<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended June 30, 1996 Commission file number #0-17937
PINNACLE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2671129
(State of Incorporation) (I.R.S. Employer Identification No.)
830 Pleasant Street, St. Joseph, Michigan 49085
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 983-6311
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE, 15,000,000 SHARES AUTHORIZED
Indicate by check mark whether the registrant (1) has filed all reports
required to be by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period than registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of common shares, no par value, outstanding as of June 30, 1996
was 5,873,558.
Page 1 of 18
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
FORM 10-Q
June 30, 1996
TABLE OF CONTENTS PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Six Months Ended June 30, 1996 and 1995 3
Consolidated Balance Sheets
June 30, 1996; June 30, 1995; December 31, 1995 4
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
(a) Annual Meeting of Pinnacle Financial Services, Inc.,
April 30, 1996
(c) Matters voted upon and Tabulations for Director nominees
Item 6. Exhibits and Reports on Form 8-K 18
Page 2 of 18
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in thousands, except per share data) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 12,286 $ 7,064 $ 23,863 $ 13,705
Tax-exempt 42 57 86 119
Interest and dividends on securities:
Available-for-sale
Taxable 5,373 1,026 10,140 2,028
Tax-exempt 260 - 524 -
Held-to-maturity
Taxable - 319 - 684
Tax-exempt - 226 - 455
Interest on federal funds sold 15 45 105 62
Interest on interest-bearing deposits with financial institutions 29 26 445 41
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 18,005 8,763 35,163 17,094
INTEREST EXPENSE:
Interest on deposits 7,489 3,729 14,888 7,042
Federal Home Loan Bank advances 1,628 245 3,097 415
Interest on securities sold under repurchase
agreements and other borrowings 448 242 869 538
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 9,565 4,216 18,854 7,995
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,440 4,547 16,309 9,099
PROVISION FOR LOAN LOSSES 70 40 150 125
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income, after provision for loan losses 8,370 4,507 16,159 8,974
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 485 377 936 735
Trust income 176 120 320 240
Securities gains and losses, net 36 180 270 181
Other income 1,299 509 2,054 985
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,996 1,186 3,580 2,141
NONINTEREST EXPENSES:
Salaries and benefits 2,707 1,585 5,229 3,146
Occupancy expense 479 244 1,001 509
Equipment expense 376 209 756 413
FDIC insurance premiums 227 200 446 400
Other expense 2,363 1,225 4,471 2,288
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 6,152 3,463 11,903 6,756
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 4,214 2,230 7,836 4,359
Income tax expense 1,634 695 2,812 1,352
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,580 $ 1,535 $ 5,024 $ 3,007
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net income per common share $ 0.44 $ 0.40 $ 0.86 $ 0.79
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 5,873,518 3,821,904 5,873,438 3,821,904
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share $ 0.21 $ 0.19 $ 0.40 $ 0.38
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 3 of 18
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands) 6/30/96 6/30/95 12/31/95
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 21,423 $ 16,276 $ 24,681
Federal funds sold - 4,100 3,850
- --------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 21,423 20,376 28,531
Interest-bearing deposits with financial institutions 2,051 126 41,511
Securities available-for-sale 341,647 58,904 287,532
Securities held-to-maturity - 37,617 -
Loans, net of unearned income:
Real estate 284,926 102,687 268,911
Commercial 179,098 132,925 154,044
Tax-exempt 2,494 2,731 2,678
Consumer 99,865 68,642 92,826
- --------------------------------------------------------------------------------------------------------------------
Subtotal loans 566,383 306,985 518,459
Less allowance for loan losses 5,815 4,945 5,852
- --------------------------------------------------------------------------------------------------------------------
Net loans 560,568 302,040 512,607
Premises and equipment, net 12,685 6,943 12,546
Accrued interest receivable and other assets 31,230 9,870 28,719
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 969,604 $ 435,876 $ 911,446
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 55,418 $ 39,785 $ 50,400
Interest-bearing demand 75,852 44,074 80,066
Savings 262,431 129,057 252,453
Time 344,528 155,597 320,181
- --------------------------------------------------------------------------------------------------------------------
Total deposits 738,229 368,513 703,100
Federal Home Loan Bank advances 121,063 11,000 96,752
Securities sold under repurchase agreements and other borrowings 33,171 15,431 30,402
Accrued interest payable and other liabilities 5,247 2,753 6,296
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 897,710 397,697 836,550
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock; no par value; 15,000,000 shares authorized;
5,873,558 shares isssued and outstanding at June 30, 1996
and 5,873,358 shares issued and outstanding at
December 31, 1995 and 3,821,904 shares at June 30. 1995 19,110 19,110 19,110
Additional paid in capital 43,915 10,005 44,174
Retained earnings 13,150 8,866 10,475
Net unrealized gain (loss) on securities available-for-sale (4,281) 198 1,137
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 71,894 38,179 74,896
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 969,604 $ 435,876 $ 911,446
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) SEE DECEMBER 31, 1995 ANNUAL REPORT FOR AUDITOR'S REPORT.
Page 4 of 18
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STOCKHOLDERS' EQUITY SCHEDULE
<TABLE>
<CAPTION>
GAINS (LOSSES)
ADDITIONAL ON SECURITIES
COMMON PAID-IN RETAINED AVAILABLE-FOR
(Dollars in thousands) STOCK CAPTITAL EARNINGS SALE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 19,110 $ 10,005 $ 4,390 $ 373 $ 33,878
Net income 5,290 5,290
Cash dividends declared, $.62 per share (2,369) (2,369)
Change in unrealized losses for securities available-for-sale,
net of tax effect of $(851) (1,651) (1,651)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 19,110 10,005 7,311 (1,278) 35,148
Net income 6,459 6,459
Common stock issuance, 862,500 shares, net of
stock offering costs 13,184 13,184
Common stock issuance per merger, 1,188,954 shares
at $17.65 per share 20,985 20,985
Cash dividends declared, $.76 per share (3,295) (3,295)
Change in unrealized losses for securities available-for-sale,
net of tax effect of $1,244 2,415 2,415
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 19,110 44,174 10,475 1,137 74,896
Net income 2,444 2,444
Common stock issuance, 862,500 shares, net of
stock offering costs (259) (259)
Cash dividends declared, $.19 per share (1,116) (1,116)
Change in unrealized gains for securities available-for-sale,
net of tax effect of $(1,271) (2,467) (2,467)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 19,110 43,915 11,803 (1,330) 73,498
Net income 2,580 2,580
Cash dividends declared, $.21 per share (1,233) (1,233)
Change in unrealized gains for securities available-for-sale,
net of tax effect of $(1,520) (2,951) (2,951)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 $ 19,110 $ 43,915 $ 13,150 $ (4,281) $ 71,894
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 5 of 18
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,024 $ 3,007 $ 2,604
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,292 581 629
Net amortization on loans and securities 733 610 845
Provision for loan losses 150 125 65
Deferred federal income taxes 35 (153) 76
Mortgage loans originated for sale (40,759) (1,961) (7,671)
Proceeds from sales of loans 30,220 6,846 6,777
Gain on sale of securities, net (270) (181) (71)
Gain on sale of loans, net (480) (51) (54)
Increase in interest receivable and other assets (407) (945) (394)
Increase in interest payable and other liabilities (1,167) 268 220
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (5,629) 8,146 3,026
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans, excluding loan sales, purchases, and originated for sale (15,286) (14,828) (9,537)
Purchases of loans (22,415) (7,129) (3,388)
Purchases of securities available-for-sale (131,404) (49,293) (14,277)
Purchases of securities held-to-maturity - (494) (3,515)
Proceeds from sales of securities available-for-sale 47,996 37,502 9,154
Proceeds from maturities and paydowns of securities available-for-sale 21,231 3,253 17,132
Proceeds from maturities and paydowns of securities held-to-maturity - 6,126 11,324
Net increase in interest-bearing deposits with financial institutions 39,460 1,026 (1,058)
Capital expenditures (779) (370) (409)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (61,197) (24,207) 5,426
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 35,129 16,476 (13,434)
Net increase in securities sold under repurchase agreements and other borrowings 27,080 6,549 3,847
Dividends paid (2,232) (1,338) (1,070)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES 59,718 21,687 (10,657)
- ----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (7,108) 5,626 (2,205)
Cash and cash equivalents at beginning of year 28,531 14,750 13,892
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,423 $ 20,376 $ 11,687
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 18,741 $ 7,733 $ 5,673
Federal income taxes paid $ 2,670 $ 1,862 $ 1,135
Loans transferred to other real estate owned $ 74 $ 516 $ 303
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 6 of 18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes and with the
statistical information and financial data appearing in this report as well
as the 1995 Annual Report and Form 10-K of Pinnacle Financial Services, Inc.
(the "Company" or "Pinnacle"). Results of operations for the six month
period ended June 30, 1996 are not necessarily indicative of results to be
attained for any other period.
DESCRIPTION OF THE COMPANY
Pinnacle Financial Services, Inc., is a registered bank holding company
organized under the laws of the State of Michigan and headquartered in St.
Joseph, Michigan. Pinnacle was formed in 1986 in connection with the June
30, 1986 reorganization of the Peoples State Bank of St. Joseph as a wholly
owned subsidiary of Pinnacle. Pinnacle conducts a full service commercial
and retail banking business ("Peoples") through 17 branch offices of Peoples
located in Southwestern Michigan.
Pinnacle Financial Services, Inc. is also a registered savings and loan
holding company through the December 1, 1995 acquisition of Maco Bancorp,
Inc. ("Maco") and its subsidiaries, First Federal Savings Bank of Indiana
("First Federal") a federal savings bank headquartered in Merrillville,
Indiana, Brookview Real Estate, Ltd., a real estate development company, and
First Insurance, Inc., an insurance agency. First Federal is a
community-oriented savings institution that conducts its operations through
14 branch offices located throughout northwest Indiana, and through two loan
production offices located in Merrillville and Indianapolis, Indiana.
The Company's subsidiaries, Peoples State Bank of St. Joseph and First
Federal Savings Bank of Indiana, completed a name change effective April 29,
1996. Peoples changed its name to Pinnacle Bank-Michigan ("Michigan") and
First Federal changed its name to Pinnacle Bank-Indiana ("Indiana"). The
name change did not affect the separate charters of the two institutions.
Pinnacle has approximately, $969,604,000 in total assets as of June 30,
1996. Through its subsidiaries, it offers financial service products which
include domestic banking services such as consumer, commercial and real estate
loans, personal and business checking accounts, savings accounts, time deposits,
safe deposit services, cash management services, and transmission of funds, as
well as trust and other fiduciary services and full brokerage services.
Commercial customers include retailers, commercial developers, professionals,
and small manufacturers. Retail banking customers cover a broad spectrum with
focus on providing personalized, high quality and comprehensive service in order
to develop and maintain long-term, multiple account relationships with
customers.
Page 7 of 18
<PAGE>
SUMMARY OF PERFORMANCE
NET INCOME
Net income for the second quarter ending June 30, 1996 totaled $2,580,000
or $.44 per share, as compared to $1,535,000, or $.40 per share for the second
quarter ending June 30, 1995 for an increase of 68.1% on a net income basis and
10.0% increase on a per share basis. Net income for the six months ended June
30, 1996 totaled $5,024,000 or $.86 per share, as compared to $3,007,000, or
$.79 per share for the same period ended June 30, 1995 for an increase of 67.1%
on a net income basis and 8.9% increase on a per share basis. The increase in
net income was largely the result of higher levels of net interest income
associated with higher levels earnings assets mainly associated with the First
Federal acquisition that occurred on December 1, 1995.
Presented below is an income statement analysis, expressed on a per-share
basis, comparing the quarter and six months ended June 30, 1996, to the same
period in 1995. A more detailed discussion and analysis of the major factors
outlined below is provided in following sections of this report.
QUARTER SIX MONTHS
- --------------------------------------------------------------------------------
Net income per-share - Period ended March 31, 1995 (1) $ 0.26 $ 0.51
Pre-tax increase (decrease) in 1996, as compared to 1995
resulting from changes in:
Net interest income (taxable equivalent) 0.66 1.23
Provision for loan losses 0.00 0.00
Noninterest income 0.14 0.25
Noninterest expense (0.46) (0.88)
- --------------------------------------------------------------------------------
Pre-tax increase 0.34 0.60
Income tax expense (0.16) (0.25)
Net income per share - Period ended March 31, 1996 $ 0.44 $ 0.86
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Net income per share restated based on 5,873,518 average shares outstanding
for the quarter, and 5,873,438 average shares outstanding for six months.
RETURN ON AVERAGE ASSETS AND STOCKHOLDERS' EQUITY
Return on average assets for the second quarter of 1996 was 1.08% as
compared to 1.40% for the second quarter of 1995. Return on average assets for
the six months ended June 30, 1996 was 1.07% as compared to 1.40% for the same
period in 1995.
Return on average stockholders' equity for the second quarter of 1996 was
14.13% as compared to 16.55% for the second quarter of 1995. Return on average
stockholders' equity for the six months ended June 30, 1996 was 13.63% as
compared to 16.67% for the same period in 1995.
The Company recognizes the importance of maximizing the use of capital to
provide improved returns to our stockholders. This has been accomplished in the
past by way of growth through acquisition of other financial institutions.
While it is management's intention to seize upon favorable opportunities which
may arise with respect to community banks or other financial institutions in the
future, at the present time there are no ongoing negotiations for any
acquisitions. Pinnacle's most recent acquisition occurred on December 1, 1995,
when the company acquired Maco Bancorp and its subsidiaries of First Federal
Savings Bank of Indiana, Brookview Real Estate, and First Insurance, Inc.,
headquarted in Merrillville, Indiana. At the time of the acquisition, First
Federal added approximately $208,000,000 in loans and approximately $316,000,000
in total deposits. Operations of First Federal have been included in the
Company's consolidated financial statements from December 1, 1995.
Page 8 of 18
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the Company's primary source of earnings and
represents the excess of interest earned on earning assets over interest expense
associated with the deposits and other funding sources used used to finance
those assets. Net interest income is influenced primarily by changes in the
volume and mix of earning assets and sources of funding and market rates of
interest. Other external factors, such as the strength of credit demands by
customers, liquidity and maturity preferences of deposit customers, and
governmental monetary policy, also can have a significant impact of the
Company's earnings.
Net interest income on a tax-equivalent basis for the quarter and six
months ended June 30, 1996 was $8,579,000 and $16,588,000, compared to
$4,674,000 and $9,358,000 for the same periods ended June 30, 1995. The
increase was primarily due to an increase in average earnings assets associated
with the First Federal acquisition on December 1, 1995.
The increase in average earning assets of $486,136,000 increased net
interest income by $3,842,000 while a lower net interest margin of 3.84% for the
second quarter 1996 as compared to 4.54% in 1995, a decrease of .70%, resulted
in a decrease in net interest income of $699,000. The decrease in net interest
margin was mainly attributed to the lower margins associated with the Indiana
subsidiary who have historically operated with lower net interest margins.
The increase in average earning assets for the six months ended June 30,
1996 of $477,345,000 increased net interest income by $7,338,000 while a lower
net interest margin of 3.77% as compared to 4.63% for the six months ended June
30, 1996, or a decrease of .86%, resulted in a decrease in net interest income
of $1,634,000, mainly attributed to lower margins with the Indiana subsidiary.
Page 9 of 18
<PAGE>
The table below summarizes the changes in average interest-earning assets
and interest-bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the second quarter ended June
30, 1996 as compared to 1995. The table also details the increase and decrease
in income and expense for each major category of assets and liabilities and
analyzes the extent to which such variances are attributable to volume and rate
changes.
QUARTER ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTH AVERAGE EARNING INTEREST RATES
ASSETS AND PAYING LIABILITIES EARNED/PAID
- -------------------------------------------------------------------------------------------------------------------
INCREASE/ BASIS POINTS
1996 1995 (DECREASE) 1996 1995 INC/(DEC)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short term investments $ 4,327 $ 4,739 $ (412) 4.09% 6.01% -1.92%
Securities:
Available-for-sale 338,736 63,552 275,184 6.83 6.48 0.36
Held-to-maturity (1) - 39,278 (39,278) - 6.60 -6.60
Loans, net of unearned discount (1) 556,180 305,538 250,642 8.93 9.38 -0.45
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 899,243 $ 413,107 $ 486,136 8.12% 8.63% -0.52%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
NOW accounts $ 77,198 $ 44,173 $ 33,025 2.02% 1.94% 0.07%
Money market deposits 27,315 13,190 14,125 3.81 3.47 0.35
Savings deposits 234,295 117,010 117,285 3.71 4.26 -0.55
Time deposits 336,272 151,489 184,783 5.60 5.71 -0.11
Federal Home Loan Bank advances 114,297 15,505 98,792 5.73 6.34 -0.61
Other borrowings 39,296 19,541 19,755 4.59 4.97 -0.38
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 828,673 $ 360,908 $ 467,765 4.64% 4.69% -0.04%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Net interest margin (1) 3.84% 4.54% -0.70%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
QUARTER ENDED JUNE 30, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME VARIANCE ANALYSIS
INTEREST ------------------------------------------------
INCOME/EXPENSE INCREASE/(DECREASE) DUE TO:
- -----------------------------------------------------------------------------------------------------------------------------
VOLUME/
1996 1995 (DECREASE) VOLUME RATE RATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short term investments $ 44 $ 71 $ (27) $ (0) $ (0) $ (27) $ (27)
Securities:
Available-for-sale 5,753 1,026 4,727 4,431 56 240 4,727
Held-to-maturity (1) - 646 (646) (644) (644) 642 (646)
Loans, net of unearned discount (1) 12,347 7,147 5,200 5,847 (345) (302) 5,200
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 18,144 $ 8,890 $ 9,254 $ 9,633 $ (933) $ 554 $ 9,254
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 387 $ 214 $ 173 $ 2 $ 0 $ 171 $ 173
Money market deposits 259 114 145 122 11 12 145
Savings deposits 2,161 1,244 917 1,244 (161) (165) 917
Time deposits 4,682 2,157 2,525 2,624 (42) (57) 2,525
Federal Home Loan Bank advances 1,628 245 1,383 1,557 (23) (150) 1,383
Other borrowings 448 242 206 244 (19) (19) 206
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 9,565 $ 4,216 $ 5,349 $ 5,791 $ (234) $ (209) $ 5,349
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income (1) $ 8,579 $ 4,674 $ 3,905 $ 3,842 $ (699) $ 763 $ 3,905
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Presented on a tax-equivalent basis assuming statutory income tax rates of
34% for 1996 and 1995.
Page 10 of 18
<PAGE>
The table below summarizes the changes in average interest-earning assets
and interest-bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the six months ended June 30,
1996 as compared to 1995. The table also details the increase and decrease in
income and expense for each major category of assets and liabilities and
analyzes the extent to which such variances are attributable to volume and rate
changes.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTH AVERAGE EARNING INTEREST RATES
ASSETS AND PAYING LIABILITIES EARNED/PAID
- -------------------------------------------------------------------------------------------------------------------
INCREASE/ BASIS POINTS
1996 1995 (DECREASE) 1996 1995 INC/(DEC)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short term investments $ 20,253 $ 3,527 $ 16,726 5.46% 5.89% -0.43%
Securities:
Available-for-sale 325,738 62,318 263,420 6.73 6.56 0.17
Held-to-maturity (1) - 41,030 (41,030) - 6.61 -6.61
Loans, net of unearned discount (1) 538,979 300,750 238,229 8.95 9.31 -0.36
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 884,970 $ 407,625 $ 477,345 8.05% 8.58% -0.53%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
NOW accounts $ 76,193 $ 44,503 $ 31,690 2.07% 1.93% 0.14%
Money market deposits 26,821 14,034 12,787 3.79 3.41 0.38
Savings deposits 232,589 117,579 115,010 3.70 4.25 -0.54
Time deposits 330,953 145,037 185,916 5.66 5.43 0.23
Federal Home Loan Bank advances 107,941 13,713 94,228 5.77 6.10 -0.33
Other borrowings 38,084 21,541 16,543 4.59 5.04 -0.45
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 812,581 $ 356,407 $ 456,174 4.67% 4.52% 0.14%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Net interest margin (1) 3.77% 4.63% -0.86%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME VARIANCE ANALYSIS
INTEREST ------------------------------------------------
INCOME/EXPENSE INCREASE/(DECREASE) DUE TO:
- -----------------------------------------------------------------------------------------------------------------------------
Increase/ VOLUME/
1996 1995 (DECREASE) VOLUME RATE RATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short term investments $ 550 $ 103 $ 447 $ 5 $ (0) $ 442 $ 447
Securities:
Available-for-sale 10,904 2,028 8,876 8,596 52 227 8,876
Held-to-maturity (1) - 1,344 (1,344) (1,348) (1,348) 1,351 (1,344)
Loans, net of unearned discount (1) 23,988 13,878 10,110 11,024 (531) (382) 10,110
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 35,442 $ 17,353 $ 18,089 $ 18,277 $ (1,827) $ 1,639 $ 18,089
- -----------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 784 $ 426 $ 358 $ 3 $ 0 $ 355 $ 358
Money market deposits 505 237 268 217 27 25 268
Savings deposits 4,285 2,476 1,809 2,429 (317) (303) 1,809
Time deposits 9,314 3,903 5,411 5,017 168 226 5,411
Federal Home Loan Bank advances 3,097 415 2,682 2,860 (23) (155) 2,682
Other borrowings 869 538 331 414 (48) (35) 331
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 18,854 $ 7,995 $ 10,859 $ 10,939 $ (193) $ 113 $ 10,859
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income (1) $ 16,588 $ 9,358 $ 7,230 $ 7,338 $ (1,634) $ 1,526 $ 7,230
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Presented on a tax-equivalent basis assuming statutory income tax rates of
34% for 1996 and 1995.
Page 11 of 18
<PAGE>
NONINTEREST INCOME
Noninterest income increased $810,000, or 68.3%, for the second quarter of
1996, as compared to the same quarter of 1995. The Indiana acquisition provided
$419,000 of the increase. The Michigan subsidiary had an increase in deposit
service charges of $70,000 or 18.6%; trust income increased $56,000 or 46.7%;
brokerage and investment fees increased $69,000 or 234.3%; and other loan fees
from credit life premiums and loan sales increased $180,000 or 82.9%.
Noninterest income increased $1,439,000, or 67.2%, for the six months ended
June 30, 1996, as compared to the same period in 1995. The Indiana acquisition
provided $930,000 of the increase, of which $231,000 was security gains. The
Michigan subsidiary had an increase in deposit service charges of $93,000 or
12.7%; trust income increased $80,000 or 33.3%; brokerage and investment fees
increased $105,000 or 200.7%; and other loan fees from credit life premiums and
loan sales increased $191,000 or 46.2%.
NONINTEREST EXPENSE
Noninterest expense increased $2,689,000 or 77.7% for the second quarter
1996 as compared to the same quarter 1995. The Indiana acquisition provided
$2,354,000 of the increase. In addition, professional and legal fees increased
at the Michigan subsidiary by $70,000 or 145.4%; depreciation expense on
equipment increased $63,000 or 51.2% to support computer needs for the Indiana
acquisition; supplies expense increased $102,000 or 93.9% primarily from costs
associated with the name change in the second quarter. The Federal Deposit
Insurance Company ("FDIC") expense continued to decrease at the Michigan
subsidiary by $154,000 or7 6.9% in the second quarter, as compared to the same
period in 1995.
Noninterest expense increased $5,147,000 or 76.2% for the six months
ended June 30, 1996, as compared to the same period in 1995. The Indiana
acquisition provided $4,536,000 of the increase. In addition, equipment
expense increased at the Michigan subsidiary by $166,000 or 40.2% related to
computer upgrades to support new services, supermarket banking, and the
Indiana acquisition; supplies expense increased $106,000 or 49.3% related to
the name change; and marketing expense increased $83,000 or 28.3% primarily
due to costs associated with the name change and a new line of checking
accounts. The FDIC expense decreased by $314,000 or 367.9% at the Michigan
subsidiary for the six months ended June 30, 1996, as compared to the same
period in 1995; telephone expense increased $62,000 or 68.9% as communication
costs increased associated with the Indiana acquisition; and professional
fees increased $97,000 or 96.0%.
Page 12 of 18
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
LIQUIDITY AND FUNDING
The Company manages its liquidity in order to maximize earnings
opportunities and to ensure that the cash flow needs of the parent and
subsidiary companies are met in a cost-effective manner.
The Company's total assets increased by $533,728,000 or 122.5% to
T$969,604,000 at June 30, 1996 from from $435,876,000 at June 30, 1995. The
Indiana acquisition added $480,443,000 to total assets. At the Michigan
subsidiary, total loans increased $15,436,000 or 5.0%; total securities
increased $37,626,000 or 28.0%. Deposits and short-term borrowings are the
Company's primary funding sources. Deposits increased $369,716,000 or 100.1% as
of June 30, 1996 as compared to June 30, 1995. The Indiana subsidiary accounted
for $341,527,000 of the increase, while the Michigan subsidiary added
$28,189,000 or 7.6% in deposits, mainly in short-term time and demand deposits.
Borrowed funds increased $127,803,000 or 483.5% with the Indiana acquisition
providing $98,063,000 of the increase as the Indiana subsidiary utilized the
Federal Home Loan Bank ("FHLB") as a source of funding specific match investment
purchases.
Liquidity is the ability to satisfy demands for extensions of credit,
deposit withdrawals, and other customer and operational needs. Traditional
sources of liquidity include asset maturities and core deposit growth. Pinnacle
maintains a portion of its assets in liquid form to meet anticipated withdrawal
requirement and loan demand from customers. At June 30, 1996, cash and due from
banks, federal funds sold, and money market instruments totaled $23,474,000
representing 2.4% of the Company's total assets. Additional liquidity is
providedby the ability to borrow from the FHLB. As of June 30, 1996, the
Company had borrowed $121,063,000 from the FHLB to match longer term loans and
specific securities with matching maturities.
Pinnacle placed 100% of the security portfolio at December 1, 1995, as
being available-for-sale totaling $341,647,000 as of June 30, 1996 which would
be available to meet any liquidity needs of the Company.
Proceeds from the sales of securities available-for-sale amounted to
$47,996,000 in the six months ended June 30, 1996 and $37,502,000 for the same
period in 1995 with resulting gains of $270,000 and $181,000, respectively. At
June 30, 1996 gross unrealized holding gains and gross unrealized holding losses
in the Company's total security portfolio totaled approximately $601,000 and
$7,088,000, respectively. At June 30, 1995 gross unrealized holding gains and
gross unrealized holding losses in the Company's total security portfolio
amounted to $624,000 and $324,000, respectively.
The focus of liquidity management at Pinnacle is to satisfy general
operating expenses, to service existing debt, and to take advantage of
investment opportunities which management believes will result in an improved
return to stockholders. The primary source of funds for Pinnacle is the receipt
of dividend payments from Peoples and First Federal.
Dividends paid to the Company by Peoples amounted to $1,575,000 as of June
30, 1996 and $850,000 by First Federal. Dividends paid to Pinnacle by Peoples
amounted to $1,457,000 as of June 30, 1995. Under current regulations, the
amount of dividends that Peoples and First Federal can declare in 1996 is
limited to its 1996 net profits (as defined in the Federal Reserve Act) plus
retained profits for 1996 and 1995, unless regulatory approval is obtained.
Page 13 of 18
<PAGE>
CAPITAL COMPONENTS
The Federal Reserve Board measures capital adequacy for bank holding
companies on the basis of a risk-based capital framework and a leverage
ratio. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
established a capital-based supervisory system of prompt corrective action
for all depository institutions. The bank regulatory agencies' "implementing
rule" under FDICIA defines "well-capitalized" institutions (the highest
possible rating) as those whose capital ratios equal or exceed all the
following: Tier I Risk-Based Ratio, 6.00%, Total Risk-Based Ratio, 10.00%
and Tier I Leverage Ratio, 5.00%. At June 30, 1996 and June 30, 1995, the
Company and its subsidiaries reported capital ratios in excess of these "well
capitalized" standards.
The following table details Pinnacle's capital components and ratios at
June 30, 1996 and December 31, 1995 based upon the capital requirements set by
regulatory agencies.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1
Common stockholders' equity $ 71,894 $ 74,896
Net unrealized (gains) losses on securities available-for-sale 4,281 (1,137)
Less: net unrealized losses on equity securities,
goodwill and other intangibles (14,890) (15,661)
- ----------------------------------------------------------------------------------------------------------------------------------
Total tier 1 capital $ 61,285 $ 58,098
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital / risk adjusted assets 12.18% 12.10%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Minimum regulatory tier 1 capital requirement $ 20,121 $ 19,214
Minimum regulatory tier 1 capital / risk adjusted assets 4.00% 4.00%
Excess tier 1 capital $ 41,164 $ 38,884
Excess tier 1 capital / risk adjusted assets 8.18% 8.10%
Tier 2
Allowable portion of the reserve for possible credit losses $ 5,815 $ 5,852
- ----------------------------------------------------------------------------------------------------------------------------------
Total tier 2 capital $ 5,815 $ 5,852
- ----------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital $ 67,100 $ 63,950
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets $ 503,020 $ 480,342
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Quarterly average total assets less deductible intangibles $ 940,084 $ 548,448
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital / risk-adjusted assets
(regulatory minimum is 8% 13.34% 13.31%
Tier 1 capital / quarterly average total assets less
deductible intangibles (leverage ratio)
(regulatory minimum is 3% to 5%) 6.52% 10.59%
</TABLE>
Tier 1 and total qualifying capital increased $3,187,000 and $3,150,000,
respectively, as of June 30, 1996 as compared to December 31, 1995, due
primarily to net income offset by cash dividends paid.
On December 31, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting of Certain
Investments in Debt and Equity Securities." The unrealized holding gains
and losses, net of related tax effect, on available-for-sale securities are
reportable as a separate component of stockholders' equity until realized.
However, for determining risk-based capital ratios, only unrealized holding
losses on equity securities are considered as a component of qualifying
capital.
PAGE 14 OF 18
<PAGE>
ASSET QUALITY
NONPERFORMING ASSETS
Nonperforming assets include nonaccruing loans, restructured loans,
contractually past due 90 days or more but still accruing loans, and other real
estate owned. The following table presents detailed information concerning
nonperforming assets at June 30, 1996, and December 31, 1995.
JUNE 30, DECEMBER 31
Dollars in thousands 1996 1995
- --------------------------------------------------------------------------------
Nonperforming assets (a) :
Nonaccruing loans:
Real estate $ 937 $ 1,351
Commercial 1,416 1,807
Other 195 163
- --------------------------------------------------------------------------------
Total nonaccruing loans 2,548 3,321
Contractually past due but still accruing loans (a)
Real estate 1,200 557
Commercial 1,343 52
Other 57 66
- --------------------------------------------------------------------------------
Total contractually past due but still accruing
loans (a) 2,600 675
Restructured loans 230 324
- --------------------------------------------------------------------------------
Total nonperforming loans 5,378 4,320
Other real estate owned 1,234 1,419
- --------------------------------------------------------------------------------
Total nonperforming assets $ 6,612 $ 5,739
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nonperforming loans / loans 0.95% 0.83%
Nonperforming assets / loans and other real estate owned 1.16% 1.10%
Reserve for possible loan losses / nonperforming loans 108.13% 135.46%
Reserve for possible loan losses / nonperforming assets 87.95% 101.97%
- --------------------------------------------------------------------------------
(a) Accruing loans past due 90 days or more.
The increase in total nonperforming loans from December 31, 1995 to June
30, 1996 is primarily due to an increase in commercial nonaccruing loans and
accruing loans past due 90 days or more of $900,000 and real estate
nonaccruing loans and accruing loans past due 90 days or more of $229,000.
Management's determination regarding the accrual of interest on loans that
were 90 days or more past due but still accruing is based on the availability
and sufficiency of collateral and the status of collection efforts. In the
present environment, certain of such loans could become nonperforming assets
and/or result in charge-offs in the future.
Management continues to focus on asset quality and its potential impact on
the provision and the reserve for possible loan losses. The Company believes
that it has responded appropriately to the current economic environment, and
is prepared to forego transactions which do not meet it quality standards.
Page 15 of 18
<PAGE>
LOAN LOSS EXPERIENCE
The following table provides detailed information pertaining to the
Company's provision and reserve for possible loan losses and charge-off
experience.
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans outstanding at end of period, net of
unearned income $ 566,383 $ 306,985
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Average loans for the period, net $ 524,245 $ 295,910 $ 538,979 $ 300,750
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of period $ 5,803 $ 5,048 $ 5,852 $ 5,014
Charge-offs for period:
Commercial loans - (56) (40) (56)
Real estate loans (5) (9) (28) (36)
Consumer loans (162) (158) (320) (257)
- ----------------------------------------------------------------------------------------------------------------------------------
Total charged-offs (167) (223) (388) (349)
Recoveries for period:
Commercial loans 64 52 116 98
Real estate loans 10 1 14 8
Consumer loans 35 27 71 49
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 109 80 201 155
- ----------------------------------------------------------------------------------------------------------------------------------
Net charged-offs for the period (58) (143) (187) (194)
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 70 40 150 125
- ----------------------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses, end of period $ 5,815 $ 4,945$ 5,815 $ 4,945
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to average
loans outstanding 0.01% 0.05% 0.03% 0.06%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Allocation of allowance for loan losses:
Commercial loans $ 3,245 $ 2,897
Real estate loans 1,461 1,161
Consumer loans 1,109 887
- ----------------------------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 5,815 $ 4,945
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Percentage of loans to total gross loans:
Real estate loans 50% 33%
Commercial loans 32 45
Home Equity loans 10 9
Consumer loans 8 13
- ----------------------------------------------------------------------------------------------------------------------------------
Total 100% 100%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The allowance for loan losses has been allocated according to the amount
deemed to be reasonably necessary to provide for the possibility of losses
being incurred within the above categories of loans at the dates indicated.
The allowance is based on management's periodic evaluation of the loan
portfolio and reflects an amount that, in management's opinion, is adequate
to absorb losses in the existing 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 probability of collection of
specific loans.
PAGE 16 OF 18
<PAGE>
Effective January 1, 1995, the Company adopted the Financial Accounting
Standard Board's Statement of Financial Accounting Standards ("SFAS") 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures".
A loan is considered impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due.
Under SFAS 114 and SFAS 118, "impaired" loans must be measured based on the
present value of expected future cash flows, discounted at the loan's
effective interest rate, or, as a practical expedient, at the loan's
observable market price, or the fair value of the collateral if the loan is
collateral-dependent. SFAS 114 and SFAS 118 do not apply to certain groups
of small-balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of cost or
fair value, leases, or debt securities. Prior to January 1, 1995, the
Company's impaired loans were described as, and included in, nonaccrual
loans. The adoption of the Statements had no effect on the Company's
nonperforming assets or financial statements.
SFAS 114 and SFAS 118 also require additional disclosures. As a result,
the Company has expanded its accounting policy regarding the recognition of
interest income on loans to read as follows: "Interest income is not accrued
on loans where management has determined that the borrowers may be unable to
meet contractual principal and/or interest obligations, or where interest or
principal is 90 days or more past due, unless the loans are adequately
secured and in the process of collection. When a loan is placed on
nonaccrual status (which includes "impaired" loans), interest accruals cease
and uncollected accrued interest is reversed and charged against current
income. Nonaccrual loans are generally not returned to accruing status
until principal and interest payments have been brought current and full
collectibility is reasonably assured. Cash receipts on nonaccrual loans are
generally applied to the principal balance until the remaining balance is
considered fully collectible, at which time interest income may be
recognized when received. Interest on loans that have been restructured is
recognized according to the revised terms."
As of June 30, 1996, under SFAS 114 and SFAS 118, the Company's impaired
loans totaled $1,720,000 (of which $1,500,000 were on a nonaccrual basis).
The related allowance for loan loss on impaired loans of $1,038,000 at June 30,
1996, was $349,000. The Company's impaired loans averaged $1,233,000 for the
six months ended June 30, 1996. Interest income of approximately $14,000 and
$58,000 was recognized for the second quarter and six months ended June 30,
1996, respectively, of which approximately $2,000 and $41,000 was on a cash
basis, on impaired loans for the quarter and six months ended June 30, 1996.
Charge-offs of approximately $56,000 were recognized on impaired loans during
the six months ended June 30, 1996, of which no charge-off's were recorded
during the second quarter.
The levels of the provision and reserve for possible loan losses are based
on management's ongoing assessment of the Company's credit exposure and
consideration of a number of factors, including prevailing and anticipated
economic conditions, assigned risk ratings on credit exposures, the
diversification and size of the loan portfolio, the results of the most recent
regulatory examinations available to the Company, the current and projected
financial status and creditworthiness of borrowers, certain off-
balance sheet credit risks, the nature and level of nonperforming assets and
loans that have been identified as potential problems, the adequacy of
collateral, past and expected loss experience and other factors deemed relevant
by management. The Company's risk rating system and the quarterly reporting
process for problem and vulnerable credits are utilized by management in
determining the adequacy of the Company's reserve for possible loan losses.
Net charge-offs were $58,000 in the second quarter of 1996, compared to
$143,000 in the second quarter of 1995. Net charge-off's were $187,000 and
$194,000 for the six months ended June 30, 1996 and 1995, respectively. In
the second quarter of 1996 and 1995, respectively, net charge-offs included
- -$64,000 (recoveries) and -$52,000 (recoveries) related to commercial
borrowers, $35,000 and $27,000 in consumer credits and and $10,000 and
$1,000 in real estate credits. For the six months ended June 30,1996 and
1995, respectively, net charge-off's included -$116,000 (recoveries) and
- -$98,000 (recoveries) related to commercial borrowers, $71,000 and $49,000
in consumer credits and $14,000 and $8,000 in real estate credits.
PAGE 17 OF 18
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Pinnacle Financial Services, Inc.,
April 30, 1996
(c) Matters voted upon and Tabulations for Director nominees
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3 - (I) Articles of Incorporation amended and
restated April 1996
Exhibit 13 - 1996 Second Quarter Report to Shareholders;
1995 Annual Report to Shareholders; 1996 Proxy
Statement
Exhibit 27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PINNACLE FINANCIAL SERVICES, INC.
DATE: August 8, 1996 /s/ David W. Kolhagen
------------------------------------------
David W. Kolhagen
Vice President, Chief Financial Officer
/s/ John A. Newcomer
------------------------------------------
John A. Newcomer
Corporate Affairs Officer
PAGE 18 OF 18
<PAGE>
PART II
Item 4
c. Matters voted upon and tabulations for Director nominees
(1) Election of
Directors For Against W/Held Broker Non-Vote
--------- --- ------- ------ ---------------
John Cunningham 4,049,109 14,352
Peter DeGroot 4,098,997 9,464
Charles Edinger 4,096,277 12,184
John Fetters 4,098,198 10,263
Terrence Friedman 4,098,997 9,464
Richard Schanze 4,098,997 9,464
Kay Varga 4,049,532 58,929
Arnold Weaver 4,098,997 9,464
Alton Wendzel 4,098,997 9,464
(2) Amend the Articles of Incorporation to Increase Number of
Authorized Shares from 10,000,000 to 15,000,000
3,983,199 101,946 23,316
(3) Amend the 1993 Pinnacle Financial Services, Inc. Stock Option
Plan, increasing plan shares
3,876,515 149,213 72,773 9,960
<PAGE>
Articles of Incorporation
Page 3
We, the incorporation, sign our names this 31 day of March , 1986.
------ ---------
----------------------------------------
Richard L. Schanze
----------------------------------------
Lester C. Tiscornia
----------------------------------------
Alton Wendzel
----------------------------------------
Charles R. Edinger
----------------------------------------
John D. Fetters
<PAGE>
PART II
EXHIBIT 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION
ARTICLES OF INCORPORATION
These Articles of Incorporation are signed by the incorporators for the
purpose of forming a profit corporation under, and in all respects in
compliance with, the provisions of Act No. 284 of the Public Acts of the
State of Michigan of 1972, as amended, as follows:
ARTICLE I
The name of the Corporation is: PINNACLE FINANCIAL SERVICES, INC.
ARTICLE II
The purpose or purposes for which the Corporation is organized is to
engage in any activity within the purposes for which corporations may be
organized under the Business Corporation Act of the State of Michigan.
ARTICLE III
The aggregate number of shares of all classes of capital stock which the
Corporation shall have authority to issue is 15,000,000 shares of Common
Stock, having no par value per share.
A statement of the designation and the powers and rights, and the
qualifications, limitations or restrictions of the above class of capital
stock shall be as follows:
The Corporation has only one class of capital stock, Common Stock, with
no par value per share, which has full voting rights and powers and all other
rights and powers and no qualifications, limitations or restrictions.
ARTICLE IV
SECTION 1. The street address of the initial registered office of the
Corporation is:
830 Pleasant Street
St. Joseph, Michigan 49085
SECTION 2. The mailing address of the initial registered office of the
Corporation is:
830 Pleasant Street
St. Joseph, Michigan 49085
<PAGE>
Articles of Incorporation
Page 2
ARTICLE V
The names and business addresses of the incorporators are as follows:
Richard L. Schanze
1112 Highland Avenue
St. Joseph, Michigan 49085
Lester C. Tiscornia
2008 Sunset Drive
St. Joseph, Michigan 49085
Alton Wendzel
Route 2, Box 418
Watervliet, Michigan 49098
Charles R. Edinger
620 Lynwood Drive
Benton Harbor, Michigan 49022
John D. Fetters
1109 Flanders Place
St. Joseph, Michigan 49085
ARTICLE VI
A director of this Corporation shall not be personally liable to this
Corporation or its shareholders for monetary damages for a breach of the
director's fiduciary duty, except in the event of any of the following:
(a) A breach of the director's duty of loyalty to the Corporation or
its shareholders.
(b) Acts or conditions not in good faith or that involve intentional
misconduct or a knowing violation of law.
(c) A violation of Section 551(1) of the Michigan Business Corporation
Act, as amended.
(d) A transaction from which the director derived an improper personal
benefit.
(e) Acts or omissions occurring before the date that this Article
is added to the Articles of Incorporation and becomes effective upon
the filing of a Certificate of Amendment to the Articles of
Incorporation with the appropriate agency of the State of Michigan.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,423
<INT-BEARING-DEPOSITS> 2,051
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 341,647
<INVESTMENTS-CARRYING> 348,135
<INVESTMENTS-MARKET> 341,647
<LOANS> 566,383
<ALLOWANCE> 5,815
<TOTAL-ASSETS> 969,604
<DEPOSITS> 738,229
<SHORT-TERM> 104,103
<LIABILITIES-OTHER> 5,247
<LONG-TERM> 50,131
0
0
<COMMON> 19,110
<OTHER-SE> 52,784
<TOTAL-LIABILITIES-AND-EQUITY> 969,604
<INTEREST-LOAN> 12,328
<INTEREST-INVEST> 5,633
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 18,005
<INTEREST-DEPOSIT> 7,489
<INTEREST-EXPENSE> 9,565
<INTEREST-INCOME-NET> 8,440
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 36
<EXPENSE-OTHER> 6,152
<INCOME-PRETAX> 4,214
<INCOME-PRE-EXTRAORDINARY> 2,580
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,580
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 3.84
<LOANS-NON> 2,548
<LOANS-PAST> 2,600
<LOANS-TROUBLED> 230
<LOANS-PROBLEM> 10,818
<ALLOWANCE-OPEN> 5,803
<CHARGE-OFFS> 167
<RECOVERIES> 109
<ALLOWANCE-CLOSE> 70
<ALLOWANCE-DOMESTIC> 5,815
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
