U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 33-67528
PINNACLE FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
GEORGIA 58-1538862
- ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization
884 ELBERT STREET,
P.O. BOX 430, ELBERTON, GEORGIA 30635-0430
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (706) 283-2854
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
AS OF JULY 31, 1999 THERE WERE 768,000 SHARES OF COMMON STOCK OUTSTANDING.
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PINNACLE FINANCIAL CORPORATION
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position at
June 30, 1999 and December 31, 1998 1
Consolidated Statements of Income for the Three
Months ended June 30, 1999 and 1998 2
Consolidated Statements of Income for the Six
Months ended June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 4
Item 2. Managements Discussion and Analysis or Plan of
Operation 6
PART II - OTHER INFORMATION 13
I
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PINNACLE FINANCIAL CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
II
<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,097,092 $ 10,083,914
Federal funds sold 4,140,000 7,150,000
Securities available for sale 100,108,019 92,807,286
Loans, net of allowance for credit losses
of $2,088,713 and $2,070,005, respectively 141,029,094 142,025,057
Premises and equipment 8,383,449 8,636,788
Accrued interest receivable 2,595,037 2,653,111
Foreclosed real estate 350,434 495,566
Other assets 2,167,823 1,335,761
------------- ------------
Total assets $ 267,870,948 $265,187,483
============= ============
LIABILITIES
Demand deposits $ 43,909,003 $ 41,417,077
Savings and NOW deposits 69,202,436 67,996,928
Other time deposits 110,794,841 111,527,553
------------- ------------
Total deposits 223,906,280 220,941,558
Federal funds purchased 0 0
Accrued interest and other liabilities 3,341,646 3,598,216
------------- ------------
Total liabilities 227,247,926 224,539,774
------------- ------------
SHAREHOLDERS' EQUITY
Common stock, $10 par value; 5,000,000 shares
authorized, 768,000 shares issued and outstanding 7,680,000 7,680,000
Capital surplus 7,280,000 7,280,000
Retained earnings 26,294,196 24,669,429
Accumulated other comprehensive income (631,174) 1,018,280
------------- ------------
Total shareholders' equity 40,623,022 40,647,709
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 267,870,948 $265,187,483
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
1
<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
INTEREST INCOME
- ---------------
Loans $3,535,976 $3,749,336
Securities available for sale 1,446,819 1,360,249
Federal funds sold 77,661 113,466
---------- ----------
Total interest income 5,060,456 5,223,051
---------- ----------
INTEREST EXPENSE
- ----------------
Deposits 1,844,384 1,994,294
Fed Funds Purchased 0 0
---------- ----------
Total interest expense 1,844,384 1,994,294
---------- ----------
NET INTEREST INCOME 3,216,072 3,228,757
- -------------------
Provision for credit losses 75,000 75,000
---------- ----------
Net interest income after provision for credit losses 3,141,072 3,153,757
---------- ----------
OTHER INCOME
- ------------
Service charges on deposit accounts 336,723 321,456
Other service charges and fees 218,332 242,103
Net realized gains on sales of securities available for sale 0 17,140
Other income 72,084 47,225
---------- ----------
Total other income 627,139 627,924
---------- ----------
OTHER EXPENSES
- --------------
Salaries and employee benefits 1,142,628 1,123,705
Occupancy expense 286,056 270,315
Net realized losses on sales of securities available for sale 5,969 0
Other expenses 465,985 485,651
---------- ----------
Total other expenses 1,900,638 1,879,671
---------- ----------
Income before income taxes 1,867,573 1,902,010
Income tax expense 581,000 587,500
---------- ----------
NET INCOME $1,286,573 $1,314,510
- ---------- ========== ==========
Net income per share of common stock $ 1.68 $ 1.71
========== ==========
Average shares outstanding 768,000 768,000
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
2
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PINNACLE FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
YTD YTD
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
INTEREST INCOME
- ---------------
Loans $ 7,045,816 $ 7,428,104
Securities available for sale 2,853,365 2,657,300
Federal funds sold 173,443 198,276
----------- -----------
Total interest income 10,072,624 10,283,680
----------- -----------
INTEREST EXPENSE
- ----------------
Deposits 3,734,369 3,960,112
Fed Funds Purchased 0 267
----------- -----------
Total interest expense 3,734,369 3,960,379
----------- -----------
NET INTEREST INCOME 6,338,255 6,323,301
- -------------------
Provision for credit losses 150,000 150,000
----------- -----------
Net interest income after provision for credit losses 6,188,255 6,173,301
----------- -----------
OTHER INCOME
- ------------
Service charges on deposit accounts 668,778 651,525
Other service charges and fees 448,725 442,402
Net realized gains on sales of securities available for sale 0 17,225
Other income 106,481 103,658
----------- -----------
Total other income 1,223,984 1,214,810
----------- -----------
OTHER EXPENSES
- --------------
Salaries and employee benefits 2,309,819 2,239,193
Occupancy expense 567,846 518,282
Net realized losses on sales of securities available for sale 5,969 0
Other expenses 921,038 913,185
----------- -----------
Total other expenses 3,804,672 3,670,660
----------- -----------
Income before income taxes 3,607,567 3,717,451
Income tax expense 1,138,000 1,169,655
----------- -----------
NET INCOME $ 2,469,567 $ 2,547,796
- ---------- =========== ===========
Net income per share of common stock $ 3.22 $ 3.32
=========== ===========
Average shares outstanding 768,000 768,000
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
PINNACLE FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 2,469,567 $ 2,547,796
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 310,006 245,728
Provision for credit losses 150,000 150,000
Net realized (gains) losses on securities available for sale 5,969 (17,225)
(Increase) decrease in accrued interest and other assets (628,856) (566,144)
Decrease in accrued expenses and other liabilities (256,570) (36,993)
------------ ------------
Total adjustments (419,451) (224,634)
------------ ------------
Net cash provided by operating activities 2,050,116 2,323,162
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold 3,010,000 (1,902,830)
Purchase of securities available for sale (28,634,779) (21,585,055)
Proceeds from sales of securities available for sale 1,511,094 1,249,880
Proceeds from maturities of securities available for sale 18,155,789 12,240,035
Net decrease (increase) in loans 845,963 (663,553)
Purchases of premises and equipment (44,927) (366,991)
------------ ------------
Net cash used by investing activities (5,156,860) (11,028,514)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing demand deposits,
Savings and NOW deposit accounts 3,697,434 6,231,390
Net (decrease) increase in time deposits (732,712) 116,651
Net decrease in federal funds purchased 0 (360,000)
Dividends paid (844,800) (768,000)
------------ ------------
Net cash provided by financing activities 2,119,922 5,220,041
------------ ------------
Net decrease in cash and due from banks (986,822) (3,485,311)
Cash and due from banks at January 1 10,083,914 10,789,675
------------ ------------
Cash and due from banks at June 30 $ 9,097,092 $ 7,304,364
============ ============
Interest paid $ 3,664,007 $ 3,658,983
============ ============
Income taxes paid $ 1,055,635 $ 1,100,965
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
4
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PINNACLE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(1) BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of
Pinnacle Financial Corporation (the Company) and its wholly-owned commercial
bank subsidiary, Pinnacle Bank, N.A. All significant intercompany accounts have
been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for fair statements of the consolidated
financial position and the results of operations of the Company for the interim
periods. The results of operations for the six month period ended June 30, 1999
are not necessarily indicative of the results which may be expected for the
entire year.
(2) INCOME TAXES
------------
Deferred income taxes are recorded as required by FAS No. 109,
"Accounting for Income Taxes", using the liability method under which deferred
tax assets and liabilities are determined based on the differences between the
financial accounting and tax basis of assets and liabilities.
(3) ACCOUNTING FOR IMPAIRED LOANS
-----------------------------
FAS 114, "Accounting by Creditors for Impairment of a Loan" was
adopted as of January 1, 1995 as required. Loans having carrying values of
$1,232,000 as of June 30, 1999 have been recognized as impaired in conformity
with FAS 114. The total allowance for credit losses related to the impaired
loans is $523,000. For impairment recognized in conformity with FAS 114, the
entire change in the present value of expected cash flows is reported as bad
debt expense in the same manner in which the initial impairment was recognized
or as a reduction in the amount of bad debt expense that otherwise would be
reported. The company has recognized specific allowances in prior periods for
each of these loans based on previous methodology for calculating its allowance
for credit losses.
5
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis or Plan of Operation of Pinnacle
Financial Corporation (hereinafter "Pinnacle" or the "Company") analyses the
major elements of Pinnacle's consolidated balance sheets and statements of
income. The financial condition and operating results of Pinnacle are primarily
determined by its wholly-owned subsidiary bank, Pinnacle Bank, N.A. (hereinafter
the "Bank").
Pinnacle continues to weigh the merits of additional business
combinations while maintaining a focus on its general mission to responsibly
serve the needs of its customers and communities and to enhance profit potential
and shareholder value.
For a comprehensive presentation of Pinnacle's financial condition and
results of operations, the following analysis should be viewed along with other
information contained in this report, including the financial statements and
accompanying disclosures. All amounts throughout this section are rounded to the
nearest 1,000 dollars, the nearest .1 million dollars and to the nearest .1
percent to represent approximations of reported amounts.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The objective of liquidity management is to maintain cash flows
adequate to meet immediate and ongoing future needs of credit demand, deposit
withdrawal, maturing liabilities and corporate operating expenses. Pinnacle
seeks to meet liquidity requirements primarily through the management of federal
funds and the investment securities portfolio. At June 30, 1999, 7.1% of the
investment securities portfolio had maturity dates within the next year and an
additional 67.8% matures within the next 5 years. All investment securities are
classified as available for sale and may be sold or used as a source of
collateralized borrowings in the event of a liquidity shortfall. Other sources
of liquidity are payments on commercial and installment loans and repayment of
maturing single payment loans. Pinnacle retains short term borrowing
relationships with two correspondent banks that could provide up to $10.75
million on short notice. Additionally, the Bank has established membership in
the Federal Home Loan Bank of Atlanta and has granted a blanket floating lien on
its mortgage portfolio that collaterizes up to $20 million of borrowings on a
short or long term basis. Pinnacle's management intends to continue to closely
monitor and maintain appropriate levels of interest bearing assets and
liabilities in future periods so that maturities of assets are such that
adequate funds are provided to meet customer withdrawals and loan requests while
net interest margins are maximized.
Regulatory policy generally requires the maintenance of a liquidity
ratio of 25%, which is generally defined as cash plus liquid investments divided
by deposits plus borrowings due within one year. The desired level of liquidity
is determined by management based in part on Pinnacle's commitment to make loans
and an assessment of its ability to generate funds. At June 30, 1999, the
liquidity ratio for Pinnacle was 42%.
6
<PAGE>
Management continues to give priority to the importance of maintaining
high levels of assets with interest rate sensitivity. Cash and cash equivalents
decreased during the first six months of 1999 from December 31, 1998 levels by
$4.0 million and securities available for sale increased by $7.3 million or 7.9%
from December 31, 1998 to June 30, 1999. The average balance in these investment
securities increased by $10.1 million in the current year compared to the six
months ended June 30, 1998. The average balance of Federal Funds sold during the
first six months of 1999 was $7.1 million.
Total interest-earning assets increased by $3.3 million or 1.4% for
the current period when compared with December 31, 1998. Average net loans for
the Bank decreased $0.6 million (0.4%) to $141.7 million in the six months ended
June 30, 1999 from the same 1998 period, primarily as a result of increased
competition and reduced loan demand in Northeast Georgia.
The allowance for credit losses is established by management at a
level estimated to be adequate to absorb losses inherent in the loan portfolio.
The allowance was unchanged at $2.1 million at June 30, 1999 and December 31,
1998. The Bank experienced loan charge-offs of $210,000 in the six months ended
June 30, 1999 compared to $77,000 in the same period of 1998. Net charge-offs
amounted to $131,000 in 1999 compared to $14,000 for the six months ended June
30, 1998. The allowance for credit losses represents 1.5% of total loans
outstanding at June 30, 1999 and 1.4% at December 31, 1998.
As a result of the sale of four properties and the foreclosure on one
new property in the six months ending June 30, 1999, other real estate owned
decreased by $146,000 to $350,000 at June 30, 1999 from $496,000 at December 31,
1998. The accrual of interest has been discontinued on loans totaling $18,000 as
of June 30, 1999 representing .01% of total loans compared to $139,000 at
December 31, 1998. Unrecorded income on these loans for the six months ended
June 30, 1999 was $3,000. All non-accrual loans at June 30, 1999 are classified
as unsecured.
Pinnacle continues to maintain a concentration of core deposits from
an established customer base which provides a stable funding source. Deposits
increased $3.0 million to $223.9 million at June 30, 1999 from $220.9 million at
December 31, 1998, due primarily to normal growth. Non-interest bearing deposits
increased $2.5 million to $43.9 million from December 31, 1998. Interest bearing
deposits increased $.5 million for the six months ended June 30, 1999.
Shareholders' equity was unchanged at $40.6 million at June 30, 1999
when compared to December 31, 1998. Net earnings retained during the six months
amounted to $1.6 million while equity decreased $1.6 million as a result of a
change from a $1.0 million net unrealized gain on investments available for sale
to an unrealized loss of $630,000 due to a decrease in values in the bond market
caused by increasing interest rates. All unrealized amounts are presented net of
their tax impact.
7
<PAGE>
Pinnacle continues to maintain adequate capital ratios (see "Risk
Based Capital Ratios" below and see "Results of Operations" below for discussion
of dividend levels.) Pinnacle maintained a level of capital, as measured by its
average equity to average assets ratio, of 15.2% during the first six months of
1999, compared to 15.0% for the year which ended December 31, 1998.
Management is not aware of any known trends, events or uncertainties
that are reasonably likely to have a material effect on Pinnacle's liquidity,
capital resources, or results of operation. Pinnacle is not aware of any current
recommendations by the regulatory authorities which, if implemented, would have
such an effect. Loans classified for regulatory purposes as loss, doubtful,
substandard or special mention do not represent trends or uncertainties which
management reasonably expects will materially impact future operational trends.
RESULTS OF OPERATIONS (for the three month period ended June 30, 1999)
- ---------------------
Pinnacle's operating results primarily depend on the earnings of the
Bank. Its earnings depend to a large degree on net interest income, the
difference between the interest income received from investments (such as loans,
investment securities, federal funds sold, etc.) and the interest expense paid
on deposits and borrowings.
Interest income on interest bearing assets decreased by $163,000 from
the same quarter in 1998 as a decline in average yields from 8.4% to 8.2% offset
an increase in average earning assets in the second quarter of 1999 as compared
to 1998. The decline in yield reflects a general decline in interest rates
during the one year period as well as an increased percentage of funds invested
in lower yielding investment securities and federal funds sold. Interest expense
declined by $150,000 from the same quarter of 1998 in spite of increased
deposits as a result of increased non-interest bearing deposits and lower
interest rates paid on all deposit accounts. Consequently, net interest income
in the three months ended June 30, 1999 decreased by $13,000 or 0.4% as compared
to the same period for the previous year. Management continues to match rate
sensitive assets with rate sensitive liabilities in such a way that net interest
margins have remained stable from the same period in the prior year.
The provision for credit losses is the charge to operating expenses
that management believes is necessary to fund the allowance for credit losses.
The provision reflects management's estimate of potential loan losses and the
creation of an allowance for loan losses adequate to absorb losses inherent in
the portfolio. Pinnacle provided $75,000 for loan losses in both quarters ended
June 30, 1999 and 1998.
Other income during the three months ended June 30, 1999 was unchanged
at approximately $627,000 from the same period in 1998. Other operating expenses
during the three months ended June 30, 1999 increased $21,000 from the same
period in the previous year. The increase is attributable to slight increases in
salaries, employee benefits and occupancy expenses.
8
<PAGE>
Pinnacle's income tax expense decreased $7,000 for the quarter
compared to the same period in the previous year due primarily to decreased
taxable income. The effective income tax rate of 31.1% during the quarter is an
increase of 0.2% over the rate of 30.9% in the same quarter of 1998.
Results of operations can be measured by various ratio analyses. Two
widely recognized performance indicators are return on average equity and return
on average assets. Net income during the three months ended June 30, 1999 was
$1.3 million and represents annualized returns of 12.6% on average shareholders'
equity and 1.91% on average assets. Comparable amounts during the same period of
1998 were $1.3 million, 13.8% and 2.0%, respectively.
Dividends declared and paid during the three months ended June 30,
1999 increased $.05 per share to $.55 from $.50 per share during the same period
of 1998.
RESULTS OF OPERATIONS (for the six month period ended June 30, 1999)
- ---------------------
Interest income on interest bearing assets for the six months ended
June 30, 1999 decreased by $211,000 from the same period in 1998. A decline in
average yield from 8.7% to 8.1% was offset by an increase in average earning
assets in the first half of 1999 as compared to 1998. The decline in yield
reflects a general decline in interest rates during the period as well as an
increased percentage of funds invested in lower yielding investment securities
and federal funds sold. Interest expense declined by $226,000 from the same
period of 1998 in spite of increased deposits as a result of increased
non-interest bearing deposits and lower interest rates paid on all deposit
accounts. Consequently, net interest income in the six months ended June 30,
1999 increased by $15,000 or 0.2% as compared to the same period for the
previous year.
The provision for credit losses and its purpose is explained above.
Pinnacle provided $150,000 for credit losses in both periods ended June 30, 1999
and 1998.
Other income during the six months ended June 30, 1999 increased
$9,000 to $1,224,000 from $1,215,000 from the same period in 1998. Slight
increases in service charges and other miscellaneous income offset the
nonrecurrence of 1998 gains on sales of securities.
Other operating expenses during the six months ended June 30, 1999
increased $134,000 to $3.8 million from $3.7 million for the same period in the
previous year. The increase in other operating expenses is attributable
generally to normal increases in salaries and employee benefits as well as
increased expenses related to a branch opened in late 1998.
Pinnacle's income tax expense decreased $32,000 for the six months
ended June 30, 1999 compared to the same period in the previous year due
primarily to decreased taxable income. The effective income tax rate during the
period of 31.5% is a minor increase of 0.1% from the effective rate of 31.4% in
1998.
9
<PAGE>
Net income during the six months ended June 30, 1999 was $2.5 million
and represents annualized returns of 12.3% on average shareholders' equity and
1.85% on average assets. Comparable amounts during the same period of 1998 were
$2.5 million, 13.2% and 2.0%, respectively. As indicated above, net income
declined primarily due to increased operating expenses while the operating
ratios reflect the decreased earnings compared to a slightly larger asset and
equity base.
Dividends declared during the six months ended June 30, 1999 increased
$.10 per share to $1.10 from $1.00 per share during the same period of 1998.
YEAR 2000
- ---------
Generally, year 2000 risk involves computer programs and computer
hardware that are not able to perform without interruption into the year 2000.
The arrival of the year 2000 poses a unique worldwide challenge to the ability
of all systems to correctly recognize the date change from December 31, 1999 to
January 1, 2000. If Pinnacle's systems do not correctly recognize such a date
change, computer applications that rely on the date field could fail or create
erroneous results. Such errors could affect interest, payment or due dates or
could cause the temporary inability to process transactions, send invoices or
engage in similar normal business activities. If it is not adequately addressed
by Pinnacle or its suppliers and borrowers, the year 2000 issue could result in
a material adverse impact on Pinnacle's financial condition, liquidity and
results of operations.
PINNACLE'S STATE OF READINESS. Pinnacle is proceeding on a plan that
will assure the Bank is ready to process in the year 2000. The plan involves
five phases consisting of awareness, assessment, renovation, validation and
implementation for hardware and software in both information technology systems
("IT") and non-information technology systems ("non- IT"or environmental
systems) that are potentially affected by the year 2000. Pinnacle has completed
the awareness, assessment, and validation (testing) phases and all critical
business systems have been renovated. Renovation of non-critical systems will
continue throughout 1999. The implementation phase has occurred as each system
passed through the testing procedures and will continue throughout 1999 for
noncritical systems. Modifications and upgrades are performed on the majority of
Pinnacle's IT systems by third-party vendors as Pinnacle performs no internal
programming.
COST TO ADDRESS THE YEAR 2000 ISSUES. In 1997 and 1998, Pinnacle made
substantial investments in technology in the normal course of business to
enhance operational efficiency that included remediation of many of its year
2000 issues. The cost of assuring readiness to process in the year 2000 has been
budgeted to not exceed $40,000 for the years 1998 through 2000, not including
the investments in technology referred to above nor the time associated with
existing employee development and implementation of Pinnacle's year 2000 plan.
Approximately 25% of this amount was expensed in 1998 with the remainder of the
expenses to be incurred in 1999. At this time, this budget is expected to be
10
<PAGE>
adequate. The majority of costs associated with hardware and software
enhancements to make Pinnacle's systems year 2000 compliant are covered in the
annual maintenance fees paid to its vendors and are not included in this
budgeted amount. Any unexpected costs that may arise during implementation in
excess of the budgeted amounts will be reported to the Board of Directors.
RISKS OF THIRD-PARTY YEAR 2000 ISSUES. The impact of year 2000
non-compliance by outside parties with whom Pinnacle transacts business cannot
be accurately estimated. In addition to the review of IT providers discussed
above, Pinnacle has surveyed major borrowers for year 2000 compliance and has
prepared a detailed assessment of the risk associated with each borrower's
inability to be compliant. In addition, all primary non-IT vendors and suppliers
have responded to inquiries regarding year 2000 compliance. Ongoing
communication with these primary vendors and suppliers is anticipated throughout
1999. At this time, no material impact on Pinnacle's operations from vendor
non-compliance is anticipated but no provider can assure Pinnacle that no
disruptions will occur. Pinnacle would be significantly impacted by failures in
power and communication systems that are largely outside of the control of the
Bank. Pinnacle relies upon the Federal Reserve System for electronic funds
transfers and check clearing and understands that its systems are year 2000
compliant. Initial testing of the Federal Reserve systems have been completed
and additional testing will be performed through 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, provide meaningful
information to customers and community groups regarding risks and solutions to
plan for Year 2000 uncertainties and provide assistance on prudent activities to
be taken.
PINNACLE'S CONTINGENCY PLANS. Pinnacle has not developed system
remediation contingency plans as all mission critical systems have been tested
and certified as year 2000 compliant. Pinnacle has prepared a business
resumption plan that provides detailed directions for continued operation if one
or more mission critical items (including power and communication systems) fails
due to year 2000 related issues. The plan documents how Pinnacle will recover
from any critical system failures within an acceptable time frame while
delivering an acceptable level of service. The plan assumes limited transaction
processing on a manual basis until the impacted systems can be corrected or
replaced. The plan has been approved by Pinnacle's Board of Director's. The
business resumption plan will be reviewed and certified by an independent third
party and will be tested in the third quarter of 1999.
11
<PAGE>
The following tables present Pinnacle's Regulatory capital position at June 30,
1999:
(Rounded to the nearest thousand)
Total Risk Adjusted Assets $ 166,068
Risk Based Capital Ratios:
TIER 1 CAPITAL
Common stock $ 7,680 4.62%
Surplus 7,280 4.38%
Retained earnings 26,294 15.83%
--------- ------
Total Tier 1 capital 41,254 24.83%
Tier 1 minimum requirement 6,643 4.00%
--------- ------
Excess (shortfall) $ 34,611 20.83%
========= ======
TIER 2 CAPITAL
Tier 1 from above $ 41,254 24.83%
Allowance for loan losses, limited to 1.25%
of risk weighted assets 2,076 1.25%
--------- ------
Total Tier 2 capital 43,330 26.08%
Tier 2 minimum requirement 13,285 8.00%
--------- ------
Excess (shortfall) $ 30,045 18.08%
========= ======
LEVERAGE RATIO
Tier 1 capital $ 41,254 15.42%
Minimum requirement 10,699 4.00%
--------- ------
Excess (shortfall) $ 30,555 11.42%
========= ======
Average total assets, net of goodwill $267,476
========
12
<PAGE>
PINNACLE FINANCIAL CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
Pinnacle is not aware of any pending material legal proceedings to
which Pinnacle or its subsidiary is a party or to which any of their property is
subject.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 27. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule (for SEC use only).
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PINNACLE FINANCIAL CORPORATION
Date: August 12, 1999 By: /s/ L. Jackson McConnell
--------------- ----------------------------------
L. Jackson McConnell
Chairman and Chief Executive Officer
(Principal Executive and Financial Officer)
Date: August 12, 1999 By: /s/ James E. Purcell
--------------- ----------------------------------
James E. Purcell
President and Chief Credit Officer
14
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,097,092
<INT-BEARING-DEPOSITS> 0
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<TRADING-ASSETS> 0
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0
0
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