SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED].
For the fiscal year ended December 31, 1996.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 33-67528
Pinnacle Financial Corporation
---------------------------------------------
(Name of small business issuer in its charter)
Georgia 58-1538862
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
884 Elbert Street, P.O. Box 430, Elberton, Georgia 30635-0430
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 283-2854
Securities registered pursuant to Section 12(b) of the Act: None.
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 there is no 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. Not Applicable. Registrant is
not required to be registered under the Securities Exchange Act
of 1934.
State Issuer's revenue for its most recent fiscal year: $20,616,229.
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock, as
of a specified date within the past 60 days: as of March 15,
1997, there were 351,434 shares of Common Stock, $10.00 par value
outstanding held by non-affiliates of the issuer, with an
aggregate value of $20,031,738 (based upon approximate market
value of $57/share) (the last sale price known to the Registrant
for the Common Stock, for which there is no established trading
market).
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: AS
OF MARCH 15, 1997, COMMON STOCK, $10.00 PAR VALUE - 768,000
SHARES OUTSTANDING.
<PAGE>
PINNACLE FINANCIAL CORPORATION
FORM 10-KSB
INDEX
PAGE
Part I
Item 1. Description of Business . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . 13
Item 4. Submission Of Matters To A Vote Of Security
Holders . . . . . . . . . . . . . . . . . . . 13
Part II
Item 5. Market For Common Equity And Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . 13
Item 6. Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . 13
Item 7. Financial Statements . . . . . . . . . . . . 30
Item 8. Changes In And Disagreements With Accountants On
Accounting
And Financial Disclosure . . . . . . . . . . . 50
Part III
Item 9. Directors and Executive Officers, Promoters and
Control Persons . . . . . . . . . . . . . . . 50
Item 10. Executive Compensation . . . . . . . . . . . . 51
Item 11. Security Ownership Of Certain Beneficial Owners
And Management . . . . . . . . . . . . . . . . 54
Item 12. Certain Relationships And Related Transactions 54
Item 13. Exhibits and Reports on Form 8-K . . . . . . . 55
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . .
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . .
<PAGE>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Pinnacle Financial Corporation (hereinafter "Pinnacle" or
the "Company") is a two-bank holding company headquartered in
Elberton, Georgia. Full service banking businesses are presently
conducted by its wholly-owned banking subsidiaries, First
National Bank in Elberton ("First National"), based in Elberton,
Georgia with four offices which are located in Elbert and Hart
Counties, Georgia which serve customers in Elbert and Hart
Counties and Tri-County Bank of Royston ("Royston") with four
offices located in Franklin County which serve customers in
Franklin and Hart Counties (collectively referred to as the
"Banks"). Through its bank subsidiaries, Pinnacle provides such
customary types of banking services as checking accounts, savings
accounts, time deposits, safe deposit facilities and money
transfers. Pinnacle also finances commercial transactions, makes
secured and unsecured loans to individuals and provides other
financial services. Unless the context otherwise requires, the
term "Pinnacle" wherever used herein means Pinnacle Financial
Corporation, First National Bank in Elberton and Tri-County Bank
of Royston. Pinnacle Financial Corporation was formerly known as
First Elbert Corporation.
Pinnacle was incorporated under the laws of Georgia in 1982
and commenced operations in 1983 by acquiring 100% of the
outstanding shares of First National pursuant to a reorganization
in which a newly-formed, wholly-owned subsidiary of Pinnacle
merged with First National. The holders of First National common
stock received in a one-for-one exchange Pinnacle Stock for First
National common stock. On December 31, 1994 Pinnacle acquired
Royston through an exchange of stock, whereby each former
shareholder of Royston received two shares of Pinnacle Stock for
each share of Royston Stock.
Pinnacle is a registered bank holding company. All of
Pinnacle's activities are conducted by its wholly owned
subsidiaries, First National, which was organized as a national
banking association in 1934 and Royston, which was incorporated
as a bank under the laws of Georgia in 1941.
The Banks are community-oriented, and offer such customary
banking services as consumer and commercial checking accounts,
NOW accounts, savings accounts, certificates of deposit, lines of
credit, MasterCard and VISA accounts and money transfers. The
Banks finance commercial and consumer transactions, make secured
and unsecured loans, and provide a variety of other banking
services.
1<PAGE>
As of December 31, 1996, Pinnacle had total assets of
approximately $236.5 million, total deposits of approximately
$200.9 million, net loans of approximately $131.4 million and
shareholders' equity of approximately $33.3 million. The
principal executive office of Pinnacle is located at 884 Elbert
Street, Elberton, Georgia 30635-0430, and its telephone number at
that address is (706) 283-2854.
PROPOSED MERGER AND NAME CHANGES. In December 1996, the
board of directors of Pinnacle and both banks decided to merge
First National and Royston into a single bank to be named
Pinnacle Bank with a proposed consummation date of December 31,
1997. Related to proposed merger of the two banks, the board of
directors of First National has decided to change the name of
that institution to Pinnacle Bank, N.A. effective as soon as
possible on or after March 31, 1997. The board of directors of
Royston similarly decided to change that institution's name to
Pinnacle Bank upon approval of the Georgia Department of Banking
which is expected to occur in early April, 1997.
MARKETS. Pinnacle conducts banking activities through First
National and Royston primarily in Elbert, Franklin and Hart
Counties. Customers of the Banks are consumers and small
businesses.
DEPOSITS. The Banks offer a full range of depository
accounts and services to both consumers and businesses. At
December 31, 1996, the Banks' deposit base, totaling
approximately $200.9 million, consisted of approximately $32.5
million in noninterest bearing demand deposits (16.2% of total
deposits), approximately $44.4 million in interest-bearing demand
deposits (including money market accounts) (22.1% of total
deposits), approximately $16.5 million in savings deposits (8.2%
of total deposits), approximately $80.6 million in time deposits
in amounts less than $100,000 (40.1% of total deposits), and
approximately $26.9 million in time deposits of $100,000 or more
(13.4% of total deposits).
INTEREST RATE SENSITIVITY. Interest rate sensitivity
management seeks to maximize net interest income as a result of
changing interest rates, but to do so without subjecting the
interest margin to an imprudent degree of risk. Pinnacle
attempts to do this by structuring the balance sheet so that
repricing opportunities exist for both assets and liabilities in
roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any
point in time constitutes a bank's interest sensitivity.
An indicator of the interest rate sensitivity structure of a
financial institution's balance sheet is the difference between
its interest rate sensitive assets and interest rate sensitive
liabilities, which is referred to as the "gap". Pinnacle
attempts to keep the gap between rate-sensitive assets and rate-
sensitive liabilities at a minimum, preferring to increase the
spread between matched assets and liabilities rather than place
earnings at risk by attempting to predict the frequency,
direction and magnitude of interest rate fluctuations.
Table 8 on page 29 reflects the gap positions of Pinnacle's
consolidated balance sheet as of December 31, 1996.
2<PAGE>
The rate sensitivity analysis table is designed to
demonstrate Pinnacle's sensitivity to changes in interest rates
by setting forth in comparative form the repricing maturities of
Pinnacle's assets and liabilities for the period shown. A ratio
of interest earning assets to interest bearing liabilities (more
interest earnings assets repricing in a given period than
interest bearing liabilities) greater than 100% indicates than an
increase in interest rates will generally result in an increase
in net income for Pinnacle and a decrease in interest rates will
result in a decrease in net income. A ratio of earning assets to
interest-bearing liabilities of less than 100% indicates that a
decrease in interest rates will generally result in an increase
in net income for Pinnacle and an increase in interest rates will
result in a decrease in net income.
At December 31, 1996, the gap analysis reflects a negative
gap at the one-year interval equivalent to 28.2% of earning
assets, as compared to 16.6% at December 31, 1995.
Since all interest rates and yields do not adjust at the
same velocity, the interest sensitivity gap is only an indicator
of the potential effects of interest rate changes on net interest
income.
LOANS. The Banks make both secured and unsecured loans to
individuals, firms and corporations, and both consumer and
commercial lending operations include various types of credit for
its customers. Secured loans include first and second real
estate mortgage loans. The Banks also make direct installment
loans to consumers on both a secured and unsecured basis. At
December 31, 1996, consumer, real estate (including mortgage and
construction loans) and commercial loans represented
approximately 17.9%, 68.3%, and 13.8%, respectively, of
Pinnacle's total loan portfolio. The real estate loans made by
the Banks include residential real estate construction,
acquisition and development loans, as well as loans for other
purposes which are secured by real estate.
LENDING POLICY. The current lending strategy of the Banks
is to make loans only to persons who reside or work in the Banks'
primary trade areas. Unsecured loans normally are made only to
persons who maintain depository relationships with the Banks.
Secured loans are made to persons who are well established and
have net worth, collateral and cash flow to support the loan.
Real estate loans usually are made only when such loans are
secured by real property located in Elbert, Franklin and Hart
Counties, the Banks' market area.
The Banks provide each lending officer with written
guidelines for lending activities. Lending authority is
delegated by the Board of Directors of the Banks to loan
officers, each of whom is limited in the amount of secured and
unsecured loans which he can make to a single borrower or related
group of borrowers. All loans in excess of $100,000 must have
the approval of the President or a Senior Vice-President of the
Banks prior to being committed. All loans over $500,000 require
Board approval.
Making loans to businesses to fund working capital is a
traditional function of commercial banks. Such loans are
expected to be repaid out of the current earnings of the
commercial entity, and the ability of the borrower to service its
debt is dependent upon the success of the commercial enterprise.
3<PAGE>
It is the Bank's policy to secure these loans with collateral.
Many of the Bank's commercial loans are secured by real estate
collateral because such collateral is superior to other types of
collateral available to small businesses. Loans secured by
commercial real estate, however, particularly if collateral
dependent, are subject to certain inherent risks. Commercial
real estate may be substantially illiquid, and commercial real
estate values are difficult to ascertain and subject to wide
fluctuation depending upon economic conditions.
Effective March 19, 1993, inter-agency guidelines adopted by
federal bank regulators including the Office of the Comptroller
of the Currency went into effect mandating that financial
institutions establish real estate lending policies and
establishing certain minimum real estate loan-to-value standards.
The Bank has adopted these federal standards as its minimum
standards. These standards require loan-to-value ratios for
various types of real estate loans as set forth below, although
the Bank may make exceptions to the standards, which exceptions
must be accounted for and tracked:
<TABLE>
<CAPTION>
Loan category Loan-to Value Limit (percent)
<S> <C>
Raw Land 65
Land Development 75
Construction:
Commercial, multifamily<F1> and
Other nonresidential 80
1- to 4- family residential 85
Improved Property 85
Owner-occupied 1- to 4- family and <F2>
home equity
<FN>
<F1> Multifamily construction includes condominiums and cooperatives.
<F2> A loan-to-value limit has not been established for permanent mortgage
or home equity loans on owner-occupied, 1- to 4- family residential
property. However, for any such loan with a loan-to-value ratio
that equals or exceeds 90 percent at origination, appropriate credit
enhancements in the form of either mortgage insurance or readily
marketable collateral is required.
</FN>
</TABLE>
LOAN REVIEW AND NONPERFORMING ASSETS. The Banks review
their loan portfolio to determine deficiencies and corrective
action to be taken. Senior lending officers conduct periodic
reviews of borrowers with total direct and indirect indebtedness
of $100,000 or more and ongoing review of all past due loans.
Past due loans are reviewed at least weekly by lending officers
and a summary report is reviewed monthly by the Board of
Directors of the Banks. The Board of Directors reviews all loans
over $500,000, whether current or past due, at least once
annually.
4<PAGE>
ASSET/LIABILITY MANAGEMENT. A committee composed of
officers of each bank is charged with managing their assets and
liabilities. The committees' tasks are to manage asset growth,
liquidity and capital. To meet these objectives while
maintaining prudent management of risks, the committees direct
the Banks' overall acquisition and allocation of funds. At their
monthly meetings, the committees review and discuss the monthly
asset and liability funds budget in relation to the actual flow
of funds, as well as peer group comparisons; the ratio of the
amount of rate sensitive assets to the amount of rate sensitive
liabilities; the ratio of loan loss reserve to outstanding loans;
and other variables, such as expected loan demand, investment
opportunities, core deposit growth within specified categories,
regulatory changes, monetary policy adjustments and the overall
state of the economy.
INVESTMENT POLICY. The Banks' investment portfolio policy
is to maximize income consistent with liquidity, asset quality
and regulatory constraints. The policy is reviewed from time to
time by their Boards of Directors. Individual transactions,
portfolio composition and performance are reviewed and approved
monthly by the Board of Directors or a committee thereof. The
Presidents of the Banks implement the policy and each report to
the Board of Directors on a monthly basis information concerning
sales, purchases, resultant gains or losses, average maturity,
federal taxable equivalent yields and appreciation or
depreciation by investment categories.
Management has classified all investment securities as
available for sale and believes specific gains and losses are
temporary. Management believes the bond market will
significantly fluctuate from time to time and has no plan to sell
large amounts of its investment securities portfolio. Management
has confidence in the diversity of its securities portfolio and
is prepared to sell certain securities before maturity as needed
for liquidity, tax planning, and other valid business purposes.
EMPLOYEES. At December 31, 1996, the Banks had 100 full-
time and 11 part-time employees. Pinnacle has no employees. The
Banks are not a party to any collective bargaining agreement, and
the Banks believe that their employee relations are good.
COMPETITION. The banking business is highly competitive.
Royston competes with four other depository institutions in
Franklin County. First National competes with one other
depository institution in Elbert County. The Banks also compete
with other financial service organizations, including savings and
loan associations, finance companies, credit unions and certain
governmental agencies. To the extent that banks must maintain
noninterest-earning reserves against deposits, they may be at a
competitive disadvantage when compared with other financial
service organizations that are not required to maintain reserves
against substantially equivalent sources of funds. Further, the
increased competition from investment bankers and brokers and
other financial service organizations may have a significant
impact on the competitive environment in which the Banks operate.
At December 31, 1996, First National ranked on the basis of
total deposits and assets of $119.6 million and $140.9 million,
respectively, as the larger of the two depository institutions
located in Elbert County and Royston rated as the largest of the
5<PAGE>
five depository institutions located in Franklin County based
upon deposits and assets of $81.8 million and $95.7 million,
respectively.
SUPERVISION AND REGULATION
Pinnacle is a registered bank holding company subject to
regulation by the Federal Reserve under the Bank Holding Company
Act of 1956, as amended (the "Act"). Pinnacle is required to
file financial information with the Federal Reserve periodically
and is subject to periodic examination by the Federal Reserve.
The Act requires every bank holding company to obtain the
prior approval of the Federal Reserve (I) before it may acquire
direct or indirect ownership or control of more than 5% of the
voting shares of any bank that is not already controlled; (ii)
before it or any of its subsidiaries, other than a bank, may
acquire all or substantially all of the assets of a bank; and
(iii) before it may merge or consolidate with any other bank
holding company. In addition, a bank holding company is
generally prohibited from engaging in, or acquiring direct or
indirect control of voting shares of any company engaged in non-
banking activities. This prohibition does not apply to
activities found by the Federal Reserve, by order or regulation,
to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Some of the activities
that the Federal Reserve has determined by regulation or order to
be closely related to banking are: making or servicing loans and
certain types of leases; performing certain data processing
services; acting as fiduciary or investment or financial advisor;
providing discount brokerage services; and making investments in
corporations or projects designed primarily to promote community
welfare.
Pinnacle must also register with the Department of Banking
and Finance (DBF) and must file periodic information with the
DBF. Such registration includes information with respect to the
financial condition, operations, management and intercompany
relationships of Pinnacle, First National and Royston and related
matters. The DBF may also require such other information as is
necessary to keep itself informed as to whether the provisions of
Georgia law and the regulations and orders issued thereunder by
the DBF have been complied with; and the DBF may make
examinations of Pinnacle and each of its bank subsidiaries other
than a national bank.
Pinnacle is an "affiliate" of the Banks under the Federal
Reserve Act, which imposes certain restrictions on (I) loans by
the Banks to Pinnacle, (ii) investments in the stock or
securities of Pinnacle by the Banks, (iii) the Banks taking the
stock or securities of an "affiliate" as collateral for loans by
it to a borrower and (iv) the purchase of assets from Pinnacle by
the Banks. Further, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of
property or furnishing of services.
6<PAGE>
First National is a National Bank chartered under the
National Bank Act and is subject to the supervision of, and is
regularly examined by, the Office of the Comptroller of the
Currency (the "OCC"). The OCC regulates or monitors all areas of
First National's operations and activities, including reserves,
loans, mergers, issuances of securities, payments of dividends,
interest rates and establishment of branches.
Royston, as a state banking association, is subject to the
supervision of, and is regularly examined by, the FDIC and the
DBF. Both the FDIC and the DBF must grant prior approval of any
merger, consolidation or other corporate reorganization involving
Royston. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 provides that a bank can be held liable
for any loss incurred by, or reasonably expected to be incurred
by, the FDIC in connection with the default of a commonly
controlled institution.
PAYMENT OF DIVIDENDS
Pinnacle is a legal entity separate and distinct from the
Banks. Most of the revenues of Pinnacle result from dividends
paid to it by the Banks. There are statutory and regulatory
requirements applicable to the payment of dividends by the Banks
as well as by Pinnacle to its shareholders.
First National is regulated by the OCC. Under the
regulations of the OCC dividends may be declared out of net
profits of the association. The approval of the OCC is required
if the total of all dividends declared by such association exceed
the total of its net profits for the year combined with its
retained net profits for the preceding two years.
Royston is a state chartered bank which is regulated by the
DBF and the FDIC. Under the regulations of the DBF, dividends
may be declared out of the retained earnings of a state bank
without first obtaining the written permission of the DBF only if
the bank meets all the following requirements:
(a) Total classified assets as of the most recent
examination of the bank do not exceed 80% of
equity capital (as defined by regulation);
(b) The aggregate amount of dividends declared or
anticipated to be declared in the calendar year
does not exceed 50% of the net profits after taxes
but before dividends for the previous calendar
year; and
(c) The ratio of equity capital to adjusted assets
shall not be less than 6%.
The payment of dividends of Pinnacle and its bank
subsidiaries may also be affected or limited by other factors,
such as the requirements to maintain adequate capital above
regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank under its jurisdiction is
engaged in or is about to engage in an unsafe or unsound practice
(which, depending upon the financial condition of the bank, could
include the payment of dividends), such authority may require,
after notice and hearing, that such bank cease and desist from
7<PAGE>
such practice. The FDIC has issued a policy statement which
provides that insured banks should generally only pay dividends
out of current operating earnings.
MONETARY POLICY
The results of operations of First National and Royston are
affected by credit policies of monetary authorities, particularly
the Federal Reserve. The instruments of monetary policy employed
by the Federal Reserve include open market operations in U.S.
government securities, changes in the discount rate on bank
borrowings and changes in reserve requirements against bank
deposits. In view of changing conditions in the national economy
and in the money markets, as well as the effect of action by
monetary and fiscal authorities, including the Federal Reserve,
no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand, or the business and
earnings of First National or Royston.
CAPITAL ADEQUACY
The Federal Reserve, the FDIC and the OCC have implemented
substantially identical risk-based rules for assessing bank and
bank holding company capital adequacy. These regulations
establish minimum capital standards in relation to assets and
off-balance sheet exposures as adjusted for credit risk. Banks
and bank holding companies are required to have (1) a minimum
level of total capital (as defined) to risk weighted assets of
eight percent (8%); (2) a minimum Tier One Capital (as defined)
to risk weighted assets of four percent (4%); and (3) a minimum
stockholders' equity to risk weighted assets of four percent
(4%). In addition, the Federal Reserve, the FDIC and the OCC
have established a minimum three percent (3%) leverage ratio of
Tier One Capital to total assets for the most highly rated banks
and bank holding companies. "Tier One Capital" generally
consists of common equity, minority interests in equity accounts
of consolidated subsidiaries and certain perpetual preferred
stock less certain intangibles. The Federal Reserve, and the
FDIC and the OCC will require a bank holding company and a bank,
respectively, to maintain a leverage ratio greater than three
percent (3%) if it is experiencing or anticipating significant
growth or is operating with less than well diversified risks in
the opinion of the Federal Reserve. The Federal Reserve, the
FDIC and the OCC use the leverage ratio in tandem with the risk
based ratio to assess capital adequacy of banks and bank holding
companies.
The FDIC, the OCC and the Federal Reserve have proposed
amending the capital adequacy standards to provide for the
consideration of interest rate risk in the overall determination
of a bank's capital ratio, requiring banks with greater interest
rate risk to maintain adequate capital for the risk. The
proposed revisions are not expected to have a significant effect
on the Company's capital requirements, if adopted in their
current form.
In addition, effective December 19, 1992, a new Section 38
to the Federal Deposit Insurance Act implemented the prompt
corrective action provisions that Congress enacted as a part of
the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "1991 Act"). The "prompt corrective action" provisions set
forth five regulatory zones in which all banks are placed largely
based on their capital positions. Regulators are permitted to
8<PAGE>
take increasingly harsh action as a bank's financial condition
declines. Regulators are also empowered to place in receivership
or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches two percent. Better
capitalized institutions are generally subject to less onerous
regulation and supervision than banks with lesser amounts of
capital.
The FDIC has adopted regulations implementing the prompt
corrective action provisions of the 1991 Act, which place
financial institutions in the following five categories based
upon capitalization ratios: (1) a "well capitalized" institution
has a total risk-based capital ratio of at least 10%, a Tier One
risk-based ratio of at least 6% and a leverage ratio of at least
5%; (2) an "adequately capitalized" institution has a total risk-
based capital ratio of at least 8%, a Tier One risk-based ratio
of at least 4% and a leverage ratio of at least 4%; (3) an
"undercapitalized" institution has a total risk-based capital
ratio of under 8%, a Tier One risk-based ratio of under 4% or a
leverage ratio of under 4%; (4) a "significantly
undercapitalized" institution has a total risk-based capital
ratio of under 6%, a Tier One risk-based ratio of under 3% or a
leverage ratio of under 3%; and (5) a "critically
undercapitalized" institution has a leverage ratio of 2% or less.
Institutions in any of the three undercapitalized categories
would be prohibited from declaring dividends or making capital
distributions. The FDIC regulations also establish procedures
for "downgrading" an institution to lower capital category based
on supervisory factors other than capital. Under the FDIC's
regulations both of the Banks are "well capitalized"
institutions.
Set forth below are pertinent capital ratios for Pinnacle, Royston and
First National as of December 31, 1996.
<TABLE>
<CAPTION>
Minimum Capital First
Requirement Pinnacle Royston National
- --------------- -------- ---------- -----------
<S> <C> <C>
Tier 1 Capital to <C>
Risk-based
Assets: 4.00% 23.45% <F1> 23.53% <F1> 23.26% <F1>
Total Capital to
Risk-based
Assets: 8.00% 24.70% <F2> 24.78% <F2> 24.51% <F2>
Leverage Ratio (Tier 1
Capital to Total
Assets): 3.00% 14.26% <F3> 14.40% <F3> 14.01% <F3>
<FN>
<F1> Minimum for "Well Capitalized" Banks = 6%
<F2> Minimum for "Well Capitalized" Banks = 10%
<F3> Minimum for "Well Capitalized" Banks = 5%
</FN>
</TABLE>
9<PAGE>
RECENT LEGISLATIVE AND REGULATORY ACTION
Congress and various federal agencies (including, in
addition to the bank regulatory agencies, HUD, the Federal Trade
Commission and the Department of Justice) (collectively the
"Federal Agencies") responsible for implementing the nations fair
lending laws have been increasingly concerned that prospective
home buyers and other borrowers are experiencing discrimination
in their efforts to obtain loans. In recent years, the
Department of Justice has filed suit against financial
institutions, which it determined had discriminated, seeking
fines and restitution for borrowers who allegedly suffered from
discriminatory practices. Most, if not all, of these suits have
been settled (some for substantial sums) without a full
adjudication on the merits.
On March 8, 1994 the Federal Agencies, in an effort to
clarify what constitutes lending discrimination and specify the
factors the agencies will consider in determining if lending
discrimination exists, announced a joint policy statement
detailing specific discriminatory practices prohibited under the
Equal Credit Opportunity Act and the Fair Housing Act. In the
policy statement, three methods of proving lending discrimination
were identified: (1) overt evidence of discrimination, when a
lender blatantly discriminates on a prohibited basis, (2)
evidence of disparate treatment, when a lender treats applicants
differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a
conscious intention to discriminate against a person, and (3)
evidence of disparate impact, when a lender applies a practice
uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral on
their face and are applied equally, unless the practice can be
justified on the basis of business necessity.
On April 19, 1995, the four federal bank regulatory agencies
adopted revisions to the regulations promulgated pursuant to the
Community Reinvestment Act (the "CRA"), which are intended to set
distinct assessment standards for financial institutions. The
revised regulation contains three evaluation tests: (I) a lending
test, which compares an institution's market share of loans in
low- and moderate-income areas to its market share of loans in
its entire service area and the percentage of a bank's
outstanding loans to low- and moderate-income areas or
individuals, (ii) a services test, which evaluates the provisions
of services that promote the availability of credit to low- and
moderate-income areas, and (iii) an investment test, which
evaluates an institution's record of investments in organizations
designed to foster community development, small- and minority-
owned businesses and affordable housing lending, including state
and local government housing or revenue bonds. The regulations
are designed to reduce some paperwork requirements of the current
regulations and provide regulators, institutions and community
groups with a more objective and predicable manner with which to
evaluate the CRA performance of financial institutions. The rule
10<PAGE>
became effective on January 1, 1996, at which time evaluation
under streamlined procedures began for institutions with assets
of less than $250 million that are owned by a holding company
with total assets of less than $1 billion. It is not expected
that these regulations will have any appreciable impact upon
Pinnacle and the Banks.
On September 29, 1994, President Clinton signed the Reigle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the
"Federal Interstate Bill") which amends federal law to permit
bank holding companies to acquire existing banks in any state
effective September 29, 1996, and any interstate bank holding
company is permitted to merge its various bank subsidiaries into
a single bank with interstate branches after May 31, 1997.
States have the authority to authorize interstate branching prior
to June 1, 1997, or alternatively, to opt out of interstate
branching prior to that date. The Georgia Financial Institutions
Code was amended in 1994 to permit the acquisition of a Georgia
bank or bank holding company by out-of-state bank holding
companies beginning July 1, 1996. On September 29, 1996, the
interstate banking provisions of the Georgia Code were superseded
by the Federal Interstate Bill.
On January 26, 1996, the Georgia legislature adopted a bill
(the "Georgia Intrastate Bill") to permit, effective July 1,
1996, any bank located in Georgia or group of affiliated banks
under one holding company to establish new or additional branch
banks in up to three additional counties anywhere within the
State of Georgia where the bank does not currently have
operations. After July 1, 1998, all restrictions on state-wide
branching will be removed. Prior to adoption of the Georgia
Intrastate Bill, Georgia only permitted branching of banks within
a county, via merger or consolidation with an existing bank or in
certain other limited circumstances.
FDIC INSURANCE ASSESSMENTS
The Banks are subject to FDIC deposit insurance assessments
for the Bank Insurance Fund (the "BIF"). In the first six months
of 1995, the Banks were assessed $.23 per $100 of deposits based
upon a risk-based system whereby banks are assessed on a sliding
scale depending upon their placement in nine separate supervisory
categories, from $.23 per $100 of deposits for the healthiest
banks (those with the highest capital, best management and best
overall condition) to as much as $.31 per $100 of deposits for
the less-healthy institutions, for an average $.259 per $100 of
deposits.
On August 8, 1995, the FDIC lowered the BIF premium for
healthy banks 83% from $.23 per $100 in deposits to $.04 per $100
in deposits, while retaining the $.31 level for the riskiest
banks. The average assessment rate was therefore reduced from
$.232 to $.044 per $100 of deposits. The new rate took effect on
September 29, 1995. On November 14, 1995, the FDIC again lowered
the BIF premium for healthy banks from $.04 per $100 of deposits
to zero for the highest rated institutions (92%) of the industry.
As a result, each Bank paid only the legally required annual
payment of $2,000 per year for insurance through 1996. Had the
current rates been in effect for all of 1995, the annual FDIC
insurance premiums paid by the Banks would have been reduced by
$201,000.
On September 29, 1996, the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 was enacted (the "1996 Act").
11<PAGE>
The 1996 Act's chief accomplishment was to provide for the
recapitalization of the Savings Association Insurance Fund
("SAIF") by levying a one-time special assessment on SAIF
deposits to bring the fund to a reserve ratio equal to $.25 per
$100 of insured deposits and to provide that beginning in 1997,
BIF assessments would be used to help pay off the $780 million in
annual interest payments on the $8 billion Financing Corporation
("FICO") bonds issued in the late 1980s as part of the government
rescue of the thrift industry. The law provides that BIF
assessments for FICO bond payments must be set at a rate equal to
20% of the SAIF rates for such assessments in for 1997, 1998 and
1999. After 1999, all FDIC insured institutions will pay the
same assessment rates. For the first six months of 1997, the
assessment for the FICO bond payments will be $.0132 per $100 of
deposits for BIF deposits and $.0648 per $100 of deposits for
SAIF deposits. The FDIC announced on November 26, 1996 that the
premium for the first six months of 1997 for deposit insurance
assessments would range from zero to $.27 per $100 of deposits
with 94% of banks paying nothing for deposit insurance. One of
the provisions of the 1996 Act was to eliminate the minimum
$2,000 per year charge for deposit insurance. As a result, the
Banks will pay no premium for deposit insurance in the first six
months of 1997 and a first quarter FICO bond assessment of
$13,000. The Bill also provided for certain limited regulatory
relief and modifications to certain out-of-date regulations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's main office is located at 884 Elbert Street,
Elberton, Georgia 30636-0430, and its telephone number at that
office is (706) 283-2854.
First National's main office is owned by it, is located at
884 Elbert Street in Elberton, Georgia and consists of
approximately 22,500 square feet of usable office space. First
National has three branch offices. The downtown branch is owned
by it and is located at 6 College Avenue, Elberton, Georgia and
consists of approximately 12,000 square feet of usable office
space. First National is currently building a new facility of
approximately 4,200 square feet at the site of its current
downtown branch. It is expected that the new facility will
completed and the current building will be demolished by May 1,
1997. The Bowman office branch is owned by it, is located at 27
North Broad Street, Bowman, Georgia and contains approximately
2,700 square feet of usable office space. The Hartwell office
is also owned by First National Bank and is located at 135 East
Franklin Street, Hartwell Georgia and consists of approximately
4,200 square feet of usable office space. The Hartwell office
was located in a temporary banking unit at the same address until
the new facility was completed and moved into on March 10,
1997. Management of First National believes that these
properties are adequately covered by insurance.
Royston's main office is owned by it, is located at 861
Church Street, Royston, Georgia and contains approximately 9,440
square feet of usable office space. Royston currently has three
other branches, the Franklin Springs branch, which is owned by it
and is located at 2311 West Main Street, Franklin Springs,
Georgia and contains approximately 2,300 square feet of office
space, and a supermarket branch, which is located in and leased
from Dill's Food City supermarket at 721 Cook Street, and which
contains approximately 540 square feet of space, and the Lavonia
12<PAGE>
Branch, which is leased at 5784 West Avenue, Lavonia, Georgia and
which contains approximately 2,200 square feet of usable office
space. Management of Royston believes that these properties are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal
proceedings to which the Company is a party or to which any of
its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of
the Company during the fourth quarter of its fiscal year.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
STOCK. There is no established public trading market for
the Company's Common Stock. As of March 15, 1997, the Company
had 364 shareholders of record. Pinnacle Stock is not traded on
an established public trading market. Management is aware of
eight transfers totaling 20,672 shares during the first two
months of 1997 at undetermined prices. Management is aware of
seven sales of Pinnacle shares totaling 489 shares to several
individuals at prices ranging from $55.00 to $57.00 per share
during 1996. Management is also aware of 25 other transfers of
shares totaling 90,895 shares during 1996 at undetermined prices,
including 69,681 shares which were transferred to family
partnerships in intra-family transactions. Management is aware
of 35 transfers of shares totaling 20,927 shares during 1995 at
undetermined prices, including 15,007 shares which were
transferred to family members in intra-family transactions.
DIVIDENDS. In 1996 and 1995, the Company declared cash
dividends aggregating $1,382,400 ($1.80 per share) and $1,305,600
($1.70 per share), respectively. The Company intends to continue
paying cash dividends on a quarterly basis. However the amount
and frequency of dividends will be determined by the Company's
Board of Directors in light of earnings, capital requirements and
the financial condition of the Company, and no assurances can be
given that dividends will be paid in the future. Information on
restrictions on the amount of dividends payable by the Company
appears in Note 15 to the Company's consolidated financial
statements appearing on page 47.
13<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Management's Discussion and Analysis or Plan of Operation of
Pinnacle analyzes the major elements of Pinnacle's consolidated
balance sheets and statements of income. This section reflects
the combination with Tri-County Bank of Royston ("Royston") on
December 31, 1994 which was treated as a pooling of interests for
accounting purposes; accordingly, Pinnacle's results for all
prior periods have been restated to include those of Royston.
The directors of the banks and Pinnacle announced in
December 1996 the proposed merger of the two banks into a single
institution to be named Pinnacle Bank. To begin the consolidation
process, as soon as possible after March 31, 1997, First National
will change its name to Pinnacle Bank, N.A., and Royston will
become Pinnacle Bank. It is proposed that the consolidation of
the two banks will take place on December 31, 1997. Management
believes the merger to be a positive move that will increase
Pinnacle's ability to operate as a strong, well-capitalized
regional bank. Customer convenience will be greatly enhanced
by having many more banking locations. Management intends to
maintain all of the banks' officers and staff throughout
the consolidation while reducing current duplication
of duties by moving personnel to frontline positions working
directly with customers. Name recognition for Pinnacle Banks
will improved through coordinated advertizing over the entire
trade area.
Pinnacle continues to weigh the merits of additional
business combinations while maintaining a focus on its general
mission to responsibly serve the needs of its customers and
communities and to enhance profit potential and shareholder
value.
For a comprehensive presentation of Pinnacle's financial
condition and results of operations, the following analysis
should be viewed along with other information contained in this
report, including the financial statements, selected statistical
information and accompanying disclosures. All amounts throughout
this section are rounded to the nearest 1,000 dollars, the
nearest .1 million dollars or the nearest .1 percent to represent
approximations of reported amounts.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to maintain cash
flows adequate to meet immediate and ongoing future needs for
credit demand, deposit withdrawal, maturing liabilities and
corporate operating expenses. Pinnacle seeks to meet liquidity
requirements primarily through the management of federal funds
and the investment securities portfolio. At December 31, 1996,
14.3% of the investment securities portfolio had maturity dates
within the next year and 75.8% matures from one to five years
after December 31, 1996. During 1996, federal funds sold
averaged $4.4 million thereby providing sufficient funds to meet
immediate needs. Other sources of liquidity are payments on
commercial and installment loans and repayment of maturing single
payment loans. Also, Pinnacle retains relationships with four
14<PAGE>
correspondent banks which could provide funds to it on short term
notice, if needed. Presently, Pinnacle has arrangements with
commercial banks for short term unsecured advances up to $9.8
million. Cash due from banks and federal funds sold, decreased
$6.5 million to $7.7 million at December 31, 1996 and Pinnacle
increased the amount of federal funds purchased at December 31,
1996 to $110,000 from zero as of December 31, 1995. These funds
were generally used to fund an increase in net loans and
investments.
Pinnacle's management intends to continue to closely monitor
and maintain appropriate levels of interest-bearing assets and
liabilities in future periods so that maturities of assets are
such that adequate funds are available to meet customer
withdrawals and loan requests while net interest margins are
maximized.
Asset/Liability management policies are outlined on page 5
of this Report on Form 10-KSB. Regulatory policy generally
requires the maintenance of a liquidity ratio of 25%, which is
generally defined as cash plus liquid investments divided by
deposits plus borrowings due within one year. The desired level
of liquidity is determined by management based in part on
Pinnacle's commitment to make loans and an assessment of its
ability to generate funds. At December 31, 1996, liquidity
ratios were: Pinnacle 42.3%, First National 48.3% and Royston
33.2%.
Average net loans increased $6.8 million or 5.7% in 1996
over 1995 primarily as a result of loans originated in the new
branches of each institution. Average net loans for First
National were $69.1 million while Royston's average net loans
were $56.2 million. As reflected in Table 4 of the statistical
information presented below, fixed rate mortgages increased $8.4
million to $51.7 million at December 31, 1996 and variable rate
mortgages decreased $491,000 to $36.4 million at December 31,
1996.
As a result of a decrease in foreclosed properties during
1996, other real estate owned increased $92,000 to $492,000 at
December 31, 1996 from $584,000 at December 31, 1995.
Pinnacle continues to maintain a concentration of core
deposits from an established customer base which provides a
stable funding source. Deposits increased $13.0 million to
$200.9 million at December 31, 1996 from $187.9 million at
December 31, 1995, due primarily to normal growth and deposits
obtained by new branches in Hartwell and Lavonia. Demand
deposits increased $2.3 million to $32.5 million at December 31,
1996 and interest bearing deposits increased $10.7 million to
$168.4 million at December 31, 1996. Cash and cash equivalents
decreased in 1996 from 1995 levels by $6.3 million reflecting a
temporary decrease in these liquid assets due to increases in
loans and investments.
Shareholders' equity increased $2.8 million to $33.3 million
at December 31, 1996 from $30.5 million at December 31, 1995, as
a result of retained earnings of $3.2 million and a $434,000
decrease that was directly related to the reduction of net
unrealized gains under FAS 115. The investment portfolio's
market value declined due to a slight increase in interest rates
during the year. As all Pinnacle investments are "available for
sale" and thus marked at market, the decline in market was
15<PAGE>
recorded in shareholders equity. For the year ended December 31,
1995, shareholders equity increased $4.9 million due to retained
earnings of $3.0 million and recognition of net unrealized gains
of investments held for sale of $1.9 million.
Pinnacle continues to maintain adequate capital ratios (see
"Risk Based Capital Ratios" below). Pinnacle maintained a level
of capital, as measured by its average equity to average assets
ratio, of 13.7% in 1996.
RESULTS OF OPERATIONS
Pinnacle's operational results primarily depend on the
earnings of the Banks. Their earnings depend to a large degree
on net interest income, which is the difference between the
interest income received from investments (such as loans,
investment securities, federal funds sold, etc.) and the interest
expense which is paid on deposit liabilities.
Net interest income in 1996 increased $854,000 or 8.0% as a
result increased volume of rate sensitive assets and liabilities and
management's ability to match rate sensitive assets with rate sensitive
liabilities in such a way that net interest margins have increased
significantly from the previous year. As a result of an increase in
interest bearing liabilities and assets, interest expense increased
$660,000 or 10.1% while interest income increased $1.5 million or
8.8% in 1996. The analysis of interest rates and the interest
differential in the selected statistical information, included
elsewhere in this report, illustrates the trends occurring in
interest rates during 1996.
The provision for possible loan losses is the charge to
operating expenses that management believes is necessary to fund
the reserve for possible loan losses. The provision reflects
management's estimate of potential loan losses and the creation
of an allowance for loan losses adequate to absorb losses
inherent in the portfolio. Pinnacle experienced loan charge-offs
in 1996 of $446,000 compared to $337,000 in 1995. The provision
for loan losses increased $79,000 to $409,000 during 1996
compared to $330,000 during 1995. Pinnacle's allowance for loan
losses represented 1.4% of total loans outstanding at December
31, 1996. Its net charge-offs were $396,000 during 1996 and
$276,000 during 1995. The allowance for loan losses remained
constant at $1.8 million from December 31, 1995 to December 31,
1996. The current year provision represents 14.1% of non-
performing loans as compared to the 1995 provision representing
53.1% of non-performing loans. The increases in charge-offs and
allowance for loan losses are due to several unrelated losses and
management does not consider this to be a trend which will
continue to have a negative effect on the future results of
operations.
Pinnacle's other income increased by $159,000 to $1.9
million in 1996. This increase was due primarily to an increase
in service charges on deposit accounts of $103,000.
Other operating expenses for Pinnacle in 1996 of $6.5
million increased by $341,000 from $6.2 million in 1995 due to
increases in salaries and employee benefits.
16<PAGE>
Pinnacle's income tax expense increased $253,000 in 1996
over 1995 due primarily to increased income resulting from the
interest rate spread. The effective income tax rate of 28.4% in
1996 is an increase of 1.4% over the 1995 rate. The reduction in
tax exempt interest was due to higher after tax yields being
obtained in alternative investments and is expected to continue
in future years.
Results of operations can be measured by various ratio
analyses. Two widely recognized performance indicators are
return on average equity and return on average assets. Net
income was $4.6 million and represents returns of 14.7% on
average shareholders' equity and 2.0% on average assets in 1996.
Comparable amounts in 1995 were $4.3 million, 15.2% and 2.0%,
respectively. The increased net income results between 1996 and
1995 was the result of increased interest rate spread less income
taxes as discussed in the previous paragraphs.
Pinnacle was required under present accounting
pronouncements to adopt FAS 107, Disclosure about Value of
Financial Instruments, for its calendar year beginning January 1,
1995. In conformity with FAS 107, Pinnacle's financial
instruments were reviewed and a fair value was estimated. The
value at December 31, 1996 for financial assets was $236.1
million compared to a carrying amount of $236.5 million and the
value of financial liabilities at that date was $195.4 million
compared to a carrying amount of $203.2 million. Fair values at
December 31, 1995 for financial assets was $221.3 million
compared to a carrying amount of $220.6 million and the value of
financial liabilities at that date was $178.7 million compared to
a carrying amount of $190.2 million. In accordance with FAS 107,
the details of the estimated fair value as compared to ledger
balances of these instruments is reflected in Note 14 to the
financial statement on page 47.
Pinnacle was also required under present accounting
pronouncements to adopt FAS 114 for its calendar year beginning
January 1, 1995. Impairment of loans having carrying values of
$739,000 and $731,000 as of December 31, 1996 and December 31,
1995, respectively, has been recognized in conformity with FAS
114, Accounting by Creditors for Impairment of a Loan. The total
allowance for credit losses related to those loans was $536,000
and $266,000 in 1996 and 1995, respectively. In conformity with
FAS 114, the entire change in present value of expected cash
flows is reported as bad debt expense in the same manner which
the initial impairment was recognized or as a reduction in the
amount of bad debt expense that otherwise would have been
reported.
Dividends increased $.10 per share in 1996 to $1.80 from
$1.70 per share in 1995.
Management is not aware of any trends, events or
uncertainties that are reasonably expected to have a material
effect on Pinnacle's liquidity, capital resources or results of
operation. Pinnacle's management is not aware of any current
recommendations by the regulatory authorities which, if they were
implemented, would have such an effect.
17<PAGE>
The following tables present Pinnacle's regulatory capital
position at December 31, 1996:
<TABLE>
<CAPTION>
(Rounded to nearest thousand)
<S> <C> <C>
Total Risk Adjusted Assets $139,834
Risk Based Capital Ratios:
TIER 1 CAPITAL
Common stock $ 7,680 5.78%
Surplus 7,280 5.48%
Retained earnings 17,831 12.75%
------ -----
Total Tier 1 capital 32,791 23.45%
Tier 1 minimum requirement 5,593 4.00%
------ -----
Excess (shortfall) $ 27,198 19.45%
====== =====
TIER 1&2 CAPITAL
Tier 1 from above 32,791 23.45%
Allowance from loan losses, limited to 1.25%
of risk weighted assets 1,748 1.25%
------ ------
Total Tier 1&2 capital 34,539 24.70%
Tier 1&2 minimum requirement 11,187 8.00%
------ ------
Excess (shortfall) $ 23,352 16.70%
====== ======
Leverage Ratio
Tier 1 capital 32,791 14.26%
Minimum requirement 9,201 4.00%
------ ------
Excess (shortfall) $ 23,590 10.26%
====== ======
Average total assets, net of goodwill $230,020
=======
</TABLE>
18<PAGE>
Selected Statistical Information
The following section presents consolidated statistical information
for Pinnacle Financial Corporation and subsidiaries, which supplements
the financial data discussed elsewhere herein.
Index to Selected Statistical Information
Table 1 Average Balance Sheets
Table 2 Volume-Rate Analysis
Table 3 Investment Portfolio
Table 4 Loan Portfolio
Table 5 Allowance for Loan Losses
Table 6 Deposits
Table 7 Selected Ratios
Table 8 Analysis of Interest Rate Sensitivity
Average balances contained in the following selected statistical
information represent month-end averages for both periods as management
believes that amounts obtained by using this method are not materially
different from those which would have been obtained had daily averages
been used.
19<PAGE>
Table 1
Pinnacle Financial Corporation and Subsidiaries
Average Balance Sheets
<TABLE>
<CAPTION>
_____________ 1996 _____________ ______________ 1995 ______________
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate
-------- ------- ---- -------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (including loan fees) 124,223,589 13,254,002 10.67% $118,484,232 $12,526,203 10.57%
Investment securities:
Taxable 68,466,361 4,118,413 6.02% 54,044,584 3,150,180 5.83%
Nontaxable <F1> 16,963,947 1,506,217 8.88% 18,602,428 1,660,818 8.93%
Federal funds sold 4,426,437 242,353 5.48% 4,973,980 303,832 6.11%
----------- ---------- ---- ----------- ---------- ----
Total interest-earning assets 214,080,334 19,120,985 8.93% 196,105,224 17,639,669 9.00%
Noninterest earning assets:
Cash and due from bank 6,506,543 6,472,408
Premises & equipment 4,919,660 4,807,824
Other assets 4,512,904 3,811,288
----------- -----------
Total assets $230,019,441 $211,196,744
=========== ===========
Liabilities and shareholders' equity:
Interest bearing liabilities:
Interest bearing demand deposits $46,831,618 1,194,418 2.55% $40,985,284 1,115,132 2.72%
Savings deposits 16,535,228 505,381 3.06% 17,245,968 537,296 3.12%
Time deposits 102,933,382 5,531,831 5.37% 94,010,131 4,919,053 5.23%
Fed Funds Borrowed 128,169 6,655 5.19% 21,726 1,634 6.28%
----------- --------- ----- ----------- --------- ----
Total interest bearing liabilities 166,428,397 7,238,285 4.35% 152,263,109 6,573,115 4.32%
Noninterest bearing liabilities:
Noninterest bearing demand 29,866,520 28,769,966
Other liabilities 2,209,328 1,964,908
----------- -----------
198,504,245 182,997,983
Shareholders' equity 31,515,196 28,198,761
----------- -----------
Total liabilities and shareholders'
equity $230,019,441 $211,196,744
=========== ===========
Excess of interest-earning assets over
interest bearing liabilities 47,651,937 43,842,115
Ratio of interest-earning assets to
interest-bearing liabilities 128.63% 128.80%
Net interest income $ 11,882,700 $ 11,068,188
========== ==========
Net interest spread 4.40% 4.68%
Net interest yield on interest earning assets 5.36% 5.64%
Non-accrual loans and the interest income which was recorded on these
loans (both prior and subsequent to the time the loans were placed on
non-accrual status, if any) are not material and are not included in the
yield calculation for loans in both periods reported.
<FN>
<F1> Tax exempt income is calculated on a tax equivalent basis.
</FN>
</TABLE>
20<PAGE>
Table 1 - (continued)
Pinnacle Financial Corporation and Subsidiaries
Average Balance Sheets
<TABLE>
<CAPTION>
______________ 1994 ______________
Interest
Average Income/ Yield/
Balances Expense Rate
-------- ------- ----
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (including loan fees) $115,455,407 $10,825,435 9.38%
Investment securities:
Taxable 52,522,369 2,888,930 5.50%
Nontaxable (a) 18,451,851 1,879,663 10.19%
Federal funds sold 5,397,940 222,620 4.12%
---------- --------- ----
Total interest-earning assets 191,827,567 15,816,648 7.99%
Noninterest earning assets:
Cash and due from banks 6,374,777
Premises & equipment 5,051,666
Other assets 2,913,547
-----------
Total assets $206,167,557
===========
Liabilities and shareholders' equity:
Interest bearing liabilities:
Interest bearing demand deposits $42,639,564 1,085,096 2.54%
Savings deposits 18,325,760 537,455 2.93%
Time deposits 88,346,946 3,877,327 4.39%
Fed Funds Borrowed 0 0 0.00%
----------- --------- ----
Total interest bearing liabilities 149,312,270 5,499,878 3.68%
Noninterest bearing liabilities:
Noninterest bearing demand 28,140,792
Other liabilities 2,966,371
----------
180,419,433
Shareholders' equity 25,748,124
-----------
Total liabilities and shareholders'
equity $206,167,557
===========
Excess of interest-earning assets over
interest bearing liabilities $42,515,297
Ratio of interest-earning assets to
interest-bearing liabilities 128.47%
======
Net interest income $10,316,770
==========
Net interest spread 4.56%
====
Net interest yield on interest earning
assets 5.38%
====
</TABLE>
21<PAGE>
Table 2
Pinnacle Financial Corporation and Subsidiaries
Volume/Rate Analysis
The following table shows a summary of the changes in interest
income and interest expense resulting from changes in volume and
changes in rates for each major category of interest earning
assets and interest-bearing liabilities for 1996 over 1995 and
1995 over 1994.
<TABLE>
<CAPTION>
1996 over 1995 1995 over 1994
-------------- --------------
Increase (decrease) due to changes in: Increase (decrease) due to changes in:
--------------------------------------- --------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans (including loan fees) $608,882 $ 118,920 $ 727,802 $ 290,171 $1,410,597 $1,700,768
Investment securities:
Taxable 862,854 105,379 968,233 78,457 429,410 507,867
Non-taxable <F1> (132,046) (21,825) (153,871) 13,431 5,342 18,773
Federal funds sold 10,097 (76,867) (66,770) (18,663) 98,511 79,848
--------- ------- --------- ------- --------- ---------
Total interest earning assets $ 1,349,787 $ $125,607 $1,475,394 $ 363,396 $1,943,860 $2,307,356
========= ======= ========= ======= ========= =========
Interest expense on:
Deposits:
Interest-bearing demand $ 233,213 $ (153,926) $ 79,287 $ (43,145) $ 73,181 $ 30,036
Savings (11,440) (20,475) (31,915) (32,627) 32,468 (159)
Time 629,632 (16,854) 612,778 260,491 781,235 1,041,726
------- -------- ------- ------- ------- ---------
Total interest-bearing liabilities $ 851,405 $ (191,255) $ 660,150 $ 184,719 $ 886,884 $1,071,603
======= ======== ======= ======= ======= =========
Rate/volume variances were allocated on a weighted average basis between
volume and rate.
<FN>
<F1> Tax exempt income is calculated on a tax equivalent basis.
</FN>
</TABLE>
22<PAGE>
Table 3
Pinnacle Financial Corporation and Subsidiaries
Investment Portfolio
The following table presents the amortized cost and market value of
investments by category at December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Amortized Amortized Amortized
Cost Market Cost Market Cost Market
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
U.S. Gov't Agencies $70,410,341 70,408,162 $58,667,831 $58,973,845 $54,600,312 $52,676,981
State, county and municipal 15,882,925 16,605,945 17,695,262 18,767.629 18,968,478 19,426,097
Other investments 134,400 134,400 134,400 134,400 134,400 134,400
---------- ---------- ---------- ---------- ---------- ----------
Totals $86,427,666 $87,148,507 $76,497,493 $77,875,874 $73,703,190 $72,237,478
</TABLE>
The following table presents the maturities of investment
securities and the weighted average yields for each range of
maturities presented. The weighted average yields reflect
taxable equivalent adjustments using a tax rate of 34% on
nontaxable securities.
<TABLE>
<CAPTION>
U.S. Treasury and State, County Other Weighted
Maturities at December 31, 1996 U.S. Gov't Agencies and Municipal Investments Average Yields
- ------------------------------- -------------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Within 1 year $10,727,855 $1,750,862 0 6.33%
After 1 through 5 years 57,605,765 8,417,349 0 6.52%
After 5 through 10 years 1,909,982 5,347,800 0 7.46%
After 10 years 164,561 1,089,934 $134,400 8.98%
---------- --------- ------- -----
Totals $70,408,163 $16,605,945 $134,400 6.61%
========== ========== ======= ====
</TABLE>
23<PAGE>
Table 4
Pinnacle Financial Corporation and Subsidiaries
Loan Portfolio
The following table presents loans by type at the end of each of the last
five years.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 18,406,805 17,273,462 $ 16,748,030 $ 16,461,448 $ 16,455,498
Real estate - construction 2,975,741 1,495,269 864,690 2,588,286 1,919,052
Real estate - mortgage 88,013,785 80,136,557 80,541,344 76,307,929 71,790,960
Installment loans to individuals 23,838,085 22,560,447 20,202,397 20,212,934 21,051,114
----------- ----------- ----------- ----------- -----------
Totals $133,234,416 $121,465,735 $118,356,461 $115,570,597 $111,216,624
=========== =========== =========== =========== ===========
</TABLE>
As of December 31, 1996, maturities of loans in the indicated
classifications were as follows:
<TABLE>
<CAPTION>
Commercial,
Financial and Real Estate
Maturity Agricultural Construction Total
-------- ------------ ------------ -----
<S> <C> <C> <C>
Within 1 year $8,845,786 $2,561,850 $11,407,636
1 to 5 years 8,547,133 413,891 8,961,024
After 5 years 1,013,886 0 1,013,886
---------- --------- ----------
Totals $18,406,805 $2,975,741 $21,382,546
</TABLE>
As of December 31, 1996, the interest terms of loans in the indicated
classifications for the indicated maturity ranges are as follows:
<TABLE>
<CAPTION>
Fixed Variable
Interest Rates Interest Rates Total
--------------- -------------- -----
<S> <C> <C> <C>
Commercial, financial and
agricultural:
1 to 5 years maturity $8,547,133 -- $8,547,133
After 5 years maturity 1,013,886 -- 1,013,886
--------- ---------
9,561,019 $9,561,019
--------- ---------
Real estate-construction:
1 to 5 years maturity 413,891 -- 413,891
After 5 years maturity -- -- --
--------- ------- ---------
$9,974,910 -- $9,974,910
========= =========
</TABLE>
Pinnacle's commercial, financial and agricultural loans and installment
loans to individuals include secured and unsecured loans as detailed
below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Commercial, financial and agricultural
Secured 13,858,739 $14,092,936 $14,363,107
Unsecured 4,548,066 3,180,526 2,384,923
--------- ---------- ----------
$18,406,805 $17,273,462 $16,748,030
========== ========== ==========
Installment loans to individuals
Secured 21,236,546 $17,718,394 $16,705,223
Unsecured 2,601,539 4,842,053 3,497,174
---------- ---------- ----------
$23,838,085 $22,560,447 $20,202,397
========== ========== ==========
</TABLE>
24<PAGE>
Table 4
Pinnacle Financial Corporation and Subsidiaries
Loan Portfolio - (continued)
The collateral for these various types of secured loans generally
includes vehicles, commercial and farm machinery and equipment, and
stock.
Pinnacle's real estate - mortgage loans and the consumer loans are
primarily fixed loans.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Real estate - mortgage:
Fixed $51,658,160 43,290,288 $38,807,647
Variable 36,355,625 36,846,269 41,733,697
---------- ---------- ----------
$88,013,785 $80,136,557 $80,541,344
========== ========== ==========
Consumer loans:
Fixed $23,270,977 $21,483,265 $19,194,257
Variable 567,108 1,077,182 1,008,140
------- --------- ---------
$23,838,085 $22,560,447 $20,202,397
========== ========== ==========
</TABLE>
The following summarizes past due, non-accrual and restructured loans as
of December 31, 1996, 1995, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days or more past due $2,669,721 $339,655 $476,340 $886,002 $673,142
Non-accrual loans 234,594 282,434 296,097 283,374 461,673
Restructured loans 228,375 77,663 216,953 228,000 237,388
</TABLE>
Accruing loans 90 days or more past due as of December 31, 1996 includes
three loans to one group of three customers with outstanding balances
totalling $1,948,342 secured by a hotel complex and a school bond with
total values of approximately $4.2 million. The loans are guaranteed by
three individuals with combined net worth of $8.2 million. The
subject hotel property is currently in Chapter 11 bankruptcy and is under
contract to sell by May 5, 1997 which has been approved by the bankruptcy
court.
It is management's opinion that Pinnacle will not incur any loss
due to these three loans.
As a result of management's ongoing review of the loan portfolio,
loans are classified as non-accrual generally when they
are past due in principal or interest payments for more
than 90 days or it is otherwise not reasonable to expect collection
of principal and interest under the original terms. Exceptions are
allowed for 90 day past due loans when such loans are well-secured
and in process of collection. Generally, payments received on non-accrual
loans are applied directly to principal.
The restructured loans are secured by real estate and approved by the
Board of Directors.
25<PAGE>
Table 5
Pinnacle Financial Corporation and Subsidiaries
Allowance for Loan Losses
The following table summarizes information concerning the allowance for loan
losses:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,828,722 $1,774,567 $1,769,269 $1,455,900 $1,171,603
Charge-offs:
Commercial, financial and agricultural 309,746 191,904 115,175 62,277 95,465
Real estate-construction -- -- -- -- --
Real estate-mortgage -- 83,115 62,339 70,092 76,795
Installment loans to individuals 136,747 62,297 64,187 90,313 71,506
------- ------ ------ ------ ------
446,493 337,316 241,701 222,682 243,766
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and agricultural 17,846 34,682 7,224 11,611 6,365
Real estate-construction -- -- -- -- --
Real estate-mortgage 10,780 2,390 1,564 3,315 --
Installment loans to individuals 21,997 24,399 18,211 18,574 29,147
------- ------- ------- ------- -------
50,623 61,471 26,999 33,500 35,512
------- ------- ------- ------- -------
Net charge-offs 395,870 275,845 214,702 189,182 208,254
------- ------- ------- ------- -------
Additions charged to operations 409,300 330,000 220,000 502,551 492,551
------- ------- ------- ------- -------
Balance at end of year $1,842,152 $1,828,722 $1,774,567 $1,769,269 $1,455,900
========= ========= ========= ========= =========
Ratio of net charge-offs during the period to
average loans outstanding during the period .32% .25% .19% .17% .20%
=== === === === ===
</TABLE>
The objective of management in establishing an allowance for loan losses
is to maintain a balance in the allowance which reflects an estimate of
potential loan losses and create an allowance adequate to absorb losses
inherent in the portfolio. To evaluate the adequacy of the allowance for
loan losses, management performs a detailed analysis of all outstanding
loans on a quarterly basis which determines the provision considered
necessary to maintain this reserve for possible problem loans.
The increase in the ratio of the allowance for loan losses to total loans
is a result of management's recognition of recent losses in the loan
portfolio. However, management believes these to be isolated incidences
and not a trend which would have a material negative effect on the future
operational results.
The following narrative addresses the risk elements in the loan portfolio
and the factors considered in determining the amount of the allowance for
loan losses:
The general risk elements which are found in the loan portfolio include
changes in the ability of the borrower to repay due to changing economic
conditions caused by unemployment, inflation, reduced cash flow, rising
taxes, and increased costs for borrowers on fixed incomes. Inherent
credit risks include possible undervalued collateral due to depreciation
over time, environmental concerns, and excessive indebtedness by
individual borrowers.
26<PAGE>
Table 5
Pinnacle Financial Corporation and Subsidiaries
Allowance for Loan Losses (continued)
Specific risk elements associated with each lending category are as
follows:
Commercial, financial, and agricultural Industry concentrations,
inability to monitor the
condition of collateral
(inventory, accounts
receivable, and vehicles),
lack of management
expertise, increased
competition and specialized
or obsolete equipment as
collateral.
Real estate - construction Inadequate collateral and
long-term financing
agreements.
Real estate - mortgage Changes in local economy and
caps on variable
rate loans.
Installment loans to individuals Loss of employment, changes
in local economy, the
inability to monitor
collateral (vehicle, boats,
mobile homes) and limited
personal contact as a
result of indirect lending
through dealers.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Loss
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and agricultural $363,000 $246,000 $303,000 $312,385 $297,871
Real Estate-construction 0 0 0 0 0
Real Estate-mortgage $155,000 141,500 71,443 121,510 69,493
Installment loans to individuals 18,000 17,000 17,000 24,000 15,927
Lease financing 0 0 0 0 0
Foreign 0 0 0 0 0
Unallocated 1,306,152 1,424,222 1,383,124 1,311,374 1,072,609
--------- --------- --------- --------- ---------
$1,842,152 $1,828,722 $1,774,567 $1,769,269 $1,455,900
========= ========= ========= ========= =========
</TABLE>
27<PAGE>
Table 6
Pinnacle Financial Corporation and Subsidiaries
Deposits
The average balance of deposits and the average rates paid on such
deposits are summarized for the periods indicated in the following table.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------ --------------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Noninterest bearing $ 29,866,520 -- $28,769,966 -- $ 28,140,792 --
Interest-bearing 46,831,618 2.55% 40,985,284 2.72% 42,639,564 2.54%
Savings deposits 16,535,228 3.06% 17,245,968 3.12% 18,325,760 2.93%
Time deposits 102,933,382 5.37% 94,010,131 5.23% 88,346,946 4.39%
----------- ----------- -----------
Totals $196,166,748 $181,011,349 $177,453,062
=========== =========== ===========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1996 are summarized as follows:
Time Certificates
of Deposit
----------
Within 3 months $3,711,037
After 3 through 6 months 3,301,355
After 6 through 12 months 6,313,547
After 12 months 4,287,846
----------
Total $17,613,785
==========
Table 7
Selected Ratios
The following table sets out certain ratios of Pinnacle for the
years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income to:
Average shareholders' equity 14.67% 15.19% 14.11%
Average asset 2.01% 2.03% 1.76%
Dividends to net income 29.90% 30.48% 31.72%
Average equity to average assets 13.70% 13.35% 12.49%
</TABLE>
28
<PAGE>
Table 8
Pinnacle Financial Corporation and Subsidiaries
Analysis of Interest Rate Sensitivity
The following table includes a listing of earning assets and interest
bearing liabilities and the distribution according to the earliest
repricing opportunity or remaining maturity at December 31, 1996 with no
prepayment assumptions. Also included are the related periodic and
cumulative gaps for each period.
<TABLE>
<CAPTION>
One Year
0-3 4-12 Through Over
Months Months Five Years Five Years Total
------ ------ ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold $ 661,972 $ 0 $ 0 $ 0 $ 661,972
Taxable investment securities 3,502,825 7,225,030 58,156,125 2,208,942 71,092,922
Nontaxable investment securities 896,393 854,469 7,866,989 6,437,734 16,055,585
Loans 59,218,027 23,299,565 48,302,738 2,390,393 133,210,723
---------- ---------- ---------- ---------- -----------
Total earning assets $64,279,217 $31,379,064 $114,325,852 $11,037,069 $221,021,202
Interest bearing liabilities:
- -----------------------------
Time deposits $28,471,845 $55,751,627 $ 23,208,507 $ 28,839 $107,460,818
Other interest bearing deposits 60,903,412 0 0 0 60,903,412
Fed Funds Purchased 110,000 0 0 0 110,000
---------- ---------- ---------- ---------- -----------
Total interest bearing liabilities $89,485,257 $55,751,627 $ 23,208,507 $ 28,839 $168,474,230
Gap summary
- -----------
Periodic net earning assets ($25,206,040) ($24,372,563) $ 91,117,345 $11,008,230 $52,546,972
Cumulative net earnings assets ($25,206,040) ($49,578,603) $ 41,538,742 $52,546,972 $105,093,944
Cumulative ratio of earning assets
to interest bearing liabilities 71.83% 65.86% 124.66% 131.19% 131.19%
</TABLE>
The rate sensitivity analysis table is designed to demonstrate Pinnacle's
sensitivity to changes in interest rates by setting forth in comparative
form the repricing maturities of Pinnacle's assets and liabilities for
the period shown. A ratio of greater than 100% of earning assets to
interest bearing liabilities (more interest earning assets repricing in a
given period than interest bearing liabilities) indicates that an
increase in interest rates would generally result in an increase in net
income for Pinnacle and a decrease in interest rates will result in a
decrease in net income. Conversely, a ratio less than 100% of earning
assets to interest bearing liabilities (less interest earning assets
repricing in a given period than interest bearing liabilities) indicates
that a decrease in interest rates would generally result in an increase
in net income and an increase in interest rates would result in a
decrease in net income. However, shifts in the structure of interest
sensitive assets and liabilities are made by management in response to
interest rate movements. These changes are made by sale of investment
securities with varying maturity ranges and/or by varying the rates
charged on loans and the rates paid on time deposits.
29<PAGE>
Item 7. FINANCIAL STATEMENTS
30<PAGE>
WHITTEMORE & SMITH, LLP
Certified Public Accountants
Hartwell Office:
P.O. Box 770
25 Chandler Center
Hartwell, Georgia 30643-0770
To the Board of Directors and Shareholders
Pinnacle Financial corporation and Subsidiaries
Elberton, Georgia 30635
Independent Auditor's Report
We have audited the accompanying consolidated balance sheet of
Pinnacle Financial Corporation and Subsidiaries as of December
31, 1996 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the years
ended December 31, 1996 and 1995. These financial statements are
the responsibility of the corporation'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 audits 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Pinnacle Financial Corporation and
Subsidiaries at December 31, 1996 and the consolidated results of
their operations and their cash flows for the years ended
December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/ WHITTMAN & SMITH, LLP
Whittman & Smith, LLP
31<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Assets
- ------
<S> <C>
Cash and due from banks $ 7,025,730
Federal funds sold 661,972
Securities available for sale 87,148,507
Loans, net of allowance for credit
loss of $1,842,152 131,392,264
Premises and equipment 5,558,659
Accrued interest receivable 2,864,465
Foreclosed real estate 491,859
Other assets 1,354,405
-----------
Total assets $236,497,861
-----------
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities
- -----------
Demand deposits $ 32,507,926
Savings and NOW deposits 60,903,412
Other time deposits 107,460,818
-----------
Total deposits 200,872,156
Federal funds purchased 110,000
Accrued interest and other liabilities 2,249,414
-----------
Total liabilities 203,231,570
-----------
Shareholders' equity
- --------------------
Common Stock, $10 par value; 5,000,000 shares
authorized, 768,000 shares issued and outstanding 7,680,000
Capital surplus 7,280,000
Retained earnings 17,830,536
Net unrealized appreciation on securities
available for sale, net of deferred tax
liability of $245,086 475,755
-----------
Total shareholders' equity 33,266,291
-----------
Total liabilities and shareholders' equity $236,497,861
-----------
</TABLE>
32<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
INTEREST INCOME
- ---------------
<S> <C>
Loans $ 13,254,005 $ 12,526,203
Securities available for sale 5,242,455 4,389,597
Federal funds sold 235,698 302,468
------------ ------------
Total interest income 18,732,158 17,218,268
------------ ------------
INTEREST EXPENSE
- ----------------
Deposits 7,231,630 6,571,481
------------ ------------
Total interest expense 7,231,630 6,571,481
------------ ------------
NET INTEREST INCOME 11,500,528 10,646,787
- ------------------
Provision for credit losses 409,300 330,000
----------- -----------
Net interest income after
provision for credit losses 11,091,228 10,316,787
------------ -----------
OTHER INCOME
- ------------
Service charges on deposit accounts 1,284,745 1,181,993
Other service charges and fees 389,134 317,030
Other income 210,192 226,430
------------ ----------
Total other income 1,884,071 1,725,453
------------ ----------
OTHER EXPENSES
- --------------
Salaries and employee benefits 3,877,382 3,492,391
Occupancy expense 944,762 858,645
Net realized losses on sales of
securities available for sale 219 18,315
Other expense 1,693,282 1,805,588
----------- ------------
Total other expenses 6,515,645 6,174,939
------------ ------------
Income before income taxes 6,459,654 5,867,301
Income tax expense 1,836,190 1,583,654
------------ ------------
Net income $ 4,623,464 $ 4,283,647
------------ ------------
Net income per share of common stock $6.02 $5.58
------------ ------------
Average shares outstanding 768,000 768,000
----------- ------------
</TABLE>
33<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/
(Depreciation) Total
Common Capital Retained on Available for Shareholders'
Stock Surplus Earnings Sale Securities Equity
----- ------- -------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $7,680,000 $7,280,000 $11,611,425 $( 967,370) $ 25,604,055
Net income for 1995 4,283,647 4,283,647
Cash dividends paid-$1.70 per share (1,305,600) (1,305,600)
Net change in unrealized appreciation/
(depreciation) on securities available
for sale, net of taxes 1,877,101 1,877,101
----------- ----------- ------------- ----------- ----------
Balance, December 31, 1995 7,680,000 7,280,000 14,589,472 909,731 30,349,203
Net income for 1996 4,623,464 4,623,464
Cash dividends paid-$1.80 per share (1,382,400) (1,382,400)
Net change in unrealized appreciation/
(depreciation) on securities available
for sale, net of taxes ( 433,976) ( 433,976)
----------- ----------- ------------ ------------ ------------
Balance, December 31, 1996 $7,680,000 $7,280,000 $17,830,536 $ 475,755 $ 33,266,291
============ =========== ============ ============ ============
</TABLE>
34<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1994
------------ --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,623,464 $ 4,283,647
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 410,422 423,307
Provision for credit losses 409,300 330,000
Deferred income taxes ( 2,053) ( 25,104)
Net realized losses on securities available for sale ( 219) ( 18,315)
Increase in accrued interest receivable and other assets ( 485,541) ( 151,234)
Increase (decrease) in accrued expenses and other liabilities ( 18,507) 487,378
------------ -------------
Total adjustments 313,402 1,046,032
------------ -------------
Net cash provided by operating activities 4,936,866 5,329,679
------------ -------------
Cash flows from investing activities
Net (increase) decrease in federal funds sold 7,400,907 ( 7,502,879)
Purchase of securities available for sale ( 44,276,293) ( 27,756,336)
Proceeds from sales of securities available for sale 15,502,634 10,441,510
Proceeds from maturities of securities available for sale 19,067,269 13,571,846
Net increase in loans ( 12,164,551) ( 3,434,356)
Purchases of premises and equipment ( 1,202,107) ( 316,083)
------------ -------------
Net cash used by investing activities 15,672,141) ( 14,996,298)
------------ -------------
Cash flows from financing activities
Net increase in non-interest bearing demand, savings
and NOW deposit accounts 1,811,282 4,390,095
Net increase in time deposits 11,142,747 5,881,215
Net increase (decrease) in federal funds purchased 110,000 ( 540,000)
Dividends paid ( 1,382,400) ( 1,305,600)
------------ -------------
Net cash provided by financing activities 11,681,629 8,425,710
------------ -------------
Net increase (decrease) in cash and due from banks 946,354 ( 1,240,909)
Cash and due from banks at January 1 6,079,376 7,320,285
------------ -------------
Cash and due from banks at December 31 $ 7,025,730 $ 6,079,376
------------ -------------
Interest paid $ 7,110,658 $ 6,342,922
------------ -------------
Income taxes paid $ 1,925,258 $ 1,551,098
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
35<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting practices of the company
conform with general practice within the banking industry. The
following is a summary of the more significant policies:
NATURE OF OPERATIONS. The company provides a variety of
financial services to individuals and corporate customers in
counties of Northeast Georgia through its two bank subsidiaries.
The company's primary deposit products include non-interest and
interest-bearing checking accounts, savings accounts, and
certificates of deposit. The company offers various lending
products with a substantial portion of the portfolio
collateralized by real estate (See Note 3).
CONSOLIDATION. The consolidated financial statements
include the accounts of Pinnacle Financial Corporation (the
Company) and its wholly-owned commercial bank subsidiaries, First
National Bank in Elberton and Tri-County Bank of Royston. All
significant intercompany accounts and transactions have been
eliminated in consolidation. In December, 1996 the bank holding
company and two subsidiaries agreed upon a proposed merger to be
effective December 31, 1997.
BASIS OF ACCOUNTING. The company utilizes the accrual basis
of accounting. The accrual basis of accounting gives recognition
to income and expenses when earned or incurred rather than when
received or paid.
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 disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS. For the purpose of presentation
in the consolidated statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance
sheet caption "Cash and due from banks".
SECURITIES AVAILABLE FOR SALE. Securities available for
sale consist of all debt securities and certain equity securities
not classified as trading securities nor as held to maturity
securities. The company has classified all debt securities as
available for sale. From time to time, the company may decide to
sell certain securities prior to maturity for liquidity, tax
planning, and other valid business purposes.
Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as a net amount in a
separate component of shareholders' equity until realized.
Gains and losses on the sale of securities available for
sale are determined using the specific-identification method.
Non-temporary declines in the fair value of held to maturity and
available for sale securities below their cost, if any, would
result in write-downs of the individual securities to their fair
value. These related write-downs would be included in earnings
as realized losses. (See Note 2).
Premiums and discounts are recognized in interest income
using the interest method over the period to maturity.
36<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
LOANS AND ALLOWANCE FOR CREDIT LOSSES. Loans are stated at
the amount of unpaid principal reduced by unearned discount and
an allowance for credit losses. Unearned discount on older
installment loans is recognized as income over the terms of the
loans by the interest method. Interest on newer loans is
calculated by using the simple interest method on daily
outstanding balances (See Note 3).
The allowance for credit losses is maintained at a level
adequate to absorb probable losses on existing loans which may
become uncollectible. Management determines the adequacy of the
allowance based on reviews of individual credits, recent loss
experience, current economic conditions, the risk characteristics
of the various categories of loans and other pertinent factors.
Credits deemed uncollectible are charged to the allowance.
Provisions for credit losses and recoveries on loans previously
charged off are added to the allowance. Changes in the allowance
relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in
the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may
change in the near term. However, the amount of change that is
reasonably possible cannot be estimated (See Note 4).
INTEREST INCOME ON LOANS. Interest on loans is accrued and
credited to income based on the principal amount outstanding.
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, the borrower's financial condition is such
that collection of interest is doubtful. Upon such
discontinuance, all unpaid accrued interest is reversed from
income.
LOAN ORIGINATION FEES AND COSTS. The effect of the
capitalization of loan fees and loan origination costs has been
computed by management and does not have a material impact upon
these financial statements.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. In the ordinary
course of business the company has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit,
commitments under personal lines of credit, commercial lines of
credit, credit card arrangements, and standby letters of credit.
Such financial instruments are recorded in the financial
statements when they become payable (See Note 14).
PREMISES AND EQUIPMENT. Premises and equipment are recorded
at cost less accumulated depreciation computed by the straight
line method over the estimated useful lives of the assets (SeeNote 5).
OTHER REAL ESTATE. Real estate acquired through foreclosure
is generally carried at the lower of cost or fair value minus
estimated cost to sell.
PENSION COSTS. Pension costs are charged to salaries and
employee benefits expense and are funded as accrued (See Note
9).
ADVERTISING COSTS. Generally, it is the company's policy to
expense all advertising costs as incurred. Advertising costs
associated with new products is immaterial to these financial
statements.
37<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES. Provisions for income taxes are based on
taxes payable or refundable for the current year (after exclusion
of nontaxable income such as interest on state and municipal
securities) and deferred taxes on temporary differences between
the amount of taxable income and pretax financial income.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets and liabilities are
expected to be realized or settled as prescribed in FAS Statement
No. 109, Accounting for Income Taxes. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes (See Note 10).
NET INCOME PER SHARE OF COMMON STOCK. Net income per share
of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding
during the year.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The following methods
and assumptions were used by the company in estimating fair
values of financial instruments as disclosed herein:
Cash and cash equivalents - The carrying amounts of cash and
short-term instruments approximate their fair value.
Securities available for sale - Fair values for investment
securities, excluding restricted equity securities, are based on
quoted market prices.
Loans receivable - For variable-rate loans that reprice
frequently and have no significant change in credit risk, fair
values are based on carrying values. Fair values for certain
mortgage loans (e.g., one-to-four family residential), credit
card loans, and other consumer loans are based on quoted market
prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics.
Fair values for commercial real estate and commercial loans are
estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Deposit liabilities - The fair values disclosed for demand
deposits are, by definition, equal to the amount payable on
demand at the reporting date (that is, their carrying amounts).
The carrying amounts of variable-rate, fixed-term money market
accounts and certificates of deposit approximate their fair
values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Accrued interest - The carrying amounts of accrued interest
approximate their fair values.
Off-balance-sheet instruments - Fair values for off-balance-
sheet lending commitments are based on fees currently charged to
enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing
(See Note 14).
38<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 2 - INVESTMENT SECURITIES
All investment securities are classified as available for
sale and recorded at their estimated fair market values in
accordance with the provisions of FAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The carrying
amounts and estimated market values of investment securities are
summarized below.
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
Cost Basis Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale:
December 31, 1996:
U.S. Treasury $17,946,379 $ 111,557 ($ 19,581) $18,038,355
U.S. Government agencies 51,723,842 152,716 ( 253,507) 51,623,051
State and Municipals 15,882,925 736,325 ( 13,305) 16,605,945
Mortgage-backed securities 740,120 9,182 ( 2,546) 746,756
Other securities 134,400 -- -- 134,400
---------- --------- ---------- ----------
$86,427,666 $1,009,780 ($ 288,939) $87,148,507
========== ========= ========== ==========
December 31, 1995:
U.S. Treasury $23,945,994 $ 80,794 ($ 39,539) $23,987,249
U.S. Government agencies 33,848,393 315,464 ( 63,224) 34,100,633
State and Municipals 17,695,262 1,074,312 ( 1,945) 18,767,629
Mortgage-backed securities 873,444 12,519 -- 885,963
Other securities 134,400 -- -- 134,400
---------- --------- ---------- ----------
$76,497,493 $1,483,089 ($ 104,708) $77,875,874
========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
The scheduled maturities of securities at December 31, 1996 were as follows:
Amortized Estimated
Cost Basis Market Value
---------- ------------
<S> <C> <C>
Securities available for sale:
Due in one year or less $12,438,245 $12,478,717
Due after one year through five years 65,658,103 66,023,114
Due after five years through ten years 7,029,174 7,257,782
Due after ten years 1,302,144 1,388,894
---------- ----------
$86,427,666 $87,148,507
========== ==========
</TABLE>
Nontaxable and taxable interest income on securities available
for sale were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Nontaxable $1,093,613 $1,239,536
Taxable 4,148,842 3,150,061
--------- ---------
$5,242,455 $4,389,597
========= =========
</TABLE>
39<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 2 - INVESTMENT SECURITIES - (CONTINUED)
Gross realized gains and gross realized losses on sales of securities
available for sale were:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross realized gains:
U.S. Government and agency securities $ 4,425 $ 247
State and municipal securities 2,322 20,187
----- ------
$ 6,747 $20,434
====== ======
Gross realized losses:
U.S. Government and agency securities $ 6,479 $38,346
State and municipal securities 487 403
------ ------
$ 6,966 $38,749
====== ======
</TABLE>
Investment securities, with a carrying value of approximately
$21,888,334 at December 31, 1996 and $13,789,275 at December 31, 1995,
were pledged to secure public deposits. The market value for such
pledged securities were approximately $22,147,940 and $14,195,654 at
December 31, 1996 and 1995, respectively.
Note 3 - Loans
The components of loans in the consolidated balance sheets were as
follows:
<TABLE>
<CAPTION>
December 31
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Commercial $18,406,805 $17,273,462
Real estate construction 2,975,741 1,495,269
Commercial real estate 47,090,661 41,635,136
Residential real estate 40,923,124 38,501,421
Consumer 23,838,085 22,560,447
---------- ----------
Total loans 133,234,416 121,465,735
Allowance for credit losses 1,842,152 1,828,722
----------- -----------
Net loans $131,392,264 $119,637,013
=========== ===========
</TABLE>
The accrual of interest has been discontinued on loans amounting to
$234,594 at December 31, 1996 and $282,434 at December 31, 1995. The
effect on interest income was $23,891 and $25,668 for 1996 and 1995,
respectively.
40<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
Note 4 - Allowance for Credit Losses
An analysis of the change in the allowance for credit losses
follows:
<TABLE>
<CAPTION>
December 31
---------------------------
1996 1995
---- ----
<S> <C> <C>
Balance at January 1 $1,828,722 $1,774,567
--------- ---------
Credits charged off ( 446,493) ( 337,316)
Recoveries 50,623 61,471
--------- ---------
Net credits charged off ( 395,870) ( 275,845)
Provision for credit losses 409,300 330,000
--------- --------
Balance at December 31 $1,842,152 $1,828,722
========= =========
</TABLE>
First National Bank in Elberton and Tri-County Bank of Royston grant
agribusiness, commercial, residential and consumer loans to individuals
and a variety of firms and corporations located primarily in counties of
Northeast Georgia. Although the subsidiary banks have diversified loan
portfolios, a substantial portion of the loan portfolios is
collateralized by improved and unimproved real estate and is dependent
upon the real estate market.
Impairment of loans having carrying values of $738,959 and $730,893
in 1996 and 1995, respectively has been recognized in conformity with FAS
114, Accounting by Creditors for Impairment of a Loan. The total
allowance for credit losses related to those loans was $536,000 and
$266,000 in 1996 and 1995, respectively. For impairment recognized in
conformity with FAS 114, the entire change in present value of expected
cash flows is reported as bad debt expense in the same manner in which
the initial impairment was recognized or as a reduction in the amount of
bad debt expense that otherwise would be reported.
Note 5 - Bank Premises and Equipment
Components of premises and equipment included in the consolidated
balance sheets at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Land $ 843,174 $ 610,572
Land improvements 312,662 312,662
Buildings 3,073,276 3,048,276
Building improvements 355,596 355,596
Furniture & fixtures 4,396,292 4,086,746
Building under construction 640,841 5,885
--------- ---------
Total cost 9,621,841 8,419,737
Accumulated depreciation ( 4,063,182) ( 3,652,763)
---------- ----------
Net book value $5,558,659 $4,766,974
========= =========
</TABLE>
41<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 5 - BANK PREMISES AND EQUIPMENT - (CONTINUED)
Premises and equipment are stated at cost less accumulated
depreciation. The company uses the straight line method of computing
depreciation using asset lives which approximate their economic useful
lives. Depreciation expense included in occupancy expense for 1996 and
1995 was $410,422 and $423,307, respectively.
In May, 1995 the Georgia Department of Transportation condemned a
portion of the property and accessibility to the downtown branch of First
National Bank in Elberton due to the expansion of Highway 17. A new
downtown branch facility is currently under construction to be completed
in 1997. Construction of a branch facility is also in progress at the
new Hartwell branch.
NOTE 6 - OTHER ASSETS AND OTHER LIABILITIES
The major components of other assets and other liabilities are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Other Assets:
Deferred income taxes $ 54,671 $ --
Cash surrender value of life insurance 968,176 930,536
Prepaid income tax 115,530 35,121
Other 216,028 158,232
--------- ----------
$1,354,405 $1,123,889
========= =========
Accrued interest and other liabilities:
Accrued interest payable $1,521,585 $1,400,613
Compensation and retirement deferral 539,633 529,840
Deferred income taxes -- 170,945
Other 188,196 166,523
--------- ---------
$2,249,414 $2,267,921
========= =========
</TABLE>
Note 7 - Deposits
<TABLE>
<CAPTION>
Deposit account balances by maturity at December 31, 1996 are as follows:
0-3 Months 4-12 Months 1-5 Years Total
---------- ----------- --------- -----
<S> <C> <C> <C> <C>
Demand deposits, savings
and NOW deposits $ 93,411,338 $ -- $ -- $93,411,338
Time deposits under $100,000 19,715,117 42,310,648 18,540,342 80,566,107
Time deposits over $100,000 8,756,729 13,440,978 4,697,004 26,894,711
----------- ---------- ---------- -----------
$121,883,184 $55,751,626 $23,237,346 $200,872,156
=========== ========== ========== ===========
</TABLE>
The amount of demand deposits reclassified as loans were $305,839
and $153,094 at December 31, 1996 and 1995, respectively.
42<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 8 - SHORT-TERM BORROWINGS
Federal funds purchased generally mature within one to four
days from the transaction date. The company had federal funds
purchased for a minimum number of days at the end of 1996.
Interest expense in the amount of $1,520 was incurred on these
amounts which was netted with interest income on federal funds
sold.
NOTE 9 - EMPLOYEE BENEFITS AND EMPLOYEE STOCK OWNERSHIP PLAN
The company maintains defined contribution 401(k) profit
sharing plans covering substantially all full-time employees.
Employee contributions to the plans are based on salary levels
and are discretionary, but the maximum employer contribution may
not exceed 6% of gross salaries in any year. Employer
contribution expense included in salaries and employee benefits
for the 401(k) plans was $58,517 in 1996 and $53,664 in 1995.
An Employee Stock Ownership Plan (ESOP) was adopted by First
National Bank in Elberton in 1992 and Tri-County Bank of Royston
in 1993. The ESOP is a non-contributory qualified stock bonus
plan established to accumulate shares of Pinnacle Financial
Corporation common stock in the ESOP trust for the benefit of all
eligible employees. Contributions to the plan are made at the
discretion of the Board of Directors.
The trust assets will be allocated among the employee
participants who will receive distributions of cash and stock
upon their termination, death, long-term disability or
retirement. At that time, the employee will have the option to
retain the stock or exercise a put option whereby the trust is
obligated to acquire the stock. Any subsequent transfer by the
employee after the put option expires is subject to an employer's
right of first refusal which provides that the stock must first
be offered to the employer and then to the trust prior to
transfer. The company will fund future obligations to reacquire
employee owned securities distributed from the ESOP. As of
December 31, 1996, the ESOP had purchased no qualified employer
securities but had incurred liabilities of $47,840 which were
paid to retiring employees from trust assets. Contribution
expense included in salaries and employee benefits for the ESOPs
were $311,479 in 1996 and $275,736 in 1995.
NOTE 10 - INCOME TAXES
The consolidated provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Current provision - federal $1,838,243 $1,608,758
Deferred portion ( 2,053) ( 25,104)
---------- ----------
$1,836,190 $1,583,654
========= =========
</TABLE>
43<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - INCOME TAXES - (CONTINUED)
The provision for federal income taxes is less than that computed by
applying the federal statutory rate of 34% in 1996 and 1995, as indicated
in the following analysis:
1996 1995
---- ----
Statutory rates 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income ( 6.3%) ( 8.2%)
Interest and other nondeductible expenses 1.0% 1.5%
Other, net ( .3%) ( .3%)
----- -----
28.4% 27.0%
===== =====
The components of the deferred income tax asset (liability) included
in other assets (liabilities) are as follows:
1996 1995
---- ----
Deferred tax liability - federal ($ 245,086) ($ 795,673)
Deferred tax asset - federal 299,757 624,728
--------- ---------
Net deferred tax asset (liability) $ 54,671 ($ 170,945)
========= =========
The tax effects of each type of significant item that gave rise to
deferred taxes are as follows:
Years Ended December 31
-----------------------
1996 1995
---- ----
Tax depreciation in excess of book
depreciation ($317,242) ($312,779)
Excess of book provision for loan
losses over deduction for federal
income tax purposes 471,120 466,554
Accretion of discount on state and
municipal investment securities ( 20,511) ( 14,245)
Non-deductible deferred directors'
fees and interest 75,770 70,637
Other real estate owned cost
capitalization for tax purposes 47,414 26,333
Non-deductible retirement benefit 17,197 17,197
Non-accrual loan interest for tax
purposes 26,009 44,007
Unrealized gain/losses on securities ( 245,086) (468,649)
------- -------
Total deferred tax asset (liability) $ 54,671 ($170,945)
======= =======
44<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 10 - INCOME TAXES - (CONTINUED)
Consolidated federal and state income tax returns are filed
for the holding company and subsidiaries and the actual tax
liability or benefit is allocated to each member of the group for
the taxable year as would be determined on a separate return
basis. Any carryovers and carrybacks of tax attributes from
separate return years are given full effect in determining
separate company tax liability or benefit if such items are
availed of in reducing the consolidated tax liability of the
affiliated group.
NOTE 11 - RELATED-PARTY TRANSACTIONS
In the normal course of business, executive officers and
directors of the company and its bank subsidiaries, and certain
business organizations and individuals associated with them,
maintain a variety of banking relationships with the bank
subsidiaries (related parties). Such transactions were made in
the ordinary course of business on substantially the same terms
and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with
other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable
features. The following is a summary of activity for related
party loans for 1996 and 1995:
1996 1995
---- ----
Beginning balance $1,839,982 $1,751,796
New loans 6,609,539 1,680,401
Repayments (4,306,440) (1,592,215)
--------- ---------
Ending balance $4,143,081 $1,839,982
========= =========
The company had deposits of approximately $5,158,002 for related
parties at December 31, 1996.
Note 12 - Executive Retirement Benefits
As of December 1996, both bank subsidiaries have established non-
qualified executive salary continuation plans which will provide benefits
to each bank's President and Chairman of the Board of Directors upon
retirement. This retirement benefit amount will be determined each year
using a life insurance contract indexed as if purchased on the effective
date of the plan. The banks are not required to fund the plans nor
obligated to purchase such life insurance policies.
45<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
The company is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such litigation and
claims will not be material to the consolidated financial statements.
NOTE 14 - FINANCIAL INSTRUMENTS
The company is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financial needs
of its customers. These financial instruments consist of commitments to
extend credit, personal lines of credit, commercial lines of credit, and
credit card arrangements and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest-
rate risk in excess of the amount recognized in the consolidated balance
sheet.
The company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit and standby letters of credit written is represented by the
contractual notional amount of those instruments. The company uses the
same credit policies in making commitments and conditional obligations as
it does for on-balance-sheet instruments.
A summary of the company's financial instruments whose contract
amounts represent credit risk at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to extend credit $1,800,000 $ 805,051
Credit card arrangements 1,853,136 1,615,356
Undisbursed lines of credit 9,485,131 8,336,783
Standby letters of credit 1,651,200 1,537,730
--------- ---------
$14,789,467 $12,294,920
========== ==========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
company upon extension of credit is based on management's credit
evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit written are conditional commitments issued
by the company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements.
In accordance with resolutions adopted by the Board of Directors,
the company does not have derivative financial instruments, therefore,
FAS 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" does not have an effect on the company.
46<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 14 - FINANCIAL INSTRUMENTS - (CONTINUED)
The estimated fair values of the company's financial instruments
were as follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 7,026 $ 7,026 $ 6,079 $ 6,079
Federal funds sold 662 662 8,063 8,063
Securities available for sale 87,148 87,105 77,876 77,997
Loans receivable, net 131,392 131,032 119,637 120,156
Accrued interest receivable &
other assets 10,270 10,270 8,990 8,990
Financial liabilities:
Deposits $200,872 $193,076 $187,918 $176,416
Federal funds purchased 110 110
Accrued interest payable &
other liabilities 2,249 2,249 2,268 2,268
Off-balance-sheet instruments:
Commercial lines of credit $ 3 $ 26
Standby letters of credit 1 8
</TABLE>
NOTE 15 - NEW BRANCH LOCATIONS AND PROPOSED MERGER
On September 9, 1996, First National Bank in Elberton opened a new
branch location in Hartwell, Georgia and Tri-County Bank of Royston
opened a new branch location in Lavonia, Georgia. A new facility is
currently under construction in Hartwell to be completed in early 1997.
The Lavonia branch is currently leasing its facilities.
In December, 1996, the bank holding company and subsidiaries
announced their intent to merge the subsidiaries. The proposed merger
would take effect December 31, 1997.
NOTE 16 - DIVIDENDS FROM SUBSIDIARIES
Dividends paid by the bank subsidiaries are the primary source of
funds available to the company. Statutes and regulations impose
restrictions on the amount of dividends that may be declared by the bank
subsidiaries. Aggregate dividends of approximately $6,853,000 can be
declared by the bank subsidiaries without prior regulatory approval. The
primary restrictions are as follows:
First National Bank in Elberton is subject to the dividend
restrictions set forth by the Comptroller of the Currency (OCC). Under
such restrictions, First National Bank in Elberton may not, without the
prior approval of the OCC, declare dividends in any calendar year in
excess of the sum of the current year's earnings plus the retained
earnings from the preceding two years.
Tri-County Bank of Royston, as a state-chartered bank, is subject to
the dividend restrictions of the Georgia State Department of Banking and
Finance. Tri-County Bank of Royston must notify the Department of
Banking if dividends declared or anticipated to be declared in a calendar
year are more than fifty percent of the net earnings for the previous
year.
47<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 17 - REGULATORY MATTERS
The banks are required to maintain minimum amounts of capital to
total "risk weighted" assets, as defined by the banking regulators. At
December 31, 1996, the banks are required to have a minimum 4.00% Tier 1
ratio, a minimum 8.00% total capital ratio, and a minimum 4.00%
core/leverage capital ratio. The actual ratios of the consolidated
company at that date were 23.45%, 24.70%, and 14.26%, respectively.
At December 31, 1996, First National Bank in Elberton was required
to maintain a minimum deposit of $25,000 with the Federal Reserve Bank of
Atlanta for clearings.
NOTE 18 - PINNACLE FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Balance Sheet
December 31, 1996
-----------------
1996
----
Assets
- ------
Cash $ 30,242
Investment in subsidiaries 33,238,191
Furniture and fixtures, net of accumulated
amortization of $1,079 1,080
Other assets --
----------
$33,269,513
==========
Liabilities and Shareholders' Equity
- ------------------------------------
Due to subsidiaries $ 3,222
Common stock 7,680,000
Capital surplus 7,280,000
Retained earnings 17,830,536
Unrealized appreciation on securities, net of tax 475,755
----------
$33,269,513
==========
48<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE 18 - PINNACLE FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Statements of Income
Years ended December 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Income:
Dividends from subsidiaries $1,450,480 $1,372,200
Expenses:
Other expenses 109,642 89,152
--------- ---------
Income before income taxes and equity in
undistributed net income of subsidiaries 1,340,838 1,283,048
Income tax benefit ( 37,278) ( 30,311)
--------- ---------
Net income before equity in undistributed
net income of subsidiaries 1,378,116 1,313,359
Equity in undistributed net income of subsidiaries 3,245,348 2,970,288
--------- ---------
Net income $4,623,464 $4,283,647
========= =========
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Years ended December 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $4,623,464 $4,283,647
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 432 432
Equity in undistributed net income of
subsidiaries ( 3,245,348) ( 2,970,288)
(Increase) decrease in prepaid expenses 16,913 ( 16,913)
Increase (decrease) in due to subsidiaries 3,222 ( 5,714)
--------- ---------
Net cash provided by operating activities 1,398,683 1,291,164
--------- ---------
Cash flows from financing activities:
Dividends paid ( 1,382,400) ( 1,305,600)
--------- ---------
Net cash used by financing activities ( 1,382,400) ( 1,305,600)
--------- ---------
Net increase (decrease) in cash and cash equivalents 16,283 ( 14,436)
Cash and cash equivalents at January 1 13,959 28,395
--------- ---------
Cash and cash equivalents at December 31 $ 30,242 $ 13,959
========= =========
</TABLE>
49<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the Company's two most recent fiscal years, the Company did
not change accountants and had no disagreements with its accountants on
any matters of accounting principle or practices or financial statement
disclosure.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS
The directors and executive officers of Pinnacle, the respective
ages, directorships in publicly owned companies, positions with Pinnacle,
principal occupations and the Pinnacle common stock owned beneficially by
them as of January 31, 1997 are as follows. Except as otherwise
indicated, each director and executive officer has been or was engaged in
his present or last principal employment, in the same or a similar
position, for more than five years. Unless otherwise stated, percentages
of shares beneficially owned are based on 768,000 shares outstanding on
March 15, 1997.
<TABLE>
<CAPTION>
Number of Shares Owned
Beneficially
Name Age Position with Pinnacle (Percent of Class)
---- --- ---------------------- ------------------
<S> <C> <C> <C>
Maurice Bond 62 Director 996*
Charles Bradshaw 73 Director 1,600*
H. Thomas Brown 45 Director 100*
W. Anderson Dilworth 67 Director 4,720*
Linton W. Eberhardt 57 President and Director 600*
William F. Grant 66 Director 5,064*<F1>
L. Jackson McConnell 59 Chairman, Chief Executive 395,186 (51.5%)<F2>
Officer and Director
James E. Purcell 56 Executive Vice President 3,400*
and Director
C. Lewis Shurbutt 67 Director 5,000*
416,566 (54.2%)
All directors and executive
officers as a group (9
persons)
_________________
*Less than one percent.
<FN>
<F1> Does not include 392 shares held by Judge Grant's wife as to
which he disclaims beneficial ownership.
<F2> Includes 391,813 shares held by the JAM Family Partnership I,
L.P. and by the JAM Family Partnership II, L.P. pursuant to
which Mr. McConnell has sole voting and investment power. Does
not include 333 shares held by Mr. McConnell's wife with respect
to which he disclaims beneficial ownership.
</FN>
</TABLE>
50<PAGE>
The following is a brief description of the business experience
of the directors and executive officers of Pinnacle who, except as
otherwise indicated, have been or were engaged in their present or last
principal employment, in the same or a similar position, and in the
described position, for more than five years:
Mr. Bond is President and the owner of Bond Realty and has been
a director of First National since January 1975 and director of Pinnacle
since March 1996.
Mr. Bradshaw was the General Administrator of Advocate Press, a
printing company, until his retirement in 1991. Mr. Bradshaw has been a
director of Royston since 1969 and was elected as a director of Pinnacle
on March 21,1996.
Mr. Brown is the Administrator of Cobb Memorial Hospital in
Royston. He has been a director of Royston since 1991, and a director of
Pinnacle since March 21, 1996.
Mr. Dilworth is the owner of Dills Food City, Inc., a retail
food store with locations in Royston, Lavonia and Hiawassee, Georgia, and
has been a director of Royston since 1981 and Pinnacle since March 8,
1995.
Mr. Eberhardt has been the Chairman, President and CEO of
Royston since 1986 and a director of Royston since 1972. He was elected
president and a director of Pinnacle on March 8, 1995.
Judge Grant was the Chief Superior Court Judge of the Northern
Judicial Circuit, State of Georgia until his retirement in 1996 and has
been a Director of Pinnacle since 1983 and a director of First National
since 1968.
Mr. Shurbutt was a Vice President of First National until his
retirement in 1995. Mr. Shurbutt has been a director of First National
since 1983 and a director of Pinnacle since March 21, 1996.
Mr. McConnell has been Chairman and a director of Pinnacle since
1983 and Chairman and CEO of First National from 1990 to present. He was
also President of Pinnacle from 1983 through March 8, 1995. He was
Chairman, President and CEO of First National from 1974 to 1990 and has
been a director of First National and Royston since 1963.
Mr. Purcell has been President of First National since 1990.
Prior to that time he was Executive Vice President of First National. He
has been a Director of First National since 1977, a director of Pinnacle
since 1983 and Vice President of Pinnacle since September 1983.
Mr. Shurbutt was a Vice President of First National until his
retirement in 1995. Mr. Shurbutt has been a director of First National since
1983 and a director of Pinnacle since March 21, 1996.
Except for Mr. Eberhardt and McConnell, who are brothers-in-law,
there are no family relationships among the directors of Pinnacle.
ITEM 10. EXECUTIVE COMPENSATION
Pinnacle does not separately compensate any of its executive
officers. The following table sets forth the annual and long-term
compensation paid to the chief executive officer and each executive
officer of First National and Royston whose salary and bonus exceeded
$100,000 during the 1996 fiscal year from First National and Royston for
fiscal years ending December 31, 1996, 1995, and 1994 (the "Named
Executive Officers").
51<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
--------------------------
Name and Principal # of SARs All Other
Position Year Salary ($)<F1> granted Compensation ($)<F2>
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
L. Jackson McConnell 1996 $157,370(2) - $21,000<F3>
(Chairman and Chief Executive 1995 $155,117(2) - $21,446<F4>
Officer) of First National and 1994 $150,306(2) - $17,780<F5>
Pinnacle
James E. Purcell 1996 $139,507 - $22,500<F6>
President First National; Vice 1995 $133,266 - $20,054<F7>
President Pinnacle 1994 $117,056 6,000 $16,610<F8>
Linton W. Eberhardt 1996 $102,325 - $13,232 <F9>
President Royston 1995 $ 96,558 - $10,426 <F10)
President Pinnacle 1994 $ 86,495 - $ 9,482 <F11>
<FN>
<F1> Includes directors fees.
<F2> Includes salary and directors fees Mr. McConnell received in
1994, 1995 and 1996 as an officer and director of Royston.
<F3> Includes $16,770 and $4,230 contributed by Pinnacle to Mr.
McConnell's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F4> Includes $17,237 and $4,209 contributed by Pinnacle to Mr.
McConnell's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F5> Includes $13,512 and $4,268 contributed by Pinnacle to Mr.
McConnell's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F6> Includes $18,750 and $3,750 contributed by Pinnacle to Mr.
Purcell's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F7> Includes $16,503 and $3,551 contributed by Pinnacle to Mr.
Purcell's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F8> Includes $13,352 and $3,358 contributed by Pinnacle to Mr.
Purcell's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F9> Includes $10,308 and $2,924 contributed by Pinnacle to Mr.
Eberhardt's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F10> Includes $7,831 and $2,695 contributed by Pinnacle to Mr.
Eberhardt's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F11> Includes $7,007 and $2,476 contributed by Pinnacle to Mr.
Eberhardt's account in Pinnacle's ESOP and 401-K Plan,
respectively.
</FN>
</TABLE>
<PAGE>
Director's Compensation
Directors of Pinnacle current receive $250 for each meeting of
the Board of Directors of Pinnacle. The directors of First National
currently receive a fee of $700 per month for service as a director. The
directors of Royston currently receive $525 per monthly meeting.
Salary Continuation Agreement
L. Jackson McConnell, Chairman and Chief Executive Officer of
Pinnacle and First National and Vice Chairman of Royston, James E.
Purcell, Vice President and a Director of Pinnacle and President of First
National, and Linton W. Eberhardt, President and a Director and President
of Royston entered into a non-qualified salary continuation agreement (the
52<PAGE>
"Salary Continuation Plans") with their First National which provide
certain benefits upon their retirement and upon their death. Both the
retirement and death benefits are determined at December 31st of each
year based on the income performance of a single premium split dollar
life insurance policy. Generally, the annual addition to his benefits is
calculated based on the increase in the policy surrender value less a
calculated charge for the use of the bank's money to fund the increase.
The Salary Continuation Plan provides that, upon their
retirement at age 65, the executive officers named above will receive
annual retirement benefits for their lifetime. In addition, the plan
provides a death benefit to their beneficiaries. If the executive
officers should be discharged for cause, all benefits under the Salary
Continuation Plan will be forfeited. If the executive officers are
terminated after a change of control of Pinnacle (as defined in the
Salary Continuation Plan), they will be entitled to receive the death
benefits and the retirement benefits after reaching age 65 as if they had
been continually employed by their respective banks until that time. The
table below indicates the value of the death benefits and estimated
retirement benefits, which are dependent upon the income performance of
the life insurance policy, as of December 31, 1995 and 1996.<PAGE>
<TABLE>
<CAPTION>
Executive Officer Date of Death Estimated Death Estimated
Agreement Benefit Annual Benefit Annual
Value Retirement Value Retirement
12/31/96 Benefits 12/31/95 Benefits
12/31/96 12/31/95
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
L. Jackson McConnell 10-24-95 $507,751 $30,947 $482,180 $30,947
James E. Purcell 12-16-94 $215,077 $21,748 $189,255 $21,748
Linton W. Eberhardt 11-10-94 $214,981 $20,212 $204,496 $20,212
</TABLE>
The stock appreciation rights plan established for Mr.
James E. Purcell on January 1, 1992, was terminated on December
1, 1995. The plan consisted of 6,000 rights valued at $50,580 as
of December 1, 1995. The $50,580 accrued in the Stock
Appreciation Rights Plan, but not paid to Mr. Purcell upon its
termination, was a consideration in designing the amount of
retirement benefits to be received by Mr. Purcell under the
Salary Continuation Plan.
53<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Principal Holders of Stock
The following table provides for each person who, to
the best information and knowledge of the Company, beneficially
owned 5% or more of the outstanding shares of Company Stock on
March 15, 1997, the following information: (a) the owner's name,
(b) the number of shares of Company Stock owned, and (c) the
percentage such number represents of the outstanding shares of
Company Stock. Unless otherwise indicated, the listed owners are
the record owners of and have sole voting and investment powers
over their shares.
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owner Owned
(Percent of Class)
------------------- -------------------
<S> <C>
L. Jackson McConnell 395,186<F1>(51.5%)
884 Elbert Street
Elberton, Georgia 30635
JAM Family Partnership 197,950 (25.8%)
I, L.P.
884 Elbert Street
Elberton, Georgia 30635
JAM Family Partnership 193,863 (25.2%)
II, L.P.
884 Elbert Street
Elberton, Georgia 30635
<FN>
<F1> Includes 197,950 shares held by the JAM Family Partnership
I, L.P. and 193,863 shares held by the JAM Family
Partnership II, L.P. pursuant to which Mr. McConnell has
sole voting and investment power. Does not include 333
shares held by Mr. McConnell's wife with respect to which he
disclaims benefit ownership.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Banks have had, and expect to have in the future,
banking transactions in the ordinary course of business with
directors and officers of Pinnacle and their associates,
including corporations in which such officers or directors are
shareholders, directors and/or officers, on the same terms
(including interest rates and collateral) as those prevailing at
the time for comparable transactions with other persons. Such
transactions have not involved more than the normal risk of
collectibility or presented other unfavorable features.
54<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The registrant submits herewith as exhibits to
this report on Form 10-KSB the exhibits required
by Item 601 of Regulation S-B, subject to Rule
12b-23 under the Securities Exchange Act of 1934.
Exhibit No. Document
10.4 Flexible Premium Life Insurance Plan for
L. Jackson McConnell dated October 24, 1995. *
10.5 Indexed Executive Salary Continuation Plan by
and between First National Bank in Elberton
and L. Jackson McConnell dated August 9,
1995. *
10.5 Flexible Premium Life Insurance Endorsement
Method Split Dollar Plan Agreement for
Linton Eberhardt, daved November 10, 1994.
22.0 Subsidiaries of Pinnacle Financial
Corporation. *
25.0 A Power of Attorney is set forth on the
signature pages to this Form 10-KSB.
27.0 Financial Data Schedule (for SEC use only)
___________________________
* previously filed
55<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, PINNACLE FINANCIAL CORPORATION has duly
caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Elberton, State of Georgia, on
the 18th day of March, 1997.
PINNACLE FINANCIAL CORPORATION
By: /s/ L. Jackson McConnell
L. Jackson McConnell
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints L. Jackson McConnell or Linton W.
Eberhardt and either of them (with full power in each to act alone), as
true and lawful attorneys-in-fact, with full power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign
any amendments to this Registration Statement and to file the same, with
all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming
all that said attorney-in-fact, or their substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report Statement has been signed by the following persons in the
capacities indicated on the 18th day of March, 1997.
Signature Title
/s/ L. Jackson McConnell Chairman and Chief Executive
L. Jackson McConnell Officer (Principal Executive
and Financial Officer) and Director
/s/ Linton W. Eberhardt President and Director
Linton W. Eberhardt
/s/ James E. Purcell Vice President and Director
James E. Purcell
/s/ Maurice Bond Director
Maurice Bond
<PAGE>
/s/ C. Lewis Shurbutt Director
C. Lewis Shurbutt
_______________________ Director
W. Anderson Dilworth
/s/ William F. Grant Director
William F. Grant
_______________________ Director
H. Thomas Brown
/s/ Charles Bradshaw Director
Charles Bradshaw
/s/Mary Coyle Barden Secretary (Principal Accounting Officer)
Mary Coyle Barden
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
------- ----------------------
10.5 Flexible Premium Life Insurance Endorsement
Method Split Dollar Plan Agreement for
Linton Eberhardt, daved November 10, 1994.
25.0 A Power of Attorney is set forth on the signature
pages to this Form 10-K.
27 Financial Data Schedule
EXHIBIT 10.5
FLEXIBLE PREMIUM LIFE INSURANCE
---------------------------------
ENDORSEMENT METHOD SPLIT DOLLAR PLAN AGREEMENT
-----------------------------------------------
Insurer:
Policy Number:
Corporation: Tri-County Bank of Royston
Insured: Linton Eberhardt
Relationship of Corporation to Insured: Employer
The respective rights and duties of the Corporation and the Insured in
the subject policy shall be as defined in the following:
I. DEFINITIONS.
Refer to the policy contract for the definition of all terms in this
Agreement.
II. POLICY TITLE AND OWNERSHIP
t Title and ownership shall reside in the Corporation for its use and
for the use of the Insured all in accordance with this Agreement.
The Corporation alone may, to the extent of its interest, exercise
the right to borrow or withdraw on the policy cash values. Where
the Corporation and the Insured (or assignee, with the consent of
the Insured) mutually agree to exercise the right to increase the
coverage under the subject split dollar policy, then, in such event,
the rights, duties and benefits of the parties to such increased
coverage shall continue to be subject to the terms of this
Agreement.
III. BENEFICIARY DESIGNATION RIGHTS
The Insured (or assignee) shall have the right and power to
designate a beneficiary or beneficiaries to receive his share of the
proceeds payable upon the death of the Insured and to elect and
change a payment option for such beneficiary, subject to any right
or interest the Corporation may have in such proceeds, as provided
in this Agreement.
IV. PREMIUM PAYMENT METHOD
The Corporation shall pay an amount equal to the planned premiums
and any other premium payments that might become necessary to keep
the policy in force.
V. TAXABLE BENEFIT
Annually the Insured will receive a taxable benefit equal to the
assumed cost of insurance as required by the Internal Revenue
Service. The Corporation (or its administrator) will report to the
Employee the amount of imputed income received each year on Form W-2
or its equivalent.<PAGE>
VI. DIVISION OF DEATH PROCEEDS
Subject to paragraph VII herein, the division of the death proceeds
of the policy is as follows:
A. The Insured's beneficiary(ies), designated in accordance with
Paragraph III, shall be entitled to an amount equal to eighty
percent (80%) of the net at risk insurance portion of the
proceeds. The net at risk insurance portion is the total
proceeds less the cash value of the policy.
B. The Corporation shall be entitled to the remainder of such
proceeds.
C. The Corporation and the Insured (or assignees) shall share in
any interest due on the death proceeds on a pro rata basis as
the proceeds due each respectively bears to the total proceeds,
excluding any such interest.
VII. DIVISION OF THE CASU SURRENDER VALUE OF THE POLICY
The Corporation shall at all times be entitled to an amount equal to
the policy's cash value, as that term is defined in the policy
contract, less any policy loans and unpaid interest or cash
withdrawals previously incurred by the Corporation and any
applicable surrender charges. Such cash value shall be determined
as of the date of surrender or death as the case may be.
VIII. PREMIUM WAIVER
If the policy contains a premium waiver provision, such waived
amounts shall be considered for all purposes of this Agreement as
having been paid by the Corporation.
IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS
In the event the policy involves an endowment or annuity element,
the Corporation's right and interest in any endowment proceeds or
annuity benefits, on expiration of the deferment period, shall be
determined under the provisions of this Agreement by regarding such
endowment proceeds or the commuted value of each annuity benefits as
the policy's cash value. Such endowment proceeds or annuity
benefits shall be considered to be like death proceeds for the
purposes of division under this Agreement.
X. TERMINATION OF AGREEMENT
This agreement shall terminate at the option of the Corporation
following thirty (30) days written notice to the Insured upon the
happening of any one of the following:
1. The Insured shall be discharged from employment with the
Corporation for cause. The term "for cause" shall mean gross
negligence or grow neglect or the commission of a felony or
gross-misdemeanor involving moral turpitude, fraud, dishonesty
or willful violation of any law that results in any adverse
effect on the bank.
2. The Internal Revenue Code is amended so as to substantially,
adversely affect the tax treatment to the corporation of the
corporation's ownership in this policy.
<PAGE>
Upon such termination, the Insured (or assignee) shall have a ninety
(90) day option to receive from the Corporation an absolute
assignment of the policy in consideration of a cash payment to the
Corporation, whereupon this Agreement shall terminate. Such cash
payment shall be the greater of:
1. The Corporation's share of the cash value of the policy on the
date of such assignment, as defined in this Agreement.
2. The amount of the premiums which have been paid by the
Corporation prior to the date of such assignment.
Should the Insured (or assignee) fail to exercise this option within
the prescribed ninety (90) day period, the Insured (or assignee)
agrees that all of his rights, interest and claims in the policy
shall terminate as of the date of the termination of this Agreement.
XI. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS
The Insured may not, without the written consent of the Corporation,
assign to any individual, trust or other organization, any right,
title or interest in the subject policy or any rights, options,
privileges or duties created under this Agreement.
XII. AGREEMENT BINDING UPON THE PARTIES
This Agreement shall bind the Insured and the Corporation, their
heirs, successors, personal representatives and assigns.
XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR
L. Jackson McConnell is hereby designated the "Named Fiduciary"
until resignation or removal by the board of directors. As Named
Fiduciary, Mr. McConnell shall be responsible for the management,
control, and administration of this Split Dollar Plan as established
herein. The Named Fiduciary may allocate to others certain aspects
of the management and operation responsibilities of the plan,
including the employment of advisors and the delegation of any
ministerial duties to qualified individuals.
XIV. FUNDING POLICY
The funding policy for this Split Dollar Plan shall be to maintain
the subject policy in force by paying, when due, all premiums
required.
XV, CLAIMS PROCEDURE FOR LIFE INSURANCE POLICY AND SPLIT DOLLAR PLAN
Claim forms or claim information as to the subject policy can be
obtained by contacting The Benefit Marketing Group, Inc. (404-952-
1529). When the Named Fiduciary has a claim which may be covered
under the provisions described in the insurance policy, he should
contact the office named above and they will either complete a claim
form and forward it to an authorized representative of the Insurer
or advise the named Fiduciary what further requirements are
necessary. The Insurer will evaluate and make a decision as to
payment. If the claim is payable, a benefit check will be issued to
the Named Fiduciary.
In the event that a claim is not eligible under the policy, the
Insurer will notify the Named Fiduciary of the denial pursuant to
the requirements under the terms of the policy. If the Named
Fiduciary is dissatisfied with the denial of the claim and wished to
<PAGE>
contest such claim denial, he should contact the office named above
and they will assist in making inquiry to the Insurer. All
objections to the Insured's actions should be in writing and
submitted to the office named above for transmittal to the Insurer.
XVI. GENDER
Whenever in this agreement words are used in the masculine or neuter
gender, the shall be read and construed as in the masculine,
feminine or neuter gender, wherever they should so apply.
XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT
The Insurer shall not be deemed a party to this Agreement, but will
respect the rights of the parties as herein developed upon receiving
an executed copy of this Agreement. Payment or other performance in
accordance with the policy provisions shall fully discharge the
Insurer for any and all liability.
Executed at Royston, Ga. this 10 day of November, 1994.
TRI-COUNTY BANK OF ROYSTON
By: /s/ L. Jackson McConnell
Title: V. Chmn.
By: /s/ Linton Eberhardt
Linton Eberhardt<PAGE>
BENEFICIARY DESIGNATION FORM
PRIMARY DESIGNATION:
Name Relationship
---- -------------
/s/ Alice M. Eberhardt Wife
CONTINGENT DESIGNATION:
Applicant's Estate
/s/ Linton Eberhardt 11/10/94
Linton Eberhardt Date
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000910678
<NAME> PINNACLE FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,025,730
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 661,972
<TRADING-ASSETS> 87,148,507
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 131,392,264
<ALLOWANCE> 1,842,152
<TOTAL-ASSETS> 236,497,861
<DEPOSITS> 200,872,156
<SHORT-TERM> 110,000
<LIABILITIES-OTHER> 2,004,378
<LONG-TERM> 0
0
0
<COMMON> 7,680,000
<OTHER-SE> 25,586,291
<TOTAL-LIABILITIES-AND-EQUITY> 236,497,861
<INTEREST-LOAN> 13,254,005
<INTEREST-INVEST> 5,478,153
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 18,732,158
<INTEREST-DEPOSIT> 7,231,630
<INTEREST-EXPENSE> 7,231,630
<INTEREST-INCOME-NET> 11,500,528
<LOAN-LOSSES> 409,300
<SECURITIES-GAINS> 219
<EXPENSE-OTHER> 6,515,645
<INCOME-PRETAX> 6,459,654
<INCOME-PRE-EXTRAORDINARY> 4,623,464
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,623,464
<EPS-PRIMARY> 6.02
<EPS-DILUTED> 6.02
<YIELD-ACTUAL> 8.9
<LOANS-NON> 234,594
<LOANS-PAST> 2,669,721
<LOANS-TROUBLED> 228,375
<LOANS-PROBLEM> 738,959
<ALLOWANCE-OPEN> 1,828,722
<CHARGE-OFFS> 446,493
<RECOVERIES> 50,623
<ALLOWANCE-CLOSE> 1,842,152
<ALLOWANCE-DOMESTIC> 536,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,306,152
</TABLE>
