SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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, 1997.
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: $22,099,834
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,
1998, there were 553,125 shares of Common Stock, $10.00 par value
outstanding held by non-affiliates of the issuer, with an
aggregate value of $35,953,125 (based upon approximate market
value of $65/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, 1998, Common Stock, $10.00 par value - 768,000
shares outstanding.
<PAGE>
PINNACLE FINANCIAL CORPORATION
FORM 10-KSB
INDEX
Part I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission Of Matters To A Vote Of Security Holders
Part II
Item 5. Market For Common Equity And Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
Part III
Item 9. Directors and Executive Officers, Promoters and Control Persons
Item 10. Executive Compensation
Item 11. Security Ownership Of Certain Beneficial Owners And Management
Item 12. Certain Relationships And Related Transactions
Item 13. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE>
PART I.
Item 1. DESCRIPTION OF BUSINESS
FORWARD LOOKING STATEMENTS
Certain statements included or incorporated by reference in
this Form 10-KSB are forward-looking (as such term is defined in
the Securities Exchange Act of 1934, as amended). Such
statements may relate to Pinnacle's operations, performance and
financial condition. These statements are based upon a number of
assumptions and estimates that are inherently subject to
significant uncertainties, many of which are beyond the control
of Pinnacle. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors
that could cause actual results to differ materially include, but
are not limited to, those set forth in this Form 10-KSB.
GENERAL
Pinnacle Financial Corporation (hereinafter "Pinnacle" or
the "Company") was a two bank holding company as of December 31,
1997, headquartered in Elberton, Georgia. At December 31, 1997
full service banking businesses were conducted by its wholly-
owned banking subsidiaries, Pinnacle Bank, N.A. ("Elberton"),
formerly known as First National Bank in Elberton, 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 Pinnacle Bank ("Royston"), formerly known as
Tri-County Bank of Royston, with four offices located in Franklin
County which serve customers in Franklin and Hart Counties
(collectively referred to as the "Banks"). On January 1, 1998
Royston was merged into Elberton with the Resulting Bank being
named Pinnable Bank, N.A. This report reflects the two bank
organizational stucture that existed during 1997.
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, Pinnacle Bank, N.A. and Pinnacle Bank. 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 Elberton pursuant to a reorganization in
which a newly-formed, wholly-owned subsidiary of Pinnacle merged
with Elberton. The holders of Elberton common stock received in
a one-for-one exchange Pinnacle Stock for Elberton 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.
1
<PAGE>
Pinnacle is a registered bank holding company. All of
Pinnacle's activities are conducted by its wholly owned
subsidiaries, Elberton, 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.
As of December 31, 1997, Pinnacle had total assets of
approximately $252.3 million, total deposits of approximately
$212.3 million, net loans of approximately $142.3 million and
shareholders' equity of approximately $37.0 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.
MARKETS. Pinnacle conducts banking activities through
Elberton 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, 1997, the Banks' deposit base, totaling
approximately $212.3 million, consisted of approximately $36.3
million in noninterest bearing demand deposits (17.1% of total
deposits), approximately $46.7 million in interest-bearing demand
deposits (including money market accounts) (22.0% of total
deposits), approximately $16.3 million in savings deposits (7.7%
of total deposits), approximately $83.7 million in time deposits
in amounts less than $100,000 (39.5% of total deposits), and
approximately $29.2 million in time deposits of $100,000 or more
(13.7% 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.
2
<PAGE>
Table 8 on page 29 reflects the gap positions of
Pinnacle's consolidated balance sheet as of December 31, 1997.
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, 1997, the gap analysis reflects a
negative gap at the one-year interval equivalent to 36.3% of
earning assets, as compared to 28.2% at December 31, 1996.
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, 1997, consumer, real estate (including mortgage and
construction loans) and commercial loans represented
approximately 19.4%, 64.5%, and 16.1%, 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.
3
<PAGE>
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.
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 Banks have adopted these federal standards as their 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:
Loan category Loan-to Value Limit (percent)
------------- -----------------------------
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>
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.
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,
4
<PAGE>
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.
YEAR 2000. The "year 2000 issue" arises from the
widespread use of computer programs that rely on two-digit codes
to perform computations or decision-making functions. Many of
these programs may fail due to an inability to properly interpret
date codes beginning January 1, 2000. For example, such programs
may misinterpret "00" as the year 1900 rather than 2000. In
addition, some equipment, being controlled by microprocessor
chips, may not deal appropriately with the year "00". Pinnacle
is evaluating its computer systems to determine which
modifications and expenditures will be necessary to make its
systems compatible with year 2000 requirements. Pinnacle
believes that its systems will be year 2000-compliant upon such
modifications. The Company has designated a committee and project
manager to oversee its Year 2000 project. The guidance outlined
by the FDIC in FIL-50-97, "Year 2000 Project Management Awareness",
was adopted in the Company's Year 2000 Operations Manual. Inventory
listings for all hardware, software, and personal computers have
been completed and mission critical systems identified to be
addressed first. The Company plans to: 1) ensure that
certification is obtained from all vendors and manufacturers
regarding Year 2000 compliance and 2) test each function for
compliance. The contingency plan provides for replacement of
non-compliant products if any mission critical systems are not
made compliant by December 31, 1998. The plan has designated
1999 for testing purposes only. The committee reports to senior
management monthly and to the Board of Directors quarterly on
their progress. Management is also including a Year 2000 credit
exposure review on large borrowers during the annual review
process or at the initial credit review for new borrowers.
5<PAGE>
The Company does not foresee any material expenditures for
the Year 2000 project. However, there can be no assurance that
all necessary modifications will be identified and corrected
or that unforeseen difficulties or costs will not arise. In
addition, there can be no assurance that the systems of other
companies on which Pinnacle depends will be modified on a timely
basis, or that the failure by another company to properly modify
its sytems will not negatively impact the systems or operations
of Pinnacle.
EMPLOYEES. At December 31, 1997, the Banks had 101
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. Elberton competes with two other
depository institutions 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, 1997, Elberton ranked on the basis of
total deposits and assets of $128.2 million and $152.3 million,
respectively, as the larger of the three depository institutions
located in Elbert County and Royston rated as the largest of the
five depository institutions located in Franklin County based
upon deposits and assets of $84.7 million and $100.5 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-
6<PAGE>
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, Elberton 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.
Elberton 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
Elberton'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, was 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. Royston was merged into Elberton effective
January 1, 1998 and the surviving bank is a national bank regulated
by the OCC.
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. The Banks
were merged on January 1, 1998 and will be subject only to the
OCC's dividend restrictions in 1998.
7<PAGE>
Elberton 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
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 Elberton 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 Elberton 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
8<PAGE>
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
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.
9<PAGE>
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 Elberton as of December 31, 1997.
<TABLE>
<CAPTION>
Minimum Capital
Requirement Pinnacle Royston Elberton
- --------------- -------- ------- --------
<S> <C> <C> <C>
Tier 1 Capital to
Risk-based
Assets: 4.00% 24.09%<F1> 23.18% <F1> 24.39% <F1>
Total Capital to
Risk-based
Assets: 8.00% 25.34% <F2> 24.43% <F2> 25.64% <F2>
Leverage Ratio (Tier 1
Capital to Total
Assets): 3.00% 15.00% <F3> 13.92% <F3> 14.73% <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>
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 determines 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
10<PAGE>
differently based on a prohibited factor even where there is no
showing that the treatment was motivated by a prejudice or a
conscious intention to discrimine 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 practice is neutral on its
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 shares 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
became effective on January 1, 1996, at which time evaluation
under streamlined procedures began for institutions with assets
of less than $250 million and 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 March 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.
11<PAGE>
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"). 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 1997, the assessment for the FICO
bond payments were $.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. In 1997, the Banks paid no deposit insurance
premiums and a FICO bond assessment of $24,285. Elberton will
pay no premium for deposit insurance in the first six months of
1998 and a FICO bond assessment of $22,000. The Bill also provided
limited regulatory relief and revised certain out-of-date regulations.
12
<PAGE>
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.
Elberton'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.
Elberton has three branch offices. The downtown office is owned
by it and is located at 32 College Avenue, Elberton, Georgia and
consists of approximately 4,200 square feet of usable office
space. The Bowman office 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 Elberton and is located at 135 East Franklin Street,
Hartwell, Georgia and consists of approximately 4,200 square feet
of usable office space. Management of Elberton 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
Branch, which is leased at 5784 West Avenue, Lavonia, Georgia and
which contains approximately 2,200 square feet of usable office
space. Pinnacle has purchased property in Lavonia and plans to
build a 4,200 square foot building to replace the current space
which is leased within the next year. 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 MATTERSPART II.
STOCK. There is no established public trading market
for the Company's Common Stock. As of March 15, 1998, the
Company had 364 shareholders of record. Pinnacle Stock is not
traded on an established public trading market. Management is aware
13
<PAGE>
of nineteen sales of Pinnacle shares totaling 5,045 shares to
several individuals at prices ranging from $50 to $64 per share
during 1997. Management is also aware of fourteen other transfers
of shares totaling 23,701 shares during 1997. 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.
DIVIDENDS. In 1997 and 1996, the Company declared cash
dividends aggregating $1,497,600 ($1.95 per share) and $1,382,400
($1.80 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.
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.
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, 1997,
13.4% of the investment securities portfolio had maturity dates
within the next year and 71.1% matures from one to five years
after December 31, 1997. During 1997, federal funds sold
14
<PAGE>
averaged $4.7 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
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 $5.3
million. Cash due from banks and federal funds sold, increased
$7.8 million to $15.4 million at December 31, 1997 and Pinnacle
increased the amount of federal funds purchased at December 31,
1997 to $360,000 from $110,000 as of December 31, 1996. 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, 1997, liquidity
ratios were: Pinnacle 43.7%, Elberton 51.5% and Royston 31.9%.
Average net loans increased $11.1 million or 10.7% in
1997 over 1996 primarily as a result of loans originated in the
new branches of each institution. Average net loans for Elberton
were $72.7 million while Royston's average net loans were $62.7
million. As reflected in Table 4 of the statistical information
presented below, fixed rate mortgages increased $4.5 million to
$56.1 million at December 31, 1997 and variable rate mortgages
decreased $5.2 million to $31.2 million at December 31, 1997.
As a result of a decrease in foreclosed properties
during 1997, other real estate owned decreased $144,000 to
$348,000 at December 31, 1997 from $492,000 at December 31, 1996.
Pinnacle continues to maintain a concentration of core
deposits from an established customer base which provides a
stable funding source. Deposits increased $11.4 million to
$212.3 million at December 31, 1997 from $200.9 million at
December 31, 1996, due primarily to normal growth and deposits
obtained by new offices in Hartwell and Lavonia. Demand deposits
increased $3.8 million to $36.3 million at December 31, 1997 and
interest bearing deposits increased $7.6 million to $175.9
million at December 31, 1997. Cash and cash equivalents
increased in 1997 from 1996 levels by $7.8 million as a result of
increases in deposits.
Shareholders' equity increased $3.8 million to $37.0
million at December 31, 1997 from $33.3 million at December 31,
1996, as a result of retained earnings of $3.6 million and a
15
<PAGE>
$219,000 increase that was directly related to the increase of
net unrealized gains under FAS 115. The investment portfolio's
market value increased due to a slight decrease in interest rates
during the year. As all Pinnacle investments are "available for
sale" and thus marked at market, the increase in market value was
recorded in shareholders' equity. For the year ended December 31,
1996, shareholders' equity increased $2.8 million due to
retained earnings of $3.2 million less a reduction in net
unrealized gains of investments held for sale of $434,000.
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 14.4% in 1997.
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 1997 increased $1.0 million or
8.8% as a result of 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 from the previous year. As a
result of an increase in interest bearing liabilities and assets,
interest expense increased $362,000 or 5.1% while interest income
increased $1.4 million or 7.3% in 1997. 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 1997.
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 1997 of $189,000 compared to $446,000 in 1996. The provision
for loan losses decreased $175,000 to $234,000 during 1997
compared to $409,000 during 1996. Pinnacle's allowance for loan
losses represented 1.4% of total loans outstanding at December
31, 1997. Its net charge-offs were $38,000 during 1997 and
$396,000 during 1996. The allowance for loan losses increased
$196,000 to $2.0 million as of December 31, 1997 compared to $1.8
million at December 31, 1996. The current year provision
represents 30.6% of non-performing loans as compared to the 1996
provision representing 14.1% of non-performing loans. The
decreases in charge-offs and allowance for loan losses are due to
a stable economy.
Pinnacle's other income increased by $109,000 to $2.0
million in 1997. This increase was due primarily to an increase
in service charges on deposit accounts of $77,000.
16
<PAGE>
Other operating expenses for Pinnacle in 1997 of $7.1
million increased by $606,000 from $6.5 million in 1996 due
primarily to increases in salaries and employee benefits.
Pinnacle's income tax expense increased $255,000 in
1997 over 1996 due primarily to increased income resulting from
the interest rate spread. The effective income tax rate of 29.2%
in 1997 is an increase of .8% over the 1996 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 $5.1 million and represents returns of 14.5% on
average shareholders' equity and 2.1% on average assets in 1997.
Comparable amounts in 1996 were $4.6 million, 14.7% and 2.0%,
respectively. The increased net income results between 1997 and
1996 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, 1997 for financial assets was $252.7
million compared to a carrying amount of $252.3 million and the
value of financial liabilities at that date was $207.1 million
compared to a carrying amount of $215.3 million. Fair values 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. 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
$764,000 and $739,000 as of December 31, 1997 and December 31,
1996, 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 $267,000
and $536,000 in 1997 and 1996, 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 $.15 per share in 1997 to $1.95
from $1.80 per share in 1996.
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, 1997:
<TABLE>
<CAPTION>
(Rounded to nearest thousand)
<S> <C> <C>
Total Risk Adjusted Assets $150,925
Risk Based Capital Ratios:
TIER 1 CAPITAL
Common stock $ 7,680 5.09%
Surplus 7,280 4.82%
Retained earnings 21,392 14.17%
-------- ------
Total Tier 1 capital 36,352 24.09%
Tier 1 minimum requirement 6,037 4.00%
-------- ------
Excess (shortfall) $ 30,315 20.09%
======== ======
TIER 1&2 CAPITAL
Tier 1 from above 36,352 24.09%
Allowance from loan losses, limited to 1.25%
of risk weighted assets 1,887 1.25%
-------- ------
Total Tier 1&2 capital 38,239 25.34%
Tier 1&2 minimum requirement 12,074 8.00%
-------- ------
Excess (shortfall) $ 26,165 17.34%
======== ======
Leverage Ratio
Tier 1 capital 36,352 15.00%
Minimum requirement 9,691 4.00%
-------- ------
Excess (shortfall) $ 26,661 11.00%
======== ======
Average total assets, net of goodwill $242,284
========
</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>
_____________ 1997 ________________ ______________ 1996_________________
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) 135,338,705 14,536,043 10.74% $124,223,589 $13,254,002 10.67%
Investment securities:
Taxable 70,188,579 4,436,518 6.32% 68,466,361 4,118,413 6.02%
Nontaxable (a) 14,862,542 1,288,067 8.67% 16,963,947 1,506,217 8.88%
Federal funds sold 3,374,104 184,154 5.46% 4,426,437 242,353 5.48%
------------ ----------- ----- ------------ ----------- -----
Total interest-earning assets 223,763,930 20,444,782 9.14% 214,080,334 19,120,985 8.93%
Noninterest earning assets:
Cash and due from bank 7,450,484 6,506,543
Premises & equipment 6,562,675 4,919,660
Other assets 4,507,345 4,512,904
------------ ------------
Total assets $242,284,434 $230,019,441
============ ============
Liabilities and shareholders' equity:
Interest bearing liabilities:
Interest bearing demand deposits $43,971,090 1,148,097 2.61% $46,831,618 1,194,418 2.55%
Savings deposits 16,864,104 515,858 3.06% 16,535,228 505,381 3.06%
Time deposits 109,036,301 5,930,099 5.44% 102,933,382 5,531,831 5.37%
Fed Funds Borrowed 215,501 11,184 5.19% 128,169 6,655 5.19%
------------ ---------- ------ ------------ ---------- -----
Total interest bearing liabilities 170,086,996 7,605,238 4.47% 166,428,397 7,238,285 4.35%
Noninterest bearing liabilities:
Noninterest bearing demand 34,808,902 29,866,520
Other liabilities 2,605,010 2,209,328
------------ ------------
207,500,908 198,504,245
Shareholders' equity 34,783,526 31,515,196
------------ ------------
Total liabilities and shareholders'
equity $242,284,434 $230,019,441
============ ============
Excess of interest-earning assets over
interest bearing liabilities 53,676,934 47,651,937
Ratio of interest-earning assets to
interest-bearing liabilities 131.56% 128.63%
Net interest income $12,839,544 $11,882,700
=========== ===========
Net interest spread 4.67% 4.40%
Net interest yield on interest earning assets 5.74% 5.36%
</TABLE>
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.
(a) Tax exempt income is calculated on a tax equivalent basis.
20
<PAGE>
Table 1 - (continued)
Pinnacle Financial Corporation and Subsidiaries
Average Balance Sheets
<TABLE>
<CAPTION>
______________ 1995 ______________
Interest
Average Income/ Yield/
Balances Expense Rate
-------- --------- ------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (including loan fees) $118,484,232 $12,526,203 10.57%
Investment securities:
Taxable 54,044,584 3,150,180 5.83%
Nontaxable (a) 18,602,428 1,660,818 8.93%
Federal funds sold 4,973,980 303,832 6.11%
------------ ----------- -----
Total interest-earning assets 196,105,224 17,641,303 9.00%
Noninterest earning assets:
Cash and due from banks 6,472,408
Premises & equipment 4,807,824
Other assets 3,811,288
------------
Total assets $211,196,744
============
Liabilities and shareholders' equity:
Interest bearing liabilities:
Interest bearing demand deposits $40,985,284 1,115,132 2.72%
Savings deposits 17,245,968 537,296 3.12%
Time deposits 94,010,031 4,919,053 5.23%
Fed Funds Borrowed 21,726 1,634 6.28%
----------- ---------- ----
Total interest bearing liabilities 152,263,109 6,573,115 4.32%
Noninterest bearing liabilities:
Noninterest bearing demand 28,769,966
Other liabilities 1,964,908
-----------
182,997,983
Shareholders' equity 28,198,761
-----------
Total liabilities and shareholders'
equity $211,196,744
============
Excess of interest-earning assets over
interest bearing liabilities $43,842,115
Ratio of interest-earning assets to
interest-bearing liabilities 128.80%
Net interest income $11,068,188
===========
Net interest spread 4.68%
Net interest yield on interest earning assets 5.64%
</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 1997 over 1996 and 1996 over 1995.
<TABLE>
<CAPTION>
1997 over 1996 1996 over 1995
-------------- --------------
Increase (decrease) due to changes in: Increase (decrease) due to changes in:
-------------------------------------- --------------------------------------
Interest income on:
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Loans (including loan fees) $290,170 $1,410,597 $1,700,767 $ 608,882 $118,920 $727,802
Investment securities:
Taxable 78,457 429,410 507,867 862,854 105,379 968,233
Non-taxable (a) 13,431 5,343 18,774 (132,046) (21,825) (153,871)
Federal funds sold (18,663) 98,511 79,848 10,097 (76,867) (66,770)
-------- ---------- ---------- ---------- -------- ----------
Total interest earning assets $363,395 $1,943,861 $2,307,256 $1,349,787 $125,607 $1,475,394
======== ========== ========== ========== ======== ==========
Interest expense on:
Deposits:
Interest-bearing demand $(43,144) $ 73,181 $ 30,037 $233,213 $ (153,926) $ 79,287
Savings (32,627) 32,468 (159) (11,440) (20,475) (31,915)
Time 260,491 781,235 1,041,726 629,632 (16,854) 612,778
-------- ---------- ---------- ---------- -------- -----------
Total interest-bearing liabilities $ 184,720 $ 886,884 $1,071,604 $ 851,405 $ (191,255) $ 660,150
========= ========== ========== ========== ========== ===========
</TABLE>
Rate/volume variances were allocated on a weighted average basis
between volume and rate.
(a) Tax exempt income is calculated on a tax equivalent basis.
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, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
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 $66,422,877 66,834,518 $70,410,341 $70,408,162 $58,667,831 $58,973,845
State, county and municipal 15,086,787 15,727,218 15,882,925 16,605,945 17,695,262 18,767,629
Other investments 134,400 134,400 134,400 134,400 134,400 134,400
----------- ----------- ----------- ----------- ----------- -----------
Totals $81,644,064 $82,696,136 $86,427,666 $87,148,507 $76,497,493 $77,875,874
=========== =========== =========== =========== =========== ===========
</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, 1997 U.S. Gov't Agencies and Municipal Investments Average Yields
- -------------------------------- ------------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Within 1 year $8,792,545 $2,245,403 0 6.88%
After 1 through 5 years 51,826,479 6,930,957 0 6.61%
After 5 through 10 years 6,215,494 4,849,163 0 6.81%
After 10 years 0 1,701,695 $134,400 7.93%
----------- ----------- -------- ----
Totals $66,834,518 $15,727,218 $134,400 6.70%
=========== =========== ======== ====
</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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 23,267,802 18,406,805 $ 17,273,462 $ 16,748,030 $ 16,461,448
Real estate - construction 5,780,973 2,975,741 1,495,269 864,690 2,588,286
Real estate - mortgage 87,272,975 88,013,785 80,136,557 80,541,344 76,307,929
Installment loans to individuals 28,004,470 23,838,085 22,560,447 20,202,397 20,212,934
---------- ---------- ---------- ---------- ----------
Totals $144,326,220 $133,234,416 $121,465,735 $118,356,461 $115,570,597
=========== =========== =========== =========== ===========
</TABLE>
As of December 31, 1997, 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 $12,310,668 $5,407,907 $17,718,575
1 to 5 years 9,044,894 373,066 9,417,960
After 5 years 1,912,240 0 1,912,240
----------- ---------- -----------
Totals $23,267,802 $5,780,973 $29,048,775
=========== ========== ===========
</TABLE>
As of December 31, 1997, 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 $9,044,894 -- $9,044,894
After 5 years maturity 1,912,240 -- 1,912,240
----------- ------- -----------
10,957,134 $10,957,134
----------- -----------
Real estate-construction:
1 to 5 years maturity 373,066 -- 373,066
After 5 years maturity -- -- --
----------- ------- -----------
$11,330,200 -- $11,330,200
=========== ===========
</TABLE>
Pinnacle's commercial, financial and agricultural loans and
installment loans to individuals include secured and unsecured
loans as detailed below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Commercial, financial and agricultural
Secured $19,626,449 $13,858,739 $14,092,936
Unsecured 3,641,353 4,548,066 3,180,526
----------- ----------- -----------
$23,267,802 $18,406,805 $17,273,462
=========== =========== ===========
Installment loans to individuals
Secured 25,965,091 $21,236,546 $17,718,394
Unsecured 2,039,379 2,601,539 4,842,053
----------- ----------- -----------
$28,004,470 $23,838,085 $22,560,447
=========== =========== ===========
</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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Real estate - mortgage:
Fixed $56,110,206 51,658,160 $43,290,288
Variable 31,162,769 36,355,625 36,846,269
----------- ----------- -----------
$87,272,975 $88,013,785 $80,136,557
=========== =========== ===========
Consumer loans:
Fixed $26,903,297 $23,270,977 $21,483,265
Variable 1,101,173 567,108 1,077,182
----------- ----------- -----------
$28,004,470 $23,838,085 $22,560,447
=========== =========== ===========
</TABLE>
The following summarizes past due, non-accrual and restructured loans
as of December 31, 1997, 1996, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days or more past due $ 934,134 $2,669,721 $339,655 $476,340 $886,002
Non-accrual loans 102,185 234,594 282,434 296,097 283,374
Restructured loans 251,356 228,375 77,663 216,953 228,000
</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
totaling $1,948,342 which paid out in May, 1997 as expected by
management.
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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,842,152 $1,828,722 $1,774,567 $1,769,269 $1,455,900
Charge-offs:
Commercial, financial and agricultural 109,846 309,746 191,904 115,175 62,277
Real estate-construction -- -- -- -- --
Real estate-mortgage -- -- 83,115 62,339 70,092
Installment loans to individuals 79,377 136,747 62,297 64,187 90,313
---------- ---------- --------- ---------- ----------
189,223 446,493 337,316 241,701 222,682
---------- ---------- --------- ---------- ----------
Recoveries:
Commercial, financial and agricultural 80,388 17,846 34,682 7,224 11,611
Real estate-construction -- -- -- -- --
Real estate-mortgage 52,801 10,780 2,390 1,564 3,315
Installment loans to individuals 17,897 21,997 24,399 18,211 18,574
---------- ---------- --------- ---------- ----------
151,086 50,623 61,471 26,999 33,500
---------- ---------- --------- ---------- ----------
Net charge-offs 38,137 395,870 275,845 214,702 189,182
---------- ---------- --------- ---------- ----------
Additions charged to operations 234,000 409,300 330,000 220,000 502,551
---------- ---------- --------- ---------- ----------
Balance at end of year $2,038,015 $1,842,152 $1,828,722 $1,774,567 $1,769,269
========== ========== ========== ========== ==========
Ratio of net charge-offs during the period to
average loans outstanding during the period .03% .32% .25% .19% .17%
=== === === === ===
</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)
<TABLE>
<CAPTION>
Specific risk elements associated with each lending category
are as follows:
<S> <C>
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>
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Loss
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and agricultural $ 483,911 $363,000 $246,000 $303,000 $312,385
Real Estate-construction 0 0 0 0 0
Real Estate-mortgage $ 241,777 155,000 141,500 71,443 121,510
Installment loans to individuals 92,706 18,000 17,000 17,000 24,000
Lease financing 0 0 0 0 0
Foreign 0 0 0 0 0
Unallocated 1,219,621 1,306,152 1,424,222 1,383,124 1,311,374
--------- ---------- ---------- ---------- ----------
$2,038,015 $1,842,152 $1,828,722 $1,774,567 $1,769,269
========= ========== ========== ========== ==========
</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>
1997 1996 1995
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Demand deposits:
Noninterest bearing $ 34,808,902 -- $29,866,520 -- $ 28,769,966 --
Interest-bearing 43,971,090 2.61% 46,831,618 2.55% 40,985,284 2.72%
Savings deposits 16,864,104 3.06% 16,535,228 3.06% 17,245,968 3.12%
Time deposits 109,036,301 5.44% 102,933,382 5.37% 94,010,131 5.23%
------------ ---- ------------ ---- ------------ ----
Totals $204,680,397 $196,166,748 $181,011,349
============ ============ ===========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Time Certificates
of Deposit
-----------------
<S> <C>
Within 3 months $8,402,247
After 3 through 6 months 3,154,112
After 6 through 12 months 11,075,429
After 12 months 6,541,401
----------
Total $29,173,189
===========
</TABLE>
Table 7
Selected Ratios
The following table sets out certain ratios of Pinnacle for
the years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income to:
Average shareholders' equity 14.54% 14.67% 15.19%
Average asset 2.08% 2.01% 2.03%
Dividends to net income 29.60% 29.90% 30.48%
Average equity to average assets 14.35% 13.70% 13.35%
</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, 1997 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 $ 4,657,170 $ 0 $ 0 $ 0 $ 4,657,170
Taxable investment securities 1,749,770 7,042,775 52,380,527 6,349,894 67,522,966
Nontaxable investment securities 923,757 1,321,646 6,376,909 6,550,858 15,173,170
Loans 50,734,483 23,796,464 67,384,650 2,410,623 144,326,220
----------- ----------- ------------ ----------- ------------
Total earning assets $58,065,180 $32,160,885 $126,142,086 $15,311,375 $231,679,526
Interest bearing liabilities:
- -----------------------------
Time deposits $ 27,604,739 $ 54,943,724 $ 30,346,867 $ 0 $112,895,330
Other interest bearing deposits 63,051,651 0 0 2,030 63,053,681
Fed Funds Purchased 360,000 0 0 0 360,000
----------- ----------- ------------ ----------- ------------
Total interest bearing liabilities $ 91,016,390 $ 54,943,724 $ 30,346,867 $ 2,030 $176,309,011
Gap summary
- -----------
Periodic net earning assets ($32,951,210) ($22,782,839) $ 95,795,219 $15,309,345 $ 55,370,515
Cumulative net earnings assets ($32,951,210) ($55,734,049) $ 40,061,170 $55,370,515 $ 55,370,515
Cumulative ratio of earning assets
to interest bearing liabilities 63.80% 61.82% 122.72% 131.41% 131.41%
</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
Index of Financial Statements
Independent Auditor's Report
Consolidated Balance Sheet December 31, 1997
Consolidated Statements of Income
for the Years ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows
for the Years ended December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997 and 1996
Notes to Consolidated Financial Statement
30<PAGE>
January 28, 1998
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,
1997 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31,
1997 and 1996. 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, 1997
and the consolidated results of their operations and their cash flows for
the years ended December 31, 1997 and 1996 in conformity with generally
accepted accounting principles.
/s/ Whittemore & Smith, LLP
31<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and due from banks $ 10,789,675
Federal funds sold 4,657,170
Securities available for sale 82,696,136
Loans, net of allowance for credit losses of $2,038,015 142,288,205
Premises and equipment 7,652,254
Accrued interest receivable 2,616,476
Foreclosed real estate 348,213
Other assets 1,292,020
-----------
TOTAL ASSETS $252,340,149
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
- ------------
Demand deposits $ 36,338,646
Savings and NOW deposits 63,051,651
Other time deposits 112,897,360
-----------
Total deposits 212,287,657
Federal funds purchased 360,000
Accrued interest and other liabilities 2,646,197
-----------
Total Liabilities 215,293,854
-----------
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 21,391,928
Net unrealized appreciation on securities available
for sale, net of deferred tax liability of $358,168 694,367
----------
Total shareholders' equity 37,046,295
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $252,340,149
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
32<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
INTEREST INCOME
- ---------------
Loans $ 14,536,043 $ 13,254,005
Securities available for sale 5,397,762 5,242,455
Federal funds sold 172,970 235,698
------------ -------------
Total interest income 20,106,775 18,732,158
------------ -------------
INTEREST EXPENSE
- ----------------
Deposits 7,594,054 7,231,630
------------ -------------
Total interest expense 7,594,054 7,231,630
------------ -------------
NET INTEREST INCOME 12,512,721 11,500,528
Provision for credit losses 234,000 409,300
------------ -------------
Net interest income after provision
for credit losses 12,278,721 11,091,228
------------ -------------
OTHER INCOME
- ------------
Service charges on deposit accounts 1,361,733 1,284,745
Other service charges and fees 422,873 389,134
Other income 208,453 210,192
------------ -------------
Total other income 1,993,059 1,884,071
------------ -------------
OTHER EXPENSES
- --------------
Salaries and employee benefits 4,199,693 3,877,382
Occupancy expense 1,038,229 944,762
Net realized losses on sales of securities
available for sale 92 219
Other expense 1,883,220 1,693,282
------------ -------------
Total other expenses 7,121,234 6,515,645
------------ -------------
Income before income taxes 7,150,546 6,459,654
Income tax expense 2,091,554 1,836,190
------------ -------------
NET INCOME $ 5,058,992 $ 4,623,464
============ =============
Net income per share of common stock $6.59 $6.02
===== =====
Average shares outstanding 768,000 768,000
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
33<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 5,058,992 $ 4,623,464
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 475,073 410,422
Gain on sale of premises and equipment ( 2,270) -
Provision for credit losses 234,000 409,300
Deferred income taxes ( 75,803) ( 2,053)
Net realized losses on securities available
for sale ( 92) ( 219)
(Increase) decrease in accrued interest
receivable and other assets 529,823 ( 485,541)
Increase (decrease) in accrued expenses and
other liabilities 396,783 ( 18,507)
--------- ----------
Total adjustments 1,557,514 313,402
--------- ----------
Net cash provided by operating activities 6,616,506 4,936,866
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Net (increase) decrease in federal funds sold (3,995,198) 7,400,907
Purchase of securities available for sale (26,288,015) ( 44,276,293)
Proceeds from sales of securities available
for sale 21,710,909 15,502,634
Proceeds from maturities of securities
available for sale 9,248,182 19,067,269
Net increase in loans (11,129,941) ( 12,164,551)
Proceeds from sale of premises and equipment 2,730 -
Purchases of premises and equipment ( 2,569,129) ( 1,202,107)
------------ ------------
Net cash used by investing activities (13,020,462) ( 15,672,141)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net increase in non-interest bearing demand,
savings and NOW deposit accounts 5,978,959 1,811,282
Net increase in time deposits 5,436,542 11,142,747
Net increase in federal funds purchased 250,000 110,000
Dividends paid (1,497,600) (1,382,400)
----------- ----------
Net cash provided by financing activities 10,167,901 11,681,629
----------- ----------
NET INCREASE IN CASH AND DUE FROM BANKS 3,763,945 946,354
Cash and due from banks at January 1 7,025,730 6,079,376
----------- ----------
Cash and due from banks at December 31 $10,789,675 $ 7,025,730
=========== ===========
Interest paid $ 7,334,907 $ 7,110,658
=========== ===========
Income taxes paid $ 2,015,243 $ 1,925,258
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
34
<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<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, 1995 $7,680,000 $ 7,280,000 $ 14,589,472 $909,731 $30,459,203
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
Net income for 1997 5,058,992 5,058,992
Cash dividends paid - $1.95 per share (1,497,600) ( 1,497,600)
Net change in unrealized appreciation/
(depreciation) on securities available
for sale, net of taxes 218,612 218,612
----------- ------------ ----------- ----------- -----------
Balance, December 31, 1997 $ 7,680,000 $ 7,280,000 $ 21,391,928 $ 694,367 $37,046,295
=========== =========== ============ =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
35<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
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,
Pinnacle Bank, N.A. (formerly First National Bank in Elberton)
and Pinnacle Bank (formerly 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 January 1, 1998.
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.
36
<PAGE>
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.
LOANS AND ALLOWANCE FOR CREDIT LOSSES. Loans are stated at
the amount of unpaid principal reduced by the allowance for
credit losses (See Note 3).
The allowance for credit losses is maintained at a level
which, in management's judgement, is adequate to absorb credit
losses inherent in the loan portfolio. The amount of the
allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, economic conditions, the
estimated value of any underlying collateral, and other risks
inherent in the portfolio. Allowances for impaired loans are
generally determined based on collateral values or the present
value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of
uncertainties inherent in the estimation process, it is
reasonably possible that a material change could occur in the
allowance for credit losses in the near term. However, the
amount of change that is reasonably possible cannot be estimated.
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 (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. Interest income is subsequently recognized only to the
extent cash payments are received.
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).
37<PAGE>
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 (See
Note 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.
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.
38<PAGE>
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).
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, 1997:
U.S. Treasury $15,221,078 $ 200,390 $ -- $15,421,468
U.S. Government agencies 47,038,693 262,557 ( 66,140) 47,235,110
State and Municipals 15,086,787 649,556 ( 9,125) 15,727,218
Mortgage-backed securities 4,163,106 17,878 ( 3,044) 4,177,940
Other securities 134,400 -- -- 134,400
----------- ---------- ----------- -----------
$81,644,064 $1,130,381 ($ 78,309) $82,696,136
=========== ========== =========== ===========
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
=========== ========== =========== ===========
</TABLE>
39<PAGE>
The scheduled maturities of securities at December 31, 1997
were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Basis Market Value
---------- ------------
<S> <C> <C>
Securities available for sale:
Due in one year or less $11,007,687 $11,037,948
Due after one year through five years 58,043,788 58,757,436
Due after five years through ten years 10,850,894 11,064,657
Due after ten years 1,741,695 1,836,095
----------- -----------
$81,644,064 $82,696,136
=========== ===========
</TABLE>
Nontaxable and taxable interest income on securities available
for sale were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Nontaxable $ 922,410 $1,093,613
Taxable 4,475,352 4,148,842
---------- ----------
$5,397,762 $5,242,455
========== ==========
</TABLE>
Gross realized gains and gross realized losses on sales of securities
available for sale were:
1997 1996
---- ----
Gross realized gains:
U.S. Government and agency securities $12,519 $ 4,425
State and municipal securities 5,900 2,322
------- -------
$18,419 $ 6,747
======= =======
Gross realized losses:
U.S. Government and agency securities $18,185 $ 6,479
State and municipal securities 326 487
------- -------
$18,511 $ 6,966
======= =======
Investment securities, with a carrying value of approximately
$22,002,907 at December 31, 1997 and $21,888,334 at December 31, 1996,
were pledged to secure public deposits. The market value for such
pledged securities was approximately $22,242,300 and $22,147,940 at
December 31, 1997 and 1996, respectively.
40
<PAGE>
NOTE 3 - LOANS
The components of loans in the consolidated balance sheets were as
follows:
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
---- ----
<S> <C> <C>
Commercial $23,267,802 $18,406,805
Real estate construction 5,780,973 2,975,741
Commercial real estate 45,904,077 47,090,661
Residential real estate 41,368,898 40,923,124
Consumer 28,004,470 23,838,085
------------ -----------
Total loans 144,326,220 133,234,416
Allowance for credit losses 2,038,015 1,842,152
------------ -----------
Net loans $142,288,205 $131,392,264
============ ============
</TABLE>
The accrual of interest has been discontinued on loans amounting to
$102,185 at December 31, 1997 and $234,594 at December 31, 1996. The
effect on interest income was $10,034 and $23,891 for 1997 and 1996,
respectively.
NOTE 4 - ALLOWANCE FOR CREDIT LOSSES
An analysis of the change in the allowance for credit losses
follows:
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
---- ----
<S> <C> <C>
Balance at January 1 $ 1,842,152 $ 1,828,722
----------- -----------
Credits charged off ( 189,223) ( 446,493)
Recoveries 151,086 50,623
----------- -----------
Net credits charged off ( 38,137) ( 395,870)
Provision for credit losses 234,000 409,300
----------- -----------
Balance at December 31 $ 2,038,015 $ 1,842,152
=========== ===========
</TABLE>
41<PAGE>
Pinnacle Bank, N.A. and Pinnacle Bank 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 $764,292 an
$738,959 in 1997 and 1996, respectively has been recognized in
conformity with FAS 114, Accounting by Creditors for Impairment
of a Loan as amended by FAS 118. The total allowance for credit
losses related to those loans was $267,000 and $536,000 in 1997
and 1996, respectively. For impairment recognized in conformity
with FAS 114 as amended by FAS 118, 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, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
---- ----
<S> <C> <C>
Land $ 1,270,252 $ 843,174
Land improvements 340,666 312,662
Buildings 4,806,513 3,073,276
Building improvements 206,214 355,596
Furniture & fixtures 4,372,740 4,396,292
Building under construction -- 640,841
----------- -----------
Total cost 10,996,385 9,621,841
Accumulated depreciation ( 3,344,131) ( 4,063,182)
----------- -----------
Net book value $ 7,652,254 $ 5,558,659
=========== ===========
</TABLE>
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 1997 and 1996 was $475,073 and $410,422,
respectively.
Pinnacle Bank, N.A. completed construction of two branch
facilities during 1997. Pinnacle Bank purchased land in Lavonia
for a new branch location and plans to complete construction in
1998. The company has also entered into contracts to purchase
various communication and computer equipment totaling
approximately $163,700.
42
<PAGE>
NOTE 6 - OTHER ASSETS AND OTHER LIABILITIES
The major components of other assets and other liabilities
are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OTHER ASSETS:
Deferred income taxes $ 17,391 $ 54,671
Cash surrender value of life insurance 1,017,132 968,176
Prepaid income tax 17,610 115,530
Other 239,887 216,028
---------- ---------
$1,292,020 $1,354,405
========== ==========
Accrued interest and other liabilities:
Accrued interest payable $1,780,732 $1,521,585
Compensation and retirement deferral 445,111 539,633
Other 420,354 188,196
---------- ----------
$2,646,197 $2,249,414
========== ==========
</TABLE>
NOTE 7 - DEPOSITS
Deposit account balances by maturity at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Over
0-3 Months 4-12 Months 1-5 Years 5 Years Total
---------- ----------- --------- -------- -----
<S> <C> <C> <C> <C> <C>
Demand deposits, savings
and NOW deposits $ 99,390,297 $ -- $ -- $2,030 $99,390,297
Time deposits under $100,000 19,202,492 40,714,183 23,805,466 -- 83,724,171
Time deposits over $100,000 8,402,247 14,229,541 6,541,401 -- 29,173,189
------------ ----------- ----------- ------ ------------
$126,995,036 $54,943,724 $30,346,867 $2,030 $212,287,657
</TABLE>
The amount of demand deposits reclassified as loans were
$119,161 and $305,839 at December 31, 1997 and 1996, respectively.
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 during 1997. Interest
expense in the amount of $11,184 was incurred on these amounts
which was netted with interest income on federal funds sold.
43
<PAGE>
NOTE 9 - EMPLOYEE BENEFITS AND EMPLOYEE STOCK OWNERSHIP PLAN
The company maintains a defined contribution 401(k) profit
sharing plan covering substantially all full-time employees.
Employee contributions to the plan are based on salary levels and
are discretionary, but the maximum employer matching contribution
may not exceed 6% of gross salaries in any year. The plan was
amended prior to the end of the year to provide an additional
profit sharing contribution allocated to employees based on four
employee classes. Employer contribution expense included in
salaries and employee benefits for the plan was $220,183 in 1997
and $58,517 in 1996.
An Employee Stock Ownership Plan (ESOP) was adopted by
Pinnacle Bank, N.A. in 1992 and Pinnacle Bank 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, 1997, the ESOP had purchased no qualified employer
securities. Contribution expense included in salaries and
employee benefits for the ESOPs were $-0- in 1997 and $311,479 in
1996.
NOTE 10 - INCOME TAXES
The consolidated provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------
1997 1996
---- ----
<S> <C> <C>
Current provision - federal $2,163,429 $1,838,243
Current provision - state 3,928 --
Deferred portion ( 75,803) ( 2,053)
----------- ----------
$2,091,554 $1,836,190
=========== ==========
</TABLE>
44<PAGE>
The provision for federal income taxes is less than that
computed by applying the federal statutory rate of 34% in 1997
and 1996, as indicated in the following analysis:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory rates 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income ( 5.1%) ( 6.3%)
Interest and other nondeductible expenses 2.0% 1.0%
Deferred portion ( 1.1%) --
Other, net ( .6%) ( .3%)
----- -----
29.2% 28.4%
===== =====
</TABLE>
The components of the deferred income tax asset
(liability) included in other assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax liability - federal ($ 358,168) ($ 245,086)
Deferred tax asset - federal 375,559 299,757
----------- ----------
Net deferred tax asset $ 17,391 $ 54,671
=========== ==========
</TABLE>
The tax effects of each type of significant item that gave rise
to deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996
---- ----
<S> <C> <C>
Tax depreciation in excess of book
depreciation ($318,078) ($317,242)
Excess of book provision for loan
losses over deduction for federal
income tax purposes 537,713 471,120
Accretion of discount on state and
municipal investment securities ( 18,725) ( 20,511)
Non-deductible deferred directors'
fees and interest 92,388 75,770
Other real estate owned cost
capitalization for tax purposes 59,441 47,414
Non-deductible retirement benefit 17,197 17,197
Non-accrual loan interest for tax
purposes 5,159 26,009
Unrealized gain/losses on securities ( 357,704) (245,086)
--------- --------
Total deferred tax asset $ 17,391 $ 54,671
========= ========
</TABLE>
45<PAGE>
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 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Beginning balance $4,143,081 $1,839,982
New loans 2,210,340 6,609,539
Repayments (2,866,799) (4,306,440)
---------- ----------
Ending balance $3,486,622 $4,143,081
========== ==========
</TABLE>
The company had deposits of approximately $4,899,077 for
related parties at December 31, 1997.
NOTE 12 - EXECUTIVE RETIREMENT BENEFITS
As of December 1997, 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.
46
<PAGE>
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, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commitments to extend credit $ 500,000 $ 1,800,000
Credit card arrangements 2,052,154 1,853,136
Undisbursed lines of credit 11,263,640 9,485,131
Standby letters of credit 1,146,391 1,651,200
----------- -----------
$14,962,185 $14,789,467
=========== ===========
</TABLE>
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The company
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by
the company upon extension of credit is based on management's
credit evaluation of the counterparty. Collateral held varies
but may include accounts receivable, inventory, property, plant,
and equipment, and income-producing commercial properties.
47<PAGE>
Standby letters of credit written are conditional
commitments issued by the company to guarantee the performance of
a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements.
In accordance with resolutions adopted by the Board of
Directors, the company does not have derivative financial
instruments, therefore, FAS 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments"
does not have an effect on the company.
The estimated fair values of the company's financial
instruments were as follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 10,790 $ 10,790 $ 7,026 $ 7,026
Federal funds sold 4,657 4,657 662 662
Securities available for sale 82,696 82,696 87,148 87,105
Loans receivable, net 142,289 142,603 131,392 131,032
Accrued interest receivable &
other assets 11,908 11,908 10,270 10,270
Financial liabilities:
Deposits $212,288 $204,049 $200,872 $193,076
Federal funds purchased 360 360 110 110
Accrued interest payable &
other liabilities 2,646 2,646 2,249 2,249
Off-balance-sheet instruments:
Commitments, commercial lines
of credit, and standby
letters of credit $ 63 $ 4
</TABLE>
NOTE 15 - PROPOSED MERGER
In December, 1996, the bank holding company and subsidiaries
announced their intent to merge the subsidiaries. The proposed
merger took effect on January 1, 1998.
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 $7,723,000 can be declared by the bank subsidiaries
without prior regulatory approval. The primary restrictions are
as follows:
Pinnacle Bank, N.A. is subject to the dividend restrictions
set forth by the Comptroller of the Currency (OCC). Under such
restrictions, Pinnacle Bank, N.A. 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.
48<PAGE>
Pinnacle Bank, as a state-chartered bank, is subject to the
dividend restrictions of the Georgia State Department of Banking
and Finance. Pinnacle Bank 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.
The two subsidiaries merged on January 1, 1998 and will be
subject only to the dividend restrictions set forth by the
Comptroller of the Currency in 1998.
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, 1997, the banks are required
to have a minimum 4.00% Tier 1 ratio, a minimum 8.00% Tier 2
total capital ratio, and a minimum 4.00% core/leverage capital
ratio. The actual ratios of the consolidated company at that
date were 24.09%, 25.34%, and 15.00%, respectively.
At December 31, 1997, Pinnacle Bank, N.A. was required to
maintain a minimum deposit of $25,000 with the Federal Reserve
Bank of Atlanta for clearings.
NOTE 18 - YEAR 2000 ISSUES
The Company has designated a committee and project manager
to oversee its Year 2000 project. The guidance outlined by the
FDIC in FIL-50-97, "Year 2000 Project Management Awareness", was
adopted in the company's Year 2000 Operations Manual. Inventory
listings for all hardware, software, and personal computers have
been completed and mission critical systems identified to be
addressed first. The company plans to: 1) ensure that
certification is obtained from all vendors and manufacturers
regarding Year 2000 compliance and 2) test each function for
compliance. The contingency plan provides for replacement of
non-compliant products if any mission critical systems are not
made compliant by December 31, 1998. The plan has designated
1999 for testing purposes only. The committee reports to senior
management monthly and to the Board of Directors quarterly on
their progress. Management is also including a Year 2000 credit
exposure review on large borrowers during the annual review
process or at the initial credit review for new borrowers.
The Company does not foresee any material expenditures for
the Year 2000 project.
49
<PAGE>
NOTE 19 - PINNACLE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Balance Sheet
December 31, 1997
-----------------
<S> <C>
Assets
- ------
Cash $ 43,255
Securities available for sale 306,900
Investment in subsidiaries 36,720,288
Furniture and fixtures, net of accumulated
amortization of $2,246 14,604
Accrued interest receivable 6,104
-----------
$37,091,151
===========
Liabilities and Shareholders' Equity
- ------------------------------------
Due to subsidiaries $ 3,552
Deferred tax liability 3,078
Income taxes payable 38,226
Common stock 7,680,000
Capital surplus 7,280,000
Retained earnings 21,391,928
Unrealized appreciation on securities, net of tax 694,367
-----------
$37,091,151
===========
</TABLE>
<TABLE>
<CAPTION>
Statements of Income
Years ended December 31, 1997 and 1996
--------------------------------------
1997 1996
---- ----
<S> <C> <C>
Income:
Dividends from subsidiaries $1,947,600 $1,450,480
Interest income - securities available for sale 6,235 --
---------- ----------
1,953,835 1,450,480
Expenses:
Other expenses 189,661 109,642
---------- ----------
Income before income taxes and equity in
undistributed net income of subsidiaries 1,953,835 1,340,838
Income tax benefit ( 26,258) ( 37,278)
---------- -----------
Net income before equity in undistributed
net income of subsidiaries 1,790,432 1,378,116
Equity in undistributed net income of subsidiaries 3,268,560 3,245,348
---------- -----------
Net income $5,058,992 $4,623,464
========== ===========
</TABLE>
50<PAGE>
NOTE 19 - PINNACLE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Statements of Cash Flows
Years ended December 31, 1997 and 1996
--------------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $5,058,992 $4,623,464
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,167 432
Deferred income taxes 464 --
Equity in undistributed net income of
subsidiaries ( 3,268,560) ( 3,245,348)
Increase in accrued interest receivable ( 6,104) --
Decrease in prepaid expenses -- 16,913
Increase in due to subsidiaries 330 3,222
Increase in income taxes payable 38,226 --
----------- -----------
Net cash provided by operating activities 1,824,515 1,398,683
----------- -----------
Cash flows from investing activities:
Purchase of securities available for sale ( 299,211) --
Purchases of furniture and fixtures ( 14,691) --
----------- -----------
Net cash used by investing activities ( 313,902) --
----------- -----------
Cash flows from financing activities:
Dividends paid ( 1,497,600) ( 1,382,400)
----------- -----------
Net cash used by financing activities ( 1,497,600) ( 1,382,400)
----------- -----------
Net increase in cash and cash equivalents 13,013 16,283
Cash and cash equivalents at January 1 30,242 13,959
----------- -----------
Cash and cash equivalents at December 31 $ 43,255 $ 30,242
=========== ===========
</TABLE>
51<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE8.
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, 1998 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, 1998.
<TABLE>
<CAPTION>
Number of Shares Owned
Beneficially
Name Age Position with Pinnacle (Percent of Class)
---- --- ---------------------- -------------------
<S> <C> <C> <C>
Maurice Bond 63 Director 996*
Charles Bradshaw 74 Director 1,600*
H. Thomas Brown 46 Director 100*
Linton W. Eberhardt 58 President and Director 600 <F1>
Robert H. Hardy 51 Director 224*
L. Jackson McConnell 60 Chairman, Chief Executive 201,123 (26.2%) <F2>
Officer and Director
James E. Purcell 57 Executive Vice President 3,400*
and Director
C. Lewis Shurbutt 68 Director 5,000*
Steven H. Williams 44 Director 1,832*
214,875 (28.0%)
All directors and executive
officers as a group (9 persons)
_________________
*Less than one percent.
<FN>
<F1>Does not include 193,863 shares held by the JAM Family
Partnership II, L.P. pursuant to which Mr. Eberhardt's wife,
Alice Eberhardt, has sole voting and investment power and 300
shares held directly by Mrs. Eberhardt. Mr. Eberhardt
disclaims beneficial ownership with respect to the shares to which
Mrs. Eberhardt has voting power.
<F2>Includes 187,950 shares held by the JAM Family Partnership I,
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 Elberton 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. 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.
Mr. Hardy is part owner of retail clothing and shoe
stores in Elberton. He has been a director of Elberton since
1991 and a director of Pinnacle since March, 1997.
Mr. McConnell has been Chairman and a director of
Pinnacle since 1983 and Chairman and CEO of Elberton from 1990 to
present. He was also President of Pinnacle from 1983 through
March 8, 1995. He was Chairman, President and CEO of Elberton
from 1974 to 1990 and has been a director of Elberton and Royston
since 1963.
Mr. Purcell has been President of Elberton since 1990.
Prior to that time he was Executive Vice President of Elberton.
He has been a Director of Elberton since 1977, a director of
Pinnacle since 1983 and Vice President of Pinnacle since
September 1983.
Mr. Shurbutt was a Vice President of Elberton until his
retirement in 1995. Mr. Shurbutt has been a director of Elberton
since 1983 and a director of Pinnacle since March 21, 1996.
Mr. Williams is owner of a heating and air conditioning
wholesale business. He has been a director of Royston and Pinnacle
since March 1997.
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
51
<PAGE>
and long-term compensation paid to the chief executive officer
and each executive officer of Elberton and Royston whose salary
and bonus exceeded $100,000 during the 1997 fiscal year from
Elberton and Royston for fiscal years ending December 31, 1997,
1996, and 1995 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
---------------------------------------------------------------------------------
Name and Principal All Other
Position Year Salary ($)<F> Compensation
------------------ ---- ------------- ------------
<S> <C> <C> <C>
L. Jackson McConnell 1997 $192,848<F2> $28,667<F3>
(Chairman and Chief Executive 1996 $157,370<F2> $21,000<F4>
Officer) of Elberton and 1995 $155,117<F2> $21,446<F5>
Pinnacle
James E. Purcell 1997 $149,657 $25,996<F6>
President Elberton; Vice 1996 $139,507 $22,500<F7>
President Pinnacle 1995 $133,266 $20,054<F8>
Linton W. Eberhardt 1997 $129,874 $23,611<F9>
President Royston 1996 $102,325 $13,232<F10>
President Pinnacle 1995 $ 96,558 $10,426<F11>
<FN>
<F1> Includes directors' fees.
<F2> Includes salary and directors fees Mr. McConnell received in 1995,
1996 and 1997 as an officer and director of Royston.
<F3> Includes $28,000 and $667 contributed by Pinnacle to Mr. McConnell's
account in Pinnacle's profit sharing plan and 401-K Plan, respectively.
<F4> Includes $16,770 and $4,230 contributed by Pinnacle to Mr.
McConnell's account in Pinnacle's ESOP and 401-K Plan, respectively.
<F5> Includes $17,237 and $4,209 contributed by Pinnacle to Mr.
McConnell's account in Pinnacle's ESOP and 401-K Plan, respectively.
<F6> Includes $23,994 and $2,002 contributed by Pinnacle to Mr. Purcell's
account in Pinnacle's profit sharing and 401-K Plan, respectively.
<F7> Includes $18,750 and $3,750 contributed by Pinnacle to Mr. Purcell's
account in Pinnacle's ESOP and 401-K Plan, respectively.
<F8> Includes $16,503 and $3,551 contributed by Pinnacle to Mr. Purcell's
account in Pinnacle's ESOP and 401-K Plan, respectively.
<F9> Includes $21,408 and $2,203 contributed by Pinnacle to Mr. Eberhardt's
account in Pinnacle's profit sharing plan and 401-K Plan, respectively.
<F10> Includes $10,308 and $2,924 contributed by Pinnacle to Mr.
Eberhardt's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F11> Includes $7,831 and $2,695 contributed by Pinnacle to Mr.
Eberhardt's account in Pinnacle's ESOP and 401-K Plan,
respectively.
52<PAGE>
Director's Compensation
- -----------------------
Directors of Pinnacle currently do not receive compensation for
each meeting of the Board of Directors of Pinnacle as they will receive
a fee of $750 per month for service as a director of the merged bank,
Pinnacle Bank, N.A. During 1997, Directors of Pinnacle received $250
for each meeting of the Board of Directors of Pinnacle. During the
first three months of 1997, directors of Elberton received a fee of $750
for service as a director. The directors of Royston received $525 per
monthly meeting during 1997.
Salary Continuation Agreement
- -----------------------------
L. Jackson McConnell, Chairman and Chief Executive Officer
of Pinnacle and Elberton and Vice Chairman of Royston, James E.
Purcell, Vice President and a Director of Pinnacle and President
of Elberton, and Linton W. Eberhardt, President and a Director
and President of Royston entered into a non-qualified salary
continuation agreement (the "Salary Continuation Plans") with
their banks 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, 1996 and 1997.
</TABLE>
<TABLE>
<CAPTION>
Executive Officer Date of Death Estimated Death Estimated
Agreement Benefit Annual Benefit Annual
Value Retirement Value Retirement
12/31/97 Benefits 12/31/96 Benefits
12/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
L. Jackson McConnell 10-24-95 $507,751 $30,947 $507,751 $30,947
James E. Purcell 12-16-94 $215,077 $21,748 $215,077 $21,748
Linton W. Eberhardt 11-10-94 $178,982 $20,212 $214,981 $20,212
</TABLE>
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, 1998, 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.
Name and Address of Number of Shares Owned
Beneficial Owner (Percent of Class)
------------------- -----------------------
L. Jackson McConnell 201,123(1) (26.2%)
884 Elbert Street
Elberton, Georgia 30635
JAM Family Partnership I, L.P. 197,950 (25.8%)
884 Elbert Street
Elberton, Georgia 30635
Alice Eberhardt 194,163 (2) (25.2%)
390 Virginia Hills Road
Royston, Georgia 30624
JAM Family Partnership II, L.P. 193,863 (25.2%)
884 Elbert Street
Elberton, Georgia 30635
(1) Includes 197,950 shares held by the JAM Family Partnership
I, 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.
(2) Includes 193,863 shares held by the JAM Family Parntership
II, L.P. pursuant to which Mrs. Eberhardt has sole voting
and investment power. Does not include 600 shares held by
Mrs. Eberhardt's husband with respect to which she disclaims
beneficial ownership.
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
<F1> <F2>
10.5 Indexed Executive Salary Continuation Plan by
and between First National Bank in Elberton
and L. Jackson McConnell dated August 9,
1995. <F1> <F2>
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)
___________________________
[FN]
<F1> previously filed
<F2> Compensation Plan arrangement
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 31st day of March, 1998.
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 31st day of March, 1998.
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 Description of Exhibit
No.
- ------- ----------------------
21.0 Subsidiaries of Pinnacle Financial
Corporation.
25.0 A Power of Attorney is set forth on the
signature pages to this Form 10-KSB.
27 Financial Data Schedule (for SEC use only)
<PAGE>
Supplemental Information To Be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act.
Four copies of the annual report and proxy materials mailed to
shareholders are enclosed with this filing.
EXHIBIT 21.0
Subsidiaries of Pinnacle Financial Corporation:
As of January 1, 1998: Pinnacle Bank, N.A.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
put this in later
</LEGEND>
<CIK> 0000910678
<NAME> PINNACLE FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,789,675
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,654,170
<TRADING-ASSETS> 82,696,136
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 142,288,205
<ALLOWANCE> 2,038,015
<TOTAL-ASSETS> 252,340,149
<DEPOSITS> 212,287,657
<SHORT-TERM> 360,000
<LIABILITIES-OTHER> 2,646,197
<LONG-TERM> 0
0
0
<COMMON> 7,680,000
<OTHER-SE> 29,366,295
<TOTAL-LIABILITIES-AND-EQUITY> 236,497,861
<INTEREST-LOAN> 14,536,043
<INTEREST-INVEST> 5,570,732
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 20,106,775
<INTEREST-DEPOSIT> 7,594,054
<INTEREST-EXPENSE> 7,594,054
<INTEREST-INCOME-NET> 12,512,721
<LOAN-LOSSES> 234,000
<SECURITIES-GAINS> 92
<EXPENSE-OTHER> 7,121,142
<INCOME-PRETAX> 7,150,546
<INCOME-PRE-EXTRAORDINARY> 5,058,992
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,058,992
<EPS-PRIMARY> 6.59
<EPS-DILUTED> 6.59
<YIELD-ACTUAL> 9.1
<LOANS-NON> 102,185
<LOANS-PAST> 934,134
<LOANS-TROUBLED> 251,356
<LOANS-PROBLEM> 764,292
<ALLOWANCE-OPEN> 1,842,152
<CHARGE-OFFS> 189,223
<RECOVERIES> 151,086
<ALLOWANCE-CLOSE> 2,038,015
<ALLOWANCE-DOMESTIC> 267,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,771,015
</TABLE>
