187,830       9.2       14.65        
 
                       
 
    1,068,350       7.2     $ 7.03       478,656  
 
                       

     On January 20, 2005, Pinnacle Financial granted options to purchase 141,182 common shares to certain employees at an exercise price of $23.88 per share. These options will vest in varying increments over five years beginning one year after the date of the grant and are exercisable over a period of ten years from the date of grant.

     Additionally, Pinnacle Financial’s 2004 equity incentive plan provides for the granting of restricted share awards and other performance-based awards, such as stock appreciation rights. During 2004, Pinnacle Financial awarded 3,846 shares 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 for the 2004, 2005 and 2006 fiscal years or earnings and soundness targets for the three year period ended December 31, 2006. Compensation expense associated with the restricted share awards is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

recognized over the time period that the restrictions associated with the awards lapse. As a result, at each financial reporting date, the restricted shares are marked to fair value and compensation expense is measured based on the anticipated number of shares that will ultimately vest and the timing of the vesting period. Earnings and soundness targets for the 2004 fiscal year were achieved and the restrictions related to 1,282 shares were released. For the year ended December 31, 2004, Pinnacle Financial recognized approximately $43,000 in compensation costs attributable to these awards.

Note 13. Employment Contracts

     Pinnacle Financial has entered into three continuously automatic-renewing three-year employment agreements with three of its senior executives, the President and Chief Executive Officer, the Chairman of the Board and Chief Financial Services Officer and the Chief Administrative Officer. These agreements will always have a three-year term unless any of the parties to the agreements gives notice of intent not to renew the agreement. The agreements specify that in certain defined “Terminating Events”, Pinnacle Financial will be obligated to pay each of the three senior executives a certain amount which is based on their annual salaries and bonuses. These Terminating Events include disability, change of control and other events.

Note 14. Related Party Transactions

     A local public relations company, of which one of Pinnacle Financial’s directors is a principal, provides various services for Pinnacle Financial. For the years ended December 31, 2004, 2003, and 2002, Pinnacle Financial incurred approximately $141,000, $137,000 and $110,000, respectively, in expense for services rendered by this public relations company. Another director is an officer in an insurance firm that serves as an agent in securing insurance in such areas as Pinnacle Financial’s property and casualty insurance and other insurance policies.

     Pinnacle Financial’s wholly-owned subsidiary, Pinnacle Credit Enhancement Holdings, Inc., owns 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. An employee of Pinnacle National also owns a 24.5% interest in Collateral Plus, LLC. The financial impact of Pinnacle Credit Enhancement Inc.’s 24.5% ownership of Collateral Plus, LLC to Pinnacle Financial’s financial statements as of and for each of the three years ended December 31, 2004 was not significant.

Note 15. Fair Value of Financial Instruments

     The following methods and assumptions were used by Pinnacle Financial in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2004 and 2003. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Cash, Due From Banks and Fed Funds Sold - The carrying amounts of cash, due from banks, and federal funds sold approximate their fair value.

Securities - Fair values for securities are based on available quoted market prices.

Loans - For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are equal to carrying values. For fixed rate loans that reprice within one year, fair values are equal to carrying values. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. Fair values

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

Deposits, Securities Sold Under Agreements to Repurchase, Advances from the Federal Home Loan Bank and Subordinated Debt - The carrying amounts of demand deposits, savings deposits, securities sold under agreements to repurchase and subordinated debt approximate their fair values. Fair values for certificates of deposit and advances from the Federal Home Loan Bank are estimated using discounted cash flow models, using current market interest rates offered on certificates and advances with similar remaining maturities.

Off-Balance Sheet Instruments - The fair values of Pinnacle Financial’s off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit and standby letters of credit do not represent a significant value to Pinnacle Financial until such commitments are funded. Pinnacle Financial has determined that the fair value of these instruments is not significant.

     The carrying amounts and estimated fair values of Pinnacle Financial’s financial instruments at December 31, 2004 and 2003 were as follows:

                                 
    December 31, 2004     December 31, 2003  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
Financial assets:
                               
Cash, due from banks, and Federal funds sold
  $ 26,745,787$       26,745,787$       47,184,050$       47,184,050  
Securities available-for-sale
    180,573,820       180,573,820       139,944,238       139,944,238  
Securities held-to-maturity
    27,596,159       27,134,913              
Mortgage loans held-for-sale
    1,634,900       1,634,900       1,582,600       1,582,600  
Loans, net
    466,712,205       467,290,014       293,285,512       296,613,342  
Financial liabilities:
                               
Deposits and securities sold under agreements to repurchase
  $ 602,654,870     $ 601,379,055     $ 405,619,122     $ 406,219,648  
Federal Home Loan Bank advances
    53,500,000       53,183,141       44,500,000       44,639,973  
Subordinated debt
    10,310,000       10,310,000       10,310,000       10,310,000  
                                 
    Notional             Notional          
    Amount             Amount          
Off-balance sheet instruments:
                               
Commitments to extend credit
  $ 160,849,000     $     $ 95,615,000     $  
Standby letters of credit
    45,342,000             30,317,000        

Note 16. Regulatory Matters

     Pinnacle National is subject to restrictions on the payment of dividends to Pinnacle Financial under federal banking laws and the regulations of the Office of the Comptroller of the Currency. Pinnacle Financial is also subject to limits on payment of dividends to its shareholders by the rules, regulations and policies of federal banking authorities. Pinnacle Financial has not paid any dividends to date, nor does it anticipate paying dividends to its shareholders for the foreseeable future. Future dividend policy will depend on Pinnacle National’s earnings, capital position, financial condition and other factors.

     Pinnacle Financial and Pinnacle National are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pinnacle Financial and Pinnacle National must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pinnacle

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Financial’s and Pinnacle National’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

     Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and Pinnacle National to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 2004 and 2003, Pinnacle Financial and Pinnacle National meet all capital adequacy requirements to which they are subject. To be categorized as well-capitalized, Pinnacle National must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. Pinnacle Financial and Pinnacle National’s actual capital amounts and ratios are presented in the following table (dollars in thousands):

                                                 
                                    Minimum  
                                    To Be Well-Capitalized  
                    Minimum     Under Prompt  
                    Capital     Corrective  
    Actual     Requirement     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
At December 31, 2004
                                               
 
                                               
Total capital to risk weighted assets:
                                               
Pinnacle Financial
  $ 73,540       12.7 %   $ 46,410       8.0 %   not applicable        
Pinnacle National
  $ 63,775       11.0 %   $ 46,373       8.0 %   $ 57,967       10.0 %
Tier I capital to risk weighted assets:
                                               
Pinnacle Financial
  $ 67,880       11.7 %   $ 23,205       4.0 %   not applicable        
Pinnacle National
  $ 58,115       10.0 %   $ 23,187       4.0 %   $ 34,780       6.0 %
Tier I capital to average assets (*):
                                               
Pinnacle Financial
  $ 67,880       9.7 %   $ 28,134       4.0 %   not applicable        
Pinnacle National
  $ 58,115       8.3 %   $ 28,116       4.0 %   $ 35,145       5.0 %
 
                                               
At December 31, 2003
                                               
 
                                               
Total capital to risk weighted assets:
                                               
Pinnacle Financial
  $ 47,914       12.8 %   $ 29,981       8.0 %   not applicable        
Pinnacle National
  $ 38,617       10.3 %   $ 29,944       8.0 %   $ 37,430       10.0 %
Tier I capital to risk weighted assets:
                                               
Pinnacle Financial
  $ 44,185       11.8 %   $ 14,990       4.0 %   not applicable        
Pinnacle National
  $ 34,888       9.3 %   $ 14,972       4.0 %   $ 22,458       6.0 %
Tier I capital to average assets (*):
                                               
Pinnacle Financial
  $ 44,185       9.7 %   $ 18,188       4.0 %   not applicable        
Pinnacle National
  $ 34,888       7.7 %   $ 18,188       4.0 %   $ 22,735       5.0 %


(*)   Average assets for the above calculations were fourth quarter amounts.

     In connection with approving Pinnacle Financial’s issuance of Trust Preferred Securities, the Federal Reserve Bank of Atlanta (“FRB-Atlanta”) required Pinnacle Financial to maintain a Total capital to risk-weighted assets ratio of 10%, a Tier 1 capital to risk-weighted assets ratio of 6% and a Tier 1 capital to average-assets ratio of 5% during the year ended December 31, 2004. Furthermore, and in order to provide additional assurance to the FRB-Atlanta as to the maintenance of these ratios, Pinnacle Financial’s President and Chief Executive Officer, Chairman and Chief Administrative Officer agreed to exercise their common stock warrant agreements should it become apparent that maintenance of the ratios at the required levels would not occur otherwise during the year ended December 31, 2004. During the year ended December 31, 2004, no such exercise of common stock warrants was required and this additional commitment of these executive officers expired at December 31, 2004. Thus, Pinnacle Financial believes that it has met the Federal Reserve Bank of Atlanta’s requirements as of December 31, 2004 in connection with this matter.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17. Parent Company Only Financial Information

     The following information presents the condensed balance sheets, statements of income, and cash flows of Pinnacle Financial as of December 31, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004:

CONDENSED BALANCE SHEETS

                 
    2004     2003  
Assets:
               
Cash
  $ 8,091,049     $ 9,108,723  
Investments in consolidated subsidiaries:
               
Pinnacle National
    58,140,549       35,039,058  
Pinnacle Advisory Services
    15,450        
Pinnacle Credit Enhancement Holdings
    245        
Investment in unconsolidated PNFP Statutory Trust I subsidiary
    310,000       310,000  
Income taxes receivable from subsidiaries
    1,807,272       902,819  
Other assets
    139,175       151,540  
 
           
 
  $ 68,503,740     $ 45,512,140  
 
           
Liabilities and stockholders’ equity:
               
Current income taxes payable
    312,221       855,759  
Subordinated debt
    10,310,000       10,310,000  
Other liabilities
    1,344       10,000  
Stockholders’ equity
    57,880,175       34,336,381  
 
           
 
  $ 68,503,740     $ 45,512,140  
 
           

CONDENSED STATEMENTS OF INCOME

                         
    2004     2003     2002  
Revenues:
                       
Interest income
  $ 63,121     $ 24,833     $ 41,983  
Expenses:
                       
Interest expense – subordinated debentures
    431,318              
Compensation expense – restricted stock
    43,009              
Other expense
    100,179       23,113        
 
                 
Income (loss) before income taxes and equity ncome of subsidiaries
    (511,385 )     1,720       41,983  
Income tax (expense) benefit
    198,516       (657 )     (16,217 )
 
                 
Income before equity in income of subsidiaries
    (312,869 )     1,063       25,766  
Equity in income of subsidiaries
    5,631,779       2,553,576       622,294  
 
                 
Net income
  $ 5,318,910     $ 2,554,639     $ 648,060  
 
                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF CASH FLOWS

                         
    2004     2003     2002  
Operating activities:
                       
Net income
  $ 5,318,910     $ 2,554,639     $ 648,060  
Adjustments to reconcile net income to net cash provided (used) by operating activities:
                       
Amortization of compensation expense related to restricted stock awards
    43,009              
Increase in income taxes receivable, net
    (1,447,991 )     (47,060 )      
Decrease (increase) in other assets
    12,365       (1,540 )      
Increase (decrease) in other liabilities
    (8,656 )     4,385       5,615  
Deferred tax expense (benefit)
          47,726       16,217  
Equity in income of subsidiaries
    (5,631,779 )     (2,553,576 )     (622,294 )
 
                 
Net cash provided (used) by operating activities
    (1,714,142 )     4,574       47,598  
 
                 
 
Investing activities
                       
Investment in unconsolidated Trust
          (310,000 )      
Investment in consolidated subsidiaries:
                       
Pinnacle National
    (17,556,000 )     (4,244,500 )     (10,080,000 )
Other subsidiaries
    (57,812 )            
 
                 
Net cash used by investing activities
    (17,613,812 )     (4,554,500 )     (10,080,000 )
 
                 
 
Financing activities
                       
Proceeds from issuance of subordinated debt
          10,310,000        
Debt issuance costs related to issuance of subordinated debt
          (150,000 )      
Net proceeds from sale of common stock
    18,192,167             12,745,000  
Exercise of common stock options
    118,113              
 
                 
Net cash provided by financing activities
    18,310,280       10,160,000       12,745,000  
 
                 
 
Net increase (decrease) in cash
    (1,017,674 )     5,610,074       2,712,598  
Cash, beginning of year
    9,108,723       3,498,649       786,051  
 
                 
Cash, end of year
  $ 8,091,049     $ 9,108,723     $ 3,498,649  
 
                 

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

Note 18. Investments in Affiliated Companies (unaudited)

     Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of PNFP Statutory Trust I (“Trust”), a wholly-owned statutory business trust. The Trust was formed on December 30, 2003. Summary financial information for the Trust follows (dollars in thousands):

Summary Balance Sheet

                 
    At Dec. 31,     At Dec. 31,  
    2004     2003  
Asset – Investment in subordinated debentures issued by Pinnacle Financial
  $ 10,310     $ 10,310  
 
           
 
Liabilities
  $     $  
 
Stockholder’s equity – Trust preferred securities
    10,000       10,000  
Common stock (100% owned by Pinnacle Financial)
    310       310  
 
           
Total stockholder’s equity
    10,310       10,310  
 
           
Total liabilities and stockholder’s equity
  $ 10,310     $ 10,310  
 
           

Summary Income Statement

                 
    Years Ended Dec. 31,  
    2004     2003  
Income – Interest income from subordinated debentures issued by Pinnacle Financial
  $ 431     $  
 
           
Net Income
  $ 431     $  
 
           

Summary Statement of Stockholder’s Equity

                                 
    Trust                     Total  
    Preferred     Common     Retained     Stockholder’s  
    Securities     Stock     Earnings     Equity  
Beginning balances, December 31, 2003
  $ 10,000     $ 310     $     $ 10,310  
Retained earnings:
                               
Net income
                431       431  
Dividends:
                               
Trust preferred securities
                (418 )     (418 )
Common dividends paid to Pinnacle Financial
                (13 )     (13 )
 
                       
Total retained earnings
                       
 
                       
Ending balances, December 31, 2004
  $ 10,000     $ 310     $     $ 10,310  
 
                       

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Quarterly Financial Results (unaudited)

     A summary of selected consolidated quarterly financial data for the years ended December 31, 2004 and 2003 follows:

                                 
    First     Second     Third     Fourth  
(in thousands, except per share data)   Quarter     Quarter     Quarter     Quarter  
2004
                               
Interest income
  $ 5,666     $ 6,225     $ 7,214     $ 8,574  
Net interest income
    4,152       4,536       5,299       6,278  
Provision for loan losses
    354       449       1,012       1,134  
Net income before taxes
    1,611       1,655       1,961       2,263  
Net income
    1,071       1,168       1,391       1,689  
Basic net income per share
  $ 0.15     $ 0.16     $ 0.18     $ 0.20  
Diluted net income per share
  $ 0.13     $ 0.14     $ 0.16     $ 0.18  
 
                               
2003
                               
Interest income
  $ 3,946     $ 4,369     $ 4,702     $ 5,244  
Net interest income
    2,636       2,984       3,385       3,893  
Provision for loan losses
    288       347       318       204  
Net income before taxes
    568       839       1,228       1,345  
Net income
    373       537       787       858  
Basic net income per share
  $ 0.05     $ 0.08     $ 0.11     $ 0.12  
Diluted net income per share
  $ 0.05     $ 0.07     $ 0.10     $ 0.11  

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

               None.

ITEM 9A. CONTROLS AND PROCEDURES

          Evaluation of Disclosure Controls and Procedures

Pinnacle Financial maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to Pinnacle Financial’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Pinnacle Financial carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that Pinnacle Financial’s disclosure controls and procedures were effective.

          Management Report on Internal Control Over Financial Reporting

The report of Pinnacle Financial’s management on Pinnacle Financial’s internal control over financial reporting is set forth on page 47 of this Annual Report on Form 10-K. The attestation of Pinnacle Financial’s registered public accounting firm related to the report is set forth on page 49 of this Annual Report on Form 10-K.

          Changes in Internal Controls

There were no changes in Pinnacle Financial’s internal control over financial reporting during Pinnacle Financial’s fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, Pinnacle Financial’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

               None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2005, which will be filed on or before March 31, 2005 under the headings “Corporate Governance,” “Proposal #1 Election of Directors,” “Executive Management Information,” and “Security Ownership of Certain Beneficial Owners and Management”.

ITEM 11. EXECUTIVE COMPENSATION

The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2005, which will be filed on or before March 31, 2005 under the heading, “ Compensation” and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2005, which will be filed on or before March 31, 2005 under the headings, “Security Ownership of Certain Beneficial Owners and Management,” and “Proposal #3 Amendment to the Pinnacle Financial Partners, Inc. 2004 Equity Incentive Plan,” and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2005, which will be filed on or before March 31, 2005 under the headings, “Security Ownership of Certain Beneficial Owners and Management — Certain Relationships and Related Transactions,” and “Compensation” and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The responses to this Item will be included in Pinnacle Financial’s Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2005, which will be filed on or before March 31, 2005 under the heading, “Independent Registered Public Accounting Firm” and is incorporated herein by reference.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a) Exhibits

             
    Exhibit No.   Description
    3.1       Charter, as amended and restated (3)
 
           
    3.2       Bylaws (6)
 
           
    4.1.1     Specimen Common Stock Certificate (1)
 
           
    4.1.2     See Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining rights of holders of the Common Stock
 
           
    10.1     Lease Agreement by and between TMP, Inc. (former name of Pinnacle Financial Partners, Inc.) and Commercial Street Associates dated March 16, 2000 (main office) (1)
 
           
    10.4     Form of Pinnacle Financial Partners, Inc.’s Organizers’ Warrant Agreement (1)
 
           
    10.7     Employment Agreement dated as of August 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr. (1)
 
           
    10.8     Employment Agreement dated as of April 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and Hugh M. Queener (1)

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    Exhibit No.   Description
 
           
    10.9     Letter Agreement dated March 14, 2000 and accepted March 16, 2000 by and between Pinnacle Financial Corporation (now known as Pinnacle Financial Partners, Inc.) and Atkinson Public Relations (1)
 
           
    10.14     Employment Agreement dated March 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and M. Terry Turner (1)
 
           
    10.15     Pinnacle Financial Partners, Inc. 2000 Stock Incentive Plan (1)
 
           
    10.16     Form of Pinnacle Financial Partners, Inc.’s Stock Option Award (1)
 
           
    10.18     Agreement for Assignment of Lease by and between Franklin National Bank and TMP, Inc., now known as Pinnacle Financial Partners, Inc., effective July 17, 2000 (1)
 
           
    10.19     Form of Assignment of Lease and Consent of Landlord by Franklin National Bank, Pinnacle Financial Partners, Inc., formerly TMP, Inc., and Stearns Investments, Jack J. Stearns and Edna Stearns, General Partners (1)
 
           
    10.21     Green Hills Office Lease (2)
 
           
    10.22     Pinnacle Financial Partners, Inc. 2004 Equity Incentive Plan (4)
 
           
    10.23     Form of Restricted Stock Award Agreement (5)
 
           
    10.24     Form of Incentive Stock Option Agreement (5)
 
           
    10.25     Lease Agreement for West End Lease
 
           
    10.26     Lease Amendments for Commerce Street location
 
           
    21.1     Subsidiaries of Pinnacle Financial Partners, Inc.
 
           
    23.1     Consent of KPMG LLP
 
           
    31.1     Certification pursuant to Rule 13a-14(a)/15d-14(a)
 
           
    31.2     Certification pursuant to Rule 13a-14(a)/15d-14(a)
 
           
    32.1     Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
 
           
    32.2     Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002


(1)   Registrant hereby incorporates by reference to the exhibit of identical index number filed with, and made a part of, Registrant’s Registration Statement on Form SB-2, as amended (File No. 333-38018).
 
(2)   Registrant hereby incorporates by reference to the exhibit of identical index number filed with Form 10-KSB for the fiscal year ended December 31, 2000 as filed with the SEC on March 29, 2001.
 
(3)   Registrant hereby incorporates by reference to the exhibit of identical index number filed with, and made a part of, Registrant’s Form 10-Q for the quarter end March 31, 2004.
 
(4)   Registrant hereby incorporates by reference to Exhibit 10.1 filed with, and made part of, Registrant’s Registration Statement on Form S-8 (File No. 333-114799).
 
(5)   Registrant hereby incorporates by reference to Exhibit 10.1 and 10.2 of Registrant’s Form 10-Q for the quarter ended September 30, 2004.
 
(6)   Registrant hereby incorporates by reference to exhibit of identical index number filed with Form 10-KSB for the fiscal year ended December 31, 2002 as filed with the SEC on March 6, 2003.

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Pinnacle Financial is a party to certain agreements entered into in connection with the offering by PNFP Statutory Trust I of $10,000,000 in trust preferred securities, as more fully described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(ii) of Regulation SB, and because the total amount of the trust preferred securities is not in excess of 10% of Pinnacle Financial’s total assets, Pinnacle Financial has not filed the various documents and agreements associated with the trust preferred securities herewith. Pinnacle Financial has, however, agreed to furnish copies of the various documents and agreements associated with the trust preferred securities to the Securities and Exchange Commission upon request.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

     
  PINNACLE FINANCIAL PARTNERS, INC.
 
   
  By: /s/ M. Terry Turner
 
  M. Terry Turner
  President and CEO
 
   
  Date: February 28, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

         
Signature   Title   Date
 
       
/s/ Robert A. McCabe, Jr.
  Chairman of the Board   February 28, 2005

       
Robert A. McCabe, Jr.
       
 
       
/s/ M. Terry Turner
  President and Chief   February 28, 2005

  Executive Officer    
M. Terry Turner
  (Principal Executive Officer)    
     
 
       
/s/ Harold R. Carpenter
  Chief Financial Officer   February 28, 2005

  (Principal Financial    
Harold R. Carpenter
and Accounting Officer)    
     
 
       

  Director     
Sue R.Atkinson
       
 
       
/s/ Gregory L. Burns
  Director   February 28, 2005

       
Gregory L. Burns
       
 
       

  Director     
Colleen Conway-Welch
       
 
       
/s/ Clay T. Jackson
  Director   February 28, 2005

       
Clay T. Jackson
       
 
       
/s/ John E. Maupin, Jr.
  Director   February 28, 2005

       
John E. Maupin, Jr.
       
 
       
/s/ Robert E. McNeilly, Jr.
  Director   February 28, 2005

       
Robert E. McNeilly, Jr.
       
 
       
/s/ Dale W. Polley
  Director   February 28, 2005

       
Dale W. Polley
       

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Signature   Title   Date
/s/ Linda E. Rebrovick
  Director   February 28, 2005

       
Linda E. Rebrovick
       
 
       
/s/ James L. Shaub, II
  Director   February 28, 2005

       
James L. Shaub, II
       
 
       
/s/ Reese L. Smith, III
  Director   February 28, 2005

       
Reese L. Smith, III
       

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EXHIBIT INDEX

     
Exhibit    
No.   Description
3.1
  Charter, as amended and restated (3)
 
   
3.2
  Bylaws (6)
 
   
4.1.3
  Specimen Common Stock Certificate (1)
 
   
4.1.4
  See Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining rights of holders of the Common Stock
 
   
10.1
  Lease Agreement by and between TMP, Inc. (former name of Pinnacle Financial Partners, Inc.) and Commercial Street Associates dated March 16, 2000 (main office) (1)
 
   
10.4
  Form of Pinnacle Financial Partners, Inc.’s Organizers’ Warrant Agreement (1)
 
   
10.7
  Employment Agreement dated as of August 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr. (1)
 
   
10.8
  Employment Agreement dated as of April 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and Hugh M. Queener (1)
 
   
10.9
  Letter Agreement dated March 14, 2000 and accepted March 16, 2000 by and between Pinnacle Financial Corporation (now known as Pinnacle Financial Partners, Inc.) and Atkinson Public Relations (1)
 
   
10.14
  Employment Agreement dated March 1, 2000 by and between Pinnacle National Bank, Pinnacle Financial Partners, Inc. and M. Terry Turner (1)
 
   
10.15
  Pinnacle Financial Partners, Inc. 2000 Stock Incentive Plan (1)
 
   
10.16
  Form of Pinnacle Financial Partners, Inc.’s Stock Option Award (1)
 
   
10.18
  Agreement for Assignment of Lease by and between Franklin National Bank and TMP, Inc., now known as Pinnacle Financial Partners, Inc., effective July 17, 2000 (1)
 
   
10.19
  Form of Assignment of Lease and Consent of Landlord by Franklin National Bank, Pinnacle Financial Partners, Inc., formerly TMP, Inc., and Stearns Investments, Jack J. Stearns and Edna Stearns, General Partners (1)
 
   
10.21
  Green Hills Office Lease (2)
 
   
10.22
  Pinnacle Financial Partners, Inc. 2004 Equity Incentive Plan (4)
 
   
10.23
  Form of Restricted Stock Award Agreement (5)
 
   
10.24
  Form of Incentive Stock Option Agreement (5)
 
   
10.25
  Lease Agreement for West End Lease
 
   
10.26
  Lease Amendments for Commerce Street location
 
   
21.1
  Subsidiaries of Pinnacle Financial Partners, Inc.

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Exhibit    
No.   Description
23.1
  Consent of KPMG LLP
 
   
31.1
  Certification pursuant to Rule 13a-14(a)/15d-14(a)
 
   
31.2
  Certification pursuant to Rule 13a-14(a)/15d-14(a)
 
   
32.1
  Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
 
   
32.2
  Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002


(1)   Registrant hereby incorporates by reference to the exhibit of identical index number filed with, and made a part of, Registrant’s Registration Statement on Form SB-2, as amended (File No. 333-38018).
 
(2)   Registrant hereby incorporates by reference to the exhibit of identical index number filed with Form 10-KSB for the fiscal year ended December 31, 2000 as filed with the SEC on March 29, 2001.
 
(3)   Registrant hereby incorporates by reference to the exhibit of identical index number filed with, and made a part of, Registrant’s Form 10-Q for the quarter end March 31, 2004.
 
(4)   Registrant hereby incorporates by reference to Exhibit 10.1 filed with, and made part of, Registrant’s Registration Statement on Form S-8 (File No. 333-114799).
 
(5)   Registrant hereby incorporates by reference to Exhibit 10.1 and 10.2 of Registrant’s Form 10-Q for the quarter ended September 30, 2004.
 
(6)   Registrant hereby incorporates by reference to exhibit of identical index number filed with Form 10-KSB for the fiscal year ended December 31, 2002 as filed with the SEC on March 6, 2003.

Pinnacle Financial is a party to certain agreements entered into in connection with the offering by PNFP Statutory Trust I of $10,000,000 in trust preferred securities, as more fully described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(ii) of Regulation SB, and because the total amount of the trust preferred securities is not in excess of 10% of Pinnacle Financial’s total assets, Pinnacle Financial has not filed the various documents and agreements associated with the trust preferred securities herewith. Pinnacle Financial has, however, agreed to furnish copies of the various documents and agreements associated with the trust preferred securities to the Securities and Exchange Commission upon request.

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