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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 29549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission File Number 33-67528
PINNACLE FINANCIAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Georgia 58-1538862
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization Number)
884 Elbert Street,
P.O. Box 430, Elberton, Georgia 30635-0430
- --------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (706) 283-2854
Check whether the issuer (1) 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 / /
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
AS OF OCTOBER 31, 1998 THERE WERE 768,000 SHARES OF COMMON STOCK OUTSTANDING.
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PINNACLE FINANCIAL CORPORATION
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position at
September 30, 1998 and December 31, 1997 1
Consolidated Statements of Income for the Three
Months ended September 30, 1998 and 1997 2
Consolidated Statements of Income for the Nine
Months ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 4
Item 2. Managements Discussion and Analysis or Plan of
Operation 6
PART II - OTHER INFORMATION 12
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I<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
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Assets
- ------
Cash and due from banks $ 7,003,939 $ 10,789,675
Federal funds sold 4,830,000 4,657,170
Securities available for sale 91,609,735 82,696,136
Loans, net of allowance for credit losses
of $2,204,537 and $2,038,015, respectively 142,769,664 142,288,205
Premises and equipment 7,750,620 7,652,254
Accrued interest receivable 2,659,362 2,616,476
Foreclosed real estate 541,426 348,213
Other assets 1,315,282 1,292,020
------------ ------------
Total assets $258,480,028 $252,340,149
============ ============
Liabilities
- -----------
Demand deposits $38,210,783 $ 36,338,646
Savings and NOW deposits 64,073,024 63,051,651
Other time deposits 112,782,748 112,897,360
------------ ------------
Total deposits 215,066,555 212,287,657
Federal funds purchased 0 360,000
Accrued interest and other liabilities 3,141,714 2,646,197
------------ ------------
Total liabilities 218,208,269 215,293,854
------------ ------------
Shareholders' equity
- --------------------
Common stock, $10 par value; 5,000,000 shares
authorized, 768,000 shares issued and outstanding 7,680,000 7,680,000
Capital surplus 7,280,000 7,280,000
Retained earnings 24,024,981 21,391,928
Net unrealized appreciation on securities available for sale,
net of taxes of $657,767 and $356,168, respectively 1,286,778 694,367
------------ ------------
Total shareholders' equity 40,271,759 37,046,295
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $258,480,028 $252,340,149
============ ============
The accompanying notes are an integral part of these financial statements.
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1<PAGE>
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PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
1998 1997
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Interest income
- ----------------
Loans $3,751,084 $3,674,999
Securities available for sale 1,413,999 1,364,703
Federal funds sold 68,452 31,560
---------- ----------
Total interest income 5,233,535 5,071,262
---------- ----------
Interest expense
- ----------------
Deposits 1,997,494 1,927,032
Federal funds purchased 390 0
---------- ----------
Total interest expense 1,997,884 1,927,032
---------- ----------
Net interest income 3,235,651 3,144,230
- -------------------
Provision for credit losses 75,000 38,000
---------- ----------
Net interest income after provision for credit losses 3,160,651 3,106,230
---------- ----------
Other income
- ------------
Service charges on deposit accounts 310,286 350,768
Other service charges and fees 220,700 108,346
Net realized gains on sales of securities available for sale 8,343 180
Other income 44,733 121,446
---------- ----------
Total other income 584,062 580,740
---------- ----------
Other expenses
- --------------
Salaries and employee benefits 1,168,531 1,094,411
Occupancy expense 268,066 244,892
Other expenses 553,260 533,595
---------- ----------
Total other expenses 1,989,857 1,872,898
---------- ----------
Income before income taxes 1,754,856 1,814,072
Income tax expense 517,600 544,800
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Net Income $1,237,256 $1,269,272
- ---------- ========== ==========
Net income per share of common stock $1.61 $1.65
===== =====
Average shares outstanding 768,000 768,000
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The accompanying notes are an integral part of these financial statements.
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2<PAGE>
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PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
YTD YTD
September 30, September 30,
1998 1997
<S> <C> <C>
Interest income
- ---------------
Loans $11,179,188 $10,761,033
Securities available for sale 4,071,299 4,083,931
Federal funds sold 266,728 135,941
----------- -----------
Total interest income 15,517,215 14,980,905
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Interest expense
- ----------------
Deposits 5,957,606 5,637,334
Federal funds borrowed 657 5,441
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Total interest expense 5,958,263 5,642,775
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NET INTEREST INCOME 9,558,952 9,338,130
Provision for credit losses 225,000 209,000
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Net interest income after provision for credit losses 9,333,952 9,129,130
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OTHER INCOME
Service charges on deposit accounts 961,811 1,011,448
Other service charges and fees 663,102 284,568
Net realized gains on sales of securities available for sale 25,568 0
Other income 148,391 220,887
----------- -----------
Total other income 1,798,872 1,516,903
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OTHER EXPENSES
Salaries and employee benefits 3,407,724 3,225,056
Occupancy expense 786,348 721,281
Net realized losses on sales of securities available for sale 0 1,969
Other expenses 1,466,445 1,471,680
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Total other expenses 5,660,517 5,419,986
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Income before income taxes 5,472,307 5,226,047
Income tax expense 1,687,255 1,536,000
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NET INCOME $ 3,785,052 $ 3,690,047
=========== ===========
Net income per share of common stock $4.93 $4.80
===== =====
Average shares outstanding 768,000 768,000
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The accompanying notes are an integral part of these financial statements.
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3
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PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
September 30, September 30,
1998 1997
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CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 3,785,053 $ 3,690,047
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 369,442 312,846
Provision for credit losses 225,000 209,000
Deferred income taxes ---- ----
Net realized (gains) losses on securities available for sale (25,568) 1,969
(Increase) decrease in accrued interest and other assets (259,361) 521,444
Increase (decrease) in accrued expenses and other liabilities 495,517 106,765
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Total adjustments 805,030 (297,444)
----------- -----------
Net cash provided by operating activities 4,590,083 4,842,081
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CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (172,830) (1,660,534)
Purchase of securities available for sale (30,591,080) (19,180,868)
Proceeds from sales of securities available for sale 1,748,595 7,729,843
Proceeds from maturities of securities available for sale 20,546,866 15,026,688
Net increase in loans (706,459) (7,006,338)
Purchases of premises and equipment (467,808) (2,013,128)
----------- -----------
Net cash used by investing activities (9,642,716) (7,104,337)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing demand deposits,
Savings and NOW deposit accounts 2,893,510 1,487,181
Net increase in time deposits (114,613) 2,596,814
Net decrease in federal funds purchased (360,000) (110,000)
Dividends paid (1,152,000) (1,036,800)
----------- ----------
Net cash provided by financing activities 1,266,897 2,937,195
----------- ----------
Net increase in cash and due from banks (3,785,736) 674,939
Cash and cash equivalents at January 1 10,789,675 7,025,730
----------- -----------
Cash and cash equivalents at September 30 $ 7,003,939 $ 7,700,669
============ ===========
Interest paid $ 5,551,045 $ 5,571,283
============ ===========
Income taxes paid $ 1,695,465 $ 1,438,243
============ ===========
The accompanying notes are an integral part of these financial statements.
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4
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PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Pinnacle Financial Corporation (the Company) and its wholly-owned
commercial bank subsidiaries, Pinnacle Bank, N.A. and Pinnacle Bank.
All significant intercompany accounts have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary for fair statements of
the consolidated financial position and the results of operations of
the Company for the interim periods. The results of operations for
the nine month period ended September 30, 1998 are not necessarily
indicative of the results which may be expected for the entire year.
(2) INVESTMENT SECURITIES
As of December 31, 1994, the Company adopted FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
All investment securities are classified as available-for-sale and are
recorded at their estimated fair market values in accordance with the
provision of FAS No. 115. From time to time, the Company may decide
to sell certain securities prior to maturity for liquidity, tax
planning and other valid business purposes. Gains and losses are
determined using the specific identification method when securities
are sold.
(3) INCOME TAXES
Deferred income taxes are recorded as required by FAS No. 109,
"Accounting for Income Taxes", using the liability method under which
deferred tax assets and liabilities are determined based on the
differences between the financial accounting and tax basis of assets
and liabilities.
(4) ACCOUNTING FOR IMPAIRED LOANS
FAS 114, "Accounting by Creditors for Impairment of a Loan" was
adopted as of January 1, 1995 as required. Loans having carrying
values of $1.3 million as of September 30, 1998 have been recognized
as impaired in conformity with FAS 114. The total allowance for
credit losses related to the impaired loans was $797,000. For
impairment recognized in conformity with FAS 114, the entire change in
the 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. The company has recognized specific
allowances in prior periods for each of these loans based on previous
methodology for calculating its allowance for credit losses.
5<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Pinnacle analyses the major elements of
Pinnacle's consolidated balance sheets and statements of income. This
section reflects the results of its wholly-owned subsidiary bank,
Pinnacle Bank, National Association ("Elberton"). Pinnacle Bank,
National Association, was the surviving institution following the
January 1, 1998 consummation of the merger of Pinnacle Bank, National
Association (formerly First National Bank in Elberton) and Pinnacle
Bank (formerly Tri-County Bank of Royston).
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 and accompanying disclosures. All
amounts throughout this section are rounded to the nearest 1,000
dollars, the nearest .1 million dollars and to the nearest .1 percent
to represent approximations of reported amounts.
FORWARD LOOKING STATEMENTS
Certain statements included or incorporated by reference in
this Form 10-QSB 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-QSB.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to maintain cash
flows adequate to meet immediate and ongoing future needs of 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 September 30, 1998, 7.8% of the investment
securities portfolio had maturity dates within the next year and an
additional 68.9% matures within the next 5 years. During the first
nine months of 1998, federal funds sold averaged $6.6 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
6<PAGE>
up to $5.3 million. 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 provided to meet customer withdrawals
and loan requests while net interest margins are maximized.
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 September 30, 1998, the liquidity ratio
for Pinnacle was 42.3%.
Average yields on interest bearing assets averaged 8.4% for
the current quarter compared to 8.9% for the same period the year
before. Total average interest bearing assets increased by $13.1
million or 5.8% for the current period when compared with the quarter
ended September 30, 1997. Average net loans increased $7.8 million or
5.8% in the three months ended September 30, 1998 from the same 1997
period, primarily as a result of a healthy economy in Northeast
Georgia. Average net loans during the quarter for Pinnacle Bank, N.A.
were $142.5 million.
Average yields on interest bearing assets increased to 8.7%
for the nine month period ended September 30, 1998 compared to 8.8%
for the same period the year before. Total average interest bearing
assets increased by $14.7 million or 6.5% for the current period when
compared with the nine month period ended September 30, 1997. Average
net loans increased $4.8 million or 3.5% in the nine months ended
September 30, 1998 from the same 1997 period, primarily as a result of
a healthy economy in Northeast Georgia. Average net loans during the
period for Pinnacle Bank, N.A. were $142.8 million.
Other real estate owned during the first nine months of 1998
increased by $193,000, resulting in $541,000 held at September 30,
1998 compared to $348,000 at December 31, 1997. Non-performing loans
totaled $162,000 as of September 30, 1998 representing .1% of total
loans at September 30, 1998 compared to $494,000 at December 31, 1997,
which represented .4% of total loans at that date. Accrued interest
as of September 30, 1998 on non-performing loans totaled $11,000 which
is not reported as income. Non-performing loans at September 30, 1998
are classified as real estate.
Pinnacle continues to maintain a concentration of core
deposits from an established customer base which provides a stable
funding source. Deposits increased $2.8 million to $215.0 million at
September 30, 1998 from $212.3 million at December 31, 1997, due
primarily to continued economic expansion in Northeast Georgia.
Non-interest bearing deposits increased $1.9 million to $38.2 million
compared to December 31, 1997 balance of $36.3 million. Interest
bearing deposits increased $907,000 at September 30, 1998.
Management continues to give priority to the importance of
maintaining high levels of assets with interest rate sensitivity.
Cash and cash equivalents decreased during the first nine months of
1998 from December 31, 1997 levels by $3.8 million and investment
securities increased $8.9 million from December 31, 1997 levels. This
reflects managements ability to invest the growth in the assets in
loans yielding higher returns than federal funds.
7<PAGE>
Shareholders' equity increased $3.2 million to $40.3 million
at September 30, 1998 from $37.1 million at December 31, 1997.
Earnings retained during the nine months amounted to $2.6 million and
equity was increased $592,000 as a result of a increase in net
unrealized gains during the first nine months due to a increase in the
bond market. FAS 115 which was adopted on December 31, 1994 requires
that unrealized gains/losses on certain marketable securities be
recorded in shareholder's equity.
Pinnacle continues to maintain adequate capital ratios (see
"Risk Based Capital Ratios" below and see "Results of Operations"
below for discussion of dividend levels.) Pinnacle maintained a level
of capital, as measured by its average equity to average assets ratio,
of 14.8% during the first nine months of 1998, compared to 14.1% for
the year which ended December 31, 1997.
Pinnacle Bank, N.A., has been named as defendant in a
lawsuit which alleges that the bank is liable to the plaintiff in the
amount of $270,000 plus interest. The outcome of this litigation is
uncertain at this time. On advice of legal counsel, management is
unable to reasonably estimate any possible loss but believes it would
be immaterial to the financial statements. Legal costs are being
expensed as incurred.
Management is not aware of any known trends, events or
uncertainties other than the pending law suit mentioned above that are
reasonably likely to have a material effect on the registrants
liquidity, capital resources, or results of operation. Pinnacle is
not aware of any current recommendations by the regulatory authorities
which, if they were implemented, would have such an effect. Loans
classified for regulatory purposes as loss, doubtful, substandard or
special mention do not represent trends or uncertainties which
management reasonably expects will materially impact future
operational trends.
RESULTS OF OPERATIONS(for the three month period ended September 30,
1998)
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 the three months ended September 30,
1998 increased 2.9% as a result of growth in interest bearing assets
and deposits, favorable rate spreads 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 same period the
prior year. As a result of increased deposits, interest expense
increased $65,000 or 3.6% while interest income increased $162,000 or
3.2% in the three months ended September 30, 1998 compared to the same
period the year before.
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
8<PAGE>
loan losses adequate to absorb losses inherent in the portfolio.
Pinnacle provided $75,000 for loan losses in the three months ended
September 30, 1998 as compared to $38,000 for the same period in 1997.
Pinnacle experienced loan charge-offs in the three months ended
September 30, 1998 of $102,000 compared to $73,000 in the same period
in 1997. The allowance for loan losses increased $169,000 to $2.2
million at September 30, 1998 compared to $2.0 million at September
30, 1997. Pinnacle's allowance for loan losses represents 1.5% of
total loans outstanding at September 30, 1998. Its net recoveries
were $44,000 during the three months ended September 30, 1998 and
$41,000 during the same period in 1997.
Other operating expenses for Pinnacle during the three
months ended September 30, 1998 increased $117,000 to $2.0 million
from $1.9 million for the same period in the previous year. The
increase in other operating expenses is attributable to increases in
the salaries and employee benefits.
Pinnacle's income tax expense decreased $27,000 for the
quarter compared to the same period in the previous year due primarily
to decreased taxable income. The effective income tax rate during the
quarter of 29.5% is a increase of .5% over the same quarter in 1997.
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 during the
three months ended September 30, 1998 was $1.2 million and represents
annualized returns of 13.0% on average shareholders' equity and 1.9%
on average assets. Comparable amounts during the same period of 1997
were $1.3 million, 14.4% and 2.1%, respectively. As detailed in
previous paragraphs, the decrease in net income of $32,000 was
primarily due to the increase in the other expenses.
Dividends declared during the three months ended September
30, 1998 increased $.05 per share to $.50 from $.45 per share during
the same period of 1997.
RESULTS OF OPERATIONS(for the nine month period ended September 30,
1998)
Pinnacle's operational results primarily depend on the
earnings of the banks. 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 the nine months ended September 30,
1998 increased 2.2% as a result of growth of interest bearing assets
and liabilities, favorable rate spreads 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 same period the
prior year. As a result of increased deposits, interest expense
increased $315,000 or 5.6% while interest income increased $536,000
million or 3.6% in the nine months ended September 30, 1998 compared
to the same period the year before.
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 provided $225,000 for loan losses in the nine months ended
9<PAGE>
September 30, 1998 and $209,000 for the same period in 1997. Pinnacle
experienced loan charge-offs in the nine months ended September 30,
1998 of $179,000 compared to $149,000 in the same period in 1997. Its
net charge-offs were $58,000 during the nine months ended September
30, 1998 and $15,000 during the same period in 1997.
Other operating expenses for Pinnacle during the nine months
ended September 30, 1998 increased $241,000 to $5.7 million compared
to $5.4 million for the same period in the previous year. The
increase in other operating expenses is attributable to the increase
in the salaries and employee benefits.
Pinnacle's income tax expense increased $151,000 for the nine
months ended September 30, 1998 compared to the same period in the
previous year due primarily to increased taxable income. The
effective income tax rate during the period of 30.8% is a increase of
1.4% over the same quarter in 1997.
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 during the
nine months ended September 30, 1998 was $3.8 million and represents
annualized returns of 13.2% on average shareholders' equity and 2.0%
on average assets. Comparable amounts during the same period of 1997
were $3.7 million, 14.3% and 2.0%, respectively. As detailed in
previous paragraphs, the increase in net income of $95,000 was
primarily due to the increase in the net interest margin.
Dividends declared during the nine months ended September 30,
1998 increased $.15 per share to $1.50 from $1.35 per share during the
same period of 1997.
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".
If it is not adequately addressed by Pinnacle or its suppliers and
customers, the year 2000 issue could result in a material adverse
impact on Pinnacle's financial condition and results of operation.
Pinnacle is proceeding with its plans to address its year 2000 issues.
The plan involves five phases including awareness, assessment, renovation,
validation and implementation for hardware and software in both information
technology systems and non-information technology systems. Pinnacle
has completed the awareness and assessment phases and a majority of
all systems have been renovated. All mission critical systems are
expected to be renovated and tested by the end of the first quarter of
1999. Modifications and upgrades will be performed on the majority of
Pinnacle's existing systems by third- party vendors as Pinnacle
provides no internal programming. Testing of mission critical systems
is scheduled through the first quarter of 1999. Implementation will
occur as each system passes the testing procedures. Implementation
will continue through the remainder of 1999.
10<PAGE>
In 1997 and 1998, Pinnacle made substantial investment in technologies
for increased operational efficiency which encompassed remediation of
many of its year 2000 issues. The cost of assuring readiness to
process in the year 2000 has been budgeted to not exceed $20,000, not
including the investments in technology referred to above. A majority
of the costs associated with hardware and software enhancements to
make Pinnacle's systems year 2000 compliant are covered in the annual
maintenance fees that Pinnacle pays to its vendors. Any unexpected
costs which may arise as Pinnacle implements each phase of its plan of
action addressing the year 2000 in excess of the budgeted amount will
be reported to board of directors.
Pinnacle continues to host educational seminars for customers alerting
them and providing assistance on how to limit their exposure.
Pinnacle has surveyed major customers for year 2000 compliance and
will be preparing a detailed assessment of Pinnacle's risk associated
with each customer's inability to be compliant.
Pinnacle has developed general contingency plans with respect to the
year 2000 date change for all critical applications and service
providers. These plans will be enhanced over the next two quarters to
provide detailed directions in case of failure for each application
ensuring that Pinnacle will be able to recover from any critical
system failures within an acceptable time frame.
11<PAGE>
The following tables present Pinnacle's Regulatory capital position at
September 30, 1998:
(Rounded to the nearest thousand)
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Total Risk Adjusted Assets $154,340
Risk Based Capital Ratios:
TIER 1 CAPITAL
Common stock $7,680 4.98%
Surplus 7,280 4.72%
Retained Earnings 24,025 15.57%
Less: Goodwill 0 0.00%
------ -------
Total Tier 1 capital 38,985 25.26%
Tier 1 minimum requirement 6,174 4.00%
------ -------
Excess (shortfall) $32,811 21.26%
======= ======
TIER 2 CAPITAL
Tier 1 from above $38,985 25.26%
Subordinated Debentures 0 0.00%
Allowance for loan losses, limited to 1.25%
of risk weighted assets 1,929 1.25%
------- ------
Total Tier 2 capital 40,914 26.51%
Tier 2 minimum requirement 12,347 8.00%
------- ------
Excess (shortfall) $28,567 16.92%
======= ======
LEVERAGE RATIO
Tier 1 capital $38,985 15.01%
Minimum requirement 7,791 3.00%
------- ------
Excess (shortfall) $31,194 12.01%
======= ======
Average total assets, net of goodwill $259,704
=======
</TABLE>
12<PAGE>
PINNACLE FINANCIAL CORPORATION
PART II
ITEM 2. LEGAL PROCEEDINGS
Pinnacle Bank, N.A., has been named as defendant in a
lawsuit which alleges that the bank is liable to the plaintiff in the
amount of $270,000 plus interest. The outcome of this litigation is
uncertain at this time. On advice of legal counsel, management is
unable to reasonably estimate any possible loss but believes it would
be immaterial to the financial statements. Legal costs are being
expensed as incurred.
ITEM 3. CHANGES IN SECURITIES
None.
ITEM 4. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 10, 1998 the Registrant held its annual meeting of
Shareholders where the following directors were elected at the meeting
for one year terms:
L. Jackson McConnell James E. Purcell
Lint W. Eberhardt Maurice Bond
L. Jackson McConnell, Jr. Steve Williams
Robert H. Hardy H. Thomas Brown
Charles Bradshaw William F. Grant
Calvin Hill Robert E. Lee, III
J. Daniel McAvoy Anderson Dilworth
Don C. Fortson D. Wayne Braswell
Etherage C. Phillips
619,994 Shares (81%) were cast in favor of the directors.
There were an additional 1,248 shares (less than one percent) cast for
only ten of the elected directors. There were no broker non-votes
cast.
ITEM 6. OTHER INFORMATION
None.
ITEM 27. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule (for SEC use only)
17<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PINNACLE FINANCIAL CORPORATION
Date: November 12, 1998 By: /s/ L. Jackson McConnell
----------------------------
L. Jackson McConnell
Chairman and Chief Executive Officer
(Principal Executive and Financial Officer)
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