<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 March 31, 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, 10,000,000 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 March 31, 1996 was
5,873,358.
Page 1 of 16
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
FORM 10-Q
March 31, 1996
TABLE OF CONTENTS PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended March 31, 1996 and 1995 3
Consolidated Balance Sheets
March 31, 1996; March 31, 1995; December 31, 1995 4
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Page 2 of 16
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- - --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
(Dollars in thousands, except per share data) 1996 1995
- - -------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 11,577 $ 6,641
Tax-exempt 44 62
Interest and dividends on securities:
Available-for-sale
Taxable 4,767 1,002
Tax-exempt 264 -
Held-to-maturity
Taxable - 365
Tax-exempt - 229
Interest on federal funds sold 90 17
Interest on interest-bearing deposits with
financial institutions 416 15
- - -------------------------------------------------------------------------------
Total interest income 17,158 8,331
INTEREST EXPENSE:
Interest on deposits 7,399 3,313
Interest on securities sold under repurchase
agreements and other borrowings 1,890 466
- - -------------------------------------------------------------------------------
Total interest expense 9,289 3,779
- - -------------------------------------------------------------------------------
Net interest income 7,869 4,552
Provision for loan losses 80 85
- - -------------------------------------------------------------------------------
Net interest income, after provision
for loan losses 7,789 4,467
- - -------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 451 358
Trust income 144 120
Securities gains and losses, net 234 1
Other income 755 476
- - -------------------------------------------------------------------------------
Total noninterest income 1,584 955
NONINTEREST EXPENSES:
Salaries and benefits 2,522 1,561
Occupancy expense 522 265
Equipment expense 380 204
FDIC insurance premiums 219 200
Other expense 2,108 1,063
- - -------------------------------------------------------------------------------
Total noninterest expenses 5,751 3,293
- - -------------------------------------------------------------------------------
Income before federal income tax expense 3,622 2,129
Federal income tax expense 1,178 657
- - -------------------------------------------------------------------------------
Net income $ 2,444 $ 1,472
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Net income per common share $ 0.42 $ 0.39
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Weighted average shares outstanding 5,873,358 3,821,904
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Cash dividends declared per common share $ 0.19 $ 0.19
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
</TABLE>
Page 3 of 16
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
- - ----------------------------------------------------------------------------------------------------
(Dollars in thousands) 3/31/96 3/31/95 12/31/95
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 23,229 $ 13,180 $ 24,681
Federal funds sold - - 3,850
- - ----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 23,229 13,180 28,531
Interest-bearing deposits with financial institutions 423 1,170 41,511
Securities available-for-sale 332,826 74,128 287,532
Securities held-to-maturity - 41,384 -
Loans, net of unearned income:
Real estate 272,876 103,091 268,911
Commercial 171,820 130,344 154,044
Tax-exempt 2,774 4,101 2,678
Consumer 95,672 64,674 92,826
- - ----------------------------------------------------------------------------------------------------
Subtotal loans 543,142 302,210 518,459
Less allowance for loan losses 5,803 5,048 5,852
- - ----------------------------------------------------------------------------------------------------
Net loans 537,339 297,162 512,607
Premises and equipment, net 12,449 7,012 12,546
Accrued interest receivable and other assets 29,205 10,629 28,719
- - ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 935,471 $ 444,665 $ 911,446
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 50,152 $ 35,488 $ 50,400
Interest-bearing demand 75,329 43,734 80,066
Savings 260,180 133,990 252,453
Time 330,998 145,500 320,181
- - ----------------------------------------------------------------------------------------------------
Total deposits 716,659 358,712 703,100
Securities sold under repurchase agreements and
other borrowings 138,748 46,291 127,154
Accrued interest payable and other liabilities 6,566 3,046 6,296
- - ----------------------------------------------------------------------------------------------------
Total liabilities 861,973 408,049 836,550
- - ----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock; no par value; 10,000,000 shares
authorized; 5,873,358 shares issued and
outstanding at March 31. 1996 and
December 31, 1995 and 3,821,904 shares at
March 31. 1995 19,110 19,110 19,110
Additional paid in capital 43,915 10,005 44,174
Retained earnings 11,803 8,057 10,475
Net unrealized gain (loss) on securities
available-for-sale (1,330) (556) 1,137
- - ----------------------------------------------------------------------------------------------------
Total stockholders' equity 73,498 36,616 74,896
- - ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 935,471 $ 444,665 $ 911,446
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
(1) SEE DECEMBER 31, 1995 ANNUAL REPORT FOR AUDITOR'S REPORT.
Page 4 of 16
<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 CAPITAL 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)
Change in unrealized losses for securities
available-for-sale, net of tax effect of $1,244 2,415
- - ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 19,110 44,174 10,475 1,137 74,896
Net income 2,444
Additional stock offering costs associated with
common stock issuance in prior period (259) (259)
Cash dividends declared, $.19 per share (1,116)
Change in unrealized gains for securities
available-for-sale, net of tax effect of $(1,271) (2,467)
- - ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 $ 19,110 $ 43,915 $ 11,803 $ (1,330) $ 73,498
- - ----------------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 5 of 16
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
- - ------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
(Dollars in thousands) 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,444 $ 1,472 $ 1,329
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 467 289 313
Net amortization on loans and securities 440 274 396
Provision for loan losses 80 85 35
Deferred federal income taxes 83 (85) 76
Mortgage loans originated for sale (15,221) (329) (10,500)
Proceeds from sales of loans 24,798 2,937 4,803
Gain on sale of securities, net (234) (1) (70)
Gain on sale of loans, net (196) (7) (79)
Decrease (increase) in interest receivable and other assets 493 (1,270) (369)
Increase in other liabilities 270 561 45
- - ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 13,424 3,926 (4,021)
- - ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans, excluding loan sales, purchases
and originated for sale (28,738) (9,056) 5,860
Purchases of loans (5,834) (5,631) (1,423)
Purchases of securities available-for-sale (81,750) (33,328) (13,580)
Proceeds from sales of securities available-for-sale - - (3,971)
Proceeds from maturities and paydowns of securities available-for-sale 23,045 6,357 4,687
Purchases of securities held-to-maturity 9,846 1,998 8,659
Proceeds from maturities and paydowns of securities held-to-maturity - 1,970 7,701
Net decrease (increase) in interest-bearing deposits with
financial institutions 41,088 (18) (16)
Capital expenditures (161) (260) (215)
- - ------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (42,504) (37,968) 7,702
- - ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits 13,559 6,675 (6,622)
Change in securities sold under repurchase agreements and
other borrowings 11,594 26,409 2,712
Common stock issued (259) - -
Dividends paid (1,116) (612) (535)
- - ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 23,778 32,472 (4,445)
- - ------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,302) (1,570) (764)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,531 14,750 13,892
- - ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,229 $ 13,180 $ 13,128
- - ------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
- - ------------------------------------------------------------------------------------------------------------------------
Interest paid $ 9,231 $ 3,716 $ 2,883
Federal income taxes paid $ 870 $ 290 $ 150
Loans transferred to other real estate owned $ 75 $ 236 $ 23
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 6 of 16
<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 three month period ended
March 31, 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.
Pinnacle has approximately, $935,471,000 in total assets as of March 31,
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 16
<PAGE>
SUMMARY OF PERFORMANCE
NET INCOME
Net income for the first quarter ending March 31, 1996 totaled $2,444,000
or $.42 per share, as compared to $1,472,000, or $.39 per share for the first
quarter ending March 31, 1995 for an increase of 66.00% on a net income basis
and 7.70% 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
of 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 three months ended March 31, 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.
<TABLE>
<CAPTION>
Three Months
- - --------------------------------------------------------------------------------
<S> <C>
Net income per-share - Period ended March 31, 1995 $ 0.25
Pre-tax increase (decrease) in 1996, as compared to 1995
resulting from changes in:
Net interest income (taxable equivalent) 0.57
Provision for loan losses 0.00
Noninterest income 0.11
Noninterest expense (0.42)
- - --------------------------------------------------------------------------------
Pre-tax increase 0.26
Income tax expense (0.09)
Net income per share - Period ended March 31, 1996 0.42
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
RETURN ON AVERAGE ASSETS AND STOCKHOLDERS' EQUITY
Return on average assets for the first quarter of 1996 was 1.06% as
compared to 1.40% for the first quarter of 1995.
Return on average stockholders' equity for the first quarter of 1996 was
13.07% as compared to 16.79% for the first quarter of 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
$316,000,0000 in total deposits. Operations of First Federal have been included
in Pinnacle's consolidated financial statements from December 1, 1995.
Page 8 of 16
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is Pinnacle'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 Pinnacle's earnings.
Net income on a tax-equivalent basis for the first quarter of 1996 was
$8,009,000 compared to $4,684,000 for the first quarter of 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 $473,132,000 increased net
interest income by $3,970,000 while a lower net interest margin of 3.68% for the
first quarter 1996 as compared to 4.72% in 1995, a decrease of 1.04%, resulted
in a decrease in net interest income of $1,010,000. The decrease in net interest
margin was mainly attributed to the lower margins associated with the First
Federal subsidiary who have historically operated with lower net interest
margins.
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 three months ended March 31,
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
- - ---------------------------------------------------------------------------------------------------------------------------------
THREE MONTH AVERAGE EARNING INTEREST RATES
ASSETS AND PAYING LIABILITIES EARNED/PAID
1996 1995 (DECREASE) 1996 1995 INC/(DEC)
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short term investments $ 36,156 $ 2,313 $ 33,843 5.63% 5.61% 0.02%
Securities:
Available-for-sale (1) 314,827 61,129 253,698 6.58 6.65 (0.07)
Held-to-maturity (1)
Loans, net of unearned discount (1) 524,245 295,910 228,335 8.93 9.23 (0.29)
- - ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 875,228 $ 402,096 $ 473,132 $ 7.95% 8.54% -0.59%
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 75,711 $ 44,836 $ 30,875 2.11% 1.92% 0.19%
Money market deposits 26,418 14,887 11,531 3.75 3.35 0.39
Savings deposits 231,505 119,245 112,260 3.69 4.19 (0.50)
Time deposits 328,000 137,424 190,576 5.68 5.15 0.53
Short-term borrowings 139,234 35,465 103,769 5.46 5.33 0.13
- - ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 800,868 $ 351,857 $ 449,011 $ 4.66% 4.36% 0.31%
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin(1) 3.68% 4.72% -1.04%
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 9 of 16
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE/VOLUME VARIANCE ANALYSIS
--------------------------------------------------
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 $ 506 $ 32 $ 474 $ 5 $ 0 $ 469 $ 474
Securities:
Available-for-sale(1) 5,151 1,002 4,149 4,193 (10) (34) $ 4,149
Held-to-maturity(1) -- 698 (698) (704) (704) 710 (698)
Loans, net of unearned discount(1) 11,641 6,731 4,910 5,237 (216) (111) 4,910
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS(1) $ 17,298 $ 8,463 $ 8,835 $ 8,731 $ (930) $ 1,034 $ 8,835
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 397 $ 212 $ 185 $ 1 $ 0 $ 183 $ 185
Money market deposits 246 123 123 96 15 12 123
Savings deposits 2,124 1,232 892 1,170 (148) (129) 892
Time deposits 4,632 1,746 2,886 2,442 180 264 2,886
Short-term borrowings 1,890 466 1,424 1,375 12 38 1,424
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 9,289 $ 3,779 $ 5,510 $ 5,083 $ 58 $ 368 $ 5,510
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME(1) $ 8,009 $ 4,684 $ 3,325 $ 3,648 $ (989) $ 666 $ 3,325
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Presented on a tax-equivalent basis assuming statutory income tax rates of
34% for 1996 and 1995.
NONINTEREST INCOME
Noninterest income increased $629,000, or 65.90%, for the first quarter of
1996, as compared to the same quarter of 1995. The First Federal acquisition
provided $511,000 of the increase, of which $225,000 was from security gains,
while service charges on deposit accounts at the Peoples subsidiary increased
6.40% or $23,000 and trust income increased 20.00% or $24,000.
NONINTEREST EXPENSE
Noninterest expense increased $2,458,000 or 74.70% for the first quarter
1996 as compared to the same quarter 1995. The First Federal acquisition
provided $2,182,000 of the increase. In addition, salary and benefits expense,
excluding the First Federal acquisition increased by $111,000 or 7.10%,
primarily due to merit increases and the opening of a new supermarket branch.
Equipment expense increased at the Peoples subsidiary by $77,000 or 37.70% for
depreciation expense associated with upgrades and additions. The Federal Deposit
Insurance Company ("FDIC") expense continued to decrease at the Peoples
subsidiary by $161,000 or 80.50% in the first quarter 1996 as compared to first
quarter 1995. Marketing expense at Peoples increased $73,000 or 90.10%,
primarily due to costs associated with a new line of checking accounts
introduced in March 1995.
Page 10 of 16
<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 $490,806,000 or 110.40% to
$935,471,000 at March 31, 1996 from from $444,665,000 at March 31, 1995. The
First Federal acquisition added $460,518,000 to total assets. At the Peoples
subsidiary, total loans increased $10,101,000 or 3.30%, total securities
increased $15,076,000 or 13.10%. Deposits and short-term borrowings are the
Company's primary funding sources. Deposits increased $357,947,000 or 99.80% as
of March 31, 1996 as compared to March 31, 1995. First Federal accounted for
$324,468,000 of the increase, while Peoples added $33,479,000 or 9.30% in
deposits, mainly in short-term time and demand deposits. Borrowed funds
increased $92,457,000 or 199.70% with the First Federal acquisition providing
$92,012,000 of the increase as First Federal 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 March 31, 1996, cash and due from
banks, federal funds sold, and money market instruments totaled $23,652,000
representing 2.50% of Pinnacle's total assets. Additional liquidity is provided
by the ability to borrow from the Federal Reserve Bank and the FHLB. As of March
31, 1996, Pinnacle had borrowed $103,900,000 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 $332,826,000 as of March 31, 1996 which would
be available to meet any liquidity needs of the Company.
Proceeds from the sales of securities available-for-sale amounted to
$23,045,000 in the first quarter 1996 and $6,357,000 in the first quarter 1995
with resulting gains of $234,000 and $1,000 respectively. At March 31, 1996,
gross unrealized holding gains and gross unrealized holding losses in Pinnacle's
total security portfolio totaled approximately $1,080,000 and $3,096,000,
respectively. At March 31, 1995 gross unrealized holding gains and gross
unrealized holding losses in Pinnacle's total security portfolio amounted to
approximately $152,000 and $995,000, 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 $750,000 as of March
31, 1996 and $400,000 by First Federal. Dividends paid to Pinnacle by Peoples
amounted to $730,000 as of March 31, 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.
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 ("FDCIA") 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,
Page 11 of 16
<PAGE>
10.00% and Tier I Leverage Ratio, 5.00%. At March 31, 1996 and March 31, 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
March 31, 1996 and December 31, 1995 based upon the capital requirements set by
regulatory agencies.
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1996 1995
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1
Common stockholders' equity $ 73,498 $ 74,896
Net unrealized (gains) losses on securities available-for-sale 1,330 (1,137)
Less: net unrealized losses on equity securities,
goodwill and other intangibles (14,961) (14,396)
- - --------------------------------------------------------------------------------------------------------------
Total tier 1 capital $ 59,867 $ 59,363
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
Tier 1 capital / risk adjusted assets 11.82% 11.97%
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
Minimum regulatory tier 1 capital requirement $ 20,258 $ 19,839
Minimum regulatory tier 1 capital / risk adjusted assets 4.00% 4.00%
Excess tier 1 capital $ 39,609 $ 39,524
Excess tier 1 capital / risk adjusted assets 7.82% 7.97%
Tier 2
Allowable portion of the reserve for possible credit losses $ 5,803 $ 5,852
- - --------------------------------------------------------------------------------------------------------------
Total tier 2 capital $ 5,803 $ 5,852
- - --------------------------------------------------------------------------------------------------------------
Total risk-based capital $ 65,670 $ 65,215
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
Risk-adjusted assets $ 506,445 $ 495,978
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
Quarterly average total assets less deductible intangibles $ 915,283 $ 548,448
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
Total risk-based capital / risk-adjusted assets
(regulatory minimum is 8% 12.97% 13.15%
Tier 1 capital / quarterly average total assets less
deductible intangibles (leverage ratio)
(regulatory minimum is 3% to 5%) 6.54% 10.82%
</TABLE>
Tier 1 and total qualifying capital increased $504,000 and $455,000,
respectively, as of March 31, 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 12 of 16
<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 March 31, 1996, and December 31, 1995.
<TABLE>
<CAPTION>
March 31, December 31
Dollars in thousands 1996 1995
- - ---------------------------------------------------------------------------------------------------------
<S> <S> <C>
Nonperforming assets (a) :
Nonaccruing loans:
Real Estate $ 1,485 $ 1,351
Commercial 1,696 1,807
Other 211 163
- - ---------------------------------------------------------------------------------------------------------
Total nonaccruing loans 3,392 3,321
Contractually past due but still accruing loans (a)
Real Estate 241 557
Commercial 734 52
Other 108 66
- - ---------------------------------------------------------------------------------------------------------
Total contractually past due but still accruing loans (a) 1,083 675
Restructured loans 232 324
- - ---------------------------------------------------------------------------------------------------------
Total nonperforming loans 4,707 4,320
Other real estate owned 1,302 1,419
- - ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 6,009 $ 5,739
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Nonperforming loans / loans 0.87% 0.83%
Nonperforming assets / loans and other real estate owned 1.10% 1.10%
Reserve for possible loan losses / nonperforming loans 123.28% 135.46%
Reserve for possible loan losses / nonperforming assets 96.57% 101.97%
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Accruing loans past due 90 days or more.
The increase in total nonperforming loans from December 31, 1995 to March
31, 1996 is primarily due to an increase in commercial nonaccruing loans and
accruing loans past due 90 days or more of $682,000 while real estate accruing
loans past due 90 days or more decreased $316,000.
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 13 of 16
<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>
THREE MONTHS
ENDED MARCH 31,
1996 1995
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans outstanding at end of period, net of
unearned income $ 543,142 $ 302,210
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
Average loans for the period, net $ 524,245 $ 295,910
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of period $ 5,852 $ 5,014
Charge-offs for period:
Commercial loans (40) -
Real estate loans (23) (27)
Consumer loans (158) (99)
- - ----------------------------------------------------------------------------------------------------
Total charged-offs (221) (126)
Recoveries for period:
Commercial loans 52 46
Real estate loans 4 7
Consumer loans 36 22
- - ----------------------------------------------------------------------------------------------------
Total recoveries 92 75
- - ----------------------------------------------------------------------------------------------------
Net charged-offs for the period (129) (51)
- - ----------------------------------------------------------------------------------------------------
Provision for loan losses 80 85
- - ----------------------------------------------------------------------------------------------------
Total allowance for loan losses, end of period $ 5,803 $ 5,048
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to average
loans outstanding 0.02% 0.02%
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
Allocation of allowance for loan losses:
Commercial loans $ 3,181 $ 2,901
Real estate loans 1,456 1,169
Consumer loans 1,166 978
- - ----------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 5,803 $ 5,048
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
Percentage of loans to total gross loans:
Real estate loans 50% 34%
Commercial loans 3 43
Home Equity loans 9
Consumer loans 13
Economic development bonds and other tax-exempt loans 1
- - ----------------------------------------------------------------------------------------------------
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 14 of 16
<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 March 31, 1996, under SFAS 114 and SFAS 118, the Company's impaired
loans totaled $699,000 (of which $441,000 were on a nonaccrual basis). The
related allowance for loan loss on these impaired loans at March 31, 1996, was
$167,000. The Company's impaired loans averaged $802,000 for the three months
ended March 31, 1996. Interest income of approximately $44,000 was recognized,
of which approximately $39,000 was on a cash basis, on impaired loans for the
three months ended March 31, 1996. Charge-offs of approximately $56,000 were
recognized on impaired loans during the three months ended March 31, 1996.
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 $129,000 in the first quarter of 1996, compared to
$51,000 in the first quarter of 1995. In the first quarter of 1996 and 1995,
respectively, net charge-offs included -$12,000 (recoveries) and -$46,000
(recoveries) related to commercial borrowers, $122,000 and $77,000 in consumer
credits and $19,000 and $20,000 in real estate credits.
Page 15 of 16
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 1 - 1996 First Quarter Report to Shareholders
Exhibit 2 - 1995 Annual Report to Shareholders
Exhibit 3 - 1996 Proxy Statement
(b) Form 8-K - None
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: May 15, 1996 /s/ David W. Kolhagen
----------------------------------------
David W. Kolhagen
Vice President, Chief Financial Officer
/s/ John A. Newcomer
----------------------------------------
John A. Newcomer
Corporate Affairs Officer
Page 16 of 16
