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, 2001

 ̈                    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                             ACT OF 1934

                                     Commission File No.  33-67528

 

|  **Pinnacle Financial  Corporation**
(Name of small  business issuer in its charter)

 
                                         Georgia 
 58-1538862                                       (State or other jurisdiction
(I.R.S. Employer                                of incorporation or        organization) 
  Identification Number)         
 884 Elbert Street, P.O. Box 430,  Elberton,  Georgia
30635-0430                         (Address of principal executive offices)
(Zip Code)              
Registrant’s telephone number,  including area code:    (706) 283-2854

Securities registered pursuant to  Section 12(b) of the Act:    None.

Securities registered pursuant to  Section 12(g) of the Act:    None.

Check whether the Issuer (1) has  filed all reports required to be filed by Section 13 or 15(d) of the Exchange  Act during the past 12 months (or for such shorter period that the registrant  was required to file such reports), and (2) has been subject to such filing  requirements for the past 90 days.       Yes    þ      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:      ****$24,429,470

State the aggregate market value of  the voting stock held by non-affiliates (which for purposes hereof are all  holders other than executive officers and directors and JAM Family Partnership  II, L.P.).  As of March 15, 2002, there were 364,728 shares of Common  Stock, $10.00 par value outstanding held by non-affiliates of the issuer, with  an aggregate value of $32,825,520 (based upon approximate market value of  $90/share) (the last sale price known to the Issuer for the Common Stock, for  which there is no established trading market).

State the number of shares  outstanding of each of the issuer’s classes of common equity, as of the latest  practicable date:   As  of March 15, 2002, Common Stock, $10.00 par value -  768,000 shares outstanding.

 

 
          
 PINNACLE FINANCIAL  CORPORATION

FORM 10-KSB

INDEX

 

 

 

**PAGE**

**Part I**

 

 

 1

 

 

 

 

 

Item 1.

Description of Business

  1

 

Item 2.

Description of Property

 10

 

Item 3.

Legal Proceedings

 11

 

Item 4.

Submission Of Matters To A Vote        Of Security Holders

 11

 

 

 

 

**Part II**

 

 

 11

 

 

 

 

 

Item 5.

Market For Common Equity And        Related Stockholder Matters

 11

 

Item 6.

Management’s Discussion and        Analysis or Plan of Operation

 12

 

Item 7.

Financial Statements

 33

 

Item 8.

Changes In And Disagreements        With Accountants On Accounting And Financial Disclosure

 33

 

 

 

 

**Part III**

 

 

 34

 

 

 

 

 

Item 9.

Directors, Executive Officers,        Promoters and Control Persons

 34

 

Item 10.

Executive Compensation

 36

 

Item 11.

Security Ownership Of Certain        Beneficial Owners And Management

 38

 

Item 12.

Certain Relationships And        Related Transactions

 38

 

Item 13.

Exhibits and Reports on Form        8-K

 40

 

 

 

 

 

SIGNATURES

40

** **

** **-i-
            
**PART I**

**Item 1.      DESCRIPTION OF BUSINESS**

**General**

                         Pinnacle Financial Corporation (hereinafter “Pinnacle” or the  “Company”) is a registered one-bank holding company, headquartered  in Elberton, Georgia.  The Company’s full service banking activities  are  conducted by its wholly-owned banking subsidiary, Pinnacle Bank,  (the “Bank”), based in Elberton, Georgia with eight offices which  are located in Elbert, Franklin and Hart Counties, Georgia. Pinnacle was  incorporated under the laws of Georgia in 1982.  In 1983, the Company  acquired 100% of the outstanding shares of First National Bank in Elberton (“Elberton”)  and in 1994 acquired Tri-County Bank of Royston (“Royston”).  The two  subsidiary banks merged as of January 1, 1998 and became Pinnacle Bank, N.A.   The Bank was organized as a national banking association in 1934 but converted  to a State chartered bank in Georgia in November 2001.  At that time, the  name of the bank was changed to Pinnacle Bank.

                         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, credit card 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, 2001, Pinnacle had total assets of approximately $311.2  million, total deposits of approximately $239.8 million, net loans of  approximately $177.2 million and shareholders’ equity of approximately $46.2  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.

**Forward-Looking Statements**

**                       **This discussion contains forward-looking statements  under the private Securities Litigation Reform Act of 1995 that involve risk  and uncertainties.  Although Pinnacle believes that the assumptions  underlying the forward-looking statements contained in the discussion are  reasonable, any of the assumptions could be inaccurate, and therefore, no  assurance can be made that any of the forward-looking statements in this  discussion will be accurate.  Factors that could cause actual results to  differ from results discussed in forward-looking statements include, but are  not limited to: economic conditions (both generally and in the markets where  the Company operates); competition from other providers of financial services  offered by the Bank; government regulations and legislation; changes in  interest rates; material unforeseen changes in the financial stability and  liquidity of the Bank’s credit customers, all of which are difficult to  predict and which may be beyond the control of the Company.  Pinnacle  undertakes

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no obligation to revise  forward-looking statements to reflect events or changes after the date of this  discussion or to reflect the occurrence of unanticipated events.

                         **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, 2001, the Bank’s deposit base, totaling approximately $239.8  million, consisted of approximately $45.5 million in noninterest bearing  demand deposits (19.0% of total deposits), approximately $62.1 million in  interest-bearing demand deposits (including money market accounts) (25.9% of  total deposits), approximately $17.5 million in savings deposits (7.3% of  total deposits), approximately $81.4 million in time deposits of less than  $100,000 (33.9% of total deposits), and approximately $33.3 million in time  deposits of $100,000 or more (13.9% of total deposits).

                         **Interest Rate Sensitivity.**  The absolute level and volatility of  interest rates can have a significant impact on Pinnacle’ s profitability.  The objective of interest rate risk management is to identify and manage the  sensitivity of net interest income to changing interest rates to achieve  Pinnacle’s overall financial goals.  Based on economic conditions,  asset quality and various other considerations, management establishes  tolerance ranges for interest rate sensitivity and manages within these  ranges.  The Company uses income simulation modeling as the primary tool  to measure interest rate risk and manage interest rate sensitivity.   Simulation modeling considers not only the impact of changing market rates on  interest on future net interest income, but on other potential causes of  variability.  The Company also measures its short-term exposure to  interest rate risk by simulating the impact to net interest income under  several rate change levels.  These rate shocks are performed at levels of  up and down 300 basis points from current interest rates.  The most  recent simulations indicate Pinnacle is only slightly impacted by changes in  interest rates in the short term but an extended period of increased interest  rates will negatively impact future earnings.

                         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 manages the gap between rate-sensitive assets  and rate-sensitive liabilities to keep it at an acceptable level, rather than  place significant earnings at risk by attempting to predict the frequency,  direction and magnitude of interest rate fluctuations.  While the gap  information is meaningful and used by bank management, it has inherent  limitations.  For example, gap analysis ignores the differences in  characteristics between a loan with an interest rate tied to prime and an  interest bearing checking account that has lower interest rate sensitivity and  management reprices at its discretion.  The bank believes the interest  rate simulations it performs are better indications of future performance in  various interest rate environments.

                         Table 8 in the statistical information reflects the gap position of Pinnacle’s  consolidated balance sheet. At December 31, 2001, the gap analysis reflects a  negative gap at

 

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the one-year interval equivalent to  31.3% of earning assets, as compared to 29.1% at December 31, 2000.

                         The rate sensitivity analysis table is designed to demonstrate estimates of  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. As indicated above, changes in  interest rates do not result in identical changes in all assets and  liabilities, and the rate of change in interest rates is significantly  different in some products versus others.  The interest sensitivity gap,  therefore, is only an indicator of the potential effects of interest rate  changes on net interest income. See also the “Asset/Liability Management”  section below.

                         **Loans.**  The Bank makes both secured and unsecured loans to  individuals, firms and corporations.  These loans to consumers and  businesses include open ended, installment, and revolving types of credit for  its customers. At December 31, 2001, consumer, real estate (including mortgage  and construction loans) and commercial loans represented approximately 11.6%,  76.1%, and 12.3%, respectively, of  Pinnacle’s total loan  portfolio.  The real estate loans made by the Bank include residential  construction, first and second mortgage loans, 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  generally make loans only to persons and businesses who reside, work, or are  located in the Bank’s primary trade areas.   Loans are made to  borrowers who are well established and have collateral and cash flow to  support repayment of the loan.  Unsecured loans normally are made only to  borrowers who have an unblemished repayment history. Real estate loans usually  are made only when such loans are secured by real property located in Elbert,  Franklin and Hart Counties, or counties contiguous to 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 loans he  can make to a single borrower or related group of borrowers.  The Bank  has established a loan committee system that has four levels of loan  committees that have responsibility for initial review of new loans. Lower  level committees are responsible for the review of smaller loans; the Bank’s  Chief Credit Officer and Loan Review Officer are members of all committees.  All loans in excess of $250,000 (or loan relationships where the aggregate  commitment, excluding amortizing mortgage loans, exceeds $250,000) are  reviewed at least annually.  The Bank’s Senior Loan committee, composed  of the Bank’s executive officers and other senior loan officers, approves  and reviews 

3
            
at least annually all loans or  relationships over $500,000.  Lending relationships exceeding $750,000  are reviewed annually by the Executive and Loan Committee, which includes  outside directors.  The Executive and Loan Committee also reviews and  approves the adequacy of the Bank’s allowance for loan losses on a quarterly  basis.

                         Making working capital loans to businesses is a traditional function of  commercial banks.  Such loans are expected to be repaid out of the  current cash flow of the commercial entity as 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.  Many  of the Bank’s commercial loans are secured by real estate that are subject  to certain inherent risks.  Commercial real estate can be considered  illiquid and commercial real estate values are subject to fluctuation  depending upon economic conditions 

                         Inter-agency guidelines adopted by bank regulators mandate that financial  institutions establish real estate lending policies and establish certain  minimum real estate loan-to-value standards.  The Bank has adopted these  standards.  These standards limit loan-to-value ratios for various types  of real estate loans as set forth below.  The Bank may make exceptions to  the standards, which are identified and reported.

**Loan category**

**Loan-to-Value Limit (percent)**
   
Raw  Land

  65

Land  Development

  75

Construction:
Commercial, multifamily1and                 Other  nonresidential  80
1- to 4-family  residential

  85

Improved  Property

  85

Owner-occupied 1- to 4-family  and

    

                 home equity2

**                         Loan Review and Nonperforming Assets.**  The Bank  reviews its loan portfolio to identify deficiencies and to take corrective  action.  Lending officers conduct periodic reviews of borrowers with  total direct and indirect indebtedness of $100,000 or more and regularly  review all past due loans.  Past due loans are reviewed 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 loan relationships over  $750,000 at least annually.

_____________________
1     Multifamily construction includes condominiums and cooperatives.2     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.
4
          
 

                         **Asset/Liability Management.**  A committee composed of executive  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) growth and performance of the Bank compared to projections and the annual  budget, (b) peer group comparisons, (c) simulations prepared by an independent  outside vendor summarizing the interest rate risk inherent in the balance  sheet of the institution,  and (d) 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 at least annually by the Board of  Directors.  Individual transactions and investment portfolio composition,  characteristics, and performance are reviewed periodically by the Board of  Directors.

                         Management has classified all investment securities as available for sale and  believes specific gains and losses are temporary.  Management recognizes  the bond market may 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.

                         **Employees.**  At December 31, 2001, the Bank had 104 full-time and  20 part-time employees.  Pinnacle has no employees.  The Bank is  not a party to any collective bargaining agreement, and the Bank believes its  employee relations are good.

                         **Competition.**  The banking business is highly competitive.   The Bank competes with seven other commercial banks 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.

 

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                         At December 31, 2001, the Bank ranked on the basis of total deposits and  assets of $239.8 million and $311.2 million, respectively, as one of the  largest 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 quarterly 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  listed in the act 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 brokerage services; underwriting bank eligible  securities; underwriting debt and equity securities on a limited basis through  separately capitalized subsidiaries; and making investments in corporations or  projects designed primarily to promote community welfare.

                         In addition, bank holding companies whose banking subsidiaries are all  well-capitalized and well-managed may apply to become a financial holding  company.  Financial holding companies have the authority to engage in  activities that are “financial in nature” that are not permitted for other  bank holding companies.  Some of the activities that the Act provides are  financial in nature are: 
lending, exchanging, transferring, investing for others or safeguarding money  or securities;
insuring, guaranteeing, or indemnifying against  loss, harm, damage, illness, disability, or death, or providing and issuing  annuities, and acting as principal, agent, or broker with respect thereto;
providing financial, investment, or economic  advisory services, including advising an investment company;
issuing or selling instruments representing  interests in pools of assets permissible for a bank to hold directly; and
underwriting, dealing in or making a market in  securities.

                         Pinnacle has no immediate plans to register as a financial holding company. 

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                         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.

                         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.

                       Until November 2001, the Bank was a National Bank chartered under the National  Bank Act and was subject to the supervision of, and was regularly examined by,  the Office of the Comptroller of the Currency (the “OCC”).  In  November 2001, the Bank converted to a state charter under the laws of the  state of Georgia.  The Bank’s primary regulator is now the Federal  Deposit Insurance Corporation (the “FDIC”).  The FDIC regulates or  monitors all areas of its operations and activities, including reserves,  loans, mergers, issuances of securities, payments of dividends, interest rates  and establishment of branches.  The Bank is also subject to examination  by and the regulations of the DBF. 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 a state chartered bank regulated by the  DBF and the FDIC.  Under the regulations of the DBF, dividends may not be  declared out of the retained earnings of a state bank without first obtaining  the written permission of the DBF, unless such bank meets all of the following  requirements:
(a)  total classified      assets as of the most recent examination of the bank do not exceed 80% of      equity capital (as defined by regulation);                      (b) the aggregate      amount of dividends declared or anticipated to be declared in the calendar      year does not exceed 50% of the net profits after taxes but before      dividends for the previous calendar year; and
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                      (c) the ratio of equity      capital to adjusted assets is not less than 6%.
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.  In additional to the formal statutes and  regulations, regulatory authorities consider the adequacy of the Bank’s  total capital in relation to its assets, deposits, and other such items.   Capital adequacy considerations could further limit the availability of  dividends to the Bank.  At December 31, 2001, net assets available from  the Bank to pay dividends without prior approval from regulatory authorities  totaled approximately $2.1 million.  For 2001, Pinnacle’s declared cash  dividend payout to stockholders was 43% of net income. 

**                         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.

**                         Capital Adequacy. **The Federal Reserve and the  FDIC 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, regulators have established a minimum three percent (3%) leverage  ratio of Tier One Capital to average total assets (4% for all but 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 Banking  regulators use the leverage ratio in tandem with the risk based ratio to  assess capital adequacy of banks and bank holding companies.  The capital  adequacy standards also 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. 

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                         The Federal Deposit Insurance Corporation Improvement Act of 1991 requires  prompt corrective active provisions to be established by all depository  institution regulators.  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 tangible equity to total  asset ratio reaches  two percent.  Better capitalized institutions are generally subject to  less onerous regulation and supervision than banks with lesser amounts of  capital 

                         Various other sections of the 1991 Act imposed substantial new auditing and  reporting requirements and increase the role of independent accountants and  outside directors.  The 1991 Act also provided for a prohibition on the  acceptance of brokered deposits except by well-capitalized institutions and by  adequately-capitalized institutions with the permission of the FDIC, and for  restrictions on activities engaged in by state banks and their subsidiaries as  principal, including insurance underwriting, to the same activities  permissible for national banks and their subsidiaries, unless a state bank is  well capitalized and a determination is made by the FDIC that the activities  do not pose a significant risk to the insurance fund.

                       The FDIC have 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  FDIC’s regulations also establish procedures for “downgrading” an  institution to lower capital category based on supervisory factors other than  capital.  Under the FDIC’s regulations the Bank is a “well  capitalized” institution.

The following table presents the Bank’s  capital ratios at December 31, 2001 :

Actual

Minimum Capital       Requirement

Minimum for well       Capitalized  

Tier      1 Capital to      Risk weighted      Assets

20.60% 

4.0%

6.0%

 

 

 

  

Total      Capital to      Risk weighted       Assets

21.54%

8.0%

 10.0%

 

 

 

     
Leverage      Ratio (Tier 1      Capital to Total      Average Assets)

14.51%

4.0%

5.0%

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            **Recent  Legislative and Regulatory Action.** On November  12, 1999, President Clinton signed the Gramm-Leach-Bliley Act, a   significant piece of legislation intended to modernize the financial services  industry.  The bill repeals the anti-affiliation provisions of the 1933  Glass-Steagall Act to allow for the merger of banking and securities  organizations and permits banking organizations to engage in insurance  activities including insurance underwriting.  The bill also allows bank  holding companies to engage in financial activities that are “financial in  nature or complementary to a financial activity.”  The act lists the  expanded areas that are financial in nature and includes insurance and  securities underwriting and merchant banking among others.  The bill  also:
prohibits non-financial entities from acquiring  or establishing a thrift while grandfathering existing thrifts owned by  non-financial entities.
establishes state regulators as the appropriate  functional regulators for insurance activities but provides that state  regulators cannot “prevent or significantly interfere” with affiliations  between banks and insurance firms.
contains provisions designed to protect consumer  privacy.  The bill requires financial institutions to disclose their  policy for collecting and protecting confidential information and allows  consumers to “opt out” of information sharing except with unaffiliated  third parties who market the institutions’ own products and services or  pursuant to joint agreements between two or more financial institutions.
provides for functional regulation of a bank’s  securities activities by the Securities and Exchange Commission.

**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 and one supermarket  branch that it leases.

                         The Bank’s main office 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 

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 feet of office space.  The  Lavonia office is located at 12321 Augusta Road, Lavonia, Georgia and has  approximately 4,200 square feet of usable 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.  This  location is leased for $18,000 per year under an operating lease that expires  in September 2003.  The Bank can exercise a renewal option at that time  for an additional five year lease with annual rent of $21,600.  If the  office purchase discussed later in this 10-KSB is consummated, the Bank will  add one additional location with approximately 3,380 square feet located in  Lexington, Georgia.  None of the properties owned by the Bank are subject  to encumbrances.  Management of the Bank believes that these properties  are adequately covered by insurance. 

**Item 3.      LEGAL PROCEEDINGS**

                         Pinnacle Bank is party to litigation 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 are not  material to the consolidated financial statements.

**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 the 2001 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, 2002, the Company had  approximately 400 shareholders of record.   Management is aware of  28 sales of Pinnacle stock in 2001, aggregating 15,348 shares in blocks  ranging from 5 shares to 4,672 shares at prices ranging from $85 to $100 per  share. Management is aware of 20 sales of its stock in 2000, aggregating  approximately 2,231 shares in blocks ranging from 10 shares to 400 shares at  prices ranging from $82 to $95 per share.   

                         **Dividends.**  In both 2001 and 2000, the Company declared cash  dividends aggregating $1,843,200 ($2.40 per share).  The 2001 amount  includes $460,800 ($.60 per share) that was not paid until January 2002.   The Company intends to continue paying cash dividends on a quarterly  basis.  The amount and frequency of dividends will, however, 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 

 

11
          
 

 Company appears in the  “Supervision and Regulation” section of this 10-KSB and in Note 15 to the  Company’s consolidated financial statements.

**Item 6.    MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

                         Management’s Discussion and Analysis of Pinnacle analyzes 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. 

                         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. 

**Liquidity And Capital Resources**

Liquidity Management

                         The objective of liquidity management is to maintain cash flows adequate to  meet immediate and ongoing future needs for credit demand, deposit  withdrawals, maturing liabilities and corporate operating expenses.   Pinnacle uses a combination of asset-based and liability-based monitoring and  sources of funds to manage its liquidity. The asset-based liquidity monitoring  is based on the expected liquidity provided by the assets, primarily loans and  securities, of the Bank. At December 31, 2001, 13.1% of the investment  securities portfolio had maturity dates within the next year and an additional  39.1% matures within the next five years.  In addition, a substantial  portion of the mortgage-backed securities portfolio, which amounted to  approximately $34.6 million at December 31, 2001 provides regular payments of  principal and interest. Management regularly reviews information provided by  an outside service estimating the expected investment portfolio cash flows in  various interest rate environments. This information provides a better  estimate of the liquidity to be generated from the investment portfolio than  stated maturities since many instruments have call or prepayment options  inherent in the securities. In addition, all investment securities are  classified as available for sale and may be sold in the event of a liquidity  shortfall.

                          Other sources of liquidity include payments on commercial and  installment loans and repayment of maturing single payment loans.   Management acknowledges that many of the sources of asset-based liquidity can  be volatile and are often difficult to predict with a high level of accuracy.  For example, the loan portfolio and many securities, especially  mortgage-backed securities, have prepayment options that are exercisable by  the borrower based on the current level of interest rates, offers received  from competing lending entities, and changes in the circumstances of the  borrower.  Conversely, payments on fixed rate instruments will be reduced  in the event of rising interest rates.

 

12
          
 

                         As a result of the volatility of asset-based liquidity, Pinnacle’s  management places a high degree of reliance on liability-based liquidity.  These measures of liquidity are based on management’s estimates of sources  of liquidity that are readily available at a reasonable cost in the event of  liquidity shortfalls or unpredicted events. The primary sources of  liability-based liquidity are documented credit lines and the ability to  attract additional deposits.  The Bank has short term borrowing  relationships with two correspondent banks that could provide up to $22.0  million on short notice.  One of these relationships requires that the  borrowings be repaid at least once every seven days while the second line, for  $12 million, has no defined repayment period. Additionally, the Bank has  established membership in the Federal Home Loan Bank of Atlanta (hereinafter  the “FHLB”) and has granted a blanket floating lien on its mortgage  portfolio that collateralizes up to 15% of assets (approximately $46 million),  subject to adequate collateral availability.

                         The Board of Directors of the Bank has authorized the acquisition of deposits  from consumers outside of our general market area, institutional deposits, and  brokered funds to supplement the Bank’s liquidity needs.  These sources  of funds have not been used at this time but it is management’s opinion that  the Bank’s earnings and capital position would result in a minimum  availability of several million dollars of deposits.  Management views  these liability-based sources of liquidity as the cushion to be used to meet  shortfalls caused by changes in asset-based liquidity. Management believes the  liability-based sources are sufficient to fund reasonably expected growth of  the bank for the next several years. 

                         A final source of liquidity results from transactions that Pinnacle management  believes should be considered nonrecurring. These sources include accessing  the capital markets via the issue of additional stock or trust preferred  securities and off balance sheet financings such as securitization of assets.  Pinnacle has no plans at this time to enter into either of these types of  transactions.  One other nonrecurring source of liquidity is a branch  purchase. The Bank anticipates finalizing a Purchase and Assumption agreement  with another institution to purchase the loans and assume the deposits of one  of its branches in the very near future. It is anticipated that this  transaction will close in the second quarter of 2002.  While the overall  impact on the financial results and size of the bank are expected to be  immaterial, the transaction is expected to provide approximately $8 to $9  million of liquidity to Pinnacle.  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.

Investments and Loans                         Management continues to give priority to the importance of maintaining high  levels of assets with interest rate sensitivity while attempting to minimize  the amount of cash and overnight investments held.  Cash and cash  equivalents decreased from December 31, 2000 levels by $2.9 million while  securities available for sale increased by $15.4 million from December 31,  2000 to December 31, 2001.  The average balance in these investment  securities increased by $9.2 million in the current year compared to  2000.  The average balance in Federal Funds sold in 2001 and 2000 was  $4.0 million and $1.6 million, respectively.

13
            
The increases in both  averages resulted from increases in the levels of deposits that exceeded the  Bank’s loan demand throughout 2001. The Bank experienced increased deposits  that mirrored the experience of many other financial institutions as  uncertainty and volatility in the stock market resulted in funds being  deposited in insured deposit accounts.  Additionally, the year 2000  included a security restructuring transaction in the third quarter.  This  transaction involved the sale of $9.8 million of investment securities at a  pretax loss of approximately $390,000.  The proceeds were used to  purchase approximately $4.1 million of longer term, higher yielding securities  and to repay short term borrowings of the Bank. 

                         Total interest-earning assets increased by $24.8 million or 9.7% from December  31, 2000 to December 31, 2001.  Average net loans increased $2.8 million  or 1.7% to $166.6 million in 2001 over 2000.  As reflected in Table 4 of  the statistical information presented below, fixed rate mortgages increased  $2.3 million to $82.2 million at December 31, 2001 while variable rate  mortgages increased $2.9 million to $42.6 million at that same date.  The  higher percentage of fixed rate mortgages reflects the preference of borrower’s  for fixed rate financing in Pinnacle’s lending area.  The majority of  the fixed rate loans have balloon features that allow the Bank to reprice the  loan to current market rates within three to five years of origination.

Allowance for Loan Losses                         The allowance for loan losses is established by management at a level  estimated to be adequate to absorb losses inherent in the loan  portfolio.  The allowance decreased to $2.0 million at December 31, 2001  from $2.4 million at December 31, 2000.  The Bank experienced loan  charge-offs of $1,571,000 in the year ended December 31, 2001 compared to  $459,000 in 2000.  Net charge-offs amounted to $1,069,000 in 2001  compared to $261,000 in 2000.  The significant increase in charge-offs  reflects activity related to two large commercial borrowers.  The bank  foreclosed on one borrower’s assets in April and May of 2001 and recorded a  charge-off of $800,000 at the time of foreclosure.  A second unsecured  commercial loan in the amount of $400,000 was charged-off in June 2001.  Both loans were considered impaired at December 31, 2000. These charge-offs  were somewhat offset by a $369,000 recovery received on a commercial loan that  was initially charged off in the early 1990’s. Management does not believe  these two large charge-offs or the large recovery represent trends in the loan  portfolio. The allowance for loan losses represented 1.1% and 1.4% of total  loans outstanding at December 31, 2001 and 2000, respectively.

                         Determination of the appropriate level of the allowance for loan losses is a  subjective issue that requires judgement on the part of management and the  Board of Directors. The committee process for approval and review of new loans  described previously in this document is the first step in monitoring loans on  a regular basis.  The Bank requires each of its loan officers to grade  every loan at inception and requires the officers to be the primary source of  monitoring for all loans.  A numeric system of one to eight is used to  grade each loan, with one being the highest quality and the top four grades  considered satisfactory loans.  Each officer is expected to report any  negative trends or activity in his loan portfolio and is responsible for  immediately initiating downgrades in loan relationships.  The Bank’s  Loan Review Officer (the “LRO”), with direct reporting to the Executive  and Loan Committee of the 

14
            
 Board, is empowered to regrade any loan at any  time.  Loan officers may suggest or recommend upgrades to the LRO but  they have no authority to make such a change.  As an additional control,  gradings are reviewed twice a year by an independent loan consultant who  reviews a significant portion of the portfolio to examine the appropriateness  of classifications, the adequacy of specific reserves, and the systems used by  management to identify problem loans.  The findings of this review are  reported in summary form to the Executive and Loan committee of the Board of  Directors.  The gradings of the portfolio provide one key element in the  ultimate determination of the adequacy of the allowance.

                         Every quarter, loan officers are required to prepare a Classified Loan Asset  Report for all loans with a rating of 5 or lower that are over $10,000.   These reports include all key facts regarding the relationship, significant  trends, collateral evaluations, estimates of value, collection activity taken  by the Bank, etc.  These reports are reviewed by the appropriate  committee and then are submitted to a final review by a committee composed of  the Bank’s President, LRO, Chief Credit Officer, and Chief Financial  Officer.  This group provides the final recommendation to the Board on  levels of specific reserves and determination of impairment  classifications.  In most cases, the determination of impairment reserves  is based on the estimated fair value of collateral securing the loan. Loans  with outstanding balances of $2.0 million and $4.5 million have been  recognized as impaired as of December 31, 2001 and December 31, 2000,  respectively, and had total allocated allowances for loan losses of $450,000  and $1,215,000, respectively.  The average investment in impaired loans  was $3.0 and $2.1 million, respectively.  Unrecorded income on nonaccrual  loans for 2001 and 2000 was $141,000 and $126,000, respectively.  Real  estate secures $1.5 million of the impaired loans at December 31, 2001 while  the remainder are either unsecured or secured by other forms of collateral.

                         The Bank’s general allowance is management’s best estimate of the amount  required for probable but unrecognized losses as of the end of the  period.  While subjectivity and estimates are involved in determining the  specific reserves for large, impaired loans, a greater amount is required to  determine the proper level of the unallocated reserve.  To determine its  best estimate, management considers a number of factors, including historical  charge-offs and recoveries, in aggregate and by type of loan, the average life  of the portfolio,  industry concentrations, geographic concentrations,  peer averages, current economic conditions, and changes in the size and  composition of the portfolio.  Specific considerations as it impacts the  Bank’s portfolio are as follows:

                         Historical charge-offs: As can be seen in Table 5, the Bank’s five year  historical loss experience is approximately .23% of total loans per  year.  During this five year period, the Bank had one exceptionally high  year (2001) and one very low year (1997).  In addition to the large  charge-off experienced during 2001 that impacts the averages, the Bank also  considered that the large recovery received during 2001 will not be  repeated.  If these two charge-offs and recoveries (including recoveries  in prior years) related to the one loan are excluded, the five year average  loss rate would be approximately .16%. Using these two averages as a range,  the Bank would expect annual losses on the portfolio to approximate 

15
          
 between  $300,000 and $400,000 per year.  With an average life of approximately  three and one-half years, an unallocated allowance of $1.0 million to $1.4  million appears appropriate.

                         Concentrations: The Bank has two industry concentrations with 10% and 14% of  the portfolio exposed to the granite and poultry industries,  respectively.  Substantially all of the portfolio is lent to borrowers  and is secured by assets within the four county area of the Bank.  The  existence of these industry and geographic concentrations tends to increase  the risk in the event of an economic downturn in the area or within a  particular industry.  Consequently, one negative event may have higher  than expected consequences on the loan portfolio.  Management believes  the existence of these concentrations and the resultant potential for losses  results in the need for a higher general loan loss allowance.

                         General conditions: The economy has officially been declared to be in  recession beginning in March 2001 and the Bank’s local economies have  reflected the increased unemployment rate experienced throughout most of the  country.  The Bank has experienced loan portfolio growth of about 7% per  year for the last two years while the composition has changed somewhat as a  larger percentage of the portfolio is committed to construction lending and  commercial lending secured by assets other than real estate.  The  combination of these and other circumstances have resulted in an increase in  the level of delinquent and nonaccrual loans from historical levels.  Management believes these changes have resulted in a need to maintain the  general allowance as a percentage of loans above historical charge-off  averages. 

                         Management combines the above information and determines its best estimate of  the appropriate level of the general and total allowance.  It is  management’s belief that the allowance is reasonable and appropriate based  on the information available as of December 31, 2001.

Other assets                         The balance of other real estate owned (“OREO”) increased from $384,000 at  December 31, 2000 to $2,745,000 at December 31, 2001. As indicated above, this  increase is primarily the result of the foreclosure on properties securing one  large commercial relationship  during 2001. The property acquired by the  Bank included two homes, numerous undeveloped tracts of land, and the property  and equipment used in a sawmill operation.  The balance in OREO peaked at  approximately $3.4 million subsequent to the foreclosure of this  property.  Since that time, the Bank has disposed of almost $600,000 of  the real estate securing the loan and has taken additional write downs of  $200,000.  The property is recorded at its estimated net realizable value  based on an appraisal of the collateral.  Management does not believe the  increase in the level of OREO are indications of a trend in the loan  portfolio.  Significant uncertainty exists as to the amount that will  ultimately be collected based on the special purpose nature of portions of the  real estate and equipment the Bank is attempting to sell.

                         The Bank purchased approximately $5.0 million of Bank Owned Life Insurance on  certain of its officers and employees during 2001.  The Bank is the  beneficiary of these policies.  The policies were purchased to reduce  employee benefits costs.  The income generated by the increase in cash  surrender value is recorded as other income and is recognized 

16
            
 by the Bank on a  tax free basis.  The purchases represent long term commitments of the  Bank. The return generated on an annual basis will vary based on the general  level of interest rates.  The Bank does not anticipate the purchase of  significant additional amounts of Bank Owned Life Insurance in the near  future.

                         The Bank regularly makes financial commitments to extend credit to its  customers.  These commitments have off-balance sheet risk with exposure  to credit loss in the event of nonperformance by the customer.  The Bank  uses the same credit policies in making such commitments as it does in  on-balance sheet lending. The total amount of these financial commitments  amounted to approximately $29.5 million and $22.7 million at December 31, 2001  and 2000, respectively.  Many of these commitments are expected to expire  without being drawn upon; the chance that a significant portion of the  commitments would be funded within a short time period is considered highly  unlikely.  Details of these off-balance sheet commitments may be found in  footnote 13 of the Consolidated Financial Statements 

Liabilities                         Pinnacle continues to maintain a concentration of core deposits from an  established customer base which provides a stable funding source.   Deposits increased $18.1 million (8.2%) to $239.8 million at December 31, 2001  from $221.7 million at December 31, 2000.  Noninterest-bearing deposits  increased $2.1 million to $45.5 million at December 31, 2001 while  interest-bearing deposits increased $16.0 million to $194.3 million.   Management believes a portion of the increase is due to consumers transferring  money from the stock market to insured deposits as a result of stock market  volatility.  Money market deposit accounts, which often represent funds  invested for short periods of time awaiting long term investment  opportunities, increased by $9.1 million during the year.  Certificates  of deposits grew by $6.1 million as consumers sought guaranteed returns and  the Bank increased its certificates issued to municipalities by approximately  $1.5 million.  The ability of the Bank  to consistently increase  deposits by a similar percentage in future years without additional branch  purchases, bank acquisitions, or the use of brokered or out-of-market deposits  is questionable. 

                         As discussed above, Bank management actively manages its liquidity position  and has obtained several sources of both secured and unsecured borrowed  funds.  These sources of liability-based liquidity have allowed the bank  to invest a higher percentage of its funds in loans and investment securities  that earn a higher yield than overnight investments.   During 2001,  the Bank began offering certain commercial deposit customers the opportunity  to invest with the Bank under short term securities sold under agreements to  repurchase.  These commercial “sweep” accounts provide for the daily  accrual of interest on balances in excess of certain targets. The Bank  anticipates continued use of these sources of funds and any other reasonably  priced source of borrowings to enhance its earnings while continuing to  monitor the maturities and interest rate risk of interest-bearing assets and  liabilities.

Shareholders’ equity                         Shareholders’ equity increased $3.7 million to $46.2 million at December 31,  2001 from $42.5 million at December 31, 2000.  Net earnings retained  during the year amounted to $2.5 million while equity increased $1.2 million  due to an increase in the net 

17
            
 unrealized gain on securities available for sale  (net of its tax impact).  The change in unrealized amounts reflects the  significant decrease in interest rates during 2001.  Dividends declared  were unchanged at $2.40 per share. Approximately $461,000 of the dividends  declared in 2001 were paid in January 2002.  The declared but unpaid  dividend is reflected in the balance sheet at December 31, 2001 as a  liability, with the amount reduced from retained earnings.

                         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 15.0% in 2001. 

Other information                         Pinnacle’s financial statements include a disclosure of the fair value of  financial instruments. The fair value and carrying amounts of Pinnacle’s  financial assets at December 31, 2001 amounted to $314.3 million and $311.2  million, respectively, compared to the fair value and carrying amounts of  liabilities of $262.4 million and $265.0 million, respectively.   Comparable values of assets at December 31, 2000 were $281.6 million and  $281.8 million, respectively, while comparable liability values at December  31, 2000 were $226.8 million and $239.2 million.  The details of the fair  value estimates and assumptions can be found in Note 14 of the financial  statements.

                         Management is not aware of any trends, events or uncertainties that are  reasonably likely to have a material effect on Pinnacle’s liquidity, capital  resources, or results of operations except as disclosed in this Form  10-KSB.  Pinnacle is not aware of any current recommendations by the  regulatory authorities that, 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**

                         Pinnacle’s operational results primarily depend on the earnings of the  Bank.  The 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.  As mentioned in the “Interest  Rate Sensitivity” section, future earnings are impacted by changes in  interest rates.

                         Interest income on interest bearing assets decreased by $817,000 (3.7%) as  average tax equivalent yields declined from 8.9% to 8.1% as a result of  significant reductions in interest rates during 2001 and a change in asset mix  resulting in a higher proportion of interest bearing assets being lower  yielding investment securities. The aggressive lowering of short term interest  rates by the Federal Reserve resulted in a significant portion of the loan  portfolio repricing downward while new lending and purchases of investment  securities were made at lower rates than in the previous year. Interest  expense on deposits and borrowings was unchanged from 2000 as a result of  growth in deposits and borrowings offsetting a slight decline in Pinnacle’s  cost of funds.  The average cost of funds was 3.6% in 2001 and 3.8% 

18
            
 in  2000.  The negligible decrease in the cost of funds reflects the lagging  nature of the repricing of many of the Bank’s sources of funds, particularly  certificates of deposit. As a result of the above changes in the bank’s  asset mix and declines in interest rates, net interest income in the year  ended December 31, 2001 declined by $807,000 or 6.1% as compared to  2000.  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 2001.

                         The provision for loan losses is the charge to operating expenses that  management believes is necessary to fund the allowance for loan losses. The  provision reflects management’s estimate of potential loan losses and the  creation of an allowance for loan losses adequate to absorb losses inherent in  the portfolio.  Pinnacle provided $750,000 in 2001 and $500,000 for  possible loan losses in 2000. The increased provision reflects the growth in  the loan portfolio as well as the charge-offs recorded in 2001.

                         Pinnacle’s other income increased by approximately $900,000 to $3.1 million in  2001. The increase primarily results from increases in four areas.   First, the Bank implemented a new program that reduced the manual involvement  in accessing various fees, decreasing the amount of waived service charges and  NSF fees.  Consequently, total deposit account service charges increased  by slightly over $500,000.  Second, increased mortgage origination volume  resulted in an increase in fee income of $184,000.  All of these loans  were sold by the Bank immediately upon closing. Next, the purchase of Bank  Owned Life Insurance resulted in an increase in other income of  $132,000.  Finally, the Bank took advantage of the declining interest  rate environment to dispose of securities that no longer met its investment  objectives and to recognize gains to allow for the prepayment of long term  borrowings. While other income in the future will reflect an entire year of  return on the Bank Owned Life Insurance, many of the other sources are  dependent on the level of interest rates and consumer behavior that is outside  of the control of the Bank.  Management can not predict if these  increases will be sustained.

                         Other expenses decreased by $184,000 in 2001 primarily due to three  nonrecurring charges recognized by Pinnacle in 2000.  The first item  relates to the retirement of the Bank’s president, announced in the first  quarter of 2000.  The Company recognized the expected payments to be made  under the terms of an employment security agreement between the former  president and the Bank as compensation expense in the amount of  $385,000.  Payments under the agreement result in charges to the  established liability account and do not have an impact on current or future  earnings.  The second charge is the result of an unfavorable ruling in a  lawsuit in which the court granted Capital Resource Funding  a motion for  summary judgement on its claim regarding unlawful conversion of assets.   The Bank recognized an expense of $250,000 to establish the liability that was  ultimately paid to settle the claim.  Finally, the Bank restructured its  investment portfolio in the third quarter of 2000 to sell under performing  assets, invest in higher yielding investment securities, and decrease its  reliance on short term debt.  This transaction resulted in a loss of  approximately $390,000.  These three transactions cumulatively increased  other expenses by $1,025,000 in 2000. Excluding these three nonrecurring  transactions, other expenses would have increased by $841,000, or 10.5% of  2000’s recurring expenses.  Compensation and benefits increased  approximately $200,000 or 4.3%, excluding the retirement 

19
            
 liability recorded in  2000.  This increase reflects normal growth combined with increased  commissions related to the increased mortgage origination volume indicated  earlier.  The remainder of the increase is primarily the result of  increased expenses and write-downs related to OREO ($381,000 increase),   penalties on the early prepayment of long term borrowings ($44,000 increase),  and professional services ($54,000 increase). As indicated earlier, management  has recorded its OREO at expected net realizable value but can provide no  assurance that carrying amounts will be received.  Additionally,  continued projected growth of the Bank and the purchase of a new branch will  result in an increase in operating expenses.  Management continues to  closely review new expenditures and believes increases in such expenses will  be controlled.

                         Pinnacle’s income tax expense decreased $68,000 in 2001 compared to 2000 as  the effective income tax rate decreased to 29.2% in 2001 from 30.4% in  2000.  The decreased effective tax rate primarily resulted from  tax-exempt interest income being a more significant percentage of taxable  income and a decreased state income tax rate as a result of a limited  partnership investment that substantially reduced State of Georgia taxes (see  Footnote 6 of the Consolidated Financial Statements).

                         Net income for the year ended December 31, 2001 was $4.3 million and  represents returns of 9.7% on average shareholders’ equity and 1.4% on  average assets.    Comparable amounts during 2000 were $4.2  million, 10.4% and 1.5%, respectively.  As indicated above, net income  increased slightly as the result of the nonrecurrence of several 2000  transactions, increased fee income, and a lower effective tax rate offset by  an increased loan loss provision and lower net interest income. The operating  ratios reflect the slightly increased earnings compared to a larger asset  base.      

 

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The following tables present  Pinnacle’s regulatory capital position at December 31, 2001:

 (Rounded to   nearest thousand)
  
 
Total Risk Adjusted      Assets

 $       216,794

  
          
Risk Based Capital Ratios: 
        
  
         
     
     
TIER 1 CAPITAL

  

 
Common stock

 $              7,680

 3.54%

Surplus 

 7,280

3.36%

Retained earnings 

29,869

 13.78%
               
Total Tier 1 capital 

44,829

 20.68%

Tier 1 minimum requirement

8,672

  4.00%

Excess (shortfall)

 $            36,157

16.68%

TOTAL CAPITAL

 

  

Tier 1 from above

 $            44,829

 20.68%

Allowance for loan losses,      limited to 1.25%                             of risk weighted assets

       2,033

  0.94%

Total Tier 2 capital

 46,862

 21.62%

Tier 2 minimum requirement

 17,344

        8.00%
               
Excess (shortfall)

$            29,518

 13.62%

LEVERAGE      RATIO 

  

  

Tier 1 capital

 $            44,829

15.13%

Minimum requirement

 8,889 

 3.00%
                
Excess (shortfall)

 $            35,940

12.13%
               
Average total      assets, net of goodwill

$          296,297

  

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**Selected Statistical Information**

                         The following section  presents consolidated statistical information for Pinnacle, which supplements  the financial data discussed elsewhere herein.

Index to Selected Statistical  Information
         
     
Table 1

Average Balance Sheets and Net  Interest Earnings

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

 

 

 

 

 

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**Table 1  Pinnacle Financial Corporation and  Subsidiary  Average Balance Sheets and Net  Interest Earnings**

 

**2001**

**2000**

 

**Average          Balances**

**Interest          Income/          Expense**

**Yield/          Rate**

**Average          Balances**

**Interest          Income/          Expense**

**Yield/          Rate**
**  **
Assets:

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

                 Net loans (including loan fees)

$166,640,818

$15,549,647

9.33%

$163,825,573

$16,629,961

10.15%

 

 

 

 

 

 

 

     Investment securities:

 

 

 

 

 

 

                 Taxable

76,243,993

4,601,071

6.03%

71,538,421

4,522,416

6.32%

                 Nontaxable (a)

22,060,245

1,548,786

7.02%

17,606,405

1,359,083

7.72%

     Federal funds sold

3,983,821

166,655

4.18%

1,570,798

106,950

6.81%
          
 

 

 

 

 

 

 

         Total interest-earning         assets

268,928,877

21,866,159

8.13%

254,541,197

22,618,410

8.89%

 

 

 

 

 

 

 

Noninterest earning assets:

 

 

 

 

 

 

     Cash and due from bank

9,213,733

 

 

9,125,713

 

 

     Premises & equipment

7,981,220

 

 

8,194,715

 

 

     Other assets

10,398,559

 

 

6,871,743

 

 
 
 

 

 

 

 

 

 

                 Total assets

$296,522,389

 

 

$278,733,368

 

 
 
Liabilities and        shareholders’ equity:

 

 

 

 

 

 

Interest bearing        liabilities:

 

 

 

 

 

 

     Interest bearing demand deposits

$56,336,510

1,354,106

2.40%

$53,735,905

1,612,554

3.00%

     Savings deposits

17,419,577

385,640

2.21%

17,532,246

460,489

2.63%

     Time deposits

115,605,394

6,406,482

5.54%

109,612,174

6,112,211

5.58%

     Borrowings

12,429,961

662,954

5.33%

9,963,661

633,468

6.36%
**  **
 

 

 

 

 

 

 

                Total        interest-bearing        liabilities

201,791,442

8,809,182

4.37%

190,843,986

8,818,722

4.62%

 

 

 

 

 

 

 

Noninterest bearing        liabilities:

 

 

 

 

 

 

     Noninterest bearing demand

45,229,483

 

 

43,867,765

 

 

     Other liabilities

4,928,997

 

 

4,237,010

 

 
 
 

251,949,922

 

238,948,761

 

     Shareholders’ equity

44,572,468

 

 

39,784,607

 

 
 
 

 

 

 

 

 

 

         Total liabilities        and shareholders’                            equity

$296,522,390

 

 

$278,733,368

 

 
 
 

 

 

 

 

 

 

Excess of interest-earning        assets           over interest bearing liabilities 

$67,137,435

 

 

$63,697,211

 

 

Ratio of interest-earning        assets to             interest- bearing liabilities        

133.27%

 

 

133.38%

 

 

Net interest income

 

$13,056,977

 

 

$13,799,688

 

Net interest spread

 

 

3.76%

 

 

4.27%

Net interest yield on        interest earning assets 

 

 

4.86%

 

 

5.42%

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 included in the yield calculation for loans in all periods reported.

(a) Tax exempt income is  calculated on a tax equivalent basis using a 34% tax rate.

23
            
**Table 1 – (continued)  Pinnacle Financial Corporation and  Subsidiary  Average Balance Sheets and Net  Interest Earnings**

** **

**1999**

** **

**Average          Balances**

**Interest          Income/          Expense**

**Yield/          Rate**
   
Assets:

 

 

 

Interest-earning assets:

 

 

 

    Loans (including loan fees)

$145,141,797 

$14,527,573

10.01%

     Investment securities:

 

 

 

                 Taxable

80,885,666 

4,905,061

6.06%

                 Nontaxable (a)

17,161,110 

1,354,012

7.89%

     Federal funds sold

4,591,789 

242,797

5.29%
   
 

 

 

 

                       Total interest-earning assets

247,780,362 

21,029,443

8.49%

 

 

 

 

Noninterest earning assets:

 

 

 

     Cash and due from banks

8,750,038 

 

 

     Premises & equipment

8,399,884 

 

 

     Other assets

4,710,160 

 

 

 

 

 

 

                       Total assets

$269,640,444 

 

 

Liabilities and        shareholders’ equity:

 

 

 

Interest bearing        liabilities:

 

 

 

     Interest bearing demand deposits

$51,450,881 

1,277,067

2.48%

     Savings deposits

18,385,791 

485,745

2.64%

     Time deposits

110,188,748 

5,637,386

5.12%

     Borrowings

1,330,767 

77,179

5.80%
   
 

 

 

 

                       Total interest bearing liabilities

181,356,187 

7,477,377

4.12%

 

 

 

 

Noninterest bearing        liabilities:

 

 

 

     Noninterest bearing demand

43,410,734 

 

 

     Other liabilities

3,733,700 

 

 

 

 228,500,621 

 

Shareholders’ equity

41,139,823 

 

 

 

 

 

 

                       Total liabilities and shareholders’ equity

$269,640,444 

 

 

 

 

 

 

Excess of interest-earning        assets over             interest bearing liabilities        

$66,424,175 

 

 

 

 

 

 

Ratio of interest-earning        assets to             interest-bearing liabilities        

136.63%

 

 

 

 

 

 

Net interest income

 

$13,552,066

 

 

 

 

 

Net interest spread

 

 

4.37%

Net interest yield on        interest earning assets

 

 

5.47%

** **24
 
**Table 2  Pinnacle Financial Corporation and Subsidiaries  Volume/Rate Analysis**

The following table shows a summary  of the changes in interest income and interest expense resulting from changes  in volume and changes in rates for each major category of interest earning  assets and interest-bearing liabilities for 2001 over 2000 and 2000 over 1999.

** **

**2001 over          2000**

**2000 over          1999**
    
** **

**Increase          (decrease) due to changes in:**

**Increase          (decrease) due to changes in:**
    
Interest income on:

** **

** **

** **

** **

** **

** **

** **

**Volume**

**Rate**

**Total**

**Volume**

**Rate**

**Total**

 

 

 

 

 

 

 

 

Loans (including loan fees)

$285,747 

$(1,366,061)

$(1,080,314)

$1,899,189 

$203,199

$2,102,388 

Investment securities:

 

 

 

 

 

 

            Taxable

286,116 

(207,461)

78,655 

(592,948)

210,303 

(382,645)

            Non-taxable (a)

312,948 

(123,245)

189,703 

34,245 

(29,174)

5,071 

Federal funds sold

101,017

(41,312)

59,705 

(205,642)

69,795 

(135,847)

                 Total interest earning                               assets        

$985,828 

$(1,738,079)

$(752,251)

$1,134,844 

$454,123 

$1,588,967 

 

 

 

 

 

 

 

Interest expense on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

            Interest-bearing demand

$78,018 

$(336,466)

$(258,448)

$56,669 

$278,818 

$335,487 

            Savings

(2,963)

(71,886)

(74,849)

(23,417)

(1,839)

(25,256)

     Time

338,116 

(43,845)

294,271

(29,521)

504,346 

474,825)

            Borrowings

132,112 

(102,626)

29,486 

548,837 

7,452 

556,289 

                 Total interest-bearing                               liabilities        

$545,283 

$(554,823)

$(9,540)

$552,568

$788,777 

$1,341,345 

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.

25 
**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,  2001, 2000, and 1999:

 

**2001**

**2000**

**1999**
** **
** **

**Amortized          Cost**

**Market**

**Amortized          Cost**

**Market**

**Amortized          Cost**

**Market**
 
U.S. Treasury and             U.S. Gov’t Agencies        

$ 57,973,965

$ 59,457,073

$63,123,148

$63,209,810

$75,792,343

$73,592,108

State, county and municipal

27,889,257

28,190,331

19,066,843

19,209,016

19,571,315

19,296,812

Other investments

14,670,165

14,920,132

4,738,865

4,756,760

2,252,136

2,211,800
 
                 Totals

$ 100,533,387

$ 102,567,536

$86,928,856

$87,175,586

$97,615,794

$95,100,720
 
** **

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.

**Maturities at December 31,          2001**

**U.S.          Treasury and          U.S. Gov’t          Agencies**

**State,          County          and          Municipal**

**Other          Investments**

**Weighted          Average          Yields**

 

 

 

 

 

Within 1 year

$10,088,756       

$1,847,398     

$3,093,169    

5.50%

After 1 through 5 years

46,647,279       

14,132,563     

10,567,004    

6.23%

After 5 through 10 years

2,721,038       

9,991,301     

1,259,959    

6.57%

After 10 years

0       

2,219,069     

0    

6.72%
 
 

 

 

 

 

                       Totals

$59,457,073     

$28,190,331    

$14,920,132    

6.19%
               
** **

26 
**Table 4  Pinnacle Financial Corporation and  Subsidiary  Loan Portfolio**

The following table presents loans  by type at the end of each of the last five years.

 

**2001**

**2000**

**1999**

**1998**

**1997**
** **
Commercial, financial             and        agricultural

$22,020,411

$19,566,350

$19,369,499

$22,383,379

$23,267,802

Real estate - construction

11,701,754

6,893,572

6,602,735

5,017,757

5,780,973

Real estate – mortgage

124,810,133

119,624,187

103,411,277

88,232,782

87,272,975

Installment loans to        individuals

20,746,967

23,058,750

27,000,807

28,461,144

28,004,470
** **
 

 

 

 

 

 

Totals

$179,279,265

$169,142,859

$156,384,318

$144,095,062

$144,326,220
** **
As of December 31, 2001,  maturities of loans in the indicated classifications were as follows:

**Maturity**

**Commercial,          Financial          and          Agricultural**

**Real Estate          Construction**

**Total**
** **
 

 

 

 

Within 1 year

    $8,580,134      

$7,829,805     

$16,409,939    

1 to 5 years

     8,534,369      

3,871,949     

12,406,318    

After 5 years 

    4,905,908      

–     

4,905,908    
** **
 

 

 

 

                 Totals

$22,020,411      

$11,701,754     

$33,722,165    
** **
As of December 31, 2001, the  interest terms of loans maturing after one year in the indicated  classifications for the indicated maturity ranges are as follows:

 

**Fixed          Interest          Rates**

**Variable          Interest          Rates**

**Total**
** **
Commercial, financial and             agricultural:

 

 

 

                 1 to 5 years maturity

$6,679,161

$1,855,208

$8,534,369

                 After 5 years maturity

2,595,703

2,310,205

4,905,908
** **
 

9,274,864

4,165,413

13,440,277
** **
Real estate-construction:

 

 

 

                 1 to 5 years maturity

2,264,344

1,607,605

3,871,949

                 After 5 years maturity

–

–

–
** **
 

2,264,344

1,607,605

3,871,949
** **
 

 

 

 

 

$11,539,208

$5,773,018

$17,312,226
** **
Pinnacle’s commercial, financial  and agricultural loans and installment loans to individuals include secured  and unsecured loans as detailed below:

** **

**2001**

**2000**

**1999**
 
Commercial, financial and agricultural

 

 

 

     Secured

$19,523,399

$16,055,742

$16,680,933

     Unsecured

 2,497,012

3,510,608

2,688,566
 
 

$22,020,411

$19,566,350

$19,369,499
 
Installment loans to        individuals

 

 

 

     Secured

$15,645,789

$17,929,544

$21,360,405

     Unsecured

 5,101,178

 5,129,206

5,640,402
 
 

$20,746,967

$23,058,750

$27,000,807
      
27
 
**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.

** **

**2001**

**2000**

**1999**
 
Real estate - mortgage:

 

 

 

     Fixed

$82,168,757

$79,871,781

$74,578,960

     Variable

42,641,376

39,752,406

28,832,317
 
 

$124,810,133

$119,624,187

$103,411,277
 
Installment loans to        individuals:

 

 

 

     Fixed

$19,671,368

$22,268,023

$26,381,960

     Variable

1,075,599

790,727

618,847
 
 

$20,746,967

$23,058,750

$27,000,807
 
The following summarizes past due,  non-accrual and restructured loans as of December 31, 2001, 2000, 1999, 1998,  and 1997:

** **

**2001**

**2000**

**1999**

**1998**

**1997**

 

 

 

 

 

 

Accruing loans 90 days or        more past due

$666,832

$   918,476

$235,571

$233,337

$934,134

Non-accrual loans

931,264

4,059,027

48,641

139,087

102,185

Restructured loans

0

181,389

188,835

196,262

251,356

Accruing loans 90 days or more  past due as of December 31, 2000 included three significant loans totaling  $753,167.  One of these loans, amounting to $385,932 was subsequently  brought current. One loan totaling $241,776 was subsequently placed on  nonaccrual while the collateral for the remaining loan was foreclosed upon in  February 2001.  The nonaccual loans at December 31, 2000 included  $3,720,354 to one commercial relationship that ultimately resulted in  foreclosure by the Bank.

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 loan was secured  by real estate and approved by the Board of Directors. The Bank foreclosed  upon the property in 2001.
   
28
 
**Table 5  Pinnacle Financial Corporation and  Subsidiary  Allowance for Loan Losses**

The following table summarizes  information concerning the allowance for loan losses:

**  **

**2001**

**2000**

**1999**

**1998**

**1997**
 
 

 

 

 

 

 

Balance at beginning of year

$2,352,245

$2,113,735

$2,070,005

$2,038,015

$1,842,152
 
Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

     Commercial, financial and                  agricultural

401,629

281,344

351,864

193,748

109,846

                 Real estate-construction

–

–

–

–

–

                 Real estate-mortgage

964,676

167,985

55,049

80,992

–

                 Installment loans to individuals

204,269

10,145

18,421

57,762

79,377
 
 

 

 

 

 

 

 

1,570,574

459,474

425,334

332,502

189,223
 
Recoveries:

 

 

 

 

 

 

 

 

 

 

 

     Commercial, financial and             agricultural

2,921

79,994

38,969

28,895

80,388

                 Real estate-construction

–

–

–

–

–

                 Real estate-mortgage

440,133

116,876

110,335

92,380

52,801

                 Installment loans to individuals

58,548

1,114

19,760

18,217

17,897
 
 

 

 

 

 

 

 

501,602

197,984

169,064

139,492

151,086
 
 

 

 

 

 

 

Net charge-offs

1,068,972

261,490

256,270

193,010

38,137
 
 

 

 

 

 

 

Additions charged to        operations

750,000

500,000

300,000

225,000

234,000
 
 

 

 

 

 

 

Balance at end of year

$2,033,273

$2,352,245

$2,113,735

$2,070,005

$2,038,015
 
Ratio of net charge-offs        during the             period to average loans outstanding             during the period

.63%

.16%

.18%

.14%

.03%
 
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.  The  allowance for loan losses is evaluated by management on a quarterly basis  based upon the collectibility of the loans in light of historical experience,  the nature and size of the loan portfolio, adverse situations that may affect  the borrower’s ability to repay, estimated value of underlying collateral  and prevailing economic conditions.  Based on this review, the provision  necessary to maintain this allowance is recorded. 

The following narrative addresses  the risk elements in the loan portfolio and the factors considered in  determining the amount of the allowance for loan losses:

The general risk elements which  are found in the loan portfolio include changes in the ability of the borrower  to repay due to changing economic conditions caused by unemployment,  inflation, reduced cash flow, rising taxes, and increased costs for borrowers  on fixed incomes.  Inherent credit risks include possible undervalued  collateral due to depreciation over time, environmental concerns, and  excessive indebtedness by individual borrowers.

 29
 
 

**Table 5****Pinnacle Financial Corporation and  Subsidiary  Allowance for Loan Losses  (continued)**

Specific risk elements associated  with each lending category are as follows:

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 inadequate collateral.

Installment loans to individuals   Loss of employment, changes in local economy, and the inability to  monitor collateral (vehicle, boats, mobile homes).

Allocation of the Allowance for  Loan Losses:

 

**2001**

**2000 **

**1999**

**1998**

**1997**
** **
Domestic:

 

 

 

 

 

     Commercial, financial and agricultural

$125,000

$1,357,106

$563,252

$612,820

$483,911

     Real Estate-construction

0

36,000

51,000

36,000

0

     Real Estate-mortgage

250,000

46,000

84,300

99,300

241,777

     Installment loans to individuals

75,000

55,000

82,852

122,500

92,706

     Unallocated

1,583,273

858,139

1,332,331

1,199,385

1,219,621
** **
 

$2,033,273

$2,352,245

$2,070,005

$2,038,015

$2,038,015
** **
 

30
 
**Table 6  Pinnacle Financial Corporation and  Subsidiary  Deposits**

The following table presents  average balances of deposits and the average rates paid on such deposits for  2001, 2000, and 1999.

 

**2001**

**2000**

**1999**
** **
 

**Amount**

**Rate**

**Amount**

**Rate**

**Amount**

**Rate**
** **
Demand deposits:

 

 

 

 

 

 

    Noninterest bearing

$ 45,229,483

–   

$ 43,867,765

–   

$ 43,410,734

–   

    Interest-bearing

56,336,510

2.40%

53,735,905

3.00%

51,450,881

2.48%

Savings deposits

17,419,577

2.21%

17,532,246

2.63%

18,385,791

2.64%

Time deposits

115,605,394

5.54%

109,612,174

5.58%

110,188,748

5.12%
** **
 

 

 

 

 

 

 

        Totals

$234,590,964

 

$224,748,090

 

$223,436,154

 

Maturities of time certificates of  deposit of $100,000 or more outstanding at December 31, 2001 are summarized as  follows:

 

**Time          Certificates          of Deposit**

 

 

Within 3 months

$10,198,688     

After 3 through 6 months

11,028,543     

After 6 through 12 months

 8,540,685     

After 12 months

 3,566,697     

    

 

     Total

$33,334,613     

** **

**Table 7  Selected Ratios**** **

The following table sets out  certain ratios of Pinnacle for the years indicated.

 

**2001**

**2000**

**1999**

Net income to:

 

 

 

     Average shareholders’ equity

  9.67%

10.38%

12.34%

     Average assets

 1.45%

 1.51%

 1.88%

Dividends to net income

42.94%

43.85%

92.30%

Average equity to average        assets

14.98%

14.53%

15.26%

 31
 
**Table 8  Pinnacle Financial Corporation and  Subsidiary  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, 2001 with no prepayment assumptions.  Also  included are the related periodic and cumulative gaps for each period.

** **

**0-3          Months**

**4-12          Months**

**One Year          Through          Five Years**

**Over          Five Years**

**Total**

**Earning assets:**

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

$0   

$0  

$0  

$0  

$0  

Taxable investment        securities

5,041,937   

16,864,281  

45,829,716  

8,146,615  

75,882,549  

Nontaxable investment        securities

304,521   

939,427  

10,117,946  

15,323,093  

26,684,987  

Loans

63,647,821   

18,523,426  

88,953,173  

6,121,572  

177,245,992  

 

 

 

 

 

 

                 Total earning assets

$68,994,279  

$36,327,134  

$144,900,835  

$29,591,280  

$279,813,528  

 

 

 

 

 

 

**Interest bearing        liabilities****:**

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$30,661,583   

$68,612,995  

$17,382,515  

$0  

$116,657,093  

Other interest bearing        deposits

77,614,996   

0  

0  

0  

77,614,996  

Borrowings

14,397,893   

1,500,000  

4,500,000  

0  

20,397,893  

                 Total interest bearing liabilities

$122,674,472  

$70,112,995  

$21,882,515  

$0  

$214,669,982  

 

 

 

 

 

 

**Gap summary**

 

 

 

 

 

Periodic net earning assets

($53,680,193)  

($33,785,861) 

$123,018,320  

$29,591,280  

$65,143,546  

 

 

 

 

 

 

Cumulative net earnings        assets

($53,680,193)  

($87,466,054) 

$35,552,266  

$65,143,546  

$65,143,546  

 

 

 

 

 

 

Cumulative ratio of earning        assets to             interest bearing liabilities

56.24%

54.63%

116.56%

130.35%

130.35%

The rate sensitivity analysis  table is designed to indicate Pinnacle’s sensitivity to changes in interest  rates by setting forth in comparative form the repricing of  assets and  liabilities for the period shown.  In the first year, 38% of all interest  earning assets will reprice compared to 90% of interest bearing liabilities.  Changes in the mix of earning assets or supporting liabilities can either  increase or decrease the net interest margin without affecting interest rate  sensitivity.  In addition, the interest rate spread between an asset and  its supporting liability can vary significantly while the timing of repricing  for both the asset and the liability remains the same, thus impacting net  interest income. This characteristic is referred to as basis risk and  generally relates to the possibility that the repricing characteristics of  short-term assets tied to Pinnacle’s prime lending rate are different from  those of short-term funding sources such as NOW accounts or certificates of  deposit.  Varying interest rate environments can create unexpected  changes in prepayment levels of assets and liabilities that are not reflected  in the interest rate sensitivity analysis.  Consequently, an interest  rate gap analysis may not provide an accurate assessment of Pinnacle’s  exposure to changes in interest rates. See the “interest rate sensitivity”  section of this 10KSB for a discussion of significance of the cumulative  ratios presented above.

32
            
**Item 7.      FINANCIAL STATEMENTS**

                         The financial statements and the report of independent public accountants are  included in this report beginning at page F-1 of this Form 10-KSB.

**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.

 

 

 

 

 

 

 

 

33
          
**PART III**

**Item 9.****      DIRECTORS, EXECUTIVE  OFFICERS, PROMOTERS AND**     **             CONTROL PERSONS**

                         The directors and executive officers of Pinnacle, their respective ages,  positions with Pinnacle,  and the Pinnacle common stock owned  beneficially by them as of March 15, 2002 are as follows.  None of  Pinnacle’s directors have directorships in other publicly owned  companies.  Percentages of shares beneficially owned are based on 768,000  shares outstanding on March 15, 2002.

**           Name**

**Age**

**Position with Pinnacle**

** ****Number      of Shares ****Owned Beneficially       (Percent of Class) **

**  **

**  **

**  **** **

Linton W. Eberhardt 

 62 

President & Director

 600* 

(1)

Don C. Fortson 

 52 

Director 

 818* 

 

Robert H. Hardy 

 53  

Director  

 224*  

 

Robert E. Lee, III  

 50 

Director 

400*  

 

J. Daniel McAvoy, M.D.  

 51  

Director  

 612* 

(2)

L. Jackson McConnell   

 65 

Chairman & Director  

201,323    

(3)

  

 

  (26.2%)

  

L. Jackson McConnell, Jr. 

 35 

Director   

200*  

 

James E. Purcell  

 61 

Director 

3,400* 

 

Steven A. Williams 

 49 

Director 

1,832* 

(4)

**  **

**  **

**  **** **

All      directors and executive officers as a group (9 persons)  

 

209,409   

 

  

  

  (27.3%)

  

_________________

*Less than one percent.

  

(1)

 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.

(2)

 Does not  include 100 shares held by Margaret McAvoy, Dr. McAvoy’s wife.  Dr.  McAvoy disclaims beneficial ownership with respect to the shares to which Mrs.  McAvoy has voting power.

(3)

 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.

(4)

 Does not  include Mr. Williams 14% ownership of J. A. Williams Family partnership which  owns 26,170 shares.  Mr. Williams does not have voting power and  disclaims beneficial ownership of these shares.

  

34
            
                       The following is a brief description of the business experience of the  directors and executive officers of Pinnacle.  Except as otherwise  indicated, each director has been or was engaged in his present or last  principal employment, in the same or a similar position,  for more than  five years.  All “Bank” dates are based upon the date of association  with either Elberton or Royston, the predecessors to Pinnacle Bank.

             Mr. Eberhardt has been a director of the Bank since 1972.  He was the  Chairman, President, and Chief Executive Officer of Royston from 1986 to  1997.  He was elected President and a director of Pinnacle in 1995 and  has been Vice-Chairman of the Bank since 1997.

             Mr. Fortson has been an officer of the Bank since 1975 and Senior  Vice-President since 1997.  He has been a director of the Bank since 1992  and a director of Pinnacle since 1998.

             Mr. Hardy is an owner of J. C. Pool Company, Inc., a retail clothing and shoe  store in Elberton.  He has been a director of the Bank since 1991 and a  director of Pinnacle since 1997.

             Mr. Lee is co-owner of Elbert Insurance Associates, Inc. and has been a  director of the Bank since 1987 and a director of Pinnacle since 1998.

             Dr. McAvoy is a physician in Elberton and has been a director of the Bank  since 1986 and a director of Pinnacle since 1998.

             Mr. L. Jackson McConnell has been Chairman and a director of Pinnacle since  1983 and Chairman and Chief Executive Officer of the Bank since 1990.  Mr. McConnell also served as President of the Bank from 1974 through 1990. He  has been a director of the Bank since 1963.

             Mr. L. Jackson McConnell, Jr. has been an officer of the Bank since 1994 and  served as an Executive Vice-President from March 1999 until April 2000. Mr.  McConnell was named President of the Bank in April 2000. He has been a  director of the Bank since 1994 and a director of Pinnacle since 1998.

             Mr. Purcell served as President of the Bank from 1990 until 2000 and was  previously an Executive Vice-President.  He has been a director of the  Bank since 1977 and a director of Pinnacle since 1983.

             Mr. Williams is owner of Tri-State Distributors, Inc., a heating and air  conditioning wholesale distributing business.  He has been a director of  the Bank since 1996 and a director of Pinnacle since 1997.

             Mr. Eberhardt and Mr. L. Jackson McConnell are brothers-in-law and the two  McConnells are father and son.  There are no other family relationships  among the directors of Pinnacle.

** **

35
            
**Item 10.   EXECUTIVE  COMPENSATION**

                         The following table sets forth the annual and long-term compensation for each  of our last three fiscal years paid to the chief executive officer and each  executive officer of Pinnacle whose salary and bonus exceeded $100,000 for  fiscal year 2001 (the “Named Executive Officers"). 

**Summary  Compensation Table**

Annual Compensation

Name and  Principal         Position

Year

Salary($)(1)

 All Other  Compensation(2)
    
L. Jackson  McConnell

2001

  $191,953

$29,750

Chairman

2000

$190,300

  $29,750

1999

$188,177

$28,667
    
 L. Jackson McConnell,  Jr.

2001

$121,274

  $15,963

President

  2000

$  96,177

$14,209

          

1999

  $  83,149

$12,269

(1)       Includes directors fees.

(2)       Consists of contributions by Pinnacle to the executives’ accounts in  Pinnacle’s 401-K plan.

 

Director’s Compensation

                         Compensation is paid for service as directors of the Bank.  No additional  compensation is paid for service as a director of Pinnacle.  Beginning in  April 2000, directors received a monthly fee of $1,000.  From April 1998  until April 2000, directors received a monthly fee of  $800.    

Salary Continuation Agreements

                         L. Jackson McConnell, James E. Purcell, Linton W. Eberhardt, and L. Jackson  McConnell, Jr., have entered into  non-qualified salary continuation  agreements (the “Salary Continuation Plans”) with the Bank which provide  certain benefits upon their retirement and upon their death.  Both the  retirement and death benefits are determined at December 31st of each year  based on the income performance of a single premium split dollar life  insurance policy.  Generally, the annual addition to 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 Plans provide 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  (as defined in the Salary Continuation Plan), all benefits under the Salary  Continuation Plans will be forfeited.  If the executive officers are  terminated after a change of control of Pinnacle (as defined in the Salary  Continuation Plans), they will be entitled to receive the death benefits and  the retirement benefits after reaching age 65 as if they had been continually  employed 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, 2001 and  2000.

 

36
          
 

 Executive  Officer          
Date  of      Agreement
  Estimated      Death       Benefits
  Annual      Retirement       Value 
  Estimated        Death        Benefits
  Annual        Retirement      Value 
 

    

12/31/01

12/31/01

12/31/00

12/31/00

 

    

L. Jackson McConnell

10-24-95

$635,515

$24,275

$608,379

$28,949

 

    

  

  

  

  

James E. Purcell

12-16-94

$271,047

 $27,483

 $259,055

$25,834

 

    

  

  

  

  

Linton W. Eberhardt 

11-10-94

$270,606

 $18,299

 $258,703

 $18,299

 

    

  

  

  

  

L. Jackson McConnell, Jr.

03-19-99

$117,294

$71,002

 $111,199

 $61,496

Life Insurance Agreements

                         The Bank has entered into split dollar, joint life insurance agreements for  the benefit of L. Jackson McConnell and Linton W. Eberhardt. The Bank paid the  premium on the policies and is the sole owner of both policies. The policies  are “last survivor” policies that provide benefits to named beneficiaries  upon the death of the surviving spouse.  At that time, the Bank will  receive the cash surrender value of the policy while the remaining death  benefit values will be paid to the beneficiaries named by the executive.   The death benefits and cash surrender value are adjusted annually based on the  income performance of the policies. The table below summarizes the cash  surrender values and death benefits of both policies as of December 31, 2001  and 2000. 

 

      

Cash  

Death

Cash   

Death

  

   

Surrender

Benefit

Surrender 

Benefit

  

     

Value 

Value

Value 

Value

       Executive Officer

       Date of        Agreement 

12/31/01

12/31/01

12/31/00 

12/31/00

    

   

  

   

  

L. Jackson McConnell  

 04-17-00

 $1,113,653

 $2,134,864

 $1,060,164

  $2,093,164

    

   

  

   

  

Linton W. Eberhardt   

 04-17-00

$  732,323

$1,763,185

 $   690,819

  $1,731,338

                         The Bank purchased $5,000,000 of Bank Owned Life Insurance during 2001.   As part of the purchase, the Bank agreed to provide $100,000 of life insurance  to a number of officers.  The terms of the agreements provide that the  beneficiaries named by the officer will receive the $100,000 if the officer  dies while employed by the Bank or after retiring at normal retirement  age.  L. Jackson McConnell, Jr. was one of the officers included in the  plan.

Employment Security Agreement

                         James E. Purcell entered into an employment security agreement with the Bank on June 9, 1999 that provides, among  other things, that the Bank will continue to compensate Mr. Purcell at an  annual rate of $125,000 from the time of his retirement from the bank until  age 62.  Mr. Purcell retired in May of 2000 and funding under the  agreement began at that time.

 

37
            
 

                         Pinnacle has never granted restricted stock, stock options, stock appreciation  rights, or similar awards to any of its present or past executive officers.

 

**Item 11.****   SECURITY OWNERSHIP OF  CERTAIN BENEFICIAL OWNERS AND**      **           MANAGEMENT**

**Principal Holders of Stock**

                         The following table sets forth, for each person who beneficially owned 5% or  more of the outstanding shares of Common Stock on March 15, 2002, the  following information: (a) the owner’s name and address, (b) the number of  shares of Common Stock owned, and (c) the  percentage such number  represents of the outstanding shares of Common Stock at March 15, 2002.   Unless otherwise indicated, the listed owners are the record owners of and  have sole voting and investment powers over their shares.  See Item 9 of  this Form 10-KSB for information related to beneficial ownership of stock by  other directors and executive officers.

**  Name and Address of              Beneficial          Owner      **

 **Number of          Shares Owned               (Percent of Class)      **

L. Jackson McConnell          884 Elbert Street          Elberton, Georgia 30635

201,323  (1) (26.2%)

Alice Eberhardt          390 Virginia Hills Road          Royston, Georgia 30624

194,163  (2) (25.3%)

(1)

  Includes 197,950 shares held by the JAM Family Partnership I, L.P. pursuant to  which Mr. McConnell has sole voting and investment power.  Does not  include 333 shares held by Mr. McConnell’s wife with respect to which he  disclaims beneficial ownership.

(2)

  Includes 193,863 shares held by the JAM Family 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 she  disclaims beneficial ownership.

**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.

 

38
            
 

**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

 

 

 

 

 3.1

Articles of Incorporation of        Pinnacle, as amended.  (1)

 

 

 

 

 3.2

Bylaws of Pinnacle, as amended.                (1)

 

 

 

 

 4.1

See exhibit 3.1 and 3.2 for        provisions of the Articles of

 

 

Incorporation and Bylaws which        define the rights of the

 

 

holders of Common Stock of        Pinnacle.

 

 

 

 

10.1

Flexible Premium Life Insurance        Plan.  (1)(2)

 

 

 

 

10.2

Indexed Executive Salary        Continuation Plan.  (1)(2)

 

 

 

 

10.3

Employment Security Agreement.         (3)

 

 

 

 

10.4

Split Dollar Life Insurance        Agreements.  (2)

 

 

 

 

21.0

Subsidiaries of Pinnacle        Financial Corporation.  (4)

 

 

 

 

24.0

A Power of Attorney is set        forth on the signature pages to this Form 10-KSB.

___________________________

 

(1)

Incorporated by reference from        Pinnacle’s Form S-4, filed with the Securities and Exchange        Commission, dated August 16, 1993.

 

(2)

Incorporated by reference        from Pinnacle’s Form 10-KSB filed with the Securities  and        Exchange Commission March 30, 2001.

 

(3)

Incorporated by reference from        Pinnacle’s Form 10-KSB filed with the Securities and Exchange        Commission on March 28, 2000.

 

(4)

Incorporated by reference from        Pinnacle’s Form 10-KSB filed with the Securities  and Exchange        Commission on March 30, 1999.

** **             (b)          Pinnacle did not file any        reports on Form 8-K during the fourth quarter of 2001.

39
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY**

**CONSOLIDATED  FINANCIAL STATEMENTS   YEARS ENDED DECEMBER 31, 2001 AND 2000**

 

**Index to Financial  Statements**

 

 
**Page**
 

 

 

Report of Independent          Certified Public Accountants

F-2

 

 

 

Consolidated Balance Sheets          as of December 31, 2001

F-3

 

 

 

Consolidated Statements of          Income for the Years Ended

 

 

December 31, 2001 and 2000

F-4

 

 

 

Consolidated Statements of          Shareholders’ Equity

 

 

for the Years Ended December          31, 2001 and 2000

F-5

 

 

 

Consolidated           Statements  of Cash  Flows for the Years Ended

 

 

December 31, 2001 and 2000

F-6

 

 

 

Notes to Consolidated          Financial Statements

F-9

 

 

 

F-1

 
            
**SMITH, BURCH &  COMPANY, LLP***Certified Public  Accountants*

Offices in Hartwell  and Elberton, Georgia

 

January 14, 2002

 

To the Board of Directors and Shareholders  Pinnacle Financial Corporation and Subsidiary  Elberton, Georgia  30635

 

Independent Auditor’s Report

We have audited the accompanying consolidated balance sheet of Pinnacle  Financial Corporation and Subsidiary as of December 31, 2001 and the related  consolidated statements of income, changes in shareholders’ equity and cash  flows for the years ended December 31, 2001 and 2000.  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 auditing standards generally  accepted in the United States of America.  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 Subsidiary at December 31, 2001 and the consolidated  results of their operations and their cash flows for the years ended December  31, 2001 and 2000 in conformity with accounting  principles generally  accepted in the United States of America.

 

 

/s/ Smith, Burch &  Company, LLP

 

 

 F-2

 
       
   
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  CONSOLIDATED BALANCE SHEET  DECEMBER 31, 2001**

 

**Assets**

 

 

Cash          and due from banks

$

9,620,074

Total          cash and cash equivalents

 

9,620,074

 

 

 

Securities          available for sale

 

102,567,536

Loans,          net of allowance for loan losses of $2,033,273

 

177,245,992

 

 

 

Premises          and equipment, net

 

7,766,269

Accrued          interest receivable

 

2,227,295

Other          assets

 

11,777,441

 

 

 

**Total          assets**

$

311,204,607

 

 

 

**Liabilities and          Shareholders’ Equity**

 

 

 

 

 

**Liabilities**

 

 

Deposits:

 

 

Noninterest-bearing

$

45,488,608

Interest-bearing

 

194,272,089

Total          deposits

 

239,760,697

 

 

 

Borrowings

 

20,397,893

Other          liabilities

 

4,874,089

 

 

 

Total          liabilities

 

265,032,679

 

 

 

**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

 

29,869,390

Accumulated          other comprehensive income

 

1,342,538

 

 

 

Total          shareholders’ equity

 

46,171,928

 

 

 

**Total          liabilities and shareholders’ equity**

$

311,204,607
 
 

**The accompanying notes are an  integral part of these financial statements.**

 

 F-3

 
       
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  CONSOLIDATED STATEMENTS OF INCOME  YEARS ENDED DECEMBER 31, 2001 AND 2000**

 

 

 

**2001      **

 

**2000       **

 

 

 

 
**Interest income**

 

 

 

 

 
Loans,        including fees

$

15,549,647

$

16,629,961

 
Securities        available for sale

 

5,623,270

 

5,419,411

 
Federal        funds sold and other

 

166,655

 

106,950

 

 

 

 
 

 

 

 

 

 
Total        interest income

 

21,339,572

 

22,156,322

 

 

 

 
 

 

 

 

 

 
**Interest expense**

 

 

 

 

 
Deposits

 

8,146,228

 

8,185,254

 
Borrowings

 

662,954

 

633,468

 

 

 

 
 

 

 

 

 

 
Total        interest expense

 

8,809,182

 

8,818,722

 

 

 

 
 

 

 

 

 

 
**Net interest income**

 

12,530,390

 

13,337,600

 
Provision        for loan losses

 

750,000

 

500,000

 

 

 

 
 

 

 

 

 

 
Net        interest income, after provision for loan losses

 

11,780,390

 

12,837,600

 

 

 

 
 

 

 

 

 

 
**Other income**

 

 

 

 

 
Service        charges on deposit accounts

 

1,832,676

 

1,325,949

 
Other        service charges and fees

 

845,969

 

636,961

 
Net        realized gains on sales of securities

 

67,582

 

–

 
Other        income

 

343,671

 

232,578

 

 

 

 
 

 

 

 

 

 
Total        other income

 

3,089,898

 

2,195,488

 

 

 

 
 

 

 

 

 

 
**Other expenses**

 

 

 

 

 
Salaries        and employee benefits

 

4,817,146

 

5,003,313

 
Occupancy        expense

 

1,301,191

 

1,277,607

 
Net        realized losses on sales of securities

 

–

 

416,478

 
Other        expenses

 

2,689,811

 

2,294,188

 

 

 

 
 

 

 

 

 

 
Total        other expenses

 

8,808,148

 

8,991,586

 

 

 

 
 

 

 

 

 

 
Income before income taxes

 

6,062,140

 

6,041,502

 
Income tax expense

 

1,770,000

 

1,838,000

 

 

 

 
 

 

 

 

 

 
**Net income**

$

4,292,140

$

4,203,502

 

 

 

 
 

 

 

 

 

 
Net income per share of common        stock

 

$5.59    

 

$5.47    

 

 

 

 
 

 

 

 

 

 
Average shares outstanding

 

768,000

 

768,000

 

 

 

 **The accompanying notes are  an integral part of these consolidated financial statements.**

F-4
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY  ENDED DECEMBER 31, 2001 AND 2000**

 

 

 

Common Stock

 

Capital        Surplus

 

Retained        Earnings

 

Accumulated        Other        Comprehensive        Income (Loss)

 

Total         Shareholders’         Equity

 

 

 

 

 

 

Balance, December 31, 1999

$

7,680,000    

$

7,280,000     

$

25,060,148    

$

(1,559,346)        

$

38,460,802       

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

  Net income for 2000

 

 

 

 

 

4,203,502    

 

 

 

4,203,502      

  Change in unrealized        gain (loss) on

 

 

 

 

 

 

 

 

 

 

    securities        available for sale,

 

 

 

 

 

 

 

 

 

 

    net of        reclassification adjustments

 

 

 

 

 

 

 

 

 

 

    and tax        effects

 

 

 

 

 

 

 

1,712,319         

 

1,712,319       

             Total comprehensive income

 

 

 

 

 

 

 

 

 

5,915,821       

Cash dividends declared –        $2.40 per share

 

 

 

 

(1,843,200)  

 

 

 

(1,843,200)     

 

 

 

 

 

 

Balance, December 31, 2000

 

7,680,000     

 

7,280,000     

27,420,450    

 

152,973         

 

42,533,423       

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

  Net income for 2001

 

 

 

 

 

4,292,140   

 

 

 

4,292,140       

  Change in unrealized        gain (loss) on

 

 

 

 

 

 

 

 

 

 

    securities        available for sale,

 

 

 

 

 

 

 

 

 

 

    net of        reclassification adjustments

 

 

 

 

 

 

 

 

 

 

    and tax        effects

 

 

 

 

 

 

 

1,189,565        

 

1,189,565       

 

 

 

 

 

 

             Total comprehensive income

 

 

 

 

 

 

 

 

 

5,481,705       

 

 

 

 

 

 

Cash dividends declared –        $2.40 per share

 

 

 

 

(1,843,200)  

 

 

 

(1,843,200)     

 

 

 

 

 

 

Balance, December 31, 2001

$

7,680,000     

$

7,280,000     

$

29,869,390    

$

1,342,538        

$

46,171,928     

 

 

 

 

 

 

 

 

**The accompanying notes are an integral part of these consolidated  financial statements.**

F-5

 
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  CONSOLIDATED STATEMENTS OF CASH FLOWS  YEARS ENDED DECEMBER 31, 2001 AND 2000**

 

 

 

**2001       **

 

**2000       **

**Cash flows from operating        activities**

 

 

 

 

Net        income

$

4,292,140

$

4,203,502 

Adjustments        to reconcile net income to net cash provided by operating                  activities:

 

 

 

 

Depreciation        and amortization

 

663,805 

 

616,091 

Provision        for loan losses

 

750,000 

 

500,000 

Loss on        sale of premises and equipment

 

1,139 

 

8,590 

Deferred        income taxes

 

736,058 

 

(265,543)

Net        realized (gains) losses on securities

 

(67,582)

 

416,478 

Net        losses on foreclosed assets

 

325,921 

 

38,527 

Net        change in:

 

 

 

 

Accrued        interest receivable and other assets

 

(5,178,105)

 

(932,937)

Other        liabilities

 

(188,484)

 

219,724 

Total        adjustments

 

(2,957,248)

 

600,930 

Net        cash provided by operating activities

 

1,334,892 

 

4,804,432 

**Cash flows from investing        activities**

 

 

 

 

Available        for sale securities:

 

 

 

 

Sales

 

5,130,907 

 

18,571,604 

Maturities,        prepayments, and calls

 

20,311,675 

 

6,713,601 

Purchases

 

(39,577,384)

 

(16,064,231)

Net        change in loans

 

(15,124,378)

 

(13,779,458)

Proceeds        from sale of premises and equipment

 

1,586 

 

18,700 

Proceeds        from sales of foreclosed assets

 

1,232,605 

 

511,900 

Purchases        of premises and equipment

 

(233,993)

 

(671,383)

Net        cash used by investing activities

 

(28,258,982)

 

(4,699,267)

**Cash flows from financing        activities**

 

 

 

 

Net        change in deposits

 

18,108,691 

 

3,307,565 

Net        change in federal funds purchased and securities sold under                      agreements         to repurchase

 

9,397,893 

 
– 
Federal        Home Loan Bank Advances:

 

 

 

 

Proceeds        from issuance

 

9,600,000 

 

36,150,000 

Repayments

 

(11,700,000)

 

(33,550,000)

Cash        dividends paid

 

(1,382,400)

 

(3,340,800)

Net        cash provided by financing activities

 

24,024,184 

 

2,566,765 

 

 

 

 

 

**Net change in cash and cash        equivalents**

 

(2,899,906)

 

2,671,930 

Cash and cash equivalents at        January 1

 

12,519,980 

 

9,848,050 

 

 

 

 

 

Cash and cash equivalents at        December 31

$

9,620,074 

$

12,519,980 

**Supplemental disclosures of        cash flow information:**

 

 

 

 

Interest        paid on deposits and borrowings

$

8,773,999 

$

8,557,398 

Income        taxes paid

$

1,773,974 

$

1,848,492 

**Supplemental schedule of        noncash investing and financing activities:**

 

 

 

 

Foreclosed        assets acquired in settlement of loans

$

3,919,000 

 
759,427 

 

**The accompanying notes are an  integral part of these consolidated financial statements.**

F-6
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 1 – Summary of  Significant Accounting Policies**

 Basis  of Presentation and Consolidation.  The consolidated financial  statements of Pinnacle Financial Corporation (the company) and its  wholly-owned commercial bank subsidiary, Pinnacle Bank (the bank) are prepared  in conformity with generally accepted accounting principles and general  practice within the banking industry. All significant intercompany accounts  and transactions have been eliminated in consolidation.

 Nature  of operations.  The company is a bank holding company whose principal  activity is the ownership and management of the bank and is subject to  regulation by the Federal Reserve Bank.  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 offers various lending products  with a substantial portion of the portfolio collateralized by real  estate.  The bank operated under a national bank charter until November  2001 and was subject to regulation by the Office of the Comptroller of the  Currency (OCC) and the Federal Deposit Insurance Corporation.  In  November 2001, the bank converted to a state bank charter and is now subject  to regulation by the Georgia Department of Banking and Finance and the Federal  Deposit Insurance Corporation.

 Use  of Estimates.  In preparing consolidated financial statements in  conformity with generally accepted accounting principles, management is  required to make estimates and assumptions that affect the reported amounts of  assets and liabilities and disclosures of contingent assets and liabilities as  of 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.  Material estimates that are particularly  susceptible to significant change in the near term relate to the determination  of the allowance for loan losses, the valuation of foreclosed real estate, and  deferred tax assets (liabilities).

 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.

 Significant  Group Concentrations of Credit Risk.  Most of the company’s  activities are with customers located in the Northeast Georgia area.  The  company has significant concentrations, as defined by their regulators, in the  granite and poultry industries.

 Cash  and cash equivalents.  For purposes of these statements, cash and  cash equivalents include cash, balances due from banks, and federal funds  sold, all of which mature within ninety days. 

 Securities  available for sale.  Securities are classified as available for sale  and are carried at fair value.  Unrealized holding gains and losses, net  of reclassification adjustments and related tax effects, are excluded from  earnings and are reported in accumulated other comprehensive income.

 

F-7
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 1 – Summary of Significant  Accounting Policies – (Continued)**

Securities  available for sale – (Continued).  Purchase premiums and discounts  are recognized in interest income using the interest method over the terms of  the securities.  Interest and dividend income are recognized when  earned.  A decline in the fair value of any security below cost that is  deemed to be other than temporary is charged to income resulting in the  establishment of a new cost basis for the security.  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.   The company does not own any derivative security instruments nor does it  participate in any hedging activities.

Loans.   The bank grants agribusiness, commercial, residential and consumer loans to  individuals and a variety of firms and corporations located primarily in  Northeast Georgia.  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 is collateralized by improved and unimproved real estate  and is dependent upon the real estate market, economic conditions, and the  granite and poultry industries.  Loans are stated at the amount of the  outstanding unpaid principal balances adjusted for charge-offs and the  allowance for loan losses.

Interest  on loans is recognized at the applicable interest rate 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, there is a doubt concerning full collectibility of both  principal and interest.  Interest income is subsequently recognized only  to the extent cash payments are received.  Loans are returned to accrual  status when all the principal and interest amounts contractually due are  brought current and future payments are reasonably assured.

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.

Allowance  for loan losses.  The allowance for loan losses is established as  losses are estimated to have occurred through a provision for loan losses  charged to earnings.  Loan losses are charged against the allowance when  management believes the uncollectibility of a loan balance is confirmed.   Subsequent recoveries, if any, are credited to the allowance.

The  allowance for loan losses is evaluated on a regular basis by management and is  based upon management’s periodic review of the collectibility of the loans  in light of historical experience, the nature and volume of the loan  portfolio, adverse situations that may affect the borrower’s ability to  repay, estimated value of any underlying collateral and prevailing economic  conditions.  This evaluation is inherently subjective as it requires  estimates that are susceptible to significant revision as more information  becomes available.

While  management uses available information to recognize losses on loans, further  reductions in the carrying amounts of loans may be necessary.  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.

 F-8
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 1 – Summary of Significant  Accounting Policies – (Continued)**

Allowance  for loan losses – (Continued). A loan is considered impaired when, based  on current information and events, it is probable that the bank 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.  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  (generally real estate).

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.

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.

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.   Maintenance and repairs are expensed as incurred while major additions and  improvements are capitalized.

Foreclosed  assets.  Assets acquired through foreclosure are initially recorded  at the lower of the bank’s carrying amount or estimated fair market value  less cost to sell, establishing a new cost basis.  Any losses recognized  at the date of foreclosure are charged to the allowance for loan losses. Costs  of significant property improvements are capitalized.  Subsequent to  foreclosure, valuations are periodically performed by management and the  assets are carried at the lower of carrying amount or fair value less cost to  sell. Income and expenses of foreclosed assets, including adjustments to the  carrying amount subsequent to foreclosure, are included in current earnings.

Income  taxes.  The provision for income taxes is based on income reported  for consolidated financial statement purposes and consists of taxes currently  due plus deferred taxes resulting from the recognition of certain revenues and  expenses in different periods for tax reporting purposes.  A deferred tax  asset or liability is recognized for the tax consequences of temporary  differences between the financial statement carrying amounts and the tax bases  of existing assets and liabilities.  The tax consequence is calculated by  applying enacted statutory tax rates, applicable to future years, to these  temporary differences.  The company files consolidated income tax returns  with its subsidiary.

 F-9
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 1 – Summary of Significant  Accounting Policies – (Continued)**

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.

Reclassifications.   Certain 2000 amounts have been reclassified for comparative purposes in order  to conform to the 2001 presentation.  Such reclassifications had no  impact on total assets or net income.

** **

**Note 2 – Securities Available  for Sale**

Securities  available for sale at December 31 were as follows:

 

 

           Gross  

 

                  Gross

 

          Amortized  

          Unrealized

                 Unrealized  

                  Fair

 

           Cost       

 Gains   

 Losses    

                   Value

**               2001**

 

 

 

 

U.S. Treasury

$              752,576

$              18,986

$                  –     

$              771,562

U.S. Government agencies

26,835,176

1,037,998

(               13,120)

27,860,054

State and Municipals

27,889,257

  534,877

(             233,803)

28,190,331

Mortgage-backed securities

34,622,380

563,983

(             116,403)

35,069,960

Corporate bonds

6,566,329

257,472

(               15,841)

6,807,960

Other securities

            3,867,669

                  –    

                –    

           3,867,669

 

 

 

 

 

 

$100,533,387

$  2,413,316

($           379,167)

$102,567,536

**               2000**

 

 

 

 

U.S. Treasury

$              756,072

$                3,158

($                    90)

$             759,140

U.S. Government agencies

41,201,072

169,601

(             195,666)

41,175,007

State and Municipals

19,066,843

  312,749

(             170,576)

19,209,016

Mortgage-backed securities

21,166,004

169,111

(               59,452)

21,275,663

Corporate bonds

3,515,565

36,875

(               18,980)

3,533,460

Other securities

           1,223,300

                 –    

                –     

          1,223,300

 

$ 86,928,856

$            691,494

($          444,764)

$ 87,175,586

Other  securities include stocks in the Federal Home Loan Bank of Atlanta (FHLB), the  Federal Reserve Bank and mutual fund investments.  The stocks are carried  at cost, since they do not have a readily determinable fair value because  their ownership is restricted and lacks a market.  These stocks are  classified as due after ten years for contractual maturities.  During  2001, the bank sold the stock in the Federal Reserve Bank.  The mutual  fund investment is classified as due in one year or less for contractual  maturities because of the liquidity and repricing characteristics and is  carried at cost because the difference between amortized cost and fair value  is insignificant.

 F-10
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 2 – Securities Available  for Sale – (Continued)**

The  amortized cost and fair value of securities by contractual maturity at  December 31, 2001 were as follows:

 

                    Amortized  

                  Fair       

 

                      Cost      

                  Value     

 

 

 

Due in one year or less

$ 13,173,484

$13,386,880

Due after one year through five        years

  39,324,794

40,640,367

Due after five years through        ten years

  10,401,132

10,466,761

Due after ten years

          3,011,597

 3,003,568

 

 

 

 

 

  65,911,007

67,497,576

Mortgage-backed securities

  34,622,380

35,069,960

 

 

 

 

 

$100,533,387

$102,567,536

 Expected  maturities will differ from contractual maturities because borrowers may have  the right to call or prepay obligations with or without call or prepayment  penalties.

 Nontaxable  and taxable interest income on securities available for sale were as follows:

 

2001     

2000     

 

 

 

Nontaxable

$1,022,199

$  896,995

Taxable

4,601,071

4,522,416

 

 

 

 

   

$5,623,270

$5,419,411

 

For  the years ended December 31, 2001 and 2000, proceeds from sales of securities  amounted to $5,130,907 and $18,571,604, respectively.  Gross realized  gains amounted to $67,582 and $23,900, respectively.  Gross realized  losses amounted to $ -0- and $440,378, respectively.

 Securities  available for sale, with a carrying value of approximately $34,155,046 and  $32,847,096 at December 31, 2001 and 2000, respectively, were pledged to  secure public deposits and for other purposes required or permitted by law.

 

 **Note 3 - Loans**

 Components  of loans at December 31 were as follows:

 

2001     

2000      

 

 

 

   Commercial

$          22,020,411 

$          19,566,350 

   Construction and        land

11,987,726 

         6,893,572 

   Commercial real        estate

79,718,264 

78,419,567 

   Residential real        estate

44,805,897 

41,204,620 

   Consumer

 20,746,967 

23,058,750 

 

 

 

 Total        loans

179,279,265 

169,142,859 

   Allowance for loan        losses

(           2,033,273)

(           2,352,245)

 

 

 

         Net loans

$177,245,992 

$166,790,614 

 F-11
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 3 – Loans – (Continued)**

             At December 31, 2001, the bank had total loans outstanding to the granite and  poultry industries amounting to $18,000,380 and $24,492,506, respectively.

The  accrual of interest has been discontinued on loans amounting to $931,264 at  December 31, 2001 and $4,059,027 at December 31, 2000.  The amount of  interest income that would have been recorded in 2001 and 2000, if all such  loans had been accruing interest at their contractual rates, was approximately  $141,000 and $126,000, respectively. 

In  the normal course of business, executive officers and directors of the bank  and certain business organizations and individuals associated with them,  maintain borrowing relationships with the bank.  Such loans were made 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.  Activity  in related party loans follows:

 

Years Ended        December 31
 

2001      

2000       

 

    

 

Balance at January 1

            $6,264,467 

$6,488,659 

   New loans

 3,412,109 

 3,495,526 

   Repayments

(2,805,650)

(3,719,718)

 

 

 

Balance at December 31

$6,870,926 

$6,264,467 

 

**Note 4 – Allowance for Loan  Losses**

 Activity  in the allowance for loan losses follows:

 

Years Ended          December 31
 

2001      

2000       

 

    

 

Balance at January 1

              $2.352,245 

$2,113,735 

   Provision for          loan losses

750,000 

 500,000 

   Loans charged          off

(1,570,574)

(             459,474)

   Recoveries

 501,602 
197,984 
 

    

 

Balance at December 31

$2,033,273

$2,352,245 

The  following is a summary of information pertaining to impaired loans at December  31:

 

2001    

2000     

 

 

 

Impaired loans without a        valuation

 

 

   allowance

$          659,909

$          312,636

Impaired loans with a valuation

 

 

   allowance

1,332,875

4,179,831

 

 

 

 

Total impaired loans

$1,992,784

$4,492,467

 

 

 

 

Valuation allowance related to

 

 

   impaired        loans

$  449,705

$1,214,856

 

 F-12
            
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 4 – Allowance for Loan  Losses – (Continued)**

The  average recorded investment in impaired loans during 2001 and 2000 was  $2,966,020 and $2,087,350, respectively.  Interest income recognized on  impaired loans in 2001 and 2000 was $83,187 and $56,941, respectively. 

 

**Note 5 – Premises and Equipment**

Premises  and equipment at December 31 were as follows:

 

2001      

2000      

 

 

 

   Land

$        1,302,199  

$ 1,302,199 

   Land        improvements

393,674 

392,574 

   Buildings and        improvements

6,186,697 

6,139,341 

   Furniture        & fixtures

3,972,644 

 3,956,988 

 

        Total        cost

11,855,214 

11,791,102 

   Accumulated        depreciation

(         4,088,945)

(         3,617,291)

 

 

 

 

              Net premises and equipment

$ 7,766,269 

$ 8,173,811 

             Depreciation expense included in occupancy expense for 2001 and 2000 was  $638,810 and $616,091, respectively.

 

**Note 6 – Other Assets and Other  Liabilities**

The  components of other assets and other liabilities at December 31 were as  follows:

 

2001     

2000     

**Other assets:**

 

 

            Deferred income taxes

$                  –     

          $   628,311

     Cash        surrender value of life insurance

  8,229,239

           2,984,431

            Foreclosed and repossessed assets

  2,744,908

             384,434

            Prepaid income tax

–    

              11,385

            Interest in limited partnership

           475,004

  –   

     Other

           328,290

             388,344

 

 

 

 

 

$11,777,441

$4,396,905

 

 

 

 

 

2001     

2000     

**Other liabilities:**

 

 

**     **Accrued        interest payable

 $          3,108,917

          $3,073,734

            Compensation and retirement deferral

           723,715

             830,506

            Declared dividends payable

           460,800

               –   

            Deferred income taxes

           107,747

           –   

     Income        taxes payable

            62,972

             217,859

     Other

           409,938

             371,927

 

 

 

 

 

 $         4,874,089

$4,494,026

 

The  bank has purchased life insurance on certain of its employees and is the  beneficiary of these policies.  There are no restrictions or outstanding  borrowings against the cash surrender value of these policies.  During  2001 the bank purchased an interest in a limited partnership that will produce  state income tax credits.  The asset is being amortized over a ten year  life.

 F-13
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 7 – Time Deposits**

The  aggregate amount of time deposits in denominations of $100,000 or more at  December 31, 2001 and 2000 was $33,334,613 and $29,140,707.  Time  deposits are included in interest-bearing deposits on the consolidated balance  sheets.

At  December 31, 2001, the scheduled maturities of time deposits are as follows:

 

2002

$         99,274,578

 

2003

13,045,649

 

2004

2,668,497

 

2005 and therafter

  1,668,369

 

 

 

 

$116,657,093

 The  company had deposits of approximately $2,130,305 and $2,171,598 from related  parties at December 31, 2001 and 2000, respectively. 

 

 **Note 8 –  Borrowings**

              Borrowings at December 31 were as follows:

 

2001      

2000      

 

 

 

  FHLB Short-Term Advances

$ 6,500,000

$10,100,000

  Federal Funds Purchased

7,118,000

–    

  Securities Sold Under        Agreements to

 

 

             Repurchase

 2,279,893

    –    

 

 

 

 

 Total        Short-Term Borrowings

15,897,893

10,100,000

 

 

 

 

  FHLB Long-Term Advances

 4,500,000

 3,000,000

 

 

 

 

Total        Long-Term Borrowings

 4,500,000

 3,000,000

 

 

 

 

         Total Borrowings

$20,397,893

$13,100,000

The  FHLB advances are secured by the company’s investment in FHLB stock, which  totaled $774,500 at December 31, 2001 and 2000, and by a blanket floating lien  on portions of the company’s loan portfolio

Of  the total outstanding advances as of December 31, 2001, $6,000,000 are  callable by the FHLB beginning in January 2002. If the callable advances are  called prior to maturity, replacement funds will be offered by the FHLB at a  then-current rate.  Advances that are callable or mature within one year  are classified as short-term. Non-callable advances require monthly interest  payments, while callable advances require quarterly interest payments.

 F-14
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 8 – Borrowings –  (Continued)**

 Interest  rates on FHLB advances are as follows:

Short-term          advances

Long-term          advances

 

 

 

 

$3,000,000

 

5.71%

$2,000,000

 

4.70%

            500,000

 

2.43%

1,000,000

 

4.19%

1,000,000

 

6.39%

500,000

 

2.72%

2,000,000

 

4.98%

1,000,000

 

3.42%

$6,500,000

 

 

$4,500,000

 

 

 

 

 

 

$6,500,000

 

 

$4,500,000

 

 

Federal  funds purchased generally mature within one to four days from the transaction  date.  Average federal funds purchased amounted to $471,000 and $550,000  in 2001 and 2000, respectively.

The  bank has sold securities under agreements to repurchase to a number of its  commercial deposit customers that provide for daily maturity and the payment  of interest on a monthly basis.  These borrowings are fully secured by  the pledging of selected investment securities owned by the bank.   Average securities sold under agreements to repurchase amounted to $693,000  and $ -0- in 2001 and 2000, respectively.

Interest  expense on borrowings was as follows:

 

2001    

2000    

 

 

 

FHLB Advances

$633,209

$599,422

Federal Funds Purchased

12,176

34,046

Securities Sold under

 

 

            Agreements to Repurchase

           17,569

                 –  

 

 

 

 

 

$662,954

$633,468

 

 **Note  9 - Other Expenses**

 The  major components of other expenses were as follows:

 

2001    

2000    

 

 

 

Professional fees

 

$  379,270

Stationery, supplies and        printing

224,878

192,692

Advertising and public        relations

247,075

237,506

Litigation settlement

  –     

248,250

Foreclosed assets losses and        expenses

443,428

62,051

Other expenses

1,341,898

1,174,419

 

 

 

 

$2,689,811

$2,294,188

  F-15
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 10 – Employee Benefit Plans**

401(K)  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.  Employer contribution expense included in salaries  and employee benefits for the plan was $198,478 in 2001 and $250,048 in 2000.

Employee  Stock Ownership Plan.  An Employee Stock Ownership Plan (ESOP) was  adopted by the company in 1992.  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.  There were no contributions for the ESOP in 2001 or  2000.  As of December 31, 2001, the ESOP had purchased no qualified  employer securities. 

Executive  Retirement Benefits.  The bank has a non-qualified executive salary  continuation plan which will provide benefits to the Chairman and  Vice-Chairman of the Board of Directors and selected executive officers 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 bank is not required to fund the plan.

Employment  Security Agreement.  The bank’s former President retired effective  April 15, 2000.  Under the provisions of an employment security  agreement, the bank has recognized an outstanding liability of $140,298 and  $283,538 as of December 31, 2001 and 2000, respectively.
 

**Note 11 – Income Taxes**

 The  provision for income taxes consisted of the following:

 

               Years Ended December 31        

 

2001    

2000      

 

 

 

Current tax provision - federal

$1,576,560

$1,977,569 

Current tax provision - state

 55,234

125,974 

Deferred tax provision        (benefit)

138,206

(          265,543)

 

 

 

 

$1,770,000

$1,838,000 

 The  provision for federal income taxes is less than that computed by applying the  federal statutory rate of 34% in 2001 and 2000, as indicated in the following  analysis:

 

2001    

2000    

 

 

 

Statutory federal tax rate

34.0% 

34.0% 

Increase (decrease) resulting        from:

 

 

   State taxes, net        of federal tax benefit

 .5% 

1.4% 

   Tax-exempt income

(          7.9%)

(          6.6%)

   Interest and other        nondeductible expenses

1.2% 

 .6% 

   Other, net

 1.4% 

 1.0% 

 

 

 

 

29.2% 

30.4% 

  F-16
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 11 – Income Taxes –  (Continued)**

 The  components of the net deferred income tax asset (liability) included in other  assets (liabilities) at December 31 were as follows:

 

2001     

2000      

  **Deferred tax assets:**

 

 

Allowance        for loan losses

$534,245 

$         720,381 

Deferred        directors’ fees and interest

139,206 

150,037 

Employee        severance pay

 47,701 

   107,745 

Other,        net

          201,142 

  149,417 

 

 

 

 

            922,294 

1,127,580 

**Deferred tax liabilities:**

 

 

Net        unrealized gain on securities

 

 

          available for sale

           691,611 

         93,758 

Depreciation

         326,904 

391,955 

Other,        net

          11,526 

          13,556 

 

 

 

 

1,030,041 

         499,269 

 

 

 

Net deferred tax asset        (liability)

($  107,747)

 $         628,311 

 

 **Note 12 – Contingent  Liabilities**

 The  company is party to litigation and claims arising in the normal course of  business.  Management, after consultation with legal counsel, believes  that the liabilities, if any, arising from such litigation and claims will not  be material to the consolidated financial statements.

  

**Note 13 – Off-Balance-Sheet  Activities**

 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  and commercial lines of credit, 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 all off-balance sheet commitments  is represented by the contractual 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.

  F-17
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

 

**Note 13 – Off-Balance-Sheet  Activities – (Continued)**

A  summary of the company’s financial instruments whose contract amounts  represent credit risk at December 31 were as follows:

 

2001     
2000      
New loan commitments

$ 3,176,000

$                 –      

Credit card arrangements

3,658,094

3,298,890

Undisbursed lines of credit

20,411,265

17,179,111

Standby letters of credit

 2,238,560

 2,269,951

 

 

 

 

$29,483,919

$22,747,952

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 credit exposure or cash requirements.  The  amount of collateral obtained, if it is deemed necessary by the company, is  based on management’s credit evaluation of the customer.

Standby  letters of credit are conditional commitments issued by the company to  guarantee the performance of a customer to a third party.  Those letters  of credit are issued to support both public and private borrowing  arrangements. The credit risk involved in issuing letters of credit is  essentially the same as that involved in extending loans to customers.   The company may hold collateral supporting these commitments if deemed  necessary.

 

 **Note 14 – Fair Value of  Financial Instruments**

The  fair value of a financial instrument is the current amount that would be  exchanged between willing parties, other than in a forced liquidation.   Fair value is best determined based upon quoted market prices.  However,  in many instances, there are no quoted market prices for the company’s  various financial instruments.  In cases where quoted market prices are  not available, fair values are based on estimates using present value or other  valuation techniques.  Those techniques are significantly affected by the  assumptions used, including the discount rate and estimates of future cash  flows.  Accordingly, the fair value estimates may not be realized in an  immediate settlement of the instrument.  Certain financial instruments  and all nonfinancial instruments are excluded from fair value disclosure  requirements.  Accordingly, the aggregate fair value amounts presented  may not necessarily represent the underlying fair value of the company.

 

 F-18
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 14 – Fair Value of  Financial Instruments – (Continued)**

The  estimated fair values, and related carrying amounts, of the company’s  financial instruments at December 31 were as follows ($ in thousands):

 

2001                            
2000                      
 

 

Carrying  

Fair    

Carrying  

Fair     

 

Amount  

Value   

Amount  

Value   

Financial assets: @

 

 

 

 

  Cash and cash        equivalents

$     9,620

$     9,620

$    12,520

$    12,520

  Securities available for        sale

102,568

102,568

87,175

  87,175

  Loans, net

177,246

180,311

166,791

166,587

  Accrued interest        receivable &

 

 

 

 

     other        assets

21,771

21,771

15,293

15,293

 

 

 

 

 

Financial liabilities:

 

 

 

 

  Deposits

$239,760

$237,051

$221,652

$209,099

  Borrowings

20,398

20,518

13,100

13,226

  Other liabilities

4,874

4,874

4,494

4,494

 

 

 

 

 

Off-balance-sheet instruments:

 

 

 

 

  Commitments, commercial        lines

 

 

 

 

             of credit, and standby

   

 

 

 

             letters of credit

 

$                 9

 

$               27

 The  following methods and assumptions were used by the company in estimating fair  value disclosures for financial instruments:

 Cash  and cash equivalents – The carrying amounts of cash and short-term  instruments approximate fair values.

 Securities  available for sale – Fair values for securities, excluding Federal Home Loan  Bank and Federal Reserve Bank Stock, are based on quoted market prices.   The carrying value of Federal Home Loan Bank and Federal Reserve Bank Stock  approximates fair value based on redemption provisions.

 Loans  – For variable-rate loans that reprice frequently and have no significant  change in credit risk, fair values approximate 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 fixed  rate 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.

 Other  assets and other liabilities – The carrying amounts of other assets and  other liabilities approximate fair value.

 

 F-19
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 14 – Fair Value of  Financial Instruments – (Continued)**

Deposits  – The fair values  of deposits with no defined maturity (e.g., interest  and noninterest checking, savings, and money market accounts) are equal to  their carrying amounts.  The carrying amounts of variable-rate,  fixed-term certificates of deposit approximate their fair values at the  reporting date.  Fair values for defined maturity 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.

Borrowings  – The carrying amounts of federal funds purchased and other short-term  borrowings maturing within ninety days approximate their fair values.   The fair values of the company’s remaining borrowings are estimated using  discounted cash flow analyses based on the company’s current incremental  borrowing rates for similar types of borrowing arrangements. 

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.

 

**Note 15 – Regulatory Matters and  Restrictions**

The  bank is subject to various regulatory capital requirements administered by  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 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 of total and Tier I capital to  risk-weighted assets, and a leverage ratio of Tier I capital to average  assets. Management believes, as of December 31, 2001 and 2000, that the bank  met all capital adequacy requirements to which it is subject.

Because  the company is a bank holding company with only one bank subsidiary, there are  no significant differences between the consolidated risk-based capital ratios  and those of the bank.

  

F-20
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 15 – Regulatory Matters and  Restrictions – (Continued)**

The  bank’s actual capital amounts and ratios are presented in the table below ($  in thousands):

 

 

 

 

 

To Be        Well         

 

 

 

 

 

Capitalized        Under    

 

 

 

Capital                 

Prompt        Corrective   

 

                       Actual                    

                   Adequacy              

  Action        Provisions   

 

Amount 

Ratio  

Amount 

Ratio  

Amount 

Ratio   

 

 

 

 

 

 

 

**As of December 31, 2001:**

 

 

 

 

 

 

Total        Capital to Risk

 

 

 

 

 

 

Weighted        Assets

$46,829

21.54%

$17,393

8.0%

$21,741

10.0%

 Tier        I Capital to Risk

 

 

 

 

 

 

Weighted        Assets

 44,796

20.60   

 8,697

4.0   

13,045

6.0   

Tier I        Capital to Average

 

 

 

 

 

 

Assets

44,796

14.51   

  9,261

3.0   

15,435

5.0   

 

 

 

 

 

 

 

**As of December 31, 2000:**

 

 

 

 

 

 

Total        Capital to Risk

 

 

 

 

 

 

Weighted        Assets

$44,070

22.62%

$15,589

8.0%

$19,486

10.0%

Tier I        Capital to Risk

 

 

 

 

 

 

Weighted        Assets

41,718

21.41   

 7,794

4.0   

11,691

6.0   

Tier I        Capital to Average

 

 

 

 

 

 

Average        Assets

41,718

15.14   

 8,268

3.0   

13,780

5.0   

To  comply with state lending limit regulations, the bank has appropriated  $25,040,000 of retained earnings.  The appropriated retained earnings are  unavailable for dividends without prior regulatory approval.  Dividends  paid by the bank subsidiary are the primary source of funds available to the  company.  In accordance with regulations issued by the Georgia Department  of Banking and Finance, the total amount of dividends the bank may pay at any  date is generally limited to fifty percent of the net earnings for the  previous year or approximately $2,100,000 at December 31, 2001.

The  Federal Reserve Bank requires the company to maintain certain levels of cash  on hand or on deposit with the Federal Reserve Bank.  The required cash  level at December 31, 2001 and 2000 was $4,413,000 and $3,928,000,  respectively. The company is also required to maintain a minimum deposit with  the Federal Reserve for clearings. The required deposit was $25,000 at  December 31, 2001 and 2000.

  F-21
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 16 – Comprehensive Income**

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  components of other comprehensive income and related tax effects are as  follows:

 

            Years Ended December 31       

 

2001      

2000      

Unrealized holding gains on      securities

 

 

    available for      sale

$1,848,777 

$2,752,606 

Reclassification adjustment for      losses

 

 

     (gains)      realized in income

(         61,359)

9,199 

 

 

 

Net unrealized gains

1,787,418 

2,761,805 

 

 

 

Tax effect

(  597,853)

(1,049,486)

 

 

 

           Net-of-tax amount

$1,189,565 

$1,712,319 

 

**Note 17 – Subsequent Event**

In  February 2002, the bank signed a letter of intent with another financial  institution to purchase a branch in the local area.  Consummation of the  purchase is subject to the completion of a definitive agreement, performance  of due diligence and obtaining applicable regulatory approvals.

 F-22
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

** Note 18 – Condensed  Financial Statements of Parent Company**

Financial  information pertaining only to Pinnacle Financial Corporation is as follows:

**Balance Sheet        December 31, 2001**

 

 

 

2001     
**Assets **  
Cash in subsidiary bank

$               35,209

Investment in subsidiary

46,138,643

Due from subsidiary

          460,800

 

 

**Total        assets**

$46,634,652

  

 
**Liabilities and        Shareholders’ Equity** 
Accrued expenses

$            1,924

Declared dividends payable

  460,800

Common stock

 7,680,000

Capital surplus

7,280,000

Retained earnings

29,869,390

Accumulated other comprehensive        income

  1,342,538

 

 

**Total        liabilities and shareholders’ equity**

$46,634,652

  

**Statements of        Income        Years ended December 31, 2001 and 2000**

 

2001      

2000      

**Income**

 

 

 Dividends        from subsidiary

$1,261,600

$1,873,200

 Interest        income – securities available for sale

           12,788

          30,708

 

1,274,388

1,903,908

 

 

 

**Operating expenses**

            93,039

           86,497

 

 

 

Income before income taxes and        equity in

 

 

undistributed        income of subsidiary

1,181,349

  1,817,411

 

 

 

Income tax benefit

          33,000

          33,000

 

 

 

Net income before equity in        undistributed

 

 

 income        of subsidiary

1,214,349

  1,850,411

 

 

 

Equity in undistributed income        of subsidiary

3,077,791

2,353,091

 

 

 

**Net income**

$4,292,140

$4,203,502

** **

 F-23
              
**PINNACLE FINANCIAL  CORPORATION & SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)  YEARS ENDED DECEMBER 31, 2001 AND 2000**

**Note 18 – Condensed Financial  Statements of Parent Company – (Continued)**

 

**Statements          of Cash Flows          Years ended December 31, 2001 and 2000**

 

2001       

2000       
**Cash        flows from operating activities:**
Net        income

$         4,292,140 

$         4,203,502 

Adjustments        to reconcile net income to

 

 

net        cash provided by operating activities:

 

 

Deferred        income taxes

          1,743 

697 

Equity        in undistributed income of

 

 

subsidiary

( 3,077,791)

( 2,353,091)

Net        change in:

 

 

Other        assets

9,486 

481 

Due        from subsidiary

(          460,800)

1,499,890 

Accrued        expenses

(              9,928)

4,099 

 

    

 

 

Net        cash provided by operating activities

754,850 

3,355,578 

 

 

 

 

**Cash flows from investing        activities:**

 

 

Available        for sale securities:

 

 

Sales        to subsidiary

619,432 

–            

Other        changes

(                   20)

(                    69)

 

     

 

 

Net        cash used by investing activities

619,412 

(                    69)

 

 

 

 

**Cash flows from financing        activities:**

 

 

Cash        dividends paid

( 1,382,400)

( 3,340,800)

 

 

 

 

Net        cash used by financing activities

( 1,382,400)

( 3,340,800)

 

**Net change in cash and cash        equivalents**

(               8,138)

14,709 

Cash and cash equivalents at        January 1

font>43,347 

28,638 

 

 

 

 

Cash and cash equivalents at        December 31

$              35,209 

$              43,347 

 

 

 F-24
       
 

**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 22nd day of March, 2002.

 

**PINNACLE FINANCIAL        CORPORATION**

  

  

  

  

Date: March 22, 2002

By:    */s/ L. Jackson McConnell*

 

      L. Jackson McConnell

 

      Chairman and Chief Executive        Officer

 

      (Principal Executive Officer)

 

 

Date: March 22, 2002

By:    /s/ Lint W. Eberhardt

 

              Lint W. Eberhardt

 

              President

**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 22nd day of March, 2002.

Signature

Title

 

 

 */s/ L. Jackson        McConnell*

Chairman and Chief Executive        Officer

 and Director

 L. Jackson McConnell

 

  

  
* /s/ Linton W. Bernhard*President and Director        Linton W. Eberhardt                                    */s/ Don C. Fortson*        Director      
Don C. Fortson

 

40
                
 

 
*/s/ Robert H. Hardy*Director
Robert H. Hardy

 

 

*/s/ Robert E. Lee, III*

Director

Robert E. Lee, III

 

 

 

*/s/ J. Daniel McAvoy, M.D.*

Director

J. Daniel McAvoy, M.D

 

*/s/ L. Jackson McConnell,        Jr.*

Director

L. Jackson McConnell, Jr.

 

 

 

*/s/ James E. Purcell*

Director
               
James E. Purcell

 

*/s/ Steven A. Williams*

Director

Steven A. Williams

 

 

 

*/s/ H. Thomas Warren III*

Chief Financial        Officer/Principal
Accounting Officer
H. Thomas Warren III

 

41
              
**EXHIBIT INDEX**

  

Exhibit No.

Description of Exhibit

24.0

A Power of Attorney is set        forth on the signature pages to this Form 10-KSB.

 

 

 

 

 

 

 

 

 
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