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, 1999
COMMISSION FILE NUMBER 33-67528
PINNACLE FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
GEORGIA 58-1538862
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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, 1999 there were 768,000 shares of common stock outstanding.
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PINNACLE FINANCIAL CORPORATION
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position at
September 30, 1999 and December 31, 1998 1
Consolidated Statements of Income for the Three
Months ended September 30, 1999 and 1998 2
Consolidated Statements of Income for the Nine
Months ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 4
Item 2. Managements Discussion and Analysis or Plan of
Operation 6
PART II - OTHER INFORMATION 14
I
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PINNACLE FINANCIAL CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
II
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PINNACLE FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
Assets
- -------
<S> <C> <C>
Cash and due from banks $ 9,392,878 $ 10,083,914
Federal funds sold 0 7,150,000
Securities available for sale 101,389,378 92,807,286
Loans, net of allowance for credit losses
of $2,172,112 and $2,070,005, respectively 148,353,095 142,025,057
Premises and equipment 8,266,365 8,636,788
Accrued interest receivable 2,619,060 2,653,111
Foreclosed real estate 527,990 495,566
Other assets 2,491,453 1,335,761
------------- ------------
Total assets $ 273,040,219 $265,187,483
============= ============
Liabilities
- -----------
Demand deposits $ 44,916,896 $ 41,417,077
Savings and NOW deposits 71,537,071 67,996,928
Other time deposits 108,657,151 111,527,553
------------- ------------
Total deposits 225,111,118 220,941,558
Federal funds purchased 210,000 0
Federal Home Loan Bank Advances 3,000,000 0
Accrued interest and other liabilities 3,506,083 3,598,216
------------- ------------
Total liabilities 231,827,201 224,539,774
------------- ------------
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 27,224,481 24,669,429
Accumulated other comprehensive income (971,463) 1,018,280
Total shareholders' equity 41,213,018 40,647,709
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 273,040,219 $265,187,483
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
1
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<TABLE>
<CAPTION>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
Interest Income
- ---------------
Loans $3,672,412 $3,751,084
Securities available for sale 1,490,846 1,413,999
Federal funds sold 36,135 68,452
---------- ----------
Total interest income 5,199,393 5,233,535
---------- ----------
Interest Expense
- ----------------
Deposits 1,836,740 1,997,494
Borrowings 3,618 390
---------- ----------
Total interest expense 1,840,358 1,997,884
---------- ----------
NET INTEREST INCOME 3,359,035 3,235,651
Provision for credit losses 75,000 75,000
---------- ----------
Net interest income after provision for credit losses 3,284,035 3,160,651
---------- ----------
Other Income
- ------------
Service charges on deposit accounts 325,355 310,286
Other service charges and fees 190,593 220,700
Net realized gains on sales of securities available for sale 3,864 8,343
Other income 61,282 44,733
---------- ----------
Total other income 581,094 584,062
---------- ----------
Other Expenses
- --------------
Salaries and employee benefits 1,128,751 1,168,531
Occupancy expense 314,232 268,066
Other expenses 473,461 553,260
---------- ----------
Total other expenses 1,916,444 1,989,857
---------- ----------
Income before income taxes 1,948,685 1,754,856
Income tax expense 596,000 517,600
---------- ----------
NET INCOME $1,352,685 $1,237,256
========== ==========
Net income per share of common stock $ 1.76 $ 1.61
========== ==========
Average shares outstanding 768,000 768,000
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
YTD YTD
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
INterest Income
- ---------------
Loans $10,718,228 $11,179,188
Securities available for sale 4,344,211 4,071,299
Federal funds sold 209,578 266,728
----------- -----------
Total interest income 15,272,017 15,517,215
----------- -----------
Interest Expense
- ----------------
Deposits 5,571,109 5,957,606
Borrowings 3,618 657
----------- -----------
Total interest expense 5,574,727 5,958,263
----------- -----------
Net Interest Income 9,697,290 9,558,952
- ------------------- --------- ---------
Provision for credit losses 225,000 225,000
----------- -----------
Net interest income after provision for credit losses 9,472,290 9,333,952
----------- -----------
Other Income
- ------------
Service charges on deposit accounts 994,133 961,811
Other service charges and fees 639,318 663,102
Net realized gains on sales of securities available for sale 0 25,568
Other income 167,763 148,391
----------- -----------
Total other income 1,801,214 1,798,872
----------- -----------
Other Expenses
- --------------
Salaries and employee benefits 3,438,570 3,407,724
Occupancy expense 882,078 786,348
Net realized losses on sales of securities available for sale 2,105 0
Other expenses 1,394,499 1,466,445
----------- -----------
Total other expenses 5,717,252 5,660,517
----------- -----------
Income before income taxes 5,556,252 5,472,307
Income tax expense 1,734,000 1,687,255
----------- -----------
NET INCOME $ 3,822,252 $ 3,785,052
=========== ===========
Net income per share of common stock $ 4.98 $ 4.93
=========== ===========
Average shares outstanding 768,000 768,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
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PINNACLE FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 3,822,252 $ 3,785,053
------------ ------------
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 469,819 369,442
Provision for credit losses 225,000 225,000
Net realized (gains) losses on securities available for sale 2,105 (25,568)
Increase in accrued interest and other assets (1,154,065) (259,361)
Increase (decrease) in accrued expenses and other liabilities (92,133) 495,517
------------ ------------
Total adjustments (549,274) 805,030
------------ ------------
Net cash provided by operating activities 3,272,978 4,590,083
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold 7,150,000 (172,830)
Purchase of securities available for sale (35,742,875) (30,591,080)
Proceeds from sales of securities available for sale 3,025,625 1,748,595
Proceeds from maturities of securities available for sale 22,124,190 20,546,866
Net increase in loans (6,553,038) (706,459)
Purchases of premises and equipment (80,276) (467,808)
------------ ------------
Net cash used by investing activities (10,076,374) (9,642,716)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing demand deposits,
Savings and NOW deposit accounts 7,039,962 2,893,510
Net decrease in time deposits (2,870,402) (114,613)
Net increase (decrease) in borrowings 3,210,000 (360,000)
Dividends paid (1,267,200) (1,152,000)
Net cash provided by financing activities 6,112,360 1,266,897
------------ ------------
Net decrease in cash and due from banks (691,036) (3,785,736)
Cash and due from banks at January 1 10,083,914 10,789,675
Cash and due from banks at September 30 $ 9,392,878 $ 7,003,939
============ ============
Interest paid $ 5,372,360 $ 5,551,045
============ ============
Income taxes paid $ 1,702,635 $ 1,695,465
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
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PINNACLE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(1) Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Pinnacle
Financial Corporation (the Company) and its wholly-owned commercial bank
subsidiary, Pinnacle Bank, N.A. 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,
1999 are not necessarily indicative of the results which may be expected for the
entire year.
(2) 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.
(3) 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 $666,000 as
of September 30, 1999 have been recognized as impaired in conformity with FAS
114. The total allowance for credit losses related to the impaired loans is
$509,000. 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
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
Management's Discussion and Analysis or Plan of Operation of
Pinnacle Financial Corporation (hereinafter "Pinnacle" or the "Company")
analyses the major elements of Pinnacle's consolidated balance sheets and
statements of income. The financial condition and operating results of Pinnacle
are primarily determined by its wholly-owned subsidiary bank, Pinnacle Bank,
N.A.(hereinafter the "Bank").
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
- --------------------------
This discussion contains forward-looking statements under the
private Securities Litigation Reform Act of 1995 that involve risk and
uncertainties. Although Pinnacle believes that the assumptions underlying the
forward-looking statements contained in the discussion are reasonable, any of
the assumptions could be inaccurate, and therefore, no assurance can be made
that any of the forward-looking statements in this discussion will be accurate.
Factors that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to: economic conditions
(both generally and in the markets where the Company operates); competition from
other providers of financial services offered by the Bank; government
regulations and legislation; changes in interest rates; material unforeseen
changes in the financial stability and liquidity of the Bank's credit customers;
material unforeseen complications related to the Year 2000 issues for the
Company, its suppliers, customers, and governmental agencies, all of which are
difficult to predict and which may be beyond the control of the Company.
Pinnacle undertakes no obligation to revise forward-looking statements to
reflect events or changes after the date of this discussion or to reflect the
occurrence of unanticipated events.
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, 1999,
8.8% of the investment securities portfolio had maturity dates within the
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next year and an additional 67.2% matures within the next 5 years. All
investment securities are classified as available for sale and may be sold or
used as a source of collateralized borrowings in the event of a liquidity
shortfall. Other sources of liquidity are payments on commercial and installment
loans and repayment of maturing single payment loans. The Bank has short term
borrowing relationships with two correspondent banks that could provide up to
$10.75 million on short notice. Additionally, the Bank has established
membership in the Federal Home Loan Bank of Atlanta (hereinafter the "FHLB") and
has granted a blanket floating lien on its mortgage portfolio that collaterizes
up to $20 million of borrowings on a short or long term basis. 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, 1999, the liquidity ratio for Pinnacle was 39.4%.
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 1999 from December 31,
1998 levels by $7.8 million while securities available for sale increased by
$8.6 million from December 31, 1998 to September 30, 1999. The average balance
in these investment securities increased by $9.3 million in the current year
compared to the nine months ended September 30, 1998. The average balance of
Federal Funds sold during the first nine months of 1999 was $5.6 million. It is
anticipated that average Federal Funds sold will decrease as a percentage of
assets in the future. See discussion below regarding management's use of sources
of funds.
Total interest-earning assets increased by $7.8 million or
3.2% as of September 30, 1999 when compared with December 31, 1998. Average net
loans increased $400,000 (0.3%) to $142.9 million in the nine months ended
September 30, 1999 from the same 1998 period. This slight increase is the result
of significant loan demand in the third quarter of 1999 that offset a decline in
average loans for the first half of the year.
The allowance for credit losses is established by management
at a level estimated to be adequate to absorb losses inherent in the loan
portfolio. The allowance increased to $2.2 million from $2.1 million at
September 30, 1999 and December 31, 1998. The Bank experienced loan charge-offs
of $262,000 in the nine months ended September 30, 1999 compared to $179,000 in
the same period of 1998. Net charge-offs amounted to $123,000 in 1999 compared
to $58,000 for the nine months ended September 30, 1998. The allowance for
credit losses represents 1.4% of total loans outstanding at September 30, 1999
and December 31, 1998.
The balance of other real estate owned has increased by 32,000
from $496,000 at December 31, 1998 to $528,000 at September 31, 1999. This
change is the net result of the sale of five properties and the foreclosure on
two new properties during this period. The accrual of
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interest has been discontinued on loans totaling $9,000 as of September 30,
1999, representing .01% of loans, compared to $139,000 at December 31, 1998.
Unrecorded income on nonaccrual loans for the nine months ended September 30,
1999 was $4,000. All non-accrual loans at September 30, 1999 are classified as
unsecured.
Pinnacle continues to maintain a concentration of core
deposits from an established customer base which provides a stable funding
source. Deposits increased $4.2 million to $225.1 million at September 30, 1999
from $220.9 million at December 31, 1998, due primarily to normal growth.
Non-interest bearing deposits increased $3.5 million to $44.9 million from
December 31, 1998 while interest-bearing deposits increased $.7 million for the
same period.
As indicated above, Bank management actively manages its
liquidity position and has obtained several sources of both secured and
unsecured borrowed funds. These sources have allowed the bank to invest a higher
percentage of its funds in loans and investment securities that earn a higher
yield than overnight investments. As a consequence, the third quarter of 1999
includes increased use of federal funds purchased and, for the first time,
borrowings from the FHLB. The $3 million of FHLB advances were used to purchase
investment securities to improve the net interest income of Pinnacle. The Bank
anticipates continued use of these sources of funds in an attempt to enhance its
earnings while continuing to monitor the maturities and interest rate risk of
interest-bearing assets and liabilities.
Shareholders' equity increased $0.6 million to $41.2 million
at September 30, 1999 from $40.6 million at December 31, 1998. Net earnings
retained during the nine months amounted to $2.6 million while equity decreased
$2.0 million due to of a decline from a $1.0 million net unrealized gain on
investments available for sale to an unrealized loss of $1.0 million (All
unrealized amounts are reported net of their tax impact. The shift from an
unrealized gain to loss resulted in the recording of a deferred tax asset,
causing much of the increase in other assets from December 31, 1998). The change
in unrealized amounts reflects the increase in interest rates from December 31,
1998 and widening of spreads on non treasury instruments.
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 15.2% during the
first nine months of 1999, compared to 15.0% for the year which ended December
31, 1998.
The bank is a defendant in a lawsuit that alleges unlawful
conversion of assets and seeks damages of $270,000 plus interest. The outcome of
the litigation is uncertain but management believes, based upon the advice of
legal counsel, that any ultimate loss will be immaterial to the financial
statements. Legal expenses of the lawsuit are being expensed as incurred.
Management is not aware of any trends, events or uncertainties
that are reasonably likely to have a material effect on Pinnacle's liquidity,
capital resources, or results of operation. Pinnacle is not aware of any current
recommendations by the regulatory authorities
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which, if 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, 1999)
Pinnacle's operating results primarily depend on the earnings
of the Bank. Its earnings depend to a large degree on net interest income, the
difference between the interest income received from investments (such as loans,
investment securities, federal funds sold, etc.)
and the interest expense paid on deposits and borrowings.
Interest income on interest bearing assets decreased by
$35,000 as a decline in average yields from 8.4% to 8.3% offset an increase in
average earning assets in the third quarter of 1999 as compared to 1998. The
slight decline in yield reflects a general decline in interest rates during much
of the period and increasing competition for loans resulting in the need to
price more competitively. Interest expense declined by $158,000 from the same
quarter of 1998 in spite of increased deposits as a result of increased
non-interest bearing deposits and lower interest rates paid on all deposit
accounts. Consequently, net interest income in the three months ended September
30, 1999 increased by $123,000 or 3.8% as compared to the same period for the
previous year. Management continues to match rate sensitive assets with rate
sensitive liabilities in such a way that net interest margins have remained
stable from the same period in the prior year.
The provision for credit losses is the charge to operating
expenses that management believes is necessary to fund the allowance for credit
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 $75,000 for loan losses in
both quarters ended September 30, 1999 and 1998.
Other income during the three months ended September 30, 1999
was unchanged as compared to the same period in 1998. Other operating expenses
during the three months ended September 30, 1999 decreased $74,000 to $1.9
million from $2.0 million for the same period in the previous year. The decrease
is attributable to decreased compensation and benefits as fewer mortgage loan
originations resulted in lower amounts of volume-based compensation.
Additionally, legal fees declined by $75,000 from the third quarter of 1998 as
an unusually high level of fees were paid during that quarter. These expense
reductions were somewhat offset by increased occupancy expenses related to a new
branch facility opened in late 1998.
Pinnacle's income tax expense increased $78,000 for the
quarter compared to the same period in the previous year due primarily to
increased taxable income. The effective income tax rate of 30.6% during the
quarter is an increase of .9% over the rate of 29.5% in the same quarter of
1998.
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
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income during the three months ended September 30, 1999 was $1.4 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 1998 were $1.2
million, 13.0% and 1.9%, respectively.
Dividends declared during the three months ended September 30,
1999 increased $.05 per share to $.55 from $.50 per share during the same period
of 1998.
RESULTS OF OPERATIONS (for the nine month period ended September 30, 1999)
Interest income on interest bearing assets for the nine months
ended September 30, 1999 decreased by $245,000 from the same period in 1998. A
decline in average yields from 8.7% to 8.3% was somewhat offset by an increase
in average earning assets in 1999 as compared to 1998. The decline in yield
reflects a general decline in interest rates during the period as well as an
increased percentage of funds invested in lower yielding investment securities.
Interest expense declined by $383,000 from the same period of 1998 in spite of
increased deposits as a result of increased non-interest bearing deposits and
lower interest rates paid on all deposit accounts. Consequently, net interest
income in the nine months ended September 30, 1999 increased by $138,000 or 1.4%
as compared to the same period for the previous year.
The provision for credit losses and its purpose is explained
above. Pinnacle provided $225,000 for credit losses in both periods ended
September 30, 1999 and 1998.
Other income during the nine months ended September 30, 1999
was virtually unchanged at $1.8 million from the same period in 1998. Slight
increases in service charges and other miscellaneous income offset the
nonrecurrence of 1998 gains on sales of securities.
Other operating expenses during the nine months ended
September 30, 1999 increased $56,000 (to $5.7 million) from the same period in
the previous year. The increase in other operating expenses is attributable
generally to normal increases in compensation and employee benefits as well as
increased expenses related to a branch opened in late 1998. The decline in legal
expenses mentioned above served to somewhat reduce the amount of the increase.
Pinnacle's income tax expense increased $47,000 for the nine
months ended September 30, 1999 compared to the same period in the previous year
due primarily to increased taxable income. The effective income tax rate during
the period of 31.2% is a minor increase of 0.4% from the effective rate of 30.8%
in 1998.
Net income during the nine months ended September 30, 1999 was
$3.8 million and represents annualized returns of 12.5% on average shareholders'
equity and 1.90% on average assets. Comparable amounts during the same period of
1998 were $3.8 million, 13.2% and 2.0%, respectively. As indicated above, net
income increased primarily due to increased net interest income offsetting a
slight increase in operating expenses while the operating ratios reflect the
increased earnings compared to a slightly larger asset and equity base.
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Dividends declared during the nine months ended September 30,
1999 increased $.15 per share to $1.65 from $1.50 per share during the same
period of 1998.
Year 2000
- ---------
Generally, year 2000 risk involves computer programs and
computer hardware that are not able to perform without interruption into the
year 2000. The arrival of the year 2000 poses a unique worldwide challenge to
the ability of all systems to correctly recognize the date change from December
31, 1999 to January 1, 2000. If Pinnacle's systems do not correctly recognize
such a date change, computer applications that rely on the date field could fail
or create erroneous results. Such errors could affect interest, payment or due
dates or could cause the temporary inability to process transactions, send
invoices or engage in similar normal business activities. If it is not
adequately addressed by Pinnacle or its suppliers and borrowers, the year 2000
issue could result in a material adverse impact on Pinnacle's financial
condition, liquidity and results of operations.
PINNACLE'S STATE OF READINESS. Pinnacle is proceeding on a
plan that will assure the Bank is ready to process in the year 2000. The plan
involves five phases consisting of awareness, assessment, renovation, validation
and implementation for hardware and software in both information technology
systems ("IT") and non-information technology systems ("non- IT"or environmental
systems) that are potentially affected by the year 2000. Pinnacle has completed
all phases and all critical business systems have been renovated. Substantially
all noncritical systems have been renovated with renovation of the few remaining
non-critical systems continuing throughout 1999. Modifications and upgrades are
performed on the majority of Pinnacle's IT systems by third-party vendors as
Pinnacle performs no internal programming.
COST TO ADDRESS THE YEAR 2000 ISSUES. In 1997 and 1998,
Pinnacle made substantial investments in technology in the normal course of
business to enhance operational efficiency that included 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 $40,000 for the years 1998 through 2000, not
including the investments in technology referred to above nor the time
associated with existing employee development and implementation of Pinnacle's
year 2000 plan. Approximately 25% of this amount was expensed in 1998 with the
remainder of the expenses to be incurred in 1999. At this time, this budget is
expected to be adequate. The majority of costs associated with hardware and
software enhancements to make Pinnacle's systems year 2000 compliant are covered
in the annual maintenance fees paid to its vendors and are not included in this
budgeted amount. Any unexpected costs that may arise during implementation in
excess of the budgeted amounts will be reported to the Board of Directors.
RISKS OF THIRD-PARTY YEAR 2000 ISSUES. The impact of year 2000
non-compliance by outside parties with whom Pinnacle transacts business cannot
be accurately estimated. In addition to the review of IT providers discussed
above, Pinnacle has surveyed major borrowers for year 2000 compliance and has
prepared a detailed assessment of the risk associated with each borrower's
inability to be compliant. In addition, all primary non-IT vendors and suppliers
have responded to inquiries regarding year 2000 compliance. Ongoing
communication with these
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<PAGE>
primary vendors and suppliers is anticipated throughout 1999. At this time, no
material impact on Pinnacle's operations from vendor non-compliance is
anticipated but no provider can assure Pinnacle that no disruptions will occur.
Pinnacle would be significantly impacted by failures in power and communication
systems that are largely outside of the control of the Bank. Pinnacle relies
upon the Federal Reserve System for electronic funds transfers and check
clearing and understands that its systems are year 2000 compliant. Extensive
testing of the Federal Reserve systems have been completed and all indications
are that the systems should perform as designed. If the Federal Reserve does not
successfully complete all modifications required by the date change and is
forced to interrupt services to Pinnacle, Pinnacle could experience significant
difficulties.
Pinnacle continues to host educational seminars, provide
meaningful information to customers and community groups regarding risks and
solutions to plan for Year 2000 uncertainties and provide assistance on prudent
activities to be taken. The Bank's primary Year 2000 activities during the last
quarter of 1999 will involve community awareness campaigns and providing
assurances that all steps have been taken to prepare for the new year.
PINNACLE'S CONTINGENCY PLANS. Pinnacle has not developed
system remediation contingency plans as all mission critical systems have been
tested and certified as year 2000 compliant. Pinnacle has prepared a business
resumption plan that provides detailed directions for continued operation if one
or more mission critical items (including power and communication systems) fails
due to year 2000 related issues. The plan documents how Pinnacle will recover
from any critical system failures within an acceptable time frame while
delivering an acceptable level of service. The plan assumes either use of the
Bank's hot site facility or limited transaction processing on a manual basis
(depending upon the fact situation and the systems involved) until the impacted
systems can be corrected or replaced. The plan has been reviewed and certified
by an independent third party and has been approved by Pinnacle's Board of
Director's. Testing of the significant procedures occurred during the third
quarter of 1999 with additional testing and employee training planned as we
approach the year 2000.
Pinnacle's contingency plans also include the monitoring of
cash withdrawals and cash balances to determine the need to increase liquidity
at branch locations. Pinnacle has the ability to pledge additional investment
securities with the Federal Reserve Bank of Atlanta and correspondent banks to
provide additional cash in the event of significantly increased customer demand.
These facilities provide borrowing capacity in addition to the amounts indicated
earlier in this document. Nevertheless, an extreme level of customer fear or
uncertainty could result in significant unanticipated withdrawals that could
have a material impact on the Bank's short term operations.
12
<PAGE>
The following tables present Pinnacle's Regulatory capital position at
September 30, 1999:
(Rounded to the nearest thousand)
Total Risk Adjusted Assets $168,664
Risk Based Capital Ratios:
TIER 1 CAPITAL
Common stock $ 7,680 4.55%
Surplus 7,280 4.32%
Retained Earnings 27,224 16.14%
Less: Goodwill 0 0.00%
-------- -----
Total Tier 1 capital 42,184 25.01%
Tier 1 minimum requirement 6,747 4.00%
-------- -----
Excess (shortfall) $ 35,437 21.01%
======== =====
TIER 2 CAPITAL
Tier 1 from above $ 42,184 25.01%
Subordinated Debentures 0 0.00%
Allowance for loan losses, limited to 1.25%
of risk weighted assets 2,108 1.25%
-------- -----
Total Tier 2 capital 44,292 26.26%
Tier 2 minimum requirement 13,493 8.00%
-------- -----
Excess (shortfall) $ 30,799 18.26%
======== =====
LEVERAGE RATIO
Tier 1 capital $ 42,184 15.64%
Minimum requirement 10,787 4.00%
-------- -----
Excess (shortfall) $ 31,397 11.64%
======== =====
Average total assets, net of goodwill $269,663
========
13
<PAGE>
PINNACLE FINANCIAL CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
Pinnacle Bank, N.A. is a defendant in a lawsuit brought by
Capitol Resource Funding in U.S. District Court for the Middle District of
Georgia, filed in March 1997, File No. 3:97-C-116 (HL) that alleges unlawful
conversion of assets and seeks damages of $270,000 plus interest. The outcome of
the litigation is uncertain at this time. Management believes, based on the
advice of legal counsel, that any ultimate loss will be immaterial to the
financial statements. Legal costs are being expenses as incurred.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 27. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule (for SEC use only).
14
<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, 1999 By: /S/ L. Jackson Mcconnell
----------------- -------------------------
L. Jackson Mcconnell
Chairman and Chief Executive Officer
(Principal Executive and Financial Officer)
Date: November 12, 1999 By: /S/ James E. Purcell
----------------- ------------------------
James E. Purcell
President and Chief Credit Officer
15
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