SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 33-67528
Pinnacle Financial Corporation
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(Name of small business issuer in its charter)
Georgia 58-1538862
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(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
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(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: $23,104,352
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, 1999, there
were 347,939 shares of Common Stock, $10.00 par value outstanding held
by non-affiliates of the issuer, with an aggregate value of
$22,616,035 (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).
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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,
1999, COMMON STOCK, $10.00 PAR VALUE - 768,000 SHARES OUTSTANDING.
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PINNACLE FINANCIAL CORPORATION
FORM 10-KSB
INDEX
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PAGE
<S> <S> <S> <C>
Part I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission Of Matters To A Vote Of Security Holders . . . . . . . 13
Part II
Item 5. Market For Common Equity And Related Stockholder Matters . . . . 13
Item 6. Management's Discussion and Analysis or Plan of Operation . . . . 13
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 31
Item 8. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure . . . . . . . . . . . . . . . . . . 31
Part III
Item 9. Directors and Executive Officers, Promoters and Control Persons . 32
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 34
Item 11. Security Ownership Of Certain Beneficial Owners And Management . 37
Item 12. Certain Relationships And Related Transactions . . . . . . . . . 37
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 38
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
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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 Financial Corporation'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
Financial Corporation. 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") is a one-bank holding company, headquartered in Elberton,
Georgia. The Company's full service banking activities are presently
conducted by its wholly-owned banking subsidiary, Pinnacle Bank, N.A.
( Elberton or the "Bank"), formerly known as First National Bank in
Elberton, based in Elberton, Georgia with eight offices which are
located in Elbert, Franklin and Hart Counties, Georgia. On January 1,
1998, ("Royston"), formerly known as Tri-County Bank of Royston, was
merged into Elberton with the resulting bank being named Pinnacle
Bank, N.A. This report reflects the one bank organizational structure
that exists after such merger.
Through its bank subsidiary, 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. 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. 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. The two subsidiary banks merged as of January 1,
1998.
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Pinnacle is a registered bank holding company. All of Pinnacle's
activities are now conducted by its wholly owned subsidiary, the Bank,
which has been organized as a national banking association since 1934.
The Bank is community-oriented and offers 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 Bank finances commercial
and consumer transactions, makes secured and unsecured loans, and
provides a variety of other banking services.
As of December 31, 1998, Pinnacle had total assets of
approximately $265.2 million, total deposits of approximately $220.9
million, net loans of approximately $142.0 million and shareholders'
equity of approximately $40.6 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 the Bank
primarily in Elbert, Franklin and Hart Counties. Customers of the
Bank are generally consumers and small businesses.
DEPOSITS. The Bank offers a full range of depository accounts
and services to both consumers and businesses. At December 31, 1998,
the Bank's deposit base, totaling approximately $220.9 million,
consisted of approximately $41.4 million in noninterest bearing demand
deposits (18.7% of total deposits), approximately $50.1 million in
interest-bearing demand deposits (including money market accounts)
(22.7% of total deposits), approximately $17.9 million in savings
deposits (8.1% of total deposits), approximately $82.5 million in time
deposits in amounts less than $100,000 (37.4% of total deposits), and
approximately $29.0 million in time deposits of $100,000 or more
(13.1% of total deposits).
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.
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Table 8 on page 30 reflects the gap positions of Pinnacle's
consolidated balance sheet as of December 31, 1998.
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 that 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, 1998, the gap analysis reflects a negative gap at
the one-year interval equivalent to 39.6% of earning assets, as
compared to 36.3% at December 31, 1997.
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 Bank makes 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 Bank also makes direct installment loans to consumers on both a
secured and unsecured basis. At December 31, 1998, consumer, real
estate (including mortgage and construction loans) and commercial
loans represented approximately 19.8%, 64.7%, and 15.5%, respectively,
of Pinnacle's total loan portfolio. The real estate loans made by
the Bank 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 Bank is to
make loans only to persons who reside or work in the Bank's primary
trade areas. Unsecured loans normally are made only to persons who
maintain depository relationships with the Bank. 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 Bank's market area.
The Bank provides each lending officer with written guidelines
for lending activities. Lending authority is delegated by the Board
of Directors of the Bank 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 Bank prior to being committed. Lending relationships
exceding $200,000 must be approved by the Officer Loan Committees.
These committees consist of the Bank's Chief Credit officer, President
and CEO and other loan officers. All loans over $500,000 require
Senior Loan Committee approval. The Senior Loan Committee consists of
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the Bank's executive officers. Lending relationships exceeding
$500,000 are reviewed annually by the Executive Loan Committee which
includes outside directors.
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 because such collateral is superior
to other types of collateral available to small businesses. Loans
secured by commercial real estate, however, particularly if collateral
dependent, are subject to certain inherent risks. Commercial real
estate may be substantially illiquid and commercial real estate values
are difficult to ascertain and subject to wide fluctuation depending
upon economic conditions.
Effective March 19, 1993, inter-agency guidelines adopted by
federal bank regulators including the Office of the Comptroller of the
Currency went into effect mandating that financial institutions
establish real estate lending policies and establishing certain
minimum real estate loan-to-value standards. The Bank has adopted
these federal standards as its minimum standards. These standards
limit 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)
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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
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[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>
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LOAN REVIEW AND NONPERFORMING ASSETS. The Bank reviews its 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 Bank. 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 is
charged with managing the Bank's assets and liabilities. The
committee's task is to manage asset growth, liquidity and capital. To
meet these objectives while maintaining prudent management of risks,
the committee directs the Bank's overall acquisition and allocation of
funds. At its quarterly meetings, the committee reviews and discusses
(a) the asset and liability funds budget in relation to the actual
flow of funds, (b) peer group comparisons, (c) the ratio of the amount
of rate sensitive assets to the amount of rate sensitive liabilities,
(d) the ratio of loan loss reserve to outstanding loans and (e) 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 Bank's investment portfolio policy is to
maximize income consistent with liquidity, asset quality and
regulatory constraints. The policy is reviewed from time to time by
the Board 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 Bank
implement the policy and 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.
Generally, the 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 did not correctly recognize such a date change,
computer applications that rely on the date field could fail or create
erroneous results. Such erroneous results 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.
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PINNACLE'S STATE OF READINESS. Pinnacle is proceeding on a plan
that will assure the institution of being ready to process in the year
2000. The plan involves five phases including awareness, assessment,
renovation, validation and implementation for hardware and software in
both information technology systems ("IT") and non-information
technology systems ("non-IT") that are potentially affected by year
2000. Pinnacle has completed the awareness and assessment phases and a
majority of all systems have been renovated. The completion of the
validation or testing phase, is currently being conducted and is
expected to be completed shortly after the end of the first quarter of
1999 for all mission critical systems. The implementation phase will
occur as each system passes the testing procedures. Implementation
will continue throughout the remainder 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.
COSTS TO ADDRESS THE YEAR 2000 ISSUES. In 1997 and 1998, Pinnacle
made substantial investments in technologies in the normal course of
business to increase 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
$40,000 for the years 1998 though year 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. 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 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 gauged. In addition to the review of IT
providers as discussed above, Pinnacle has surveyed major borrowers
for year 2000 compliance and will prepare, by April 30, 1999, a
detailed assessment of Pinnacle's risk associated with each borrower's
inability to be compliant. In addition, all primary non-technology
vendors and suppliers have responded to Pinnacle's inquiries regarding
year 2000 compliance. Ongoing communications with these primary
venders and suppliers is anticipated throughout 1999. At this time,
no material impact on Pinnacle's operations from vendor non-compliance
is anticipated. Pinnacle relies upon the Federal Reserve for
electronic funds transfers and check clearing and understands that the
Federal Reserve has upgraded its systems to be year 2000 compliant.
Testing of the Federal Reserve systems will be completed by the end of
the third quarter of 1999. 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 and provide
meaningful information for customers and community groups regarding
risks and solutions for appropriate activities to plan for Year 2000
uncertainties and alerting them and providing assistance on how to
limit their exposure.
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PINNACLE'S CONTINGENCY PLANS. Pinnacle will complete contingency
plans by June 1999 for any items found non-compliant after testing.
Each plan will have a trigger date for implementation. These plans
will provide detailed directions in the event an item continues to be
non-compliant, including a replacement vendor or product and an
implementation date. Pinnacle will also complete by June 1999 a
general business resumption plan which will provide detailed
directions for continued operation in case one or more mission
critical items fails due to "year 2000" related issues so that
Pinnacle will be able to recover from any critical system failures
within an acceptable time frame.
EMPLOYEES. At December 31, 1998, the Bank had 100 full-time and
14 part-time employees. Pinnacle has no employees. The Bank is not a
party to any collective bargaining agreement, and the Bank believes
that their employee relations are good.
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COMPETITION. The banking business is highly competitive. The
Bank competes with six other depository institutions in Elbert,
Franklin and Hart Counties. The Bank also competes 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 Bank operates.
At December 31, 1998, the Bank ranked on the basis of total
deposits and assets of $220.9 million and $265.2 million,
respectively, as one of the largest of the depository institutions
located in Elbert, Franklin and Hart Counties.
SUPERVISION AND REGULATION. Pinnacle is a registered bank
holding company subject to regulation by the Board of Governors of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended
(the "Act"). Pinnacle is required to file financial information with
the Federal Reserve periodically and is subject to periodic
examination by the Federal Reserve.
The Act requires every bank holding company to obtain the prior
approval of the Federal Reserve (i) before it may acquire direct or
indirect ownership or control of more than 5% of the voting shares of
any bank that is not already controlled; (ii) before it or any of its
subsidiaries, other than a bank, may acquire all or substantially all
of the assets of a bank; and (iii) before it may merge or consolidate
with any other bank holding company. In addition, a bank holding
company is generally prohibited from engaging in, or acquiring direct
or indirect control of voting shares of any company engaged in non-
banking activities. This prohibition does not apply to activities
found by the Federal Reserve, by order or regulation, to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve has
determined by regulation or order to be closely related to banking
are: making or servicing loans and certain types of leases;
performing certain data processing services; acting as fiduciary or
investment or financial advisor; providing discount brokerage
services; and making investments in corporations or projects designed
primarily to promote community welfare.
Pinnacle must also register with the Georgia 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 and the Bank 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 examine Pinnacle and the Bank.
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Pinnacle is an "affiliate" of the Bank under the Federal Reserve
Act, which imposes certain restrictions on (i) loans by the Bank to
Pinnacle, (ii) investments in the stock or securities of Pinnacle by
the Bank, (iii) the Bank 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 Bank. 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.
The Bank 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. The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 provides that a bank can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in
connection with the default of a commonly controlled institution.
PAYMENT OF DIVIDENDS. Pinnacle is a legal entity separate and
distinct from the Bank. Most of the revenues of Pinnacle result from
dividends paid to it by the Bank. There are statutory and regulatory
requirements applicable to the payment of dividends by the Bank as
well as by Pinnacle to its shareholders.
The Bank 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.
The payment of dividends of Pinnacle and its bank subsidiary 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 the Bank 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 the Bank.
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CAPITAL ADEQUACY. The Federal Reserve, the FDIC and the OCC have
implemented substantially identical risk-based rules for assessing
bank and bank holding company capital adequacy. These regulations
establish minimum capital standards in relation to assets and off-
balance sheet exposures as adjusted for credit risk. Banks and bank
holding companies are required to have (1) a minimum level of total
capital (as defined) to risk weighted assets of eight percent (8%);
(2) a minimum Tier One Capital (as defined) to risk weighted assets of
four percent (4%); and (3) a minimum stockholders' equity to risk
weighted assets of four percent (4%). In addition, the Federal
Reserve, the FDIC and the OCC have established a minimum three percent
(3%) leverage ratio of Tier One Capital to total assets for the most
highly rated banks and bank holding companies. "Tier One Capital"
generally consists of common equity, minority interests in equity
accounts of consolidated subsidiaries and certain perpetual preferred
stock less certain intangibles. The Federal Reserve, 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 amended, effective
January 1, 1997, 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 revised standards have
not had a significant effect on the Company's capital requirements.
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 OCC has adopted regulations implementing the prompt
corrective action provisions of the 1991 Act, which place financial
institutions in the following five categories based upon
capitalization ratios: (1) a "well capitalized" institution has a
total risk-based capital ratio of at least 10%, a Tier One risk-based
ratio of at least 6% and a leverage ratio of at least 5%; (2) an
"adequately capitalized" institution has a total risk-based capital
ratio of at least 8%, a Tier One risk-based ratio of at least 4% and a
leverage ratio of at least 4%; (3) an "undercapitalized" institution
has a total risk-based capital ratio of under 8%, a Tier One risk-
based ratio of under 4% or a leverage ratio of under 4%; (4) a
"significantly undercapitalized" institution has a total risk-based
capital ratio of under 6%, a Tier One risk-based ratio of under 3% or
a leverage ratio of under 3%; and (5) a "critically undercapitalized"
institution has a leverage ratio of 2% or less. Institutions in any
of the three undercapitalized categories would be prohibited from
declaring dividends or making capital distributions. The OCC's
regulations also establish procedures for "downgrading" an institution
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<PAGE>
to lower capital category based on supervisory factors other than
capital. Under the OCC's regulations the Bank is a "well capitalized"
institution.
10<PAGE>
<PAGE>
Set forth below are pertinent capital ratios for the Bank as of
December 31, 1998.
<TABLE>
<CAPTION>
Minimum
Minimum Capital for well
Requirement Actual Required Capitalized
- -------------- ------ -------- -----------
<S> <C> <C> <C>
Tier 1 Capital to
Risk-based
Assets 24.56% <F1> 4.0% 6.0%
Total Capital to
Risk-based
Assets 25.81% <F2> 8.0% 10.0%
Leverage Ratio (Tier 1
Capital to Total
Assets) 14.97% <F3> 4.0% 5.0%
<FN>
<F1> Minimum for "Well Capitalized" Banks = 6%
<F2> Minimum for "Well Capitalized" Banks= 10%
<F3> Minimum for "Well Capitalized" Banks = 5%
</FN>
</TABLE>
11
<PAGE>
<PAGE>
RECENT LEGISLATIVE AND REGULATORY ACTION. 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, 1995, and any
interstate bank holding company is permitted to merge its various bank
subsidiaries into a single bank with interstate branches after May 31,
1997. States have the authority to authorize interstate branching
prior to June 1, 1997, or alternatively, to opt out of interstate
branching prior to that date. The Georgia Financial Institutions Code
was amended in 1994 to permit the acquisition of a Georgia bank or
bank holding company by out-of-state bank holding companies beginning
July 1, 1995. On September 29, 1995, 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. On July 1, 1998, all
restrictions on state-wide branching were 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.
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. The Bank has six branches that it owns while it
leases one supermarket branch.
The Bank's main office is located at 884 Elbert Street in
Elberton, Georgia and consists of approximately 22,500 square feet of
usable office space. The downtown Elberton office is located at 32
College Avenue, Elberton, Georgia and consists of approximately 4,200
square feet of usable office space. The Bowman office is located at
27 North Broad Street, Bowman, Georgia and contains approximately
2,700 square feet of usable office space. The Hartwell office is
located at 135 East Franklin Street, Hartwell, Georgia and consists of
approximately 4,200 square feet of usable office space. The Royston
location is located at 861 Church Street, Royston, Georgia and
contains approximately 9,440 square feet of usable office space. The
Franklin Springs branch is located at 2311 West Main Street, Franklin
Springs, Georgia and contains approximately 2,300 square feet of
office space. The supermarket branch, which is leased from Dill's
Food City supermarket, is located at 721 Cook Street and contains
approximately 540 square feet of space. A new facility was completed
during the year in Lavonia and has 4,200 square feet of usable office
space. Management of the Bank believes that these properties are
adequately covered by insurance.
12<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal
proceedings to which the Company or the Bank is a party or to which
any of its property is subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the
Company during the fourth quarter of its fiscal year.
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
STOCK. There is no established public trading market for the
Company's Common Stock. As of March 15, 1999, the Company had 356
shareholders of record. Pinnacle Stock is not traded on an
established public trading market. Management is aware of three sales
totaling 280 shares during the first two months of 1999 at prices
ranging from $65.00 to $90.00 per share. Management is aware of eight
sales of Pinnacle shares totaling 945 shares to several individuals at
prices ranging from $65.00 to $78.00 per share during 1998.
Management is also aware of 23 other transfers of shares totaling
61,104 shares during 1998 which were transferred to family members.
Management is aware 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.
DIVIDENDS. In 1998 and 1997, the Company declared cash dividends
aggregating $1,651,200 ($2.15 per share) and $1,497,600 ($1.95 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 18 to the Company's
consolidated financial statements.
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.
13<PAGE>
<PAGE>
The directors of Elberton and Royston, the prior two bank
subsidiaries of Pinnacle, and Pinnacle announced in December 1996 the
proposed merger of the two banks into a single institution. On
January 1, 1998, Royston was merged into Elberton with the resulting
bank being named Pinnacle Bank, N.A. Management believes the merger
is a positive move that will increase Pinnacle's ability to operate as
a strong, well-capitalized regional bank. Customer convenience will
be greatly enhanced by having more banking locations. Management has
maintained all the banks' officers and staff throughout the
consolidation while reducing current duplication of duties by moving
personnel to frontline positions working directly with customers.
Name recognition for Pinnacle Bank has been improved through
coordinated advertising over the entire trade area.
Pinnacle continues to weigh the merits of additional business
combinations while maintaining a focus on its general mission to
responsibly serve the needs of its customers and communities and to
enhance profit potential and shareholder value.
For a comprehensive presentation of Pinnacle's financial
condition and results of operations, the following analysis should be
viewed along with other information contained in this report,
including the financial statements, selected statistical information
and accompanying disclosures. All amounts throughout this section are
rounded to the nearest 1,000 dollars, the nearest .1 million dollars
or the nearest .1 percent to represent approximations of reported
amounts.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The objective of liquidity management is to maintain cash flows
adequate to meet immediate and ongoing future needs for credit demand,
deposit withdrawal, maturing liabilities and corporate operating
expenses. Pinnacle seeks to meet liquidity requirements primarily
through the management of federal funds and the investment securities
portfolio. At December 31, 1998, 7.70% of the investment securities
portfolio had maturity dates within the next year and 65.9% matures
from one to five years after December 31, 1998. Cash, due from banks
and net federal funds sold increased $1.8 million to $17.2 million at
December 31, 1998. During 1998, federal funds sold averaged $7.5
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 $10.7 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 available to meet customer withdrawals and loan requests
while net interest margins are maximized.
14<PAGE>
<PAGE>
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, 1998,
Pinnacle's liquidity ratio was 48.4%.
Average net loans increased $7.1 million to $142.4 million or
5.2% in 1998 over 1997 primarily as a result of loans originated in
the new branches. As reflected in Table 4 of the statistical
information presented below, fixed rate mortgages increased $4.1
million to $60.2 million at December 31, 1998 and variable rate
mortgages decreased $3.1 million to $28.1 million at December 31,
1998.
As a result of an increase in foreclosed properties during 1998,
other real estate owned increased $147,500 to $495,500 at December 31,
1998 from $348,000 at December 31, 1997.
Pinnacle continues to maintain a concentration of core deposits
from an established customer base which provides a stable funding
source. Deposits increased $8.6 million to $220.9 million at December 31,
1998 from $212.3 million at December 31, 1997, due primarily to
normal growth and deposits obtained by new offices in Hartwell and
Lavonia. Demand deposits increased $5.1 million to $41.4 million at
December 31, 1998 and interest bearing deposits increased $3.6 million
to $179.5 million at December 31, 1998.
Shareholders' equity increased $3.6 million to $40.6 million at
December 31, 1998 from $37.0 million at December 31, 1997, as a result
of retained earnings of $3.3 million and a $352,000 increase in 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, net of tax effect, was
recorded in shareholders' equity. For the year ended December 31,
1997, shareholders' equity increased $3.8 million due to retained
earnings of $3.6 million and a $219,000 increase in net unrealized
gains on investments held for sale.
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 15.04%
in 1998.
15<PAGE>
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Pinnacle's operational results primarily depend on the earnings
of the Bank. The 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 1998 increased $237,000 or 1.9% 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
increased from the previous year even though the Bank experienced
decreased yields on earnings assets. As a result of an increase in
interest bearing liabilities and assets, interest expense increased
$333,000 or 4.4% while interest income increased $570,000 or 2.8% in
1998. 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
1998.
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 1998 of $332,500 compared to $189,000
in 1997. The provision for loan losses decreased $9,000 to $225,000
during 1998 compared to $234,000 during 1997. Pinnacle's allowance
for loan losses represented 1.4% of total loans outstanding at
December 31, 1998. Its net charge-offs were $193,000 during 1998 and
$38,000 during 1997. The allowance for loan losses increased $32,000
to $2.1 million as of December 31, 1998 compared to $2.0 million at
December 31, 1997. The minimum increase in the allowance for loan
losses is due to a stable economy. Management does not believe that
the increase in charge-offs for 1998 is a trend in the loan portfolio.
Pinnacle's other income increased by $435,000 to $2.4 million in
1998. This increase was primarily related to an increase in fees
generated from brokering long-term mortgages as a result of
substantial mortgage refinance activity by consumers.
Other operating expenses increased by $760,000 to $7.9 million in
1998. The increase included almost $400,000 additional salaries and
benefits primarily related to commissions paid on mortgage origination
and new branch employees. Additionally, professional fees increased
by $140,000 due to increased legal fees and fees associated with
outsourcing of the internal audit function.
Pinnacle's income tax expense increased $50,000 in 1998 over 1997
as the effective income tax rate increased to 30.3% in 1998 from 29.2%
in 1997. The increased effective tax rate primarily resulted from
decreased tax-exempt interest income.
16<PAGE>
<PAGE>
Results of operations can be measured by various ratio analyses.
Two widely recognized performance indicators are return on average
equity and return on average assets. Net income was $4.9 million and
represents returns of 12.6% on average shareholders' equity and 1.9%
on average assets in 1998. Comparable amounts in 1997 were $5.1
million, 14.5% and 2.1%, respectively. The decreased net income
results between 1998 and 1997 was the result of increased operating
expenses due primarily to the additional branch locations and
personnel expenses.
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, 1998 for financial assets
was $265.9 million compared to a carrying amount of $265.2 million and
the value of financial liabilities at that date was $216.4 million
compared to a carrying amount of $224.5 million. Fair values 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. In accordance with FAS 107, the details of
the estimated fair value as compared to the financial statement
balances of these instruments is reflected in Note 16 to the financial
statement on page 51.
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 $1.7
million and $764,000 as of December 31, 1998 and December 31, 1997,
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 $726,000 and $267,000 in
1998 and 1997, 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 $.20 per share in 1998 to $2.15 from $1.95
per share in 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.
17<PAGE>
<PAGE>
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. Loans classified for regulatory purposes as loss,
doubtful, susbstandard or special mention do not represent trends or
uncertainties which management reasonably expects will materially
impact future operational trends.
18<PAGE>
The following tables present Pinnacle's regulatory capital position at
December 31, 1998:
(Rounded to nearest thousand)
Total Risk Adjusted Assets $161,438
Risk Based Capital Ratios:
<TABLE>
<CAPTION>
<S> <C> <C>
TIER 1 CAPITAL
Common stock $ 7,680 4.76%
Surplus 7,280 4.51%
Retained earnings 24,669 15.29%
------ -----
Total Tier 1 capital 39,629 24.56%
Tier 1 minimum requirement 6,455 4.00%
------ -----
Excess $ 33,174 20.56%
====== =====
TIER 1&2 CAPITAL
Tier 1 from above $ 39,629 24.56%
Allowance from loan losses, limited to 1.25%
of risk weighted assets 2,017 1.25%
------ -----
Total Tier 1&2 capital 41,646 25.81%
Tier 1&2 minimum requirement 12,909 8.00%
------ -----
Excess $ 28,737 17.81%
====== =====
Leverage Ratio
Tier 1 capital $ 39,629 14.97%
Minimum requirement 10,585 4.00%
------ -----
Excess $ 29,044 10.97%
====== =====
Average total assets, net of goodwill $259,390
=======
</TABLE>
19<PAGE>
<PAGE>
Selected Statistical Information
The following section presents consolidated statistical information
for Pinnacle and its subsidiary, 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.
20<PAGE>
<PAGE>
Table 1
Pinnacle Financial Corporation and Subsidiary
Average Balance Sheets
<TABLE>
<CAPTION>
_____________ 1998 _____________ ______________ 1997 ______________
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) $142,418,653 $14,850,838 10.43% $135,338,705 $14,536,043 10.74%
Investment securities:
Taxable 74,335,476 4,602,324 6.19% 70,188,579 4,436,518 6.32%
Nontaxable (a) 14,771,090 1,202,689 8.14% 14,862,542 1,288,067 8.67%
Federal funds sold 7,501,804 385,785 5.14% 3,374,104 184,154 5.46%
------------ ----------- ---- ------------ ----------- ----
Total interest-earning assets 239,027,023 21,041,636 8.80% 223,763,930 20,444,782 9.14%
Noninterest earning assets:
Cash and due from bank 7,781,657 7,450,484
Premises & equipment 7,838,467 6,562,675
Other assets 4,743,047 4,507,345
------------ ------------
Total assets $259,390,194 $242,284,434
============ ============
Liabilities and shareholders' equity:
Interest bearing liabilities:
Interest bearing demand deposits $47,241,779 1,226,874 2.60% $43,971,090 1,148,097 2.61%
Savings deposits 17,501,057 528,857 3.02% 16,864,104 515,858 3.06%
Time deposits 112,620,899 6,171,025 5.48% 109,036,301 5,930,099 5.44%
Fed Funds Borrowed 11,178 657 5.88% 215,501 11,184 5.19%
------------ ----------- ---- ------------ ----------- ----
Total interest bearing liabilities 177,374,913 7,927,413 4.47% 170,086,996 7,605,238 4.47%
Noninterest bearing liabilities:
Noninterest bearing demand 39,613,496 34,808,902
Other liabilities 3,396,896 2,605,010
------------ ------------
220,385,305 207,500,908
Shareholders' equity 39,004,889 34,783,526
------------ ------------
Total liabilities and shareholders'
equity $259,390,194 $242,284,434
============ ============
Excess of interest-earning assets over
interest bearing liabilities $61,652,110 53,676,934
Ratio of interest-earning assets to
interest-bearing liabilities 134.76% 131.56%
Net interest income $13,114,223 $12,839,544
=========== ===========
Net interest spread 4.33% 4.67%
Net interest yield on interest earning assets 5.49% 5.74%
<PAGE>
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 all periods reported.
(a) Tax exempt income is calculated on a tax equivalent basis.
</TABLE>
21<PAGE>
<PAGE>
Table 1 - (continued)
Pinnacle Financial Corporation and Subsidiary
Average Balance Sheets
<TABLE>
<CAPTION>
______________ 1996 ______________
Interest
Average Income/ Yield/
Balances Expense Rate
-------- -------- ------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans (including loan fees) $124,223,589 $13,254,002 10.67%
Investment securities:
Taxable 68,466,361 4,118,413 6.02%
Nontaxable (a) 16,963,947 1,506,217 8.88%
Federal funds sold 4,426,437 242,353 5.48%
------------ ---------- -----
Total interest-earning assets 214,080,334 19,120,985 8.93%
Noninterest earning assets:
Cash and due from banks 6,506,543
Premises & equipment 4,919,660
Other assets 4,512,904
------------
Total assets $230,019,441
============
Liabilities and shareholders' equity:
Interest bearing liabilities:
Interest bearing demand deposits $46,831,618 1,194,418 2.55%
Savings deposits 16,535,228 505,381 3.06%
Time deposits 102,933,382 5,531,831 5.37%
Fed Funds Borrowed 128,169 6,655 5.19%
------------ ---------- -----
Total interest bearing liabilities 166,428,397 7,238,285 4.35%
Noninterest bearing liabilities:
Noninterest bearing demand 29,866,520
Other liabilities 2,209,328
------------
198,504,245
Shareholders' equity 31,515,196
------------
Total liabilities and shareholders'
equity $230,019,441
============
Excess of interest-earning assets over
interest bearing liabilities $47,651,937
Ratio of interest-earning assets to
interest-bearing liabilities 128.63%
Net interest income $11,882,700
===========
Net interest spread 4.40%
Net interest yield on interest earning
assets 5.36%
</TABLE>
22<PAGE>
Table 2
Pinnacle Financial Corporation and Subsidiary
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 1998 over 1997 and 1997 over 1996.
<TABLE>
<CAPTION>
1998 over 1997 1997 over 1996
-------------- --------------
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) $ 818,482 $( 503,687) $ 314,795 $ 290,170 $1,410,597 $1,700,767
Investment securities:
Taxable 269,504 ( 103,698) 165,806 78,457 429,410 507,867
Non-taxable (a) ( 7,651) ( 77,727) ( 85,378) 13,431 5,343 18,774
Federal funds sold 238,967 ( 37,336) 201,631 (18,663) 98,511 79,848
--------- ---------- -------- -------- --------- ---------
Total interest earning assets $1,319,302 $ ( 722,448) $ 596,854 $ 363,395 $1,943,861 $2,307,256
========= ========== ======== ======== ========= =========
Interest expense on:
Deposits:
Interest-bearing demand $ 87,675 $ (8,898) $ 78,777 $ (43,144) $ 73,181 $ 30,037
Savings 19,879 (6,880) 12,999 (32,627) 32,468 ( 159)
Time 196,889 44,037 240,926 260,491 781,235 1,041,726
Federal funds borrowed (12,244) 1,717 (10,527) -- -- --
--------- ---------- -------- -------- ---------- ---------
Total interest-bearing liabilities $ 292,199 $ 29,976 $ 322,175 $ 184,720 $ 886,884 $1,071,604
======== ========== ======== ======== ========== =========
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.
</TABLE>
23<PAGE>
<PAGE>
Table 3
Pinnacle Financial Corporation and Subsidiary
Investment Portfolio
The following table presents the amortized cost and market value of
investments by category at December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- --------------------------- -----------------------------
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 $74,446,250 $75,410,866 $66,422,877 $66,834,518 $70,410,341 $70,408,162
State, county and municipal 15,736,579 16,391,370 15,086,787 15,727,218 15,882,925 16,605,945
Other investments 982,069 1,005,050 134,400 134,400 134,400 134,400
---------- ---------- ---------- ---------- ---------- ----------
Totals $91,164,898 $92,807,286 $81,644,064 $82,696,136 $86,427,666 $87,148,507
</TABLE>
The following table presents the maturities of investment securities
using market values 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, 1998 U.S. Gov't Agencies and Municipal Investments Average Yields
- ------------------------------- ------------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Within 1 year $ 6,051,654 $1,029,433 0 6.76%
After 1 through 5 years 57,299,975 8,105,839 0 6.44%
After 5 through 10 years 12,059,237 4,144,891 $556,250 6.28%
After 10 years 0 3,111,207 448,800 6.90%
Totals $75,410,866 $16,391,370 $1,005,050 6.46%
</TABLE>
24
<PAGE>
<PAGE>
Table 4
Pinnacle Financial Corporation and Subsidiary
Loan Portfolio
<TABLE>
<CAPTION>
The following table presents loans by type at the end of each of the last five years.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 22,383,379 $ 23,267,802 $ 18,406,805 $ 17,273,462 $ 16,748,030
Real estate - construction 5,017,757 5,780,973 2,975,741 1,495,269 864,690
Real estate - mortgage 88,232,782 87,272,975 88,013,785 80,136,557 80,541,344
Installment loans to individuals 28,461,144 28,004,470 23,838,085 22,560,447 20,202,397
----------- ----------- ----------- ----------- -----------
Totals $144,095,062 $144,326,220 $133,234,416 $121,465,735 $118,356,461
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998, maturities of loans in the indicated classifications were as follows:
Commercial,
Financial and Real Estate
Maturity Agricultural Construction Total
-------- ------------- ------------ -----
<S> <C> <C> <C>
Within 1 year $10,243,767 $4,804,070 $15,047,837
1 to 5 years 10,098,477 213,687 10,312,164
After 5 years 2,041,135 0 2,041,135
---------- --------- ----------
Totals $22,383,379 $5,017,757 $27,401,136
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998, the interest terms of loans in the indicated classifications for the indicated
maturity ranges are as follows:
Fixed Variable
Interest Rates Interest Rates Total
--------------- -------------- -----
<S> <C> <C> <C>
Commercial, financial and
agricultural:
1 to 5 years maturity $7,911,239 $2,187,238 $10,098,477
After 5 years maturity 203,063 1,838,072 2,041,135
--------- --------- ----------
8,114,302 4,025,310 12,139,612
Real estate-construction:
1 to 5 years maturity 213,687 -- 213,687
After 5 years maturity -- -- --
--------- --------- ----------
213,687 -- 213,687
--------- --------- ----------
$8,327,989 $4,025,310 $12,353,299
========= ========= ==========
</TABLE>
<PAGE>
Pinnacle's commercial, financial and agricultural loans and
installment loans to individuals include secured and unsecured loans
as detailed below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C>
Commercial, financial and agricultural
Secured $18,694,505 $19,626,449 $13,858,739
Unsecured 3,688,874 3,641,353 4,548,066
---------- ---------- ----------
$22,383,379 $23,267,802 $18,406,805
========== ========== ==========
Installment loans to individuals
Secured $22,646,210 $25,965,091 $21,236,546
Unsecured 5,814,934 2,039,379 2,601,539
---------- ---------- ----------
$28,461,144 $28,004,470 $23,838,085
========== ========== ==========
</TABLE>
25<PAGE>
<PAGE>
Table 4
Pinnacle Financial Corporation and Subsidiary
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 consumer loans are
primarily fixed rate loans.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Real estate - mortgage:
Fixed $60,166,600 $56,110,206 $51,658,160
Variable 28,066,182 31,162,769 36,355,625
---------- ---------- ----------
$88,232,782 $87,272,975 $88,013,785
========== ========== ==========
Consumer loans:
Fixed $26,048,737 $26,903,297 $23,270,977
Variable 2,412,407 1,101,173 567,108
---------- ---------- ----------
$28,461,144 $28,004,470 $23,838,085
========== ========== ==========
</TABLE>
The following summarizes past due, non-accrual and restructured loans
as of December 31, 1998, 1997, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days or more past due $233,337 $ 934,134 $2,669,721 $339,655 $476,340
Non-accrual loans 139,087 102,185 234,594 282,434 296,097
Restructured loans 196,262 251,356 228,375 77,663 216,953
</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.
26<PAGE>
<PAGE>
Table 5
Pinnacle Financial Corporation and Subsidiary
Allowance for Loan Losses
The following table summarizes information concerning the allowance for loan
losses:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,038,015 $1,842,152 $1,828,722 $1,774,567 $1,769,269
Charge-offs:
Commercial, financial and agricultural 193,748 109,846 309,746 191,904 115,175
Real estate-construction -- -- -- -- --
Real estate-mortgage 80,992 -- -- 83,115 62,339
Installment loans to individuals 57,762 79,377 136,747 62,297 64,187
--------- --------- --------- --------- ---------
332,502 189,223 446,493 337,316 241,701
--------- --------- --------- --------- ---------
Recoveries:
Commercial, financial and agricultural 28,895 80,388 17,846 34,682 7,224
Real estate-construction -- -- -- -- --
Real estate-mortgage 92,380 52,801 10,780 2,390 1,564
Installment loans to individuals 18,217 17,897 21,997 24,399 18,211
--------- --------- --------- --------- ---------
139,492 151,086 50,623 61,471 26,999
--------- --------- --------- --------- ---------
Net charge-offs 193,010 38,137 395,870 275,845 214,702
--------- --------- --------- --------- ---------
Additions charged to operations 225,000 234,000 409,300 330,000 220,000
--------- --------- --------- --------- ---------
Balance at end of year $2,070,005 $2,038,015 $1,842,152 $1,828,722 $1,774,567
========= ========= ========= ========= =========
Ratio of net charge-offs during the period to
average loans outstanding during the period .14% .03% .32% .25% .19%
=== === === === ===
</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:<PAGE>
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.
27<PAGE>
<PAGE>
Table 5
Pinnacle Financial Corporation and Subsidiary
Allowance for Loan Losses (continued)
Specific risk elements associated with each lending category are
as follows:
<TABLE>
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.
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.
<CAPTION>
Allocation of the Allowance for Loan Loss
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and agricultural $ 612,820 $ 483,911 $ 363,000 $ 246,000 $ 303,000
Real Estate-construction 36,000 0 0 0 0
Real Estate-mortgage 99,300 241,777 155,000 141,500 71,443
Installment loans to individuals 122,500 92,706 18,000 17,000 17,000
Lease financial 0 0 0 0 0
Foreign 0 0 0 0 0
Unallocated 1,199,385 1,219,621 1,306,152 1,424,222 1,383,124
--------- --------- --------- --------- ---------
$2,070,005 $2,038,015 $1,842,152 $1,828,722 $1,774,567
========= ========= ========= ========= =========
</TABLE>
28<PAGE>
<PAGE>
Table 6
Pinnacle Financial Corporation and Subsidiary
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>
1998 1997 1996
------------------------ ------------------------ --------------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Noninterest bearing $ 39,613,496 -- $ 34,808,902 -- $ 29,866,520 --
Interest-bearing 47,241,779 2.60% 43,971,090 2.61% 46,831,618 2.55%
Savings deposits 17,501,057 3.02% 16,864,104 3.06% 16,535,228 3.06%
Time deposits 112,620,899 5.48% 109,036,301 5.44% 102,933,382 5.37%
----------- ----------- -----------
Totals $216,977,231 $204,680,397 $196,166,748
=========== =========== ===========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1998 are summarized as follows:
Time Certificates
of Deposit
-----------------
Within 3 months $9,018,804
After 3 through 6 months 2,527,593
After 6 through 12 months 9,778,461
After 12 months 7,978,884
----------
Total $29,303,742
==========
Table 7
Selected Ratios
The following table sets out certain ratios of Pinnacle for the years
indicated.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income to:
Average shareholders' equity 12.64% 14.54% 14.67%
Average assets 1.90% 2.08% 2.01%
Dividends to net income 33.50% 29.60% 29.90%
Average equity to average assets 15.04% 14.35% 13.70%
</TABLE>
29<PAGE>
<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, 1998 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 $ 7,150,000 $ 0 $ 0 $ 0 $ 7,150,000
Taxable investment securities 500,000 5,551,655 57,856,534 13,064,286 76,972,475
Nontaxable investment securities 233,721 795,712 7,549,280 7,256,098 15,834,811
Loans 49,563,275 18,170,612 73,717,544 2,643,631 144,095,062
---------- ---------- ------------ ----------- -----------
Total earning assets $57,446,996 $24,517,979 $ 139,123,358 $ 22,964,015 $244,052,348
Interest bearing liabilities:
- ----------------------------
Time deposits $ 27,081,686 $ 51,846,822 $ 32,596,892 $ 2,153 $ 111,527,553
Other interest bearing deposits 67,996,928 0 0 0 67,996,928
Fed Funds Purchased 0 0 0 0 0
---------- ---------- ------------ ----------- -----------
Total interest bearing liabilities $ 95,078,614 $ 51,846,822 $ 32,596,892 $ 2,153 $ 179,524,481
Gap summary
- -----------
Periodic net earning assets ($37,631,618) ($27,328,843) $106,526,466 $22,961,862 $64,527,867
Cumulative net earnings assets ($37,631,618) ($64,960,461) $41,566,005 $64,527,867 $64,527,867
Cumulative ratio of earning assets
to interest bearing liabilities 60.42% 55.79% 123.15% 135.94% 135.94%
</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.
30<PAGE>
<PAGE>
Item 7. FINANCIAL STATEMENTS
The financial statements and the report of independent public
accountants are included in this report beginning at page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the Company's two most recent fiscal years,
the Company did not change accountants and had no disagreements with
its accountants on any matters of accounting principle or practices or
financial statement disclosure.
31<PAGE>
<PAGE>
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, 1999 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, 1999.
<TABLE>
<CAPTION>
Number of Shares
Owned Beneficially
Name Age Position with Pinnacle (Percent of Class)
---- --- ---------------------- ------------------
<S> <C> <S> <C>
Maurice Bond 64 Director 896*
Charles Bradshaw 75 Director 1,600*
H. Thomas Brown 47 Director 100*
Anderson Dilworth 69 Director 4,720*
Linton W. Eberhardt 59 Vice-Chairman, President & Director 600* <F1>
Don C. Fortson 49 Senior Vice-President & Director 830* <F2>
William F. Grant 68 Director 5,064* <F3>
Robert H. Hardy 50 Director 224*
E. Calvin Hill 66 Director 2,104* <F4>
Robert E. Lee, III 47 Director 400*
J. Daniel McAvoy, M.D. 48 Director 612*
L. Jackson McConnell 61 Chairman, Chief 201,123(26.2%) <F5>
Executive Officer & Director
L. Jackson McConnell, Jr. 32 Vice-President & Director 200*
James E. Purcell 58 President, Chief Credit Officer & 3,400*
Director
Steven A. Williams 45 Director 1,832*
223,705 (29.1%)
All directors and executive officers as a group (15 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> Shares owned as JTROS with wife, Anne B. Fortson.
<F3> Includes 392 shares held jointly with Mr.Grant's wife, and does
not include 400 shares held by Mr. Grant's wife individually.
<F4> Includes 1,272 shares held jointly with Mr. Hill's wife.
<F5> 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.
</FN>
(/TABLE>
32<PAGE>
<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, 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. Dilworth is owner and President of Dill's Food City, a chain
of retail grocery stores. He has been a director of Royston since
1981 and a director of Pinnacle since March 1998.
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. Fortson has been an officer of the Elberton office since
March 1975 and Senior Vice President since March 1997. He has been a
director of Elberton since March 1992 and a director of Pinnacle Bank
since March 1998.
Mr. Grant is a retired Superior Court Judge and has been a
director of Elberton since March 1968, and a director of Pinnacle
since March 1998.
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. Hill is owner of a granite company and has been a director of
Elberton since March 1997 and a director of Pinnacle since March 1998.
Mr. Lee is co-owner and President of Elbert Insurance Agency and
has been a director of Elberton since March 1988 and a director of
Pinnacle since March 1998.
Dr. McAvoy is a local physician and has been a director of
Elberton since March 1988 and a director of Pinnacle since March 1998.
Mr. Jack 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. Jackson McConnell, Jr. has been Vice President of Elberton
since March 1995 and director of Elberton since March 1995 and
director of Pinnacle since March 1998.
Mr. Purcell has been President of Elberton since 1990. Prior to
that time he was Executive Vice President of Elberton. He has been a
33<PAGE>
<PAGE>
Director of Elberton since 1977, a director of Pinnacle since 1983 and
Vice President of Pinnacle since September 1983.
Mr. Williams is owner of Tri-State Distributors, Inc., a heating
and air conditioning wholesale business. He has been a director of
Royston and Pinnacle since March 1997.
Mr. Eberhardt and Mr. Jack McConnell are brothers-in-law and the
two McConnells are father and son. There are no other family
relationships among the directors of Pinnacle.
Item 10. Executive Compensation
*** The following table sets forth the annual and long-term
compensation paid to the chief executive officer and each executive
officer of Pinnacle whose salary and bonus exceeded $100,000 for
fiscal years ending December 31, 1998, 1997, and 1996 (the "Named
Executive Officers").
34<PAGE>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and Principal --------------------------- ----------------------
Position Year Salary<F1> All Other Compensation
_______________________________________________________________________________________________
<S> <C> <C> <C>
L. Jackson McConnell 1998 $187,963 $28,667 <F3>
Chairman and Chief 1997 $192,848 <F2> $28,667 <F4>
Executive Officer of 1996 $157,370 <F2> $21,000 <F5>
Pinnacle
James E. Purcell 1998 $164,014 $28,032 <F6>
President and Chief Credit 1997 $149,657 $25,996 <F7>
Officer of Pinnacle 1996 $139,507 $22,500 <F8>
Linton W. Eberhardt 1998 $164,329 $28,069 <F9>
Vice Chairman and 1997 $129,874 $23,611 <F10>
President of Pinnacle 1996 $102,325 $13,232 <F11>
<FN>
<F1> Includes directors fees.
<F2> Includes directors fees Mr. McConnell received in 1996 and
1997 as an officer and director of Royston.
<F3> Reflects $28,000 and $667 contributed by Pinnacle to Mr.
McConnell's account in Pinnacle's profit sharing plan and
401-K Plan, respectively.
<F4> Reflects $28,000 and $667 contributed by Pinnacle to Mr.
McConnell's account in Pinnacle's profit sharing plan and
401-K Plan, respectively.
<F5> Reflects $16,770 and $4,230 contributed by Pinnacle to Mr.
McConnell's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F6> Reflects $27,048 and $984 contributed by Pinnacle to Mr.
Purcell's account in Pinnacle's profit sharing plan and 401-
K Plan, respectively.
<F7> Reflects $23,994 and $2,002 contributed by Pinnacle to Mr.
Purcell's account in Pinnacle's profit sharing plan and 401-
K Plan, respectively.
<F8> Reflects $18,750 and $3,750 contributed by Pinnacle to Mr.
Purcell's account in Pinnacle's ESOP and 401-K Plan,
respectively.
<F9> Reflects $27,104 and $965 contributed by Pinnacle to Mr.
Eberhardt's account in Pinnacle's profit sharing plan and
401-K Plan, respectively.
<F10> Reflects $21,408 and $2,203 contributed by Pinnacle to Mr.
Eberhardt's account in Pinnacle's profit sharing plan and
401-K Plan, respectively.
<F11> Reflects $10,308 and $2,924 contributed by Pinnacle to Mr.
Eberhardt's account in Pinnacle's ESOP and 401-K Plan,
respectively.
</FN>
(/TABLE>
35<PAGE>
<PAGE>
Director's Compensation
- -----------------------
Directors of Pinnacle currently do not receive compensation for
attending meetings of the Board of Directors. During the first three
months of 1998, directors of the Bank received a fee of $750 for
service as a director. During the last nine months of 1998, directors
of the Bank received a fee of $800 for service as a director. During
1997, Directors of Pinnacle received $250 for each meeting of the
Board of Directors of Pinnacle.
Salary Continuation Agreement
- -----------------------------
L. Jackson McConnell, Chairman and Chief Executive Officer and a
Director of Pinnacle, James E. Purcell, President and Chief Credit
Officer and a Director of Pinnacle, and Linton W. Eberhardt, Vice-
Chairman and President and a Director of Pinnacle entered into a non-
qualified salary continuation agreement (the Salary Continuation
Plans ) with the bank which provides 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 their 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 the Bank 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, 1998 and 1997.
</TABLE>
<TABLE>
<CAPTION>
Estimated Estimated
Death Annual Death Annual
Benefit Retirement Benefit Retirement
Date of Value Benefits Value Benefits\
Executive Officer Agreement 12/31/98 12/31/98 12/31/97 12/31/97
- ------------------ --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
L. Jackson McConnell 10-24-95 $557,567 $30,947 $487,563 $30,947
James E. Purcell 12-16-94 $236,755 $21,748 $188,847 $21,748
Linton W. Eberhardt 11-10-94 $236,546 $20,212 $178,982 $20,212
(/TABLE>
36<PAGE>
<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,
1999, the following information: (a) the owner's name and address, (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 <F1>(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 <F2>(25.3%)
390 Virginia Hills Road
Royston, Georgia 30624
JAM Family Partnership II, L.P. 193,863 (25.2%)
884 Elbert Street
Elberton, Georgia 30635
<FN>
<F1> 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.
<F2> Includes 193,863 shares held by the JAM Family Partnership 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 he disclaims beneficial
ownership.
</FN>
Item 12. Certain Relationships and Related Transactions
The Bank has had, and expects 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.
37
<PAGE>
<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
----------- --------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
3.1 Articles of Incorporation of Pinnacle, as amended <F1>
3.2 Bylaws of Pinnacle, as amended <F1>
10.4 Flexible Premium Life Insurance. <F1> <F2>
10.5 Indexed Executive Salary Continuation Plan. <F1> <F2>
21.0 Subsidiaries of Pinnacle Financial Corporation.
24.0 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> Incorporated bny reference from Pinnacle's Form S-4, filed
with the Securities and Exchange Commission, dated August 16,
1993.
<F2> Management Contract or Compensatory Plan required to be filed
as an exhibit.
</FN>
(b) Pinnacle did not file any reports on Form 8-K during the
fourth quarter of 1998.
38<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . F-1
FINANCIAL STATEMENTS
Consolidated balance sheets dated as of
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated statements of income for the
years ended December 31, 1998 and 1997 . . . . . . . . . . . . F-3
Consolidated statements of cash flows for the
years ended December 31, 1998 and 1997 . . . . . . . . . . . . F-4
Consolidated statements of shareholders' equity
for the years ended December 31, 1998 and 1997 . . . . . . . . F-5
Notes to consolidated financial statements . . . . . . . . . . . F-6 through F-24
</TABLE>
<PAGE>
<PAGE>
January 15, 1999
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, 1998 and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for the years ended December 31, 1998 and 1997. 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, 1998 and the
consolidated results of their operations and their cash flows for the
years ended December 31, 1998 and 1997 in conformity with generally
accepted accounting principles.
/s/ Whittemore & Smith, LLP
F-1<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
Assets
- ------
<S> <C>
Cash and due from banks $ 10,083,914
Federal funds sold 7,150,000
Securities available for sale 92,807,286
Loans, net of allowance for credit losses of $2,070,005 142,025,057
Premises and equipment 8,636,788
Accrued interest receivable 2,653,111
Foreclosed real estate 495,566
Other assets 1,335,761
------------
Total assets $ 265,187,483
============
Liabilities and Shareholders' Equity
- ------------------------------------
Liabilities
- -----------
Demand deposits $ 41,417,077
Savings and NOW deposits 67,996,928
Other time deposits 111,527,553
------------
Total deposits 220,941,558
Accrued interest and other liabilities 3,598,216
------------
Total liabilities 224,539,774
------------
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 24,669,429
Accumulated other comprehensive income 1,018,280
------------
Total shareholders' equity 40,647,709
------------
Total liabilities and shareholders' equity $ 265,187,483
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-2<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
<S> <C> <C>
Interest Income
- ---------------
Loans, including fees $ 14,850,838 $ 14,536,043
Securities available for sale 5,440,598 5,397,762
Federal funds sold 385,129 172,970
------------- -------------
Total interest income 20,676,565 20,106,775
------------- -------------
Interest expense
- ----------------
Deposits 7,926,755 7,594,054
------------- -------------
Total interest expense 7,926,755 7,594,054
------------- -------------
Net interest income 12,749,810 12,512,721
Provision for credit losses 225,000 234,000
------------- -------------
Net interest income after provision
for credit losses 12,524,810 12,278,721
------------- -------------
Other income
- ------------
Service charges on deposit accounts 1,298,148 1,361,733
Other service charges and fees 896,940 422,873
Net realized gains on sales of securities
available for sale 28,254 -
Other income 204,445 208,453
------------- -------------
Total other income 2,427,787 1,993,059
------------- -------------
Other expenses
- --------------
Salaries and employee benefits 4,595,496 4,199,693
Occupancy expense 1,109,520 1,038,229
Net realized losses on sales of securities
available for sale - 92
Other expenses 2,177,292 1,883,220
------------- -------------
Total other expenses 7,882,308 7,121,234
------------- -------------
Income before income taxes 7,070,289 7,150,546
Income tax expense 2,141,588 2,091,554
------------- -------------
Net income $ 4,928,701 $ 5,058,992
============= =============
<PAGE>
Net income per share of common stock $6.42 $6.59
===== =====
Average shares outstanding 768,000 768,000
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income $ 4,928,701 $ 5,058,992
------------- -------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 550,163 475,073
Gain on sale of premises and equipment ( 2,302) ( 2,270)
Provision for credit losses 225,000 234,000
Deferred income taxes ( 63,462) ( 75,803)
Net realized (gains) losses on securities
available for sale ( 28,254) 92
(Increase) decrease in accrued interest
receivable and other assets ( 227,729) 529,823
Increase in accrued expenses and other
liabilities 1,015,481 396,783
------------- -------------
Total adjustments 1,468,897 1,557,698
------------- -------------
Net cash provided by operating activities 6,397,598 6,616,690
------------- -------------
Cash flows from investing activities
- ------------------------------------
Net increase in federal funds sold ( 2,492,830) ( 3,995,198)
Purchase of securities available for sale (38,864,848) (26,288,199)
Proceeds from sales of securities available
for sale 18,954,884 21,710,909
Proceeds from maturities of securities
available for sale 10,150,981 9,248,182
Net (increase) decrease in loans 38,148 (11,129,941)
Proceeds from sale of premises and equipment 33,185 2,730
Purchases of premises and equipment ( 1,565,580) ( 2,569,129)
------------- -------------
Net cash used by investing activities ( 13,746,060) (13,020,646)
------------- -------------
Cash flows from financing activities
- ------------------------------------
Net increase in non-interest bearing demand,
savings and NOW deposit accounts 10,023,708 5,978,959
Net increase (decrease) in time deposits ( 1,369,807) 5,436,542
Net increase (decrease) in federal funds purchased ( 360,000) 250,000
Dividends paid ( 1,651,200) ( 1,497,600)
------------- -------------
Net cash provided by financing activities 6,642,701 10,167,901
------------- -------------
Net increase (decrease) in cash and due from banks ( 705,761) 3,763,945
Cash and due from banks at January 1 10,789,675 7,025,730
------------- -------------
Cash and due from banks at December 31 $ 10,083,914 $ 10,789,675
============= =============
Interest paid $ 7,316,086 $ 7,334,907
============= =============
Income taxes paid $ 2,311,965 $ 2,015,243
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
Accumulated
Other Total
Common Capital Retained Comprehensive Shareholders'
Stock Surplus Earnings Income Equity
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 7,680,000 $ 7,280,000 $ 17,830,536 $ 475,755 $ 33,266,291
Comprehensive income:
Net income for 1997 5,058,992 5,058,992
Change in unrealized gain (loss) on
securities available for sale, net
of tax effects 219,679
Less: Reclassification adjustments ( 1,067)
218,612
Total comprehensive income 5,277,604
Cash dividends paid - $1.95 per share (1,497,600) (1,497,600)
----------- ------------ ------------ ----------- ------------
Balance, December 31, 1997 7,680,000 7,280,000 21,391,928 694,367 37,046,295
Comprehensive income:
Net income for 1998 4,928,701 4,928,701
Change in unrealized gain (loss) on
securities available for sale, net
of tax effects 352,481
Less: Reclassification adjustments ( 28,568)
323,913
Total comprehensive income 5,252,614
Cash dividends paid - $2.15 per share (1,651,200) (1,651,200)
----------- ----------- ------------ ----------- ------------
Balance, December 31, 1998 $ 7,680,000 $ 7,280,000 $ 24,669,429 $ 1,018,280 $ 40,647,709
=========== =========== ============ =========== ============
</TABLE>
F-5<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 1 - Summary of 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. Pinnacle Financial Corporation (the
--------------------
Company) is a bank holding company whose principal activity is the
ownership and management of its wholly-owned subsidiaries, Pinnacle
Bank, N.A. (the Bank) and Pinnacle Bank. On January 1, 1998, the two
subsidiaries merged and Pinnacle Bank, N.A. was the surviving
corporation. The bank provides a variety of financial services to
individuals and corporate customers through its eight locations in
Northeast Georgia. The bank's primary deposit products include non-
interest and interest-bearing checking accounts, savings accounts, and
certificates of deposit. The bank also offers various lending
products with a substantial portion of the portfolio collateralized by
real estate (See Note 4). The bank operates under a national bank
charter and is subject to regulation by the Office of the Comptroller
of the Currency (OCC) and the Federal Deposit Insurance Corporation.
Basis of 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.
and Pinnacle Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
Use of Estimates. The preparation of financial statements in
----------------
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and 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.
The determination of the adequacy of the allowance for loan
losses is based on estimates that are particularly susceptible to
significant changes in the economic environment and market conditions.
In connection with the determination of the estimated losses on loans,
management obtains independent appraisals for significant collateral.
The bank's loans are generally secured by specific items of
collateral including real property, consumer assets, and business
assets. Although the bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts
is dependent on local economic conditions in the granite and
agricultural industries.
<PAGE>
While management uses available information to recognize losses
on loans, further reductions in the carrying amounts of loans may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the estimated losses on loans. Such agencies may
require the bank to recognize additional losses based on their
judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that
the estimated losses on loans may change materially in the near term.
However, the amount of the change that is reasonably possible cannot
be estimated.
F-6<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 1 - Summary of Significant Accounting Policies - (Continued)
Significant Group Concentrations of Credit Risk. Most of the
-----------------------------------------------
company's activities are with customers located in the Northeast
Georgia area. Note 3 discusses the types of securities that the
company invests in. Note 4 discusses the types of lending that the
company engages in. The company has significant concentrations, as
defined by their regulators, in the granite and agricultural
industries.
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.
Securities available for sale are carried at fair value with
unrealized gains and losses, net of tax effects, reported in
accumulated other comprehensive income.
Realized gains (losses) on the sale of securities available for
sale are recorded on the trade date and 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 3).
The amortization of premiums and accretion of discounts are
recognized in interest income using methods approximating the interest
method over the period to maturity.
Loans. Loans are stated at the amount of unpaid principal
-----
reduced by the allowance for credit losses (See Note 4).
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.
F-7<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 1 - Summary of Significant Accounting Policies - (Continued)
Allowance for credit losses. 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 periodic 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. 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. (See Note 5).
A loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect
the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis by either the present value of
expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent. Substantially all of
the company's loans which have been identified as impaired have been
measured by the fair value of existing collateral.
Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the company does
not separately identify individual consumer loans for impairment
disclosures.
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 when they are funded or related fees are
received or paid (See Note 16). <PAGE>
Premises and equipment. Land is carried at cost. Other 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 6). Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.
F-8<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 1 - Summary of Significant Accounting Policies - (Continued)
Foreclosed real estate. Real estate properties acquired through
----------------------
loan foreclosure are initially recorded at the lower of the company's
carrying amount or fair value less estimated selling cost at the date
of foreclosure. Any write-downs based on the asset's fair value at
the date of acquisition are charged to the allowance for credit
losses. After foreclosure, these assets are carried at the lower of
their new cost basis or fair value less cost to sell. Costs of
significant property improvements are capitalized, whereas costs
relating to holding property are expensed. Valuations are
periodically performed by management, and any subsequent write-downs
are recorded as a charge to operations, if necessary, to reduce the
carrying value of a property to the lower of its cost or fair value
less cost to sell.
Pension costs. Pension costs are charged to salaries and
-------------
employee benefits expense and are funded as accrued (See Note 11).
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. The deferred tax
assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled. 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 12). The company files consolidated income tax
returns with it subsidiaries.
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.
<PAGE>
Securities available for sale - Fair values for investment
securities, excluding restricted equity securities, are based on
quoted market prices.
F-9<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 1 - Summary of Significant Accounting Policies - (Continued)
Loans receivable - For variable-rate loans that reprice
frequently and have no significant change in credit risk, fair values
are based on carrying values. Fair values for certain mortgage loans
(e.g., one-to-four family residential), credit card loans, and other
consumer loans are based on quoted market prices of similar loans sold
in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for commercial real
estate and commercial loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Deposit liabilities - The fair values disclosed for demand
deposits are, by definition, equal to the amount payable on demand at
the reporting date (that is, their carrying amounts). The carrying
amounts of variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair values at the reporting
date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
Accrued interest - The carrying amounts of accrued interest
approximate their fair values.
Off-balance-sheet instruments - Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing (See Note 16).
Comprehensive Income
--------------------
The company adopted SFAS No. 130, "Reporting Comprehensive
Income," as of January 1, 1998. Accounting principles generally
require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section
of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had
no effect on the company's net income or shareholders' equity.
<PAGE>
The change in unrealized gain (loss) on securities available for
sale and related tax effects are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997
---- ----
<S> <C> <C>
Net unrealized gain (loss) on securities
available for sale $ 1,642,388 $ 1,052,072
Tax effects ( 624,108) ( 357,705)
---------- ----------
Net-of-tax amount $ 1,018,280 $ 694,367
========== ==========
</TABLE>
F-10<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 2 - Restriction on Cash and Due From Banks
The company is required to maintain a minimum deposit with the
Federal Reserve Bank for clearings. The required deposit was $25,000
at December 31, 1998 and 1997.
Note 3 - 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, 1998:
U.S. Treasury $13,733,050 $ 387,125 $ -- $14,120,175
U.S. Government agencies 56,509,268 600,719 ( 67,869) 57,042,118
State and Municipals 15,736,579 662,004 ( 7,213) 16,391,370
Mortgage-backed securities 4,203,932 44,641 -- 4,248,573
Other securities 982,069 22,981 -- 1,005,050
----------- ---------- ---------- -----------
$91,164,898 $1,717,470 ($ 75,082) $92,807,286
=========== =========== ========== ===========
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
=========== =========== ========== ===========
(/TABLE>
The amortized cost and estimated market value of securities by
contractual maturity at December 31, 1998 are as follows:
</TABLE>
<TABLE>
<CAPTION>
Amortized Estimated
Cost Basis Market Value
---------- ------------
<S> <C> <C>
Securities available for sale:
Due in one year or less $ 7,018,511 $ 7,081,087
Due after one year through five years 60,049,360 61,157,241
Due after five years through ten years 16,456,134 16,760,378
Due after ten years 3,436,961 3,560,007
----------- -------------
86,960,966 88,558,713
Mortgage-backed securities 4,203,932 4,248,573
----------- -------------
$91,164,898 $92,807,286
=========== =============
(/TABLE>
F-11<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 3 - Investment Securities - (Continued)
Nontaxable and taxable interest income on securities available for sale were as follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Nontaxable $ 838,274 $ 922,410
Taxable 4,602,324 4,475,352
---------- ----------
$5,440,598 $5,397,762
========== ==========
(/TABLE>
Gross realized gains and gross realized losses on sales of securities
available for sale were:
1998 1997
---- ----
Gross realized gains:
U.S. Government and agency securities $13,177 $12,519
State and municipal securities 17,501 5,900
------- -------
$30,678 $18,419
======= =======
Gross realized losses:
U.S. Government and agency securities $2,110 $18,185
State and municipal securities 314 326
------ -------
$2,424 $18,511
====== =======
Investment securities, with a carrying value of approximately $27,193,238
at December 31, 1998 and $22,002,907 at December 31, 1997, were
pledged to secure public deposits. The market value for such pledged
securities was approximately $28,098,934 and $22,242,300 at December 31,
1998 and 1997, respectively.
<PAGE>
Note 4 - Loans
The components of loans in the consolidated balance sheets were as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Commercial $ 22,383,379 $ 23,267,802
Real estate construction 5,017,757 5,780,973
Commercial real estate 48,711,718 45,904,077
Residential real estate 39,521,064 41,368,898
Consumer 28,461,144 28,004,470
----------- ------------
Total loans 144,095,062 144,326,220
Allowance for credit losses 2,070,005 2,038,015
----------- ------------
Net loans $142,025,057 $142,288,205
============ ============
F-12<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 4 - Loans - (Continued)
The accrual of interest has been discontinued on loans amounting to $139,087
at December 31, 1998 and $102,185 at December 31, 1997.
The effect on interest income was $11,851 and $10,034 for 1998 and 1997, respectively.
Note 5 - Allowance for Credit Losses
An analysis of the change in the allowance for credit losses follows:
</TABLE>
<TABLE>
<CAPTION>
December 31
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Balance at January 1 $2,038,015 $1,842,152
---------- -----------
Credits charged off ( 332,502) ( 189,223)
Recoveries 139,492 151,086
---------- -----------
Net credits charged off ( 193,010) ( 38,137)
Provision for credit losses 225,000 234,000
---------- -----------
Balance at December 31 $2,070,005 $2,038,015
========== ==========
(/TABLE>
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 $1,718,154 and
$764,292 in 1998 and 1997, respectively has been recognized in
conformity with FAS 114, Accounting by Creditors for Impairment of a
Loan as amended by FAS 118. The average recorded investment in
impaired loans during 1998 and 1997 was $1,076,924 and $1,162,563,
respectively. The total allowance for credit losses related to those
loans was $725,820 and $267,000 in 1998 and 1997, respectively.
Interest income on impaired loans of $70,062 and $74,469 was
recognized for cash payments received in 1998 and 1997, 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.
F-13<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 6 - Bank Premises and Equipment
Components of premises and equipment included in the consolidated
balance sheets at December 31, 1998 and 1997 were as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Land $ 1,270,252 $ 1,270,252
Land improvements 345,872 340,666
Buildings 5,693,928 4,806,513
Building improvements 206,214 206,214
Furniture & fixtures 4,727,564 4,372,740
------------ -------------
Total cost 12,243,830 10,996,385
Accumulated depreciation ( 3,607,042) ( 3,344,131)
------------ ------------
Net book value $ 8,636,788 $ 7,652,254
============ ============
(/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 1998
and 1997 was $550,163 and $475,073, respectively.
Pinnacle Bank, N.A. completed construction of a branch facility
in Lavonia during 1998.
Note 7 - Other Assets and Other Liabilities
The major components of other assets and other liabilities are as
follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Other assets:
Deferred income taxes $ -- $ 17,391
Cash surrender value of life insurance 1,067,419 1,017,132
Prepaid income tax 83,138 17,610
Other 185,204 239,887
---------- ----------
$1,335,761 $1,292,020
========== ==========
Accrued interest and other liabilities:
Deferred income taxes $ 185,550 $ --
Accrued interest payable 2,392,058 1,780,732
Compensation and retirement deferral 415,152 445,111
Other 605,456 420,354
---------- ---------
$3,598,216 $2,646,197
========== ==========
(/TABLE>
F-14<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 8 - Deposits
Deposit account balances by maturity at December 31, 1998 are as follows:
</TABLE>
<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 $109,414,005 $ -- $ -- $ -- $109,414,005
Time deposits under $100,000 18,062,882 39,540,768 24,618,008 2,153 82,223,811
Time deposits over $100,000 9,018,804 12,306,054 7,978,884 -- 29,303,742
------------ ----------- ----------- ------ ------------
$136,495,691 $51,846,822 $32,596,892 $2,153 $220,941,558
============ =========== =========== ====== ============
(/TABLE>
The amount of demand deposits reclassified as loans were $245,114
and $119,161 at December 31, 1998 and 1997, respectively.
Note 9 - 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 1998. Interest expense in the
amount of $657 was incurred on these amounts which was netted with
interest income on federal funds sold.
Note 10 - Other Expenses
The major components of other expenses are as follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Stationary, supplies and printing expense $ 255,521 $ 262,868
Professional fees 442,560 300,889
Advertising and public relations expense 240,815 230,343
Other expenses 1,238,396 1,089,120
---------- ----------
$2,177,292 $1,883,220
========== ==========
(/TABLE>
Note 11 - 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 $226,568 in 1998 and $220,183 in 1997.
F-15<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 11 - Employee Benefits and Employee Stock Ownership Plan - (Continued)
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, 1998, the ESOP had purchased no
qualified employer securities. There were no contributions for the
ESOPs in 1998 or 1997.
Note 12 - Income Taxes
The consolidated provision for income taxes consisted of the following:
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------
1998 1997
---- ---
<S> <C> <C>
Current provision - federal $2,123,747 $2,163,429
Current provision - state 81,303 3,928
Deferred portion ( 63,462) ( 75,803)
--------- ---------
$2,141,588 $2,091,554
========= =========
(/TABLE>
The provision for federal income taxes is less than that computed
by applying the federal statutory rate of 34% in 1998 and 1997, as
indicated in the following analysis:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- -----
<S> <C> <C>
Statutory rates 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income ( 4.4%) ( 5.1%)
Interest and other nondeductible expenses 1.2% 2.0%
Deferred portion ( .3%) ( 1.1%)
Other, net ( .2%) ( .6%)
----- -----
30.3% 29.2%
===== =====
(/TABLE>
F-16<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 12 - Income Taxes - (Continued)
The components of the deferred income tax asset (liability) included
in other assets (liabilities) are as follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liability ($ 625,435) ($ 358,168)
Deferred tax asset 439,885 375,559
-------- ---------
Net deferred tax asset (liability) ($ 185,550) $ 17,391
======== =========
(/TABLE>
The tax effects of each type of significant item that gave rise to
deferred taxes are as follows:
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Tax depreciation in excess of book
depreciation ($380,822) ($318,078)
Excess of book provision for loan
losses over deduction for federal
income tax purposes 613,130 537,713
Non-deductible deferred directors'
fees and interest 129,534 92,388
Other real estate owned cost
capitalization for tax purposes 56,363 59,441
Unrealized gain/losses on securities ( 624,108) (357,704)
Other, net 20,353 3,631
------- -------
Total deferred tax asset (liability) ($185,550) $ 17,391
======= =======
(/TABLE>
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.
F-17<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 13 - 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 1998 and 1997:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $3,486,622 $4,143,081
New loans 2,047,134 2,210,340
Repayments (2,460,351) (2,866,799)
--------- ---------
Ending balance $3,073,405 $3,486,622
========= =========
(/TABLE>
The company had deposits of approximately $3,452,488 and $4,899,077
for related parties at December 31, 1998 and 1997, respectively.
Note 14 - Executive Retirement Benefits
As of December 1998, the bank subsidiary has a non-qualified
executive salary continuation plan which will provide benefits to the
Chairman and Vice-Chairman of the Board of Directors and President
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.
Note 15 - 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.
F-18<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 16 - 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, 1998 and 1997 are as
follows:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit $ 2,350,000 $ 500,000
Credit card arrangements 2,354,855 2,052,154
Undisbursed lines of credit 17,137,046 11,263,640
Standby letters of credit 571,700 1,146,391
Commitment to issue letter of credit 1,750,000 --
---------- ----------
$24,163,601 $14,962,185
=========== ===========
(/TABLE>
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the company upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing commercial properties.
Standby letters of credit written are conditional commitments
issued by the company to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public
and private borrowing arrangements.
In accordance with resolutions adopted by the Board of Directors,
the company does not have derivative financial instruments, therefore,
FAS 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" does not have an effect on the
company.
F-19<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 16 - Financial Instruments - (Continued)
The estimated fair values of the company's financial instruments were
as follows ($ in thousands):
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------ ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ------ ------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 10,084 $ 10,084 $ 10,790 $ 10,790
Federal funds sold 7,150 7,150 4,657 4,657
Securities available for sale 92,807 92,807 82,696 82,696
Loans receivable, net 142,025 142,755 142,289 142,603
Accrued interest receivable &
other assets 13,121 13,121 11,908 11,908
Financial liabilities:
Deposits $220,941 $212,840 $212,288 $204,049
Federal funds purchased -- -- 360 360
Accrued interest payable &
other liabilities 3,598 3,598 2,646 2,646
Off-balance-sheet instruments:
Commitments, commercial lines
of credit, and standby
letters of credit $ 151 $ 63
(/TABLE>
Note 17 - Merger of Subsidiaries
In December, 1996, the bank holding company and subsidiaries
announced their intent to merge the subsidiaries. The merger took\
effect on January 1, 1998, with Pinnacle Bank, N.A. as the sole
subsidiary.
Note 18 - 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 without prior regulatory approval. At December 31,
1998, approximately $11,462,706 of retained earnings were available
for dividend declaration without prior regulatory approval.
F-20<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 19 - Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
<PAGE>
The Bank's actual capital amounts and ratios are also presented
in the table ($ in thousands):
</TABLE>
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes: Action Provisions:
------------------- ---------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $41,647 25.81% >$12,911 >8.0% >$16,139 >10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $39,629 24.56% >$ 6,455 >4.0% >$ 9,683 >6.0%
- - - -
Tier I Capital
(to Average Assets) $39,629 14.97% >$10,585 >4.0% >$13,232 >5.0%
- - - -
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $38,239 25.34% >$12,074 >8.0% >$15,093 >10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $36,352 24.09% >$ 6,037 >4.0% >$ 9,056 >6.0%
- - - -
Tier I Capital
(to Average Assets) $36,352 15.00% >$ 9,691 >4.0% >$12,114 >5.0%
- - - -
(/TABLE>
F-21<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 20 - 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", has been 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. All outside vendors have been contacted
and the majority have responded that they are Year 2000 compliant.
The company plans to perform in-house testing for products whose
vendors have not responded in the first quarter of 1999. Products
that fail testing will be replaced by March, 1999. The company is in
the process of receiving and reviewing proxy results of testing from
their major software vendor. 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 has not incurred and does not foresee any material
expenditures for the Year 2000 project.
Note 21 - Pinnacle Financial Corporation (Parent Company Only) Financial Information
Balance Sheet
December 31, 1998
</TABLE>
<TABLE>
<CAPTION>
Assets
- ------
<S> <C>
Cash $ 23,898
Securities available for sale 315,431
Investment in subsidiaries 40,290,858
Furniture and fixtures, net of accumulated
amortization of $4,147 12,703
Accrued interest receivable 6,887
Due from subsidiary 6,000
-----------
$40,655,777
===========
Liabilities and Shareholders' Equity
- ------------------------------------
Due to subsidiaries $ 601
Deferred tax liability 7,467
Income taxes payable --
Common stock 7,680,000
Capital surplus 7,280,000
Retained earnings 24,669,429
Unrealized appreciation on securities, net of tax 1,018,280
-----------
$40,655,777
===========
(/TABLE>
F-22<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 21 - Pinnacle Financial Corporation (Parent Company Only) Financial
Information - (Continued)
Statements of Income
Years ended December 31, 1998 and 1997
--------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income:
Dividends from subsidiaries $1,697,200 $1,947,600
Interest income - securities available for sale 14,713 6,235
---------- ----------
1,711,913 1,953,835
Expenses:
Other expenses 115,572 189,661
---------- ----------
Income before income taxes and equity in
undistributed net income of subsidiaries 1,596,341 1,764,174
Income tax benefit ( 80,762) ( 26,258)
--------- ---------
Net income before equity in undistributed
net income of subsidiaries 1,677,103 1,790,432
Equity in undistributed net income of subsidiaries 3,251,598 3,268,560
--------- ---------
Net income $4,928,701 $5,058,992
========= =========
(/TABLE>
F-23<PAGE>
<PAGE>
PINNACLE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 21 - Pinnacle Financial Corporation (Parent Company Only)
Financial Information (Continued)
Statements of Cash Flows
Years ended December 31, 1998 and 1997
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $4,928,701 $5,058,992
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,901 1,167
Deferred income taxes 863 464
Equity in undistributed net income of
subsidiaries ( 3,251,598) ( 3,268,560)
Increase in accrued interest receivable ( 783) ( 6,104)
Increase in due to subsidiaries ( 6,000) --
Increase (decrease) in due to subsidiaries ( 2,951) 330
Increase (decrease) in income taxes payable ( 38,226) 38,226
---------- ---------
Net cash provided by operating activities 1,631,907 1,824,515
---------- ---------
Cash flows from investing activities:
Other changes in securities available for sale ( 64) --
Purchase of securities available for sale -- ( 299,211)
Purchases of furniture and fixtures -- ( 14,691)
---------- ---------
Net cash used by investing activities ( 64) ( 313,902)
---------- ---------
Cash flows from financing activities:
Dividends paid ( 1,651,200) ( 1,497,600)
---------- ---------
Net cash used by financing activities ( 1,651,200) ( 1,497,600)
---------- ---------
Net increase (decrease) in cash and cash equivalents ( 19,357) 13,013
Cash and cash equivalents at January 1 43,255 30,242
---------- ---------
Cash and cash equivalents at December 31 $ 23,898 $ 43,255
========== =========
(/TABLE>
F-24<PAGE>
<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, 1999.
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, 1999.
Signature Title
/S/ L. Jackson McConnell Chairman and Chief Executive Officer
L. Jackson McConnell and Director
/S/ Linton W. Eberhardt Vice-Chairman and President and Director
Linton W. Eberhardt
/S/ James E. Purcell President and Chief Credit Officer and
James E. Purcell Director
/S/ L. Jackson McConnell, Jr. Vice President and Director
L. Jackson McConnell, Jr.
/S/ Maurice Bond Director
Maurice Bond
39<PAGE>
- ------------------------------- Director
Charles Bradshaw
- ------------------------------- Director
H. Thomas Brown
- ------------------------------ Director
Steven A. Williams
- ------------------------------ Director
Anderson Dilworth
/S/ Don C. Fortson Director
Don C. Fortson
/S/ William F. Grant Director
William F. Grant
/S/ Robert H. Hardy Director
Robert H. Hardy
/S/ Calvin Hill Director
Calvin Hill
/S/ Robert E. Lee, III Director
Robert E. Lee, III
- ---------------------------- Director
J. Daniel McAvoy, M.D.
/S/ Mary Coyle Barden Secretary (Principal Accounting Officer)
Mary Coyle Barden
40
</TABLE>
EXHIBIT 21.0
Subsidiaries of Pinnacle Financial Corporation:
Pinnacle Bank, N.A.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000910678
<NAME> PINNACLE FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,083,914
<INT-BEARING-DEPOSITS> 0
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0
0
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<INTEREST-DEPOSIT> 7,926,755
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</TABLE>
