<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 September 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) (IRS 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 September 30,
1996 was 5,875,121.
Page 1 of 19
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
FORM 10-Q
September 30, 1996
TABLE OF CONTENTS PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Consolidated Statements of Income
Nine Months Ended September 30, 1996 and 1995 3
Consolidated Balance Sheets
September 30, 1996; September 30, 1995; December 31, 1995 4
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 7
PART II. OTHER INFORMATION
Items 1-3 These items have been omitted from this Form since they
are inapplicable or would have contained a negative
response 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
Page 2 of 19
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 $ 12,638 $ 7,160 $ 36,501 $ 20,865
Tax-exempt 50 49 136 168
Interest and dividends on securities:
Available-for-sale
Taxable 5,631 998 15,771 3,026
Tax-exempt 261 - 785 -
Held-to-maturity
Taxable - 307 - 991
Tax-exempt - 212 - 667
Interest on federal funds sold 45 120 150 182
Interest on interest-bearing deposits with financial
institutions 10 2 455 43
Total interest income 18,635 8,848 53,798 25,942
INTEREST EXPENSE:
Interest on deposits 7,695 3,890 22,583 10,932
Federal Home Loan Bank advances 1,835 166 4,932 581
Interest on securities sold under repurchase
agreements and other borrowings 383 134 1,252 672
- --------------------------------------------------------------------------------------------------------------
Total interest expense 9,913 4,190 28,767 12,185
- --------------------------------------------------------------------------------------------------------------
Net interest income 8,722 4,658 25,031 13,757
PROVISION FOR LOAN LOSSES 95 70 245 195
- --------------------------------------------------------------------------------------------------------------
Net interest income, after provision for
loan losses 8,627 4,588 24,786 13,562
- --------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 538 381 1,474 1,116
Trust income 159 163 479 403
Securities gains and losses, net 87 - 357 181
Other income 1,232 538 3,286 1,523
- --------------------------------------------------------------------------------------------------------------
Total noninterest income 2,016 1,082 5,596 3,223
NONINTEREST EXPENSES:
Salaries and benefits 2,622 1,661 7,851 4,807
Occupancy expense 596 246 1,597 755
Equipment expense 391 219 1,147 632
FDIC insurance premiums 2,600 20 3,046 420
Other expense 2,526 1,239 6,997 3,527
- --------------------------------------------------------------------------------------------------------------
Total noninterest expenses 8,735 3,385 20,638 10,141
- --------------------------------------------------------------------------------------------------------------
Income before income tax expense 1,908 2,285 9,744 6,644
Income tax expense 647 717 3,459 2,069
- --------------------------------------------------------------------------------------------------------------
Net income 1,261 1,568 6,285 4,575
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Net income per common share $ 0.21 $ 0.41 $ 1.07 $ 1.20
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 5,873,745 3,821,904 5,873,541 3,821,904
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share $ 0.21 $ 0.19 $ 0.61 $ 0.57
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Page 3 of 19
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(Dollars in thousands) 9/30/96 9/30/95 12/31/95
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 27,796 $ 16,698 $ 24,681
Federal funds sold 4,327 11,650 3,850
- -----------------------------------------------------------------------------------------------
Total cash and cash equivalents 32,123 28,348 28,531
Interest-bearing deposits with financial institutions 364 130 41,511
Securities available-for-sale 360,076 61,679 287,532
Securities held-to-maturity - 35,282 -
Loans, net of unearned income:
Real estate 277,394 104,263 268,911
Commercial 201,054 133,385 154,044
Tax-exempt 4,643 2,730 2,678
Consumer 105,063 69,437 92,826
- -----------------------------------------------------------------------------------------------
Subtotal loans 588,154 309,815 518,459
Less allowance for loan losses 5,676 4,865 5,852
- -----------------------------------------------------------------------------------------------
Net loans 582,478 304,950 512,607
Premises and equipment, net 12,744 7,517 12,546
Accrued interest receivable and other assets 30,655 10,600 28,719
- -----------------------------------------------------------------------------------------------
Total assets $1,018,440 $ 448,506 $ 911,446
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 65,153 $ 40,808 $ 50,400
Interest-bearing demand 74,824 51,499 80,066
Savings 267,693 129,717 252,453
Time 337,151 157,987 320,181
- -----------------------------------------------------------------------------------------------
Total deposits 744,821 380,011 703,100
Federal Home Loan Bank advances 150,024 11,000 96,752
Securities sold under repurchase agreements and other
borrowings 43,291 14,610 30,402
Accrued interest payable and other liabilities 6,823 3,839 6,296
- -----------------------------------------------------------------------------------------------
Total liabilities 944,959 409,460 836,550
- -----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock; no par value; 15,000,000 shares
authorized; 5,875,121 shares issued and outstanding
at September 30, 1996 and 5,873,358 shares issued
and outstanding at December 31, 1995 and 3,821,904
shares issued and outstanding at September 30, 1995 19,110 19,110 19,110
Additional paid in capital 43,946 10,005 44,174
Retained earnings 13,177 9,708 10,475
Net unrealized gain (loss) on securities
available-for-sale (2,752) 223 1,137
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 73,481 39,046 74,896
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,018,440 $ 448,506 $ 911,446
- -----------------------------------------------------------------------------------------------
</TABLE>
SEE DECEMBER 31, 1995 ANNUAL REPORT FOR AUDITOR'S REPORT.
Page 4 of 19
<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, 1995 $ 19,110 $ 10,005 $ 7,311 $ (1,278) $ 35,148
Net income 4,575 4,575
Cash dividends declared, $.57 per share (2,178) (2,178)
Change in unrealized gains/(losses) for securities
available-for-sale, net of tax effect of $773 (1,501) (1,501)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 $ 19,110 $ 10,005 $ 7,708 $ 223 $ 39,046
Net income 1,883 1,883
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, $.19 per share (1,116) (1,116)
Change in unrealized gains/(losses) for securities
available-for-sale, net of tax effect of $471 914 914
- ----------------------------------------------------------------------------------------------------------------------------
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/(losses) 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/(losses) 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
Common stock issuance, 1,763 shares in options
exercised 31 31
Net income 1,261 1,261
Cash dividends declared, $.21 per share (1,234) (1,234)
Change in unrealized gains/(losses) for securities
available-for-sale, net of tax effect of $788 1,529 1,529
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 $ 19,110 $ 43,946 $ 13,177 $ (2,752) $ 73,481
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 5 of 19
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,285 $ 4,575 $ 3,924
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,948 876 933
Net amortization on loans and securities 1,096 946 1,067
Provision for loan losses 245 195 65
Deferred federal income taxes 35 (177) (205)
Mortgage loans originated for sale (88,167) (2,309) (2,546)
Proceeds from sales of loans 87,067 11,243 16,230
Gain on sale of securities, net (357) (181) (71)
Gain on sale of loans, net (944) (97) (3)
Increase in interest receivable and other
assets (938) (1,778) 693
Increase in interest payable and other
liabilities 409 492 (693)
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,679 13,785 19,394
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans, excluding loan
sales, purchases, and originated for sale (35,222) (19,428) (28,696)
Purchases of loans (33,612) (9,737) (3,258)
Purchases of securities available-for-sale (191,309) (55,833) (22,039)
Purchases of securities held-to-maturity - (1,120) (3,515)
Proceeds from sales of securities
available-for-sale 83,036 37,502 9,154
Proceeds from maturities and paydowns of
securities available-for-sale 29,860 5,020 22,273
Proceeds from maturities and paydowns of
securities held-to-maturity - 11,013 14,469
Net increase in interest-bearing deposits with
financial institutions 41,147 1,022 (5,019)
Capital expenditures (1,176) (1,125) (557)
- ----------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (107,276) (32,686) (17,188)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 41,721 28,835 (3,003)
Net increase in securities sold under repurchase
agreements and other borrowings 66,161 5,728 4,234
Common stock issued (228) - -
Dividends paid (3,465) (2,064) (1,682)
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 104,189 32,499 (451)
- ----------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 3,592 13,598 1,755
Cash and cash equivalents at beginning of year 28,531 14,750 13,892
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,123 $ 28,348 $ 15,647
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 28,671 $ 11,829 $ 8,624
Federal income taxes paid $ 4,070 $ 2,492 $ 2,035
Loans transferred to other real estate
owned $ 216 $ 587 $ 463
- ----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 6 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Pinnacle Financial Services, Inc. (together with its subsidiaries,
the "Company") have been prepared in conformity with generally
accepted accounting principles for interim financial information and
with the instruction for Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all necessary adjustments
(consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The operating results
for the nine month period ended September 30, 1996 are not
necessarily indicative of the results to be expected for the year
ending December 31, 1996.
For further information, refer to the consolidated financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 filed
with the Securities and Exchange Commission on March 31, 1996.
NOTE 1: CHANGE IN ACCOUNTING FOR IMPAIRED LOANS
Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standard No. 114 (as amended by No. 118),
"Accounting by Creditors for Impairment of a Loan."
Impaired loans under SFAS 114 and SFAS 118 are nonaccrual loans
and restructured loans. All nonaccrual loans are considered
impaired loans. Additionally, loans are considered impaired if
principal and/or interest is considered at risk, even if the loan
is current with all payments of principal and interest.
Nonperforming loans are comprised of loans for which the accrual
of interest has been discontinued, loans contractually past due 90
days or more as the interest and/or principal and not included in
nonaccrual loans. Loans are generally placed on a nonaccrual
basis when, in the opinion of management, collection of principal
or interest payments is unlikely. Income on such loans is then
recognized only to the extent that cash is received and where
future collection of principal is probable.
NOTE 2: POST PERIOD CLOSING ACQUISITION
Effective October 1, 1996, the Company acquired 100% of
the outstanding common capital stock of Starke's, Inc., ("Starke's")
a full-line independent insurance agency located in St. Joseph,
Michigan. The acquisition is accounted for as a pooling of
interest, with 99,451 shares of the Company's common stock issued
as consideration. Starke's will be operated as a wholly-owned
subsidiary of Pinnacle Bank-Michigan with the existing management
of Starke's remaining intact. It is anticipated that Michigan's
other wholly-owned subsidiary, First Insurance, located in
Merrillville, Indiana will be merged with and into Starke's on
December 31, 1996. The financial results of Starke's will be
included in the Company's financial statements beginning October 1,
1996. The Company's prior period financial statements have not
been restated due to immateriality to the overall consolidated
financial statements.
Page 7 of 19
<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 nine month period
ended September 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 Bank-Michigan has filed applications to merge Pinnacle Bank-Indiana
with and into the Michigan subsidiary to be effective December 31, 1996. At
that time, the Company will cease to be a savings and loan holding company.
Approval is pending with the FDIC and the Federal Institutions Bureau of
Michigan.
Pinnacle has approximately, $1,018,440,000 in total assets as of
September 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 8 of 19
<PAGE>
SUMMARY OF PERFORMANCE
NET INCOME
Net income for the third quarter ending September 30, 1996 totaled
$1,261,000 or $.21 per share, as compared to $1,568,000, or $.41 per share
for the third quarter ending September 30, 1995 for a decrease of 19.6% on a
net income basis and 48.8% decrease on a per share basis. Net income for the
nine months ended September 30, 1996 totaled $6,285,000 or $1.07 per share,
as compared to $4,575,000, or $1.20 per share for the same period ended
September 30, 1995 for an increase of 37.4% on a net income basis and 12.1%
decrease 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, and was offset by a one-time net charge of
$1,447,000 or $.25 per share by the Savings Association Insurance Fund
(SAIF). The charge by SAIF was to increase their reserves to 1.25% of insured
deposits which will result in reduced future SAIF assessments charged to
institutions.
Presented below is an income statement analysis, expressed on a per-share
basis, comparing the quarter and nine months ended September 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.
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net income per-share - Period ended September 30, 1995 (1) $ 0.26 $ 0.78
Pre-tax increase (decrease) in 1996, as compared to 1995
resulting from changes in:
Net interest income (taxable equivalent) 0.69 1.93
Provision for loan losses 0.00 (0.01)
Noninterest income 0.16 0.40
Noninterest expense (0.66) (1.54)
Special SAIF assessment (0.25) (0.25)
- ---------------------------------------------------------------------------------------
Pre-tax increase (0.06) 0.53
Income tax expense 0.01 (0.24)
Net income per share - Period ended September 30, 1996 $ 0.21 $ 1.07
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Net income per share restated based on 5,873,745 average shares outstanding
for the quarter, and 5,873,541 average shares outstanding for nine months.
RETURN ON AVERAGE ASSETS AND STOCKHOLDERS' EQUITY
Return on average assets for the third quarter of 1996 was 0.51% as
compared to 1.42% for the third quarter of 1995. Return on average assets
for the nine months ended September 30, 1996 was 0.88% as compared to 1.41%
for the same period in 1995. Excluding the special SAIF assessment, the
return on average assets would have been 1.10% for the third quarter of 1996
and 1.08% for the nine months ended September 30, 1996.
Return on average stockholders' equity for the third quarter of 1996 was
6.94% as compared to 16.25% for the third quarter of 1995. Return on average
stockholders' equity for the nine months ended September 30, 1996 was 11.42%
as compared to 16.81% for the same period in 1995. Excluding the special
SAIF assessment, the return on average stockholders' equity would have been
14.90% for the third quarter of 1996 and 14.05% for the nine months ended
September 30, 1996.
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. 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. Except for the acquisition of Starke's
as previously discussed, Pinnacle's most recent acquisition occurred on
December 1, 1995, when the Company acquired Maco Bancorp
Page 9 of 19
<PAGE>
and its subsidiaries of First Federal Savings Bank of Indiana, Brookview Real
Estate, and First Insurance, Inc., headquartered 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 31, 1995.
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 nine
months ended September 30, 1996 was $8,864,000 and $25,452,000, compared to
$4,776,000 and $14,134,000 for the same periods ended September 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 $503,591,000 increased net
interest income by $3,982,000 while a lower net interest margin of 3.85% for
the third quarter 1996 as compared to 4.60% in 1995, a decrease of .75%,
resulted in a decrease in net interest income of $724,000. 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 nine months ended
September 30, 1996 of $486,125,000 increased net interest income by
$11,434,000 while a lower net interest margin of 3.80% as compared to 4.62%
for the nine months ended September 30, 1996, or a decrease of .82%, resulted
in a decrease in net interest income of $2,367,000, mainly attributed to
lower margins with the Indiana subsidiary.
Page 10 of 19
<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 third quarter
ended September 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.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS AVERAGE ENDED 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 $ 4,994 $ 8,366 $ (3,372) 4.38% 5.79% (1.40%)
Securities:
Available-for-sale 339,914 59,103 280,811 7.04 6.70 0.34
Held-to-maturity (1) - 37,108 (37,108) 0.00 6.58 (6.58)
Loans, net of unearned discount (1) 571,002 307,742 263,260 8.86 9.32 (0.47)
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 915,910 $ 412,319 $ 503,591 8.16% 8.63% (0.47%)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 76,766 $ 47,034 $ 29,732 1.97% 1.90% 0.08%
Money market deposits 30,212 13,285 16,927 4.00 3.23 0.78
Savings deposits 232,978 116,613 116,365 3.68 4.37 (0.68)
Time deposits 346,191 156,193 189,998 5.58 5.78 (0.20)
Federal Home Loan Bank advances 127,062 11,000 116,062 5.75 5.99 (0.24)
Other borrowings 34,321 13,641 20,680 4.44 3.90 0.54
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 847,530 $ 357,766 $ 489,764 4.65% 4.65% 0.01%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin (1) 3.85% 4.60% (0.75%)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 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 $ 55 $ 122 $ (67) $ (49) $ (30) $ 12 $ (67)
Securities:
Available-for-sale 6,011 998 5,013 4,742 50 221 5,013
Held-to-maturity (1) - 615 (615) (615) (615) 615 (615)
Loans, net of unearned discount (1) 12,711 7,231 5,480 6,186 (362) (344) 5,480
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 18,777 $ 8,966 $ 9,811 $ 10,263 $ (956) $ 504 $ 9,811
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 381 $ 225 $ 156 $ 142 $ 9 $ 5 $ 156
Money market deposits 304 108 196 138 26 32 196
Savings deposits 2,156 1,283 873 1,280 (201) (206) 873
Time deposits 4,854 2,274 2,580 2,766 (78) (108) 2,580
Federal Home Loan Bank advances 1,835 166 1,669 1,751 (7) (76) 1,669
Other borrowings 448 242 206 244 (19) (19) 206
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 9,913 $ 4,190 $ 5,723 $ 6,281 $ (232) $ (326) $ 5,723
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (1) $ 8,864 $ 4,776 $ 4,088 $ 3,982 $ (724) $ 830 $ 4,088
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Presented on a tax-equivalent basis assuming statutory income tax rates of
34% for 1996 and 1995.
Page 11 of 19
<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 nine months ended
September 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------------------
NINE 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 $ 15,110 $ 5,162 $ 9,948 5.35% 5.83% (0.48)%
Securities:
Available-for-sale 330,488 61,236 269,252 6.84 6.61 0.23
Held-to-maturity (1) - 39,708 (39,708) - 6.60 (6.60)
Loans, net of unearned discount (1) 549,740 303,107 246,633 8.92 9.31 (0.39)
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 895,338 $ 409,213 $ 486,125 8.09% 8.60% (0.51)%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 76,388 $ 45,356 $ 31,032 2.04% 1.92% 0.12%
Money market deposits 27,959 13,782 14,177 3.87 3.35 0.52
Savings deposits 232,723 118,599 114,124 3.70 4.28 (0.59)
Time deposits 336,058 147,796 188,262 5.63 5.55 0.08
Federal Home Loan Bank advances 114,351 12,799 101,552 5.76 6.07 (0.31)
Other borrowings 36,817 18,878 17,939 4.54 4.76 (0.22)
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 824,296 $ 357,210 $ 467,086 4.66% 4.56% 0.10%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin (1) 3.80% 4.62% (0.82)%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME VARIANCE ANALYSIS
INTEREST ----------------------------------
INCOME/EXPENSE INCREASE/(DECREASE) DUE DO:
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 605 $ 225 $ 380 $ 434 $ (19) $ (35) $ 380
Securities:
Available-for-sale 16,915 3,026 13,889 13,305 105 479 13,889
Held-to-maturity (1) - 1,959 (1,959) (1,959) (1,959) 1,959 (1,959)
Loans, net of unearned discount (1) 36,699 21,109 15,590 17,176 (893) (693) 15,590
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1) $ 54,219 $ 26,319 $ 27,900 $ 28,956 $ (2,765) $ 1,709 $ 27,900
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 1,165 $ 651 $ 514 $ 445 $ 40 $ 29 $ 514
Money market deposits 809 345 464 355 53 56 464
Savings deposits 6,441 3,799 2,642 3,656 (520) (494) 2,642
Time deposits 14,168 6,137 8,031 7,817 88 125 8,031
Federal Home Loan Bank advances 4,932 581 4,351 4,610 (29) (229) 4,351
Other borrowings 1,252 672 580 639 (31) (28) 580
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 28,767 $ 12,185 $ 16,582 $ 17,522 $ (398) $ (542) $ 16,582
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (1) $ 25,452 $ 14,134 $ 11,318 $ 11,434 $ (2,367) $ 2,251 $ 11,318
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Presented on a tax-equivalent basis assuming statutory income tax rates of
34% for 1996 and 1995.
Page 12 of 19
<PAGE>
NONINTEREST INCOME
Noninterest income increased $934,000, or 86.3%, for
the third quarter of 1996, as compared to the same quarter of 1995. The
Indiana acquisition provided $610,000 of the increase. The Michigan
subsidiary had an increase in deposit service charges of $57,000 or 15.0%;
other loan fees from credit life premiums and loan sales increased $94,000 or
41.4%; and security gains increased $41,000.
Noninterest income increased $2,373,000, or 73.6%, for the nine months
ended September 30, 1996, as compared to the same period in 1995. The
Indiana acquisition provided $1,540,000 of the increase, of which $277,000
was related to security gains. The Michigan subsidiary had an increase in
deposit service charges of $150,000 or 13.4%; trust income increased $76,000
or 18.9%; brokerage and investment fees increased $92,000 or 85.4%; and other
loan fees from credit life premiums and loan sales increased $285,000 or
44.6%.
NONINTEREST EXPENSE
Noninterest expense increased $5,350,000 or 158.0% for the third quarter
1996 as compared to the same quarter 1995. The Indiana acquisition provided
$4,554,000 of the increase, of which $2,016,000 was a result of the special
SAIF assessment. In addition, the special SAIF assessment for the Michigan
subsidiary was $358,000; professional and legal fees increased $86,000 or
193.3%; depreciation expense on equipment increased $67,000 or 53.5% to
support computer needs for the Indiana acquisition; supplies expense
increased $47,000 or 43.7% primarily from additional costs associated with
the name change; and marketing expense increased $94,000 or 68.3% from
additional costs associated with the name change and checking account
promotions.
Noninterest expense increased $10,497,000 or 103.5% for the nine months
ended September 30, 1996, as compared to the same period in 1995. The
Indiana acquisition provided $9,090,000 of the increase, of which $2,016,000
was a result of the special SAIF assessment. In addition, the special SAIF
assessment for the Michigan subsidiary was $358,000; equipment expense
increased at the Michigan subsidiary by $244,000 or 38.6% related to computer
upgrades to support new services, supermarket banking and the Indiana
acquisition; supplies expense increased $153,000 or 47.4% related to the name
change; marketing expense increased $177,000 or 41.0% primarily due to costs
associated with the name change and a new line of checking accounts;
telephone expense increased $84,000 or 52.8% as communication costs increased
associated with the Indiana acquisition; and professional fees increased
$183,000 or 124.7%.
Page 13 of 19
<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 $569,934,000 or 127.1% to
$1,018,440,000 at September 30, 1996 from $448,506,000 at September 30, 1995.
The Indiana acquisition added $488,928,000 to total assets. At the Michigan
subsidiary, total loans increased $22,802,000 or 7.4%, and total securities
increased $60,641,000 or 62.5%. Deposits and short-term borrowings are the
Company's primary funding sources. Deposits increased $364,810,000 or 96.0%
as of September 30, 1996 as compared to September 30, 1995. The Indiana
subsidiary accounted for $329,840,000 of the increase, while the Michigan
subsidiary added $34,970,000 or 9.2% in deposits, mainly in short-term time
and demand deposits. Borrowed funds increased $167,705,000 or 654.8% with
the Indiana acquisition providing $115,350,000 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 September 30,
1996, cash and due from banks, federal funds sold, and money market
instruments totaled $32,487,000 representing 3.2% of the Company's total
assets. Additional liquidity is provided by the ability to borrow from the
FHLB. As of September 30, 1996, the Company had borrowed $150,024,000 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 $360,076,000 as of September 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
$83,036,000 in the nine months ended September 30, 1996 and $37,502,000 for
the same period in 1995 with resulting gains of $357,000 and $181,000,
respectively. At September 30, 1996 gross unrealized holding gains and gross
unrealized holding losses in the Company's total security portfolio totaled
approximately $894,000 and $5,064,000, respectively. At September 30, 1995
gross unrealized holding gains and gross unrealized holding losses in the
Company's total security portfolio amounted to $569,000 and $230,000,
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 the Michigan and Indiana subsidiaries.
Dividends paid to the Company by the Michigan subsidiary amounted to
$2,400,000 as of September 30, 1996 and $1,300,000 by the Indiana
subsidiary. Dividends paid to Pinnacle by Peoples amounted to $1,457,000 as
of September 30, 1996. 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 14 of 19
<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 September 30, 1996 and 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
September 30, 1996 and December 31, 1995 based upon the capital requirements
set by regulatory agencies.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1
Common stockholders' equity $ 73,481 $ 74,896
Net unrealized (gains) losses on securities available-for-sale 2,752 (1,137)
Less: net unrealized losses on equity securities,
goodwill and other intangibles (12,754) (15,661)
- -------------------------------------------------------------------------------------------------------------------------
Total tier 1 capital $ 63,479 $ 58,098
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Tier 1 capital / risk adjusted assets 11.13% 12.10%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Minimum regulatory tier 1 capital requirement $ 22,822 $ 19,214
Minimum regulatory tier 1 capital / risk adjusted assets 4.00% 4.00%
Excess tier 1 capital $ 40,657 $ 38,884
Excess tier 1 capital / risk adjusted assets 7.13% 8.10%
Tier 2
Allowable portion of the reserve for possible credit losses $ 5,676 $ 5,852
- -------------------------------------------------------------------------------------------------------------------------
Total tier 2 capital $ 5,676 $ 5,852
- -------------------------------------------------------------------------------------------------------------------------
Total risk-based capital $ 69,155 $ 63,950
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets $ 570,545 $ 480,342
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Quarterly average total assets less deductible intangibles $ 964,421 $ 548,448
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Total risk-based capital / risk-adjusted assets
(regulatory minimum is 8%) 12.12% 13.31%
Tier 1 capital / quarterly average total assets less
deductible intangibles (leverage ratio)
(regulatory minimum is 3% to 5%) 6.58% 10.59%
</TABLE>
Tier 1 and total qualifying capital increased $5,381,000 and $5,205,000,
respectively, as of September 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 15 of 19
<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 September 30, 1996, and December 31, 1995.
SEPTEMBER 30, DECEMBER 31
Dollars in thousands 1996 1995
- -------------------------------------------------------------------------------
Nonperforming assets (a) :
Nonaccruing loans:
Real estate $ 303 $ 1,351
Commercial 526 1,807
Other 139 163
- ----------------------------------------------------------------------------
Total nonaccruing loans 968 3,321
Contractually past due but still
accruing loans (a)
Real estate 2,032 557
Commercial 1,844 52
Other 250 66
- ----------------------------------------------------------------------------
Total contractually past due but still
accruing loans (a) 4,126 675
Restructured loans 228 324
- ----------------------------------------------------------------------------
Total nonperforming loans 5,322 4,320
Other real estate owned 1,323 1,419
- ----------------------------------------------------------------------------
Total nonperforming assets $ 6,645 $ 5,739
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Nonperforming loans / loans 0.90% 0.83%
Nonperforming assets / loans and other real
estate owned 1.13% 1.10%
Reserve for possible loan losses / nonperforming
loans 106.65% 135.46%
Reserve for possible loan losses / nonperforming
assets 85.42% 101.97%
- -----------------------------------------------------------------------------
(a) Accruing loans past due 90 days or more.
The increase in total nonperforming loans from December 31, 1995 to
September 30, 1996 is primarily due to an increase in commercial nonaccruing
loans and accruing loans past due 90 days or more of $511,000 and real estate
nonaccruing loans and accruing loans past due 90 days or more of $427,000.
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 16 of 19
<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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans outstanding at end of period, net of
unearned income $ 588,154 $ 309,815
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Average loans for the period, net $ 571,002 $307,742 $ 549,740 $ 303,106
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of period $ 5,815 $ 4,945 $ 5,852 $ 5,014
Charge-off for period:
Commercial loans (131) (1) (171) (57)
Real estate loans - (8) (28) (44)
Consumer loans (190) (187) (510) (445)
- --------------------------------------------------------------------------------------------------
Total charged-off (321) (196) (709) (546)
Recoveries for period:
Commercial loans 44 8 160 106
Real estate loans 9 - 23 9
Consumer loans 34 38 105 87
- --------------------------------------------------------------------------------------------------
Total recoveries 87 46 288 202
- --------------------------------------------------------------------------------------------------
Net charged-off for the period (234) (150) (421) (344)
- --------------------------------------------------------------------------------------------------
Provision for loan losses 95 70 245 195
- --------------------------------------------------------------------------------------------------
Total allowance for loan losses, end of period $ 5,676 $ 4,865 $ 5,676 $ 4,865
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Ratio of net charge-off during the period to
average loans outstanding 0.04% 0.05% 0.08% 0.11%
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Allocation of allowance for loan losses:
Commercial loans $ 3,158 $ 2,905
Real estate loans 1,486 953
Consumer loans 1,032 1,007
- --------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 5,676 $ 4,865
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Percentage of loans to total gross loans:
Real estate loans 47% 34%
Commercial loans 35 44
Home Equity loans 11 9
Consumer loans 7 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 17 of 19
<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 th`e 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 September 30, 1996, under SFAS 114 and SFAS 118, the Company's
impaired loans totaled $912,000 (of which $520,000 were on a nonaccrual
basis). The related allowance for loan loss on impaired loans of $861,000 at
September, 30, 1996, was $201,000. The Company's impaired loans averaged
$1,134,000 for the nine months ended September 30, 1996. Interest income of
approximately $25,000 and $83,000 was recognized for the third quarter and
nine months ended September 30, 1996, respectively, of which approximately
$18,000 and $59,000 was on a cash basis, on impaired loans for the quarter
and nine months ended September 30, 1996. Net charge-offs of approximately
$153,000 were recognized on impaired loans during the nine months ended
September 30, 1996, of which $97,000 were recorded during the third 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 $234,000 in the third quarter of 1996, compared to
$150,000 in the third quarter of 1995. Net charge-offs were $421,000 and
$344,000 for the nine months ended September 30, 1996 and 1995, respectively.
In the third quarter of 1996 and 1995, respectively, net charge-offs
included $87,000 and -7,000 (recoveries) related to commercial borrowers,
$156,000 and $149,000 in consumer credits and -$9,000 (recoveries) and $8,000
in real estate credits. For the nine months ended September 30,1996 and
1995, respectively, net charge-offs included $11,000 and -$49,000
(recoveries) related to commercial borrowers, $405,000 and $358,000 in
consumer credits and $5,000 and $35,000 in real estate credits.
Page 18 of 19
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1-3. These items have been omitted from this Form 10-Q since they are
inapplicable or would contain a negative response
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 13 - 1996 Third Quarter Report to Shareholders
1995 Annual Report to Shareholders Incorporated
by Reference
1996 Proxy Statement Incorporated by Reference
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: November 13, 1996 /s/ David W. Kolhagen
--------------------------------------
David W. Kolhagen
Vice President, Chief Financial Officer
/s/ John A. Newcomer
--------------------------------------
John A. Newcomer
Corporate Affairs Officer
Page 19 of 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 27,796
<INT-BEARING-DEPOSITS> 364
<FED-FUNDS-SOLD> 4,327
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 360,076
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 588,154
<ALLOWANCE> 5,676
<TOTAL-ASSETS> 1,018,440
<DEPOSITS> 744,821
<SHORT-TERM> 147,915
<LIABILITIES-OTHER> 6,823
<LONG-TERM> 45,400
0
0
<COMMON> 19,110
<OTHER-SE> 54,371
<TOTAL-LIABILITIES-AND-EQUITY> 1,018,440
<INTEREST-LOAN> 12,688
<INTEREST-INVEST> 5,892
<INTEREST-OTHER> 55
<INTEREST-TOTAL> 18,635
<INTEREST-DEPOSIT> 7,695
<INTEREST-EXPENSE> 9,913
<INTEREST-INCOME-NET> 8,722
<LOAN-LOSSES> 95
<SECURITIES-GAINS> 87
<EXPENSE-OTHER> 8,735<F1>
<INCOME-PRETAX> 1,908
<INCOME-PRE-EXTRAORDINARY> 1,261
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,261
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 3.85
<LOANS-NON> 968
<LOANS-PAST> 4,126
<LOANS-TROUBLED> 228
<LOANS-PROBLEM> 8,822
<ALLOWANCE-OPEN> 5,815
<CHARGE-OFFS> 321
<RECOVERIES> 87
<ALLOWANCE-CLOSE> 5,676
<ALLOWANCE-DOMESTIC> 5,676
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>INCLUDES 2,374 FOR SPECIAL SAIF ASSESSMENT
</FN>
</TABLE>
