<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended_____________
OR
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from July 1, 1996 to December 31, 1996
Commission file number 1-12707
PINNACLE BANCSHARES, INC.
(Name of small business issuer in its charter)
Delaware [Applied For]
- -------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1811 Second Avenue, Jasper, Alabama 35502-1388
- --------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (205) 221-4111.
Securities registered pursuant to Section 12(b) of the Act: None.
Name of Each Exchange
Title of Each Class on Which Registered
- -------------------------------------- ------------------------
Common Stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO ___
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year. $8,096,062. The
aggregate market value of the voting stock held by non-affiliates, computed by
reference to the price ($21.625 per share) at which the Common Stock was sold on
March 31, 1997, was approximately $17,644,745. For purposes of this calculation,
the term "affiliate" refers to all executive officers and directors of the
registrant and all stockholders beneficially owning more than 10% of the
registrant's Common Stock.
As of the close of business on March 31, 1997, 889,823 shares of the
registrant's Common Stock were outstanding.
Transitional Small Business Disclosure Format: YES NO X
---- -----
Documents Incorporated By Reference
Part II:
Annual Report to Stockholders for the period ended December 31, 1996.
Part III:
Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
THE HOLDING COMPANY. Pinnacle Bancshares, Inc. (the "Holding Company")
is a bank holding company incorporated under the laws of the State of Delaware.
The Holding Company is registered under the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"). The Holding Company is the holding company
for Pinnacle Bank (the "Bank"), which was chartered by the State of Alabama and
acquired by the Holding Company on January 31, 1997.
The Holding Company's executive offices and the main office of the Bank
are located at 1811 Second Avenue, Jasper, Alabama 35502. The Holding Company's
telephone number is (205) 221-4111.
THE BANK. The Bank is an Alabama-chartered commercial bank with five
offices located in Central and Northwest Alabama. The Bank was originally
chartered as First Federal Savings and Loan Association of Jasper in 1935, and
since that time its accounts have been federally insured. The Bank converted
from a federal stock savings bank to an Alabama-chartered commercial bank on
January 31, 1997 in connection with the holding company reorganization. The Bank
has its main office at 1811 Second Avenue, Jasper, Alabama, and also has a
branch office in Jasper, Alabama, with other branch offices in Sumiton,
Haleyville, and Birmingham, Alabama.
The Bank is primarily engaged in the business of obtaining funds in the
form of savings deposits and investing such funds in mortgage loans on
single-family residential real estate. To a lesser extent the Bank is engaged in
making consumer loans, commercial real estate loans, and other commercial loans.
The principal sources of funds for the Bank's lending activities are
savings deposits, Federal Home Loan Bank ("FHLB") of Atlanta advances, principal
repayments of loans and sales of loans. The Bank's principal sources of income
are interest on loans, servicing and commitment fees, and interest and dividends
on securities. Its principal expenses are interest on savings accounts and
borrowings, and general and administrative expenses.
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<PAGE> 3
SELECTED FINANCIAL AND OTHER DATA
The following data should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, and other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
At June 30, At December 31,
----------------------------- -------------------
1995 1996 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FINANCIAL CONDITION AND OTHER DATA:
Total amount of:
Assets............................................ $ 196,399 $ 186,475 $ 195,502
Loans, net........................................ 118,535 120,644 129,858
Interest-bearing deposits in other banks.......... 5,536 2,824 3,869
Securities........................................ 60,087 53,671 48,945
Loans held for sale............................... 2,091 326 1,429
Deposits.......................................... 161,212 165,234 173,407
Borrowed funds.................................... 18,850 3,750 3,750
Stockholders' equity.............................. 14,363 15,165 15,285
Number of:
Real estate loans outstanding..................... 4,283 4,175 4,131
Savings accounts.................................. 19,387 19,114 20,708
Full service offices open......................... 5 5 5
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, Six Months Ended December 31,
---------------------------- -----------------------------------
1995 1996 1995 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
OPERATING DATA:
Interest revenue.................................... $ 13,108 $ 14,650 $ 7,412 $ 7,442
Interest expense.................................... 7,541 8,599 4,424 4,268
------------ ------------ ------------ ---------------
Net interest income before provision for losses
on loans......................................... 5,567 6,051 2,988 3,174
Provision for losses on loans....................... 235 240 120 145
------------ ------------ ------------ ---------------
Net interest income after provision for losses 5,332 5,811 2,868 3,029
on loans.........................................
Noninterest income.................................. 1,012 1,275 594 654
Noninterest expense................................. 4,323 4,456 2,199 3,373
Unusual items....................................... -- -- -- --
Income tax expense.................................. 780 993 503 123
------------ ------------ ------------ ---------------
Net earnings........................................ $ 1,241 $ 1,637 $ 840 $ 187
============ ============ ============ ===============
</TABLE>
3
<PAGE> 4
The following table sets forth certain information relating to the
Bank's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans, if
any, are included in the net loan category. Average balances are derived from
month-end average balances. Management does not believe that the use of
month-end average balances instead of average daily balances has caused any
material difference in the information presented.
<TABLE>
<CAPTION>
For the Years Ended June 30,
--------------------------------------------------------------------------------------
1995 1996
---------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net............... $ 115,511 $ 9,217 8.0% $ 123,459 $ 10,801 8.7%
Securities Available for Sale....... 27,569 1,566 5.7% 41,521 2,465 5.9%
Securities held to Maturity......... 33,648 2,220 6.6% 14,910 1,082 7.2%
Other............................... 1,786 105 5.9% 5,358 302 5.6%
----------- --------- ----------- ----------
Total............................... 178,514 13,108 7.3% 185,248 14,650 8.0%
Non-interest-earning assets......... 8,838 -- 6,689 --
----------- -----------
Total assets........................ $ 187,352 13,108 $ 191,937 14,650
=========== ===========
Interest-bearing liabilities:
Deposits............................ $ 154,244 6,550 4.3% $ 164,649 7,994 4.9%
Borrowings.......................... 16,935 991 5.9% 10,713 605 5.6%
----------- --------- ----------- ----------
Total interest-bearing liabilities:. 171,179 7,541 4.4% 175,362 8,599 4.9%
Non-interest-bearing liabilities.... 1,882 2,080
----------- -----------
Total Liabilities:.................. 173,061 177,442
Equity........................... 14,291 14,495
----------- -----------
Total Liabilities and Equity..... $ 187,352 $ 191,937
=========== ===========
Net interest-earning assets......... 7,335 9,886
--------- ----------
Net interest income................. $ 5,567 $ 6,051
========= ==========
Interest rate spread................ 2.9% 3.1%
========= =========
Net interest margin................. 3.1% 3.3%
========= =========
Ratio of average interest-earning
assets to interest-bearing
liabilities...................... 104.3% 105.6%
========= =========
(Continued on following page)
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
For the Six Months Ended December 31,
----------------------------------------------------------------------------------------
1995 1996
------------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost (1) Balance Interest Yield/Cost (1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net............... $ 124,396 $ 5,416 8.7% $ 129,881 $ 5,673 8.7%
Securities Available for Sale....... 26,842 755 5.6% 51,403 1,691 6.6%
Securities held to Maturity......... 29,800 1,082 7.3% -- -- 0.0%
Other............................... 5,515 159 5.8% 2,783 78 5.6%
----------- --------- ---------- ----------
Total............................... 186,553 7,412 7.9% 184,067 7,442 8.1%
Non-interest-earning assets......... 7,802 -- 7,796 --
----------- ----------
Total assets........................ $ 194,355 7,412 $ 191,863 7,442
=========== ==========
Interest-bearing liabilities:
Deposits............................ $ 161,805 4,005 5.0% $ 170,423 4,157 4.9%
Borrowings.......................... 14,336 419 5.9% 3,799 111 5.8%
----------- --------- ---------- ----------
Total interest-bearing liabilities:. 176,141 4,424 5.0% 174,222 4,268 4.9%
Non-interest-bearing liabilities.... 3,536 2,407
----------- ----------
Total Liabilities:.................. 179,677 176,629
Equity........................... 14,678 15,234
----------- ----------
Total Liabilities and Equity..... $ 194,355 $ 191,863
=========== ==========
Net interest-earning assets......... 10,412 9,865
--------- ----------
Net interest income................. $ 2,988 $ 3,174
========= ==========
Interest rate spread................ 2.9% 3.2%
========== ==========
Net interest margin................. 3.2% 3.4%
========== ==========
Ratio of average interest-earning
assets to interest-bearing
liabilities...................... 105.9% 105.7%
========= =========
</TABLE>
(1) Annualized.
LENDING ACTIVITIES
GENERAL. The Bank's net loan portfolio totaled $129.9 million at
December 31, 1996, or 66.4% of its total assets. On that date, $109.6 million,
or 84.4% of total net loans outstanding, consisted of loans secured by mortgages
on single family, two-to-four family, multi-family residential properties, and
commercial real estate loans, while the remainder of the loan portfolio
consisted of savings account, home improvement and other consumer and commercial
loans.
The principal lending activity of the Bank historically has been the
origination of conventional first mortgage single-family loans. The Bank also
makes loans on two-to-four family dwelling units, multi-family dwelling units,
commercial real estate and other improved real estate. The majority of the
Bank's loans have been originated within its primary market area.
Loan demand during the year ended June 30, 1995 exceeded repayments on
loans resulting in an increase in short-term borrowings from the FHLB of Atlanta
of approximately $8.0 million. During the year ended June 30, 1996, the Bank
repaid approximately $16.1 million in borrowed funds with the proceeds from
maturing investment securities, increases in savings deposits, and loan
repayments. The Bank funded loan demands with the proceeds from loan repayments,
increases in savings deposits and maturing securities. The Bank borrowed funds
on a short-term basis from the FHLB of Atlanta. However, there were no
short-term borrowings outstanding at December 31, 1996.
5
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During December 1995, the Bank changed classification of its securities
held to maturity to securities available for sale. Accordingly, the Bank had no
securities classified as held to maturity as of June 30, 1996 or December 31,
1996. See Note 1 of Notes to Consolidated Financial Statements.
The Bank's volume of total loans originated to be retained in the
Bank's loan portfolio totaled approximately $69.3 million during the year ended
June 30, 1995, $74.9 million during the year ended June 30, 1996 and $42.0
million during the six months ended December 31, 1996. The Bank directly
originates most of its mortgage loans through its existing branches. These loans
have been originated predominantly within the Bank's geographical lending area
of Walker, Jefferson, Shelby, Winston and Fayette counties, in Alabama. See " --
Loan Solicitation and Processing" and "-- Loan Originations, Purchases and
Sales."
The Bank seeks to improve the interest rate sensitivity of its mortgage
loan portfolio through the origination of adjustable rate loans, which
constituted approximately 59.3% of the single family residential mortgage loans
in the Bank's loan portfolio, and 41.1% of the Bank's net loan portfolio at
December 31, 1996. During the year ended June 30, 1996, the Bank purchased $1.6
million in adjustable-rate single-family one-to-four family residential mortgage
loans from an affiliate. Most adjustable rate mortgage loans are held in the
Bank's loan portfolio, while most fixed-rate mortgage loans are either sold as
whole-loans to the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Federal National Mortgage Association ("FNMA") or other investors, or converted
into mortgage-backed securities with servicing retained by the Bank.
The following table sets forth, in dollar amounts and percentages, the
major categories of the Bank's loans. At December 31, 1996, the Bank had no
concentrations of loans exceeding 10% of gross losses other than as described
below.
<TABLE>
<CAPTION>
At June 30, At December 31,
-------------------------------------------------- --------------------------
1995 1996 1996
------------------------ ---------------------- --------------------------
$ % $ % $ %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real estate mortgage loans...... $ 91,979 77.6% $ 86,818 72.0% $ 89,968 69.2%
Construction loans.............. 21,276 17.9% 26,801 22.3% 27,762 21.4%
Commercial loans................ 6,511 5.5% 10,021 8.3% 12,019 9.3%
Consumer loans.................. 8,485 7.2% 8,942 7.4% 9,701 7.5%
Less --
Loans in process............. 8,251 7.0% 10,441 8.7% 8,198 6.3%
Discounts and other.......... 246 0.2% 212 0.2% 205 0.2%
Allowance for loan losses.... 1,219 1.0% 1,285 1.1% 1,189 0.9%
---------- --------- ---------- -------- ---------- -----------
Total...................... $ 118,535 100.0% $ 120,644 100.0% $ 129,858 100.0%
========== ========= ========== ======== ========== =====
</TABLE>
RESIDENTIAL LOANS. The primary lending activity of the Bank has been
the granting of conventional mortgage loans to enable borrowers to purchase
existing homes or construct new homes. The Bank's real estate loan portfolio
also includes loans on two-to-four family dwellings, multi-family housing (over
four units), and loans made for the development of unimproved real estate to be
used for residential housing. At December 31, 1996, approximately 93% of the
Bank's total real estate loan portfolio consisted of loans secured by
residential real estate.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Bank generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions, and underwriting standards established by
the Bank. Mortgage loans made by the Bank are generally long-term loans,
amortized on a monthly basis, with principal and interest due each month. The
initial contractual loan payment period for residential loans typically ranges
from 15 to 30 years. Currently, the Bank offers one-year, adjustable rate loans
based upon the one-year U.S. Treasury Bill rate
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<PAGE> 7
adjusted to a constant maturity, with limitations on adjustments of 2% in any
one year and 6% over the life of the loan.
At December 31, 1996, the largest amount loaned by the Bank to one
borrower was $2.9 million which was approximately 19% of the Bank's
stockholders' equity.
COMMERCIAL REAL ESTATE AND CONSTRUCTION LOANS. Construction loans on
residential properties are made primarily to individuals. The maximum loan to
value ratio is 80% of either the appraisal or the purchase price, whichever is
lower. Residential construction loans are typically made for periods of six
months. At December 31, 1996, the Bank had $23.0 million outstanding in
residential construction loans, compared with $22.5 million and $20.9 million in
construction loans on residential properties outstanding at June 30, 1996 and
1995, respectively.
The Bank has historically originated commercial real estate loans
within its primary market area. The Bank either funded or purchased
participation interests in various large commercial real estate projects, one of
which was outside of its primary market area. See " -- Non-Performing Loans and
Asset Classification" and "Subsidiary Activities." Since 1984, the Bank has
limited its commercial real estate lending activities to smaller commercial real
estate projects located in its primary market area, with the amount loaned
limited to 10% of its net worth. See "-- Nonperforming Loans and Asset
Classification" and "Subsidiary Activities." At December 31, 1996, the Bank had
$13.3 million outstanding in commercial real estate loans, including $4.8
million in commercial construction loans. These loans are typically limited to
owner-occupied financings.
COMMERCIAL BUSINESS LOANS. At December 31, 1996, there were
approximately $12 million in commercial loans outstanding. The Bank will
consider making these types of loans in its local market area.
CONSUMER LOANS. The Bank makes various types of consumer loans,
including the loans made to depositors on the security of their savings
accounts, personal loans, automobile loans, educational loans and loans for home
improvement or other purposes.
At December 31, 1996, the Bank had $9.7 million outstanding in consumer loans.
LOAN SOLICITATION AND PROCESSING. Loan originations come from a
combination of walk-in customers and real estate brokers.
For additional information on the Bank's lending activities, see Note 3
of Notes to Consolidated Financial Statements.
LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank has engaged in selling
in the secondary market certain loans it has originated. Such loans sold are
generally fixed-rate, long-term mortgage loans. These sales, the majority of
which do not allow recourse to the Bank, have been made to FHLMC and FNMA, which
purchases residential mortgage loans from federally insured financial
institutions and certain other lenders. Many of the Bank's loans have been
exchanged for FHLMC participation certificates ("PCs") or FNMA mortgage-backed
securities. These PCs or mortgage-backed securities are generally considered to
be a more liquid form of asset and are a more widely accepted form of collateral
than the underlying loans.
The sale of loans in the secondary mortgage market reduces the Bank's
risk that the interest rates it pays will escalate while holding long-term,
fixed-rate loans in its portfolio and allows the Bank to continue to make loans
during periods when savings flows decline or funds are not otherwise available
for lending purposes. In connection with such sales the Bank provides servicing
on the loans (i.e., collection of principal and interest payments) for which it
receives a fee payable monthly of 1/4% to 3/8% per annum of the unpaid balance
of each loan. These loan sales will continue as the Bank attempts to maintain
its loan servicing base. As of December 31, 1996, the Bank was servicing loans
for others aggregating approximately $97.5 million. Servicing income for the
year ended June 30, 1996 and the six months ended December 31, 1996 was
approximately $266,000 and $128,000, respectively.
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<PAGE> 8
The Bank is continuously selling loans in the secondary market. During
the year ended June 30, 1995 and 1996 and the six months ended December 31,
1996, the Bank sold in excess of $37 million, $41 million and $11 million,
respectively, in whole loans. As of December 31, 1996, the Bank had $258,000 in
commitments outstanding to package or sell additional loans.
The Bank's loan policy requires that the Bank's loan committee
identify, at the beginning of each quarter, loans which will be held for the
portfolio and loans which will be held for sale. Loans that are designated to be
held for the portfolio may be sold only in unusual circumstances which could not
be reasonably anticipated at the time of their origination or purchase. Loans
held for sale are carried at the lower of cost or market value and are sold as
soon as possible after their origination, as market conditions allow.
LOAN COMMITMENTS. The Bank issues commitments to prospective borrowers
to make loans conditioned upon the occurrence of certain events. Such
commitments are made on specific terms and conditions, and are honored for 60
days from approval with no additional fees required. The Bank charges a
non-refundable commitment fee equal to 1% of the actual amount of committed
funds on all single-family construction loans. The Bank had outstanding
commitments to originate mortgage loans aggregating $2.1 million at December 31,
1996. Of these commitments, $2 million were for adjustable rate mortgages and
$100,000 were for fixed rate mortgages.
Although the Bank originates most fixed-rate loans for resale in the
secondary mortgage market, a certain amount of interest rate risk exists for the
Bank after a loan is closed until a loan is sold.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, the Bank receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage loan
which are charged to the borrower for creation of the loan. The Bank accounts
for loan origination fees net of direct costs as a yield adjustment over the
life of the loan. See Note 1 of Notes to Consolidated Financial Statements.
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. The Bank does not have any
loans with no stated schedule of repayments and no stated maturity.
<TABLE>
<CAPTION>
Due After One Through Due After
Due by Five Years After Five Years After
December 31, 1997 December 31, 1996 December 31, 1996 Total
----------------- ----------------- ----------------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage........... $ 3,554 $ 19,487 $ 66,928 $ 89,969
Real estate construction....... 19,564 -- -- 19,564
Commercial business loans...... 5,306 3,845 2,868 12,019
Consumer....................... 2,899 6,415 387 9,701
------------- ---------- ------------ ------------
Total....................... $ 31,323 $ 29,747 $ 70,183 $ 131,253
============= ========== ============ ============
</TABLE>
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<PAGE> 9
The following table sets forth the dollar amount of all loans due after
one year at December 31, 1996 which have predetermined interest rates and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or Adjustable
Predetermined Rates Rates
------------------- ---------------
(In thousands)
<S> <C> <C>
Real estate mortgage...................... $ 35,103 $ 51,312
Commercial business loans................. 1,756 4,957
Consumer.................................. 6,113 689
-------------- ---------------
Total................................... $ 42,972 $ 56,958
============== ===============
</TABLE>
NON-PERFORMING LOANS AND ASSET CLASSIFICATION. Loans that are 120 days
contractually past due are placed on nonaccrual status and interest income is
reversed. Income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in which case
the loan is returned to accrual status.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When such property is acquired it is recorded at the lower of the
unpaid principal balance of the related loan or its fair value less estimated
costs of disposition. Any write-down of the property at foreclosure is charged
to the allowance for loan losses. Future declines in fair value of the asset
less costs of disposition below its carrying amount increases the valuation
allowance account. Future increases in fair value of the asset less costs of
disposition above its carrying amount reduces the valuation allowance account,
but not below zero. Increases or decreases in the valuation allowance account is
charged or credited to income. Costs relating to the development and improvement
of property are capitalized, whereas costs relating to the holding of property
are expensed.
The recognition of gains and losses on the sale of real estate is
dependent upon whether the nature and terms of the sale and future involvement
of the Bank in the property meet certain requirements. If the transaction does
not meet these requirements, income recognition is deferred and recognized under
an alternative method in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 66 -- "Accounting for Sales of Real Estate."
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<PAGE> 10
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------------------ -----------------
1995 1996 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real Estate:
Residential................................... $ 126,779 $ 293,983 $ 1,273,667
Commercial.................................... -- 963,509 664,189
Consumer......................................... 32,874 56,190 113,134
------------ ------------ -------------
Total............................................ $ 159,653 $ 1,313,682 $ 2,050,990
============ ============ =============
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential................................... $ -- $ -- $ --
Commercial.................................... -- -- --
Consumer......................................... -- -- --
------------ ------------ -------------
Total............................................ $ -- $ -- $ --
============ ============ =============
Total of nonaccrual and 90 days past
due loans................................... $ 159,653 $ 1,313,682 $ 2,050,990
============ ============ =============
Percentage of Total Loans........................ 0.13% 1.09% 1.58%
Percentage of Total Assets....................... 0.08% 0.70% 1.05%
Other Non-Performing Assets(2)................... $ -- $ -- $ 1,010,340
============ ============ =============
</TABLE>
(1) Nonaccrual status denotes loans on which accrual of interest has been
ceased in accordance with the guidelines discussed above. Payments received
on a nonaccrual loan are either applied to the outstanding principal
balance or recorded as interest income, depending on assessment of the
collectibility of the loan.
(2) Other non-performing assets represent property acquired by the Bank through
foreclosure or repossession. The property is carried at the lower of its
fair value less estimated costs of disposition or the investment balance of
the related loan, whichever is lower.
Management has identified certain loans aggregating approximately $2.1
million at December 31, 1996 (including loans identified in the above table)
which it has determined require special attention due to potential weaknesses.
It is management's opinion that the allowance for loan losses (see below) is
adequate to absorb potential losses related to such loans. Aggressive efforts to
continue to reduce principal, secure additional collateral and improve the
overall payment status of their loans.
During the year ended June 30, 1996 and six months ended December 31,
1996 gross interest income of $30,686 and $53,650, respectively, would have been
recorded on loans accounted for on a nonaccrual basis if the loans had been
current throughout the period. The amount of interest income included in current
income for these loans was $28,472 and $69,724 for the year ended June 30, 1996
and the six months ended December 31, 1996.
It is management's policy to establish an allowance for estimated
losses on loans and real estate owned based upon prior experience, current
economic conditions in its market area, or when it determines that losses are
expected to be incurred on the ultimate disposition of the underlying
properties. Although management believes that it uses the best information
available to make such determinations, future adjustments to allowances may be
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<PAGE> 11
necessary, and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the initial
determinations.
The following table presents an allocation of the allowance for
possible loan losses by the categories indicated and the percentage that all
loans in the category bear to total loans. This allocation is used by management
to qualify its evaluation of the loan portfolio. Allocations are merely
estimates and are subject to revisions as conditions change.
<TABLE>
<CAPTION>
At June 30, At December 31,
-------------------------------------------------------- --------------------------
1995 1996 1996
-------------------------- -------------------------- --------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans.. $ 677 95.5% $ 629 94.3% $ 835 90.6%
Commercial......... 259 5.5% 391 8.3% 156 9.3%
Other loans........ 283 7.2% 265 7.4% 198 7.5%
--------- ----------- --------- ----------- ---------- ------------
Total........... $ 1,219 108.2% $ 1,285 110.0% $ 1,189 107.4%
========= =========== ========= =========== ========== ============
</TABLE>
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30, December 31,
------------------------------------- ------------------------------------
1995 1996 1995 1996
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period............ $ 1,039 $ 1,219 $ 1,219 $ 1,285
---------------- ------------- -------------- ---------------
Loans charged-off:
Consumer............................... 127 184 120 123
Mortgage............................... 37 29 18 120
---------------- ------------- -------------- ---------------
Total charge-offs......................... 164 213 138 243
---------------- ------------- -------------- ---------------
Total recoveries.......................... 109 39 11 11
---------------- ------------- -------------- ---------------
Net loans charged-off..................... 55 174 127 232
---------------- ------------- -------------- ---------------
Provision for possible loan losses........ 235 240 120 145
---------------- ------------- -------------- ---------------
Balance at end of period.................. $ 1,219 $ 1,285 $ 1,212 $ 1,198
================ ============= ============== ===============
Ratio of net charge-offs to average
loans outstanding during the period.... 0.05% 0.14% 0.10% 0.18%
================ ============= ============== ===============
</TABLE>
For further information and for an analysis of the Bank's allowances
for loan and real estate losses, see Notes 3 and 5 of Notes to Consolidated
Financial Statements.
INVESTMENT ACTIVITIES
Interest income from cash deposits and securities generally provide the
second largest source of income for the Bank after interest on loans and loan
servicing fees and other fees. At December 31, 1996, the Bank's interest-bearing
deposits and securities portfolio of approximately $7.4 million, excluding
mortgage-backed
11
<PAGE> 12
securities, consisted primarily of interest-bearing bank deposits, U.S.
government and agency obligations, corporate securities, and FHLB of Atlanta
stock.
It has generally been the Bank's policy to maintain a liquidity
portfolio in excess of regulatory requirements in order to shorten the
maturities of the Bank's investment portfolio to enable the Bank to better match
its short-term investments and interest rate sensitive savings deposit
liabilities. The Bank also increases its liquidity by selling most of its fixed
rate loans with maturities of greater than 10 years.
On June 30, 1995, the Bank adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In adopting SFAS No. 115,
securities have been classified as either trading, available for sale or held to
maturity based on management's intent and ability. See Note 1 of Notes to
Consolidated Financial Statements.
The following table sets forth the carrying value of the Bank's
investment securities and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
---------------------------------- --------------------
1995 1996 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasury securities...................... $ 17,172 $ 12,018 $ 13,099
U.S. Government and agency securities......... 970 5,890 7,966
Corporate securities.......................... 7,952 7,006 1,005
FHLB stock.................................... 1,716 1,716 1,716
Mortgage-backed securities.................... 32,061 26,824 24,942
Other securities.............................. 216 217 217
--------------- --------------- -------------
Total............................................ $ 60,087 $ 53,671 $ 48,945
=============== =============== =============
</TABLE>
The following table sets forth the scheduled maturities, amortized
cost, fair values and weighted average yields for the Bank's securities
available for sale at December 31, 1996.
<TABLE>
<CAPTION>
One Year Or Less After One Through Five Years After Five Through Ten Years
---------------- ---------------------------- ----------------------------
Amortized Weighted Amortized Weighted Amortized Weighted
Cost Average Yield Cost Average Yield Cost Average Yield
---- ------------- ---- ------------- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities...... $ 3,017,660 5.7% $ 10,023,622 6.1% $ -- --%
U.S. government and agency.... 1,000,000 5.0 6,997,968 6.2 -- --
FHLB of Atlanta stock (3)..... -- -- -- -- -- --
Corporate securities (1)...... 1,006,960 5.4 -- -- -- --
Other securities (2).......... 9,881 4.5 -- -- 206,941 4.5
Mortgage-backed securities.... -- -- -- -- 563,098 8.5
------------ ----------- ------------ ----------- ------------- -----------
Total......................... $ 5,034,501 5.5% $ 17,021,590 6.1% $ 770,039 7.4%
============ =========== ============ =========== ============= ===========
</TABLE>
<TABLE>
<CAPTION>
After Ten Years Total
--------------- -----
Amortized Weighted Amortized Weighted
Cost Average Yield Cost Fair Value Average Yield
---- ------------- ---- ---------- -------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities...... $ -- --% $ 13,041,282 $ 13,098,936 6.0%
U.S. government and agency.... -- -- 7,997,968 7,965,694 6.0
FHLB of Atlanta stock (3)..... 1,715,800 7.3 1,715,800 1,715,800 7.3
Corporate securities (1)...... -- -- 1,006,960 1,005,324 5.4
Other securities (2).......... -- -- 216,822 216,965 4.5
Mortgage-backed securities.... 24,520,044 7.0 25,083,142 24,942,093 7.0
------------- ----------- ---------- ------------- ------------
Total......................... $ 26,235,844 7.0% $ 49,061,974 $ 48,944,812 6.7%
============= =========== ============ ============= ============
</TABLE>
(Footnotes on following page)
12
<PAGE> 13
- ---------------
(1) Corporate securities consists of corporate bonds.
(2) Other securities includes the Bank's investment in First General Lending
Corporation (a 40% owned affiliate), at cost, of $120,819; and an interest
investment in limited partnerships, at cost, of $86,122 whose sole purpose
is to hold and operate real estate. The Bank has no loans to these real
estate partnerships. These investments are not readily marketable.
(3) FHLB of Atlanta stock is an equity security. The amount of such stock held
by the Bank is included under "After Ten Years" as the Bank is required to
hold such stock as a FHLB of Atlanta member.
SUBSIDIARY ACTIVITIES
FIRST GENERAL SERVICE(S) CORPORATION. First General Service(s)
Corporation ("First General") was incorporated in August 1978, for the purpose
of having an ownership interest in Savings and Loan Data Corporation,
Cincinnati, Ohio, which provided on-line computer services to the Bank.
In January 1984, First General established an office at 407-9th Avenue
in Jasper, Alabama. At the same time, four employees from the Bank were
transferred to First General for the purpose of servicing the Bank's loans. The
scope of First General's activities included servicing, auditing and quality
control of all loans originated by the Bank and by First General's 40% owned
subsidiary, First General Lending Corporation. On June 30, 1990, all employees
of First General, and property and equipment relating to loan servicing, were
transferred to the Bank. At December 31, 1996, First General had total equity
investments of $122,472, which included an investment in First General Lending
Corporation of $120,819 and an investment in First General Insurance Agency of
$1,653.
FIRST GENERAL VENTURES CORPORATION. As of December 31, 1996, First
General Ventures Corporation had a total investment in joint ventures of
$86,123. The Bank believes that the market value of these investments is in
excess of the book values. The assets of First General Land Corporation, one of
the Bank's wholly-owned subsidiaries, were transferred to First General Ventures
Corporation. First General Land Corporation was dissolved. As of December 31,
1996, the Bank had no loan commitments and does not presently intend to make
loans to these joint ventures.
FIRST GENERAL LENDING CORPORATION. The Bank, through First General
Service(s) Corporation, also owns 40% of First General Lending Corporation, a
mortgage origination concern with one office located in Birmingham, Alabama. The
remaining 60% of First General Lending Corporation is owned by two individuals
who oversee the company's operations. First General Lending Corporation
originates single-family residential mortgage loans. The loans are underwritten
to FHLMC and FNMA standards or investor standards if a third-party loan.
The Bank issued a mortgage banking warehouse line of credit to First
General Lending Corporation in April 1989. Currently, the limit is set at $1.3
million. This line of credit was issued at market rates and terms and may be
used solely for the purpose of funding mortgage loans which have been
pre-committed for sale to third parties. The line of credit is secured by the
assignment of mortgages funded by First General Lending. Due to the nature and
size of the line of credit, the Bank's loan committee reviews the activity,
rates, terms and balance of this line of credit on a quarterly basis.
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, The Bank derives funds
from loan principal repayments, advances from the FHLB of Atlanta and other
borrowings. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short term basis
to compensate for reductions in the availability of other sources of funds. They
may also be used on a longer term basis for general business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including NOW accounts, non-interest
13
<PAGE> 14
bearing demand deposit accounts, money market accounts, regular savings
accounts, term certificate accounts and retirement savings plans. Deposit
account terms vary, with the principal differences being the minimum balance
required, the amount of time the funds must remain on deposit and the interest
rate.
The Bank offers a full range of accounts including: passbook, money
market, checking, individual retirement accounts ("IRAs") and certificate
accounts. The deregulation of various federal controls on insured deposits has
allowed the Bank to be more competitive in obtaining funds and given it more
flexibility to alleviate the risk of net deposit outflows. While the
deregulation of rates payable on deposits has allowed the Bank to be competitive
in the acquisition and retention of funds, it has also resulted in a more
volatile cost of funds.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a weekly basis. Determination of rates
and terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals, and federal regulations.
Marketing of the Bank's savings programs takes a number of different
forms. All branch offices are provided with brochures which outline the rates
and features of the Bank's various accounts. The Bank already offers most of the
services provided by other savings and loans. These services include consumer
and commercial loans, limited lines of credit, all types of checking and deposit
accounts, and IRAs.
As of December 31, 1996, the Bank's total deposits were $173.4 million.
The following table indicates the amount of the Bank's certificates of
deposit and other time deposits of $100,000 or more by time remaining until
maturity as of December 31, 1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
<S> <C>
Three months or less........................ $ 16,586
Over three through six months............... 1,141
Over six through twelve months.............. 10,137
Over twelve months.......................... 8,898
---------------
Total..................................... $ 36,762
===============
</TABLE>
The following table sets forth the average balances and average
interest rates based on daily balances for deposits for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1995 1996
----------------------------- ----------------------------
Average Average Average Average
Deposits Rate Deposits Rate
-------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits............ $ 4,104 0.0% $ 4,755 0.0%
Interest bearing demand deposits................ 20,570 2.8 19,572 2.9
Savings deposits................................ 19,676 2.8 18,257 2.7
Time deposits................................... 109,894 5.0 122,065 5.7
------------ ------- ----------- -------
Total deposits............................... $ 154,244 4.3% $ 164,649 4.9%
============ ======= =========== =======
</TABLE>
(Continued on following page)
14
<PAGE> 15
<TABLE>
<CAPTION>
Six Months Ended December 31,
---------------------------------------------
1995 1996
-------------------- ---------------------
Average Average Average Average
Deposits Rate Deposits Rate
-------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits ....... $ 4,804 0.0% $ 5,594 0.0%
Interest bearing demand deposits ........... 19,841 2.8 22,876 2.7
Savings deposits ........................... 18,576 2.7 18,231 2.8
Time deposits .............................. 118,584 5.7 123,722 5.8
-------- -------- -------- --------
Total deposits .......................... $161,805 5.0% $170,423 4.9%
======== ======== ======== ========
</TABLE>
For further information, see Note 6 of Notes to Consolidated Financial
Statements.
BORROWINGS. The Bank relies upon deposits and loan repayments and sales
as its major sources of funds. However, the Bank makes use of FHLB advances to
expand its lending and short-term investment activities and to meet depositor
withdrawals. Advances have been used to supplement deposit flows and are
particularly used when the Bank determines that it can profitably invest the
advances over their term.
The following table sets forth certain information regarding the Bank's
short-term borrowings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or for the At or for the Six Months
Year Ended June 30, Ended December 31,
--------------------- -------------------------
1995 1996 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB of Atlanta advances ................................ $15,000 $ -- $ --
Weighted average rate paid at period end:
FHLB advances ........................................... 6.76% --% --%
Maximum amount of borrowings outstanding at any
month end:
FHLB advances ........................................... $18,000 $15,100 $3,000
Approximate average amounts outstanding for period:
FHLB advances ........................................... $13,006 $ 6,620 $ 249
Approximate weighted average rate paid during
period (1):
FHLB advances ........................................... 5.97% 5.96% 2.84%
</TABLE>
(1) The approximate weighted average rate paid during the period was computed
by dividing the average amounts outstanding into the related interest
expense for the period.
For further information on the Bank's borrowings, see Note 7 of Notes
to Consolidated Financial Statements.
15
<PAGE> 16
SELECTED FINANCIAL RATIOS
The following table sets forth selected financial ratios of the Bank
for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30, Six Months Ended December 31,
------------------------------ ----------------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on Assets (Net Income Divided By
Average Total Assets) (1)................... 0.7% 0.9% 0.8% 0.2%
Return on Equity (Net Income Divided By
Average Equity) (1)...................... 8.7% 11.0% 11.4% 2.6%
Equity-to-Assets Ratio (Average Equity
Divided By Average Total Assets)......... 7.7% 8.2% 7.7% 7.6%
Dividend Payout Ratio (Dividends
Declared Per Share Divided By Net
Income Per Share)........................ 51.8% 39.1% 38.3% 171.4%
</TABLE>
(1) Ratios have been annualized for the six-month periods ended December
31, 1996 and 1995.
LIQUIDITY AND RATE SENSITIVITY
The following table sets forth the maturity distribution of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
1996, the Bank's interest rate sensitivity gap (i.e., interest rate sensitive
assets less interest rate sensitive liabilities), the Bank's cumulative interest
rate sensitivity gap, the ratio of interest-earning assets to interest-bearing
liabilities, and the Bank's cumulative interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
Over One Over Five
One Year Through Through Over
or Less Five Years Ten Years Ten Years Total
------- ---------- --------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets: (1)
Loans....................... $ 31,323 $ 29,747 $ 13,575 $ 56,608 $ 131,253
Securities.................. 5,034 17,022 563 26,326 48,945
Other assets................... 3,869 -- -- -- 3,869
------------ ------------ ------------ ------------ ------------
Total..................... $ 40,226 $ 46,769 $ 14,138 $ 82,934 $ 184,067
============ ============ ============ ============ ============
Interest-Bearing Liabilities:(2)
Deposits.................... $ 134,817 $ 36,085 $ 2,184 $ -- $ 173,086
Borrowings.................. 120 580 1,020 2,030 3,750
------------ ------------ ------------ ------------ ------------
Total..................... $ 134,937 $ 36,665 $ 3,204 $ 2,030 $ 176,836
============ ============ ============ ============ ============
Interest Sensitivity Gap....... $ (94,711) $ 10,104 $ 10,934 $ 80,904 $ 7,231
============ ============ ============ ============ ============
Cumulative Interest Sensitivity
Gap......................... $ (94,711) $ (84,607) $ (73,673) $ 7,231 $ 7,231
============ ============ ============ ============ ============
</TABLE>
(1) Fixed-rate loans are distributed based on their contractual maturity
adjusted for projected or anticipated prepayments, and variable rate loans
are distributed based on the interest rate reset date and contractual
maturity adjusted for prepayments. Loan run-off and repricing assumes a
constant prepayment rate based on coupon rate and maturity.
(2) Passbook savings and demand deposits are presented in the earliest
repricing period since amounts in these accounts are subject to withdrawal
on demand. Savings certificates are distributed assuming no withdrawal
prior to maturity.
16
<PAGE> 17
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. The
calculations are based on average month end balances during the respective
periods. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
volume (changes in volume multiplied by old rate) and (2) changes in rates
(change in rate multiplied by old volume). Changes in rate-volume (change in
rate multiplied by the change in volume) have been allocated to the volume and
rate changes based upon the pro-rata amount that rate and volume are to their
total change, before allocation of the rate/volume amount.
<TABLE>
<CAPTION>
Year ended June 30 Year Ended June 30,
1994 vs. 1995 1995 vs. 1996
Increase (Decrease) Increase (Decrease)
------------------- -------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income.................... $ 823 $ 597 $ 1,420 $ 660 $ 924 $ 1,584
Loans.............................. (78) (4) (82) (1,386) 248 $ (1,138)
Securities held to maturity........ 40 89 129 825 74 $ 899
Securities available for sale...... 71 16 87 201 (4) $ 197
---------- ---------- ---------- ---------- ---------- -----------
Other interest-earning assets...... $ 856 $ 698 $ 1,554 $ 300 $ 1,242 $ 1,542
========== ========== ========== ========== =========== ===========
Total interest earning assets......
Interest Expense:
Deposits........................... $ 153 $ 587 $ 740 $ 384 $ 1,059 $ 1,443
Borrowed Funds..................... 484 150 634 (542) 157 (385)
---------- ---------- ---------- ---------- ----------- ----------
Total interest-bearing liabilities. $ 637 $ 737 $ 1,374 $ (158) $ 1,216 $ 1,058
========== ========== ========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
1995 vs. 1996
Increase (Decrease)
-------------------
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Interest Income.................... $ 239 $ 18 $ 257
Loans.............................. (1,082) -- $ (1,082)
Securities held to maturity........ 790 146 $ 936
Securities available for sale...... (76) (5) $ (81)
---------- ---------- ----------
Other interest-earning assets...... $ (129) $ 159 $ 30
========== ========== ==========
Total interest earning assets......
Interest Expense:
Deposits........................... $ 210 $ (45) $ 165
Borrowed Funds..................... (307) (1) $ (308)
---------- ---------- ----------
Total interest-bearing liabilities. $ (97) $ (46) $ (143)
========== ========== ==========
</TABLE>
COMPETITION
The Bank faces strong competition in its primary market area for the
attraction and retention of deposits and in the origination of loans. The Bank's
most direct competition for deposits has historically come from other thrift
institutions and from commercial banks located in its primary market area.
However, in recent years the Bank has had significant competition from money
market mutual funds and other sources which are not subject to federal interest
rate limitations. The Bank's competition for real estate loans comes principally
from other thrift institutions, commercial banks, mortgage banking companies,
insurance companies and other institutional lenders.
The Bank competes for loans through the interest rates and loan fees it
charges and the efficiency and quality of the services it provides borrowers,
real estate brokers, and home builders. It competes for deposits by offering a
wide variety of accounts, convenient branch locations, tax-deferred retirement
programs, and other miscellaneous services.
17
<PAGE> 18
REGULATION, SUPERVISION AND GOVERNMENTAL POLICY
On January 31, 1997, the Bank converted from a federal savings bank
chartered under the laws of the United States to a commercial bank chartered
under the laws of the State of Alabama and, immediately thereafter, completed
its internal reorganization into a bank holding company structure as a result of
which it became the wholly owned subsidiary of the Holding Company. The
following is a brief summary of certain statutes, rules and regulations
affecting the Holding Company and the Bank. A number of other statutes and
regulations have an impact on their operations. The following summary of
applicable statutes and regulations does not purport to be complete and is
qualified in its entirety by reference to such statutes and regulations.
Bank Holding Company Regulation. The Holding Company is registered as a
bank holding company under the Holding Company Act and, as such, subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System ("FRB"). A bank holding company is required to furnish to the FRB annual
and quarterly reports of its operations and to furnish such additional
information as the FRB may require pursuant to the Holding Company Act. The
Holding Company is also subject to regular examination by the FRB.
Under the Holding Company Act, a bank holding company must obtain the
prior approval of the FRB before (i) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.
The Holding Company Act, as amended by the Riegle-Neal Act, generally
permits the FRB to approve interstate bank acquisitions by bank holding
companies without regard to any prohibitions of state law. See "Competition".
Under the Holding Company Act, any company must obtain approval of the
FRB prior to acquiring control of the Holding Company or the Bank. For purposes
of the Holding Company Act, "control" is defined as ownership of more than 25%
of any class of voting securities of the Holding Company or the Bank, the
ability to control the election of a majority of the directors, or the exercise
of a controlling influence over management or policies of the Holding Company or
the Bank.
The Change in Bank Control Act and the regulations of the FRB
thereunder require any person or persons acting in concert (except for companies
required to make application under the Holding Company Act), to file a written
notice with the FRB before such person or persons may acquire control of the
Holding Company the Bank. The Change in Bank Control Act defines "control" as
the power, directly or indirectly, to vote 25% or more of any voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
The Holding Company Act also prohibits, with certain exceptions, a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of a company that is not a bank or a bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The non-bank activities of the Holding Company are subject
to these legal and regulatory limitations under the Holding Company Act and the
FRB's regulations thereunder. Notwithstanding the FRB's prior approval of
specific nonbanking activities, the FRB has the power to order a holding company
or its subsidiaries to terminate any activity, or to terminate its ownership or
control of any subsidiary, when it has reasonable cause to believe that the
continuation of such activity or such ownership or control constitutes a serious
risk to the financial safety, soundness or stability of any bank subsidiary of
that holding company.
18
<PAGE> 19
The FRB has adopted guidelines regarding the capital adequacy of bank
holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets.
See "--Capital Requirements."
The FRB has the power to prohibit dividends by bank holding companies
if their actions constitute unsafe or unsound practices. The FRB has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the FRB's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.
Bank Regulation. As an Alabama banking institution, the Bank is subject
to regulation, supervision and regular examination by the Banking Department.
Furthermore, as a state bank that is not a member of the Federal Reserve System
(a "state nonmember bank"), the Bank is subject to regulation, supervision and
regular examination by the FDIC under the applicable provisions of the Federal
Deposit Insurance Act and the FDIC's regulations. The deposits of the Bank are
insured by the FDIC to the maximum extent provided by law (a maximum of $100,000
for each insured depositor). Alabama and federal banking laws and regulations
control, among other things, the Bank's required reserves, investments, loans,
mergers and consolidations, issuance of securities, payment of dividends, and
establishment of branches and other aspects of the Bank's operations.
The Bank is required to pay assessments, based on a percentage of its
insured deposits, to the FDIC for insurance of its deposits by the SAIF. The
FDIC has established a risk-based deposit insurance assessment system for
insured depository institutions, under which insured institutions are assigned
assessment risk classifications based upon capital levels and supervisory
evaluations.
In 1995 and 1996, institutions with SAIF-assessable deposits, like the
Bank, were required to pay higher deposit insurance premiums than institutions
with deposits insured by the Bank Insurance Fund (the "BIF"). In order to
recapitalize the SAIF and to address the insurance premium disparity, the
recently enacted Deposit Funds Insurance Act of 1996 (the "1996 Act") authorized
the FDIC to impose a one-time special assessment on all institutions with
SAIF-assessable deposits in the amount necessary to recapitalize the SAIF to the
statutorily designated reserve ratio of 1.25% of insured deposits. Institutions
were assessed at the rate of 65.7 basis points per $100 of each institution's
SAIF-assessable deposits as of March 31, 1995.
In view of the recapitalization of the SAIF, the FDIC set the
effective insurance assessment rates payable by SAIF-insured institutions for
the first half of 1997 at zero to 27 basis points, depending on an individual
institution's risk classification. In addition, SAIF-insured institutions will
be required, until December 31, 1999, to pay assessments to the FDIC at the
annual rate of 6.6 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO"), an agency of the federal
government established to recapitalize the predecessor to the SAIF. During this
period, BIF member banks will be assessed for payment of the FICO obligations at
the annual rate of 1.3 basis points. After December 31, 1999, BIF and SAIF
member institutions will be assessed at the same rate for the FICO obligations.
The 1996 Act also provides that the FDIC may not assess regular
insurance assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. As of December 31, 1996, the Bank was classified as
"well-capitalized."
Under Alabama law, the approval of the Banking Department is required
if the total of all the dividends declared by the Bank in any calendar year
exceeds the Bank's net income as defined for that year combined with its
retained net income for the preceding two calendar years.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies, including the FDIC's capital
adequacy guidelines for state non-member banks. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators
19
<PAGE> 20
that, if undertaken, could have a direct material effect on the Bank's financial
statements. See "--Capital Requirements."
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required the federal bank regulatory agencies to prescribe, by
regulation, non-capital safety and soundness standards for all insured
depository institutions and depository institution holding companies. The FDIC
and the other federal banking agencies have adopted guidelines prescribing
safety and soundness standards pursuant to FDICIA. The safety and soundness
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. In general the guidelines require, among other things, the maintenance
of appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. In addition, pursuant to FDICIA, the FDIC
and the other banking agencies have proposed guidelines for asset quality and
earnings standards. Under the proposed standards, a bank would be required to
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves.
Supervision, regulation and examination of the Holding Company and the
Bank by the bank regulatory agencies are intended primarily for the protection
of depositors rather than for holders of Holding Company stock or of the Holding
Company as the holder of the stock of the Bank.
Capital Requirements. The FRB has established guidelines with respect
to the maintenance of appropriate levels of capital by bank holding companies,
and the FDIC has promulgated substantially similar capital adequacy regulations
for state non-member banks. These capital regulations impose two sets of capital
adequacy requirements: minimum leverage rules, which require bank holding
companies and banks to maintain a specified minimum ratio of capital to total
assets, and risk-based capital rules, which require the maintenance of specified
minimum ratios of capital to "risk-weighted" assets.
The regulations of the FRB and the FDIC require bank holding companies
and state non-member banks, respectively, to maintain a minimum leverage ratio
of "Tier 1 capital" (as defined in the risk-based capital guidelines discussed
in the following paragraphs) to total assets of 3.0%. Although setting a minimum
3.0% leverage ratio, the regulations state that only the strongest bank holding
companies and banks, with composite examination ratings of 1 under the rating
system used by the federal bank regulators, would be permitted to operate at or
near such minimum level of capital. All other bank holding companies and banks
are expected to maintain a leverage ratio of at least 1% to 2% above the minimum
ratio, depending on the assessment of an individual organization's capital
adequacy by its primary regulator. Any bank or bank holding company experiencing
or anticipating significant growth would be expected to maintain capital well
above the minimum levels. In addition, the FRB has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the FRB and the FDIC require bank
holding companies and state non-member banks, respectively, to maintain minimum
regulatory capital levels based upon a weighing of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a supplementary capital
(Tier 2) requirement. Core capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less intangible assets, primarily goodwill. Supplementary capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify for Tier 1 and
long-term preferred stock with an original maturity of at least 20 years from
issuance; hybrid capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and intermediate-term preferred
stock. The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-
20
<PAGE> 21
balance sheet items in the four risk categories are weighted at 0%, 20%, 50% and
100%. These computations result in the total risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total
risk-weighted assets.
Under FDICIA, the federal banking agencies were required to revise
their risk-based capital standards to ensure that such standards take adequate
account of interest rate risk, concentration of credit risk and the risks of
nontraditional activities. The FRB, the FDIC and the other banking agencies have
amended the risk-based capital standards to take account of a bank's
concentration of credit risk, the risk of nontraditional activities, and a
bank's exposure to declines in the economic value of its capital resulting from
changes in interest rates. The revised capital guidelines do not, however,
codify a measurement framework for assessing the level of a bank's interest rate
exposure. The FRB, the FDIC and the other banking agencies have adopted a joint
policy statement requiring that banks adopt comprehensive policies and
procedures for managing interest rate risk and setting forth general standards
for such internal policies.
The FDIC has issued final regulations that classify insured depository
institutions by capital levels and provide that the applicable agency will take
various prompt corrective actions to resolve the problems of any institution
that fails to satisfy the capital standards. Under such regulations, a
"well-capitalized" bank is one that is not subject to any regulatory order or
directive to meet any specific capital level and that has or exceeds the
following capital levels: a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6%, and a leverage ratio of 5%. An "adequately
capitalized" bank is one that does not qualify as "well capitalized" but meets
or exceeds the following capital requirements: a total risk-based capital of 8%,
a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4%
or (ii) 3% if the bank has the highest composite examination rating. A bank not
meeting these criteria is treated as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" depending on the extent to
which the bank's capital levels are below these standards. A bank that fails
within any of the three "undercapitalized" categories will be subject to certain
severe regulatory sanctions required by FDICIA and the regulations of the FDIC.
As of December 31, 1996, the Bank would have been categorized as
"well-capitalized" by the FDIC.
Effects of Governmental Policy. The earnings and business of BancTrust
and Peoples Bank have been and will be affected by the policies of various
regulatory authorities of the United States, particularly the FRB. Important
functions of the FRB, in addition to those enumerated above, include the
regulation of the supply of money in light of general economic conditions within
the United States. The instruments of monetary policy employed by the FRB for
these purposes influence in various ways the overall level of investments,
loans, other extensions of credit and deposits, and the interest rates paid on
liabilities and received on interest-earning assets.
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by the Bank on its deposits
and its other borrowings and the interest received by the Bank on loans extended
to customers and securities held in its investment portfolios comprises the
major portion of the Bank's earnings. The earnings and gross income of the Bank
thus have been and will be subject to the influence of economic conditions
generally, both domestic and foreign, and also to monetary and fiscal policies
of the United States and its agencies, particularly the FRB. The nature and
timing of any future changes in such policies and their impact on Peoples Bank
are not predictable.
21
<PAGE> 22
EMPLOYEES
As of December 31, 1996, the Bank had 82 full-time and 18 part-time
employees.
The employees are not represented by a collective bargaining agreement.
The Bank believes its employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name, Age and Position Business Experience
- ---------------------- -------------------
<S> <C>
Robert B. Nolen, Jr., 37 - Mr. Nolen joined the Bank in 1987 as First
President of the Holding Vice President, Chief Financial Officer and
Company and theBank Treasurer. Effective July 1, 1994, Mr. Nolen
was appointed President and Chief Executive
Officer of the Bank. As President of each of
the Holding Company and Bank, Mr. Nolen is
responsible for ensuring that the overall
operations of the Holding Company and the
Bank are carried out in accordance with the
policies and procedures of the Board of
Directors.
Mary Jo Gunter, 43 - Ms. Gunter joined the Bank in September 1976
Vice President of the and has served in various lending related
Holding Company and Senior positions within the Bank. She is
Vice President - Banking Services responsible for branch operations,
of the Bank. personnel, loan servicing and other customer
service areas.
</TABLE>
ITEM 2. PROPERTIES
The Bank has 5 offices located in central and northwestern Alabama. The
following discussion provides relevant information on these offices.
Home Office
1811 2nd Avenue
Jasper, Alabama 35501
In 1984, the Bank purchased a four-story, 38,000 square foot building
at this location for $1,650,000. Following remodeling at a cost of $981,000, the
Bank moved its headquarters to this location in 1987. The Bank currently
occupies three floors in this building and leases two floors to the Alabama
Surface Mining Commission. The net book value at December 31, 1996 was
$2,131,183.
Jasper Mall Branch
U.S. Highway 78 and Mallway
Jasper, Alabama 35501
This branch was opened in March 1982. The total investment in the
property was $383,006 and the net book value at June 30, 1996 was $254,709. The
total square footage of the branch is 1,800 square feet. The Bank owns the
building and leases the property from an affiliate of the Bank. The term of the
lease is 35 years, and will terminate in September 2017. The rental for the year
ended June 30, 1996 and the six months ended December 31, 1996 was $20,329 and
$11,931, respectively.
22
<PAGE> 23
Haleyville Branch
1012 20th Street
Haleyville, Alabama 35565
The Haleyville Branch was acquired in a merger of First Federal Savings
and Loan Bank of Haleyville, Alabama with the Bank effective October 1983. The
total square footage is 3,100 sq. ft. The Bank leases the building and property
from an affiliate of the Bank. The term of the lease is 25 years, terminating
May 31, 2008. The annual rental is adjusted on February 1st of each year. The
rental for the year ended June 30, 1996 and the six months ended December 31,
1996 was $23,514 and $10,152, respectively.
Sumiton Branch
U.S. Highway & Bryan Road
Sumiton, Alabama 35148
The office was opened in February 1976. The total investment in the
property was $263,260 and the net book value at June 30, 1996 was $127,446. The
total square footage is 1,000 square feet. The Bank owns the building and leases
the property. The initial lease effective July 1, 1975 provided a term of 10
years with the option to renew for two successive periods of 5 years each.
During fiscal 1992, an amendment to the lease was executed to provide the Bank
with the options of four additional 5 year extensions to the lease. The rental
for the year ended June 30, 1996 and the six months ended December 31, 1996 was
$8,030 and $4,434, respectively.
Birmingham South
701 Montgomery Highway
Birmingham, Alabama 35203
This office was opened in October 1991 in rented space previously
utilized as an agency office of the Bank. A five-year lease with two five-year
renewal options was entered into during October 1992, for office space at 701
Montgomery Highway. The total square footage of this office facility is 3,106.
The rental for the year ended June 30, 1996 and the six months ended December
31, 1996 was $31,697 and $16,321, respectively.
Administrative Office
312 West 18th Street
Jasper, Alabama 35501
This office was opened in March 1960. In June 1987 it was remodeled
from the home office of the Bank to the Bank's administrative office. The total
investment in the property was $490,789 and the net book value at June 30, 1996
was $379,722. The total square footage of this office is 7,000 square feet. The
Bank owns the building and leases the land from an affiliate of the Bank. The
term of the lease is 10 years, and will terminate December 31, 1996. The annual
rental for fiscal 1995 was $12,600. The lease provides four additional options
to renew for 5 years each. The Bank has been granted right of first refusal on
the purchase of the land on which the building stands.
On August 17, 1994, the Bank agreed to sublease this building to
SouthTrust Bank of Walker County. The initial term of this sublease extends
until December 31, 2001. The Bank has also extended to SouthTrust Bank the
option to renew the sublease for three additional terms of five years each.
For further information on the Bank's lease commitments, see Note 4 of
Notes to Consolidated Financial Statements.
The total net book value of the Bank's investment in premises and
equipment was $5,176,991 at December 31, 1996. See Note 4 of Notes to
Consolidated Financial Statements for further information.
23
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
On October 27, 1993, a suit was initiated in the Circuit Court for
Walker County, Alabama by one customer who alleged that the Bank improperly
charged his account for insufficient funds. The plaintiff also alleged that he
represented a class composed of both current and past customers of the Bank. The
Bank denied the material allegations of the plaintiff's complaint. Despite the
fact that no discovery had been taken, the Court set the matter for preliminary
injunction, summary judgment, class action certification and other matters on
January 25, 1994. Notwithstanding, on January 28, 1994, the Court ordered that
the suit proceed as a class action but did not rule on the validity and
truthfulness of the allegations in the complaint. The Bank filed a motion for
the Circuit Court Judge to recuse himself, which was refused. Additionally, on
motion of the plaintiff's attorney, the Judge disqualified the Bank's attorneys
from further representation of the Bank in this litigation. The Circuit Court
then entered a Scheduling Order resulting in a trial setting in September 1994.
The Bank appealed the rulings of the Circuit Court to the Alabama Supreme Court.
The Alabama Supreme Court subsequently stayed all orders of the Circuit Court
pending its review of all matters before it. No date has been set for a ruling
by the Supreme Court on the Bank's pending motions. There has been no
substantive change in the status of this lawsuit since June 30, 1994.
Three suits are currently pending against the Bank in the Circuit Court
for Walker County, Alabama which involve the sale of credit life insurance -
Rhonda Hood vs. First Federal of Alabama, Patricia Green vs. First Federal of
Alabama, and Dutton vs. First Federal of Alabama. The oldest of these cases,
Dutton, was initiated in 1994 and has never been considered by the Bank to be
material to its business or financial condition. The most recent cases, Hood and
Green, were initiated on January 18, 1996 and January 23, 1996, respectively,
and allege overcharging for credit life insurance, as well as misrepresentations
regarding splitting of the commission or premium between the Bank and the
insurance company with which it dealt. In the event a settlement is not effected
in the Hood and Green cases, the Bank anticipates that each of the plaintiffs
therein will allege that the plaintiff represents a class composed of customers
of the Bank. No amount of compensatory or punitive damages has been claimed in
the Hood and Green cases.
In addition to the litigation noted above, the Bank is from time to
time subject to routine litigation incidental to its business. Such litigation
may include alleged compensatory and punitive damages. In recent years in the
State of Alabama many complaints have been filed which ultimately seek punitive
damage awards in amounts that bear little or no relation to actual damages. In
some of these cases, juries have awarded large punitive damage awards to the
plaintiffs.
Although it is not possible to determine with any certainty at this
point in time the potential exposures related to damages in connection with any
pending litigation against the Bank, it is the opinion of management, based upon
consultation with legal counsel, that the ultimate resolution of all pending
litigation against the Bank will not have a materially adverse effect on the
Bank's business or financial condition.
24
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 18, 1996, the Bank held its Annual Meeting of Stockholders
at which the following matters were voted on:
Proposal I - Election of Directors
<TABLE>
<CAPTION>
NOMINEES FOR WITHHOLD
-------- ------- --------
<S> <C> <C>
O.H. Brown (three-year term) 579,434 1,000
Sam W. Murphy (three-year term) 579,434 1,000
J.T. Waggoner (three-year term) 579,434 1,000
James M. Cannon (two-year term) 579,434 1,000
</TABLE>
The terms of directors Carlton Mayhall, Jr., Robert B. Nolen, Jr., Max
W. Perdue, Al H. Simmons, Greg Batchelor and Melvin R. Kacharos continued after
the Annual Meeting.
Proposal II - Ratification of appointment of Arthur Andersen LLP as the Bank's
independent auditors for the 1997 fiscal year.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------- ------- -------
<S> <C> <C>
578,934 0 1,500
</TABLE>
There were no broker no votes.
On January 29, 1997, the Bank held a Special Meeting of Stockholders at
which the following matters were voted on:
Proposal I - Approval of both the conversion of the Bank to an
Alabama-chartered commercial bank and the reorganization of the
converted Bank into the holding company form of ownership.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------- ------- -------
<S> <C> <C>
503,698 3,298 1,715
</TABLE>
Proposal II - Approval of the Pinnacle Bank 1996 Stock Option and Incentive
Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------- ------- -------
<S> <C> <C>
474,812 30,494 3,405
</TABLE>
There were no broker no votes.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The information contained under the section captioned "Market Price and
Dividend Information" in the Bank's Annual Report to Stockholders for the period
ended December 31, 1996 (the "Annual Report"), is incorporated herein by
reference.
25
<PAGE> 26
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in the section captioned "Management's
Discussion and Analysis" in the Annual Report is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS
The financial statements contained in the Annual Report are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
For information concerning the Board of Directors of the Holding
Company, the information contained under the section captioned "Proposal I --
Election of Directors" in the Holding Company's definitive proxy statement, to
be filed within 120 days after the end of the fiscal year covered by this Form
(the "Proxy Statement"), is incorporated herein by reference. For information
concerning the executive officers of the Holding Company, see "Item 1. Business
- -- Executive Officers of the Registrant," which is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof" and "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Changes in Control
Management of the Registrant knows of no arrangements, including
any pledge by any person of securities of the Registrant, the
operation of which may at a subsequent date result in a change
of control of the Registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.
26
<PAGE> 27
PART IV
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Form 10-KSB
1. Report of Independent Public Accountants*
2. Consolidated Financial Statements*
(a) Consolidated Statements of Financial
Condition at June 30, 1996 and December 31,
1996.
(b) Consolidated Statements of Operations for
the years ended June 30, 1995 and 1996 and
the six months ended December 31, 1995
(unaudited) and 1996.
(c) Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1995 and
1996 and the six months ended December 31,
1995 (unaudited) and 1996.
(d) Consolidated Statements of Cash Flows for
the years ended June 30, 1995 and 1996 and
the six months ended December 31, 1995
(unaudited) and 1996.
(e) Notes to Consolidated Financial Statements
All schedules have been omitted as the required
information is either inapplicable or included in the
Consolidated Financial Statements or related notes.
3. Exhibits
3.1 Certificate of Incorporation
3.2 Bylaws
4 Form of Stock Certificate
10.1 Employment Agreement between the Registrant and
Robert B. Nolen, Jr. - Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration
Statement on Form S-4 (File No. 333-11495)
10.2 Pinnacle Bank 1996 Stock Option and Incentive Plan -
Incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-4 (File
No. 333-11495)
13 Annual Report to Stockholders for the period ended
December 31, 1996. Except for the portions of the
Annual Report to Stockholders which are expressly
incorporated herein by reference, such Annual Report
to Stockholders is furnished for the information of
the SEC and is not to be deemed "filed" as part of
this Report.
22 Subsidiaries
27 Financial Data Schedule (for SEC use only)
(b) Not applicable.
27
<PAGE> 28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE BANCSHARES, INC.
Date: April 15, 1997 By: /s/ Robert B. Nolen, Jr.
------------------------
Robert B. Nolen, Jr., President
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Robert B. Nolen, Jr. By:
------------------------------------- --------------------
Robert B. Nolen, Jr. James W. Cannon
President and Chief Executive Officer Director
(Principal Executive Officer, Principal
Financial Officer and Principal Accounting
Officer)
Date: April 15, 1997 Date:
By: /s/ Albert H. Simmons By: /s/ Max W. Perdue
------------------------------------- ---------------------
Albert H. Simmons Max W. Perdue
Chairman of the Board Director
Date: April 15, 1997 Date: April 15, 1997
By: /s/ O. H. Brown By: /s/ Greg Batchelor
------------------------------------- --------------------
O. H. Brown Greg Batchelor
Director Director
Date: April 15, 1997 Date: April 15, 1997
By: By: /s/ Melvin R. Kacharos
------------------------------------- ----------------------
Sam W. Murphy Melvin R. Kacharos
Director Director
Date: Date: April 15, 1997
By: /s/ Carlton Mayhall, Jr. By: /s/ J. T. Waggoner
------------------------------------- --------------------
Carlton Mayhall, Jr. J. T. Waggoner
Director Director
Date: April 15, 1997 Date: April 15, 1997
</TABLE>
<PAGE> 1
EXHIBIT 3.1
<PAGE> 2
CERTIFICATE OF INCORPORATION
OF
PINNACLE BANCSHARES, INC.
ARTICLE I
Name
The name of the corporation is Pinnacle Bancshares, Inc.
(herein the "Corporation").
ARTICLE II
Registered Office
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Corporation Trust Center, in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to act as a
savings institution holding company and to transact all other lawful business
for which corporations may be incorporated pursuant to the laws of the State of
Delaware. The Corporation shall have all the powers of a corporation organized
under the General Corporation Law of the State of Delaware.
ARTICLE IV
Term
The Corporation is to have perpetual existence.
ARTICLE V
Incorporator
The name and mailing address of the incorporator are as follows:
Name Mailing Address
---- ---------------
Robert B. Nolen, Jr. 1811 Second Avenue
Jasper, Alabama 35502-1388
1
<PAGE> 3
ARTICLE VI
Initial Directors
The number of directors constituting the initial board of directors of
the Corporation is eleven (11), and the names and addresses of the persons who
are to serve as directors until their successors are elected and qualified,
together with the classes of directorships to which such persons have been
assigned, are:
<TABLE>
<CAPTION>
Name Address Class
---- ------- -----
<S> <C> <C>
James W. Cannon 1811 Second Avenue
Jasper, Alabama 35502-1388 I
Robert B. Nolen, Jr. 1811 Second Avenue
Jasper, Alabama 35502-1388 I
Max W. Perdue 1811 Second Avenue
Jasper, Alabama 35502-1388 I
Carlton Mayhall, Jr. 1811 Second Avenue
Jasper, Alabama 35502-1388 I
Melvin R. Kacharos 1811 Second Avenue
Jasper, Alabama 35502-1388 II
John D. Baird 1811 Second Avenue
Jasper, Alabama 35502-1388 II
Greg Batchelor 1811 Second Avenue
Jasper, Alabama 35502-1388 II
O. H. Brown 1811 Second Avenue
Jasper, Alabama 35502-1388 III
Sam W. Murphy 1811 Second Avenue
Jasper, Alabama 35502-1388 III
Al H. Simmons 1811 Second Avenue
Jasper, Alabama 35502-1388 III
J. T. Waggoner 1811 Second Avenue
Jasper, Alabama 35502-1388 III
</TABLE>
ARTICLE VII
Capital Stock
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 2,500,000 of which 2,400,000 are to be
shares of common stock, $.01 par value per share, and of which 100,000 are to be
shares of serial preferred stock, $.01 par value per share. The shares may be
issued by the Corporation from time to time as approved by the board of
directors of the Corporation without the approval of the stockholders except as
otherwise provided in this Article VII or the rules of a national securities
exchange if applicable. The consideration for the issuance of the shares shall
be paid to or received by the Corporation in full before their issuance and
shall not be less than the par value per share. The consideration for the
issuance of the shares shall be cash, services rendered, personal property
(tangible or intangible), real property, leases of real property or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the judgment of the board of directors as to the value of such consideration
shall be conclusive. Upon payment of such consideration such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, the
part of the surplus of the Corporation which is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be the
consideration for their issuance.
2
<PAGE> 4
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate, the
holders of the common stock shall exclusively possess all voting power. Each
holder of shares of common stock shall be entitled to one vote for each share
held by such holder, except as otherwise expressly set forth in this
Certificate.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock, and on any class
or series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when and as
declared by the board of directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event, the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation, except as otherwise expressly
set forth in this Certificate.
B. Serial Preferred Stock. Except as provided in this
Certificate, the board of directors of the Corporation is authorized, by
resolution or resolutions from time to time adopted, to provide for the issuance
of serial preferred stock in series and to fix and state the powers,
designations, preferences and relative, participating, optional or other special
rights of the shares of each such series, and the qualifications, limitations or
restrictions thereof, including, but not limited to determination of any of the
following:
(1) the distinctive serial designation and the number of shares
constituting such series;
(2) the dividend rates or the amount of dividends to be paid on
the shares of such series, whether dividends shall be
cumulative and, if so, from which date or dates, the payment
date or dates for dividends, and the participating or other
special rights, if any, with respect to dividends;
(3) the voting powers, full or limited, if any, of the shares of
such series;
(4) whether the shares of such series shall be redeemable and, if
so, the price or prices at which, and the terms and conditions
upon which such shares may be redeemed;
(5) the amount or amounts payable upon the shares of such series
in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
(6) whether the shares of such series shall be entitled to the
benefits of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and, if so entitled,
the amount of such
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fund and the manner of its application, including the price or
prices at which such shares may be redeemed or purchased
through the application of such funds;
(7) whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes or
any other series of the same or any other class or classes of
stock of the Corporation and, if so convertible or
exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at
which such conversion or exchange may be made, and any other
terms and conditions of such conversion or exchange;
(8) the subscription or purchase price and form of consideration
for which the shares of such series shall be issued; and
(9) whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued
shares of serial preferred stock and whether such shares may
be reissued as shares of the same or any other series of
serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series,
except as otherwise expressly set forth in this Certificate.
ARTICLE VIII
Preemptive Rights
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates or indebtedness, debentures or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued pursuant to resolution of the board of directors of the Corporation to
such persons, firms, corporations or associations, whether or not holders
thereof, and upon such terms as may be deemed advisable by the board of
directors in the exercise of its sole discretion.
ARTICLE IX
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE X
Meetings of Stockholders; Cumulative Voting
A. Notwithstanding any other provision of this Certificate or the
bylaws of the Corporation, no action required to be taken or which may be taken
at any annual or special meeting of stockholders of the
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Corporation may be taken without a meeting, and the power of stockholders to
consent in writing, without a meeting, to the taking of any action is
specifically denied.
B. Special meetings of the stockholders of the Corporation for
any purpose or purposes may be called at any time by the board of directors of
the Corporation, or by a committee of the board of directors which has been duly
designated by the board of directors and whose powers and authorities, as
provided in a resolution of the board of directors or in the bylaws of the
Corporation, include the power and authority to call such meetings, but such
special meetings may not be called by any other person or persons.
C. There shall be no cumulative voting by stockholders of any
class or series in the election of directors of the Corporation.
D. Meetings of stockholders may be held at such place as the
bylaws may provide.
ARTICLE XI
Notice for Nominations and Proposals
A. Nominations for the election of directors and proposals for
any new business to be taken up at any annual or special meeting of stockholders
may be made by the board of directors of the Corporation or by any stockholder
of the Corporation entitled to vote generally in the election of directors. In
order for a stockholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than thirty days nor more than sixty days prior to the date
of any such meeting; provided, however, that if less than forty days' notice of
the meeting is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later than the
close of business on the tenth day following the day on which notice of the
meeting was mailed to stockholders. Each such notice given by a stockholder with
respect to nominations for the election of directors shall set forth (i) the
name, age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment of each
such nominee, and (iii) the number of shares of stock of the Corporation which
are beneficially owned by each such nominee. In addition, the stockholder making
such nomination shall promptly provide any other information reasonably
requested by the Corporation.
B. Each such notice given by a stockholder to the Secretary with
respect to business proposals to be brought before a meeting shall set forth in
writing as to each matter: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in this Certificate to the contrary, no new business shall be conducted at the
meeting except in accordance with the procedures set forth in this Article.
C. The Chairman of the annual or special meeting of stockholders
may, if the facts warrant, determine and declare to such meeting that a
nomination or proposal was not made in accordance with the foregoing procedure,
and, if he should so determine, he shall so declare to the meeting and the
defective nomination or proposal shall be disregarded and laid over for action
at the next succeeding special or annual meeting of the stockholders taking
place thirty days or more thereafter. This provision shall not require the
holding of any adjourned or special meeting of stockholders for the purpose of
considering such defective nomination or proposal.
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ARTICLE XII
Directors
A. Number; Vacancies. The number of directors of the Corporation
shall be such number, not less than five (5) nor more than fifteen (15)
(exclusive of directors, if any, to be elected by holders of preferred stock of
the Corporation, voting separately as a class), as shall be set forth from time
to time by action by the board of directors, provided that no action shall be
taken to decrease or increase the number of directors unless at least two-thirds
of the directors then in office shall concur in said action. Vacancies in the
board of directors of the Corporation, however caused, and newly created
directorships shall be filled by a vote of two-thirds of the directors then in
office, whether or not a quorum, and any director so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
the class to which the director has been chosen expires and when the director's
successor is elected and qualified.
B. Classified Board. The board of directors of the Corporation
shall be divided into three classes of directors which shall be designated Class
I, Class II and Class III. The members of each class shall be elected for a term
of three years and until their successors are elected and qualified. Such
classes shall be as nearly equal in number as the then total number of directors
constituting the entire board of directors shall permit, with the terms of
office of all members of one class expiring each year. Subject to the provisions
of this Article XII, should the number of directors not be equally divisible by
three, the excess director or directors shall be assigned to Classes I or II as
follows: (i) if there shall be an excess of one directorship over a number
equally divisible by three, such extra directorship shall be classified in Class
I; and (ii) if there be an excess of two directorships over a number equally
divisible by three, one shall be classified in Class I and the other in Class
II. At the first annual meeting of stockholders, directors of Class I shall be
elected to hold office for a term expiring at the third succeeding annual
meeting thereafter. At the second annual meeting of stockholders, directors of
Class II shall be elected to hold office for a term expiring at the third
succeeding annual meeting thereafter. At the third annual meeting of
stockholders, directors of Class III shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. Thereafter, at each
succeeding annual meeting, directors of each class shall be elected for three
year terms. Notwithstanding the foregoing, the director whose term shall expire
at any annual meeting shall continue to serve until such time as his successor
shall have been duly elected and shall have qualified unless his position on the
board of directors shall have been abolished by action taken to reduce the size
of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the board of directors shall consist of
said directors so elected in addition to the number of directors fixed as
provided in this Article XII. Notwithstanding the foregoing, and except as
otherwise may be required by law or by the terms and provisions of the preferred
stock of the Corporation, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
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ARTICLE XIII
Removal of Directors
Notwithstanding any other provision of this Certificate or the bylaws
of the Corporation, any director or the entire board of directors of the
Corporation may be removed, at any time, but only for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose. Notwithstanding the foregoing, whenever
the holders of any one or more series of preferred stock of the Corporation
shall have the right, voting separately as a class, to elect one or more
directors of the Corporation, the preceding provisions of this Article XIII
shall not apply with respect to the director or directors elected by such
holders of preferred stock.
ARTICLE XIV
Approval of Certain Business Combinations
The stockholder vote required to approve Business Combinations (as
hereinafter defined) shall be as set forth in this section.
A. (1) Except as otherwise expressly provided in this Article
XIV, the affirmative vote of the holders of (i) at least 80% of the
outstanding shares entitled to vote thereon (and, if any class or
series of shares is entitled to vote thereon separately, the
affirmative vote of the holders of at least 80% of the outstanding
shares of each such class or series), and (ii) at least a majority of
the outstanding shares entitled to vote thereon, not including shares
deemed beneficially owned by a Related Person (as hereinafter defined),
shall be required in order to authorize any of the following:
(a) any merger or consolidation of the Corporation with or
into a Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other capital
device, of all or any Substantial Part (as hereinafter defined) of
the assets of the Corporation (including without limitation any
voting securities of a subsidiary) or of a subsidiary, to a Related
Person;
(c) any merger or consolidation of a Related Person with
or into the Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other
disposition of all or any Substantial Part of the assets of a
Related Person to the Corporation or a subsidiary of the
Corporation;
(e) the issuance of any securities of the Corporation or
a subsidiary of the Corporation to a Related Person;
(f) the acquisition by the Corporation or a subsidiary
of the Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the
Corporation, or any recapitalization involving the common stock of
the Corporation; and
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(h) any agreement, contract or other arrangement
providing for any of the transactions described in this Article XIV.
(2) Such affirmative vote shall be required notwithstanding any
other provision of this Certificate, any provision of law, or any
agreement with any regulatory agency or national securities exchange which
might otherwise permit a lesser vote or no vote.
(3) The term "Business Combination" as used in this Article XIV
shall mean any transaction which is referred to in any one or more of
subparagraphs A(l)(a) through (h) above.
B. The provisions of paragraph A shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by any other provision of this
certificate, any provision of law, or any agreement with any regulatory agency
or national securities exchange, if the Business Combination shall have been
approved by a two-thirds vote of the Continuing Directors (as hereinafter
defined); provided, however, that such approval shall only be effective if
obtained at a meeting at which a Continuing Director Quorum (as hereinafter
defined) is present.
C. For the purposes of this Article XIV the following definitions
apply:
(1) The term "Related Person" shall mean and include (a) any
individual, corporation, partnership or other person or entity which
together with its "affiliates" (as that term is defined in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of
1934, as amended), "beneficially owns" (as that term is defined in Rule
13d-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended) in the aggregate 10% or more of the outstanding
shares of the common stock of the Corporation; and (b) any "affiliate" (as
that term is defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended) of any such individual, corporation, partnership or
other person or entity. Without limitation, any shares of the common stock
of the Corporation which any Related Person has the right to acquire
pursuant to any agreement, or upon exercise or conversion rights, warrants
or options or otherwise, shall be deemed "beneficially owned" by such
Related Person.
(2) The term "Substantial Part" shall mean more than 25% of the
total assets of the Corporation, as of the end of its most recent fiscal
year ending prior to the time the determination is made.
(3) The term "Continuing Director" shall mean any member of the
board of directors of the Corporation who is unaffiliated with the Related
Person and was a member of the board prior to the time that the Related
Person became a Related Person, and any successor of a Continuing Director
who is unaffiliated with the Related Person and is recommended to succeed
a Continuing Director by a majority of Continuing Directors then on the
board.
(4) The term "Continuing Director Quorum" shall mean two-thirds of
the Continuing Directors capable of exercising the powers conferred on
them.
ARTICLE XV
Evaluation of Business Combinations
In connection with the exercise of its judgment in determining what is
in the best interests of the Corporation and of the shareholders, when
evaluating a Business Combination (as defined in Article XIV) or a tender or
exchange offer, the board of directors of the Corporation may, in addition to
considering the adequacy of the amount to be paid in connection with any such
transaction, consider all of the following factors and any other
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factors which it deems relevant; (i) the social and economic effects of the
transaction on the Corporation and its subsidiaries, employees, depositors, loan
and other customers, creditors and other elements of the communities in which
the Corporation and its subsidiaries operate or are located; (ii) the business
and financial condition and earnings prospects of the acquiring person or
entity, including, but not limited to, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
acquisition and other likely financial obligations of the acquiring person or
entity and the possible effect of such conditions upon the Corporation and its
subsidiaries and the other elements of the communities in which the Corporation
and its subsidiaries operate or are located; and (iii) the competence,
experience, and integrity of the acquiring person or entity and its or their
management.
ARTICLE XVI
Indemnification
A. Persons. The Corporation shall indemnify, to the extent provided
in paragraphs B, D or F:
(1) any person who is or was a director, officer, employee, or agent
of the Corporation; and
(2) any person who serves or served at the Corporation's request as
a director, officer, employee, agent, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees but excluding amounts paid in
settlement) actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject
of the suit or action, and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XIV) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has
been adjudged liable to the Corporation unless (and only to the extent
that) the court in which the suit was brought shall determine, upon
application, that despite the adjudication but in view of all the
circumstances, he is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending
or completed suit, action or proceeding (whether civil, criminal, administrative
or investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph E, for
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
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E. Standard -- Nonderivative Suits. In case of a nonderivative suit,
a person named in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject
of the nonderivative suit and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the Corporation, including, but
not limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XIV) not approved by the board of directors and, with respect to any
criminal action or proceeding, he had no reasonable cause to believe his
conduct was unlawful. The termination of a nonderivative suit by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent shall not, in itself, create a presumption that the person
failed to satisfy the standard of this subparagraph E(2).
F. Determination That Standard Has Been Met. A determination that
the standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in subparagraph C(2) (second sentence), the determination may
be made by:
(1) the board of directors by a majority vote of a quorum consisting
of directors of the Corporation who were not parties to the action, suit
or proceeding; or
(2) independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
(3) the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation shall pay in advance any
expenses (including attorneys' fees) which may become subject to indemnification
under paragraphs A through G if:
(1) the board of directors authorizes the specific payment; and
(2) the person receiving the payment undertakes in writing to repay
the same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A through G.
I. Nonexclusive. The indemnification and advance payment of expenses
provided by paragraphs A through H shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. Continuation. The indemnification provided by this Article XVI
shall be deemed to be a contract between the Corporation and the persons
entitled to indemnification thereunder, and any repeal or modification of this
Article XVI shall not affect any rights or obligations then existing with
respect to any state of facts then or theretofore existing or any action, suit
or proceeding theretofore or thereafter brought based in whole or in part upon
any such state of facts. The indemnification and advance payment provided by
paragraphs A through H shall continue as to a person who has ceased to hold a
position named in paragraph A and shall inure to his heirs, executors and
administrators.
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K. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who holds or who has held any position named in paragraph
A, against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the Corporation would have power to indemnify
him against such liability under paragraphs A through H.
L. Intention and Savings Clause. It is the intention of this Article
XVI to provide for indemnification to the fullest extent permitted by the
General Corporation Law of the State of Delaware, and this Article XVI shall be
interpreted accordingly. If this Article XVI or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVI that shall
not have been invalidated and to the full extent permitted by applicable law. If
the General Corporation Law of the State of Delaware is amended, or other
Delaware law is enacted, to permit further or additional indemnification of the
persons defined in paragraph A of this Article XVI, then the indemnification of
such persons shall be to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended, or such other Delaware law.
ARTICLE XVII
Limitations on Directors' Liability
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except: (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions that are not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived any
improper personal benefit. If the General Corporation Law of the State of
Delaware or other Delaware law is amended or enacted after the date of filing of
this Certificate to further eliminate or limit the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended, or such other Delaware law. Any
repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification.
ARTICLE XVIII
Amendment of Bylaws
In furtherance and not in limitation of the powers conferred by statute,
the board of directors of the Corporation is expressly authorized to adopt,
repeal, alter, amend and rescind the bylaws of the Corporation by a vote of
two-thirds of the board of directors. Notwithstanding any other provision of
this Certificate or the bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law), the bylaws shall not be
adopted, repealed, altered, amended or rescinded by the stockholders of the
Corporation except by the vote of the holders of not less than 80% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed adoption, repeal, alteration, amendment or
rescission is included in the notice of such meeting), or, as set forth above,
by the board of directors.
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ARTICLE XIX
Amendment of Certificate of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII and this Article
XIX may not be repealed, altered, amended or rescinded in any respect unless the
same is approved by the affirmative vote of the holders of not less than 80% of
the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting); except that such repeal, alteration,
amendment or rescission may be made by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) if the same is first approved by a majority of the Continuing
Directors, as defined in Article XIV of this Certificate.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true and
accordingly have hereunto set my hand this 29th day of August, 1996.
/s/ Robert B. Nolen, Jr.
------------------------
Robert B. Nolen, Jr.
Incorporator
Attest:
---------------------
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EXHIBIT 3.2
<PAGE> 2
BYLAWS
OF
PINNACLE BANCSHARES, INC.
ARTICLE I
Principal Executive Office
The principal executive office of PINNACLE BANCSHARES, INC. (the
"Corporation") shall be at 1811 2nd Avenue, in the County of Jasper, in the
County of Walker, in the State of Alabama. The Corporation may also have offices
at such other places within or without the State of Alabama as the board of
directors shall from time to time determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the principal executive office of the Corporation
or at such other place within or without the State of Delaware as the board of
directors may determine and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for
any purpose or purposes may be called at any time by the board of directors or
by a committee of the board of directors in accordance with the provisions of
the Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with these Bylaws or as otherwise prescribed by the
board of directors. The chairman or the chief executive officer of the
Corporation shall preside at such meetings.
SECTION 5. Notice of Meeting. Written notice stating the place, day and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing his duties, not less
than ten days nor more than fifty days before the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail, addressed to the
stockholder at his address as it appears on the stock transfer books or records
of the Corporation as of the record date prescribed in Section 6, with postage
thereon prepaid. If a stockholder is present at a meeting, or in writing waives
notice thereof before or after the meeting, notice of the meeting to such
stockholder shall be unnecessary. When any stockholders' meeting, either annual
or special, is adjourned for thirty days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be
necessary to give any notice of the time and place of any meeting adjourned for
less than thirty days or of the business to be transacted at such adjourned
meeting, other than an announcement at the meeting at which such adjournment is
taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of
<PAGE> 3
directors shall fix in advance a date as the record date for any such
determination of stockholders. Such date in any case shall be not more than
sixty days, and in case of a meeting of stockholders not less than ten days,
prior to the date on which the particular action requiring such determination of
stockholders, is to be taken. When a determination of stockholders entitled to
vote at any meeting of stockholders has been made as provided in this section,
such determination shall apply to any adjournment thereof.
SECTION 7. Voting Lists. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten days
before each meeting of stockholders, a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number of shares held by each. The record, for a period of ten days
before such meeting, shall be kept on file at the principal office of the
Corporation, whether within or outside the State of Florida, and shall be
subject to inspection by any stockholder for any purpose germane to the meeting
at any time during usual business hours. Such record shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection of any stockholder for any purpose germane to the meeting during the
whole time of the meeting. The original stock transfer books shall be prima
facie evidence as to who are the stockholders entitled to examine such record or
transfer books or to vote at any meeting of stockholders.
SECTION 8. Quorum. One-third of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than one-third of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution unless otherwise provided in
the proxy.
SECTION 10. Voting. At each election for directors every stockholder
entitled to vote at such election shall be entitled to one vote for each share
of stock held. Unless otherwise provided by the Certificate of Incorporation, by
statute, or by these Bylaws, a majority of those votes cast by stockholders at a
lawful meeting shall be sufficient to pass on a transaction or matter, except in
the election of directors, which election shall be determined by a plurality of
the votes of the shares present in person or by proxy at the meeting and
entitled to vote on the election of directors.
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy,
<PAGE> 4
but no trustee shall be entitled to vote shares held by him without a transfer
of such shares into his name. Shares standing in the name of a receiver may be
voted by such receiver, and shares held by or under the control of a receiver
may be voted by such receiver without the transfer thereof into his name if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
stockholders, the chairman of the board or the board of directors may appoint
any persons, other than nominees for office, as inspectors of election to act at
such meeting or any adjournment thereof. The number of inspectors shall be
either one or three. If the board of directors so appoints either one or three
inspectors, that appointment shall not be altered at the meeting. If inspectors
of election are not so appointed, the chairman of the board may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment in
advance of the meeting or at the meeting by the chairman of the board or the
president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. Nominating Committee. The board of directors or a committee
appointed by the board of directors shall act as a nominating committee for
selecting the management nominees for election as directors. Except in the case
of a nominee substituted as a result of the death or other incapacity of a
management nominee, the nominating committee shall deliver written nominations
to the secretary at least twenty days prior to the date of the annual meeting.
Provided such committee makes such nominations, no nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by stockholders are made in writing and
delivered to the secretary of the Corporation in accordance with the provisions
of the Corporation's Certificate of Incorporation.
SECTION 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors
and committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as provided in the
Corporation's Certificate of Incorporation.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its board of directors. The chairman shall
preside at all meetings of the board of directors.
<PAGE> 5
SECTION 2. Term and Election. The board of directors shall be divided
into three classes as nearly equal in number as possible. The members of each
class shall be elected for a term of three years and until their successors are
elected or qualified. The board of directors shall be classified in accordance
with the provisions of the Corporation's Certificate of Incorporation.
SECTION 3. Regular Meetings. A regular meeting of the board of
directors shall be held at such time and place as shall be determined by
resolution of the board of directors without other notice than such resolution.
SECTION 4. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman, the chief executive officer
or one-third of the directors. The person calling the special meetings of the
board of directors may fix any place as the place for holding any special
meeting of the board of directors called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person.
SECTION 5. Notice. Written notice of any special meeting shall be given
to each director at least two days previous thereto delivered personally or by
telegram or at least seven days previous thereto delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid if mailed or when delivered to the telegraph
company if sent by telegram. Any director may waive notice of any meeting by a
writing filed with the secretary. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any meeting of the board of
directors need be specified in the notice or waiver of notice of such meeting.
SECTION 6. Quorum. A majority of the number of directors fixed by
Section 2 shall constitute a quorum for the transaction of business at any
meeting of the board of directors, but if less than such majority is present at
a meeting, a majority of the directors present may adjourn the meeting from time
to time. Notice of any adjourned meeting shall be given in the same manner as
prescribed by Section 5 of this Article III.
SECTION 7. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the General Corporation Law of the State of
Delaware.
SECTION 8. Action Without a Meeting. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
SECTION 9. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Corporation
addressed to the chairman. Unless otherwise specified therein such resignation
shall take effect upon receipt thereof by the chairman.
SECTION 10. Vacancies. Any vacancy occurring in the board of directors
shall be filled in accordance with the provisions of the Corporation's
Certificate of Incorporation. Any directorship to be filled by reason of an
increase in the number of directors may be filled by the affirmative vote of
two-thirds of the directors then in office or by election at an annual meeting
or at a special meeting of the stockholders held for that purpose. The term of
such director shall be in accordance with the provisions of the Corporation's
Certificate of Incorporation.
<PAGE> 6
SECTION 11. Removal of Directors. Any director or the entire board of
directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 12. Compensation. Directors, as such, may receive compensation
for service on the board of directors. Members of either standing or special
committees may be allowed such compensation as the board of directors may
determine.
SECTION 13. Age Limitation of Directors. No person shall be eligible
for election, reelection, appointment or reappointment to the board of directors
if such person is then more than seventy-two (72) years of age.
ARTICLE IV
Committees of the Board of Directors
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation, and
may prescribe the duties, constitution and procedures thereof. Each committee
shall consist of one or more directors of the Corporation appointed by a
majority of the whole board. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee.
The board shall have power at any time to change the members of, to
fill vacancies in, and to discharge any committee of the board. Any member of
any such committee may resign at any time by giving notice to the Corporation;
provided, however, that notice to the board, the chairman of the board, the
chief executive officer, the chairman of such committee, or the secretary shall
be deemed to constitute notice to the Corporation. Such resignation shall take
effect upon receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective. Any member of any such committee may be removed
at any time, either with or without cause, by the affirmative vote of a majority
of the authorized number of directors at any meeting of the board called for
that purpose.
ARTICLE V
Officers
SECTION 1. Positions. The officers of the Corporation shall be a
chairman, a president, one or more vice presidents, a secretary and a treasurer,
each of whom shall be elected by the board of directors. The board of directors
may designate one or more vice presidents as executive vice president or senior
vice president. The board of directors may also elect or authorize the
appointment of such other officers as the business of the Corporation may
require. The officers shall have such authority and perform such duties as the
board of directors may from time to time authorize or determine. In the absence
of action by the board of directors, the officers shall have such powers and
duties as generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the stockholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment contract with any officer in accordance with state law; but
<PAGE> 7
no such contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds of
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors, and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a
director of the Corporation.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Certificate of Incorporation
or these Bylaws with respect to certificates for shares, the board of directors
or the executive committee may authorize any officer, employee, or agent of the
Corporation to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Corporation. Such authority may be general or
confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner, including in facsimile form, as shall
from time to time be determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any of its duly authorized depositories as the board of directors may select.
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Corporation shall
be represented by certificates signed by the chairman of the board of directors
or the president or a vice president and by the treasurer or an assistant
treasurer or the secretary or an assistant secretary of the Corporation, and may
be sealed with the seal of the Corporation or a facsimile thereof. Any or all of
the signatures upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent, or registered by a registrar, other than the
Corporation itself or an employee of the Corporation. If any officer who has
signed or whose facsimile signature has been placed upon such certificate shall
have ceased to be such officer before the certificate is issued, it may be
issued by the Corporation with the same effect as if he were such officer at the
date of its issue.
<PAGE> 8
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any stockholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
That the Corporation is organized under the laws of the State of Delaware; the
name of the person to whom issued; the number and class of shares, the
designation of the series, if any, which such certificate represents; the par
value of each share represented by such certificate, or a statement that the
shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
share until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the
issuance of shares shall be paid in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Corporation. Such transfer shall be made only on surrender for cancellation
of the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Corporation shall be deemed by the Corporation
to be the owner thereof for all purposes.
SECTION 6. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the last day of
December of each year. The Corporation shall be subject to an annual audit as of
the end of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE IX
Dividends
Dividends upon the stock of the Corporation, subject to the provisions
of the Certificate of Incorporation, if any, may be declared by the board of
directors at any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property or in the Corporation's own stock.
<PAGE> 9
ARTICLE X
Corporation Seal
The corporate seal of the Corporation shall be in such form as the
board of directors shall prescribe.
ARTICLE XI
Amendments
In accordance with the Corporation's Certificate of Incorporation,
these Bylaws may be repealed, altered, amended or rescinded by the stockholders
of the Corporation only by vote of not less than 80% of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting). In addition, the board of directors may repeal, alter, amend or
rescind these Bylaws by vote of two-thirds of the board of directors at a legal
meeting held in accordance with the provisions of these Bylaws.
<PAGE> 1
EXHIBIT 4
<PAGE> 2
(FORM OF STOCK CERTIFICATE - FRONT SIDE)
NUMBER SHARES
-- -------
PINNACLE BANCSHARES, INC.
JASPER, ALABAMA
common stock
$.01 par value
This certifies that ____________________________ is the owner of
____________________ fully paid and nonassessable shares of the common stock
of Pinnacle Bancshares, Inc. a Delaware Corporation (The "Corporation").
The shares evidenced by this Certificate are transferable only on the books of
the Corporation by the holder of record hereof, in person or by Attorney, upon
surrender of this Certificate properly endorsed.
The capital stock evidenced hereby is not an account of an insurable type and
is not insured by the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. This Certificate is not valid until
countersigned and registered by the Corporation's Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused a
facsimile of its seal to be affixed hereto.
PINNACLE BANCSHARES, INC.
By:
- --------------------- -----------------------------------------
Secretary President and Chief Executive Officer
(SEAL)
<PAGE> 3
(FORM OF STOCK CERTIFICATE - BACK SIDE)
The shares represented by this certificate are issued subject to all
the provisions of the Certificate of Incorporation and Bylaws of The
Corporation as from time to time amended (copies of which are on file at the
principal executive office of the Corporation), to all of which the holder by
acceptance hereof assents.
The Corporation will furnish to any stockholder upon request and
without charge a full statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each authorized
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights, to the extent that the same
have been fixed, and of the authority of the Board of Directors to designate
the same with respect to other series. Such request may be made to the
Secretary of the Corporation.
The following abbreviations, when used in the inscription on the
face of this certificate, shall be construed as though they were written
out in full according to applicable laws or regulations.
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as
tenants in common
UNIF TRANSFER MIN ACT - ...........Custodian......... under Uniform Transfers
(Cust) (Minor)
to Minors Act.......................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,
---------------------------------------------------
HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------
OF THE COMMON STOCK EVIDENCED BY THIS CERTIFICATE, AND DO HEREBY IRREVOCABLY
CONSTITUTE AND APPOINT, ATTORNEY, TO TRANSFER THE SAID SHARES ON THE BOOKS OF
THE BANK, WITH FULL POWER OF SUBSTITUTION.
DATED
-----------------
---------------------------
SIGNATURE
---------------------------
SIGNATURE
<PAGE> 1
EXHIBIT 13
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONVERSION AND REORGANIZATION
On January 29, 1997, the stockholders of Pinnacle Bank (the "Bank")
approved both the conversion of the Bank from a federal stock savings bank to an
Alabama-chartered commercial bank and the reorganization of the converted Bank
into the holding company form of ownership by approving an Agreement and Plan of
Conversion and Reorganization, pursuant to which the converted Bank became a
wholly-owned commercial bank subsidiary of Pinnacle Bancshares, Inc., a Delaware
corporation (the "Holding Company"), and each outstanding share of common stock
of the Bank was converted into one share of the common stock of the Holding
Company. The fiscal year of the Holding Company and the converted Bank ends on
December 31 of each year. See Notes 1 and 13 of Notes to Consolidated Financial
Statements.
GENERAL
The Bank generates revenue primarily from net interest margin derived
by soliciting deposits and borrowings which are used to fund the Bank's loan
portfolio, mortgage-backed securities, and investment securities. The Bank also
derives revenue from fees and charges on loans and deposit accounts.
Historically, the Bank's business strategy has been to engage primarily
in residential lending and retail consumer lending. To enhance growth and
achieve greater portfolio diversification as well as to provide improved
interest rate spread, the Bank's strategy has expanded to include active
participation in commercial real estate and other commercial lending activities
in its primary market area of Walker, Winston, Jefferson, and Shelby Counties.
Although the inherent risks associated with geographic concentrations in the
Bank's loan portfolio do not appear to have had a significant effect on the
Bank's earnings to date, any dramatic functions in the economic conditions in
the Bank's market area could have a material effect on the Bank's profitability.
The Bank sells most fixed-rate mortgage loans with maturities greater
than 10 years to the Federal Home Loan Mortgage Corporation ("FHLMC") and the
Federal National Mortgage Corporation ("FNMA") and other investors as whole-loan
sales with loan servicing retained by the Bank. This strategy produces service
fee income which is recurring noninterest income and is an integral part of the
Bank's asset liability management described below:
MORTGAGE BANKING AND FIRST GENERAL LENDING
During the fiscal year ended June 30, 1995, the Bank purchased
short-term U.S. Treasury securities of approximately $4.0 million and sold $6.0
million in short-term securities, including $2.0 million in U. S. Treasury
securities, $1.0 million in U.S. agency securities and $3.0 million in corporate
securities. Also during fiscal year 1995, the Bank increased its short-term
borrowings from the Federal Home Loan Bank ("FHLB") of Atlanta by approximately
$8.0 million. The increase in borrowings, along with proceeds from loan
repayments, was used to fund increased lending activity.
During the fiscal year ended June 30, 1996, the Bank purchased
short-term U.S. Treasury securities of approximately $8.0 million and U.S.
agency securities of approximately $5.0 million and sold approximately $3.0
million in U.S. Treasury securities. The proceeds from maturing investment
securities, increases in saving deposits and loan repayments were used to fund
lending activities. Also, during the fiscal year ended June 30, 1996, the Bank
repaid approximately $16.3 million in borrowings from the FHLB of Atlanta.
During the six-month period ended December 31, 1995, the Bank did not
purchase or sell any securities. The Bank used proceeds from loan repayments
to repay $5.0 million in advances from the FHLB of Atlanta.
1
<PAGE> 3
During the six-month period ended December 31, 1996, the Bank
purchased approximately $5.0 million in short-term U.S. Treasury securities
and approximately $3.0 million in U.S. agency securities. The Bank sold
approximately $3.0 in U.S. Treasury securities.
ASSET LIABILITY MANAGEMENT
The Bank has an Asset/Liability Committee, comprised of the President,
one Senior Vice President, One Vice President and one non-employee Director. The
Committee's primary responsibility is to both analyze and manage the level, mix
and maturities of asset liabilities as well as to establish procedures for asset
liability management. The sale of most fixed-rate mortgage loans with
contractual maturities in excess of 10 years is believed to remove some
vulnerability to interest rate risk which could result from rising interest
rates. Management continuously monitors the financial condition of the Bank and
believes that its strength is measured by the quality of the Bank's assets, the
composition of its loan portfolio and the Bank's capital adequacy. The Board of
Directors and management of the Bank intend to emphasize loan growth
commensurate with local market demands and the lending expertise of the Bank's
personnel.
RESULTS OF OPERATIONS
GENERAL. The Bank's net earnings are derived from net interest income,
which is the difference between interest income on loans and securities and
interest expense on deposits and borrowings. In addition, net earnings are
affected by the gain and loss on the sale of loans and securities, loan
servicing income, subsidiary earnings, operating expenses and income taxes.
Although changes in interest rates necessarily lead to the net interest margins,
the level and direction of overall interest rates have had a minimal impact on
the Bank's operations to date.
NET EARNINGS. The Bank reported net earnings of $1.2 million and $1.6
million for fiscal years ended June 30, 1995, and 1996, respectively. The Bank
reported $840,000 for the six-month period ended December 31, 1995 and $187,000
for the six-month period ended December 31, 1996. The increase from June 30,
1995 to June 30, 1996, was due primarily to an increase in the Bank's net
interest margin. The decrease in the six-month period ended December 31, 1995 to
December 31, 1996, was due primarily to the one time special Savings Association
Insurance Fund ("SAIF") assessment of approximately $1.1 million. See "-- SAIF
Recapitalization."
INTEREST REVENUE. Interest on loans and securities increased
approximately $1.3million from the fiscal year ended June 30, 1995 to the fiscal
year ended June 30, 1996. Interest Income on loans and securities increased
$111,000 from the six-month period ended December 31, 1995 to the six-month
period ended December 31, 1996. The increase from the fiscal year ended June 30,
1995 to the fiscal year ended June 30, 1996 was due primarily to an increase in
average yield on loans from approximately 8.0 % in fiscal year 1995 to 8.7 % in
fiscal year 1996, compounded by an increase in average loans outstanding of $7.9
million from the fiscal year ended June 30, 1995 to the fiscal year ended June
30, 1996. The increase from the six-month period from December 1995 to December
1996 was due primarily to an increase of approximately $5.5 million in the
average loan balance outstanding.
Other interest increased approximately $197,000 from the fiscal year
ended June 30, 1995 to the fiscal year ended June 30, 1996. Other interest
decreased approximately $81,000 from the six-month period ended December 31,
1995 to the six-month period ended December 31, 1996. The increase from the
fiscal year ended June 30, 1995 to the fiscal year ended June 30, 1996 was due
primarily to an increase in the average balance of interest-bearing deposits at
other banks of approximately $3.6 million. The decrease from the six-month
period ending December 31, 1995 to the six-month period ending December 1996,
was due primarily to a decrease of approximately $2.7 million in the average
balance of interest bearing deposits at other banks.
2
<PAGE> 4
INTEREST EXPENSE. Interest expense on deposits increased approximately
$1.4 million from the fiscal year ended June 30, 1995 to the fiscal year ended
June 30, 1996, due primarily to an increase in average deposits of approximately
$10.4 million. Average rates paid on deposits increased from 4.3 % in the fiscal
year ended June 30, 1995 to 4.9% in the fiscal year ended June 30, 1996.
Interest expense on deposits increased approximately $152,000 from the six-month
period ended December 31, 1995 to the six-month period ended December 31, 1996,
due in part to an increase of approximately $8.6 million in the average balance
of deposits outstanding.
Interest expense on borrowed funds decreased approximately $385,000
from the fiscal year ended June 30, 1995 to the fiscal year ended June 30, 1996
due in part to the repayment of $16.3 million in short-term borrowings. Interest
expense on borrowed funds decreased approximately $307,000 from the six-month
period ended December 31, 1995 to the six-month period ending December 31, 1996,
in part due to a decrease in the average balance of borrowed funds of
approximately $10.5 million.
PROVISION FOR LOSSES ON LOANS. Provisions for loan losses are based on
management's analysis of the various factors which affect the loan portfolio and
management's desire to maintain the allowance for loan losses at a level
considered adequate to provide losses. The provision for losses on loans in the
fiscal year ended June 30, 1996 was $240,000, compared to $235,000 in the fiscal
year ended June 30, 1995. The provision for loan losses for the six-month period
ended December 31, 1995 was $120,000 compared to $145,000 for the six-month
period ended December 31, 1996. This increase was due primarily in response to
overall loan portfolio growth.
The Bank maintains an allowance for loan losses based on management's
review and classification of the loan portfolio and analyses of borrowers'
ability to pay, historical charge-off experience, risk characteristics of
individual loans or groups of similar loans and underlying collateral, current
and prospective economic conditions, status of nonperforming loans and
regulatory reviews. In establishing the allowance for loan losses, management
recognizes that a substantial portion of the Bank's loans, including
nonperforming loans, are secured by mortgages on residential real estate. Total
nonperforming loans, which includes loans on nonaccrual status and loans 120
days past due and accruing, were $160,000 and $1,314,000 at June 30, 1995, and
1996, respectively. Total nonperforming loans were $421,000 and $2.0 million at
December 31, 1995 and 1996, respectively. The increase in nonperforming loans at
June 30, 1996, was primarily attributed to a multi-family real estate loan of
approximately $960,000 which was placed on nonaccrual status. The increase in
nonperforming loans at December 31, 1996 was primarily attributed to one
commercial real estate loan of approximately $360,000 and one residential real
estate development loan of $1.2 million, both of which were placed on nonaccrual
status during 1996.
NONINTEREST INCOME (LOSS). Noninterest income, which includes fees and
charges on deposit accounts and existing loans, service fee income on loans
sold, income on real estate operations, and gain (loss) on sale of assets
increased approximately $263,000 from the fiscal year ended June 30, 1995 to the
fiscal year ended June 30, 1996, primarily due to increases in each of the
foregoing items. Noninterest income increased approximately $60,000 from the
six-month period ended December 31, 1995 to the six-month period ended December
31, 1996, due primarily to an increase in fees and service charges on deposit
accounts.
NONINTEREST EXPENSE. Noninterest expense increased approximately
$132,000 from the fiscal year ended June 30, 1995 to the fiscal year ended June
30, 1996. The increase from the fiscal year ended June 30, 1995 to the fiscal
year ended June 30, 1996 was primarily due to an increase in marketing and
professional expense of approximately $57,000 associated with the Bank's name
change as well as a slight increase in overall noninterest expense. Noninterest
expense increased approximately $1,254,000 from the six-month period ended
December 31,1995 to the six-month period ended December 31,1996. The increase
was due primarily to the one-time SAIF assessment of approximately $1.1 million
as well as slight increases on overall noninterest expense. See "-- SAIF
Recapitalization."
3
<PAGE> 5
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the ability or the financial flexibility
to manage future cash flows to meet the needs of depositors and borrowers and to
provide funds for operations. Maintaining appropriate levels of liquidity allows
the Bank to have sufficient funds available for reserve requirements, customer
demand for loans, withdrawal of deposit balances and maturities of deposits and
other liabilities. The Holding Company's primary source of liquidity is
dividends paid by the Bank, which actively manages both assets and liabilities
to achieve its desired level of liquidity. Alabama law imposes restrictions on
the amount of dividends that may be declared by the Bank. Further, any dividend
payment by the Bank is subject to the continuing ability of the Bank to maintain
compliance with federal regulatory capital requirements. See "Market Price and
Dividend Information" and Note 10 of Notes to Consolidated Financial Statements.
In the ordinary course of its business, the Bank's primary sources of
cash are interest and fee income, in addition to loan repayments and the
maturity of sales of other earning assets including investment securities and
mortgage loans. The entire investment portfolio at December 31, 1996 was
classified as available for sale, with a market value of $48.9 million. See Note
2 of Notes to Consolidated Financial Statements. At December 31, 1996, liquid
assets, consisting primarily of cash on hand, interest-bearing deposits in other
banks and short-term investments totaled $56.0 million.
The Bank's liability base provides liquidity through deposit growth,
the rollover of maturing deposits and accessibility to external sources of
funds, including borrowings from the FHLB of Atlanta and other sources. At
December 3, 1996, the Bank had an approved credit availability of $29.0 million
at the FHLB of Atlanta and no advances outstanding.
Virtually all of 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. Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services, since
such prices are affected by inflation. In the current interest rate environment,
liquidity and the maturity structure of the Bank's assets and liabilities are
believed to be critical to the maintenance of desired performance levels.
Management considers the Bank's liquidity sources to be adequate to meet its
current and projected needs.
CAPITAL RESOURCES. The Holding Company's capital position is reflected
in its stockholders' equity, subject to certain adjustments for regulatory
purposes. Stockholders' equity is a measure of the Holding Company's net worth,
soundness and viability. The capital base of the Holding Company allows it and
the Bank to take advantage of business opportunities, while maintaining a level
of resources deemed appropriate by management to address business risks inherent
in daily operations. Stockholders' equity at December 31, 1996 was $15.3
million.
Risk-based capital regulations adopted by the Board of Governors of the
Federal Reserve Board and the Federal Deposit Insurance Corporation ("FDIC")
require bank holding companies and banks, respectively, to achieve and maintain
specified ratios of capital to risk-weighted assets. The risk-based capital
rules are designed to measure Tier 1 Capital and Total Capital in relation to
the credit risk of both on- and off-balance sheet items. Under the guidelines,
one of four risk weights is applied to the different on-balance sheet items.
Off-balance sheet items, such as loan commitments, are also subject to
risk-weighting after conversion to balance sheet equivalent amounts. All bank
holding companies and banks must maintain a minimum total capital to total
risk-weighted assets ratio of 8.00%, at least half of which must be in the form
of core, or Tier 1, capital (consisting of stockholders' equity, less goodwill).
At December 31, 1996, the Bank satisfied its minimum regulatory capital
requirement and was "well-capitalized" within the meaning of federal regulatory
requirements.
SAIF RECAPITALIZATION
The Bank is required to pay assessments, based on a percentage of its
insured deposits, to the FDIC for insurance of its deposits by the SAIF. The
FDIC has established a risk-based deposit insurance assessment system for
insured depository
4
<PAGE> 6
institutions, under which insured institutions are assigned assessment risk
classifications based upon capital levels and supervisory evaluations.
In 1995 and 1996, institutions with SAIF-assessable deposits, like the
Bank, were required to pay higher deposit insurance premiums than institutions
with deposits insured by the Bank Insurance Fund (the "BIF"). In order to
recapitalize the SAIF and to address the insurance premium disparity, the
Deposit Funds Insurance Act of 1996 (the "1996 Act") authorized the FDIC to
impose a one-time special assessment on all institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF to the statutorily
designated reserve ratio of 1.25% of insured deposits. Institutions were
assessed at the rate of 65.7 basis points per $100 of each institution's
SAIF-assessable deposits as of March 31, 1995.
In view of the recapitalization of the SAIF, the FDIC set the effective
insurance assessment rates payable by SAIF-insured institutions for the first
half of 1997 at zero to 27 basis points, depending on an individual
institution's risk classification. In addition, SAIF-insured institutions will
be required, until December 31, 1999, to pay assessments to the FDIC at the
annual rate of 6.6 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO"), an agency of the federal
government established to recapitalize the predecessor to the SAIF. During this
period, BIF member banks will be assessed for payment of the FICO obligations at
the annual rate of 1.3 basis points. After December 31, 1999, BIF and SAIF
member institutions will be assessed at the same rate for the FICO obligations.
The 1996 Act also provides that the FDIC may not assess regular
insurance assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. As of December 31, 1996, the Bank was classified as
"well-capitalized."
MARKET PRICE AND DIVIDEND INFORMATION
The common stock of the Bank is traded on the American Stock Exchange
under the symbol "PLE". As of December 31,1996, the Bank had 444 stockholders of
record. This total does not reflect the number of persons or entities who hold
stock in nominee or "street name" through various brokerage firms.
Following are the high and low sale prices of the Bank's common stock
for the periods indicated:
<TABLE>
<CAPTION>
Price Range
Common Stock
--------------------------
High Low
<S> <C> <C>
Fiscal Year 1995
First Quarter $ 15 5/8 $ 15 1/4
Second Quarter 14 13 3/4
Third Quarter 14 5/8 13 3/4
Fourth Quarter 16 1/8 14 3/4
Fiscal Year 1996
First Quarter $ 16 3/4 $ 16
Second Quarter 19 17 1/2
Third Quarter 18 1/8 17 3/4
Fourth Quarter 16 3/8 15 7/8
Six Months Ended December 31, 1996
First Quarter $ 18 1/8 $ 17 3/4
Second Quarter 16 3/8 15 7/8
</TABLE>
5
<PAGE> 7
Dividends of $.72 ($.18 in each of the four quarters) were declared and
paid during fiscal year 1996. Dividends of $.36 ($.18 in each of the two
quarters) were declared and paid during the six-month period ending December 31,
1996. Under Alabama law, the approval of the Superintendent of Banks of the
State of Alabama is required if the total of all the dividends declared by the
Bank in any calendar year exceeds the Bank's net income as defined for that year
combined with its retained net income for the preceding two calendar years.
Federal law provides that no insured depository institution may make any capital
distribution (including a cash dividend) if the institution would not satisfy
one or more of its minimum capital requirements after the distribution.
6
<PAGE> 8
PINNACLE BANK
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Assets
Cash on hand and in banks $ 3,612,668 $ 2,273,532 $ 2,879,396
Interest-bearing deposits in other banks 5,535,694 2,823,950 3,868,664
Securities available for sale 28,026,256 53,671,326 48,944,812
Accrued interest on securities and deposits 716,035 660,663 561,326
----------------- ----------------- ----------------
37,890,653 59,429,471 56,254,198
----------------- ----------------- ----------------
Loans receivable, net 118,535,135 120,643,908 129,857,656
Securities held to maturity 32,060,793 -- --
Loans held for sale (fair value $2,090,709, $326,474
and $1,248,742 at June 30, 1995 and 1996 and at
December 31, 1996, respectively) 2,090,709 326,474 1,428,742
Real estate owned -- -- 1,010,340
Premises and equipment, net 4,233,957 4,213,949 5,176,990
Prepaid expenses and other assets 116,816 327,696 251,678
Accrued interest on loans 775,658 928,040 958,803
Excess mortgage servicing 123,228 73,961 53,154
Excess cost over net assets acquired 572,113 531,248 510,815
----------------- ----------------- ----------------
$ 196,399,062 $ 186,474,747 $ 195,502,376
================= ================= ================
Liabilities and Stockholders' Equity
Deposits $ 161,211,920 $ 165,234,455 $ 173,407,101
Borrowed funds 18,850,000 3,750,000 3,750,000
Official checks outstanding 558,887 769,642 1,675,929
Advance payments by borrowers for taxes
and insurance 458,902 380,037 144,587
Deferred taxes 216,000 168,000 297,042
Other liabilities 740,560 1,007,237 943,017
----------------- ----------------- ----------------
182,036,269 171,309,371 180,217,676
----------------- ----------------- ----------------
Stockholders` Equity
Common stock (.01 par value, 10,000 shares);
authorized, 932,000 shares issued and 889,824
outstanding at June 30, 1995 and 1996 and
December 31, 1996, respectively) 9,320 9,320 9,320
Additional paid-In capital 8,376,037 8,376,037 8,376,037
Treasury stock at cost (42,176 shares at June 30, 1995
and 1996 and December 31, 1996, respectively) (345,317) (345,317) (345,317)
Retained earnings 6,452,000 7,448,806 7,315,182
Unrealized loss on securities available for sale, net (129,247) (323,470) (70,522)
----------------- ----------------- ----------------
14,362,793 15,165,376 15,284,700
----------------- ----------------- ----------------
$ 196,399,062 $ 186,474,747 $ 195,502,376
================= ================= ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 9
PINNACLE BANK
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended For the Six Months Ended
June 30, December 31,
----------------------------------- ----------------------------------
1995 1996 1995 1996
---- ---- ---- ----
INTEREST REVENUE (Unaudited)
<S> <C> <C> <C> <C>
Interest on loans $ 9,216,858 $ 10,800,833 $ 5,416,039 $ 5,673,236
Interest on securities held to maturity 2,219,924 2,464,886 755,081 --
Interest and dividends on securities
available for sale 1,565,830 1,081,571 1,081,571 1,690,759
Other Interest 105,389 302,508 159,142 77,899
-------------- --------------- ------------- -------------
13,108,001 14,649,798 7,411,833 7,441,894
-------------- --------------- ------------- -------------
INTEREST EXPENSE
Interest on deposits 6,550,426 7,993,660 4,004,569 4,156,751
Interest on borrowed funds 990,404 604,952 418,973 110,741
-------------- --------------- ------------- -------------
7,540,830 8,598,612 4,423,542 4,267,492
-------------- --------------- ------------- -------------
Net interest income before provision for
loan losses 5,567,171 6,051,186 2,988,291 3,174,402
Provision for loan losses 235,000 240,000 120,000 145,000
-------------- --------------- ------------- -------------
Net interest income after provision for
losses on loans 5,332,171 5,811,186 2,868,291 3,029,402
-------------- --------------- ------------- -------------
NONINTEREST INCOME
Fees and service charges on deposit
accounts 303,707 345,641 101,574 202,579
Service fees income on loans sold 257,109 265,523 133,044 127,669
Fees and charges on loans 207,624 229,664 162,956 142,641
Real estate operations, net 112,880 149,142 72,996 73,617
Net gain (loss) on sale of :
Loans held for sale 168,232 272,770 123,507 106,456
Real estate owned 1,120 12,066 156 --
Securities available for sale (39,839) (808) -- 574
Assets -- -- -- 275
Other Income 1470 957 -- 357
-------------- --------------- ------------- -------------
1,012,303 1,274,955 594,233 654,168
-------------- --------------- ------------- -------------
NONINTEREST EXPENSE
Compensation and benefits 2,148,909 2,174,691 1,068,813 1,137,433
Occupancy 968,430 978,656 488,580 534,731
FDIC insurance 342,161 364,946 180,064 1,287,349
Marketing and professional 172,200 229,104 21,000 74,088
Legal 42,000 41,998 61,355 20,968
Other 649,630 666,267 299,609 318,538
-------------- --------------- ------------- -------------
4,323,330 4,455,662 2,119,421 3,373,107
-------------- --------------- ------------- -------------
Earnings before income tax 2,021,144 2,630,479 1,343,103 310,463
Income tax expense 780,000 993,000 503,380 123,750
-------------- --------------- ------------- -------------
$ 1,241,144 $ 1,637,479 $ 839,723 $ 186,713
============== =============== ============= =============
Net earnings per share $ 1.39 $ 1.84 $ 0.94 $ 0.21
============== =============== ============= =============
Cash dividends per share $ 0.72 $ 0.72 $ 0.36 $ 0.36
============== =============== ============= =============
Weighted average shares outstanding 889,674 889,824 889,224 889,824
============== =============== ============= =============
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE> 10
PINNACLE BANK
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (loss)
Additional on Securities Total
Common Stock Paid-In Retained Treasury Available Stockholders'
Shares Amount Capital Earnings Stock for Sale, Net Equity
------ ------ ------- -------- ----- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1994 $ 929,664 $ 9,297 $ 8,364,964 $ 5,851,530 $ (345,317) $ (407,116) $ 13,473,358
Net earnings for the year
ended June 30, 1995 1,241,144 1,241,144
Options exercised 2,336 23 11,073 11,096
Cash dividends ($.72 per
share) (640,674) (640,674)
Change in unrealized
gain (loss) on
securities available for
sale, net 277,869 277,869
----------- ---------- ------------ ------------ ------------ ------------ ---------------
Balance June 30, 1995 932,000 9,320 8,376,037 6,452,000 (345,317) (129,247) 14,362,793
Net earnings for the year
ended June 30, 1996 1,637,479 1,637,479
Unrealized losses
recognized in transfer
of securities available
or sale 143,897 143,897
Cash dividends ($.72 per
share) (640,673) (640,673)
Change in unrealized
gain (loss) on
securities available for
sale, net (338,120) (338,120)
----------- ---------- ------------ ------------ ------------ ------------ ---------------
Balance June 30, 1996 932,000 9,320 8,376,037 7,448,806 (345,317) (323,470) 15,165,376
Net earnings for the
period ended
December 31, 1996 186,713 186,713
Cash dividends ($.36 per
share) (320,337) (320,337)
Change in unrealized
gain (loss) on
securities available for
sale, net
Balance 252,948 252,948
December 31, 1996 $ 932,000 $ 9,320 $ 8,376,037 $ 7,315,182 $ (345,317) $ (70,522) $ 15,284,700
=========== ========== ============ ============ ============ ============ ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
9
<PAGE> 11
PINNACLE BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended For the Six Months Ended
June 30, December 31,
--------------------- ------------------------
1995 1996 1995 1996
---- ---- ---- ----
CASH FLOW PROVIDED BY OPERATING ACTIVITIES: (Unaudited)
<S> <C> <C> <C> <C>
Net earnings $ 1,241,144 $ 1,637,479 $ 839,723 $ 186,713
Adjustment to reconcile net earnings to net cash flows provided
by operating activities:
Depreciation 470,432 482,247 231,280 252,198
Provision for losses on loans 235,000 240,000 120,000 145,000
Provision (benefits) for deferred taxes (97,818) 46,526 23,585 6,545
Net (gain) loss on sale of:
Loans held for sale (168,232) (272,770) (123,507) (106,456)
Securities available for sale 39,839 808 -- (574)
Real estate owned (1,120) (12,066) (156) --
Assets -- -- -- (275)
Amortization net, 231,068 26,657 45,585 (61,962)
Proceeds from sale of loans 36,823,729 40,805,930 21,065,721 11,290,723
Loans originated for sale (38,685,497) (39,339,677) (20,108,260) (12,286,535)
Decrease (increase) n accrued interest receivable (175,411) (97,010) (77,230) 68,574
Decease (increase) in prepaid and other assets 78,930 (210,850) (157) 76,018
Increase ( decrease) in other liabilities (205,533) 266,678 300,982 289,216
Increase (decrease) in accrued interest payable 241,338 199,541 (253,414) (353,436)
------------- ------------- -------------- -------------
Net cash provided by operating activities 27,869 3,773,493 2,064,152 (494,251)
------------- ------------- -------------- -------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Principal collected on loans and securities 60,454,102 79,811,133 37,123,667 32,502,843
Loans originated for portfolio (69,328,000) (74,865,414) (38,366,720) (42,007,376)
Loans purchased for portfolio (4,663,740) (1,649,250) (540,558) (688,000)
Net change in interest bearing deposits at other banks (5,428,052) 2,711,744 (1,613,272) (1,044,714)
Purchase of securities available for sale (4,151,251) (13,009,675) -- (8,024,934)
Proceeds from sale of securities 6,041,571 3,008,866 -- 3,002,109
Proceeds from maturing securities -- 11,000,000 2,094,259 10,052,005
Purchase of premises and equipment (155,863) (537,239) (42,647) (1,215,239)
Proceeds from sale of fixed assets 455,680 127,996 86,831 275
Proceeds from sale of real estate -- 75,000 894,736 --
------------- ------------- -------------- -------------
Net cash provided by (used in) investing activities (16,775,553) 6,673,161 (363,704) (7,423,031)
------------- ------------- ------------- -------------
CASH FLOW USED IN FINANCING ACTIVITIES:
Net (increase) decrease in passbook, NOW and money market
deposit accounts (3,738,737) (1,392,346) (352,216) 872,395
Proceeds from sales of time deposits 45,088,203 23,102,904 11,069,643 16,309,019
Payments from maturing time deposits (29,962,727) (17,887,564) (8,692,933) (9,008,768)
Proceeds from borrowed funds 31,210,000 1,250,000 (5,000,000) --
Increase (decrease) in official checks and advance (23,415,000) (16,350,000) -- --
payments by borrowers for taxes and insurance (52,369) 131,889 494,734 670,837
Proceeds from stock options exercised 11,096 -- -- --
Payments of dividends (640,674) (640,673) (320,337) (320,337)
-------------- ------------- -------------- --------------
Net cash provided by (used in) financing activities 18,499,792 (11,785,790) (2,801,109) 8,523,146
------------- ------------- -------------- -------------
NET (INCREASE) DECREASE IN CASH 1,752,108 (1,339,136) (1,100,661) 605,864
CASH AT BEGINNING OF PERIOD 1,860,560 3,612,668 3,612,668 2,273,532
------------- ------------- -------------- -------------
CASH AT END OF PERIOD $ 3,612,668 $ 2,273,532 $ 2,512,007 $ 2,879,396
============= ============= ============== =============
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest on deposits and borrowed funds $ 7,056,447 $ 8,399,071 $ 4,233,983 $ 3,802,806
Cash payments for income taxes $ 620,000 $ 832,393 $ 475,000 $ 190,000
Real estate acquired through foreclosure $ 42,251 $ 115,930 $ 993,139 $ 1,010,340
Transfer of securities held to maturity to available for sale at
fair value -- 29,948,941 -- --
</TABLE>
10
<PAGE> 12
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Following is a description of the more significant accounting policies
followed by Pinnacle Bank in presenting its consolidated financial statements.
(a) ORIGINATION AND NATURE OF OPERATIONS
First Federal of Alabama, F.S.B. received its federal charter in
1935. In 1996, First Federal of Alabama, F.S.B. changed its name to Pinnacle
Bank (the "Bank"). The Bank is primarily in the business of obtaining funds
in the form of various savings deposit products and investing those funds in
mortgage loans or single family real estate and, to a lesser extent, in
consumer and commercial loans. The Bank operates in five offices in the
central and northwest portion of Alabama, and originates its loans in this
market area.
(b) FISCAL YEAR
In connection with the conversion of the Bank to an Alabama-chartered
commercial bank and the concurrent holding company reorganization, the Bank's
stockholders approved changing the fiscal year end from June 30, to December 31.
Accordingly, the fiscal year ended on December 31, 1996 is a six month
transition period. Prior to this period, the company utilized a twelve month
period ending on June 30. The accompanying financial statements include audited
financial statements for the six-month transition period ended on December 31,
1996. Unaudited financial statements are presented for the six -month period
ended December 31, 1995 for comparative purposes only.
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results may differ from those estimates. The primary estimates
that are reflected in the financial statements are the valuation allowances for
loan losses and real estate owned.
(d) CONSOLIDATION
The consolidated financial statements include the accounts of Pinnacle
Bank and wholly-owned subsidiaries First General Service(s) Corporation, First
General Capital Corporation and First General Ventures. All significant
intercompany transactions and accounts have been eliminated in consolidation.
(e) SECURITIES
Securities classified as available for sale are carried at fair value.
The unrealized difference between amortized cost and fair value on securities
available for sale is excluded from earnings and is reported net of deferred
taxes as a separate component of stockholders' equity. The available for sale
category includes securities that Management intends to use as part of its
asset/liability management strategy or that may be sold in response to changes
in interest rates, changes in prepayment risk, liquidity needs, or for other
purposes. Securities designated as held to maturity are carried at amortized
cost, as the Bank has both the ability and positive intent to hold these
securities to maturity. The Bank had no securities classified as trading at June
30, 1995, 1996 or December 31, 1996. The Bank had no securities classified as
held to maturity at June 30, 1996 or December 31,1996.
Amortization of premiums and accretion of discounts are computed using
the level yield method. The adjusted cost of the specific security sold is used
to compute gain or loss on the sale of securities.
11
<PAGE> 13
During December 1995, the Bank changed classification of its securities
held to maturity to securities available for sale as permitted by the Financial
Accounting Standards Board ("FASB") report entitled, "A Guide to Implementation
of Statement No. 115 on Accounting for Certain Investment in Debt and Equity
Securities."
(f) LOANS RECEIVABLE
Loans receivable are stated at their unpaid principal balance, less the
undisbursed portion of loans, unearned interest income and an allowance for loan
losses. Unearned interest on consumer loans is amortized to income by use of a
method which approximates level yield over the lives of the related loans. Loans
that are 120 days contractually past due generally are placed on nonaccrual
status, and interest income is reversed. Income is subsequently recognized only
to the extent that cash payments are received until, in management's judgment,
the borrower's ability to make interest and principal payments has been
demonstrated in which case the loan is returned to accrual status.
(g) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which management
considers to be adequate to absorb losses inherent in the loan portfolio.
Management's estimation of the amount of the allowance is based on a continuing
evaluation of the loan portfolio and includes such factors as economic
conditions, analysis of individual loans and overall portfolio characteristics
and delinquencies. Changes in the allowances can result from changes in economic
events or changes in the creditworthiness of the borrowers. The effect of these
changes is reflected when known. The amount of the allowance is maintained
through the provision for losses and is decreased by charge-offs, net of
recoveries.
The Bank adopted Statement of Financial Accounting Standards ("SFAS")
No. 114 "Accounting by Creditors for Impairment of a Loan", and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures", as of July 1, 1995. SFAS No. 114 requires that certain impaired
loans be measured based on the present value of expected future cash flows
discounted at each loan's original effective interest rate. As a practical
expedient, impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
When the measure of the impaired loan is less than the recorded investment of
the loan, the impairment is recorded through a valuation allowance.
One-to-four family residential mortgages and consumer installment loans
are exempt from SFAS No. 114 when evaluated collectively for impairment as is
done by the Bank. The Bank's commercial loans had previously been reviewed for
impairment using methods similar to those prescribed in SFAS No. 114.
Accordingly, as a result of adopting these statements, no additional provision
to the allowance for loan losses was required as of July 1, 1995.
(h) LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate amortized
cost or fair value as such loans are not intended to be held to maturity. Net
unrealized losses measured in the aggregate are recognized in a valuation
allowance by charges to income.
(i) LOAN ORIGINATION FEES, LOAN COMMITMENT FEES AND PREMIUMS AND
DISCOUNTS
Loan fees, net of certain direct costs of loan originations, are
treated as an adjustment to the yield of the related loans over the contractual
term of the loan adjusted for prepayments as they occur. Loan commitment fees
are recognized into income upon expiration of the commitment period or sale of
the loan, unless the commitment results in the loans being funded and maintained
in the loan portfolio.
12
<PAGE> 14
(j) LOAN SALES AND SERVICING
Gains or losses on loan sales are recognized at the time of sale and
determined by the difference between net sales proceeds and the carrying value
of the loan sold. When loans are sold with servicing rights retained, the Bank
realizes additional gain or losses if the actual servicing fees to be received
differ from normal servicing fees. Such gains or losses are calculated at the
present value of the differential between the actual servicing fee and the
normal servicing fee over the remaining life of the loans serviced, adjusting
for estimated prepayments.
Normal servicing fees are recognized as income in the period earned.
(k) REAL ESTATE OWNED
Real estate owned acquired through foreclosure is carried at the fair
value of the foreclosed property, less estimated costs of disposition at the
date of foreclosure Any excess of the recorded investment over fair value, less
estimated cost of disposition of the property is charged to the allowance for
loan losses at the time of foreclosure. Subsequent to foreclosure, real estate
owned is evaluated on an individual basis for changes in fair value. Declines in
fair value of the asset, less cost of disposition below its carrying amount,
increase the valuation allowance account. Future increases in fair value of the
asset, less cost of disposition, reduce the valuation allowance account, but not
below zero. Increases or decreases in the valuation allowance account are
charged or credited to income. Cost relating to the development and improvement
of property are capitalized, whereas costs relating to the holding of property
are expensed.
The recognition of gains and losses on the sale of real estate is
dependent upon whether the nature and terms of the sale and future involvement
of the Bank in the property meet certain requirements. If the transaction does
not meet these requirements, income recognition is deferred and recognized under
an alternative method in accordance with SFAS No. 66, "Accounting for Sales of
Real Estate."
(l) PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are stated at cost less
depreciation accumulated on a straight-line basis over the estimated service
lives of the related assets (30 to 50 years for buildings, 10 to 15 years for
leasehold improvements and 3 to 10 years for equipment).
(m) INCOME TAXES
Under the asset and liability method, balance sheet amounts of deferred
taxes are recognized on the temporary differences between the bases of assets
and liabilities as measured by tax laws and their bases as reported in the
consolidated financial statements. Deferred tax expense or benefit is then
recognized for the change in deferred tax liabilities or assets between periods.
Recognition of deferred tax asset balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences will be realized.
(n) EXCESS COST OVER NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired (goodwill)
arose from a merger which was accounted for under the purchase method of
accounting and is being amortized over its estimated useful life of 20 years.
13
<PAGE> 15
(o) EARNINGS PER SHARE
Earnings per share are computed based on the weighted average common
shares outstanding during each period presented.
(p) NEW ACCOUNTING STANDARDS
In October 1995, the FASB issued No. 123," Accounting for Stock-Based
Compensation". SFAS 123 established a fair value based method for accounting for
stock based compensation plans. This Standard encourages entities to adopt this
method in place of the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities are still granted the option of accounting for
stock based compensation plans under the provisions of APB Opinion No. 25 but
must meet the disclosure requirements of SFAS No. 123 if they so choose.
The provisions of SFAS No. 123 are required to be adopted in financial
statements for years beginning after December 15, 1995 and are effective for
transactions entered into after the same date. The Bank adopted the provision
for this Standard as was required, effective July 1, 1996, and elected to
account for these plans under the provisions of APB No. 25. There were no
options outstanding at December 31, 1996, therefore no disclosures are required.
In June 1996, The FASB issued SFAS No. 125, Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liability it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The Company will adopt the
provisions of the Standard on January 1, 1997. Based on the Company's current
operating activities, management does not believe that the adoption of this
statement will have a material impact on the Company's financial condition or
results of operations.
2. SECURITIES
The amortized cost, unrealized gross gains and losses, and approximate
fair value of securities at June 30, 1995, June 30,1996 and December 31,1996 are
as follows:
<TABLE>
<CAPTION>
Available for Sale June 30, 1995
------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gain Gross Loss Value
---- ---- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 17,211,813 $ 20,646 $ (60,630) $ 17,171,829
Securities of U.S. Government Agencies 1,000,000 -- (30,076) 969,924
Corporate Securities 8,086,409 -- (134,609) 7,951,800
Federal Home Loan Bank Stock 1,715,800 -- 1,715,800
Other Securities 216,317 586 -- 216,903
--------------- ----------- ------------ ---------------
Total $ 28,230,339 $ 21,232 $ (225,315) $ 28,026,256
=============== =========== ============ ===============
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
Held to Maturity June 30, 1995
------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
Mortgage-backed Securities $ 32,060,793 $ 383,859 $ (371,593) $ 32,073,059
=============== =========== =========== ===============
</TABLE>
<TABLE>
<CAPTION>
Available for Sale June 30,1996
------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 12,037,954 $ 5,951 $ (26,150) $ 12,017,755
Securities of U.S. Government Agencies 6,000,000 -- (109,847) 5,890,153
Corporate Securities 7,029,319 -- (22,713) 7,006,606
Federal Home Loan Bank Stock 1,715,800 -- -- 1,715,800
Other Securities 216,647 378 -- 217,025
Mortgage Backed Securities 27,172,023 72,016 (420,052) 26,823,987
--------------- ----------- ------------ ---------------
Total $ 54,171,743 $ 78,345 $ (578,762) $ 53,671,326
=============== =========== ============ ===============
</TABLE>
<TABLE>
<CAPTION>
Available for Sale December 31, 1995
------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 17,087,365 $ 26,429 $ (5,201) $ 17,108,593
Securities of U.S. Government Agencies 1,000,000 -- (20,100) 979,900
Corporate Securities 8,057,815 -- (54,417) 8,003,398
Federal Home Loan Bank Stock 1,715,800 -- -- 1,715,800
Other Securities 216,941 535 -- 217,476
Mortgage Backed-securities 29,730,915 470,875 (252,849) 29,948,941
--------------- ----------- ----------- ---------------
Total $ 57,808,836 $ 497,839 $ (332,567) $ 57,974,108
=============== =========== =========== ===============
</TABLE>
<TABLE>
<CAPTION>
Available for Sale December 31, 1996
------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 13,041,282 $ 57,654 -- $ 13,098,936
Securities of U.S. Government Agencies 7,997,968 13,664 (45,938) 7,965,694
Corporate Securities 1,006,960 -- (1,636) 1,005,324
Federal Home Loan Bank Stock 1,715,800 (416,456) -- 1,715,800
Other Securities 216,822 143 -- 216,965
Mortgage Backed-securities 25,083,142 275,407 (416,456) 24,942,093
--------------- ----------- ----------- ---------------
Total $ 49,061,974 $ 346,868 $ (464,030) $ 48,944,812
=============== =========== =========== ===============
</TABLE>
At December 31, 1996, the amortized cost of the Bank's securities
available for sale maturing in one year or less was $5,034,501 with fair values
of $5,031,116; maturing one through five years was $17,021,590, with fair values
of $17,049,061; maturing five years through ten years was $770,039 with fair
values of $785,491; after ten years was $26,235,844 with fair values of
$26,079,144.
15
<PAGE> 17
Proceeds from the sale of securities available for sale during the year
ended June 30, 1996 were $3,008,866. Gross gains of $275 and gross losses of
$1,084 were realized on these sales. No securities were sold or purchased during
the six-month period ending December 31,1995. Proceeds from the sale of
securities available for sale for the six-month period ended December 31, 1996
were $3,002,109, gross gains of $574 were realized.
Securities carried at approximately $21,445,795 at December 31,1996
were pledged to secure deposits.
On December 31, 1995, the Bank reassessed the appropriateness of the
classification of all securities held at that time and determined that certain
securities considered to be held-to-maturity should be reclassified as
available-for-sale in accordance with the one-time reassessment prescribed by
the FASB Special Report. "A guide to the implementation of Standard 115 on
Accounting for Certain Investments in Debt and Equity Securities." The amortized
cost, fair value, unrealized gain and unrealized loss on the date of transfer,
December 31, 1995, for the securities transferred, was as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gross Gain Gross Loss Value
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
Mortgage-backed Securities $ 29,730,915 $ 470,875 $ (252,849) $ 29,948,941
=============== =========== =========== ===============
</TABLE>
3. LOANS RECEIVABLE
Loans receivable, net, are summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Real estate mortgage loans with variable rates $ 58,018,425 $ 55,504,374 $ 53,391,923
Real estate mortgage loans with fixed rates 33,960,234 31,314,251 36,576,333
Real estate construction loans 21,276,488 26,800,575 27,761,699
Commercial loans 6,511,466 10,020,992 12,019,364
Consumer Loans 8,484,729 8,942,528 9,701,254
---------------- --------------- ----------------
128,251,342 132,582,720 139,450,573
Allowance for loan losses (1,219,016) (1,285,469) (1,189,441)
Loans in process (8,250,679) (10,440,934) (8,198,026)
Unearned interest income (7,664) (857) (258)
Other unearned credits (238,848) (211,552) (205,192)
---------------- --------------- OPdf----------------
$ 118,535,135 $ 120,643,908 $ 129,857,656
================ =============== ================
</TABLE>
During fiscal years ended June 30,1995 and 1996 and the six-month
period ended December 31, 1996, certain executive officers and directors of the
Bank and its subsidiaries were loan customers of the Bank. Total loans
outstanding to these persons were $386,797, $325,307 and $431,459 at June 30,
1995, June 30, 1996, and December 31, 1996, respectively. The change from June
30, 1995 to June 30, 1996 reflects payments amounting to $91,468 and advances of
$29,978 made during the year. The change from June 30 1996 to December 31, 1996
reflects payments amounting to $32,563 and advances of $138,715 made during the
six-month period. Additionally, at December 31, 1996, the Bank has an
outstanding loan commitment to an affiliated company, the total commitment was
$1,306,000 of which $417,500 was outstanding as December 31, 1996. Such loans
are made in the ordinary course of business at normal credit terms, including
interest rate and collateral requirements, and do not represent more than normal
credit risk.
The Bank has a credit concentration in residential real estate mortgage
loans. Approximately $104,400,000, $108,100,479 and $109,600,000 at June 30,
1995 and June 30, 1996 and at December 31, 1996,
16
<PAGE> 18
respectively, of the Bank's total loan portfolio were in first or second
mortgage residential real estate loans. Substantially all of the Bank's loan
customers are located in the Bank's primary lending areas of Walker, Winston,
Jefferson and Shelby Counties in Alabama. Although the Bank has generally
conservative underwriting standards, including a policy calling for low loan
to collateral values, the ability of its borrowers to meet their mortgage
obligations is dependent upon local economic conditions.
A reconciliation of the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
For the Years For the Six Month Period Ended
Ended June 30, December 31,
---------------------------------- ---------------------------------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,039,146 $ 1,219,016 $ 1,219,016 $ 1,285,469
Provisions for losses 235,000 240,000 120,000 145,000
Less loan losses charged to allowance, net recoveries (55,130) (173,547) (126,953) (241,028)
------------- ------------- ------------- -------------
Balance at end of period $ 1,219,016 $ 1,285,469 $ 1,212,063 $ 1,189,441
============= ============= ============= =============
</TABLE>
The Bank was servicing participating interest in first mortgage loans
for others totaling $102,281,630, $98,754,374 and $97,499,127 at June 30, 1995,
June 30 1996 and at December 31, 1996, respectively. As of December 31, 1996,
the Bank was servicing $1,387,555 in mortgage loans sold with recourse.
At December 31, 1996, the Bank had outstanding loan commitments of
$17,288,639, including $8,198,026 in undisbursed construction loans in process;
$6,903,518 in unused lines and letters of credit and credit cards; $2,067,095 in
commitments to originate mortgage loans consisting primarily of 30-day
commitments; $120,000 in commitments to originate commercial business loans.
Commitments to originate conventional mortgage loans consisted of fixed-rate
mortgages for which interest rates had not been established of $1,991,815 and
adjustable-rate mortgages of $75,280, all having terms ranging from 15 to 30
years.
The recorded investment in impaired loans at June 30, 1996 and December
31, 1996 was $963,509 and $664,189. There were no specific reserves on these
loans at June 30, 1996 or December 31, 1996 because the loans were adequately
collateralized. The average recorded investment in impaired loans during the
year ended June 30, 1996 and six months ended December 31, 1996 was $277,246 and
$815,247. Interest income on impaired loans was not material for either period.
4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Land $ 347,500 $ 456,794 $ 456,794
Buildings and leasehold improvements 4,084,825 4,125,178 4,311,786
Furniture, fixtures and equipment 3,399,193 3,494,118 3,627,395
Construction In-Process 200,885 1,096,239
Automobiles 96,345 72,341 72,341
--------------- --------------- ---------------
7,927,863 8,349,316 9,564,555
Less: Accumulated depreciation 3,693,906 4,135,367 4,387,565
--------------- --------------- ---------------
$ 4,233,957 $ 4,213,949 $ 5,176,990
=============== =============== ===============
</TABLE>
17
<PAGE> 19
The Bank had noncancelable operating leases for the main and branch
office sites. Office building and equipment expenses for the fiscal years ended
June 30, 1995 and 1996, and the six-month periods ended December 31, 1995
(unaudited) and 1996, respectively, include rental expense under these leases of
$94,700, $96,170, $47,792 and $49,138 respectively. Future rental payments
subject to periodic renegotiations required under these leases are as follows:
<TABLE>
<CAPTION>
At December 31, 1996 Amount
-------------------- ------
<S> <C>
1997 $ 77,308
1998 50,604
1999 50,604
2000 48,204
2001 45,804
Later Years 178,522
----------
Total $ 451,046
==========
</TABLE>
The Bank has a lease agreement for the building in which the main
office branch is located which generated income of $104,592 and $104,772 for the
fiscal years ended June 30, 1995, and 1996 and $52,386 and $49,475 for the
six-month periods ended December 31, 1995 (unaudited) and 1996, respectively.
During 1995 the Bank entered into a lease for a building from a related party
which formerly housed administrative offices. This lease generated income of
$16,667, and $50,300 for the fiscal years ended June 30, 1995 and 1996,
respectively, and $25,000 for both the six months periods ended December 31,
1995 (unaudited) and December 31, 1996, respectively. The lease for $50,000 per
year expires December 31, 2001.
5. REAL ESTATE OWNED
Real estate owned is comprised solely of real estate acquired
through foreclosure. There was no need for a valuation allowance account on
real estate at December 31, 1996.
6. DEPOSITS
The weighted average rate payable on all deposits at June 30, 1995 and
1996 and at December 31, 1996 was 4.89%, 4.90% and 4,92%, respectively. Deposits
at June 30, 1995 and 1996 and at December 31, 1996 and the related rates or
range of interest rates payable for deposits outstanding at December 31, 1996
are summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------ December 31
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Passbook accounts, 2.75% $ 18,919,342 $ 17,595,233 $ 16,867,047
NOW accounts, 2.65% 10,768,839 10,888,537 11,255,663
Money market deposit accounts, 3.00% 8,557,388 8,930,230 9,077,227
Noninterest-bearing accounts 5,034,659 4,473,880 5,913,774
---------------- --------------- ---------------
43,280,228 41,887,880 43,113,711
Time deposits (Rates of 2.74 to 8.50%)
Fixed rate certificates less than $100,000 84,891,960 89,287,716 93,210,912
Fixed rate certificates greater than $100,000 32,564,980 33,384,566 36,761,621
---------------- --------------- ---------------
117,456,940 122,672,282 129,972,533
---------------- --------------- ---------------
Accrued Interest 474,752 674,293 320,857
---------------- --------------- ---------------
$ 161,211,920 $ 165,234,455 $ 173,407,101
================ =============== ===============
</TABLE>
18
<PAGE> 20
The amounts and scheduled maturities of time deposits at December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997 $ 91,703,462
1988 23,189,805
1999 9,522,979
2000 3,372,425
2001 and thereafter 2,183,862
-------------
$ 129,972,533
=============
</TABLE>
Interest expense on deposits are summarized as follows:
<TABLE>
<CAPTION>
For the Year For the Six Months Period
Ended June 30, Ended December 31,
---------------------------------- ----------------------------------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Passbook $ 541,415 $ 495,066 $ 252,078 $ 239,319
Now accounts 288,140 283,959 143,749 143,836
Money market deposit accounts 281,577 283,543 133,944 171,799
Time deposits 5,439,294 6,931,092 3,474,798 3,601,797
------------- -------------- -------------- -------------
$ 6,550,426 $ 7,993,660 $ 4,004,569 $ 4,156,751
============= ============== ============== =============
</TABLE>
7. BORROWED FUNDS
Borrowed funds are summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------- December 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Short-term advances from the Federal Home Loan Bank
of Atlanta $5,000,000 with interest rate 6.76%
maturing July 17, 1995 and 10,000,000 with interest
rate of 6.036 maturing February 17, 1996. $ 15,000,000 -- --
Warrants payable, maturing March 1, 2013, with a
weighted-average interest rate of 5.73% at
June 30, 1995 and 5.75% at June 30, 1996 and
December 31, 1996. 3,850,000 3,750,000 3,750,000
---------------- --------------- ---------------
$ 18,850,000 $ 3,750,000 $ 3,750,000
================ =============== ===============
</TABLE>
At December 31, 1996, the Bank had an approved credit availability of
$20,000,000 at the Federal Home Loan Bank of Atlanta. At December 31, 1996, the
Bank had no advances on this line of credit. The Bank periodically borrowed
funds on a short term basis from the Federal Home Loan Bank of Atlanta. The
maximum amount outstanding under advances from the Federal Home Loan Bank of
Atlanta at June 30, 1995 and 1996 and at December 31, 1996 was $18,000,000,
$15,100,000 and $3,000,000, respectively.
19
<PAGE> 21
8. INCOME TAX EXPENSE (BENEFIT)
Income tax expense included in the consolidation statements of
operations is comprised of the following:
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
Year ended June 30, 1995:
Current $ 791,818 $ 86,000 $ 877,818
Deferred (97,818) -- (97,818)
------------- ------------ ------------
$ 694,000 $ 86,000 $ 780,000
============= ============ ============
Year ended June 30, 1996:
Current $ 836,474 $ 110,000 $ 946,474
Deferred 46,526 -- 46,526
------------- ------------ ------------
$ 883,000 $ 110,000 $ 993,000
============= ============ ============
Six Month Period ended December 31, 1995 (unaudited):
Current $ 424,033 $ 55,762 479,795
Deferred 23,585 -- 23,585
------------- ------------ ------------
$ 447,618 $ 55,762 $ 503,380
============= ============ ============
Six Month Period ended December 31, 1996:
Current $ 104,340 $ 12,865 $ 117,205
Deferred 5,821 724 6,545
------------- ------------ ------------
$ 110,161 $ 13,589 $ 123,750
============= ============ ============
</TABLE>
Total income tax expense differs from the amount determined by
multiplying income before income taxes by the statutory rate of 34%, as follows:
<TABLE>
<CAPTION>
For the Years For the Six Month Period
Ended June 30, Ended December 31,
---------------------------- ---------------------------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Tax expense at federal income tax rate $ 687,189 $ 894,363 $ 456,655 $ 105,557
Increase (decrease) resulting from:
Amortization of excess cost over net assets
acquired 13,894 13,894 6,947 6,947
Other, net, principally state and local taxes
net of federal benefit 78,917 84,743 39,778 11,246
----------- ----------- ----------- -----------
$ 780,000 $ 993,000 $ 503,380 $ 123,750
=========== =========== =========== ===========
Effective income tax rate 39% 38% 37% 40%
----------- ----------- --- -----------
</TABLE>
20
<PAGE> 22
Temporary differences between the consolidated financial statement
carrying amounts and tax bases of assets and liabilities that give rise to
significant portions of the deferred tax liability relate to the following:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Book loan loss reserve 463,226 488,478 459,429
Unrealized loss on securities available for sale 74,835 169,361 46,864
Termination of employee contracts 153,000 117,908 106,812
Litigation settlement 121,912 111,076 118,465
Loan fees 85,699 53,741 49,802
------------- ------------- -------------
Deferred tax assets 898,672 940,564 781,372
------------- ------------- -------------
Premises and equipment, principally due to
difference in depreciation (402,919) (410,973) (451,595)
Tax bad debt reserve (238,653) (263,905) (219,920)
FHLB Stock dividends (243,771) (243,771) (243,771)
Excess mortgage servicing (44,214) (26,537) (20,202)
Other, net (185,115) (163,378) (142,926)
------------- ------------ -------------
Deferred tax liability (1,114,672) (1,108,564) (1,078,414)
------------- ------------ -------------
Net deferred tax liability (216,000) (168,000) (297,042)
============= ============= =============
</TABLE>
Thrift institutions, in determining taxable income, have historically
been allowed special bad debt deductions based on specified experience formulae
or on a percentage of taxable income before such deductions. The bad debt
deduction based on the latter had been gradually reduced to 8%. On August 2,
1996, Congress passed the Small Business Job Protection Act that, among other
things, repealed the tax bad reserve method for thrifts effective for taxable
years that began after December 31, 1995. As a result, thrifts must recapture
into taxable income the amount of their post-1987 tax bad debt reserve over a
six-year period beginning after 1995. This recapture can be deferred for up to
two years if the thrift satisfies a residential loan portfolio test. The Bank
will recapture approximately $580,000, $220,000 tax effected, of its tax bad
debt reserves at December 31, 1996 into taxable income over the five remaining
years as a result of this law. The recapture did have not have any effect on the
Bank's net income because the related tax expense had already been accrued.
Because of such repeal, thrifts such as the Bank may only use the same
tax bad debt reserve that is allowed for commercial banks. Accordingly, a thrift
with assets of $ 500 million or less may only add to its bad debt reserve based
upon its moving six-year average experience of actual loan losses (i.e., the
experience method).
The portion of a thrift's tax bad debt reserve that is not recaptured
under this new law is only subject to recapture at a later date under certain
circumstances. These include stock repurchases, redemptions by the thrift or if
the thrift converts to a type of institution (such as a credit union) that is
not considered a commercial bank for tax purposes. However, no further recapture
would be required if the thrift converted to a commercial bank charter, see
subsequent events footnote, or was acquired by a commercial bank.
9. COMPENSATION AND BENEFITS
The bank has a noncontributory profit plan and a contributory 401(k)
plan. The Bank's contributions to these plans were approximately $30,000 for
each year ended June 1995 and 1996. There were no contributions during the
six-month period ended December 31, 1995 and 1996.
Pinnacle Bank has currently entered into an employment agreement with a
key officer. Under the terms of this agreement, the officer will receive annual
compensation in an amount fixed by the contract, and may receive
21
<PAGE> 23
annual bonuses at the discretion of the Board of Directors. The agreement
provides for severance payments in the event employment is terminated following
a change in control. These payments would be equal to the total amount of 2.99
times the average annual compensation paid to this officer during the five years
immediately prior to a change in control. These sums would be paid promptly
after any change in control which is defined In the agreements, among other
things, as anytime during the period of employment when change of control is
deemed to have occurred under regulations of the Office of Thrift Supervision.
10. STOCKHOLDERS' EQUITY
At the time of conversion from a mutual to a capital stock saving bank,
the Bank established a liquidation account equal to its total retained earnings
of $6,080,532 at the date of conversion. The total amount of the liquidation
account is decreased in an amount proportionately corresponding to decreases in
savings deposit account balances of account holders that were eligible to
participate in this liquidation account as of the date of conversion of the
Bank. No dividends may be paid to stockholders if such dividends would reduce
the net worth below the amount required by the special account.
The Bank is required under regulatory capital regulations to meet
separate minimum capital requirements: (1) a tangible capital requirement equal
to 1.5% of adjusted total assets; (2) a leverage capital, or core capital,
requirement of 3% of adjusted total assets, though it is anticipated that most
banks will be expected to maintain capital of an additional 100 to 200 basis
points; (3) a risk-based or total capital requirement equal to 8% of
risk-weighted assets. Assets and off balance sheet commitments are assigned a
credit-risk weighting based upon their relative ranging from 0 percent for
assets backed by the full faith and credit of the United States Government or
that pose no credit risk to the Bank, to 100% for assets such as delinquent or
repossessed assets. The Bank's risk-weighted assets were $117.6 million compared
to total assets of $195.5 million at December 31, 1996. At June 30, 1995, June
30, 1996 and December 31,1996 the Bank exceeded all current minimum capital
requirements.
In December 1992, the capital standards under the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) became effective. These
regulations established capital standards in five categories ranging from
"critically undercapitalized" to "well capitalized" and defined "well
capitalized" as at least 5% for core (leverage) capital and at least 10% for
risk-based capital. Institutions with a core capital less than 40% or risk-based
capital less than 8% are considered "undercapitalized" and subject to
increasingly stringent prompt corrective action measures. At June 30, 1995, June
30, 1996 and December 31,1996, the Bank met the definition of a "well
capitalized" institution.
22
<PAGE> 24
The following is a reconciliation of the Bank's consolidated
stockholders equity to the Bank's consolidated tangible, core, and risk-based
available to meet regulatory requirements:
<TABLE>
<CAPTION> To be Well Capitalized
Under Prompt Corrective
For Capital Action Provisions
Actual Adequacy Purposes -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1995
Total Capital
(to Risk Weighted Assets) $ 15,053 13.8% >$8,707 > 8.0% > $10,884 >10.0%
Tier l Capital - - - -
(to Risk Weighted Assets) $ 13,834 12.7% >$4,354 > 4.0% > $ 6,530 > 6.0%
Tier I Capital - - - -
(to Average Assets) $ 13,834 7.1% >$7,827 > 4.0% > $ 9,784 > 5.0%
- - - -
As of June 30, 1996
Total Capital
(to Risk Weighted Assets) $ 16,121 14.2% >$9,113 > 8.0% > $11,391 > 10.0%
Tier I Capital - - - -
(to Risk Weighted Assets) $ 14,871 13.1% >$4,557 > 4.0% > $ 6,835 > 6.0%
Tier I Capital - - - -
(to Average Assets) $ 14,871 8.0% >$7,447 > 4.0% > $ 9,309 > 5.0%
- - - -
As of December 31, 1996
Total Capital
(to Risk Weighted Assets) $ 15,778 13.5% >$9,383 > 8.0% > $11,728 > 10.0%
Tier I Capital - - - -
(to Risk Weighted Assets) $ 14,483 12.3% >$4,691 > 4.0% > $ 7,037 > 6.0%
Tier I Capital - - - -
(to Average Assets) $ 14,483 7.6% >$7,659 > 4.0% > $ 9,574 > 5.0%
- - - -
</TABLE>
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Financial instruments are defined as cash, evidence of
ownership in an entity, contracts that convey either a right to receive cash or
other financial instruments or an obligation to deliver cash or other financial
instruments. Or contracts that convey the right or obligation to exchange
financial instruments on potentially favorable or unfavorable terms. The Bank
has a variety of financial instruments which include items recorded on the
consolidated statement of financial condition and items which, by their nature,
are not recorded on the consolidated statement of financial condition.
Quoted market prices, if available, are utilized as an estimate of the
fair value of financial instruments. In cases where quoted market prices are not
available, fair values have been estimated using present value or other
valuation techniques. These methods are highly sensitive to the assumptions used
by management, such as those concerning appropriate discount rates and estimates
of future cash flows. Different assumptions could significantly affect the
estimated fair value amounts presented above. 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 the immediate settlement of the
instrument. Further, assets that are not financial instruments are not included
in the following
23
<PAGE> 25
table. Accordingly, the aggregate estimated fair value amounts presented do not
represent the underlying value of the Bank.
This summarizes the Bank's disclosure of fair value of financial
instruments made in accordance with the requirements of SFAS No. 107:
<TABLE>
<CAPTION>
At June 30, 1995 At June 30, 1996 At December 31, 1996
---------------- ---------------- --------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
------- ---------- ------ ---------- ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash on hand and in Banks $ 3,613 $ 3,613 $ 2,274 $ 2,274 $ 2,879 $ 2,879
interest-bearing Deposits 5,536 5,536 2,824 2,824 3,869 3,869
Securities 60,087 60,099 53,671 53,671 48,945 48,945
Loans receivable, net 118,535 122,855 120,644 120,228 129,858 129,448
Loan held for sale 2,091 2,091 326 326 1,429 1,429
Excess mortgage servicing 123 152 74 116 53 94
LIABILITIES:
Deposits 161,212 162,156 165,234 165,642 173,407 173,983
Other borrowed funds 18,850 17,020 3,750 2,823 3,750 2,823
</TABLE>
The following methods and assumptions were used by the Bank is
estimating the fair values provided above:
Cash on Hand and In Banks and Interest-Bearing Deposits. The carrying
value of highly liquid instruments, such as cash on hand and in banks and
interest-bearing deposits are considered to approximate their fair values.
Securities, and Loans Held for Sale. Substantially all of the Bank's
securities and loans held for sale, primarily to third-party investors, have a
readily determinable fair value. Fair values for these securities are based on
quoted market prices, where available. If not available, fair values are based
on market prices of comparable instruments. The carrying value of accrued
interest on these instruments approximates fair value.
Loans Receivable, Net. For Loans with rates that are repriced in
coordination with movements in market rates and with no significant change no
credit risk, fair value estimates are based on carrying values. The fair value
for certain mortgage loans are based on quoted market prices of similar loans
sold in conjunction with securitization transactions, adjusted for differences
in loan characteristics. The fair values for other loans are estimated by
discounting future cash flows using current rates at which loans with similar
terms would be made to borrowers of similar credit ratings. The carrying amount
of accrued interest on loans approximates its fair values.
Excess Mortgage Servicing. Fair value of excess mortgage servicing
is based on a discounted cash flow analysis, based on market interest rates.
Deposits. The fair value of deposits with no stated maturity, such as
interest and Noninterest-bearing deposits, NOW accounts, savings accounts and
money market accounts, is by definition, equal to the amount payable on demand
at the reporting date (i.e., their carryings amounts). Fair values for
certificates of deposit are estimated using a discounted cash flow analysis that
applies rates currently offered for certificates of deposits with similar
remaining maturities. The carrying amount of accrued interest payable on
deposits approximates its fair value.
24
<PAGE> 26
The economic value attributed to the long-term relationship with
depositors who provide low-cost funds to the Bank is considered to be a separate
intangible asset and is excluded from the presentation.
Other Borrowed Funds. The fair value of other borrowed funds is
estimated using discounted cash flow analyses, based on the current rates
offered for similar borrowing arrangements. The carrying amount of accrued
interest payable on other borrowed funds approximates its fair value.
Off-Balance Sheet Items. The Bank's off-balance sheet instruments
consist of commitments to extend credit, primarily one-to-four-family mortgages;
unfunded commitments of credit, primarily unfunded construction loans; and
standby letters of credit. The carrying amount of unamortized fees related to
these items is not material, and the estimated fair value of these unamortized
fees approximates the carrying value.
12. CONTINGENCIES
Litigation. On October 27, 1993, a suit was initiated in the Circuit
Court for Walker County, Alabama, by one customer who alleged that the Bank
improperly charged his account for insufficient funds. The plaintiff also
alleged that he represented a class composed of both current and past customers
of the Bank. The Bank has denied the material allegations of the plaintiff's
complaint. There has been no substantive change in the status of this lawsuit
since June 30, 1995. In addition to the litigation noted above, the Bank is from
time to time subject to routine litigations incidental to its business. Such
litigation may include alleged compensatory and punitive damages. In recent
years in the State of Alabama, many complaints have been filed which challenge
fees charged and customer obligations associated with traditional bank services.
Additionally, punitive damage awards have been sought in amounts that bear
little or no relation to actual damages. In some of these cases, juries have
awarded large punitive awards to the plaintiffs.
Although it is not possible to determine with any certainty at this
point in time the potential exposure related to damages in connection with any
pending or threatened litigation against the Bank, it is the opinion of
management, based upon consultation with legal counsel, that the ultimate
resolutions of all pending litigation against the Bank will not have a
materially adverse effect on the Bank's financial position or result of
operations.
FDIC Assessment. The deposits of the Bank are currently insured by the
Savings Association Insurance Fund ( "SAIF" ). Both the SAIF and the Bank
Insurance Fund ( "BIF" ), the federal deposit insurance fund that covers the
deposits of state and national banks and certain savings banks, are required by
law to attain and thereafter maintain a reserve ratio of 1.25% of insured
deposits. The BIF has achieved the required reserve rate, and as discussed
below, during the past year the FDIC assessed SAIF-insured institutions to
achieve their required rate.
Banking legislation was enacted September 30, 1996 to eliminate the
premium differential between SAIF-insured institutions and BIF-insured
institutions. The FDIC Board of Directors met October 8, 1996 and approved a
rule that established the special assessment necessary to recapitalize the SAIF
at 65.7 basis points of SAIF assessable deposits held by affected institutions
as of March 31, 1995. The legislation provides that all SAIF member institutions
pay a special one time assessment to recapitalize the SAIF, which in the
aggregate is sufficient to bring the reserve ratio in SAIF to 1.25% of insured
deposits. It is anticipated that after recapitalization of the SAIF, premiums
paid by SAIF-insured institutions will be reduced. The legislation also provides
for the merger of the BIF and the SAIF, with such merger being conditioned upon
the prior elimination of the thrift charter.
Based upon its level of SAIF deposits as of March 31, 1995, the Bank
paid and expensed $1,011,000 in the six months period ended December 31, 1996.
25
<PAGE> 27
13. SUBSEQUENT EVENTS
On January 29, 1997, the Bank held a special meeting of stockholders
whereby the stockholders approved an Agreement and Plan of Reorganization and
Conversion dated October 9, 1996. Pursuant to such Agreement, on January 31,
1997, the Bank converted from a federal stock savings bank to an
Alabama-chartered commercial bank and the corporate structure of the Bank was
reorganized into the holding company form of ownership. The Bank became a
subsidiary of the newly formed bank holding company, Pinnacle Bancshares, Inc.
26
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Pinnacle Bank:
We have audited the accompanying consolidated statements of financial condition
of Pinnacle Bank (a Federally chartered savings bank) and subsidiaries as of
December 31, 1996, and June 30, 1996 and 1995 the related consolidated
statements of operations, stockholders' equity and cash flows for the six month
period ended December 31, 1996 and the years ended June 30, 1996 and 1995. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 condition of Pinnacle Bank and
subsidiaries as of December 31, 1996 and June 30, 1996 and 1995 and the results
of their operations and their cash flows for the six month period ended December
31, 1996 and the years ended June 30, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Birmingham, Alabama
January 24, 1997
27
<PAGE> 29
SELECTED QUARTERLY INFORMATION (UNAUDITED)
A summary of unaudited results of operations for each quarter of
the years ended June 30, 1995, and 1996 and for the periods ended December
31,1995 and December 31, 1996 follows:
<TABLE>
<CAPTION>
September 30, December 31, March 31, June 30,
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended June 30,1995:
Interest revenue $ 2,978,529 $ 3,187,160 $ 3,370,425 $ 3,571,887
Net interest income after provisions
for losses on loans 1,285,759 1,345,397 1,367,054 1,333,961
Noninterest income 255,442 248,328 224,758 283,775
Noninterest expense 1,090,043 1,072,658 1,067,840 1,092,789
Net earnings $ 275,423 $ 319,902 $ 321,847 $ 323,972
Earnings per share $ .31 $ .36 $ .36 $ .36
Year Ended June 30,1996:
interest revenue $ 3,696,362 $ 3,715,471 $ 3,652,709 $ 3,585,256
Net interest income after provisions
for losses on loans 1,427,357 1,440,934 1,455,779 1,487,116
Noninterest income 299,759 294,474 352,183 328,539
Noninterest expense 1,057,224 1,062,197 1,226,337 1,109,904
Net earnings $ 418,691 $ 421,033 $ 360,321 $ 437,434
Earnings per share $ .47 $ .47 $ .41 $ .49
Period Ending December 31, 1995
Interest revenue $ 3,696,362 $ 3,715,471
Net interest income after provision
for losses on loans 1,427,357 1,440,934
Noninterest income 299,759 294,474
Noninterest expense 1,057,224 1,062,197
Net earnings $ 418,691 $ 421,033
Earnings per share $ .47 $ .47
Period Ended December 31, 1996
Interest revenue $ 3,669,098 $ 3,772,796
Net interest income after provision
for losses on loans $ 1,493,153 1,536,249
Noninterest income 319,171 334,997
Noninterest expense 2,213,329 1,159,778
Net earnings $ (258,570) 445,283
Earnings per share (.29) .50
</TABLE>
28
<PAGE> 1
EXHIBIT 21
<PAGE> 2
EXHIBIT 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State of Percentage
Incorporation Ownership
------------- ---------
<S> <C> <C>
Pinnacle Bank (1) Alabama 100%
First General Service(s) Corporation (2) Alabama 100%
First General Ventures Corporation (2) Alabama 100%
Affiliate
- ---------
First General Lending Corporation
(accounted for on the cost method) (2) Alabama 40%
</TABLE>
- --------------------
(1) Subsidiary of the Registrant.
(2) Subsidiary of Pinnacle Bank
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PINNACLE FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,879,396
<INT-BEARING-DEPOSITS> 3,868,664
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,944,812
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 129,857,656
<ALLOWANCE> 1,189,441
<TOTAL-ASSETS> 195,502,376
<DEPOSITS> 173,407,101
<SHORT-TERM> 3,750,000
<LIABILITIES-OTHER> 3,060,575
<LONG-TERM> 0
0
0
<COMMON> 9,320
<OTHER-SE> 15,275,380
<TOTAL-LIABILITIES-AND-EQUITY> 195,502,376
<INTEREST-LOAN> 5,673,236
<INTEREST-INVEST> 1,690,759
<INTEREST-OTHER> 77,899
<INTEREST-TOTAL> 7,441,894
<INTEREST-DEPOSIT> 4,156,751
<INTEREST-EXPENSE> 110,741
<INTEREST-INCOME-NET> 4,267,492
<LOAN-LOSSES> 145,000
<SECURITIES-GAINS> 574
<EXPENSE-OTHER> 3,373,107
<INCOME-PRETAX> 310,463
<INCOME-PRE-EXTRAORDINARY> 186,713
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 186,713
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<YIELD-ACTUAL> 8.1
<LOANS-NON> 2,050,990
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,285,469
<CHARGE-OFFS> 243
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1,189,441
<ALLOWANCE-DOMESTIC> 1,189,441
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
