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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
- --------------------------------------------------------------------------------
June 2, 1998
Date of Report (Date of earliest event reported): (April 17, 1998)
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CNB BANCSHARES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Indiana
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(State or Other Jurisdiction of Incorporation)
0-11510 35-1568731
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(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 5. OTHER EVENTS.
- ---- -- ------------
As previously reported by CNB Bancshares, Inc., an Indiana corporation
(the "Registrant" or "CNB") on its Current Report on Form 8-K dated May 1,
1998 and filed with the Securities and Exchange Commission on May 1, 1998,
(the "Original 8-K"), the Registrant completed its merger with Pinnacle
Financial Services, Inc., a Michigan corporation ("Pinnacle") on April 17,
1998. The press release announcing the closing of the merger was filed as
Exhibit 99(a) to the Original 8-K. In connection with the merger, the
Registrant will record charges of $30 million, net of taxes, or $.89 per
share. The press release announcing the charges is filed herewith as Exhibit
99(b). The pro forma effects of the charges are reflected in the pro forma
balance sheet as of March 31, 1998, included herewith and a summary of the
combined financial results for the Registrant and Pinnacle for 1997 and the
first quarter of 1998 is filed herewith as Exhibit 99(c).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
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(a) Financial Statements of Business Acquired:
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Audited financial statements of Pinnacle required by this item were previously
filed by the Registrant with the Original 8-K and are incorporated herein by
reference.
(b) Pro Forma Financial Information:
-------------------------------
As previously undertaken by the Registrant in the Original 8-K, the following
pro forma financial information giving effect to the acquisition of Pinnacle is
submitted herewith:
(1) Pro Forma Summary Consolidated Balance Sheet as of March 31,
1998.
(2) Pro Forma Summary Consolidated Balance Sheet as of December 31,
1997.
(3) Pro Forma Summary Statement of Income for the Three Months Ended
March 31, 1998.
(4) Pro Forma Summary Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995.
(5) Notes to Pro Forma Financial Statements.
(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).
<PAGE>
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).
Exhibit 99(a) Press Release dated April 17, 1998 is incorporated herein by
reference from the Original 8-K.
The following exhibits are included with this Report:
Exhibit 23(a) Consent of KPMG Peat Marwick LLP.
Exhibit 99(b) Press Release dated June 2, 1998.
Exhibit 99(c) Financial overview.
<PAGE>
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: June 2, 1998
CNB BANCSHARES, INC.
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(Registrant)
By: /s/ John R. Spruill
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John R. Spruill
Executive Vice President
<PAGE>
PRO FORMA FINANCIAL DATA
The unaudited pro forma combined condensed balance sheets as of March 31,
1998, and December 31, 1997, and the pro forma combined condensed statements of
income for the three months ended March 31, 1998, and for each of the years in
the three-year period ended December 31, 1997, give effect to the Merger based
on the historical consolidated financial statements of CNB and its subsidiaries
and the historical financial statements of Pinnacle and its subsidiaries, under
the assumptions and adjustments set forth below.
The pro forma financial statements have been prepared based upon the
respective company's financial statements. These pro forma statements, which
include results of operations as if the Merger had been effected on the first
day of the periods presented and had been accounted for under the pooling of
interests method of accounting, may not be indicative of the results that
actually would have occurred if the Merger had been in effect on the dates
indicated or which may be obtained in the future including the year ending
December 31, 1998. The pro forma financial statements should be read in
conjunction with the historical consolidated financial statements and notes
thereto of CNB and Pinnacle.
<PAGE>
CNB BANCSHARES, INC./PINNACLE FINANCIAL SERVICES, INC.
Unaudited Pro Forma Combined Condensed Balance Sheet
March 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma CNB/Pinnacle
CNB Pinnacle Adjustments Pro Forma
---------- ---------- ---------- -----------
Increase
(Decrease)
ASSETS:
<S> <C> <C> <C> <C>
Cash and due from banks $110,814 $57,178 $167,992
Short-term money market investments 13,109 7,663 20,772
Loans held for sale 35,105 16,854 51,959
Investment securities available for sale 1,480,971 385,560 1,866,531
Investment securities 220,967 220,967
Loans, net of unearned income 2,445,940 1,495,776 3,941,716
Less: Allowance for loan losses 34,694 20,514 55,208
---------- ---------- ----------
Net loans 2,411,246 1,475,262 3,886,508
Premises and equipment 76,437 28,585 (6,000) (2) 99,022
Intangible assets 33,923 16,740 50,663
Interest receivable 30,014 15,035 45,049
Other assets 76,252 76,570 (11,700) (2) 141,122
---------- ---------- --------- ----------
Total assets $4,488,838 $2,079,447 ($17,700) $6,550,585
========== ========== ========= ==========
LIABILITIES:
Deposits $3,241,140 $1,419,757 $4,660,897
Repurchase agreements 476,985 60,562 537,547
Federal funds purchased and other short-term
borrowings 95,959 32,637 128,596
FHLB advances and other long-term debt 287,663 366,337 654,000
Other liabilities 46,660 15,950 12,300 (2) 74,910
---------- ---------- --------- ----------
Total liabilities 4,148,407 1,895,243 12,300 6,055,950
SHAREHOLDERS' EQUITY:
Common stock 20,432 19,110 (6,002) (1) 33,540
Capital surplus 278,652 78,550 6,002 (1) 363,204
Retained earnings 37,489 84,755 (30,000) (2) 92,244
Accumulated other comprehensive income 3,858 1,789 5,647
---------- ---------- --------- ----------
Total shareholders' equity 340,431 184,204 (30,000) 494,635
---------- ---------- --------- ----------
Total liabilities and shareholders' equity $4,488,838 $2,079,447 ($17,700) $6,550,585
========== ========== ========= ==========
</TABLE>
See Notes to Pro Forma Financial Data
<PAGE>
CNB BANCSHARES, INC./PINNACLE FINANCIAL SERVICES, INC.
Unaudited Pro Forma Combined Condensed Balance Sheet
December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Pro Forma CNB/Pinnacle
CNB Pinnacle Adjustments Pro Forma
--------- -------- ----------- ---------
Increase
(Decrease)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $106,949 $49,209 $156,158
Short-term money market investments 13,254 7,948 21,202
Loans held for sale 38,073 12,750 50,823
Investment securities available for sale 1,434,763 419,284 1,854,047
Investment securities 230,903 230,903
Loans, net of unearned income 2,479,651 1,508,365 3,988,016
Less: Allowance for loan losses 34,694 20,528 55,222
---------- ---------- ----------
Net loans 2,444,957 1,487,837 3,932,794
Premises and equipment 75,003 29,299 104,302
Intangible assets 31,216 17,109 48,325
Interest receivable 29,620 17,282 46,902
Other assets 75,485 74,777 150,262
---------- ---------- --------- ----------
Total assets $4,480,223 $2,115,495 $6,595,718
========== ========== ========= ==========
Liabilities:
Deposits $3,181,447 $1,433,108 $4,614,555
Repurchase agreements 517,344 69,511 586,855
Federal funds purchased and other short-term
Borrowings 94,220 94,220
FHLB advances and other long-term debt 308,028 414,365 722,393
Other liabilities 44,716 17,516 62,232
Total liabilities 4,145,755 1,934,500 6,080,255
Shareholders' equity:
Common stock 20,404 19,110 (6,030) (1) 33,484
Capital surplus 280,873 78,094 6,030 (1) 364,997
Retained earnings 28,569 81,764 110,333
Accumulated other comprehensive income 4,622 2,027 6,649
---------- ---------- --------- ----------
Total shareholders' equity 334,468 180,995 515,463
---------- ---------- --------- ----------
Total liabilities and shareholders' equity $4,480,223 $2,115,495 $6,595,718
========== ========== ========= ==========
</TABLE>
See Notes to Pro Forma Financial Data
<PAGE>
CNB BANCSHARES, INC./PINNACLE FINANCIAL SERVICES, INC.
Unaudited Pro Forma Combined Condensed Statement of Income
Three Months Ended March 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma CNB/Pinnacle
CNB Pinnacle Adjustments Pro Forma
-------- -------- ----------- ----------
Increase
(Decrease)
<S> <C> <C> <C> <C>
Interest income $84,366 $38,791 $ $123,157
Interest expense 44,821 20,971 65,792
------- ------- ------- --------
Net interest income 39,545 17,820 57,365
Provision for loan loss 2,416 900 3,316
Net interest income after provision for losses 37,129 16,920 54,049
Non-interest income 17,913 4,242 22,155
Non-interest expense 34,616 13,003 47,619
------- ------- ------- --------
Income before income taxes 20,426 8,159 28,585
Income taxes 6,800 2,203 9,003
------- ------- ------- --------
Net income $13,626 $5,956 $ $19,582
======= ======= ======= ========
Net income per share:
Basic $.67 $.58
Diluted .66 .58
Average shares outstanding:
Basic 20,453 33,553
Diluted 20,740 33,937
</TABLE>
See Notes to Pro Forma Financial Data
<PAGE>
CNB BANCSHARES, INC./PINNACLE FINANCIAL SERVICES, INC.
Unaudited Pro Forma Combined Condensed Statement of Income
Year ended December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma CNB/Pinnacle
CNB Pinnacle Adjustments Pro Forma
-------- -------- ----------- ---------
Increase
(Decrease)
<S> <C> <C> <C> <C>
Interest income $333,622 $167,072 $ $500,694
Interest expense 175,626 91,486 267,112
-------- -------- -------- --------
Net interest income 157,996 75,586 233,582
Provision for loan loss 11,566 13,320 24,886
-------- -------- -------- --------
Net interest income after provision for losses 146,430 62,266 208,696
Non-interest income 60,571 18,520 79,091
Non-interest expense 132,213 66,011 198,224
-------- -------- -------- --------
Income before income taxes 74,788 14,755 89,563
Income taxes 25,130 4,559 29,689
-------- -------- -------- --------
Net income $49,658 $10,216 $ $59,874
======= ======= ======== ========
Net income per share:
Basic $2.42 $1.80
Diluted 2.37 1.78
Average shares outstanding:
Basic 20,553 33,258
Diluted 21,040 33,801
</TABLE>
See Notes to Pro Forma Financial Data
<PAGE>
CNB BANCSHARES, INC./PINNACLE FINANCIAL SERVICES, INC.
Unaudited Pro Forma Combined Condensed Statement of Income
Year Ended December 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma CNB/Pinnacle
CNB Pinnacle Adjustments Pro Forma
-------- -------- ----------- ---------
Increase
(Decrease)
<S> <C> <C> <C> <C>
Interest income $303,825 $147,903 $ $451,728
Interest expense 154,897 79,599 234,496
-------- -------- -------- --------
Net interest income 148,928 68,304 217,232
Provision for loan loss 10,602 2,681 13,283
-------- -------- -------- --------
Net interest income after provision for losses 138,326 65,623 203,949
Non-interest income 55,833 12,853 68,686
Non-interest expense 136,994 54,946 191,940
-------- -------- -------- --------
Income before income taxes 57,165 23,530 80,695
Income taxes 19,570 7,443 27,013
-------- -------- -------- --------
Net income $37,595 $16,087 $ $53,682
======== ======== ======== ========
Net income per share:
Basic $1.81 $1.61
Diluted 1.78 1.59
Average shares outstanding:
Basic 20,788 33,280
Diluted 21,309 33,925
</TABLE>
See Notes to Pro Forma Financial Data
<PAGE>
CNB BANCSHARES, INC./PINNACLE FINANCIAL SERVICES, INC.
Unaudited Pro Forma Combined Condensed Statement of Income
Year Ended December 31, 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma CNB/Pinnacle
CNB Pinnacle Adjustments Pro Forma
-------- -------- ----------- ---------
Increase
(Decrease)
<S> <C> <C> <C> <C>
Interest income $279,964 $107,916 $ $387,880
Interest expense 143,379 55,069 198,448
-------- -------- -------- --------
Net interest income 136,585 52,847 189,432
Provision for loan loss 6,927 1,422 8,349
-------- -------- -------- --------
Net interest income after provision for losses 129,658 51,425 181,083
Non-interest income 46,628 9,809 56,437
Non-interest expense 118,448 38,660 157,108
-------- -------- -------- --------
Income before income taxes 57,838 22,574 80,412
Income taxes 21,212 6,353 27,565
-------- -------- -------- --------
Net income $36,626 $16,221 $ $52,847
======== ======== ======== ========
Net income per share:
Basic $1.78 $1.70
Diluted 1.74 1.67
Average shares outstanding:
Basic 20,527 31,034
Diluted 21,222 31,841
</TABLE>
See Notes to Pro Forma Financial Data
<PAGE>
NOTES TO PRO FORMA FINANCIAL DATA
(1) The Merger was accounted for under the pooling of interests method of
accounting whereby the historical basis of the assets and liabilities
of both CNB and Pinnacle were retained. In connection with the Merger,
CNB exchanged 1.0365 shares of CNB Common for each share of Pinnacle
Common. A total of 13,116,165 shares of CNB Common were issued,
resulting in a transfer from common stock to capital surplus to reflect
the decrease in aggregate par value of the currently outstanding
Pinnacle Common over the stated value of the issued and outstanding
shares of CNB Common.
On August 1, 1997, Pinnacle completed mergers with Indiana Federal
Corporation ("IFC") and CB Bancorp, Inc. ("CB"), each of which was
accounted for under the pooling of interests method of accounting. In
connection with the IFC and CB mergers, Pinnacle recorded $11.5 million
of pre-tax restructuring charges and increased its provision for loan
losses by $10.0 million pre-tax, which are included in the Pro Forma
income statement for the year ended December 31, 1997. The restructuring
charges included legal and accounting expenses, compensation and
employee contracts, write-off of computer contracts, investment advisor
fees and other charges. The increased provision for loan losses was
primarily attributable to the conformity of loan loss reserve
methodologies of IFC and CB to that of Pinnacle.
(2) In connection with the Merger, CNB will record one-time merger related
charges of $41.3 million ($30.0 million after tax) during the second
quarter, which will include $8.3 million in technology-related costs
(including contract terminations and software and equipment write-offs),
$9.7 million in severance pay and other personnel related expenses,
$6.7 million in professional fees, $11.2 million in conforming
accounting policies of Pinnacle to those of CNB, and $5.4 million in
other costs. These amounts, including the related tax effect, have been
reflected in the Unaudited Pro Forma Combined Condensed Balance Sheet as
of March 31, 1998, but are not reflected in the Unaudited Pro Forma
Combined Condensed Statements of Income because they are not expected to
have a continuing impact on the combined organization.
<PAGE>
EXHIBIT INDEX
--------------
Exhibit No. Description
- ------------ -----------
23(a) Consent of KPMG Peat Marwick LLP.
99(b) Press Release dated June 2, 1998.
99(c) Financial overview.
Independent Auditors' Consent
The Board of Directors
CNB Bancshares, Inc.:
We consent to the incorporation by reference in this Form 8-
K/A of CNB Bancshares, Inc. of our report dated March 30,
1998, relating to the consolidated balance sheets of
Pinnacle Financial Services, Inc. and subsidiaries
(Pinnacle) as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders'
equity, and cash flows for 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 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 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 to net income represented 40% of the respective
restated total 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 audited the
combination of the Pinnacle 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
June 2, 1998
[LOGO] CNB Bancshares, Inc.
P.O. Box 778 Evansville, Indiana 47705-0778
Telephone: 812-456-3400 News Release
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FOR FURTHER INFORMATION:
MEDIA
-----
Joan F. David
Corporate Relations
812-456-3564
[email protected]
ANALYSTS
--------
John R. Spruill Ralph L. Alley
Chief Financial Officer Controller
812-456-3043 812-456-3583
[email protected] [email protected]
FOR IMMEDIATE RELEASE JUNE 2, 1998
CNB ANNOUNCES THE CONVERSION OF PINNACLE BANK'S DATA PROCESSING
SYSTEMS AND MERGER RELATED CHARGES TO BE RECORDED IN THE 2ND QUARTER
CNB Bancshares, Inc. (NYSE:BNK) of Evansville, Indiana, announced
that Pinnacle Bank's data processing systems have now been converted
to CNB's. Pinnacle Bank, a $2.1 billion bank in southwest Michigan
and northwest Indiana, was acquired by CNB on April 17.
Over the Memorial Day weekend, CNB replaced the teller and platform
equipment in all 44 Pinnacle Bank locations and converted all loan,
deposit and ATM processing to CNB's common platform. To provide for
a smooth transition, over 100 associates from CNB will work side-by-
side with Pinnacle associates at each Pinnacle Bank location for
about two weeks. Jim Giancola, President and CEO of CNB, commented,
"We convert all of our merger partners to our common data processing
platform so that our customers can bank at any of our now 139
locations. This common platform allows for a greater offering of
products, more customer convenience and greater sales opportunities.
Finally, the common platform provides CNB with greater information to
manage its business as well as reduce overall costs. We are very
appreciative of the hundreds of associates at CNB and Pinnacle who
have worked long hours over several months to complete the
conversion."
In connection with the merger with Pinnacle, CNB will record one-time
merger related charges of $41.3 million. The charges include $8.3
million in technology-related costs (including contract terminations
and software and equipment write-offs), $9.7 million in severance pay
and other personnel related expenses, $6.7 million for professional
fees, $11.2 million in conforming accounting policies of Pinnacle to
those of CNB, and $5.4 million in other costs. The after-tax effect
of these charges is $30.0 million or $.89 per share.
CNB will file a Current Report on Form 8-K later today with the SEC
that includes pro forma combined financial statements of CNB and
Pinnacle as well as a narrative on the combined financial results
for 1997 and first quarter 1998. This report will be available
within twenty-four hours of filing on the EDGAR database at
www.sec.gov.
CNB is the largest bank holding company based in Indiana. With 139
banking offices and 190 ATM's, CNB offers a complete line of
financial products and services including brokerage, asset
management, insurance, cash management, and employee benefit plans in
addition to the traditional banking products. Customers may also
bank with Citizens Bank and Pinnacle Bank on the Internet at
www.citizensonline.com.
# # #
[BNK
Listed
NYSE]
The following is an overview of the results of operations
for the first quarter of 1998 and the year ended December
31, 1997 of CNB Bancshares, Inc. ("Company") on a pro forma
basis after giving effect to the merger with Pinnacle
Financial Services, Inc. ("Pinnacle") which was consummated
on April 17, 1998, and accounted for as a pooling of
interests (the "Pinnacle Acquisition").
Overview
First quarter 1998 diluted net income per share of $.58 was
12% higher than the first quarter of 1997. Net income for
the quarter was $19.6 million compared to $18.6 million and
$17.5 million for the fourth and first quarters of 1997,
respectively. Annualized returns on average assets and
average shareholders' equity for the quarter ended March 31,
1998, were 1.20% and 15.32%, respectively, compared with
1.13% and 14.41% for the same period of 1997.
Diluted net income per share for the year ended December 31,
1997, was $1.78, an increase of 12% over the $1.59 earned in
1996. Net income for 1997 was negatively impacted by
restructuring charges and conforming loan loss methodologies
from Pinnacle's August 1997 acquisitions of Indiana Federal
Corporation ("IFC") and CB Bancorp, Inc. ("CB"). The
restructuring charges and conforming loan loss methodologies
reduced net income by $8.4 million and $6.0 million,
respectively, and diluted income per share by $.25 and $.18,
respectively. Net income for 1996 included a one-time
assessment, required of all financial institutions with
deposits insured by the Savings Association Insurance Fund
(SAIF), which reduced net income and diluted income per
share by $6.6 million and $.20, respectively. Excluding
these nonrecurring items, diluted net income per share for
1997 of $2.21 increased 23% from $1.79 in 1996.
The Company's earnings in 1997 resulted in returns on
average assets and shareholders' equity of .93% and 12.02%,
respectively, compared with a return on average assets of
.91% and return on average shareholders' equity of 11.16% in
1996. Exclusive of the restructuring charges, conforming
adjustment, and SAIF assessment, returns on average assets
and shareholders' equity were 1.15% and 14.94%,
respectively, in 1997 compared to 1.03% and 12.55% in 1996,
respectively.
Loans and Net Interest Income
Average loans, excluding residential mortgages, of $2.7
billion grew 13.2% in the first quarter of 1998 from the
same period in 1997. Including residential mortgages,
average loans increased 5.2% from the first quarter of 1997
and declined slightly from the fourth quarter of 1997. The
Company intends to continue growing the commercial and consumer
loan sectors of its loan portfolio while selling its residential
mortgage production. This strategy, combined with normal
prepayments, resulted in residential mortgages declining
$87.3 million between December 31, 1997, and March 31, 1998.
<PAGE>
Net interest income for the first quarter of 1998 was $780
thousand greater than the first quarter of 1997 due to
increased earning assets offset by a lower net interest
margin. The margin was 3.89% for the first quarter of 1998
compared to 3.95% for the first quarter of 1997. The flat
yield curve, combined with increased competition and pre-
payments, resulted in yields on loans and securities falling
and reducing the yield on interest earning assets and the
net interest margin.
Average loans for 1997 grew $406 million from 1996,
principally from increased commercial and commercial real
estate lending and mortgage loans purchased under agreements
to resell. The net interest margin was 3.94% for 1997
versus 4.03% for the previous year. The strong loan growth
came at marginally lower rates causing average loan yields
to fall. The net interest margin also declined in 1997 due
to the sale of the Company's credit card portfolio and
additional investment in corporate-owned life insurance,
the income on which is recorded as non-interest income.
Asset Quality and Provision for Loan Losses
The allowance for loan losses at March 31, 1998, was $55.2
million, or 1.40% of loans, compared to $55.2 million and
1.38% at year-end 1997. Non-performing loans consist of
loans classified as troubled debt restructurings and loans
on non-accrual status. The Company's non-performing loans
as of March 31, 1998, totaled $29.9 million, an increase of
$1.9 million from December 31, 1997. The allowance for loan
losses represented 1.84 times non-performing loans on March
31, 1998. Risk assets, which include non-performing loans,
foreclosed properties and loans past due 90 days or more and
accruing, were $44.3 million at March 31, 1998, or 1.12% of
loan-related assets. The provision for loan losses was
$3.3 million for the first quarter of 1998 representing .34%
of average loans on an annualized basis. Net charge-offs were
.34% of average loans for the quarter, slightly better than the
.37% for the first quarter of 1997.
The allowance for loan losses at December 31, 1997, was
$55.2 million or 1.38% of loans compared to $46.2 million
and 1.25% the prior year-end. Non-performing loans at
December 31, 1997, totaled $28.0 million, a decrease of $5.6
million from December 31, 1996. The allowance for loan
losses was 1.97 times non-performing loans at December 31,
1997, compared to 1.37 times at year-end 1996. Risk assets
declined $6.3 million to $44.1 million at year-end. The
provision for loan losses totaled $24.9 million in 1997, an
increase of $11.6 million over the prior year, principally as
a result of additional provisions to conform the loan loss
methodologies of IFC and CB to that of Pinnacle. Net charge-
offs for 1997 increased to .42% of average loans from .36%
in 1996, also as a result of conforming loan loss
methodologies.
Non-Interest Income
Non-interest income in the first quarter of 1998 was $22.2
million, increasing $5.0 million or 29% from the same period
in 1997, of which $459 thousand related to the January 1,
1998, acquisition of Wedgewood Partners, Inc. ("Wedgewood"),
a full service
<PAGE>
broker/dealer and asset manager. Service
charges on deposits increased 22% compared to the first
quarter of 1997 as a result of an increased number of
deposit accounts and chargeable services, higher activity
fees and new fee sources, combined with improved efforts to
collect a greater percentage of assessable fees. Mortgage
banking revenue increased due to strong demand for new and
refinanced residential mortgages and increased loan sales.
Other income increased $1.1 million as compared to the first
quarter of 1997, principally due to the Company's increased
investment in a corporate-owned life insurance program.
Non-interest income represented 24.8% of net fully tax
equivalent revenues in 1997 as compared to 23.6% in 1996.
Service charges on deposit accounts increased 16% in 1997
compared to 1996 as a result of an increased number of
deposit accounts and chargeable services, higher activity
fees and new fee sources combined with improved efforts to
collect a greater percentage of assessable fees.
Trust and plan administration fees increased $2.1 million to
$9.8 million in 1997. The May 31, 1996, acquisition of
Small Parker & Blossom, a third party administrator of
employee benefit plans, accounted for $1.3 million of this
increase. Trust fee income, which is based primarily on the
market value of assets under management or custody, also
increased over 1996.
Mortgage banking revenue decreased $1.3 million in 1997 due
primarily to gains recorded in 1996 from the securitization
of large pools of residential mortgage loans offset by
increased mortgage origination activities. Other income
increased $6.5 million in 1997 compared to 1996. The
Company recorded a gain of $646 thousand from the sale of
its credit card portfolio. The remaining increase was
principally due to increased revenues of $1.8 million from a
corporate-owned life insurance program, $481 thousand from
the expiration of interest rate option contracts, $412
thousand from net securities trading account gains and $472
thousand from non-customer ATM access fees.
Non-Interest Expense
Non-interest expense increased 9%, or $3.9 million, in the
first quarter of 1998 compared to the first quarter
of 1997, generally due to increased business activity and
the Wedgewood acquisition. The Wedgewood acquisition
accounted for $545 thousand of the expense increase.
Salaries and employee benefits increased $1.1 million to
$24.1 million in the first quarter from the same period in
1997.
Non-interest expense increased $6.3 million, or 3.3%,
in 1997 compared with 1996. This increase was principally
due to increased compensation of $10.2 million, data
processing of $2.1 million, professional fees of $2.8
million, and other expenses of $3.0 million, which were offset
by a reduction in the FDIC premiums of $2.4 million and the one-
time SAIF assessment in 1996 of $11.0 million. Included with the
1997 expenses were $11.5 million of restructuring charges recorded
by Pinnacle in connection with its mergers with IFC and CB, which
increased compensation by $4.6 million, data processing by $2.2
<PAGE>
million, professional fees by $2.0 million and other expenses by $2.7
million. Exclusive of the restructuring charges in 1997 and the SAIF
assessment in 1996, non-interest expense increased 3.2% in 1997
compared with 1996. Incentive compensation accounted for a
significant portion of the remaining increase in compensation
expense as the Company continues to emphasize performance-based
awards tied to net income per share and product sales. Occupancy
expense and equipment related expenses increased $1.6 million due
to expanded business activities and equipment upgrades required to
facilitate the growth from acquisitions.
Merger Related Charges
In connection with the Pinnacle Acquisition, the
Company will record during the second quarter of 1998, one-
time merger related charges of $41.3 million. The charges
include $8.3 million in technology-related costs (including
contract terminations and software and equipment write-offs),
$9.7 million in severance pay and other personnel related
expenses, $6.7 million for professional fees, $11.2 million
in conforming accounting policies of Pinnacle to those of
the Company, and $5.4 million in other costs. The after-tax
effect of these charges is $30.0 million or $.89 per share.
These charges are greater than the Company originally
anticipated principally due to conforming Pinnacle's
accounting policies to the Company's more conservative
policies for revenue and expense recognition under
generally accepted accounting principles, greater severance
pay under employment contracts and a higher level of
attrition, and other costs including write-downs of equity
investments.
