SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
- -------------------------------------------------------------------------------
May 1, 1998
Date of Report (Date of earliest event reported): April 17, 1998)
-----------------------
CNB BANCSHARES, INC.
-------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Indiana
--------------------------------------
(State or Other Jurisdiction of Incorporation)
0-11510 35-1568731
----------------------- -------------------------
(Commission File Number) (IRS Employer Identification No.)
20 N.W. Third Street, Evansville, Indiana 47739
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(Address of Principal Executive Offices) (Zip Code)
(812) 456-3400
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Registrant's Telephone Number, Including Area Code
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
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Page
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
- ------ ------------------------------------
On April 17, 1998, CNB Bancshares, Inc., an Indiana corporation (the
"Registrant"), acquired Pinnacle Financial Services, Inc., a Michigan
corporation ("Pinnacle"), by means of the merger (the "Merger") of Pinnacle with
and into the Registrant pursuant to an Agreement and Plan of Merger, dated as of
October 14, 1997, between the Registrant and Pinnacle (the "Merger Agreement").
Pursuant to the Merger Agreement, each issued and outstanding share of common
stock, no par value per share, of Pinnacle was converted into 1.0365 shares of
common stock, stated value $1.00 per share, of the Registrant (approximately
13,241,070 shares in the aggregate including the assumption by the Registrant of
Pinnacle's employee stock options) with cash in lieu of fractional shares. The
Merger was accounted for as a "pooling of interests" for accounting and
financial reporting purposes. A copy of the press release announcing the
closing of the Merger is filed as Exhibit 99(a) to this Current Report on Form
8-K.
Pinnacle was a bank holding company headquartered in St. Joseph, Michigan.
At December 31, 1997, Pinnacle had consolidated assets of $2.1 billion and
shareholders' equity of $181 million. Through its wholly-owned subsidiary,
Pinnacle Bank, a Michigan state banking corporation, Pinnacle conducted full
service and retail banking through 14 branch offices located in southwestern
Michigan and 30 branch offices and two loan production offices located in
northern Indiana.
The Registrant's Registration Statement of Form S-4 (Registration No. 333
46837), which was declared effective by the Securities and Exchange Commission
on February 26, 1998 (the "Registration Statement"), sets forth certain
information regarding the Merger, the Registrant and Pinnacle, including, but
not limited to, the manner of the Merger, a description of the assets involved,
the nature and amount of consideration paid by the Registrant therefor, the
method used for determining the amount of such consideration, the nature of any
material relationships between Pinnacle and the Registrant or any officer or
director of the Registrant or any associate of any such officer or director, the
nature of Pinnacle's business and the Registrant's intended use of the assets
acquired in the Merger.
Pursuant to the Merger Agreement, on April 22, 1998, the following persons,
who were immediately prior thereto serving as members of the Board of Directors
of Pinnacle, became members of the Board of Directors of the Registrant:
Terrence A. Friedman, Chairman of the Board of Trelleborg (a manufacturer of
rubber components primarily for the auto industry); James E. Hutton, Vice
President in charge of operations for Burrell Professional Labs, Inc. (a
professional photo processing company); and Alton C. Wendzel, President of Greg
Farms, Inc. Greg Orchards and Produce, Inc. and Coloma Frozen Foods, Inc.
(growers and processors of fresh and frozen produce).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
- ------ ---------------------------------
(a) Financial Statements of Business Acquired:
-----------------------------------------
The following audited financial statements of Pinnacle are submitted
herewith:
1. Report of Independent Auditors.
2. Consolidated Balance Sheets as of December 31, 1997 and 1996.
3. Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995.
4. Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.
5. Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.
6. Notes to Consolidated Financial Statements.
(b) Pro Forma Financial Information:
-------------------------------
Pro forma financial information required by Item 7(b) of Form 8-K giving
effect to the acquisition of Pinnacle will be filed not later than 60 days after
the filing of this Report on Form 8-K.
(c) Exhibits:
--------
The following exhibits are incorporated herein by reference:
Exhibit 2(a) Agreement and Plan of Merger, dated as of October 14, 1997, by
and between CNB Bancshares, Inc., an Indiana corporation, and
Pinnacle Financial Services, Inc., a Michigan corporation, is
incorporated herein by reference from the Registration Statement
on Form S-4 of CNB Bancshares, Inc. (No. 333-46837).
Exhibit 2(b) Stock Option Agreement, dated as of October 14, 1997, between CNB
Bancshares, Inc., an Indiana corporation, and Pinnacle Financial
Services, Inc., a Michigan corporation, is incorporated herein by
reference from the Registration Statement on Form S-4 of CNB
Bancshares, Inc. (No. 333-46837).
The following exhibits are included with this Report:
Exhibit 23(a) Consent of KPMG Peat Marwick LLP.
Exhibit 99(a) Press Release dated April 17, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: May 1, 1998
CNB BANCSHARES, INC.
------------------------------
(Registrant)
By: /s/ John R. Spruill
------------------------------
John R. Spruill
Executive Vice President
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pinnacle Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of Pinnacle
Financial Services, Inc. and subsidiaries (the Company) as of December 31, 1997
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Financial
Services, Inc. and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet of Pinnacle
Financial Services, Inc. and subsidiaries as of December 31, 1996, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years ended December 31, 1996, and 1995, prior to their
restatement for the 1997 pooling of interests. The contribution of Pinnacle
Financial Services, Inc. and subsidiaries to total assets and net income
represented 50% and 57% of the respective restated totals for the year ended
December 31, 1996 and the contribution of Pinnacle Financial Services, Inc. and
subsidiaries to total assets and net income represented 50% and 40% of the
respective restated totals for the year ended December 31, 1995. Separate
consolidated financial statements of the other companies included in the
December 31, 1996 restated consolidated balance sheet and consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years ended December 31, 1996 and 1995 were audited and reported on separately
by other auditors. We also audited the combination of the accompanying
consolidated balance sheet as of December 31, 1996 and consolidated statements
of income, changes in stockholders' equity, and cash flows for the years ended
December 31, 1996 and 1995, after restatement for the 1997 pooling of interests;
in our opinion, such consolidated statements have been properly combined on the
basis described in note 1 of the notes to the consolidated financial statements.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 30, 1998
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks...................................... $ 49,209 $ 60,957
Federal funds sold........................................... 6,400 15,750
----------- ----------
Total cash and cash equivalents............................ 55,609 76,707
Interest-bearing deposits with financial institutions.......... 1,548 13,171
Securities available-for-sale:
Taxable...................................................... 386,181 491,039
Tax-exempt................................................... 33,103 22,447
Securities held-to-maturity taxable............................ -- 14,299
Mortgage loans held for sale................................... 12,750 11,485
Loans, net of unearned income.................................. 1,508,365 1,415,855
Less: allowance for loan losses.............................. 20,528 14,909
----------- ----------
Net loans.................................................. 1,487,837 1,400,946
Premises and equipment, net.................................... 29,299 26,082
Interest receivable and other assets........................... 109,168 79,034
----------- ----------
Total assets............................................. $2,115,495 $2,135,210
----------- ----------
LIABILITIES:
Deposits:
Noninterest-bearing demand................................... $ 99,262 $ 121,235
Interest bearing demand...................................... 186,808 143,821
Savings...................................................... 433,121 437,513
Time......................................................... 713,917 776,142
----------- ----------
Total deposits............................................. 1,433,108 1,478,711
Federal Home Loan Bank advances................................ 414,365 369,238
Securities sold under repurchase agreements and other borrowings 69,511 102,206
Interest payable and other liabilities......................... 17,516 14,796
----------- ----------
Total liabilities.......................................... 1,934,500 1,964,951
STOCKHOLDERS' EQUITY:
Common stock; no par value; 15,000,000 shares authorized;
12,619,499 shares issued and outstanding at December 31,
1997; and 12,151,514 shares issued and outstanding at
December 31, 1996............................................ 19,110 19,110
Additional paid-in capital..................................... 78,094 78,192
Retained earnings.............................................. 81,764 83,599
Treasury stock................................................. -- (10,304)
Guaranteed ESOP obligation..................................... -- (379)
Recognition and retention plan obligation...................... -- (4)
Net unrealized gain on securities available-for-sale........... 2,027 45
---------- ----------
Total stockholders' equity................................. 180,995 170,259
----------- ----------
Total liabilities and stockholders' equity................. $2,115,495 $2,135,210
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................................... $ 128,758 $ 114,316 $ 90,234
Tax-exempt............................................ 667 404 346
Interest and dividends on securities:
Available-for-sale
Taxable............................................. 35,643 29,424 12,867
Tax-exempt.......................................... 1,480 1,140 159
Held-to-maturity
Taxable......................................... .... -- 1,227 2,500
Tax-exempt.......................................... -- -- 873
Interest on federal funds sold.......................... 166 410 257
Interest on interest-bearing deposits with
financial institutions................................ 358 982 680
--------- --------- ---------
TOTAL INTEREST INCOME............................. 167,072 147,903 107,916
INTEREST EXPENSE:
Interest on deposits.................................... 62,695 60,567 43,556
Interest on Federal Home Loan Bank advances............. 24,286 15,928 8,821
Interest on securities sold under repurchase agreements
and other borrowings.................................. 4,505 3,104 2,692
--------- --------- ---------
TOTAL INTEREST EXPENSE............................... 91,486 79,599 55,069
--------- --------- ---------
NET INTEREST INCOME.................................. 75,586 68,304 52,847
Provision for loan losses.................................. 13,320 2,681 1,422
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.. 62,266 65,623 51,425
Noninterest income:
Service charges on deposit accounts...................... 5,279 4,341 3,653
Trust income............................................. 912 789 605
Securities gains and losses, net......................... 813 708 790
Other income............................................. 11,516 7,015 4,761
--------- --------- ---------
TOTAL NONINTEREST INCOME............................. 18,520 12,853 9,809
Noninterest expense:
Salaries and employee benefits........................... 23,858 21,690 17,599
Occupancy................................................ 4,638 4,123 3,076
Equipment................................................ 3,748 3,473 2,813
FDIC insurance premiums.................................. 681 7,858 1,965
Other expense............................................ 33,086 17,802 13,207
--------- --------- ---------
TOTAL NONINTEREST EXPENSES.......................... 66,011 54,946 38,660
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE............................ 14,775 23,530 22,574
INCOME TAX EXPENSE.......................................... 4,559 7,443 6,353
--------- --------- ---------
NET INCOME.................................................. $ 10,216 $ 16,087 $ 16,221
--------- --------- ---------
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C>
NET INCOME PER SHARE:
Basic......................................... $ .83 $ 1.33 $ 1.60
Diluted....................................... .83 1.32 1.58
AVERAGE SHARES OUTSTANDING:
Basic......................................... 12,258,265 12,051,935 10,137,302
Diluted....................................... 12,311,957 12,171,221 10,244,326
CASH DIVIDENDS DECLARED PER COMMON SHARE........ $ 0.94 $ 0.82 $ 0.76
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Net
Unrealized
(Losses) on
Additional Guaranteed Securities
Common Paid-in Retained Treasury ESOP Available-for-
Stock Capital Earnings Stock Obligation RRP Sale Total
(in thousands) ------- ---------- -------- -------- ---------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995............... $19,110 $42,690 $67,351 $(8,900) $(715) $ (48) (3,347) $116,141
Net income............................. -- -- 16,221 -- -- -- -- 16,221
Common stock dividends declared:
Pinnacle Financial Services, Inc.
$.76 per share..................... -- -- (3,295) -- -- -- -- (3,295)
Pooled companies prior to
merger............................. -- -- (4,036) -- -- -- -- (4,036)
Issuance of common stock for:
Employee incentive plan.............. -- 636 -- -- -- -- -- 636
Stock offering, net of costs......... -- 13,184 -- -- -- -- -- 13,184
Purchase of Maco Bancorp, Inc........ -- 20,985 -- -- -- -- -- 20,985
Purchase of treasury stock............. -- -- -- (957) -- -- -- (957)
Payments made on guaranteed ESOP
obligation........................... -- -- -- -- 125 -- -- 125
Amortization of RRP contribution....... -- -- -- -- -- 27 -- 27
Issuance of treasury stock............. -- (79) -- 147 -- -- -- 68
Tax benefit related to stock option
plans................................ -- 70 -- -- -- -- -- 70
Change in unrealized gain(loss) for
securities available-for-sale,
net of tax effect of $3,468.......... -- -- -- -- -- -- 5,289 5,289
------- ------- ------- ------- ----- ----- ------ --------
Balance, December 31, 1995............. 19,110 77,486 76,241 (9,710) (590) (21) 1,942 164,458
Net income............................. -- -- 16,087 -- -- -- -- 16,087
Common stock dividends declared:
Pinnacle Financial Services, Inc.
$.82 per share..................... -- -- (4,838) -- -- -- -- (4,838)
Pooled companies prior to
merger............................. -- -- (3,891) -- -- -- -- (3,891)
Issuance of common stock for:
Employee incentive plan.............. -- 913 -- -- -- -- -- 913
Additional costs related to prior
year stock offering................ -- (259) -- -- -- -- -- (259)
Purchase of treasury stock............. -- -- -- (612) -- -- -- (612)
Payments made on guaranteed ESOP
obligation........................... -- -- -- -- 211 -- -- 211
Amortization of RRP contribution....... -- -- -- -- -- 17 -- 17
Issuance of treasury stock............. -- (11) -- 18 -- -- -- 7
Tax benefit related to stock option
plans.............. ................. -- 63 -- -- -- -- -- 63
Change in unrealized gain (loss)
for securities available-for-sale,
net of tax effect) of $(1,244)....... -- -- -- -- -- -- (1,897) (1,897)
------- ------- ------- ------- ----- ----- ------ --------
Balance, December 31, 1996............. $19,110 $78,192 $83,599 $(10,304) $(379) $(4) $ 45 $170,259
Net income............................. -- -- 10,216 -- -- -- -- 10,216
Common stock dividends declared:
Pinnacle Financial Services, Inc.
$.94 per share..................... -- -- (8,675) -- -- -- -- (8,675)
Pooled companies prior to
merger............................. -- -- (2,583) -- -- -- -- (2,583)
Redemption of Shareholder's Rights
Plan................................. -- -- (48) -- -- -- -- (48)
Common stock issuance upon exercise
of options........................... -- 7,436 -- -- -- -- -- 7,436
Payments made on guaranteed ESOP
obligation........................... -- -- -- -- 379 -- -- 379
Tax Benefit Related to stock option
plans................................ -- 1,630 -- -- -- -- -- 1,630
Increase in fair value related to
allocation of ESOP shares............ -- 719 -- -- -- -- -- 719
Amortization of RRP contribution....... -- -- -- -- -- 4 -- 4
Issuance of treasury stock............. -- (575) -- 1,000 -- -- -- 425
Retirement of treasury stock........... -- (9,304) -- 9,304 -- -- -- --
Cash paid in lieu of fractional
shares............................... -- (4) -- -- -- -- -- (4)
Adjustment for change in fiscal
year of pooled entity................ -- -- (745) -- -- -- -- (745)
Change in unrealized gain (loss)
for securities available-for-sale,
net of tax effect of $............... -- -- -- -- -- -- 1,982 1,982
------- ------- ------- ------- ----- ----- ------ --------
Balance, December 31, 1997............. 19,110 78,094 81,764 -- -- -- 2,027 180,995
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(in thousands)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 10,216 $ 16,087 $ 16,221
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................ 5,135 4,999 3,756
Net amortization on loans and securities..................................... 1,116 636 1,088
Provision for loan losses.................................................... 13,320 2,681 1,422
Deferred federal income taxes................................................ (2,029) (1,206) (446)
Proceeds from sales of trading securities.................................... -- 10,154 1,975
Purchases of trading securities.............................................. -- (10,171) (1,976)
Mortgage loans purchased under agreements to resell.......................... (1,448,565) (1,111,965) (795,862)
Proceeds from sale of mortgage loans purchased under agreements to resell.... 1,363,517 1,096,721 741,010
Mortgage loans originated for sale........................................... (84,502) (175,118) (58,845)
Proceeds from sales of loans................................................. 85,146 136,662 56,800
Gain on sale of securities................................................... (813) (708) (790)
Gain on sale of loans........................................................ (3,411) (1,019) (545)
Decrease(increase) in interest receivable and other assets................... (3,529) (1,331) (1,477)
Decrease in other liabilities................................................ 267 (1,920) (2,899)
---------- ---------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES................................. (64,132) (35,498) (40,568)
---------- ---------- ---------
Net increase in loans, excluding loan sales and purchases...................... 35,324 (67,920) (5,654)
Purchases of loans............................................................. (50,269) (79,642) (17,723)
Purchases of securities available-for-sale..................................... (148,974) (320,047) (145,617)
Purchases of securities held-to-maturity....................................... -- (4,237) (11,704)
Purchases of Company owned life insurance policies............................. (25,047) (1,366) (5)
Proceeds from sales of securities available-for-sale........................... 205,091 146,580 140,291
Proceeds from maturities and paydowns of securities available-for-sale......... 56,150 65,200 22,555
Proceeds from maturities and paydowns of securities held-to-maturity........... -- 5,803 31,036
Net (increase) decrease in interest-bearing deposits with financial
institutions................................................................. 11,623 29,825 (24,583)
Capital expenditures........................................................... (6,331) (3,086) (3,185)
Purchase of Forrest Holdings Inc. preferred stock.............................. -- (2,500) --
Purchase of MACO Bancorp, Inc., net of cash acquired and stock issued.......... -- -- (12,683)
Purchase of NCB Corp., net of cash acquired.................................... -- -- (6,841)
---------- ---------- ---------
NET CASH USED BY INVESTING ACTIVITIES............................................ 77,567 (231,390) (34,113)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits....................................................... (45,603) 105,144 39,740
Net increase in securities sold under repurchase agreements and other
borrowings................................................................... 12,432 85,207 53,789
Net change in obligation to limited partnership................................ -- 18 --
Common stock issued............................................................ 7,436 654 13,752
Contribution to fund ESOP...................................................... 379 211 125
Issuance of treasury stock..................................................... 425 7 68
Purchase of treasury stock..................................................... -- (612) (957)
Dividends paid................................................................. (9,550) (8,590) (6,826)
Redemption of shareholders' rights plan........................................ (48) -- --
Cash paid for fractional shares................................................ (4) -- --
---------- ---------- ---------
NET CASH USED BY FINANCING ACTIVITIES............................................ (34,533) 282,039 99,691
---------- ---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ (21,098) 15,151 25,010
Cash and cash equivalents at beginning of year................................... 76,707 61,556 36,546
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 55,609 $ 76,707 $ 61,556
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................................................. $ 91,353 $ 78,987 $ 54,079
Income taxes paid.............................................................. $ 11,272 $ 7,921 $ 7,518
Loans transferred to other real estate owned................................... $ 4,099 $ 756 $ 738
Transfers of securities held-to-maturity to available-for-sale................. $ 14,299 $ -- $ 239,332
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Pinnacle Financial Services, Inc.
and subsidiaries conform to generally accepted accounting principles and
prevailing practices within the banking industry. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts,
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The following are significant accounting and reporting policies of
Pinnacle Financial Services, Inc. and subsidiaries.
(a) Consolidation
The consolidated Pinnacle Financial Services, Inc. entity (the "Company")
was formed on August 1, 1997 through a merger transaction whereby Indiana
Federal Corporation and subsidiaries ("IFC") and CB Bancorp, Inc. and
subsidiaries ("CB") were merged with and into the then existing Pinnacle
Financial Services, Inc. and subsidiaries ("Pinnacle"). The merger transaction
was accounted for in accordance with the pooling-of-interests method of
accounting for a business combination. Accordingly, the consolidated financial
statements included herein reflect the combination of the historical financial
results of Pinnacle, IFC and CB and their respective recorded assets and
liabilities have been restated at their historical cost as if the combining
companies had been consolidated for all periods presented.
As a result of the merger transaction, the consolidated financial statements
include the accounts of Pinnacle Financial Services, Inc. and its wholly-owned
subsidiaries, Pinnacle Bank (the "Bank"), IndFed Mortgage Company, and Pinnacle
Financial Consultants. Pinnacle Bank's two wholly-owned subsidiaries are
Starkeis, Inc. and Brookview Real Estate, LTD. Effective December 31, 1996,
Pinnacle Bank-Indiana (formerly a wholly-owned subsidiary of Pinnacle Financial
Services, Inc.) was merged with and into Pinnacle Bank-Michigan, now
collectively known as Pinnacle Bank. Significant intercompany balances and
transactions have been eliminated in consolidation.
Prior to the combination, CB's fiscal year ended March 31. In restating
the historical consolidated financial statements included herein, the
consolidated financial statements as of and for the year ended December 31, 1997
reflect transactions on a merged basis from January 1, 1997 through December 31,
1997. Additionally, CB's financial statements as of March 31, 1997 and 1996 and
for each of the years in the two year period ended March 31, 1997 were combined
with Pinnacle's and IFC's financial statements as of December 31, 1996 and 1995
and for each of the years in the two year period ended December 31, 1996. An
adjustment of $745,000 was recorded in the consolidated statement of changes in
stockholders' equity for the year ended December 31, 1997 to remove CB net
income from January 1 through March 31, 1997 from retained earnings, which
amount is included in December 31, 1996 retained earnings.
40
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Securities
Securities which management believes could be sold prior to maturity in
order to manage interest rate risk, prepayment risk, liquidity risk, or other
corporate purposes are classified as available-for-sale and are carried at fair
value with unrealized gains and losses, net of applicable income taxes, reported
as a component of stockholders' equity. Securities which management believes are
held for resale in anticipation of short-term market movements are classified as
trading securities which are stated at fair value with unrealized holding gains
and losses recognized in the income statement. Securities, other than the
foregoing, which management has the positive ability and intent to hold until
maturity are classified as securities held-to-maturity and are accounted for
using historical amortized cost. At December 31, 1997, the company had no
trading or held-to-maturity securities.
Premiums and discounts on securities are amortized and accreted over the
life of the related security as an adjustment to yield using the effective
interest method. Gain or loss on the sale of securities is determined based on
the adjusted cost of the specific security sold. A decline in the market value
of any available-for-sale or held-to-maturity security below cost that is deemed
other than temporary results in a charge to earnings thereby establishing a new
cost basis for the security.
(c) Mortgage Loans Purchased Under Agreements to Resell
The Company purchases residential mortgage loans from various mortgage
companies prior to sale of these loans by the mortgage companies in the
secondary market. The Company held loans that were purchased under agreements to
resell from approved mortgage companies as of December 31, 1997. The Company
purchases such loans from mortgage companies at par, net of certain fees, and
later sells them back to the mortgage companies at the same amount and without
recourse provisions. As a result, no gains and losses are recorded at the resale
of loans. The Company records interest income on the loans during the funding
period and fee income received from the mortgage company for each loan when the
loan is sold. The Company uses the stated interest rate in the agreement with
each mortgage company for interest income recognition, and not the interest
rates on individual loans. The Company does not retain servicing of the loans
when they are resold. Purchase money and refinancing mortgage loans are
generally held no more than 90 days by the Company and typically are resold
within 30 days. Construction loan mortgages acquired are held for the duration
of the construction loan period, which approximates one year or less.
(d) Mortgage loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market
value. Net unrealized losses are recognized in a valuation allowance by charges
to income.
(e) Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to
operating expense, is decreased by charge offs, net of recoveries, and is
available for losses incurred on loans, including certain accrued interest
receivable. The allowance for loan losses is based on management's periodic
evaluation of the loan portfolio. In evaluating the portfolio, management takes
into consideration numerous factors, including current economic conditions,
prior loan loss experience, the composition of the loan portfolio, and
management's evaluation of the collectibility of specific loans. Management
believes that the allowance for loan losses is adequate to absorb potential
losses in the portfolio, however, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies periodically review the provision for loan losses. These
agencies may require that additions be made to allowance for loan losses based
upon their
41
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
judgment of information available to them at the time of their examination.
A loan is considered impaired when it is probable that a creditor will be
unable to collect contractual principal and interest due according to the
contractual terms of the loan agreement. Impaired loans are generally considered
by the Company to be nonaccrual commercial and commercial real estate loans,
restructured loans and commercial and commercial real estate loans for which
principal and/or interest is at risk. Impairment is measured by determining the
fair value of the loans based on the present value of expected cash flows, the
market price of the loans, or the fair value of the underlying collateral. If
the fair value of the loan is less than the recorded book value, a valuation
allowance is established as a component of the allowance for loan losses.
(f) Nonperforming Assets
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, loans contractually past due 90 days or more as
to interest and/or principal and not included in nonaccrual loans, and other
real estate which has been acquired primarily through foreclosure and is
awaiting disposition. Loans are generally placed on a nonaccrual basis when, in
the opinion of management, collection of principal or interest payments is
unlikely. Income on such loans is then recognized only to the extent that cash
is received and where future collection of principal is probable.
Other real estate is carried at the lower of cost or fair value, less
estimated costs to sell. When the property is acquired through foreclosure, any
excess of the related loan balance over estimated fair value is charged to the
allowance for loan losses. Subsequent write-downs, losses upon sale, and
expenses related to maintenance of properties are charged to other expense.
(g) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation, computed on the straight-line and accelerated methods, is charged
to operations over the estimated useful lives of the properties.
(h) Goodwill and Other Intangibles
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis up to 15 years
with a remaining life of approximately 10 years at December 31, 1997. At
December 31, 1997 and 1996, goodwill of approximately $13,393,000 and
$14,604,000, respectively, is included in other assets in the accompanying
consolidated balance sheets.
42
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Core deposit intangibles, representing the premium associated with the
acquisition of certain deposit liabilities, are being amortized to operating
expenses on a straight-line basis over the average lives of approximately 7 to
10 years of such deposit liabilities, with a remaining life at December 31, 1997
of approximately 4 years. At December 31, 1997 and 1996, core deposit
intangibles of approximately $2,687,000 and $3,368,000, respectively, are
included in other assets in the accompanying consolidated balance sheets.
The Company assesses the recoverability of its goodwill and other
intangibles through review of various economic factors on a periodic basis in
determining whether impairment, if any, exists.
(i) Loan Servicing Rights
The Company recognizes as a separate asset the right to service loans for
others which are amortized over the estimated lives of the loans. The Company
also evaluates these servicing rights for impairment based on the current fair
value of those rights. Impairment is recognized through a valuation allowance
established through a charge to expense. Loan servicing rights as of December
31, 1997 and 1996 totaled approximately $1,029,000 and $477,000, respectively.
(j) Trust Assets
Assets held by the Company in fiduciary or agency capacity for customers
are not assets of the Company and as such are not included in the consolidated
financial statements. Fee income is recognized on an accrual basis for financial
reporting purposes.
(k) Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (the ESOP) for
the former employees of IFC and CB. The Company recognizes compensation expense
for the applicable ESOP shares based on the fair value of those shares when
committed to be released to employees, rather than based on their original cost
in accordance with the American Institute of Certified Public Accountants &
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans (SOP93-6).
(l) Retirement Plans
Costs for the Company's defined benefit plans, which cover substantially all
employees of the former Pinnacle and CB entities, are accounted for in
accordance with the requirements of Statement of Financial Accounting Standards
No. 87, "Employers: Accounting for Pensions". The projected unit credit method
is utilized for measuring net periodic pension cost over the employees' service
life. The Company's funding policy is to contribute annually an amount
calculated under the minimum ERISA funding requirements.
(m) Postretirement Benefits Other Than Pensions
An accrual for postretirement benefits is charged to current earnings
based upon the expected cost of providing postretirement benefits to employees
during the years that the employees render services.
(n) Stock Option Plan
As of December 31, 1996, the Company adopted the disclosure requirements
of Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation". The Company applies APB Opinion 25, "Accounting for
Employee Benefit Plans" and related interpretations in accounting for its stock
option plan.
(o) Income Taxes
Prior to the merger Pinnacle, IFC and CB and their respective subsidiaries
each filed consolidated U.S. income tax returns. The consolidated tax liability
is settled between companies generally as if each company had filed a separate
return. For the year ended December 31, 1997, the Company and its subsidiaries
will file consolidated tax returns.
43
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes", the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.
(p) Income Recognition
The Company uses the accrual basis of accounting for financial reporting
purposes. Loans are stated at the principal amount outstanding, net of any
unearned income. Loan origination fees and certain direct loan origination costs
are deferred and recognized over the lives of the related loans as an adjustment
of the yield.
(q) Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold.
(r) Per Share Data
Basic net income per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding during each
period. The diluted net income per share calculation is adjusted for the effects
of options. Average shares have been increased for the assumed conversion of
outstanding options into common shares and is retroactively adjusted for stock
splits and stock dividends. Cash dividends declared per share are based upon the
number of shares outstanding at date of declaration, retroactively adjusted for
stock splits and stock dividends.
(s) Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2 SUPERVISION AND REGULATION
The Company and its subsidiary bank are subject to supervision, regulation
and periodic examination by various federal and state banking regulatory
agencies including the Board of Governors of the Federal Reserve Board (the
"FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), and the Michigan
Financial Institutions Bureau (the "FIB"). Since the Company is a bank holding
company, the Company's activities are limited to the business of banking and
activities closely related to banking.
The following is a summary of certain statutes and regulations affecting
the Company. This summary is qualified in its entirety by such statutes and
regulations, which are subject to change based on pending and future legislation
and action by regulatory agencies.
44
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK HOLDING COMPANIES. As a bank holding company, the Company is subject
to regulation under the Bank Holding Company Act of 1956, as amended (the
"BHCA"), and by the FRB.
Banking laws and regulations restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal stockholders, officers, directors and their affiliates, and
investments by the subsidiary banks in the shares or securities of the parent
holding company (or of any other non-bank or bank affiliates), and acceptance of
such shares or securities as collateral security for loans to any borrower. The
regulators also review other payments, such as management fees, made by
subsidiary banks or affiliated companies.
Under the BHCA, a bank holding company is prohibited, with certain limited
exceptions, from engaging in activities other than those of banking or of
managing or controlling banks and from acquiring or retaining direct or indirect
ownership or control of voting shares or assets of any company which is not a
bank or bank holding company, other than subsidiaries engaged in activities
which the Federal Reserve Board determines to be so closely related to banking
and managing or controlling banks as to be a proper incident thereto.
BANKS. The Company's subsidiary bank is subject to regulation, supervision
and periodic examination by the Michigan FIB. Additionally, as an institution
whose deposits are insured by the Bank Insurance Fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF") of the FDIC, Pinnacle Bank is
also subject to supervision, regulation and periodic examination by the FDIC.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the primary
regulator of Pinnacle Bank categorized the Bank as WELL CAPITALIZED under the
regulatory framework for prompt corrective action. To be categorized as WELL
CAPITALIZED the Bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios as set forth in the table. This notification occurred
prior to the effective date of the pooling. There are no conditions or events
since that notification that management believes have changed the institution's
category.
45
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's and the Bank's actual capital amounts and ratios are also
presented in the tables for 1997 and 1996.
<TABLE>
<CAPTION>
To be well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ --------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total Capital (to Risk Weighted Assets):
CONSOLIDATED................................. $ 180,984 14.54% $ 99,611 8.00% $ 124,513 10.00%
Pinnacle Bank................................ 199,193 12.25% 97,412 8.00% 121,765 10.00%
Tier 1 Capital (to Risk Weighted Assets):
CONSOLIDATED................................. $ 165,359 13.28% $ 49,805 4.00% $ 74,708 6.00%
Pinnacle Bank................................ 133,907 11.00% 48,706 4.00% 73,059 6.00%
Tier 1 Capital (to Average Assets):
CONSOLIDATED................................. $ 165,359 7.29% $ 90,682 4.00% $ 113,352 5.00%
Pinnacle Bank................................ 133,907 6.44% 83,198 4.00% 103,998 5.00%
AS OF DECEMBER 31, 1996
Total Capital (to Risk Weighted Assets):
CONSOLIDATED................................. $ 168,081 13.30% $ 100,870 8.00% $ 126,087 10.00%
Pinnacle Bank................................ 145,522 11.61% 100,297 8.00% 125,372 10.00%
Tier 1 Capital (to Risk Weighted Assets):
CONSOLIDATED................................. $ 153,172 12.12% $ 50,435 4.00% $ 75,652 6.00%
Pinnacle Bank................................ 130,613 10.42% 50,149 4.00% 75,223 6.00%
Tier 1 Capital (to Average Assets):
CONSOLIDATED................................. $ 153,172 7.41% $ 83,832 4.00% $ 104,790 5.00%
Pinnacle Bank................................ 130,613 6.27% 83,367 4.00% 104,208 5.00%
</TABLE>
NOTE 3 MERGERS AND ACQUISITIONS
Effective August 1, 1997, the Company issued 4,790,736 and 1,553,144 shares
of its common stock in exchange for all outstanding common stock of Indiana
Federal Corporation ("IFC") and CB Bancorp, Inc. ("CB"), respectively, both of
which were thrift holding companies located in Valparaiso and Michigan City,
Indiana, respectively. Total assets acquired of IFC and CB were $835 million and
$288 million respectively. The business combinations have been accounted for as
pooling-of-interests transactions, and accordingly, the consolidated financial
statements for periods prior to the combinations have been restated to include
the accounts and results of operations of IFC and CB.
46
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The results of the operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying consolidated
financial statements are summarized below (in thousands):
<TABLE>
<CAPTION>
Six Months Years ended,
Ended June 30, December 31, December 31,
1997 1996 1995
--------- -------- ---------
(unaudited)
<S> <C> <C> <C>
Net interest income:
Pinnacle.......................................................... 18,431 34,276 19,344
IFC............................................................... 13,546 25,674 26,141
CB................................................................ 4,628 8,354 7,362
------ ------ ------
Consolidated........................................................ 36,605 68,304 52,847
------ ------ ------
------ ------ ------
Net income:
Pinnacle.......................................................... 6,081 9,152 6,459
IFC............................................................... 4,251 4,623 7,304
CB................................................................ 1,619 2,312 2,458
------ ------ ------
Consolidated........................................................ 11,951 16,087 16,221
------ ------ ------
------ ------ ------
</TABLE>
On October 1, 1996, the Company , through Pinnacle Bank, purchased
Starke's, Inc., a local insurance agency, through the issuance of 99,451 shares
of Pinnacle common stock. The assets acquired were $1,241,000 and the
transaction was accounted for using the pooling-of-interests method with no
restatement of prior periods as amounts involved were not material.
On December 1, 1995, the Company acquired all of the outstanding stock of
Maco Bancorp, Inc. ("Maco"), a Delaware corporation and registered savings and
loan holding company headquartered in Merrillville, Indiana, for a purchase
price of $41,944,000 (the "Purchase Price"). Approximately 50% of the Purchase
Price was paid in cash ($20,959,000) and the balance was paid in Pinnacle common
stock valued at $20,985,000. The acquisition of Maco was accounted for as a
purchase. All assets (approximately $412,800,000) and all liabilities
(approximately $384,200,000) of Maco and its subsidiaries (First Federal Savings
Bank of Indiana, Brookview Real Estate Ltd. and First Insurance, Inc.) were
adjusted to fair value as of the effective date creating goodwill in the amount
of $13,350,000 which is being amortized on a straight line basis over 15 years.
Premiums and discounts on the fair value adjustments amounted to approximately
$3,895,000 and $830,000, respectively. The operating results of Maco have been
included in the Company's financial statements since the date of acquisition.
On January 31, 1995, the Company acquired, for $8.2 million, NCB Corporation
("NCB"), a bank holding company with total assets of approximately $45.0 million
with offices in Culver and Granger, Indiana. The operations of NCB are included
in the Company's financial statements since the date of acquisition and reflect
the application of the purchase method of accounting. Under this method of
accounting, the aggregate cost to the Company of the acquisition was allocated
to the assets acquired and liabilities assumed, based on their estimated fair
values as of January 31, 1995, creating goodwill in the amount of $1.5
million which is being amortized on a straight line basis over 15 years.
47
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (Statement 107), requires that the Company
disclose estimated fair values for its financial instruments in its consolidated
financial statements. Fair value estimation methods and assumptions are
presented below for the Company's consolidated financial statements.
The estimated fair value of the Company's financial instruments at
December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks.................................... $ 49,209 $ 49,209 $ 60,957 $ 60,957
Federal funds sold......................................... 6,400 6,400 15,750 15,750
Interest-bearing deposits with financial institutions...... 1,548 1,548 13,171 13,171
Securities available-for-sale.............................. 419,284 419,284 513,486 513,486
Securities held-to-maturity................................ -- -- 14,299 14,348
Mortgage loans held for sale............................... 12,750 12,750 11,485 11,491
Net loans.................................................. 1,487,837 1,494,377 1,400,946 1,405,485
Accrued interest receivable................................ 17,282 17,282 15,778 15,778
---------- ---------- ---------- ----------
Total financial assets................................... $1,994,310 $2,000,850 $2,045,872 $2,050,466
Financial Liabilities:
Noninterest-bearing deposits............................... $ 99,262 $ 99,262 $ 121,235 $ 121,235
Interest-bearing deposits.................................. 1,333,846 1,335,907 1,357,476 1,361,453
Federal Home Loan Bank advances, securities sold under
repurchase agreements, and other borrowings.............. 483,876 485,070 471,444 474,376
Accrued interest payable................................... 5,239 5,239 5,130 5,130
---------- ---------- ---------- ----------
Total financial Liabilities.............................. $1,922,223 $1,925,478 $1,955,285 $1,962,174
</TABLE>
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD: The carrying value of cash
and due from banks and federal funds sold approximates fair value due to the
short term maturity of those instruments.
INTEREST-BEARING DEPOSITS WITH FINANCIAL INSTITUTIONS AND SECURITIES: Fair
values of these instruments are based on quoted market prices, when available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable assets.
MORTGAGE LOANS HELD FOR SALE: Fair value are estimated based on quoted
market prices.
NET LOANS: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage, and consumer, including credit
card loans. Each loan category is further segmented into fixed and adjustable
rate interest terms.
48
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of performing loans, except credit card loans, is
calculated by discounting scheduled cash flows through the estimated maturity
using the current rates at which similar loans would be made to borrowers with
similar credit ratings with the same remaining maturities. The estimate of the
maturity is based on industry forecast experience with repayments for each loan
classification. The fair value of variable rate loans repricing within three
months and credit card loans were assumed to be at carrying value.
Fair value for nonperforming loans is based on recent external appraisals.
If appraisals are not available, estimated cash flows are discounted using a
rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE: The carrying
value of accrued interest receivable and accrued interest payable approximates
fair value due to the relatively short period of time to expected realization.
NONINTEREST-BEARING AND INTEREST-BEARING DEPOSITS: The fair value of
deposits with no stated maturity, such as demand deposits, savings, NOW accounts
and money market accounts, is equal to the amount payable on demand as of
December 31, 1997 and 1996. The fair value of time deposits is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for similar remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
AND OTHER BORROWINGS: The carrying amounts for securities sold under
repurchase agreements and certain other borrowings approximate fair value as
they mature in 90 days or less. The fair value of certain other borrowings with
maturities greater than 90 days are based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT: The value of commitments
to extend credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the counterparties.
LIMITATIONS: Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
particular financial instruments. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
49
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage servicing
rights, premises and equipment, and intangible assets. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in the estimates.
NOTE 5 CASH AND DUE FROM BANKS
The Bank is required to maintain certain daily reserve balances on hand in
accordance with Federal Reserve Board requirements. The reserve balances
maintained in accordance with such requirements at December 31, 1997 and 1996,
were $12,086,000 and $10,603,000, respectively.
NOTE 6 SECURITIES
The following summarizes the amortized cost, gross unrealized holding
gains, gross unrealized holding losses and fair value for available-for-sale
securities at December 31, 1997.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
------------ ----------- ----------- ------
(in thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury and agency securities........................$ 156,978 $ 881 $ (376) $ 157,483
Obligations of states and political subdivisions........... 31,728 1,375 -- 33,103
Corporate securities....................................... 2,000 -- (8) 1,992
Equity securities.......................................... 31,130 -- (22) 31,108
Mortgage backed securities................................. 194,114 1,801 (317) 195,598
---------- ------- ------- ----------
Total securities.........................................$ 415,950 $ 4,057 $ (723) $ 419,284
---------- ------- ------- ----------
---------- ------- ------- ----------
</TABLE>
50
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the amortized cost, gross unrealized holding
gains, gross unrealized holding losses and fair value for available-for-sale
securities at December 31, 1996.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- --------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury and agency securities................... $ 205,608 $ 787 $ (1,212) $ 205,183
Obligations of states and political subdivisions...... 21,873 582 (8) 22,447
Corporate securities.................................. 12,350 4 (33) 12,321
Equity securities..................................... 23,653 101 (29) 23,725
Mortgage backed securities............................ 249,950 1,327 (1,467) 249,810
--------- ------- -------- ---------
Total securities.................................... $ 513,434 $ 2,801 $ (2,749) $ 513,486
--------- ------- -------- ---------
--------- ------- -------- ---------
</TABLE>
The following summarizes the amortized cost, gross unrealized holding
gains, gross unrealized holding losses and fair value for securities held to
maturity at December 31, 1996.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
------------ --------- --------- -------
<S> <C> <C> <C> <C>
(in thousands)
HELD-TO-MATURITY:
U.S. Treasury and agency securities......................... $ 3,000 $ -- $ (48) $ 2,952
Corporate securities........................................ 2,789 6 (2) 2,793
Mortgage backed securities.................................. 8,510 102 (9) 8,603
-------- ------ ------ --------
Total securities.......................................... $ 14,299 $ 108 $ (59) $ 14,348
-------- ------ ------ --------
</TABLE>
51
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of investment securities classified as available-for-sale at
December 31, 1997 by contractual maturity, are shown below. 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.
<TABLE>
<CAPTION>
Available-For-Sale
-------------------------
Amortized Fair
Cost Value
------------- ----------
(in thousands)
<S> <C> <C>
No maturity............................................................................ $ 31,130 $ 31,108
Due in one year or less................................................................ 11,664 11,716
Due after one year through five years.................................................. 16,498 16,763
Due after five years through ten years................................................. 68,309 69,198
Due after ten years.................................................................... 94,235 94,901
Mortgage-backed securities............................................................. 194,114 195,598
------------ ----------
Total securities....................................................................... $ 415,950 $ 419,284
------------ ----------
------------ ----------
</TABLE>
Proceeds from sales of securities (excluding trading securities) during
1997, 1996 and 1995 were $205,901,000, $146,580,000, and $140,291,000,
respectively. Gross gains of $1,236,000, $841,000, and $1,599,000 and gross
losses of $423,000, $150,000, and $809,000 were realized on those sales for
1997, 1996, and 1995, respectively. During 1997, 1996, and 1995 there were no
sales of securities classified as held-to-maturity.
On August 1, 1997, securities held-to-maturity were reclassified to
available-for-sale upon consummation of the CB merger to conform to
Pinnacle's classification of investment securities. At the date of transfer, the
securities had an amortized cost and net unrealized gain of $14.0 million and
$200,000, respectively.
Mortgage-backed securities include mortgage-backed securities and
collateralized mortgage obligations. The mortgage-backed securities represent
participating interest of pools of long-term first mortgage loans originated and
serviced by the issuers of the securities. Collateralized mortgage obligations
are debt securities that are secured by mortgage loans or other mortgage-backed
securities.
Securities with an amortized cost of $40,206,000 and $356,602,000 at
December 31, 1997 and 1996, respectively, were pledged to secure public deposits
and securities sold under agreements to repurchase and for other purposes as
required by law or contract.
The Company did not have any investment securities that individually
exceeded 10% of stockholders' equity at December 31, 1997 and 1996.
52
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 LOANS
The following summarizes loans by classification at December 31 of each
year.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Commercial loans..................................... $ 491,932 $ 421,948
Real estate loans.................................... 588,046 650,624
Consumer loans....................................... 238,427 238,321
Tax exempt loans..................................... 10,240 9,686
Mortgage loans purchased under agreements to
resell............................................. 179,720 95,276
---------- ---------
Loans, net..................................... $1,508,365 $1,415,855
---------- ----------
---------- ----------
</TABLE>
MORTGAGE LOANS PURCHASED UNDER AGREEMENTS TO RESELL
The Company has entered into agreements with mortgage companies in which the
Company purchases, at its discretion, mortgage loans from the mortgage companies
at par, net of certain fees, and later sells them back to the mortgage companies
at the same amount and without recourse provisions. The Company records interest
income on the loans during the funding period and the Company records fee income
(recorded as noninterest income) received from the mortgage company for each
loan when resold. The interest income recorded is based on a rate of interest
tied to the prime rate (as established from time to time by a major Chicago-
based financial institution) during the funding period, and not the rates on
individual loans. Such loans are reviewed, prior to purchase, for evidence that
the loans are of secondary market quality or meet the Company's internal
underwriting guidelines. An assignment of the mortgage to the Company is
required. In addition, the Company either takes possession of the original note
and forwards such note to the end investor or the Company receives a certified
copy of the note and subsequently receives acknowledgment from the end investor
of receiving the original note. A commitment to purchase from an end investor is
generally required prior to purchase by the Company. In the event that the end
investor would not honor this commitment and the mortgage companies would not be
able to honor their repurchase obligations, the Company would then need to sell
these loans in the secondary market at the fair value of these loans. Purchase
money and refinance loans are generally held no more than 90 days by the Company
and are typically resold within 30 days. The Company also purchases interim
construction loans under this program and holds these loans for the duration of
the construction loan period which typically approximates one year or less. The
Company had approximately $21,566,000 and $25,407,000 of interim construction
loans purchased under agreements to resell at December 31, 1997 and 1996.
53
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 LOANS (CONTINUED)
The following summarizes nonaccrual loans and loans greater than 90 days
delinquent which are still accruing interest at December 31 of each year.
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
Non- 90 Days Non- 90 Days
Accrual Past Due Accrual Past Due
-------- ----------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Real estate loans....................................... $ 1,027 $ 4,040 $ 1,742 $ 3,459
Commercial loans........................................ 7,665 1,962 4,569 2,239
Consumer loans.......................................... 446 1,036 118 503
Tax exempt loans........................................ -- -- -- --
Mortgage repurchase loans............................... 1,629 -- 4,700 --
--------- --------- --------- ---------
Total loans............................................. $ 10,767 $ 7,038 $ 11,129 $ 6,201
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, if nonaccrual loans
had been maintained current in accordance with their original terms, additional
interest income of $840,000, $1,100,000, and $449,000, respectively, would have
been realized.
54
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 LOANS (CONTINUED)
The recorded investment in impaired loans at December 31, 1997 and 1996
totaled $16.5 million and $13.3 million, respectively, for which a specific
allowance for loan losses of $2.9 million and $1.6 million, respectively, was
required as of and for the years then ended. As of December 31, 1997 and 1996,
the average recorded investment in impaired loans approximated $15.4 million and
$10.9 million, respectively. For the years ended December 31, 1997 and 1996,
interest income recorded on such loans totaled $1,031,000 and $688,000,
respectively, of which $547,000 and $475,000 respectively has been recorded on a
cash basis.
Certain officers, directors, and entities with which they are affiliated
have borrowed funds from the Company. These loans were made in the ordinary
course of business on substantially the same terms as loans to other persons
and, in the opinion of management, do not involve more than the normal risks of
collectibility or present other unfavorable features. Such loans at December 31,
1997 and 1996 aggregated approximately $19,413,000 and $14,903,000,
respectively. The net increase of $4,510,000 in such loans resulted from new
loans of $5,087,000 and collections on loans of $577,000.
55
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the activity in the allowance for loan losses for
the years ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year....................................................... $ 14,909 $ 13,853 $ 11,787
Adjustment due to change in fiscal year of pooled entity......................... 501 -- --
Provisions charged against income................................................ 13,320 2,681 1,422
Recoveries....................................................................... 515 735 335
Allowance of acquired financial institutions..................................... -- -- 1,855
--------- -------- ---------
29,245 17,269 15,399
Loans charged off................................................................ (8,717) (2,360) (1,546)
--------- -------- ---------
Balance, end of year............................................................. $ 20,528 $ 14,909 $ 13,853
--------- -------- ---------
--------- -------- ---------
</TABLE>
NOTE 8 PREMISES AND EQUIPMENT, NET
The following summarizes premises and equipment by classification at
December 31.
<TABLE>
<CAPTION>
1997 1996
--------- --------
(in thousands)
<S> <C> <C>
Land and land improvements.................................................................. $ 4,637 $ 4,766
Buildings...................................................................... .............. 26,704 25,746
Furniture, fixtures and equipment........................................................... 23,785 18,687
--------- --------
Subtotal....................................................................... .......... 55,126 49,199
Less accumulated depreciation............................................................... 25,827 23,117
--------- --------
Premises and equipment, net................................................................. $ 29,299 $ 26,082
--------- --------
--------- --------
Depreciation expense charged to operations was $3,114,000, $2,856,000, and $2,252,000 in
1997, 1996, and 1995, respectively.
</TABLE>
56
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 TIME DEPOSITS
The following summarizes time deposits and their remaining maturities,
included in interest-bearing deposits at December 31.
<TABLE>
<CAPTION>
1997
-----------
(in thousands)
<S> <C>
Due within one year.................................................... $ 535,391
From one to two years.................................................. 112,424
From two to three years................................................ 35,275
From three to four years............................................... 9,456
From four to five years................................................ 11,350
Over five years........................................................ 10,021
---------
Total.................................................................. $ 713,917
---------
---------
</TABLE>
NOTE 10 BORROWINGS
The following is a schedule of securities sold under repurchase agreements
and other borrowings at December 31 of each year.
<TABLE>
<CAPTION>
1997 1996
--------- --------
(in thousands)
<S> <C> <C>
Securities sold under repurchase agreements............. $ 69,511 $ 32,103
Federal funds purchased................................. -- 69,900
Federal Home Loan Bank advances......................... 414,365 369,238
Other borrowings........................................ -- 203
--------- ---------
Total................................................... $ 483,876 $ 471,444
--------- ---------
--------- ---------
</TABLE>
Securities sold under repurchase agreements represent an indebtedness of
the Company secured by certain securities. At December 31, 1997 and 1996, the
interest cost with regard to daily averages was 5.11% and 4.36%, respectively.
Securities with an amortized cost of $31.8 million and $29.9 million and an
estimated fair value of approximately $ 31.9 million and $29.8 million were
pledged as collateral for these agreements at December 31, 1997 and 1996,
respectively.
57
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal funds purchased, which mature daily, had an interest cost of
6.24% at December 31, 1996. There were no federal funds purchased at
December 31, 1997.
Federal Home Loan Bank advances represent borrowings from Federal Home
Loan Bank. Advances of $927.0 million, and $728.9 million, were drawn upon
during 1997, and 1996, respectively. At December 31, 1997, 1996, and 1995,
respectively, the interest cost with regard to daily averages was 5.67 %, 5.78%,
and 6.13%, with maturities of one to ninety-four months. These borrowings are
secured by Federal Home Loan Bank stock (carried at $30.9 million), by all
eligible first mortgage loans on one-to-four family dwellings held by the Bank
(approximately $553.0 million at December 31, 1997) and by specific securities
with a carrying value of approximately $269.9 million.
Other borrowings at December 31, 1996 consisted of the guaranteed ESOP
obligation. The ESOP entered into a loan agreement to borrow up to $1.2 million
with an unrelated financial institution to purchase shares of common stock in
the open market. The balance outstanding as of December 31, 1997 and 1996 was $0
and $203,000, respectively.
NOTE 11 INCOME TAXES
Income taxes (benefits) reported in the consolidated statements of income
for the years ended December 31, 1997, 1996, and 1995 include the following
components.
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
(in thousands)
<S> <C> <C> <C>
U.S. Federal
Current........................................................... $ 7,048 $ 7,304 $ 5,811
Deferred.......................................................... (2,596) (1,267) (593)
State
Current........................................................... 217 1,443 1,190
Deferred.......................................................... (110) (37) (55)
-------- -------- ---------
Total........................................................... $ 4,559 $ 7,443 $ 6,353
-------- -------- ---------
-------- -------- ---------
</TABLE>
58
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following federal income tax expense differs from the amounts computed
by applying the federal income tax rate of 35% to pretax income at December 31
of each year.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Computed "expected" tax............................................. $ 5,171 $ 8,199 $ 7,755
Tax exempt interest, net............................................ (695) (478) (430)
Low income housing credit........................................... (1,476) (1,299) (1,225)
Amortization of goodwill............................................ 389 327 42
Acquisition cost.................................................... 1,323 -- --
State income tax, net of federal benefit............................ 70 860 768
Other, net.......................................................... (223) (166) (557)
-------- -------- --------
Total........................................................... $ 4,559 $ 7,443 $ 6,353
--------- -------- --------
--------- -------- --------
</TABLE>
The following presents the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities at
December 31 of each year.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses................................................. 7,595 4,740
Deferred directors compensation........................................... 1,308 395
Capital loss and tax credit carryforward.................................. -- 887
Other..................................................................... 882 1,520
-------- --------
Total gross deferred tax assets......................................... 9,785 7,542
Less valuation allowance.................................................. -- (61)
-------- --------
Net deferred tax assets................................................. 9,785 7,481
-------- --------
-------- --------
Deferred Tax Liabilities:
Deposit base premium...................................................... (736) (1,007)
Deferred loan fees and costs.............................................. (1,647) (992)
Depreciation.............................................................. (390) (372)
Pension................................................................... (463) (271)
Purchase discount......................................................... (1,255) (1,369)
Unrealized gains on securities available-for-sale......................... (1,307) (16)
Other..................................................................... (321) (1,273)
-------- --------
Total gross deferred tax liabilities.................................... (6,119) (5,230)
-------- --------
Net deferred tax assets................................................. 3,666 2,251
-------- --------
-------- --------
</TABLE>
The valuation allowance for deferred tax assets of $61,000 as of December
31, 1996 was reduced to zero during 1997 due to the utilization of the capital
loss carry forward.
59
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 EMPLOYEE BENEFITS
The former Pinnacle, IFC and CB entities had various employee benefit
programs for which certain plans have remained in place upon consummation of the
merger transactions on August 1, 1997 and as of December 31, 1997. The details
of each plan are described herein.
401(K) PLAN
The Company sponsors a defined contribution 401(k) plan for the benefit of
former Pinnacle employees. The Company matches employee contributions at levels
dependent upon current operating results. In 1997, 1996, and 1995, the Company
contributions amounted to $128,000, $63,000, and $121,000, respectively.
Employee contributions to the plan are based upon optional percentages (ranging
from 2% to 10%) of before tax compensation.
PENSION PLANS
The Company sponsors a defined benefit pension plan which provides benefits
to substantially all full time employees of the former Pinnacle entity. Benefits
under the plan are based on the employees' years of service and compensation
during the five highest paid plan years of the last ten years preceding
retirement. The following presents the components of net pension income at
December 31 of each year.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
(in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the year..................... $ 536 $ 463 $ 333
Interest cost on projected benefit obligation..................... 379 401 268
Actual return on plan assets...................................... (735) (923) (1,093)
Net amortization and deferral..................................... (157) 144 535
------ ------ -----
Net pension expense (income).................................... 23 $ 85 $ 43
------ ------ ------
------ ------ ------
</TABLE>
60
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents the funded status of the former Pinnacle Bank's plan
and amounts recognized in the consolidated balance sheets at December 31 of each
year.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Actuarial present value of projected benefit obligation:
Accumulated benefit obligation:
Vested........................................................................ $ (3,754) $ (3,440) $ (2,837)
Nonvested..................................................................... (128) (118) (109)
Provision for future salary increases........................................... (1,976) (2,580) (1,969)
--------- --------- ---------
Projected benefit obligation.................................................... (5,858) (6,138) (4,915)
Plan assets at fair value......................................................... 8,625 8,048 7,253
--------- --------- ---------
Excess of plan assets over projected benefit obligation........................... 2,767 1,910 2,338
Unrecognized net transition asset................................................. (664) (731) (799)
Unrecognized net (gain)loss....................................................... (498) 16 (259)
Unrecognized prior service cost................................................... (468) (35) (36)
--------- --------- ---------
Prepaid pension cost, included in other assets.................................... 1,137 1,160 1,244
--------- --------- ---------
--------- --------- ---------
Major assumptions used:
Discount rate................................................................... 7.50% 7.50% 7.75%
Rate of increase in compensation levels......................................... 5.50% 5.50% 6.00%
Expected long-term rate on plan assets.......................................... 10.00% 10.00% 10.00%
</TABLE>
The plan assets are invested primarily in a collective investment trust at
December 31, 1997, 1996, and 1995.
The Company is also a part of a multi-employer defined benefit pension
plan covering substantially all former CB employees. The plan is administered
by the directors of the Financial Institutions Retirement Fund. There is no
separate actuarial valuation of plan benefits nor segregation of plan assets
specifically for the Company. As of June 30, 1997, the latest actuarial
valuation, the total plan assets exceeded the actuarially determined value of
total vested benefits. The plan was terminated and assets transferred to
participants in 1997. There was no pension plan expense or contribution for the
years ended December 31, 1997, 1996, and 1995. The administrative cost of the
plan is charged to expense and amounted to $1,600, 1,052, and $4,815 for the
years ended December 31, 1997, 1996, and 1995, respectively.
61
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has a Retiree Medical Plan which provides a portion of retiree
medical care premiums for certain former Pinnacle employees. The Company's level
of contribution is based on age and service formula which provides benefits to
substantially all retired participants until December 31, 1997 and will provide
benefits to active participants in a 100% co-pay basis until age 65. The
components of the 1997, 1996 and 1995 net periodic postretirement benefit cost
are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Service cost............................................................... $ -- $ -- $ --
Interest cost.............................................................. 13 19 21
Net amortization and deferral.............................................. 23 33 33
------ ------ ------
Net periodic postretirement benefit cost................................... 36 $ 52 $ 54
------ ------ ------
------ ------ ------
</TABLE>
The funded status of the plan and the amounts recognized in the consolidated
balance sheets are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Retired participants and beneficiaries................................ $ (160) $ (248) $ (281)
Active participants................................................... -- -- --
------- ------- -------
Accumulated postretirement benefit obligation....................... (160) (248) (281)
Plan assets at fair value............................................. -- -- --
Excess of accumulated postretirement benefit obligation over plan
assets.............................................................. (160) (248) (281)
Unrecognized transition obligation.................................... 160 193 226
Unrecognized loss(gain)............................................... (61) (6) 2
------- ------- -------
Accrued postretirement benefit obligation........................... $ (61) $ (61) $ (53)
------- ------- -------
------- ------- -------
</TABLE>
For measurement purposes, a 8.00%, 9.00%, and 10.00% annual rate of increase
in the per capita cost of covered benefits (health care cost trend rate) was
assumed for 1997, 1996, and 1995, respectively; the rate was further assumed to
decline to 4.00% after 7 years. The health care cost trend rate assumption has
an increasing effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation by $18,500 and
$25,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost by $1,000, $2,000 and $2,000 for years
ended December 31, 1997, 1996 and 1995, respectively. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.50% for December 31, 1997 and 1996, and 7.25% for December 31,
1995.
62
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL RETIREMENT PLANS
The Company maintains a supplemental retirement plan for executives of the
former CB entity. The plan requires acceleration of funding of benefits upon
change of control of the former CB entity into the secular trusts already
established. The cost of the plan charged to expense was $265,000 for the year
ended December 31, 1997 which included the payments to fund the remaining
liability under the plan as the merger transaction as described in Note 3 met
the change in control provisions per the agreement. The cost of the plan charged
to expense was $39,000 and $44,000 for the years ended December 31, 1996 and
1995, respectively. The Company has purchased corporate-owned life insurance to
partially fund its obligation under this plan. The accrued liability to the
company was $0 at December 31, 1997 and 1996.
The Company also maintains a supplemental retirement plan for certain senior
executives of the former IFC entity. The plan requires acceleration of funding
of benefits upon change of control of the former IFC entity for certain
executives. The cost of the plan charged to expense was $$1,157,000 for the year
ended December 31, 1997 which included the payments to fund the remaining
liability under the plan for certain executives as the merger transaction
described in Note 3 met the change in control provisions per the agreement as
well as the annual, actuarially determined amounts for the remaining IFC
executives. The cost of the plan charged to expense was $230,000 and $25,000 for
the years ended December 31, 1996 and 1995, respectively. The Company has
purchased corporate-owned life insurance to partially fund its obligation under
this plan. The accrued liability to the Company was $1,387,000 and $230,000 at
December 31, 1997 and 1996, respectively.
EMPLOYEE STOCK OWNERSHIP PLANS
The Company has established a leveraged Employee Stock Ownership Plan
("ESOP") in which all former IFC employees who attain minimum age and service
requirements are eligible to participate. The Company recorded compensation
expense related to the plan of $724,335 , $278,000, and $407,000 for the years
ended December 31, 1997, 1996, and 1995, respectively. The Company's 1997
contribution to the ESOP was $257,995 compared to $350,350 in 1996 and $382,628
in 1995. The ESOP plan was terminated in 1997 upon repayment of the ESOP loan
and allocation of all remaining shares to participants.
63
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 and 1996, the outstanding ESOP loan balance was
$0 and $203,096, respectively. The interest incurred on the ESOP loan amounted
to $7,507 in 1997, $18,950 in 1996, and $31,250 in 1995. Dividends paid on the
unallocated ESOP shares totaled $14,536 in 1997, $45,519 in 1996, and $50,023 in
1995. The table below summarizes shares of Company Stock
held by the ESOP.
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Shares allocated to participants.......................... 225,549 185,171
-------- --------
Unallocated shares:
Grandfathered under SOP 93-6............................ -- 10,672
Unearned ESOP shares.................................... -- 29,706
-------- --------
Total................................................. -- 225,549
-------- --------
</TABLE>
The Company also maintains an ESOP in which all former CB employees who
attain minimum age and service requirements are eligible to participate. The
Company recorded compensation expense of $192,634 for the year ended December
31, 1997 and $64,211 for each of the years ended December 31, 1996 and 1995. The
Company's contribution to the ESOP was $208,686, $82,993, and $88,772 for the
years ended December 31, 1997, 1996, and 1995, respectively. The ESOP
plan was terminated in 1997 upon repayment of the ESOP loan and the allocation
of all remaining shares to participants. At December 31, 1997 and 1996, the
outstanding ESOP loan balance was $0 and $176,852, respectively. The interest
incurred on the ESOP loan amounted to $16,052, $18,782, and $24,561 for the
years ended December 31, 1997, 1996, and 1995, respectively. The table below
summarizes shares of Company stock held by the ESOP.
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Shares allocated to participants........................... 108,729 62,260
Unallocated shares......................................... -- 46,469
-------- --------
.......................................................... -- 108,729
-------- --------
-------- --------
</TABLE>
64
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECOGNITION AND RETENTION PLANS
The Company has established the Recognition and Retention Plans (RRP) as a
method of providing directors, officers and other key employees of the former CB
entity with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Company. The terms of each RRP will be
identical, only the participants and the number of shares awarded to each
participant vary. Eligible directors, officers and other key employees of the
Company will earn (i.e., become invested in) shares of common stock covered by
the award at a rate of 20% per year. The Company contributed funds to the RRP to
enable the Plans to acquire in the aggregate 46,600 shares of common stock. An
expense of $7,705, $16,475, and $26,968 was recorded for these Plans for the
years-ended December 31, 1997, 1996, and 1995.
DIRECTORS COMPENSATION PLANS
The Company sponsors a stock-based deferred compensation plan for directors
of the former IFC entity, in which directors can defer fees and purchase phantom
units of the Company's common stock at $11.63. The amount charged to expense
related to this plan was $925,497, $156,839, and $162,199, in 1997, 1996, and
1995, respectively. At December 31, 1997, the directors had purchased 38,523
phantom units of which 6,629 were purchased in 1997.
The Company also sponsors a deferred compensation plan for its Board of
Directors of the former CB entity. Under the terms of the plan, directors may
elect to defer a portion of their fees which would be retained by the Company
with interest being credited to the participant's deferred balance. The plan was
terminated on August 1, 1997 and directors were paid their accumulated deferred
balance which approximated $267,000.
The former CB Board of Directors adopted the Outside Directors' Consultation
and Retirement Plan (the "Directors' Consultation Plan"). The purpose of the
Directors' Consultation Plan is to provide possible retirement benefits to
directors who are not officers or employees of the former CB entity to ensure
that the Company will have their continued service and assistance, if annually
contracted for by the Board of Directors in the conduct of the Company's
business in the future. Effective April 1, 1996, the Board of Directors of the
Company approved the Outside Director's Emeritus Plan (the "Directors' Emeritus
Plan) to replace the Outside Directors' Consultation and Retirement Plan. The
purpose of the Directors' Emeritus Plan is to ensure that the Company may, if
the Board so desires, have the continued service and assistance of directors who
are not officers or employees of the Company in the conduct of the Company's
business in the future.
65
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The resulting liability from the Directors' Emeritus Plan approximates the
liability accrued under the Directors' Consultation Plan. An expense of
approximately $18,000, 33,000 and $37,000 was recorded for these plans for the
years ended December 31, 1997, 1996 and 1995, respectively. The Directors'
Emeritus Plan was terminated in 1997 and final payment of $240,000 was made to
the directors. Therefore, the resulting liability to the Company
was approximately $0 and $244,000 at December 31, 1997 and 1996, respectively.
66
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 STOCK OPTION PLANS
At Pinnacle's 1993 Annual Stockholders Meeting, a non-qualified stock option
plan (the "Plan") was presented to and approved by the stockholders of the
Company. The Compensation Committee of the Board of Directors, none of whom is
eligible to participate in the Plan, awarded certain key employees options to
purchase shares of the Company's common stock at an exercise price which
approximates the fair market value at the date of grant. All stock options have
five year terms and vest and become fully exercisable after five years from date
of grant. The Board of Directors of the former CB entity has adopted the CB
Bancorp, Inc. 1992 Stock Option Plan for outside directors (the Directors'
Plan") of the former CB entity. Options for the purchase of shares of common
stock are authorized under the Directors' Plan. The option exercise price must
be at least 100% of the fair market value of the common stock on the date of the
grant, and the option term cannot exceed 10 years. Eligible directors may
exercise 100% of the options awarded to them.
The Company also awards incentive and non-qualified stock options to certain
former directors, officers and key employees. All options granted have 10 year
terms and vest and become fully exercisable over a 5 year period from the grant
date.
67
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock options activity and related information
for the year ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
Wtd. Avg. Wtd. Avg Wtd. Avg.
Exercise Exercise Exercise
--------------- --------------- ---------------
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year.................................. 537,499 14.14 499,921 11.54 491,327 8.78
Granted....................................................... 100,000 29.15 121,750 20.90 153,750 16.85
Exercised..................................................... 471,168 16.86 61,311 6.37 105,239 6.05
Forfeited or canceled......................................... 11,040 19.59 22,860 13.99 39,917 12.48
Outstanding--end of year...................................... 155,291 15.17 537,499 14.14 499,921 11.54
Exercisable--end of year...................................... 155,291 15.17 288,912 11.32 253,738 9.21
</TABLE>
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $4.62 to $21.16 and
6.0 years, respectively.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Proforma information regarding net income and net
income per share has been determined under a fair value method. The per share
weighted-average fair value of stock options granted during 1997, 1996 and 1995
was $6.63, $4.80, and $3.99, respectively. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk Free Interest rate 6.50% 6.50% 6.50%
Dividend yield 3.75% 3.75% 3.75%
Volatility .306% .341% .341%
Expected Option life 3.5 years 3.5 years 3.5 years
</TABLE>
For purposes of pro forma disclosures, if the estimated fair value of the
options is amortized to expense over the options' vesting period, the effect on
net income would be (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net income
As reported $10,216 $16,087 $16,221
Pro forma 9,539 15,699 15,853
Basic earnings per share
As reported $ .83 1.32 1.60
Pro Forma .78 1.30 1.55
Diluted earnings per share
As reported $ .83 1.32 1.58
Pro forma .78 1.29 1.55
</TABLE>
Pro forma net income and earnings per share reflect only options granted
since December 31, 1994. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in pro forma net
income and earnings per share presented above because compensation cost is
reflected over the options' vested period of generally five years and
compensation cost for options granted prior to January 1995 is not considered.
The following table reconciles the denominators for basic and diluted net
income per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Denominator
For basic net income
per share--average shares
outstanding 12,258,265 12,051,935 10,137,302
Effect of dilutive securities--
stock options 53,692 119,286 107,024
For diluted net income per
share--average shares
outstanding after assumed
conversions 12,311,957 12.171,221 10,244,326
</TABLE>
There were no dilutive securities for the years ended December 31, 1997,
1996, and 1995 in calculating the numerator for basic and diluted net income per
share.
68
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 SUPPLEMENTARY INCOME STATEMENT INFORMATION
Other than the items listed below, other noninterest income and other
noninterest expenses did not include any accounts that exceeded 1% of total
revenue, which is the sum of total interest income and total noninterest income.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Other noninterest income:
Service charges on deposit accounts................................................ $ 5,279 $ 4,341 $ 3,653
Trust fees......................................................................... 912 789 605
Recoveries on distressed assets.................................................... 479 250 296
Gain on sale of loans, net......................................................... 3,411 1,019 545
Merchant & loan servicing fees..................................................... 1,627 1,716 1,326
Fees related to mortgage loans purchased under agreements to resell................ 1,135 689 369
Brokerage fees..................................................................... 1,927 1,982 1,263
Other noninterest expense:
Salaries and benefits.............................................................. 23,858 21,690 17,599
Occupancy.......................................................................... 4,638 4,123 3,076
Equipment.......................................................................... 3,748 3,473 2,813
Professional and legal fees........................................................ 2,486 1,969 1,257
Amortization of intangibles........................................................ 2,021 2,037 1,269
FDIC Insurance..................................................................... 681 7,858 1,965
Supplies........................................................................... 1,573 1,434 973
Postage............................................................................ 1,378 1,202 900
Marketing and promotion............................................................ 1,982 2,244 1,469
Computer processing................................................................ 1,934 1,972 1,702
Restructuring charges.............................................................. 11,508 -- --
Director Fees...................................................................... 1,864 702 566
</TABLE>
NOTE 15 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments are loan commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amounts recognized in the consolidated balance
sheets. The contract amount of these instruments reflects the extent of
involvement the Company has in these financial instruments.
The following presents financial instruments with off-balance sheet risk at
December 31 of each year.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent potential credit risk
Commitments to extend credit........................................................... $ 131,609 $ 148,826
Letters of credit........................................................................ 24,477 5,660
Undisbursed construction loans in repurchase program..................................... 11,582 12,419
</TABLE>
69
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on management's
credit evaluation of the counter party. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
Letters of credit written are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. All letters of
credit are short-term guarantees of one year or less. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loans to customers. The Company has a secured interest in various
assets as collateral supporting those commitments for which collateral is deemed
necessary. The extent of collateral held on those commitments at December 31,
1997 and 1996 is in excess of the committed amount.
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION
CONDENSED PARENT COMPANY ONLY BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks................................................................. $ 9,901 $ 2,121
Interest-bearing deposits with financial institutions................................... -- 6,076
Securities available for sale........................................................... -- 217
Investment in subsidiaries.............................................................. 161,882 157,014
Note receivable......................................................................... -- 1,450
Other assets............................................................................ 13,471 5,433
---------- ----------
TOTAL ASSETS.......................................................................... $ 185,254 $ 172,311
---------- ----------
---------- ----------
LIABILITIES
Notes payable and other liabilities..................................................... $ 4,259 $ 2,052
STOCKHOLDERS' EQUITY
Common stock............................................................................ 19,110 19,110
Additional paid-in capital.............................................................. 78,094 78,192
Retained earnings....................................................................... 81,764 83,599
Treasury stock at cost.................................................................. -- (10,304)
Guaranteed ESOP obligation.............................................................. -- (379)
Recognition and retention plan obligation............................................... -- (4)
Net unrealized gain on securities available-for-sale.................................... 2,027 45
---------- ----------
Total stockholders' equity............................................................ 180,995 170,259
---------- ----------
Total liabilities and stockholders' equity............................................ $ 185,254 $ 172,311
---------- ----------
---------- ----------
</TABLE>
70
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED PARENT COMPANY ONLY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
--------- --------- --------
(in thousands)
<S> <C> <C> <C>
Income
Dividends from subsidiaries.................................................... $ 12,805 $ 14,445 $ 27,522
Interest and other income...................................................... 1,933 1,200 414
--------- --------- ---------
Total income................................................................. 14,738 15,645 27,936
--------- --------- ---------
Expenses
Salaries and benefits.......................................................... 907 290 222
Other operating expenses....................................................... 7,137 1,492 1,115
--------- --------- ---------
TOTAL EXPENSES............................................................... 8,044 1,782 1,337
--------- --------- ---------
Income before income tax benefit and undistributed earnings of subsidiaries...... 6,694 13,863 26,599
Income tax benefit............................................................... (947) (210) (342)
Equity in undistributed earnings of subsidiaries................................. 2,575 2,014 (10,720)
--------- --------- ---------
NET INCOME.................................................................... $ 10,216 $ 16,087 $ 16,221
--------- --------- ---------
</TABLE>
71
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION (CONTINUED) CONDENSED PARENT
COMPANY ONLY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 10,216 $ 16,087 $ 16,221
Equity in undistributed earning of subsidiaries................................ (2,575) (2,014) 10,720
Other, net..................................................................... (12,137) (1,188) (1,056)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... (4,496) 12,885 25,885
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits with financial
institutions................................................................. 6,076 18,108 (17,610)
Purchase acquisition, net of cash.............................................. -- -- (28,219)
Borrow funds to IndFed Mortgage Company........................................ -- -- (950)
Purchase preferred stock of Forrest Holdings, Inc.............................. -- (2,500) --
Purchase common stock of IFB Investment Services, Inc.......................... -- (100) (100)
Purchase common stock of IndFed Mortgage Company............................... -- -- (1,000)
Purchase of available-for-sale securities...................................... -- (507) (35)
Proceeds from paydowns of available-for-sale securities........................ -- 27 27
Proceeds from sales and maturities of available-for-sale securities........... 1,089 -- --
--------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............................. 7,165 15,028 (47,887)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of treasury stock....................................... $ 425 -- --
Proceeds from issuance of common stock......................................... 7,436 662 13,821
Purchase of treasury shares at cost............................................ -- (613) (957)
Contribution to fund ESOP...................................................... 379 211 125
(Repayments) Proceeds from short-term borrowings............................... 396 (18,000) 18,000
Dividends paid................................................................. (9,550) (8,590) (6,826)
Redemption of shareholders' rights plan........................................ (48) -- --
Cash paid for fractional shares................................................ (4) -- --
--------- --------- ---------
NET CASH USED (PROVIDED) BY FINANCING ACTIVITIES............................. (966) (26,330) 24,163
--------- --------- ---------
Net increase in cash and cash equivalents........................................ 1,703 1,583 2,161
Cash and cash equivalents at beginning of year................................... 8,198 6,615 4,454
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 9,901 $ 8,198 $ 6,615
</TABLE>
72
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 DIVIDENDS FROM HOLDING COMPANY
The Company is a legal entity separate and distinct from its subsidiaries.
Substantially all of the Company's revenues result from dividends paid to it by
its subsidiaries and from earnings on investments. There are statutory and
regulatory requirements applicable to the payment of dividends by Pinnacle Bank
as well as by the Company to its stockholders. Under the foregoing dividend
restrictions, Pinnacle Bank, without obtaining government approvals, could
declare aggregate dividends in 1997 of approximately $33.2 million.
NOTE 18 COMMITMENTS AND CONTINGENT LIABILITIES
There are various other matters of litigation pending against the Company
that have arisen during the normal course of business. Management is vigorously
defending themselves in all matters. Management believes that the impact to the
financial statements resulting from the ultimate resolution of these matters
will not be significant.
73
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 SUBSEQUENT EVENT- PENDING ACQUISITION
On October 14, 1997, the Company entered into a definitive agreement to
sell the Company to CNB Bancshares, Inc. (CNB) of Evansville, Indiana ($4.4
billion in total assets). The fixed exchange ratio is 1.0365 shares of CNB
Common Stock issued for each share issued and outstanding of Pinnacle Common
Stock, and it is anticipated to be accounted for using the pooling-of-interests
method of accounting. The sale is subject to shareholder approval and is
expected to close in the second quarter of 1998.
74
<PAGE>
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
(in thousands, except per share data stock prices)
1997
Interest income........................................... 40,071 41,590 42,671 42,740
Net interest income....................................... 18,130 18,475 18,953 20,028
Provision for loan losses................................. 805 865 10,850 800
Income before income tax expense.......................... 8,957 9,134 (10,172) 7,556
Net income................................................ 5,996 5,955 (7,081) 5,346
Net income per share...................................... $ 0.49 $ .49 ($0.58) $ 0.43
Stock price range......................................... $23.25-28.00 $25.13-29.00 $28.50-36.00 $35.00-49.38
1996
Interest income........................................... 34,646 35,649 37,452 40,156
Net interest income....................................... 16,118 16,651 17,383 18,152
Provision for loan losses................................. 241 520 810 1,110
Income before income tax expense.......................... 6,925 6,329 2,637 7,639
Net income................................................ 4,788 4,208 2,057 5,034
Net income per share...................................... $ 0.39 $ 0.35 $ 0.17 $ 0.41
Stock price range......................................... $17.75-20.50 $20.00-21.75 $19.50-24.75 $23.25-25.00
</TABLE>
75
EXHIBIT INDEX
-------------
Exhibit No. Description
- ---------- -----------
2(a) Agreement and Plan of Merger, dated as of
October 14, 1997, by and between CNB Bancshares, Inc., an
Indiana corporation, and Pinnacle Financial Services, Inc.,
a Michigan corporation, is incorporated herein by reference
from the Registration Statement on Form S-4 of CNB
Bancshares, Inc. (No. 333-46837).
2(b) Stock Option Agreement, dated as of
October 14, 1997, between CNB Bancshares, Inc., an Indiana
corporation, and Pinnacle Financial Services, Inc., a
Michigan corporation, is incorporated herein by reference
from the Registration Statement on Form S-4 of CNB
Bancshares, Inc. (No. 333-46837).
23(a) Consent of KPMG Peat Marwick LLP.
99(a) Press Release dated April 17, 1998.
[Letterhead of KPMG Peat Marwick LLP]
The Board of Directors
Pinnacle Financial Services, Inc.:
We consent to the inclusion of our report dated March 30, 1998, with respect to
the consolidated balance sheets of Pinnacle Financial Services, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for the each of
the years in the three-year period ended December 31, 1997, which report
appears in the Form 8-K of CNB Bancshares, Inc. dated May 1, 1998.
Our report dated March 30, 1998 contains a paragraph that states we previously
audited and reported on the consolidated balance sheet of Pinnacle Financial
Services, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended December 31, 1996, and 1995, prior to their
restatement for the 1997 pooling of interests. The contribution of Pinnacle
Financial Services, Inc. and subsidiaries to total assets and net income
represented 50% and 57% of the respective restated totals for the year ended
December 31, 1996 and the contribution of Pinnacle Financial Services, Inc. and
subsidiaries to total assets and net income represented 50% and 40% of the
respective restated totals for the year ended December 31, 1995. Separate
consolidated financial statements of the other companies included in the
December 31, 1996 restated consolidated balance sheet and consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years ended December 31, 1996 and 1995 were audited and reported on separately
by other auditors. We also audited the combination of the consolidated
balance sheet as of December 31, 1996 and consolidated statements of income,
changes in stockholders' equity, and cash flows for the years ended
December 31, 1996 and 1995, after restatement for the 1997 pooling of interest;
in our opinion, such consolidated statements have been properly combined on the
basis described in note 1 of the notes to the consolidated financial statements.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
May 1, 1998
[CNB logo] CNB Bancshares, Inc.
P.O. Box 778 Evansville, Indiana
47705-0778 Telephone: 812-456-3400
News Release
FOR FURTHER INFORMATION:
MEDIA
-----
Joan F. David
Corporate Relations
812-456-3564
[email protected]
ANALYSTS
--------
James J. Giancola John R. Spruill
Chief Executive Officer Chief Financial Officer
812-456-3265 812-456-3043
[email protected] [email protected]
For Immediate Release April 17, 1998
CNB BANCSHARES ANNOUNCES COMPLETION OF ITS ACQUISITION OF
PINNACLE FINANCIAL SERVICES
CNB Bancshares, Inc. (NYSE:BNK) of Evansville, Indiana, announced today the
completion of its acquisition of Pinnacle Financial Services, Inc., creating the
largest Indiana-based bank holding company with banking operations in four
states and assets exceeding $6.6 billion. As previously announced, Pinnacle
shareholders will receive 1.0365 shares of CNB common stock for each share of
Pinnacle stock owned in a tax free exchange.
Pinnacle's major markets include St. Joseph, Michigan and Valparaiso, Michigan
City and Merrillville, Indiana. All of Pinnacle's offices will remain open and
will continue to do business as Pinnacle Bank.
Jim Giancola, President and Chief Executive Officer of CNB, said, "We look
forward to working with Pinnacle's associates and customers. The completion of
this acquisition places CNB in the dynamic, growing markets of northern Indiana
and southwestern Michigan allowing customers to transact their banking business
at all of our 140 banking offices and 183 ATMs in four states."
Dick Schanze, Chairman of Pinnacle, stated, "We are pleased to become part of
the CNB family. With the added strength of CNB, we will continue to provide a
high level of personalized customer service through our existing staff while
offering an expanded product line. Furthermore, our shareholders have been
richly rewarded for their investment in Pinnacle. CNB shareholders have enjoyed
tremendous growth in their stock with compound annual returns of 38% over the
past year and 21% over the past five years."
Donald E. Radde, former Executive Vice President of Pinnacle, is President of
the Greater Michiana Region of Pinnacle Bank, while Thomas A. Galovic, III is
President of the Greater Lake and Porter Counties Region of Pinnacle Bank. Tom
joined Pinnacle Bank in January and was formerly First Vice President at First
Chicago NBD in Merrillville, Indiana. Jim Giancola will assume the role of
Chief Executive Officer of Pinnacle Bank in addition to his current role of
President and Chief Executive Officer of CNB. Richard L. Schanze, former
Chairman and Chief Executive Officer of Pinnacle; Arnold L. Weaver, former Vice
Chairman of Pinnacle; and Donald A. Lesch, former Vice Chairman of Pinnacle,
will retire upon completion of the acquisition. Arnie Weaver will continue to
provide consulting services to Pinnacle Bank to assist during the transition
period. David W. Kolhagen, Senior Vice President and Treasurer, and John A.
Newcomer, Vice President and Corporate Affairs Officer, will continue to serve
Pinnacle Bank through July of this year.
The following three former board members of Pinnacle are expected to be elected
to CNB's Board of Directors later this month: Terrence A. Friedman, James E.
Hutton, and Alton C. Wendzel. Mr. Friedman is Chairman of the Board of
Trelleborg, a manufacturer of rubber components primarily for the auto industry.
Mr. Hutton is Vice President in charge of operations for Burrell Professional
Labs, a professional photo processing company with operations throughout the
United States. Mr. Wendzel is President of Greg Orchards and Produce and
Coloma Frozen Foods, growers and processors of fresh and frozen produce.
CNB recently announced record earnings for the first quarter of 1998. Earnings
increased 22% over the first quarter results of 1997. Solid improvement was
also reported in the key profitability ratios of ROA, ROE and efficiency as well
as maintaining asset quality ratios. CNB has a merger pending with National
Bancorp, which has almost $200 million in assets and operates five offices in
Perry and Spencer counties in Indiana. Additional information on CNB is
available at www.citizensonline.com.
# # #
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