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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-17937
PINNACLE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MICHIGAN 38-2671129
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
830 PLEASANT STREET, ST. JOSEPH, 49085
MICHIGAN
(Address of Principal Executive (Zip Code)
Offices)
</TABLE>
Registrant's telephone number, including area code: (616) 983-6311
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting shares held by non-affiliates of
the registrant as of March 21, 1997 (based on the closing price of those shares
listed on the Nasdaq National Market) was $116,353,160.
The number of common shares, no par value, outstanding as of March 21, 1997,
was 5,980,320.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PINNACLE FINANCIAL SERVICES, INC.
FORM 10-K
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 21
Item 3. Legal Proceedings......................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders....................................... 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 21
Item 6. Selected Financial Data................................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 24
Item 8. Financial Statements and Supplementary Data...............................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 70
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 70
Item 11. Executive Compensation.................................................................... 72
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 75
Item 13. Certain Relationships and Related Transactions............................................ 77
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 78
Signatures............................................................................................. 82
</TABLE>
2
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PART I
ITEM 1. BUSINESS
GENERAL
Pinnacle Financial Services, Inc. ("Pinnacle") is a registered bank holding
company that was organized under the laws of the State of Michigan in 1986 in
connection with the June 30, 1986 reorganization of Pinnacle Bank, a Michigan
state banking corporation then known as "Peoples State Bank of St. Joseph"
("Pinnacle Bank"), into a wholly-owned subsidiary of Pinnacle. Pinnacle is one
of the leading full-service community-banking institutions in southwestern
Michigan and northern Indiana. Pinnacle's principal executive offices are
located at 830 Pleasant Street, St. Joseph, Michigan 49085, and its telephone
number is (616) 983-6311.
Through Pinnacle Bank, Pinnacle 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, full-service brokerage services and
insurance products. Commercial customers include retailers, commercial
developers, professionals, and small manufacturers. Retail banking and thrift
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.
Pinnacle Bank, which is headquartered in St. Joseph, Michigan, has two
non-bank subsidiaries: Starke's, Inc., an insurance agency, and Brookview Real
Estate, Ltd., a real estate development company. Pinnacle Bank currently
operates through 16 branch offices located throughout southwestern Michigan, 14
branch offices located throughout northern Indiana, and two loan production
offices that are located in Merrillville and Indianapolis, Indiana,
respectively. Pinnacle Bank focuses on providing personalized, high quality and
comprehensive service in order to develop and maintain long-term, multiple
account relationships with customers.
Pinnacle's market, which is adjacent to metropolitan Chicago, Illinois and
is bisected by Interstate 94 (the primary highway between Chicago and Detroit),
currently consists of northern Indiana and southwestern Michigan. The region's
location has facilitated the development of a diverse economy based primarily on
manufacturing, service and agriculture. The region's proximity to Chicago and
the southeastern expansion of metropolitan Chicago into Lake County, Indiana,
have led to significant commercial and residential development and a strong
second-home housing market. The region's popularity as a year-round recreational
area also has led to tourism-driven economic growth.
Pinnacle had $1.1 billion in total assets as of December 31, 1996. Pinnacle
returned .94% on average assets for the year ended December 31, 1996. This
compares to 1.36%, 1.30% and 1.27% for each of the years in the three year
period ended December 31, 1995. For the year ended December 31, 1996, Pinnacle's
return on average equity was 12.34%. Annual returns on average equity since 1993
have ranged from 15.40% to 15.91%.
Pinnacle believes its success is in part attributable to a growth strategy
that, since the beginning of 1993, has (i) increased assets by more than 171%
(with total assets growing to $1.1 billion by December 31, 1996), and (ii)
increased net loans by more than 130% (with total loans growing to approximately
$603.9 million at December 31, 1996). Pinnacle's loan to deposit ratio was
approximately 80.1% at December 31, 1996. Pinnacle's growth has been generated
internally through customer retention and cross-selling programs and externally
through acquisitions. Since 1988, Pinnacle has consummated five acquisitions,
two of which involved thrifts.
STRATEGIES TO ACHIEVE GROWTH
ACQUISITIONS. In recent years, Pinnacle's growth has occurred primarily
through mergers and acquisitions. Since its formation as a bank holding company
in 1986, Pinnacle has successfully integrated five
3
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significant acquisitions. In February 1988, Pinnacle acquired $37 million in
assets and assumed certain liabilities of First State Bank of White Cloud (the
"White Cloud Acquisition"), which thereafter became a branch office of Pinnacle
Bank. In December 1990, the majority of the assets of Pinnacle's White Cloud
branch office were sold to, and the liabilities associated with that branch
office were assumed by, another unaffiliated bank. In February 1990, the
Resolution Trust Corporation transferred to Pinnacle $84 million in assets and
certain liabilities of the insolvent Peoples Savings Association of St. Joseph,
Michigan (the "Peoples Acquisition"). In December 1992, Pinnacle acquired all of
the outstanding stock of Harbor Country Banking Company of Three Oaks, Michigan,
an $82 million state bank.
On December 1, 1995, Pinnacle acquired all of the outstanding capital stock
of Maco Bancorp, Inc., a Delaware corporation and a registered savings and loan
holding company ("Maco"), for aggregate consideration of $41.9 million (the
"Purchase Price"), through the merger of Maco with and into Pinnacle (the "Maco
Acquisition"). The Purchase Price, which was paid to Mr. Cyrus A. Ansary as the
sole stockholder of Maco, consisted of cash, a secured, short-term, interest
bearing promissory note in the principal amount of $18.0 million (the
"Acquisition Note"), and shares of Pinnacle Common Stock then valued at
approximately $21.0 million. As a result of the Maco Acquisition, Pinnacle
became the sole stockholder of First Federal Savings Bank of Indiana, a federal
savings bank that was renamed "Pinnacle Bank" in 1996 and was merged with and
into Pinnacle Bank effective December 31, 1996, and Mr. Ansary became the
largest single Pinnacle stockholder. Mr. Ansary currently holds approximately
20% of the shares of Pinnacle Common Stock outstanding. (In connection with the
Maco Acquisition, Mr. Ansary and Pinnacle entered into certain agreements,
including a Standstill Agreement dated as of December 1, 1995 (the "Standstill
Agreement"). The Standstill Agreement obligates Mr. Ansary, through December 31,
1999 (unless it is sooner terminated) to vote all Pinnacle voting securities of
which he is the beneficial owner in accordance with the written directions of
Pinnacle's management.)
As a result of these acquisitions and growth generated by its own
operations, Pinnacle's assets increased from $231 million at the beginning of
1990 to $1.1 billion at December 31, 1996.
Through its acquisition strategy, Pinnacle seeks to diversify and expand
both its market area and its asset base, and to increase its profitability.
Although Pinnacle is more interested in acquiring established financial service
organizations, based on its experiences with the White Cloud Acquisition and the
Peoples Acquisition, Pinnacle may acquire the assets of troubled or insolvent
banks or thrift institutions if advantageous asset acquisition opportunities of
this type present themselves. Factors usually considered by Pinnacle in
determining the desirability of an acquisition candidate include price and
terms, the growth potential of the target's market and earnings, the target's
general financial condition and the quality of the target's management.
On November 14, 1996, Pinnacle entered into an Agreement and Plan of Merger
with Indiana Federal Corporation, a Delaware corporation and a registered
savings and loan holding company ("IFC"). On February 27, 1997 Pinnacle entered
into an Agreement and Plan of Merger with CB Bancorp, Inc., a Delaware
corporation and a registered savings and loan holding company ("CB"). The
agreements contemplate the merger of each of IFC and CB with and into Pinnacle,
with Pinnacle being the surviving entity. These transactions are expected to
qualify as "pooling-of-interests" for accounting and financial reporting
purposes and to increase the total assets of Pinnacle by more than $1.0 billion.
Consummation of these transactions is subject to shareholder and regulatory
approval.
In addition to expansion through acquisitions, Pinnacle may consider
establishing branch facilities as a means of expanding its presence into new
market areas. Pinnacle may also consider expanding into businesses closely
related to its banking activities. Closely related businesses that Pinnacle
could acquire or organize include, among others, mortgage lending, mortgage
servicing, investment and financial advisory services, leasing, insurance, data
processing, management consulting to depository institutions, and courier
services.
As a result of the Maco Acquisition, Pinnacle acquired First Insurance,
Inc., an Indiana corporation engaged primarily in the sale of multi-peril
homeowner's insurance to borrowers of Pinnacle Bank. On
4
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October 1, 1996, and in exchange for 99,451 shares of Pinnacle Common Stock then
valued at $2.1 million, Pinnacle Bank acquired Starke's, Inc., a Michigan
corporation and an independent "full-line" insurance agency. On December 31,
1996, First Insurance, Inc. was merged with and into Starke's, Inc.
There can be no assurance that any further acquisitions will be made by
Pinnacle or, if made, will be successful. Moreover, there can be no assurance
that Pinnacle's strategies to achieve growth will be successful.
CUSTOMER DEVELOPMENT. Pinnacle believes that it can increase profitability
by expanding the number and types of accounts and relationships with its
existing customers. To achieve that goal, Pinnacle is continuing to explore
technologies that facilitate cross-selling of financial products to existing
customers and deliver services more efficiently. In 1995 Pinnacle initiated a
telephone marketing program utilizing personnel trained to survey customer
satisfaction and needs and to cross-sell additional products offered by it.
CUSTOMER RETENTION. Pinnacle focuses on providing personalized, high
quality and comprehensive service in order to develop and maintain long-term,
multiple account relationships with customers. Through its subsidiaries,
Pinnacle offers a wide range of banking services, including consumer, commercial
and real estate loans, personal and business checking accounts, savings
accounts, demand and time deposits, safe deposit services, trust and other
fiduciary services, and brokerage services. To facilitate the retention of
customers, Pinnacle has designed and implemented a system of quality controls
and initiatives known as its "Quality in the Banking Environment" program.
Pinnacle utilizes alternative delivery systems that include electronic funds
transfer systems (such as direct deposit of payroll services and ATMs) and
telephone banking systems. Pinnacle is also expanding its delivery of financial
services in non-traditional settings. In July 1995, Pinnacle Bank established a
full-service branch office in a supermarket located in Stevensville, Michigan.
Pinnacle has attempted to increase customer convenience, and thereby
increase customer loyalty, through, among other things, enhanced financial
services, extended banking hours, and the development of products targeted to
the needs of particular segments of its customer base. For example, some of
Pinnacle's branch offices now offer Saturday lobby hours. Pinnacle has also
developed a low-cost basic checking service, private banking services,
commercial cash management services, and special products targeted to the senior
citizen market. Finally, Pinnacle now offers its customers full-service
brokerage services that include a wide range of investment opportunities and a
combination of research and financial planning that are suited to individual
customer needs.
LENDING PRACTICES
LOAN PORTFOLIO. In accordance with its loan policies, Pinnacle strives to
maintain a diversified loan portfolio. The following table presents loans
outstanding according to loan category at December 31 of each year.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial................................................... $ 210,315 $ 154,044 $ 120,414 $ 107,660 $ 97,456
Real Estate.................................................. 276,941 268,911 103,016 103,568 110,208
Consumer..................................................... 114,112 92,826 62,742 49,779 50,956
Economic development bonds and other tax-exempt loans........ 8,196 2,678 4,158 3,003 4,003
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income................................ 609,564 518,459 290,330 264,010 262,623
Allowance for loan losses.................................... (5,643) (5,852) (5,014) (5,215) (5,881)
---------- ---------- ---------- ---------- ----------
Net loans.................................................... $ 603,921 $ 512,607 $ 285,316 $ 258,795 $ 256,742
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
5
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The following table presents commercial loans outstanding at December 31 of
each year which, based on remaining scheduled repayments of principal, are due
in the period indicated.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- --------------------
VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED
RATE RATE RATE RATE RATE RATE
---------- --------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Due in 1 year or less................................... $ 37,258 $ 15,313 $ 31,468 $ 10,773 $ 76,435 $ 9,687
Due in 1 through 5 years................................ 28,479 58,409 30,553 37,595 782 33,510
Due after 5 years....................................... 65,968 4,888 38,935 4,720 -- --
---------- --------- ---------- --------- --------- ---------
Total............................................... $ 131,705 $ 78,610 $ 100,956 $ 53,088 $ 77,217 $ 43,197
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
</TABLE>
The following table presents information concerning certain non-performing
loans at December 31 of each year.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis(1)............................. $ 761 $ 3,321 $ 749 $ 1,722 $ 5,424
Accruing loans contractually past due 90 days or more as to principal or
interest payments....................................................... 3,916 675 490 694 858
Restructured loans........................................................ 227 324 503 282 --
--------- --------- --------- --------- ---------
Total non-performing loans............................................ $ 4,904 $ 4,320 $ 1,742 $ 2,698 $ 6,282
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Loans are generally placed on a non-accrual 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 is likely. If non-accrual loans had been
maintained current in accordance with their original terms, additional
interest income of $118,000, $81,000, $87,000 and $79,000 would have been
recorded during the years ended December 31, 1996, 1995, 1994 and 1993,
respectively.
Pinnacle closely monitors other loans of concern, which are loans now
current (i.e., not included in non-accrual and past-due loan disclosures above)
but where doubts exist as to the ability of the borrower to comply with present
loan repayment terms. These loans totaled approximately $10.2 million at
December 31, 1996, $9.6 million at December 31, 1995 and approximately $7.0
million at December 31, 1994. The classification of these loans, however, does
not mean that Pinnacle's management expects losses on these loans. Such
classification relates to specific concerns relating to each individual borrower
and does not relate to any concentrated risk elements common to all the loans.
The increase in such loans during 1995 is attributable to the Maco Acquisition.
Pinnacle has no loans for which the terms have been renegotiated to less than
market rates due to weakening of a borrower's financial condition.
Pinnacle's loans outstanding to borrowers in foreign countries as of
December 31, 1996, 1995 and 1994 did not exceed 1% of its total assets. As of
December 31, 1996, 1995 and 1994 Pinnacle had no concentrations of loans to
individual borrowers that exceeded 10% of total loans.
COMMERCIAL LOANS. Through 10 experienced lending officers, Pinnacle
provides cash management services and secured and unsecured loans for business
purposes to individuals, companies and governmental units primarily within
southwestern Michigan and northern Indiana.
Pinnacle originates commercial loans for general business purposes,
including working capital requirements, inventory and accounts receivable
financing, and fixed asset financing for various equipment and plant expansions.
Pinnacle's commercial customers include, among others, professionals,
durable-goods manufacturers, service-related companies and retail
establishments.
6
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Pinnacle also originates mortgage loans for the acquisition and refinancing
of commercial real estate properties. The majority of Pinnacle's commercial real
estate loans are secured by first liens on office buildings, small retail
establishments and small manufacturing facilities located in its primary market
area.
Although conditions vary from loan to loan, commercial loans for working
capital purposes are typically written for less than one year and renewals are
reviewed on an annual basis. Loans provided for non-real estate fixed assets
generally have terms between four and six years and are fully amortizing over
the period. Commercial real estate loans are generally written with a three to
five year term with payments typically amortizing over 15 years. In addition to
a first lien on the collateral asset, Pinnacle seeks to secure its loans by
obtaining a security interest in all of the other assets of the borrower's
business, an assignment of rents, if applicable, and personal guaranties.
Commercial real estate loans generally have interest rates which are set at a
regional national bank's prime rate plus a margin and which adjust each time the
designated prime rate adjusts. Pinnacle also encourages commercial real estate
borrowers to open or maintain a deposit account at Pinnacle to facilitate the
automatic withdrawal of the loan payment based on the terms of the loan.
Pinnacle evaluates all aspects of commercial loan transactions in order to
mitigate risk to the extent possible. In underwriting these loans, consideration
is given to the stability of the borrower's cash flow and operating history,
future operating projections, comparable financial ratios for like businesses,
and collateral asset evaluations. The underwriting analysis also includes credit
checks and a review of the financial condition of the borrower and guarantor, if
applicable. A narrative appraisal report is prepared by an appraiser who is
either a member of the Appraisal Institute or state-certified and commissioned
by Pinnacle to substantiate property values for substantially all commercial
real estate loan transactions.
Commercial real estate lending entails more risks than single-family
residential lending because such loans typically involve large loan balances to
single borrowers and because the payment experience on such loans is typically
dependent on the successful operation of the project or the borrower's business.
These risks can also be significantly affected by supply and demand conditions
in the local market for retail establishments, offices or other commercial
space. Pinnacle attempts to minimize its risk exposure by limiting such lending
to proven business owners, and considering properties with an existing operating
performance which can be analyzed, and continually monitoring the financial
condition of the borrower and the operation and physical condition of the
collateral.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. Pinnacle originates loans
secured by first lien mortgages on completed one- to four-family residences in
its market area for retention in its portfolio, if the loan has an adjustable
rate of interest, and for sale in the secondary market, if the loan has a fixed
rate of interest. Pinnacle originates fixed-rate and adjustable-rate residential
mortgage loans with terms of up to 30 years; although a large number of the
loans held in its portfolio have maturities that are less than the contractual
terms due to prepayments, due-on-sale clauses and bi-weekly payments.
The adjustable-rate mortgages currently offered by Pinnacle have interest
rates which adjust commencing on the first, third or fifth anniversary of the
loan, and are based upon an index tied to the weekly average yield on U.S.
Treasury securities (adjusted to a constant comparable maturity), as made
available by the Federal Reserve Board, plus a margin.
When Pinnacle sells the residential loans it has originated, it may either
retain or sell the rights to service those loans and to receive the related
fees. Pinnacle currently receives servicing fees ranging generally from 0.25% to
0.375% per annum on its mortgage loan servicing portfolio. While the aggregation
of a servicing portfolio can create a substantial continuing source of income,
there is an active market for mortgage loan servicing rights (which are
generally valued in relation to the present value of the cash flow generated by
the servicing rights). Subject to market conditions, Pinnacle currently plans to
increase the size of its mortgage loan servicing portfolio by retaining some
servicing rights associated with wholesale residential loan purchases, making
bulk purchases of servicing rights and increasing retained servicing rights on
residential loans it originates.
7
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CONSUMER LOANS. Pinnacle originates consumer loans, which are primarily for
personal, family or household purposes, in order to provide a wide range of
financial services to its customers. Consumer loans made by Pinnacle include
home equity lines of credit, home improvement loans, and loans to finance the
purchase of new and used automobiles and boats. Pinnacle makes unsecured
consumer loans on a case-by-case basis based upon a detailed review of the
applicant's credit history. Pinnacle has begun purchasing home equity loans from
correspondents located outside of its southwestern Michigan and northern Indiana
market areas. Pinnacle also purchases retail installment loans from certain
automobile dealerships in its market areas.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and, except for the home equity lines of credit,
usually involve more credit risk than mortgage loans because of the type and
nature of the collateral. These loans are generally repaid on a monthly
repayment schedule with the source of repayment tied to the borrower's periodic
income. In addition, consumer lending collections are dependent on the
borrower's continuing financial stability, and are thus likely to be adversely
affected by job loss, illness and personal bankruptcy. In many cases,
repossessed collateral for a defaulted consumer loan will not provide an
adequate source of repayment of the outstanding loan balance because of
depreciation of the underlying collateral. Pinnacle believes that the generally
higher yields earned on consumer loans compensate for the increased credit risk
associated with such loans and that consumer loans are important to its efforts
to serve the credit needs of the communities and customers that it serves.
Pinnacle's consumer loan lending territory approximates the markets served by
its retail branches. Consumer loan customers are typically individuals who have
a pre-existing banking relationship with Pinnacle.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level that management of Pinnacle considers adequate to provide for potential
losses based upon an evaluation of known and inherent risks in the loan
portfolio. Allowances for loan losses are based on estimated net realizable
value, unless it is probable that loans will be foreclosed, in which case
allowances for loan losses are based on fair value. The allowance is reviewed by
management on a quarterly basis and its evaluation is based upon examination of
the portfolio, past loss experience, the level and trends of classified assets,
the current level of the allowance as it relates to non-performing loans, the
current level of provisions for loan losses and how such levels relate to total
loans receivable, net, non-performing loans and recent and projected
charge-offs, current economic conditions, the results of the most recent
regulatory examinations and other relevant factors. While management of Pinnacle
uses its best efforts to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluations.
8
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LOAN LOSS EXPERIENCE. The following table summarizes the loan loss
experience and provides a breakdown of the allowance for loan losses at December
31, of each year.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of period, net of unearned income... $ 609,564 $ 518,459 $ 290,330 $ 264,010 $ 262,623
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average loans for the period, net............................ $ 561,257 $ 322,851 $ 274,757 $ 256,970 $ 216,289
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, beginning of period............... $ 5,852 $ 5,014 $ 5,215 $ 5,881 $ 2,022
Charge-offs for period:
Commercial loans........................................... 172 73 284 907 621
Real Estate loans.......................................... 43 44 34 83 254
Consumer loans............................................. 720 627 280 419 627
---------- ---------- ---------- ---------- ----------
Total charge-offs........................................ 935 744 598 1,409 1,502
---------- ---------- ---------- ---------- ----------
Recoveries for period:
Commercial loans........................................... 166 116 67 120 101
Real Estate loans.......................................... 34 23 42 90 11
Consumer loans............................................. 151 120 163 173 116
---------- ---------- ---------- ---------- ----------
Total recoveries......................................... 351 259 272 383 228
---------- ---------- ---------- ---------- ----------
Net charge-offs for the period............................... 584 485 326 1,026 1,274
---------- ---------- ---------- ---------- ----------
Allowance recorded for acquired loans........................ -- 1,098 -- -- 4,039
Provision for loan losses.................................... 375 225 360 1,094 125
---------- ---------- ---------- ---------- ----------
Total allowance for loan losses, end of period............... $ 5,643 $ 5,852 $ 5,014 $ 5,215 $ 5,881
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net charge-offs during the period to average loans
outstanding................................................ .10% .15% .12% .40% .59%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allocation of allowance for loan losses:
Commercial loans........................................... $ 3,089 $ 3,169 $ 2,855 $ 3,038 $ 3,635
Real Estate loans.......................................... 1,426 1,475 1,189 1,181 1,174
Consumer loans............................................. 1,128 1,208 970 996 1,072
---------- ---------- ---------- ---------- ----------
Total allowance for loan losses.......................... $ 5,643 $ 5,852 $ 5,014 $ 5,215 $ 5,881
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Percentage of loans to total gross loans:
Commercial loans........................................... 35% 29% 42% 41% 37%
Real Estate loans.......................................... 45 52 35 39 42
Consumer loans............................................. 19 18 22 19 19
Economic development bonds and other tax-exempt loans...... 1 1 1 1 2
---------- ---------- ---------- ---------- ----------
Total.................................................... 100% 100% 100% 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.
9
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. Financial institutions such as Pinnacle have authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various Federal agencies and of state and municipal governments,
certificates of deposit at federally-insured banks and savings and loan
associations, certain bankers' acceptances and Federal funds. Subject to various
restrictions, Pinnacle may also invest a portion of its assets in commercial
paper, corporate debt securities and mutual funds (so long as the assets of such
mutual funds conform to the investments that financial institutions such as
Pinnacle are otherwise authorized to make directly).
Pinnacle's investment securities are comprised of securities
held-to-maturity and securities available-for-sale. Securities which management
believes could be sold prior to maturity in order to manage interest rate risk,
prepayments, liquidity risk, or other corporate purposes are classified as
securities available-for-sale and are carried at fair value with unrealized
gains and losses, net of applicable income taxes, reported as a component of
stockholders' equity. Securities, other than the foregoing, which management has
the ability and positive intent to hold until maturity, are classified as
securities held-to-maturity and are accounted for using historical amortized
cost. Pinnacle has no material trading account securities.
INVESTMENT PORTFOLIO. The following table presents the amortized cost basis
of securities held-to-maturity as of December 31, 1994.
At December 31, 1996 or 1995, Pinnacle did not have any securities
held-to-maturity.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1994
---------------
(IN THOUSANDS)
<S> <C>
U.S. Treasury Securities..................................................... $ --
Obligations of other U.S. government agencies and corporations............... --
Obligations of states and political subdivisions(1).......................... 16,103
Corporate securities......................................................... 15,616
Equity securities............................................................ --
Mortgage-backed securities................................................... 11,720
-------
Total.................................................................... $ 43,439
-------
-------
</TABLE>
- ------------------------
(1) At December 31, 1994, the book value of securities issued by the State of
Michigan and the State of Illinois (including all their political
subdivisions) totaled $3,706,000 and $4,315,000 with a market value of
$3,756,000 and $4,338,000, respectively.
At December 1, 1995, securities held-to-maturity including those securities
acquired from First Federal were reclassified to available-for-sale pursuant to
the FASB issuance of "A Guide to Implementation of Statement 115" that allowed
entities to reassess the appropriateness of the reclassification of all
securities.
The following table presents the amortized cost basis of securities
available-for-sale at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities................................... $ 10,046 $ 9,577 $ 17,752
Obligations of other U.S. government agencies and
corporations............................................. 160,434 91,925 7,258
Obligations of states and political subdivisions........... 20,936 19,406 55
Corporate securities....................................... 350 10,275 6,547
Equity securities.......................................... 12,138 6,328 1,803
Mortgage-backed securities................................. 168,897 148,298 16,616
---------- ---------- ---------
Total.................................................. $ 372,801 $ 285,809 $ 50,031
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
10
<PAGE>
The following table summarizes the maturities of securities
available-for-sale at the date indicated and the weighted yield of such
securities:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------
AMOUNT YIELD
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury securities:
Within 1 year........................................................ $ 2,012 5.45%
After 1 but within 5 years........................................... 8,090 5.75
---------- -----
Subtotal............................................................. 10,102 5.69
---------- -----
Obligations of other U.S. government agencies and corporations:
Within 1 year........................................................ 30 7.99%
After 1 but within 5 years........................................... 6,764 6.83
After 5 but within 10 years.......................................... 55,099 7.42
After 10 years....................................................... 97,840 7.56
---------- -----
Subtotal............................................................. 159,733 7.48%
---------- -----
Obligations of states and political subdivisions
Within 1 year........................................................ 1,710 3.54
After 1 but within 5 years........................................... 9,428 4.19
After 5 but within 10 years.......................................... 5,731 4.82
After 10 years....................................................... 4,604 5.16
---------- -----
Subtotal............................................................. 21,473 4.51
---------- -----
Corporate Securities:
Within 1 year........................................................ 183 5.74
After 1 but within 5 years........................................... 77 6.20
After 5 but within 10 years.......................................... -- --
After 10 years....................................................... 94 7.26
---------- -----
Subtotal............................................................. 354 6.24
---------- -----
Equity securities:
Within 1 year........................................................ 12,110 7.49
---------- -----
Mortgage-backed securities:
Within 1 year........................................................ 738 7.29
After 1 but within 5 years........................................... 15,659 6.76
After 5 but within 10 years.......................................... 5,713 6.79
After 10 years....................................................... 146,275 7.05
---------- -----
Subtotal............................................................. 168,385 7.02
---------- -----
Total securities available-for-sale.................................... $ 372,157 7.05%
---------- -----
---------- -----
</TABLE>
11
<PAGE>
SOURCES OF FUNDS
GENERAL. Pinnacle's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through the branch offices of its subsidiary. Pinnacle also derives funds from
the proceeds from operations, the sale of residential mortgage loans in the
secondary market, and the amortization and prepayments of outstanding loans and
mortgage-related securities. Pinnacle periodically borrows from the Federal Home
Loan Bank of Indianapolis.
DEPOSITS. Pinnacle's current deposit products include savings accounts,
checking accounts, money market deposit accounts and certificates of deposit
ranging in terms from 14 days to ten years. Pinnacle's deposits are obtained
primarily from residents in southwestern Michigan and northern Indiana. Pinnacle
attracts deposit accounts by offering a variety of accounts, competitive
interest rates, and convenient branch office locations and service hours.
Pinnacle primarily utilizes direct mail, newspaper and radio advertising to
attract new customers and deposits, but Pinnacle does not solicit brokered
deposits.
The following table presents a breakdown by category of the average amount
of deposits (all in domestic offices) and the average rate paid for the periods
indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
---------- ------------ ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits......... $ 50,458 0.00% $ 39,028 0.00% $ 37,587 0.00%
Interest-bearing demand deposits............ 76,557 2.01 48,223 1.95 45,978 1.76
Savings deposits............................ 261,149 3.72 143,006 4.13 141,511 3.24
Time deposits............................... 342,285 5.63 164,332 5.63 131,025 4.52
---------- ---------- ----------
Total................................... $ 730,449 $ 394,589 $ 356,101
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996
---------------
(IN THOUSANDS)
<S> <C>
Three months or less......................................................... $ 31,843
Three through twelve months.................................................. 22,530
One through five years....................................................... 6,179
Over five years.............................................................. 732
-------
Total.................................................................... $ 61,284
-------
-------
</TABLE>
BORROWINGS. Pinnacle borrows from time to time for short-term funding
purposes. At December 31, 1996, total borrowings by Pinnacle were $225.4
million. Pinnacle has entered into an agreement which enables it to borrow funds
from the Federal Home Loan Bank of Indianapolis that are collateralized by a
blanket agreement on all unpledged assets equal to the amount of current assets.
Such advances are made pursuant to several credit programs, each of which has
its own interest rate and range of maturities, and are generally available to
fund loans held for sale and to meet seasonal and other withdrawals of deposit
accounts. At December 31, 1996, Pinnacle had $159.5 million of advances from the
Federal Home Loan Bank of Indianapolis and $65.9 million of securities sold
under repurchase agreements, and other borrowings.
12
<PAGE>
TRUST SERVICES
Pinnacle's trust operations had approximately 328 trust accounts under
management as of December 31, 1996. Pinnacle's trust operations provide a full
complement of asset management services for individuals and corporations, and
are currently emphasizing investment management for individuals and employee
benefit plan management. Since its formation in 1987, Pinnacle's trust
operations have experienced strong growth as assets under management grew to
approximately $93.7 million as of December 31, 1996. The growth of Pinnacle's
trust operations is attributable to concerted marketing efforts by Pinnacle. Its
trust operations competes for business primarily with other banks and brokerage
companies in its market area.
COMPETITION
The banking business is highly competitive. Pinnacle competes as a financial
intermediary with other commercial banks, savings and loan associations, credit
unions, mortgage banking companies, securities brokerage companies, insurance
companies, and money market mutual funds operating in Michigan, Indiana and
elsewhere. Many of these competitors have substantially greater resources and
lending limits than Pinnacle and offer certain services that Pinnacle does not
currently provide. In addition, non-depository institutions are generally not
subject to the extensive regulation applicable to Pinnacle.
EMPLOYEES
Pinnacle does not have any employees that are not also full-time employees
of Pinnacle Bank or subsidiaries of Pinnacle Bank because virtually all of
Pinnacle's activities are conducted through Pinnacle Bank and its subsidiaries.
Pinnacle Bank had 326 full-time employees and 38 part-time employees at December
31, 1996. None of Pinnacle's employees are represented by a collective
bargaining agent. Pinnacle believes that it enjoys good relations with its
personnel.
REGULATION
GENERAL. Financial institutions such as bank holding companies, banks,
savings and loan holding companies, and thrifts are extensively regulated under
both federal and state law. Such regulations apply to, among other things,
acquisitions, permissible types and amounts of loans, investments and other
activities, capital adequacy, branching, interest rates on loans and on deposits
and the safety and soundness of banking practices. The policies and regulations
of financial institution regulatory authorities have had significant effect on
the operating results of financial institutions in the past and are expected to
have significant effects in the future. Such policies and regulations, which
generally are intended to protect depositors and not stockholders, may be
influenced by many factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and fiscal policies of the
United States government. Regulation of the financial institutions industry is
undergoing continuous change and the ultimate effect of such changes cannot be
predicted. Periodically, legislation is considered and adopted which has
resulted in, or that could result in, further regulation or deregulation of
financial institutions. In addition to the relaxation or elimination of
geographic restrictions on banks and bank holding companies, a number of
regulatory and legislative initiatives have the potential for eliminating many
of the product line barriers presently separating the services offered by
commercial banks from those offered by nonbanking institutions, including mutual
funds, securities brokerage firms and investment banking firms. No assurance can
be given as to whether any additional legislation will be adopted or as to the
effect such legislation would have on the business of Pinnacle and its
subsidiaries.
As a bank holding company, Pinnacle is subject to regulation under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and its examination and
reporting requirements and is subject to the supervision of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). Banking
laws and regulations restrict transactions by insured banks owned by a bank
holding company,
13
<PAGE>
including loans to and certain purchases from the parent holding company,
non-bank and bank subsidiaries of the parent holding company, principal
stockholders, officers, directors and their affiliates, and investments by the
subsidiary banks in the shares or securities of the parent holding company (or
of any other non-bank or bank affiliates), and acceptance of such shares or
securities as collateral security for loans to any borrower. The regulators also
review other payments, such as management fees, made by subsidiary banks or
affiliated companies.
Under the BHCA, a bank holding company is prohibited, with certain limited
exceptions, from engaging in activities other than those of banking or of
managing or controlling banks and from acquiring or retaining direct or indirect
ownership or control of voting shares or assets of any company which is not a
bank or bank holding company, other than subsidiaries furnishing services to or
performing services for its subsidiaries, and other subsidiaries engaged in
activities which the Federal Reserve Board determines to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
Pinnacle Bank is subject to regulation and examination by the Financial
Institutions Bureau of the State of Michigan (the "Michigan Financial
Institutions Bureau"). As an institution whose deposits are insured by the Bank
Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the
"SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"), Pinnacle Bank
is also subject to regulation and examination by the FDIC.
PAYMENT OF DIVIDENDS. Pinnacle is a legal entity separate and distinct from
its subsidiaries. Substantially all of Pinnacle's revenues result from dividends
paid to it by Pinnacle Bank and from earnings on investments. There are
statutory and regulatory requirements applicable to the payment of dividends by
Pinnacle Bank as well as by Pinnacle to its stockholders. Under Michigan law,
Pinnacle Bank may not declare a cash dividend or a dividend in kind except out
of net profits then on hand after deducting all losses and bad debts, and then
only if it will have a surplus amounting to not less than 20% of its capital
after the payment of the dividend. Moreover, Pinnacle Bank may not declare or
pay any cash dividend or dividend in kind until the cumulative dividends on its
preferred stock, if any, have been paid in full. Further, if the surplus of
Pinnacle Bank is at any time less than the amount of its capital, before the
declaration of a cash dividend or dividend in kind, it must transfer to surplus
not less than 10% of its net profits for the preceding half-year (in the case of
quarterly or semi-annual dividends) or the preceding two consecutive half-year
periods (in the case of annual dividends). Under the foregoing dividend
restrictions, Pinnacle Bank, without obtaining governmental approvals, could
declare aggregate dividends in 1996 of approximately $14.9 million from retained
net profits of the preceding two years, plus an amount approximately equal to
the net profits (as measured under current regulations), if any, earned for the
period from January 1, 1996 through the date of declaration less dividends
previously paid in 1996. During 1996, Pinnacle Bank paid $3.7 million in
dividends.
The payment of dividends by Pinnacle and its subsidiary may also be affected
or limited by other factors, such as the requirements to maintain adequate
capital above regulatory guidelines. In addition, if, in the opinion of the
applicable regulatory authority, a bank or thrift under its jurisdiction is
engaged in or is about to engage in an unsafe or unsound practice (which,
depending on the financial condition of the bank or thrift, could include the
payment of dividends), such authority may require, after notice and hearing,
that such bank or thrift cease and desist from such practice or prohibit the
payment of future dividends. The Federal Reserve Board has indicated that paying
dividends that deplete a bank's capital base to an inadequate level would be an
unsafe and unsound banking practice. The Federal Reserve Board and the FDIC have
issued policy statements which provide that bank holding companies and insured
banks should generally only pay dividends out of current operating earnings.
CERTAIN TRANSACTIONS WITH AFFILIATES. There are legal restrictions on the
extent to which a bank holding company such as Pinnacle and its nonbank
subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries
(e.g., Pinnacle Bank). The "covered transactions" that an insured bank such as
Pinnacle Bank and its subsidiaries are permitted to engage in with their nonbank
affiliates are limited to the following
14
<PAGE>
amounts: (i) in the case of any one such affiliate, the aggregate amount of
"covered transactions" of the insured bank and its subsidiaries cannot exceed
10% of the capital stock and the surplus of the insured bank; and (ii) in the
case of all affiliates, the aggregate amount of "covered transactions" of the
insured bank and its subsidiaries cannot exceed 20% of the capital stock and
surplus of the insured bank. "Covered transactions" are defined by statute to
include a loan or extension of credit to the affiliate, a purchase of securities
issued by an affiliate, a purchase of assets from the affiliate (unless
otherwise exempted by the Federal Reserve Board), the acceptance of securities
issued by the affiliate as collateral for a loan and the issuance of a
guarantee, acceptance, or letter of credit for the benefit of an affiliate.
Covered transactions must also be collateralized. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
CAPITAL. Bank regulators continue to indicate a desire to raise capital
requirements applicable to financial institutions beyond their current levels.
The Federal Reserve Board, FDIC, and state bank regulators require banks and
holding companies to maintain minimum ratios of primary and total capital to
total assets. Regulatory authorities may increase such minimum requirements for
all banks and bank holding companies or for specified banks or bank holding
companies. Increases in the minimum required ratios could adversely affect
Pinnacle and Pinnacle Bank, including their ability to pay dividends.
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. When the guidelines became fully phased-in at the end of
1992, the minimum guidelines for the ratio of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) increased from 7.25% to 8.00%. At least half of Total
Capital must be composed of common stockholders' equity, minority interests in
the equity accounts of consolidated subsidiaries and a limited amount of
perpetual preferred stock, less goodwill and certain other intangible assets
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock and a limited amount of loan loss reserves. At December 31,
1996, Pinnacle's ratio of Tier 1 Capital to risk-based assets was 11.99%.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies which provide for a minimum leverage
ratio of Tier 1 Capital to total assets, less goodwill and certain other
intangible assets (the "Tier 1 Capital leverage ratio"), of 3% for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies are required to maintain a
minimum Tier 1 Capital leverage ratio of 3% plus an additional cushion of 100 to
200 basis points. Pinnacle's Tier 1 Capital leverage ratio at December 31, 1996
was 6.16%. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve Board will continue to consider a "tangible Tier 1
Capital leverage ratio" (deducting all intangibles) in evaluating proposals for
expansion or new activities.
Pinnacle Bank is subject to similar capital requirements adopted by the
FDIC. At December 31, 1996, Pinnacle Bank had a Tier 1 Capital ratio and a Total
Capital ratio (computed under the 1992 guidelines) in excess of the fully
phased-in requirements and a Tier 1 Capital to risk based assets ratio in excess
of 8.00%. No regulatory agency has advised Pinnacle Bank of any specific
applicable minimum Tier 1 Capital leverage ratio. Failure to meet capital
guidelines could subject an insured bank to a variety of enforcement remedies,
including the termination of deposit insurance by the FDIC and a prohibition on
the acceptance of brokered deposits.
In December, 1992, the Federal Reserve Board approved a final rule altering
the method of computation of Tier 1 Capital of bank holding companies. Subject
to certain exceptions, in calculating Tier 1 Capital under the revised rule,
bank holding companies would be required to deduct all intangible assets other
than purchased mortgage servicing rights and purchased credit card
relationships, each valued
15
<PAGE>
at least quarterly at the lesser of 90% of their fair market value or 100% of
their book value, in an aggregate amount not exceeding 50% of Tier 1 Capital,
with a separate sublimit of 25% of Tier 1 capital for purchased credit card
relationships.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal bank regulatory agencies biannually to review risk-based
capital standards to ensure that they adequately address interest rate risk,
concentration of credit risk and risks from non-traditional activities. On
December 31, 1992, capital adequacy regulations adopted by the FDIC, the Federal
Reserve Board and the Office of the Comptroller of the Currency (the
"Comptroller") that incorporated (i) interest rate risk into the calculation of
risk-based capital and (ii) concentration of credit risk and risk from
non-traditional activities into bank capital requirements became effective.
Failure to meet the capital guidelines described above could subject an
insured financial institution to a variety of sanctions, including asset growth
restrictions and termination of deposit insurance by the FDIC.
SUPPORT OF SUBSIDIARY BANKS. Under Federal Reserve Board policy, Pinnacle
is expected to act as a source of financial strength to each of its subsidiary
banks and to commit resources to support each of such subsidiaries. This support
may be required at times when, absent such Federal Reserve Board policy,
Pinnacle would not otherwise be required to provide it. Any capital loans by a
bank holding company to any subsidiary bank are subordinate in right of payment
to deposits and to certain other indebtedness of such subsidiary bank. In the
event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC
after August 9, 1989 in connection with (i) the default of a commonly controlled
FDIC-insured depository institution, or (ii) any assistance provided by the FDIC
to any commonly controlled FDIC-insured depository institution "in danger of
default." "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance. This right of recovery by the FDIC generally is
superior to any claim of the stockholders of the depository institution that is
liable or of any affiliate of such institution. Pinnacle's subsidiary bank is
subject to such provisions of FIRREA and such right of recovery by the FDIC.
Under Michigan law, if the capital of a Michigan-chartered bank is impaired
by losses or otherwise, the Michigan Financial Institutions Bureau is authorized
to require payment of the deficiency by assessment upon the bank's stockholders,
pro rata, and to the extent necessary, if any such assessment is not paid by any
stockholder after three months notice, to cause the sale of the stock of such
stockholder to make good the deficiency.
FDIC INSURANCE ASSESSMENTS. The deposits of Pinnacle Bank are currently
insured to a maximum of $100,000 per depositor, subject to certain aggregation
rules. The FDIC establishes rates for the payment of premiums by federally
insured banks and thrifts, such as Pinnacle Bank, for deposit insurance.
Separate insurance funds (the BIF and the SAIF) are maintained for commercial
banks and thrifts, with insurance premiums from the industry used to offset
losses from insurance payouts when banks and thrifts fail. Due to the high rate
of failures in recent years, the FDIC has adopted a risk-based deposit insurance
premium system for all insured depository institutions, including Pinnacle Bank,
which requires that a depository institution pay to BIF from $.04 to $.31 per
$100, or to SAIF from $.23 to $.31 per $100, of insured deposits depending on
its capital levels and risk profile, as determined by its primary federal
regulator on a semiannual basis. Under its risk-based assessment system, the
FDIC may place a member in one of nine assessment risk categories based on
certain capital and supervisory measures. The capital measures are "well
capitalized," "adequately capitalized" and "less than adequately capitalized."
Within each capital
16
<PAGE>
group a member may be assigned to one of three supervisory subgroups: "healthy,"
"supervisory concern" and "substantial supervisory concern."
A financial institution is "well capitalized" if it has a Total Capital to
risk based assets of 10% or greater, a Tier 1 Capital of 6% or greater, and a
Tier 1 Capital ratio of 5% or greater. A financial institution is "adequately
capitalized" if it does not meet the standards for "well capitalized" but has a
Total Capital to risk based assets of 8% or greater, a Tier 1 Capital of 4% or
greater, and a Tier 1 Capital ratio of 4% or greater. A financial institution is
"less than adequately capitalized" if it does not meet the standards for
"adequately capitalized."
A "healthy" financial institution is one that is financially sound with only
a few minor weaknesses. A financial institution raising "supervisory concern" is
one with weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk to the BIF or SAIF. A
financial institution raising "substantial supervisory concern" is one that
poses a substantial probability of loss to the BIF or SAIF unless effective
corrective action is taken.
The risk-related assessment schedule adopted by the FDIC with respect to
deposits insured by the BIF is as follows:
<TABLE>
<CAPTION>
SUBSTANTIAL
SUPERVISORY SUPERVISORY
HEALTHY CONCERN CONCERN
------------- --------------- ---------------
<S> <C> <C> <C>
Well Capitalized........................................... .00% .03% .17%
Adequately Capitalized..................................... .03% .10% .24%
Less than Adequately Capitalized........................... .10% .24% .27%
</TABLE>
The risk-related assessment schedule recently adopted by the FDIC with
respect to deposits insured by the SAIF is as follows:
<TABLE>
<CAPTION>
SUBSTANTIAL
SUPERVISORY SUPERVISORY
HEALTHY CONCERN CONCERN
------------- --------------- ---------------
<S> <C> <C> <C>
Well Capitalized........................................... .23% .26% .29%
Adequately Capitalized..................................... .26% .29% .30%
Less than Adequately Capitalized........................... .29% .30% .31%
</TABLE>
The FDIC's adoption of risk-based insurance assessment, schedules did not
result in a significant increase in the insurance assessment costs of Pinnacle.
As of December 31, 1996, Pinnacle Bank was classified as "well capitalized" and
"healthy."
Legislation was recently enacted that resulted in, among other things, the
assessment of a one-time charge (the "Special Assessment") against financial
institutions with deposits insured by SAIF. The amount of the charge equaled
approximately .657% of the deposits of a financial institution held on March 31,
1995 and subject to the SAIF premium. The Special Assessment was due on
September 30, 1996 and payable no later than November 27, 1996. As a result of
the Special Assessment, Pinnacle paid an assessment of $2.4 million on
approximately $361.3 million of deposits held by it on March 31, 1995 and
insured by SAIF.
The FDIC has determined not to levy any premium on healthy banks for the
first half of 1997. As a "well capitalized" and "healthy" institution, Pinnacle
Bank will not pay (or accrue) any premiums for FDIC coverage during the first
six months of 1997. BIF insured financial institutions will, however, begin
servicing Financing Corp. ("FICO") bonds, which were funded by SAIF insured
financial institutions. The FICO bonds were issued in the late 1980s in
connection with government efforts to bail out the thrift industry. Beginning in
1997, interest payments for FICO bonds will be borne by all FDIC insured
institutions. FICO bond servicing will require BIF members to pay 6.4 cents for
every $100 in insured
17
<PAGE>
deposits, and SAIF members to pay 3.2 cents for each $100 in insured deposits.
The servicing payments will be collected electronically by the FDIC beginning
January 2, 1997.
REGULATION OF PROPOSED ACQUISITIONS. With certain limited exceptions, the
BHCA prohibits bank holding companies, such as Pinnacle, from acquiring direct
or indirect ownership or control of voting shares or assets of any company other
than a bank, unless the company involved is engaged solely in one or more
activities which the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Any such acquisition will require, except in certain limited cases, the
prior approval of the Federal Reserve Board.
FIRREA amended the BHCA in 1989 to permit the Federal Reserve Board to
approve an application by any bank holding company to acquire and operate a
thrift as a non-bank subsidiary of such bank holding company. A bank holding
company such as Pinnacle may apply to the Federal Reserve Board for permission
to acquire and operate a thrift engaged only in deposit-taking, lending and
other activities that the Federal Reserve Board has determined to be permissible
for bank holding companies.
In evaluating an application for its approval of such an acquisition, the
Federal Reserve Board will consider whether the performance by an affiliate of
Pinnacle of the activity can reasonably be expected to produce benefits to the
public (such as greater convenience, increased competition, or gains in
efficiency) that outweigh possible adverse effects (such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices). The Federal Reserve Board may apply different standards to
activities proposed to be commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern. The Federal Reserve
Board's consideration will also include an evaluation of the financial and
managerial resources of Pinnacle, including its existing subsidiaries, and of
any entity to be acquired, and the effect of the proposed transaction on those
resources. This required regulatory approval is subject to public notice and
comment procedures, and adverse public comments received, or adverse
considerations raised by regulatory agencies, may delay or prevent consummation
of such an acquisition.
FIRREA amended the BHCA in 1989 to permit the Federal Reserve Board to
approve an application by any bank holding company to acquire and operate a
thrift as a non-bank subsidiary of such bank holding company. A bank holding
company such as Pinnacle may apply to the Federal Reserve Board for permission
to acquire and operate a thrift engaged only in deposit-taking, lending and
other activities that the Federal Reserve Board has determined to be permissible
for bank holding companies, in accordance with the procedures and standards
described in the preceding paragraph.
RECENT LEGISLATION. In September 1994, the Riegle Community Development and
Regulatory Improvement Act (the "Community Development Act") was enacted. The
Community Development Act consists of (i) Subtitle A, the "Community Development
and Financial Institutions Act," which establishes the "Community Development
Financial Institutions Fund" to promote economic revitalization and community
development through investment in "Community Development Financial
Institutions," and (ii) Subtitle B, "The Home Ownership and Equity Protection
Act of 1994," which seeks to increase the protections afforded to individuals
most at risk from abusive lending practices, particularly high-interest
mortgages secured by the borrowers' homes.
The Community Development Act provides a number of initiatives to lessen the
regulatory burden placed upon depository institutions and also affects a number
of the consumer compliance laws by allowing streamlined disclosures for radio
advertising of consumer leases, providing consumers with information necessary
to challenge an "adverse characterization" due to a credit reporting agency
report and by clarifying the disclosure requirements under the Real Estate
Settlement Procedures Act regarding the transfer of serviced mortgaged loans.
The Community Development Act also reforms currency transaction reports to
increase their usefulness to the Federal Government and to various law
enforcement agencies in combating money laundering. The measure also calls for
improvement in the identification of money laundering schemes, better controls
18
<PAGE>
over negotiable instruments drawn on foreign banks by making them subject to
reporting, and uniform licensing and registration of check cashing and money
transmitting businesses, which are often used to facilitate illegal currency
transactions.
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was also enacted. The Interstate
Act facilitates the interstate expansion and consolidation of banking
organizations by permitting (i) beginning one year after enactment of the
legislation, bank holding companies that are adequately capitalized and managed
to acquire banks located in states outside their home states regardless of
whether such acquisitions are authorized under the law of the host state, (ii)
the interstate merger of banks after June 1, 1997, subject to the right of
individual states to "opt in" or "opt out" of this authority prior to such date,
(iii) banks to establish new branches on an interstate basis provided that such
action is specifically authorized by the law of the host state, (iv) foreign
banks to establish, with approval of the appropriate regulators in the United
States, branches outside their home states to the same extent that national or
state banks located in such state would be authorized to do so and (v) beginning
September 29, 1995, banks to receive deposits, renew time deposits, close loans,
service loans and receive payments on loans and other obligations as agent for
any bank or thrift affiliate, whether the affiliate is located in the same or
different state.
The Federal Deposit Insurance Corporation Improvement Act of 1991
substantially revised the bank regulatory and funding provisions of the Federal
Deposit Insurance Act and revised several other federal banking statutes. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." A depository institution is well capitalized if it
significantly exceeds the minimum level required by regulation for each relevant
capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in
regulations. The critical capital level is defined as a ratio of tangible equity
to total assets of two percent or less. An institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position under certain circumstances.
Among other things, FDICIA requires the federal bank regulatory authorities
to take "prompt corrective action" in respect of any depository institution
which does not meet specified minimum capital requirements. The scope and degree
of regulatory intervention is linked to the extent of the shortfall of the
depository institution's capital from required minimum standards. In the case of
a depository institution which is "critically undercapitalized" (a term defined
to include institutions which still have a positive net worth), the federal bank
regulatory authorities are generally required to appoint a conservator or
receiver. FDICIA also requires the holding company of any undercapitalized
depository institution to guarantee, in part, such depository institution's
capital plan in order for such plan to be acceptable. FDICIA also prohibits a
depository institution that is not well-capitalized from accepting brokered
deposits and paying deposit interest rates which significantly exceed the
prevailing rate in its own market or the national rate (as determined by the
FDIC) for similar deposits. Implementing regulations for these provisions of
FDICIA have not yet been adopted by the federal bank regulatory authorities.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized.
MORTGAGE REGULATION. In the origination of mortgage loans, Pinnacle and its
subsidiaries are subject to various federal statutes, such as the Equal Credit
Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate
Settlement Procedures Act, and Home Mortgage Disclosure Act, and the regulations
promulgated thereunder, which prohibit discrimination and specify disclosures to
be made to borrowers regarding credit and settlement costs.
As sellers and servicers of mortgage loans, Pinnacle and its subsidiaries
are participants in the secondary mortgage market with some or all of the
following: private institutional investors, Federal
19
<PAGE>
National Mortgage Association ("FNMA"), Government National Mortgage
Association, Federal Home Loan Mortgage Corporation ("FHLMC"), Veterans'
Administration and Federal Housing Authority. In its dealings with these
agencies, Pinnacle and its subsidiaries are subject to various eligibility
requirements prescribed by the agencies, including but not limited to net worth,
quality control, bonding, financial reporting and compliance reporting
requirements. The mortgage loans which Pinnacle and its subsidiaries originate
are subject to agency-prescribed procedures, including (without limitation)
inspection and appraisal of properties, maximum loan-to-value ratios,and
obtaining credit reports on prospective borrowers. On some types of loans, the
agencies prescribe maximum loan amounts, interest rates and fees. When selling
mortgage loans to FNMA and FHLMC, a seller must represent and warrant that all
such mortgage loans conform to the requirements of FNMA and FHLMC. If the
mortgage loans sold are found to be nonconforming mortgage loans, FNMA or FHLMC
may require the seller to repurchase the nonconforming mortgage loans.
Additionally, FNMA and FHLMC may require a seller/servicer to indemnify them
against all losses arising from the seller/servicer's failure to perform its
contractual obligations under the applicable selling or servicing contract.
FORWARD-LOOKING STATEMENTS
From time to time, Pinnacle may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects, new
products, and similar matters. Such information is often subject to risks and
uncertainties. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order to comply with the terms of
the safe harbor, Pinnacle notes that a variety of factors could cause its actual
results and experience to differ materially from the anticipated results or
other expectations expressed in its forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include those discussed elsewhere herein (such
as competition and regulation); future economic conditions in the regional and
national markets in which the companies compete; financial market conditions;
inflation; changing competition; the ability to carry out business plans; the
ability to enter new markets successfully and capitalize on growth
opportunities; adverse changes in applicable law, regulations or rules governing
financial institutions and environmental, tax or accounting matters; and the
following:
INTEREST RATE SENSITIVITY. Prevailing economic conditions, particularly
changes in market interest rates, may significantly affect the operations of
financial institutions such as Pinnacle and Pinnacle Bank because the earnings
of a financial institution depend primarily on its net interest income, which is
the difference between the income earned on its loans and investments and the
interest paid on its deposits and borrowings. Changes in interest rates also can
affect the value of a financial institution's interest-earning assets, which are
comprised of fixed- and adjustable-rate instruments. Generally, the value of
fixed-rate instruments fluctuates inversely with changes in interest rates.
Changes in interest rates also can affect the average life of, and demand for,
loans and mortgage-related securities. A financial institution is subject to
reinvestment risk to the extent that it is not able to reinvest such prepayments
at rates which are comparable to the rates on the maturing loans or securities.
NO ASSURANCE OF SUCCESSFUL ACQUISITIONS. Pinnacle has experienced
significant growth in assets as a result of acquisitions. Each acquisition is
subject to certain risks that could adversely affect Pinnacle's financial
condition and profitability. These risks may include, among others, incorrectly
assessing the future earnings potential of the acquired entity or encountering
difficulty in integrating the operations of the acquired entity into Pinnacle's
holding company structure. Although Pinnacle has successfully integrated a
number of acquisitions since 1988, there can be no assurance that Pinnacle will
be able to successfully integrate any future acquisition into its holding
company structure. Pinnacle intends to continue to seek acquisitions in its
existing or adjoining market areas, to the extent suitable candidates and
acceptable terms may be identified. However, other than the acquisition of
Indiana Federal Corporation and CB Bancorp, Inc. described elsewhere herein,
Pinnacle is not currently conducting any acquisition negotiations and there can
be no assurance that any further acquisitions will be made or, if made, will be
successful.
20
<PAGE>
LOCAL ECONOMIC CONDITIONS. The success of Pinnacle is dependent to a
certain extent upon the general economic conditions in the geographic markets
served by it and its subsidiaries. No assurance can be given that favorable
economic conditions will exist in such markets.
ITEM 2. PROPERTIES
Pinnacle owns or leases all of the properties in which its various offices
are located. Pinnacle owns its main office in St. Joseph, Michigan. Pinnacle has
16 additional banking offices in Berrien and Van Buren counties, Michigan and
corporate offices, 14 branch offices and two loan production offices in Jasper,
Lake, Marion and Porter counties, Indiana. Of the branch offices in Michigan, 14
are owned and two are leased. The corporate offices in Indiana are leased. Of
the branch offices and loan production offices in Indiana, 11 are owned and
three are leased. Pinnacle also owns 18 automated teller machines, of which nine
are housed within its banking offices and nine are independently located. At
December 31, 1996 and 1995, the properties and equipment of Pinnacle had an
aggregate net book value of $12.7 million and $12.5 million, respectively.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which Pinnacle is a party or to
which any of its property is subject. See also Note 19 to the consolidated
financial statements of Pinnacle Financial Services, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Pinnacle's shareholders during
the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of common stock, no par value per share, of Pinnacle ("Pinnacle
Common Stock") are traded in the over-the-counter market and listed for
quotation on the Nasdaq National Market under the symbol "PNFI." Although
transactions in Pinnacle Common Stock, of Pinnacle have been, and are expected
to continue to be, facilitated by market-makers, there can be no assurance that
an established or liquid trading market will continue.
The following table sets forth, for the periods indicated, the high and low
sale prices per share of the Pinnacle Common Stock as reported by the Nasdaq
National Market. The information with respect to such Nasdaq National Market
quotations was obtained from the National Association of Securities Dealers,
Inc.
<TABLE>
<CAPTION>
PINNACLE COMMON
STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C> <C>
1995 First Quarter...................................................... $ 17.50 $ 15.00
Second Quarter..................................................... 17.75 15.75
Third Quarter...................................................... 17.50 15.50
Fourth Quarter..................................................... 18.50 16.50
1996 First Quarter...................................................... 20.50 18.25
Second Quarter..................................................... 21.75 20.00
Third Quarter...................................................... 24.75 19.50
Fourth Quarter..................................................... 25.00 23.25
</TABLE>
As of March 21, 1997 there were 733 registered holders of shares of Pinnacle
Common Stock.
21
<PAGE>
The holders of Pinnacle Common Stock are entitled to receive such dividends
as may be declared from time to time by the Board of Directors of Pinnacle out
of funds legally available therefor. Pinnacle (or its predecessor) has paid cash
dividends at least annually since the 1930's and on a regular quarterly basis
since April 1979. The table below presents the cash dividends declared, as
retroactively adjusted for the effect of stock dividends, for the periods
indicated.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(PER SHARE AMOUNTS)
<S> <C> <C>
First Quarter............................................................ $ 0.19 $ 0.19
Second Quarter........................................................... 0.21 0.19
Third Quarter............................................................ 0.21 0.19
Fourth Quarter........................................................... 0.21 0.19
</TABLE>
Any future dividends will depend upon, among other things, the earnings,
cash position and capital needs of Pinnacle and the future financial results and
requirements and contractual restrictions applicable to Pinnacle or its
subsidiaries. The ability of Pinnacle to fund its operations and to pay
dividends on its common stock will be dependent upon its receipt of dividends
from its subsidiaries. The ability of those subsidiaries to pay dividends is
subject to regulatory restrictions.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain consolidated historical financial
data of Pinnacle for each of the years in the five year period ended December
31, 1996. All information is presented in accordance with generally accepted
accounting principles, except for selected regulatory data, which are presented
in accordance with regulatory accounting practices. (All such information is in
thousands, except per share data.)
SELECTED FINANCIAL DATA--FIVE YEAR SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.............................................. $1,069,121 $ 911,446 $ 409,438 $ 409,572 $ 394,880
Loans, net................................................ 603,921 512,607 290,330 264,010 262,623
Allowance for loan losses................................. 5,643 5,852 5,014 5,215 5,881
Securities................................................ 372,157 287,532 91,533 119,889 96,080
Cash and cash equivalents................................. 46,040 28,531 14,750 13,892 15,863
Deposits.................................................. 761,269 703,100 351,176 363,014 352,319
Securities sold under repurchase agreements and other
borrowings.............................................. 225,361 127,154 19,882 10,454 8,685
Total stockholders' equity................................ 78,049 74,896 35,148 33,878 30,494
SELECTED OPERATIONS DATA:
Interest income........................................... 73,969 37,495 28,968 29,349 26,249
Interest expense.......................................... 39,693 18,151 11,862 12,420 12,587
Net interest income..................................... 34,276 19,344 17,106 16,929 13,662
Provision for loan losses................................. 375 225 125 360 1,094
Net interest income after provision for loan losses..... 33,901 19,119 16,981 16,569 12,568
Noninterest income........................................ 7,308 4,586 3,756 4,174 3,944
Noninterest expense....................................... 26,956 14,636 13,114 13,451 10,442
Income before income taxes, extraordinary items and
accounting change..................................... 14,253 9,069 7,623 7,292 6,070
Income tax expense........................................ 5,101 2,610 2,333 2,255 1,792
Net income.............................................. $ 9,152 $ 6,459 $ 5,290 $ 5,037 $ 4,278
SELECTED OPERATING RATIOS:
Return on average assets.................................. 0.94% 1.36% 1.30% 1.27% 1.32%
Return on average stockholders' equity.................... 12.34 15.91 15.40 15.77 14.73
Net interest margin....................................... 3.79 4.43 4.61 4.67 4.69
Ratio of noninterest income to total average assets....... 0.75 0.96 0.92 1.05 1.22
Ratio of noninterest expense to total average assets...... 2.76 3.07 3.22 3.39 3.22
Efficiency ratio (1)...................................... 63.30 59.80 60.90 61.90 57.20
Ratio of average earning assets to average total assets... 94.10 93.90 94.10 94.30 93.30
Dividend payout ratio..................................... 52.90 46.91 44.93 40.15 42.86
PER SHARE DATA: (2)
Net income per share...................................... $ 1.55 $ 1.62 $ 1.38 $ 1.32 $ 1.12
Cash dividends per share.................................. 0.82 0.76 0.62 0.53 0.48
Book value per share...................................... 13.06 12.75 9.20 8.86 7.98
ASSET QUALITY RATIOS:
Nonperforming loans to total loans........................ 0.80% 0.83% 0.60% 0.92% 2.39%
Allowance for loan losses to total loans.................. 0.93 1.13 1.73 1.98 2.24
Allowance for loan losses to nonperforming loans.......... 115.08 135.46 287.83 215.85 93.62
Net charge-off loans to average loans..................... 0.10 0.15 0.12 0.40 0.59
CAPITAL RATIOS:
Stockholders' equity to assets............................ 7.30% 8.22% 8.58% 8.27% 7.72%
Tier I capital to total assets............................ 6.16 6.51 8.20 7.39 6.79
Tier I capital to risk-based assets....................... 11.99 11.97 12.13 11.85 10.70
</TABLE>
- ------------------------------
(1) Efficiency ratio is equal to noninterest expense less amortization of
intangible expenses divided by net interest income plus noninterest income
less gain or loss on security transactions.
(2) Per share data has been restated to reflect all stock dividends and stock
splits. Pinnacle's last stock split was in 1993.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion provides information regarding Pinnacle's financial
condition and results of operations for each of the years ended December 31,
1996, 1995 and 1994. This discussion should be read in conjunction with the
consolidated financial statements of Pinnacle, and the notes thereto, which
appear elsewhere herein.
OVERVIEW AND FINANCIAL CONDITION
For the year ended December 31, 1996, Pinnacle reported net income of
approximately $9.2 million, or $1.55 per share, as compared to net income of
approximately $6.5 million, or $1.62 per share for the year ended December 31,
1995, an increase in net income of 41.7%, and a decrease of 4.3% on a per share
basis. Net income for the year ended December 31, 1994 was approximately $5.3
million or $1.38 per share. The earnings for 1996 were negatively impacted by a
one-time charge to replenish the Savings Association Insurance Fund ("SAIF")
which insures thrift deposits. The charge to Pinnacle was $1.45 million after
tax or $0.25 per share. Without the charge, net income would have increased
64.1% to $10.6 million for the year ended December 31, 1996, or $1.80 per
average share outstanding, an increase of 11.1%. The substantial increase in net
income for 1996 compared to 1995 is attributable primarily to the acquisition by
Pinnacle of all of the outstanding capital stock of Maco Bancorp, Inc. in
exchange for aggregate consideration of $41.9 million through the merger of Maco
Bancorp, Inc. with and into Pinnacle (the "Maco Acquisition"). The purchase
price for the Maco Acquisition consisted of cash, a secured, short-term
interest-bearing promissory note in the principal amount of $18.0 million (the
"Acquisition Note"), and shares of Pinnacle Common Stock then valued at
approximately $21.0 million. The earnings increase in 1995 as compared to 1994
was largely the result of net interest income that was associated with higher
levels of interest earning assets.
Due to the timing of the Maco Acquisition, which was consummated on December
1, 1995, and because of the application of purchase accounting (which includes
the earnings and assets of Maco from the date of the Maco Acquisition), results
for the year ended December 31, 1996 are not necessarily comparable to results
for years ended on or before December 31, 1995.
Since 1994, average earning assets have equaled or exceeded 94.0% of total
average assets. The following table summarizes the components of Pinnacle's
total assets, total loans, total deposits and stockholders' equity at the dates
indicated.
OVERVIEW AND FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
1996 1995 1994
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans, net............................................. $ 603,921 $ 512,607 $ 285,316
Total assets........................................... 1,069,121 911,446 409,438
Deposits............................................... 761,269 703,100 352,037
Stockholders' equity................................... 78,049 74,896 35,148
</TABLE>
Pinnacle has experienced significant loan growth since December 31, 1993.
Loans, net of unearned income, at December 31, 1996 were approximately $609.6
million, which was $91.1 million greater than loans, net of unearned income, at
December 31, 1995. Of the growth in loans, Pinnacle Bank's new presence in the
northern Indiana market provided growth of $60.9 million or 29.1% while the
southwestern Michigan market grew a more moderate $30.2 million or 9.8%. Loans,
net of unearned income, at December 31, 1995 were approximately $518.5 million,
which was $228.1 million greater than loans, net of unearned income, at December
31, 1994. Of the growth in loans, net of unearned income, from December 31, 1994
to December 31, 1995, $209.6 million was related to the Maco Acquisition and
approximately $18.5 million, or 6.4%, was the result of the banking activities
of Pinnacle Bank.
24
<PAGE>
Total assets and total deposits remained relatively constant from December
31, 1993 to November 30, 1995. However, upon consummation of the Maco
Acquisition on December 1, 1995, total assets and total deposits increased
substantially. Total assets at December 31, 1996 were $1.1 billion, or 17.3%
greater than total assets at December 31, 1995. The growth was primarily the
result of strong loan demand which was funded by strong deposit growth and
increases in Federal Home Loan Bank advances and securities sold under
repurchase agreements and other borrowings. Total assets at December 31, 1995
were $911.4 million, or 122.6% greater than total assets at December 31, 1994 of
$409.4 million. Of this increase, approximately $444.8 million of this was
attributable to the Maco Acquisition, and the balance resulted from the banking
activities of Pinnacle Bank. Total deposits at December 31, 1996 were $761.0
million as compared to $703 million at December 31, 1995, an increase of 8.3%.
The growth in deposits was primarily in noninterest bearing demand deposits
which increased $28.0 million or 55.5% and time deposits which increased $24.1
million or 7.5%. Total deposits at December 31, 1995 increased $351.1 million
over total deposits at December 31, 1994, an increase of 99.7%. Of this increase
in total deposits, $318.8 million resulted from the Maco Acquisition and
approximately $32.3 million, or 9.2%, resulted from the banking activities of
Pinnacle Bank.
Federal Home Loan Bank advances, securities sold under repurchase agreements
and other borrowings were approximately $225.4 million at December 31, 1996, an
increase of $98.2 million, or 77.2%, from December 31, 1995 levels. The increase
was used primarily to fund strong loan growth and to match fund specific
investment security purchases with similar adjustable rate features and
maturities. Securities sold under repurchase agreements and other borrowings
increased to approximately $127.2 million at December 31, 1995 from
approximately $19.9 million at December 31, 1994. Of this increase, $8.5 million
was attributable to the banking activities of Pinnacle Bank, approximately $80.8
million was attributable to the Maco Acquisition, and $18.0 million was
attributable to the Acquisition Note issued by Pinnacle to the sole stockholder
of Maco. The Acquisition Note was repaid in full in March 1996.
A majority of Pinnacle's revenue is generated by its average earning assets.
For 1996, average earning assets totaled $918.4 million, an increase of $470.7
million, or 105.1%, over 1995, which helped increase net interest income by
$15.0 million. The Maco Acquisition on December 1, 1995 provided the increase in
average earning assets of $451.2 million for 1996. The increase in average
earning assets was offset by a reduction in net interest margin to 3.79% in 1996
as compared to 4.43% in 1995. This reduction was primarily the result of the
Maco Acquisition which experienced a lower net interest margin as compared to
Pinnacle's margin before the acquisition. For 1995, average earning assets
totaled $447.7 million, an increase of approximately $64.8 million over 1994.
This increase in average earning assets, which was attributable primarily to the
Maco Acquisition, resulted in an increase in net interest income of $2.2 million
for the year ended December 31, 1995. However, the increase in average earning
assets was partially offset by a reduction in net interest margin, which was
4.43% in 1995 as compared to 4.61% in 1994. This reduction in net interest
margin resulted from higher cost borrowings and time deposits and a lower net
interest margin associated with the thrift operations acquired in the Maco
Acquisition.
Stockholders' equity was approximately $78.0 million at December 31, 1996,
as compared to $74.9 million at December 31, 1995. Retained earnings generated
primarily through net income added $4.3 million while net unrealized gains
reversed to a net unrealized loss at December 31, 1996 of $376,000 for a
reduction of $1.5 million. Additional paid in capital increased $352,000
primarily from the issuance of 99,451 shares of stock through the acquisition of
Starke's, Inc., an insurance agency, in October 1996. Primarily as a result of
the Maco Acquisition, stockholders' equity grew $39.8 million, or 113.1%, to
approximately $74.9 million at December 31, 1995 as compared to stockholders'
equity of $35.1 million at December 31, 1994. Of such $39.8 million increase in
stockholders' equity, (i) approximately $13.2 million was attributable to the
public stock offering that was associated with the Maco Acquisition and
completed on December 1, 1995, (ii) approximately $21.0 million was attributable
to the stock portion of the Purchase Price paid in the Maco Acquisition, (iii)
approximately $3.2 million was attributable to retained earnings generated
primarily through net income (net of dividends declared), and (iv) approximately
$2.4 million
25
<PAGE>
was attributable to net unrealized gains on securities available-for-sale.
Pinnacle follows two key financial performance measures. Pinnacle's return on
average equity measures how profitably the stockholders' invested capital has
been deployed. Pinnacle's return on average equity was 12.34% for 1996 compared
to 15.91% for 1995. Return on average assets measures how profitably the total
assets of Pinnacle are invested. Return on average assets was .94% for 1996
compared to 1.36% for 1995. The returns were negatively impacted in 1996 by the
one-time special assessment by SAIF. Excluding the SAIF assessment, return on
average equity and return on average assets would have been 14.29% and 1.09%
respectively. The ratio of average stockholders' equity to average total assets
was 7.60% in 1996, 8.52% in 1995 and 8.44% in 1994. The ratio of dividends
declared to net income per share of Pinnacle Common Stock was 52.9% in 1996,
46.9% in 1995, and 44.9% in 1994.
RESULTS OF OPERATIONS
NET INCOME. Net income for the year ended December 31, 1996 was
approximately $9.2 million, a 41.7% increase, as compared to net income of $6.5
million for the same period in 1995. This increase in net income was largely the
result of higher levels of net interest income attributable to the higher level
of earning assets that resulted from the Maco Acquisition. Net income for the
year ended December 31, 1995 was 22.1% higher than the $5.3 million in net
income for the year ended December 31, 1994.
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 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 on earnings.
26
<PAGE>
SUMMARY OF CONSOLIDATED NET INTEREST INCOME
The following table sets forth certain information with respect to
Pinnacle's consolidated net income for each of the years ended December 31,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS (DOLLARS IN THOUSANDS)
Federal funds sold............... $ 7,728 $ 410 5.31% $ 4,458 $ 257 5.76% $ 2,748 $ 110 4.00%
Interest-bearing deposits with
financial institutions......... 9,758 529 5.42% 3,970 256 6.45% 1,554 76 4.89%
U.S. Treasury and goverment
agencies....................... 214,642 14,871 6.93% 66,380 4,291 6.46% 51,009 2,666 5.23%
Securities of Political
Subdivisions and State (2)..... 125,021 8,618 6.89% 50,083 3,335 6.66% 52,893 3,421 6.47%
Loans (1)(2)..................... 561,257 50,108 8.93% 322,851 29,854 9.25% 274,757 23,255 8.46%
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total interest-earning
assets....................... 918,406 74,536 8.12% 447,742 37,993 8.49% 382,961 29,528 7.71%
-------- -------- ------- -------- -------- ------- -------- -------- -------
Cash and due from banks.......... 21,324 14,515 12,617
Premises and equipment, net...... 12,676 7,633 7,008
Allowance for loan losses........ (5,734) (5,023) (5,156)
Other assets..................... 29,420 11,540 9,525
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total assets................... $976,092 $74,536 $476,407 $37,993 $406,955 $29,528
-------- -------- ------- -------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- ------- -------- -------- -------
LIABILITIES
Interest-bearing demand.......... $ 76,557 $ 1,541 2.01% $ 48,223 $ 939 1.95% $ 45,978 $ 810 1.76%
Savings and money market
accounts....................... 261,149 9,727 3.72% 143,006 5,905 4.13% 141,511 4,585 3.24%
Time deposits of $100,000 or
more........................... 61,928 3,418 5.52% 30,496 1,641 5.38% 14,918 638 4.28%
Other time deposits.............. 280,357 15,850 5.65% 133,836 7,608 5.68% 116,107 5,283 4.55%
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total interest-bearing
deposits..................... 679,991 30,536 4.49% 355,561 16,093 4.53% 318,514 11,316 3.55%
-------- -------- ------- -------- -------- ------- -------- -------- -------
Federal Home Loan Bank
advances....................... 127,629 7,402 5.80% 19,041 1,182 6.21% 3,733 214 5.73%
Federal funds purchased and
securities sold................ 38,311 1,755 4.58% 19,091 876 4.59% 10,676 332 3.11%
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total interest-bearing
liabilities.................... 845,931 39,693 4.69% 393,693 18,151 4.61% 332,923 11,862 3.56%
-------- -------- ------- -------- -------- ------- -------- -------- -------
Noninterest-bearing deposits..... 50,458 39,028 37,587
Other liabilities................ 5,558 3,093 2,084
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total liabilities.............. 901,947 435,814 372,594
Stockholders' equity............. 74,145 40,593 34,361
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total liabilities and
stockholders' equity......... $976,092 $476,407 $406,955
-------- -------- ------- -------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- ------- -------- -------- -------
Net interest income............ $34,843 $19,842 $17,666
-------- -------- --------
-------- -------- --------
Net interest rate margin (3)... 3.79% 4.43% 4.61%
------- ------- -------
------- ------- -------
</TABLE>
- ------------------------------
(1) For purposes of these computations, nonaccrual loans and unearned income are
included in the daily average loan amounts outstanding.
(2) Income from state and political subdivisions securities and loans are stated
on a tax equivalent basis.
(3) Net interest rate margin is equal to total interest income less total
interest expense divided by total average earning assets.
27
<PAGE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have effected
Pinnacle's interest income and expense during the periods indicated. For each
category of interest-earnings assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume), (iii) changes in volume and rate combined
(change in rate multiplied by change in volume), and (iv) total change in rate
and volume.
<TABLE>
<CAPTION>
1996/1995 1995/1994
CHANGE IN INTEREST DUE TO: CHANGE IN INTEREST DUE TO:
-------------------------------------------- ------------------------------------------
RATE & NET RATE & NET
VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME CHANGE
--------- --------- ----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold............. $ 188 $ (20) $ (15) $ 153 $ 68 48 $ 31 $ 147
Interest-bearing deposits with
financial institutions....... 373 (41) (59) 273 118 24 38 180
U.S. Treasury and government
agencies..................... 9,578 312 690 10,580 804 627 194 1,625
Securities of state and
political subdivisions (1)... 4,991 115 177 5,283 (182) 100 (4) (86)
Loans (1)...................... 22,053 (1,033) (766) 20,254 4,069 2,171 359 6,599
--------- --------- ----- --------- --------- --------- --------- ---------
Total interest-earning
assets..................... $ 37,183 $ (667) $ 27 $ 36,543 $ 4,877 $ 2,970 $ 618 $ 8,465
--------- --------- ----- --------- --------- --------- --------- ---------
--------- --------- ----- --------- --------- --------- --------- ---------
LIABILITIES
Interest-bearing demand........ $ 553 $ 29 $ 20 $ 602 $ 40 $ 87 $ 2 $ 129
Savings and money market
accounts..................... 4,879 (586) (471) 3,822 48 1,259 13 1,320
Time deposits of $100,000 or
more......................... 1,691 43 43 1,777 667 164 172 1,003
Other time deposits............ 8,322 (40) (40) 8,242 807 1,312 206 2,325
--------- --------- ----- --------- --------- --------- --------- ---------
Total interest-bearing
deposits................... 15,445 (554) (448) 14,443 1,562 2,822 393 4,777
--------- --------- ----- --------- --------- --------- --------- ---------
Federal Home Loan Bank
advances..................... 6,743 (78) (445) 6,220 877 18 73 968
Federal funds purchased and
securities sold.............. 882 (2) (1) 879 262 158 124 544
--------- --------- ----- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities................ $ 23,070 $ (634) $ (894) $ 21,542 $ 2,701 $ 2,998 $ 590 $ 6,289
--------- --------- ----- --------- --------- --------- --------- ---------
--------- --------- ----- --------- --------- --------- --------- ---------
Net interest income.......... $ 14,113 $ (33) $ 921 $ 15,001 $ 2,176 $ (28) $ 28 $ 2,176
--------- --------- ----- --------- --------- --------- --------- ---------
--------- --------- ----- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Income from state and political subdivisions securities and loans are stated
on a tax equivalent basis.
Net interest income on a tax-equivalent basis was approximately $34.8
million for the year ended December 31, 1996, as compared to $19.8 million for
the year ended December 31, 1995. The substantial increase in net interest
income during 1996 over the same period in 1995 was due primarily to the
increase in average earning assets associated with the Maco Acquisition. An
increase in average earning assets for the year ended December 31, 1996 of
$470.7 million increased net interest income by $14.1 million, while a
28
<PAGE>
lower net interest margin of 3.79% for 1996 as compared to 4.43% for 1995
resulted in a decrease in net interest income. The decrease in net interest
margin was attributable mainly to lower margins at First Federal.
Net interest income on a tax-equivalent basis for the year ended December
31, 1995, increased approximately $2.2 million, or 12.4%, over net interest
income on a tax-equivalent basis of approximately $17.7 million for the year
ended December 31, 1994. During 1995, an increase in average loan balances of
approximately $48.1 million led to an increase in interest income on loans of
nearly $4.1 million. The increase in interest income was offset by an increase
in interest expense of $2.5 million that was caused by an increase in average
interest-bearing liabilities of nearly $60.8 million. In addition, a higher
interest rate environment during 1995 caused an increase in interest income on
earning assets of $3.0 million to be offset by an increase in interest expense
on interest-bearing liabilities of $3.0 million. Net interest margin decreased
to 4.43% for year ended December 31, 1995 from 4.61% for the year ended December
31, 1994.
Total loans as of December 31, 1996 were $609.6 million, an increase of
$91.1 million or 17.6% over total loans as of December 31, 1995. Emphasis on
commercial and home equity loans in our new Indiana market entered through the
Maco Acquisition on December 1, 1995 impacted this growth. Commercial loans at
December 31, 1996 totaled $210.3 million, an increase of $56.3 million or 36.5%
over the December 31, 1995 total of $154.0 million. Pinnacle's Indiana balances
of commercial loans provided $39.1 million of this growth, an increase of 214.5%
over total commercial loans of $18.2 million in Indiana as of December 31, 1995,
as the bank placed greater emphasis on commercial banking in that market.
Consumer loans, including home equity loans, grew by 22.9% to $114.1 million at
December 31, 1996 as compared to $92.8 million at December 31, 1995. The new
Indiana market also provided most of this growth, with consumer loans in Indiana
increasing $20.2 million, or 83.3%, to $44.4 million at December 31, 1996. Real
estate loans at December 31, 1996 increased slightly by 3.0%, or $8.0 million,
to $276.9 million as compared to $268.9 million at December 31, 1995 as Pinnacle
primarily originated real estate loans for resale in the secondary market for
fee income and sought to control the level of real estate loans to manage
interest rate risk associated with these longer term assets.
Total loans at December 31, 1995, increased $228.1 million, or 78.6%, over
total loans at December 31, 1994 of $290.3 million. Approximately $209.6 million
of this increase in total loans resulted from the Maco Acquisition, while $18.5
million, or 6.4%, of this increase was attributable to the banking activities of
Pinnacle Bank. Commercial loans at December 31, 1995 increased by $33.6 million,
or 27.9%, to $154.0 million. Of this increase, approximately $18.2 million
resulted from the Maco Acquisition and approximately $15.4 million, or 12.8%,
was attributable to the banking activities of Pinnacle Bank and strong demand
for commercial business and development in southwestern Michigan. Consumer loans
grew 48.0% to approximately $92.9 million at December 31, 1995 as compared to
$62.7 million at December 31, 1994. Of this increase, $24.2 million resulted
from the Maco Acquisition and approximately $5.9 million, or 9.4%, was
attributable to the banking activities of Pinnacle Bank and a new home equity
loan product introduced by Pinnacle Bank in 1994. Real estate loans at December
31, 1995 increased approximately $165.9 million, or 161.0%, over real estate
loans of $103.0 million at December 31, 1994. Approximately $167.2 million of
this increase was attributable to the Maco Acquisition.
Securities, federal funds sold and interest-bearing deposits with financial
institutions were $391.1 million at December 31, 1996 and $332.9 million at
December 31, 1995. The increase in this item in 1996 as compared to 1995 was
attributable primarily to Pinnacle Bank using specific adjustable rate security
investments to match against short-term funding sources as a tool to manage
interest rate risk. Securities, federal funds sold and interest-bearing deposits
with financial institutions increased $240.2 million, or 259.2%, at December 31,
1995 as compared to approximately $92.7 million at December 31, 1994. The growth
during 1995 was primarily attributable to the Maco Acquisition, which added
$203.7 million to this item.
29
<PAGE>
The following table presents a breakdown by category of the average amount
of deposits (all in domestic offices) and the average rate paid for the years
indicated.
<TABLE>
<CAPTION>
1996 1995 1994
AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
---------- ------------- ---------- ------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits........ $ 50,458 0.00% $ 39,028 0.00% $ 37,587 0.00%
Interest-bearing demand deposits........... 76,557 2.01 48,223 1.95 45,978 1.76
Savings deposits........................... 261,149 3.72 143,006 4.13 141,511 3.24
Time deposits.............................. 342,285 5.63 164,332 5.63 131,025 4.52
---------- ---------- ----------
Total.................................... $ 730,449 $ 394,589 $ 356,101
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Total deposits increased by $58.2 million or 8.3% to $761.3 million at
December 31, 1996 from $703.1 million at December 31, 1995. Noninterest bearing
demand deposits increased $28.0 million or 55.5% as Pinnacle continued to have
success with a new line of checking accounts introduced in 1995.
Time deposits grew by $24.1 million, or 7.5%, to $344.2 million at December
31, 1996 as compared to $320.2 million on December 31, 1995, as interest rates
on time deposits remained attractive as compared to yields on products available
from non-bank competitors when compared to risk.
Total deposits increased by $351.1 million, or 99.7%, to $703.1 million at
December 31, 1996 from $352.0 million at December 31, 1994. The Maco Acquisition
provided $318.8 million in deposit growth while internal growth was $32.3
million, or 9.2%, as a new line of checking account products was introduced.
Demand deposit product balances grew $43.1 million or 49.4% with the Maco
Acquisition providing $38.2 million in demand deposit growth and internal growth
of $4.9 million, or 5.7%. Time deposits at December 31, 1995 totaled $320.2
million as compared to $133.1 million on December 31, 1994, an increase of
$187.1 million or 140.5%. The time deposits of the Maco Acquisition totaled
$161.7 million at December 31, 1995 while Pinnacle Bank's Michigan market
totaled $158.5 million for an increase of $25.4 million, or 19.2%, for 1995, as
interest rates increased during the first half of 1995 and customers determined
that yields on time deposits were more attractive than yields on products
available from non-bank competitors. Savings products increased $120.8 million,
or 91.8%, to $252.5 million at December 31, 1995 of which $118.9 million came
through the Maco Acquisition and $2.0 million in growth in Pinnacle Bank's
Michigan market.
30
<PAGE>
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED:
Balance at end of period....................................................... $ 42,900 $ -- $ 1,400
Weighted average interest rate at end of year.................................. 5.67% 0.00% 6.08%
Maximum amount outstanding (1)................................................. $ 42,900 $ 11,150 $ 6,300
Average amount outstanding..................................................... $ 12,259 $ 2,061 $ 1,014
Weighted average interest rate during year..................................... 5.51% 6.21% 4.64%
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Balance at end of period....................................................... $ 22,413 $ 12,402 $ 9,982
Weighted average interest rate at end of year.................................. 3.94% 3.20% 3.40%
Maximum amount outstanding (1)................................................. $ 25,092 $ 24,209 $ 12,454
Average amount outstanding..................................................... $ 22,413 $ 15,501 $ 9,961
Weighted average interest rate during year..................................... 3.90% 4.26% 2.95%
</TABLE>
- ------------------------
(1) Based on amount outstanding at month end during each year
Federal Home Loan Bank advances, securities sold under repurchase agreements
and other borrowings increased $98.2 million, or 77.2%, to approximately $225.4
million at December 31, 1996. The increase was primarily used to match specific
adjustable rate security purchases of approximately $40 million and to the match
funding of approximately $30 million in longer term 15 year fixed rate home
equity loans. Federal Home Loan Bank advances, securities sold under repurchase
agreements and other borrowings increased approximately $107.3 million, or
539.5%, to approximately $127.2 million at December 31, 1995. In comparison,
this item was only $19.9 million at December 31, 1994. The growth in 1995 was
primarily the result of the Maco Acquisition, and includes approximately $80.8
million in balances at Maco and the $18.0 million Acquisition Note issued by
Pinnacle to the sole stockholder of Maco. (The Acquisition Note was repaid in
full in March, 1996.) In addition, during 1995, borrowings at the Federal Home
Loan Bank of Indianapolis increased by $8.5 million, or 42.9%, as Pinnacle
continued to utilize alternative low rate funding sources to fund increased loan
demand and certain investment security purchases with similar adjustable rate
features and maturities.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 1996, the
provision for loan losses totaled $375,000 as compared to $225,000 for the same
period in 1995, and $125,000 for the same period in 1994. Non-accrual loans
decreased to $761,000 at December 31, 1996 as compared to $3.3 million at
December 31, 1995, and $749,000 at December 31, 1994. Total nonperforming loans
to total loans decreased to 0.80% as of December 31, 1996 compared to 0.83% as
of December 31, 1995. Total past due loans over 90 days increased from $675,000
in 1995 to $3.9 million in 1996. Pinnacle management believes these increases
are attributable primarily to the Maco Acquisition and not to any general
decline in credit quality.
The 1995 increase in the provision for loan losses was attributable mainly
to loan growth and an increase in net charge-offs of $161,000. Even though
nonaccrual loans totaled $3.3 million at December 31, 1995, as compared to
$749,000 at December 31, 1994, Pinnacle's management believes loan credit
quality remains good since much of this increase was attributable to the Maco
Acquisition. Indeed, nonaccrual loans attributable to the lending activities of
Pinnacle Bank increased only $132,000 to $881,000 at December 31, 1995. Total
nonperforming loans to total loans remained strong at .83% at December 31, 1995
as compared to .60% at December 31, 1994. Total past due loans over 90 days
increased from $490,000 in 1994 to $675,000 in 1995.
31
<PAGE>
NONINTEREST INCOME. The following table reflects various components of
noninterest income for each time period reported.
NONINTEREST INCOME
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts.............................. $ 2,207 $ 1,530 $ 1,479
Trust fees....................................................... 601 533 485
Investment services fees......................................... 229 125 169
Merchant and loan service fees................................... 1,270 923 770
Recoveries on distressed assets.................................. 250 296 262
Gain (loss) on sale of loans, net................................ 1,075 182 (11)
Investment securities gains, net................................. 653 350 64
Other income..................................................... 1,023 647 538
--------- --------- ---------
Total noninterest income..................................... $ 7,308 $ 4,586 $ 3,756
--------- --------- ---------
--------- --------- ---------
</TABLE>
Noninterest income for the year ended December 31, 1996 was approximately
$7.3 million and approximately $4.6 million for the year ended December 31,
1995. Of this $2.7 million increase, $1.8 million was attributable to the Maco
Acquisition (including $315,000 attributable to security gains from the sale of
securities available-for-sale). In addition, at Pinnacle Bank, deposit service
charges increased $306,000, or 20.3%, trust income increased $68,000, or 12.8%,
brokerage and investment services fees increased $104,000, or 83.2%, and other
loan service fees increased $299,000, or 32.5%.
Noninterest income for the year ended December 31, 1995 increased $830,000,
or 22.1%, as compared to approximately $3.8 million for the year ended December
31, 1994. Net security gains accounted for $286,000 of the increase as
securities available-for-sale were sold to support loan demand in a period where
investment security pricing was rising and yields were decreasing. Mortgage loan
sales income for the year ended December 31, 1995 was $182,000, a $193,000
increase as compared to a loss of $11,000 for year ended December 31, 1994.
During 1995, service charges on deposit accounts, trust fees and merchant and
loan servicing fees all demonstrated steady increases as new products were
introduced. However, investment service fees continued to decline in revenue as
customers remained invested in bank time deposits rather than seeking alternate
non-bank investments.
NONINTEREST EXPENSE. The following table presents the major components of
noninterest expense for each period reported.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries..................................................... $ 8,239 $ 5,306 $ 4,776
Benefits..................................................... 2,604 1,794 1,297
--------- --------- ---------
Total salaries and benefits.............................. $ 10,843 $ 7,100 $ 6,073
Occupancy expense............................................ 2,055 1,097 1,033
Equipment expense............................................ 1,615 947 885
Postage and delivery......................................... 643 362 292
Supplies..................................................... 915 455 418
Marketing and promotion...................................... 1,481 695 298
Professional services........................................ 718 314 417
FDIC insurance............................................... 3,196 552 808
Amortization of intangibles.................................. 1,283 525 458
Other expense................................................ 4,207 2,589 2,432
--------- --------- ---------
Total noninterest expense................................ $ 26,956 $ 14,636 $ 13,114
--------- --------- ---------
--------- --------- ---------
</TABLE>
32
<PAGE>
Non-interest expense for the year ended December 31, 1996 was $27.0 million
as compared to $14.6 million for the same period in 1995. Of this 84.2% increase
in non-interest expense, approximately $11.0 million was attributable to the
Maco Acquisition (including $2.0 million attributable to the one-time Special
Assessment against financial institutions with deposits insured by SAIF). The
balance of this increase, which was attributable primarily to the activities of
Pinnacle Bank and approximately $300,000 in costs associated with changing of
the name of First Federal, $358,000 for the Special Assessment charged against
Pinnacle Bank's Michigan thrift deposits, $302,000 for computer equipment
upgrades, $106,000 for telephone expenses, and $59,000 for professional fees.
Noninterest expense increased $1.5 million, or 11.6%, for the year ended
December 31, 1995 as compared to $13.1 million for the same period in 1994.
Salary and benefits increased $1.0 million, or 16.9%, in 1995 due primarily to
the Maco Acquisition, merit increases and the opening of a new supermarket
branch. Marketing expenses increased $397,000, or 133.2%, in 1995 due to
increased costs associated with a new line of checking account products
introduced by Pinnacle Bank in March 1995. FDIC insurance decreased $256,000, or
31.7%, in the period due to a decline in insurance premiums on bank deposits.
INCOME TAXES. Income taxes were approximately $5.1 million for the year
ended December 31, 1996 and approximately $2.6 million for the year ended
December 31, 1995. The increase was the result of higher levels of earnings,
including, in substantial part, earnings associated with the Maco Acquisition.
Income taxes for the year ended December 31, 1995, increased $277,000 over
income taxes of $2.3 million for the year ended December 31, 1994. This increase
was due primarily to higher levels of earnings in 1995. In addition, Pinnacle
obtained a favorable settlement of an Internal Revenue Service claim pertaining
to the deductibility of certain amortized intangible assets. The settlement
which increased the deductibility of the amount amortized from 50% to 85%,
reduced federal income taxes for 1995 by approximately $250,000.
The effective tax rates for 1996, 1995 and 1994 were 35.8%, 28.8% and 30.6%,
respectively. The increase in 1996 was primarily from the non-deductibility of
goodwill expenses associated with the Maco Acquisition and a higher state income
tax rate associated with income in the Indiana market.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS. Average earning assets equaled 94.1% of total average
assets for the year ended December 31, 1996 and 94.0% for the same period in
1995 and 94.1% for the same period in 1994. Generally, the higher earning assets
are to total assets, the greater the contribution of Pinnacle's net interest
margin to profitability.
Average loans outstanding for the year ended December 31, 1996 were $561.3
million. Average loans outstanding at December 31, 1995 were $322.9 million. The
increase in this item was attributable to the Maco Acquisition which added
$222.5 million, the growth of average loans outstanding in the Michigan market
by $15.9 million, or 5.2%, reflecting stable local economic conditions in
Michigan, and the focus of management on building its commercial presence in
Indiana. Average loans outstanding in 1995 were approximately $48.1 million and
17.5% greater than average loans outstanding in 1994. The Maco Acquisition added
approximately $17.8 million to average loans outstanding in 1995. The banking
activities of Pinnacle Bank added $30.3 million to average loans outstanding in
1995. This internal growth was a reflection of strong local economic conditions.
33
<PAGE>
The following table presents the amortized cost of securities
held-to-maturity as of December 31, 1994.
<TABLE>
<CAPTION>
1994
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
Obligations of states and political subdivisions.................................. $ 16,103
Corporate securities.............................................................. 15,616
Collateralized mortgage obligations............................................... 787
Other mortgage backed securities.................................................. 10,933
-----------
Total........................................................................... $ 43,439
-----------
-----------
</TABLE>
The following table presents the amortized cost of securities
available-for-sale at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities................................... $ 10,046 $ 9,577 $ 17,752
Obligations of other U.S. government agencies and
corporations............................................. 160,434 91,925 7,258
Obligations of states and political subdivisions........... 20,936 19,406 55
Corporate securities....................................... 350 10,275 6,547
Equity securities.......................................... 12,138 6,328 1,803
Collateralized mortgage obligations........................ 83,570 104,932 8,649
Other mortgage backed securities........................... 85,327 43,366 7,967
---------- ---------- ---------
Total.................................................... $ 372,801 $ 285,809 $ 50,031
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The following table sets forth certain information regarding securities
available-for-sale at December 31, 1996.
<TABLE>
<CAPTION>
AFTER 5 BUT
AFTER 1 BUT WITHIN 10
WITHIN 1 YEAR WITHIN 5 YEARS YEARS AFTER 10 YEARS
-------------- -------------- -------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities................ $ 2,012 5.45% $ 8,090 5.75% $ -- 0.00% $ -- 0.00%
Obligations of other U.S. government
agencies and corporations............. 30 7.99 6,764 6.83 55,099 7.42 97,840 7.56
Obligations of states and political
subdivisions (1)...................... 1,710 3.54 9,428 4.19 5,731 4.82 4,604 5.16
Corporate securities.................... 183 5.74 77 6.20 -- 0.00 94 7.26
Equity securities....................... 12,110 7.49 -- 0.00 -- 0.00 -- 0.00
Collateralized mortgage obligations
(2)................................... 738 7.29 780 6.73 2,284 6.32 79,300 6.61
Other mortgage backed securities (2).... -- 0.00 14,879 6.76 3,429 7.10 66,975 7.57
------- ----- ------- ----- ------- ----- -------- -----
Total amount/yield...................... $16,783 6.82% $40,018 5.96% $66,543 7.14% $248,813 7.22%
------- ----- ------- ----- ------- ----- -------- -----
------- ----- ------- ----- ------- ----- -------- -----
</TABLE>
- ------------------------
(1) Weighted yields on tax-exempt obligations have not been computed on a fully
tax-equivalent basis.
(2) Maturities of collateralized mortgage obligations and mortgage backed
securities are determined based on original maturity dates.
34
<PAGE>
Average securities for the year ended December 31, 1996 was approximately
$339.7 million as compared to $116.5 million at December 31, 1995, as the Maco
Acquisition added $185.6 million to average security balances and Pinnacle Bank
added $37.6 million in 1996 as the Bank increased the level of adjustable rate
securities that were matched with short-term FHLB advances.
Average securities increased $12.6 million in 1995 over 1994. Pinnacle
Bank's average security balances decreased by approximately $2.3 million in 1995
as available funds were used to fund higher yielding loan demand. Security
balances at December 31, 1995 totaled $287.5 million, an increase of
approximately $197.0 million, or 217.7%, over security balances of approximately
$90.5 million at December 31, 1994. This increase was primarily attributable to
approximately $180.3 million of securities acquired in the Maco Acquisition. All
such securities have been placed in the available-for-sale classification so as
to be available to support loan growth and to allow for better interest rate and
margin management.
Gross loan balances as of December 31, 1996 totaled $609.6 million, an
increase of $91.1 million, or 17.6%. Commercial loans increased by $56.3
million, or 36.5%, at December 31, 1996 to $210.3 million with the Indiana
market providing $39.1 million of the commercial loan growth as management
focused their attention on developing a commercial bank presence in its new
Indiana market. Consumer loans (primarily in home equity loans) increased $21.3
million, or 22.9%, to $114.1 million with its Indiana market providing $20.2
million of the consumer loan growth reflecting strong economic conditions there.
Real estate loans grew slightly in 1996 by $8.0 million, or 3.0%, to $276.9
million as Pinnacle originated real estate loans primarily for sale in the
secondary market in order to manage interest rate risk. Pinnacle sold
approximately $104.3 million in originated real estate loans in 1996 as compared
to $11.0 million in 1995. The increase is primarily from the Maco Acquisition
which has a larger network of loan originators throughout Indiana.
Gross loans at December 31, 1995 totaled approximately $518.5 million, an
increase of $228.1 million, or 78.6%, as compared to gross loans at December 31,
1994. Of this increase, $209.6 million resulted from the Maco Acquisition and
$18.5 million resulted from the banking activities of Pinnacle Bank. Commercial
loans increased by $33.6 million, or 27.9%, to $154.0 million at December 31,
1995. Of the increase, $18.2 million was attributable to the Maco Acquisition
and $15.4 million was attributable to the banking activities of Pinnacle Bank.
Consumer loans (primarily home equity loans) increased $30.1 million, or 48.0%,
to $92.8 million at December 31, 1995, with $24.2 million of this increase
resulting from the Maco Acquisition and the balance resulting from the banking
activities of Pinnacle Bank. Real estate loans grew by approximately $165.9
million, or 161.0%, to $268.9 million at December 31, 1995. While the Maco
Acquisition added approximately $167.2 million to this item, Pinnacle Bank's
real estate loan balances decreased by approximately $1.3 million as Pinnacle
managed interest rate risk in Pinnacle Bank's real estate loan portfolio. In
connection with the management of its real estate portfolio, Pinnacle Bank sold
approximately $11.0 million in originated loans in the secondary market in 1995
as compared to $19.0 million sold in 1994. Lower refinancing activity and higher
mortgage rates continued to impact mortgage loan volume during 1995.
35
<PAGE>
The following table presents loans outstanding, according to loan category
at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial........................................... $ 210,315 $ 154,044 $ 120,414 $ 107,660 $ 97,456
Real estate.......................................... 276,941 268,911 103,016 103,568 110,208
Consumer............................................. 114,112 92,826 62,742 49,779 50,956
Economic development, bonds and other tax exempt
loans.............................................. 8,196 2,678 4,158 3,003 4,003
---------- ---------- ---------- ---------- ----------
Total Loans...................................... 609,564 518,459 290,330 264,010 262,623
Less allowance for loan losses....................... (5,643) (5,852) (5,014) (5,215) (5,881)
---------- ---------- ---------- ---------- ----------
Net Loans........................................ $ 603,921 $ 512,607 $ 285,316 $ 258,795 $ 256,742
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The following table presents commercial loans outstanding at the date
indicated which, based on remaining scheduled repayments of principal, are due
in the period indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
--------------------- ---------------------
VARIABLE FIXED VARIABLE FIXED
RATE RATE RATE RATE
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in 1 year or less.............................................. $ 37,258 $ 15,313 $ 31,468 $ 10,773
Due in 1 through 5 years........................................... 28,479 58,409 30,553 37,595
Due after 5 years.................................................. 65,968 4,888 38,935 4,720
---------- --------- ---------- ---------
Total............................................................ $ 131,705 $ 78,610 $ 100,956 $ 53,088
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
The following table presents information concerning nonperforming loans
including nonaccrual, past due, and restructured loans at the indicated dates.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis (1).................... $ 761 $ 3,321 $ 749 $ 1,722 $ 5,424
Accruing loans contractually past due 90 days or more as to
principal or interest payments................................. 3,916 675 490 694 858
Restructured loans............................................... 227 324 503 282 --
--------- --------- --------- --------- ---------
Total nonperforming loans...................................... $ 4,904 $ 4,320 $ 1,742 $ 2,698 $ 6,282
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) 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 is likely. If nonaccrual loans had been
maintained current in accordance with their original terms, additional
interest income of $$118,000, $81,000 and $87,000 would have been recorded
during the periods ended December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1995, Pinnacle adopted FASB Statement No. 114, (as
amended by Statement 118), "Accounting by Creditors for Impairment of a Loan".
For further discussion see Note 7 to consolidated financial statements of
Pinnacle Financial Services, Inc. contained later in this document.
The Company has no loans for which the terms have been renegotiated to less
than market rates due to weakening of a borrower's financial condition.
36
<PAGE>
POTENTIAL PROBLEM LOANS
In addition to the loans classified as nonaccrual or greater than 90 days
delinquent and still accruing interest, there were other loans of approximately
$10.2 million and $9.6 million at December 31, 1996 and 1995, respectively,
where management is closely following the borrower's ability to continue to
comply with loan payment terms. Current conditions do not warrant classification
as nonperforming, nor is any principal loss on these loans considered likely at
this time.
FOREIGN LOANS
The Company's loans outstanding to borrowers in foreign countries as of
December 31, 1996 and 1995 did not exceed 1% of its total assets.
LOAN CONCENTRATIONS
As of December 31, 1996, there were no concentrations of loans to individual
borrowers that exceeded 10% of total loans.
37
<PAGE>
The following table summarizes the loan loss experience, and provides a
breakdown of the allowance for loan losses at December 31 of each year.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans Outstanding at end of period, net of unearned
discount............................................ $ 609,564 $ 518,459 $ 290,330 $ 264,010 $ 262,623
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average loans for the period.......................... $ 561,257 $ 322,851 $ 274,757 $ 256,970 $ 216,289
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, beginning of period........ $ 5,852 $ 5,014 $ 5,215 $ 5,881 $ 2,022
---------- ---------- ---------- ---------- ----------
Charge-offs for period:
Commercial loans.................................... 172 73 284 907 621
Real Estate loans................................... 43 44 34 83 254
Consumer loans...................................... 720 627 280 419 627
---------- ---------- ---------- ---------- ----------
Total charge-offs................................. 935 744 598 1,409 1,502
---------- ---------- ---------- ---------- ----------
Recoveries for period:
Commercial loans.................................... 166 116 67 120 101
Real Estate loans................................... 34 23 42 90 11
Consumer loans...................................... 151 120 163 173 116
---------- ---------- ---------- ---------- ----------
Total recoveries.................................. 351 259 272 383 228
---------- ---------- ---------- ---------- ----------
Net charge-offs for the period........................ 584 485 326 1,026 1,274
---------- ---------- ---------- ---------- ----------
Allowance recorded for acquired loans................. -- 1,098 -- -- 4,039
Provision for loan losses............................. 375 225 125 360 1,094
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, end of period.............. $ 5,643 $ 5,852 $ 5,014 $ 5,215 $ 5,881
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net charge-offs during the period to average
loans outstanding................................... 0.10% 0.15% 0.12% 0.40% 0.59%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allocation of allowance for loan losses:
Commercial loans.................................... $ 3,089 $ 3,169 $ 2,855 $ 3,038 $ 3,635
Real Estate loans................................... 1,426 1,475 1,189 1,181 1,174
Consumer loans...................................... 1,128 1,208 970 996 1,072
---------- ---------- ---------- ---------- ----------
Total allowance for loan losses................... $ 5,643 $ 5,852 $ 5,014 $ 5,215 $ 5,881
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Percentage of loan to total gross loans:
Commercial loans.................................... 35% 29% 42% 41% 37%
Real Estate loans................................... 45 52 35 39 42
Consumer loans...................................... 19 18 22 19 19
Economic development bonds and other tax exempt
loans............................................... 1 1 1 1 2
---------- ---------- ---------- ---------- ----------
Total............................................. 100% 100% 100% 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 collectability of specific loans.
38
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses totaled
approximately $5.7 million at December 31, 1996 as compared to approximately
$5.9 million at December 31, 1995, as compared to $5.0 million at December 31,
1994. The allowance as a percentage of total loans was .93%, 1.1%, and 1.7%,
respectively, for such dates indicated.
The Maco Acquisition added approximately $1.1 million to the allowance in
1995. However, the allowance attributable to Pinnacle Bank decreased by $262,000
during 1995 as its loan quality remained good and management believed the
allowance for loan losses remained adequate to cover potential losses in the
loan portfolio. The reductions in the allowance as a percentage of total loans
in 1996 and 1995 were attributable mainly to the large amount of mortgage loans
acquired in the Maco Acquisition that generally carry a lower reserve per
management's estimate.
Net charge-offs for the year ended December 31, 1996 were $584,000, or
0.10%, of average loans outstanding as compared to $487,000, or 0.15%, for the
year ended December 31, 1995, and $326,000, or 0.12%, for the year ended
December 31, 1994. Recoveries on previously charged-off loans were $351,000 in
1996, $257,000 in 1995, and $272,000 in 1994. At December 31, 1996 and 1995,
nonaccrual loans amounted to $761,000 and $3.3 million, respectively. This
compares to nonaccrual loans of $749,000 at December 31, 1994. Pinnacle's
management believes that the reduced level of nonaccrual loans at Pinnacle Bank
reflects good economic conditions and credit quality.
Other loans of concern to Pinnacle management increased to approximately
$10.2 million as of December 31, 1996 as compared to approximately $9.6 million
in 1995. Other loans of concern to Pinnacle management increased $2.6 million in
1995. This compares to other loans of concern to Pinnacle management totaling
$7.0 million in 1994. In the opinion of Pinnacle's management, the allowance for
loan losses is adequate and appropriately reflects the risk inherent in each of
the period-end loan portfolios. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on economic conditions and borrower circumstances. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review Pinnacle's allowance for loan losses. Such agencies may
require Pinnacle to recognize additions to the allowance based on their
judgments regarding information available to them at the time of their
examination.
NONEARNING ASSETS. Premises and equipment increased $140,000 to $12.7
million as of December 31, 1996 from $12.5 million as of December 31, 1995. The
increase was attributable in part to investment in technology and computer-based
systems that are used in sales support efforts and to better manage the
operations of consolidated banking activities. Capital improvements in each of
the years ended December 31, 1996 and 1995 totaled $1.5 million.
Premises and equipment increased $5.6 million as of December 31, 1995 from
$6.9 million as of December 31, 1994. Approximately $4.9 million of this
increase resulted from the Maco Acquisition. Capital improvements in 1995
totaled $1.5 million as compared to $720,000 in 1994. The increase was
attributable primarily to a computer capacity upgrade associated with the Maco
Acquisition and the opening of a supermarket branch facility in July 1995.
Interest receivable and other assets increased to $31.0 million from $28.7
million as of December 31, 1996 and 1995, respectively. The increase was
primarily from higher levels of accrued interest associated with higher levels
of earning assets. Other real estate increased to $1.7 million from $1.4 million
for the same time periods. Goodwill and other purchased intangible assets
decreased $2.1 million to $13.5 million as of December 31, 1996 as compared to
$15.6 million at December 31, 1995, primarily through expense provision in 1996
and through a favorable tax treatment in 1996 on the recapture of bad debt
reserves for thrifts of approximately $600,000.
Interest receivable and other assets increased $18.9 million as of December
31, 1995, from approximately $9.8 million as of December 31 1994. The increase
during 1995 was primarily the result of the Maco Acquisition, which added
approximately $18.1 million (including approximately $13.3 million of goodwill
39
<PAGE>
associated with the Maco Acquisition). Other real estate increased slightly as
of December 31, 1995 to $1.4 million as compared to $1.3 million as of December
31, 1994. At December 31, 1995, virtually all of such other real estate was held
by Pinnacle Bank.
INTEREST-BEARING LIABILITIES. In 1996, average interest-bearing liabilities
increased $452.2 million, or 114.9%, over 1995. The Maco Acquisition was the
primary reason for the increase with the acquisition providing $393.6 million of
the increase. The Pinnacle Bank operation grew $56.6 million, or 15.7%. The
increases in Michigan were primarily in time deposits which grew 9.0%, or $13.5
million, to $164.2 million at December 31, 1996 and FHLB advances, securities
sold under purchase agreements and other borrowings which grew 103.5%, or $31.6
million, in 1996 to $62.2 million as Pinnacle used this type of funding to match
specific loan and investment purchases with like maturities.
In 1995, average interest-bearing liabilities increased approximately $60.8
million, or 18.3%, over 1994. The Maco Acquisition added $32.2 million and
Pinnacle Bank's average interest-bearing liabilities increased $28.5 million, or
8.6%. The increase at Pinnacle Bank resulted from increases in average time
deposits of $19.6 million, or 15.0%, and average short-term borrowings of $16.1
million. These increases were partially offset by a decrease in savings deposits
of $8.8 million. The changes reflect the shift of funds by consumers to higher
yielding time deposits as interest rates increased in late 1994. Pinnacle
utilized low cost borrowings from the Federal Home Loan Bank of Indianapolis to
support loan growth and specific matched security portfolio investments.
Year-end 1995 interest-bearing liabilities totaled approximately $779.9 million
as compared to approximately $330.1 million for December 31, 1994 an increase of
approximately $449.8 million, or 136.3%. The Maco Acquisition was the primary
reason for this increase, adding $390.1 million. Pinnacle Bank added
approximately $41.7 million, or 12.6%, in 1995. In addition, the $18.0 million
Acquisition Note was issued by Pinnacle to the sole stockholder of Maco in
connection with the Maco Acquisition. (The Acquisition Note was paid in full in
March 1996.)
OTHER LIABILITIES. At December 31, 1996, other liabilities decreased $1.9
million, or 29.5%, to $4.4 million from $6.3 million as of December 31, 1995.
The reduction was primarily from reductions in income taxes payable and deferred
income tax adjustments associated with the recapture of bad debt reserves and
deferred taxes associated with market value adjustments in the investment
portfolio market value swings in 1996.
At December 31, 1995, other liabilities increased $3.9 million, or 165.5%,
from approximately $2.4 million at December 31, 1994. The Maco Acquisition added
$3.2 million. Other liabilities at Pinnacle Bank increased $720,000 due to
increases in accrued interest on interest-bearing liabilities associated with
growth and higher interest rates.
LIQUIDITY
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
requirements and loan demand from customers. At December 31, 1996, cash and due
from banks, federal funds sold, and money market instruments equaled
approximately $49.3 million. Additional liquidity, is provided by the ability to
borrow from the Federal Reserve Bank and Federal Home Loan Bank of Indianapolis.
As of December 31, 1996, Pinnacle had borrowed $159.5 million from the Federal
Home Loan Bank of Indianapolis to match longer term loans and specific
securities with matching maturities.
Pinnacle identified securities totaling approximately $372.2 million and
$287.5 million, respectively, as being available-for-sale at December 31, 1996
and December 31, 1995, respectively. Pinnacle classified all of its security
portfolio at December 1, 1995 as being available-for-sale. Consequently, this
portfolio, which totaled $372.2 million at December 31, 1996, is available to
meet any liquidity needs of Pinnacle. Securities acquired as a result of the
Maco Acquisition and totaling $169.6 million were transferred from held-to-
maturity to available-for-sale at fair market value, thereby conforming such
securities to Pinnacle's interest
40
<PAGE>
rate and credit risk policy. The remainder of the reclassification came from
Pinnacle Bank, with an amortized cost of $35.3 million, made pursuant to the
FASB's issuance of "A Guide to Implementation of FASB 115" that allowed entities
a one-time reclassification of securities. At the date of transfer, December 1,
1995, Pinnacle Bank's securities had a net unrealized gain totaling $530,000.
Proceeds from the sales of securities available-for-sale amounted to $140.0
million in 1996, $69.0 million in 1995, and $14.1 million in 1994, with
resulting net gains of $653,000, $350,000, and $64,000, respectively. At
December 31, 1996, gross unrealized holding gains and gross unrealized holding
losses in Pinnacle's total security portfolio amounted to approximately $1.4
million and approximately $2.0 million, respectively. At December 31, 1995 gross
unrealized holding gains and gross unrealized holding losses in Pinnacle's total
security portfolio amounted to approximately $2.2 million and $478,000
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 Pinnacle's management believes will result in an
improved return to stockholders. Substantially all of Pinnacle's revenues result
from dividends paid to it by Pinnacle Bank and from earnings on investments.
Dividends paid to Pinnacle by Pinnacle Bank amounted to $3.7 million for the
year ended December 31, 1996, $12.1 million for the year 1995, and approximately
$2.4 million in 1994. Dividends paid to Pinnacle by First Federal amounted to
$1.3 million for the year ended December 31, 1996 and $4.0 million in 1995.
There are statutory and regulatory requirements applicable to the payment of
dividends by Pinnacle Bank as well as by Pinnacle to its stockholders. Under
applicable dividend restrictions, Pinnacle Bank, without obtaining government
approvals, could declare aggregate dividends in 1996 of approximately $14.9
million from retained net profits of the preceding two years, plus an amount
approximately equal to the net profits (as measured under current regulations),
if any, earned for the period from January 1, 1996 through the date of
declaration less dividends previously paid in 1996.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is measured by analyzing the maturity and timing
of interest rate changes on assets and liabilities. The "gap" is the amount by
which interest-sensitive assets exceed interest-sensitive liabilities for any
given period. In periods of increasing interest rates, a positive gap will
generally result in increased net interest income; conversely, a negative gap
will result in decreased net interest income in such periods. In periods of
decreasing interest rates, a positive gap will result in decreased net interest
income, and a negative gap will result in increased net interest income.
To manage Pinnacle's exposure to changes in interest rates, management of
Pinnacle closely monitors its interest rate risk. An asset/liability committee
consisting of senior officers meets regularly and reviews Pinnacle's interest
rate risk position and makes recommendation for adjustments to the position. In
addition, the Board of Directors of Pinnacle periodically reviews Pinnacle's
asset/liability position, including simulations of the effect on Pinnacle's
earnings and capital of various interest rate scenarios.
In managing its asset/liability mix, and depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, Pinnacle may place somewhat greater emphasis on maximizing its net
interest margin than on matching the interest rate sensitivity of its assets and
liabilities in an effort to increase its net income. Management believes that
the increased net income resulting from a mismatch in the maturity of its asset
and liability portfolios can, during periods of declining or stable interest
rates, provide high enough returns to justify the increased exposure to sudden
and unexpected increases in interest rates which can result from such mismatch.
As a result, there may be relatively more exposure to rapid increases in
interest rates than some other institutions which concentrate principally on
matching the duration of their assets and liabilities.
Pinnacle is managing its current negative gap position by emphasizing
variable rate loans, investing in short-term securities, and encouraging longer
term deposit products through pricing strategies. The
41
<PAGE>
following table sets forth management's estimate of the projected maturities
and/or repricing of Pinnacle's assets and liabilities as of December 31, 1996.
In preparing the table, management of Pinnacle has assumed that loans prepay to
varying degrees based on type, maturity and rate. Certificates of deposit have
been entered into the analysis based on contractual maturity.
INTEREST RATE SENSITIVITY/GAP ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY PERIOD
---------------------------------------------------------------------------------------
0 - 3 4 - 6 7 - 9 10 - 12 1 - 5 OVER 5
MONTHS MONTHS MONTHS MONTHS YEARS YEARS TOTAL
---------- ----------- ----------- ----------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits with
financial institutions........ $ 18,973 $ -- $ -- $ -- $ -- $ -- $ 18,973
Securities available for sale... 169,051 12,510 5,355 9,285 66,168 109,788 372,157
Loans........................... 177,325 30,831 41,675 33,439 232,857 93,437 609,564
Nonearning assets............... -- -- -- -- -- -- 68,427
---------- ----------- ----------- ----------- ---------- ---------- ------------
Total Assets.................. $ 365,349 $ 43,341 $ 47,030 $ 42,724 $ 299,025 $ 203,225 $ 1,069,121
---------- ----------- ----------- ----------- ---------- ---------- ------------
---------- ----------- ----------- ----------- ---------- ---------- ------------
FUNDING SOURCES:
Interest-bearing demand......... $ 65,799 $ -- $ -- $ -- $ 10,866 $ -- $ 76,665
Savings and time deposits....... 254,399 97,662 39,983 23,571 186,965 3,659 606,239
Federal Home Loan Bank
advances...................... 43,500 -- 40,500 -- 45,489 30,000 159,489
Other borrowings................ 54,557 -- -- -- 11,315 65,872
Noninterest bearing sources..... -- -- -- -- -- -- 160,856
---------- ----------- ----------- ----------- ---------- ---------- ------------
Total funding sources......... $ 418,255 $ 97,662 $ 80,483 $ 23,571 $ 254,635 $ 33,659 $ 1,069,121
---------- ----------- ----------- ----------- ---------- ---------- ------------
---------- ----------- ----------- ----------- ---------- ---------- ------------
REPRICING/MATURITY GAP
Period.......................... $ (52,906) $ (54,321) $ (33,453) $ 19,153 $ 44,390 $ 169,566
Cumulative...................... $ (52,906) $ (107,227) $ (140,680) $ (121,527) $ (77,137) $ 92,429
Cumulative rate sensitivity
assets/Cumulative rate
sensitivity funding sources...... 87.35% 79.22% 76.41% 80.40% 91.18% 110.18%
</TABLE>
Certain shortcomings are inherent in the above analysis. For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. Also, interest rates on certain types of assets and liabilities may
fluctuate in advance of, or lag behind, changes in market rates. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in calculating the analysis.
Finally, in the event of rising interest rates, management may choose to
increase the rates paid on deposit accounts in order to retain those accounts.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary assets and liabilities of
Pinnacle are monetary in nature. As a result, interest rate have a more
significant impact on Pinnacle's performance than the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or
magnitude as the prices of goods and services.
42
<PAGE>
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" which is effective, in part, for transactions occurring after
December 31, 1996. This statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial components approach
that focuses on control. Pinnacle adopted this statement on January 1, 1997, and
it will not have a material effect on the Company's financial condition, results
of operations, or liquidity.
Effective January 1, 1995, Pinnacle adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 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
No. 114 and SFAS No. 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 No.
114 and SFAS No. 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, Pinnacle's impaired loans were described as, and
equaled, non-accrual loans. The adoption of SFAS No. 114 and SFAS No. 118 has
had no material effect on Pinnacle's non-performing assets or financial
condition. See Note 1(c) to Pinnacle's Consolidated Financial Statements.
In October 1994, SFAS No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" was issued by the Financial
Accounting Standard Board ("FASB"). Effective for financial statements issued
for fiscal years ending after December 15, 1994, SFAS No. 119 requires
disclosures about the amounts, nature and terms of certain derivative financial
instruments. Pinnacle adopted SFAS No. 119 and has made the required disclosures
thereunder for the year ended December 31, 1994.
In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights", which
requires Pinnacle to recognize the rights to service mortgage loans for others
as a separate asset, regardless of the manner in which such rights are acquired,
was issued. The statement applies to fiscal years beginning after December 15,
1995, with earlier adoption permitted. Pinnacle adopted SFAS No. 122 on January
1, 1995, which did not materially impact the capital, financial position or net
income of Pinnacle.
RECENT LEGISLATION
Legislation was enacted in 1996 that resulted in, among other things, the
assessment of a one-time charge against financial institutions with deposits
insured by SAIF. The amount of the charge equaled approximately .657% of the
deposits of a financial institution held on March 31, 1995 and subject to the
SAIF premium. The Special Assessment was due on October 1, 1996 and payable no
later than November 27, 1996. As a result of the Special Assessment, Pinnacle
paid an assessment of $2.4 million on approximately $361.3 million of deposits
held by it on March 31, 1995 and insured by SAIF.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Pinnacle Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Financial Services, Inc. and its subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Financial
Services, Inc. and its subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
March 3, 1997
Chicago, Illinois
44
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1996 1995
------------ ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks............................................................. $ 30,290 $ 24,681
Federal funds sold.................................................................. 15,750 3,850
------------ ----------
Total Cash and Cash Equivalents................................................... 46,040 28,531
Interest-bearing deposits with financial institutions................................. 3,223 41,511
Securities available-for-sale:
Taxable............................................................................. 350,685 267,460
Tax-exempt.......................................................................... 21,472 20,072
Loans, net of unearned income:
Real estate......................................................................... 276,941 268,911
Commercial.......................................................................... 210,315 154,044
Tax-exempt.......................................................................... 8,196 2,678
Consumer............................................................................ 114,112 92,826
------------ ----------
Total loans....................................................................... 609,564 518,459
Less allowance for loan losses...................................................... 5,643 5,852
------------ ----------
Net Loans........................................................................... 603,921 512,607
Premises and equipment, net........................................................... 12,686 12,546
Interest receivable and other assets.................................................. 31,094 28,719
------------ ----------
Total Assets...................................................................... $ 1,069,121 $ 911,446
------------ ----------
------------ ----------
LIABILITIES:
Deposits:
Non-interest bearing demand......................................................... $ 78,365 $ 50,400
Interest bearing demand............................................................. 76,665 80,066
Savings............................................................................. 261,997 252,453
Time................................................................................ 344,242 320,181
------------ ----------
Total Deposits.................................................................... 761,269 703,100
Federal Home Loan Bank advances..................................................... 159,489 96,752
Securities sold under repurchase agreements and other borrowings.................... 65,872 30,402
Interest payable and other liabilities.............................................. 4,442 6,296
------------ ----------
Total Liabilities................................................................. 991,072 836,550
STOCKHOLDERS' EQUITY:
Common stock; no par value;15,000,000 shares authorized; 5,977,548 shares issued and
outstanding at December 31, 1996; and 5,873,358 shares issued and outstanding at
December 31, 1995................................................................... 19,110 19,110
Additional paid-in capital............................................................ 44,526 44,174
Retained earnings..................................................................... 14,789 10,475
Net unrealized gain (loss) on securities available-for-sale........................... (376) 1,137
------------ ----------
TOTAL STOCKHOLDERS' EQUITY.......................................................... 78,049 74,896
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 1,069,121 $ 911,446
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable............................................................. $ 49,791 $ 29,542 $ 22,949
Tax-exempt.......................................................... 218 214 209
Interest and dividends on securities:
Available-for-sale
Taxable........................................................... 21,957 5,074 2,712
Tax-exempt........................................................ 1,064 32 --
Held-to-maturity
Taxable........................................................... -- 1,247 1,914
Tax-exempt........................................................ -- 873 998
Interest on federal funds sold........................................ 410 257 110
Interest on interest-bearing deposits with financial institutions..... 529 256 76
------------ ------------ ------------
TOTAL INTEREST INCOME............................................... 73,969 37,495 28,968
INTEREST EXPENSE:
Interest on deposits.................................................. 30,536 16,093 11,316
Interest on Federal Home Loan Bank advances........................... 7,402 1,182 214
Interest on securities sold under repurchase agreements and other
borrowings.......................................................... 1,755 876 332
------------ ------------ ------------
TOTAL INTEREST EXPENSE.............................................. 39,693 18,151 11,862
------------ ------------ ------------
NET INTEREST INCOME................................................. 34,276 19,344 17,106
PROVISION FOR LOAN LOSSES............................................... 375 225 125
------------ ------------ ------------
NET INTEREST INCOME, AFTER PROVISION FOR LOAN LOSSES................ 33,901 19,119 16,981
NONINTEREST INCOME:
Service charges on deposit accounts................................... 2,207 1,530 1,479
Trust income.......................................................... 601 533 485
Securities gains and losses, net...................................... 653 350 64
Other income.......................................................... 3,847 2,173 1,728
------------ ------------ ------------
TOTAL NONINTEREST INCOME............................................ 7,308 4,586 3,756
NONINTEREST EXPENSES:
Salaries and benefits................................................. 10,843 7,100 6,073
Occupancy expense..................................................... 2,055 1,097 1,033
Equipment expense..................................................... 1,615 947 885
FDIC insurance premiums............................................... 3,196 552 808
Other expense......................................................... 9,247 4,940 4,315
------------ ------------ ------------
TOTAL NONINTEREST EXPENSES.......................................... 26,956 14,636 13,114
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE........................................ 14,253 9,069 7,623
INCOME TAX EXPENSE...................................................... 5,101 2,610 2,333
------------ ------------ ------------
NET INCOME.............................................................. $ 9,152 $ 6,459 $ 5,290
------------ ------------ ------------
------------ ------------ ------------
NET INCOME PER COMMON SHARE............................................. $ 1.55 $ 1.62 $ 1.38
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING..................................... 5,899,453 3,996,137 3,821,904
------------ ------------ ------------
------------ ------------ ------------
CASH DIVIDENDS DECLARED PER COMMON SHARE................................ $ 0.82 $ 0.76 $ 0.62
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL GAINS (LOSSES)
COMMON PAID-IN RETAINED ON SECURITIES
STOCK CAPITAL EARNINGS AVAILABLE-FOR-SALE TOTAL
--------- ----------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994........................... $ 19,110 $ 10,005 $ 4,390 $ 373 $ 33,878
Net income......................................... -- -- 5,290 -- 5,290
Cash dividends declared, $.62 per share............ -- -- (2,369) -- (2,369)
Change in unrealized losses for securities
available-for-sale, net of tax effect of
$(851)........................................... (1,651) (1,651)
--------- ----------- --------- ------ ---------
BALANCE, DECEMBER 31, 1994......................... 19,110 10,005 7,311 (1,278) 35,148
Net income......................................... -- -- 6,459 -- 6,459
Common stock issuance, 862,500 shares, net of stock
offering costs................................... -- 13,184 -- -- 13,184
Common stock issuance per merger, 1,188,954 shares
at $17.65 per share.............................. -- 20,985 -- -- 20,985
Cash dividends declared, $.76 per share............ -- -- (3,295) -- (3,295)
Change in unrealized losses for securities
available-for-sale, net of tax effect of
$1,244........................................... -- -- -- 2,415 2,415
--------- ----------- --------- ------ ---------
BALANCE, DECEMBER 31, 1995......................... 19,110 44,174 10,475 1,137 74,896
Net income......................................... -- -- 9,152 -- 9,152
Common stock issuance, 104,190 shares, net of
offering costs................................... -- 352 -- -- 352
Cash dividends declared, $.82 per share............ -- -- (4,838) -- (4,838)
Change in unrealized gains for securities
available-for-sale, net of tax effect of
$(805)........................................... -- -- -- (1,513) (1,513)
--------- ----------- --------- ------ ---------
BALANCE, DECEMBER 31, 1996......................... $ 19,110 $ 44,526 $ 14,789 $ (376) $ 78,049
--------- ----------- --------- ------ ---------
--------- ----------- --------- ------ ---------
</TABLE>
47
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 9,152 $ 6,459 $ 5,290
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 2,628 1,308 1,251
Net amortization on loans and securities............................... 625 1,269 1,264
Provision for loan losses.............................................. 375 225 125
Deferred income taxes.................................................. (261) (380) (340)
Mortgage loans originated for sale..................................... (121,924) (10,904) (581)
Proceeds from sales of loans........................................... 79,781 24,318 12,386
Gain on sale of securities, net........................................ (653) (350) (64)
(Gain) loss on sale of loans, net...................................... (1,075) (182) 11
Increase (decrease) in interest receivable and other assets............ (2,546) (2,793) 849
(Decrease) increase in interest payable and other liabilities.......... (1,993) 436 69
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. (35,891) 19,406 20,260
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans, excluding loan sales, purchases, and originated
for sale............................................................... (10,476) (18,497) (31,470)
Purchases of loans....................................................... (38,311) (14,846) (7,192)
Purchases of securities available-for-sale............................... (264,913) (116,722) (27,050)
Purchases of securities held-to-maturity................................. -- (1,600) (3,971)
Proceeds from sales of securities available-for-sale..................... 140,008 69,007 14,149
Proceeds from maturities and paydowns of securities available-for-sale... 38,260 14,231 25,667
Proceeds from maturities and paydowns of securities held-to-maturity..... -- 12,153 16,059
Net decrease (increase) in interest-bearing deposits with financial
institutions........................................................... 38,288 (24,362) (1,032)
Capital expenditures..................................................... (1,485) (1,570) (720)
Acquisition of financial institution, net of cash and stock issued....... -- (12,683) --
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES.................................. (98,629) (94,889) (15,560)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits...................................... 58,169 33,365 (10,977)
Net increase in securities sold under repurchase agreements and other
borrowings............................................................. 98,207 45,505 9,428
Common stock issued...................................................... 352 13,184 --
Dividends paid........................................................... (4,699) (2,790) (2,293)
----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES.................................. 152,029 89,264 (3,842)
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................. 17,509 13,781 858
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 28,531 14,750 13,892
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $ 46,040 $ 28,531 $ 14,750
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES:
Interest paid.......................................................... $ 39,455 $ 17,683 $ 11,752
Federal income taxes paid.............................................. $ 4,840 $ 3,195 $ 2,185
Loans transferred to other real estate owned........................... $ 756 $ 738 $ 508
Transfers of securities held-to-maturity to available-for-sale......... $ -- $ 204,974 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Pinnacle Financial Services, Inc.
and subsidiary (the "Company") conform to generally accepted accounting
principles and prevailing practices within the banking industry. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make certain estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The following are significant accounting and reporting policies of Pinnacle
Financial Services, Inc. and subsidiary.
(a) Consolidation
The consolidated financial statements include the accounts of Pinnacle
Financial Services, Inc. and its wholly-owned subsidiary, Pinnacle Bank (the
"Bank"). Effective December 31, 1996, Pinnacle Bank-Indiana (formerly a
wholly-owned subsidiary of Pinnacle Financial Services, Inc.) was merged
with and into Pinnacle Bank-Michigan, now known collectively as Pinnacle
Bank. Significant intercompany balances and transactions are eliminated in
consolidation.
(b) Securities
The Company classifies debt and equity securities and mortgage backed
securities into three separate categories, namely securities
available-for-sale, securities held-to-maturity and trading account
securities.
Securities which management believes could be sold prior to maturity in
order to manage interest rate risk, prepayments, liquidity risk, or other
corporate purposes are classified as available-for-sale and are carried at
fair value with unrealized gains and losses, net of applicable income taxes,
reported as a component of stockholders' equity. Securities, other than the
foregoing, which management has the ability and positive intent to hold
until maturity are classified as securities held-to-maturity and are
accounted for using historical amortized cost. The Company has no material
trading account securities.
Premiums and discounts on securities are amortized and accreted over the
life of the related securities as an adjustment to yield using the effective
interest method. Gain or loss on the sale of securities is determined based
on the adjusted cost of the specific security sold. A decline in the market
value of any available-for-sale or held-to-maturity security below cost that
is deemed other than temporary results in a charge to earnings, thereby
establishing a new cost basis for the security.
(c) Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to
operating expense, is decreased by charge offs, net of recoveries, and is
available for losses incurred on loans, including certain accrued interest
receivable.
The allowance for loan losses is based on management's periodic evaluation
of the loan portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions, prior
loan loss experience, the composition of the loan portfolio, and
management's evaluation of the collectibility of specific loans. Management
believes that the allowance for loan losses is adequate.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, (as amended by Statement 118),
"Accounting by Creditors for Impairment of a Loan" issued by the Financial
Accounting Standards Board ("FASB"). Under the new statements, the 1995
allowance for loan losses related to loans that are identified as impaired
is based on discounted cash flows using the loan's initial effective
interest rate on the fair value of the collateral for certain collateral
dependent loans. A loan is considered impaired when it is probable that a
creditor will be unable to collect contractual principal and interest due
according to the contractual terms of the loan agreement. Impaired loans are
generally considered by the Company to be nonaccrual Commercial and
Commercial Real Estate loans, restructured loans and loans which principle
and or interest is at risk. Impairment is measured by determining the fair
value of the loans based on the present value of expected cash flows, the
market price of the loans, or the fair value of the underlying collateral.
If the fair value of the loans is less than the recorded book value, a
valuation allowance is established as a component of the allowance for loan
losses.
(d) Nonperforming Assets
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, including impaired loans, loans
contractually past due 90 days or more as to interest and/or principal and
not included in nonaccrual loans, and other real estate which has been
acquired primarily through foreclosure and is awaiting disposition. Loans
are generally placed on a nonaccrual basis when, in the opinion of
management, collection of principal or interest payments if unlikely. Income
on such loans is then recognized only to the extent that cash is received
and where future collection of principal is probable.
Other real estate is carried at the lower of cost or fair value, less
estimated costs to sell. When the property is acquired through foreclosure,
any excess of the related loan balance over estimated fair value is charged
to the allowance for loan losses. Subsequent write-downs, losses upon sale,
and expenses related to maintenance of properties are charged to other
operating expense.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation, computed on the straight-line and accelerated methods, is
charged to operations over the estimated useful lives of the properties.
(f) Long-lived Assets and Long-lived Assets to be Disposed of
On January 1, 1996, Pinnacle adopted Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to be Disposed of", which requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicates that the carrying
amount may not be recoverable. The impairment is measured based on the
present value of expected future cash flows from the use of the assets and
its eventual disposition. If the expected future cash flows are less than
the carrying amount of the asset, an impairment loss is recognized based on
current fair values. The adoption did not have a material impact to the
Company's consolidated financial statements.
(g) Retirement Plan
Costs for the Company's defined benefit plan, which covers substantially all
employees, are accounted for in accordance with the requirements of
Statement of Financial Accounting Standards No. 87, "Employers; Accounting
for Pensions" (Statement 87). The projected unit credit method is utilized
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for measuring net periodic pension cost over the employees' service life.
The Company's funding policy is to contribute annually an amount calculated
under the minimum ERISA funding requirements.
(h) Postretirement Benefits Other Than Pensions
An accrual for postretirement benefits is charged to current earnings based
upon the expected cost of providing postretirement benefits to employees
during the years that the employees render services.
(i) Stock Option Plans
As of December 31, 1996, Pinnacle adopted the disclosure requirements of
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation". Pinnacle applies APB Opinion 25 and related
interpretations in accounting for its stock option plans. Further
disclosures are presented in Note 14.
(j) Trust Assets
Assets held by the Company, in fiduciary or agency capacity for customers,
are not included in the consolidated financial statements and as such are
not assets of the Company. Fee income is recognized on an accrual basis for
financial reporting purposes.
(k) Goodwill and Other Intangibles
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis up to 15 years.
At December 31, 1996 and 1995, goodwill of approximately $12,509,000 and
$14,382,000, respectively, is included in other assets in the accompanying
consolidated balance sheets. At December 31, 1996, the average remaining
life of unamortized goodwill was 10 years.
Core deposit intangibles, representing the premium associated with the
acquisition of certain deposit liabilities, are being amortized to operating
expenses on a straight-line basis over the average lives of such deposit
liabilities or approximately 10 years, with a remaining life of 3 years. At
December 31, 1996 and 1995, core deposit intangibles of approximately
$949,000 and $1,265,000, respectively, are included in other assets in the
accompanying consolidated balance sheets.
The Company assesses the recoverability of its goodwill and intangibles
through review of various economic factors on a periodic basis in
determining whether impairment, if any, exists.
(l) Mortgage Servicing Rights
Effective January 1, 1995, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." Statement 122 amended SFAS Statement 65,
"Accounting for Certain Mortgage Banking Activities," to require that a
mortgage banking enterprise recognize as separate assets the rights to
service mortgage loans for others, however those servicing rights are
acquired, eliminating restrictions between servicing rights acquired through
purchase transactions and those acquired through loan originator's. The
statement also requires the assessment of capitalized mortgage servicing
rights for impairment to be used as the current fair value of those rights.
Impairment is recognized through a valuation allowance established through a
charge to expense. Mortgage servicing rights as of December 31, 1996 totaled
approximately $125,000.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) Federal Income Taxes
The Company and its subsidiary file a consolidated U.S. income tax return.
The consolidated tax liability is settled between companies generally as if
each company had filed a separate return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the period that includes the enactment date.
(n) Income Recognition
The Company uses the accrual basis of accounting for financial reporting
purposes. Loans are stated at the principal amount outstanding, net of any
unearned income. Interest on loans is accrued daily based on principal
outstanding. Loan origination fees and certain direct loan origination costs
are deferred and recognized over the lives of the related loans as an
adjustment of the yield.
(o) Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold.
(p) Per Share Data
Earnings per share is calculated by dividing net income by the weighed
average number of shares of common stock outstanding during each period and
is retroactively adjusted for stock splits and stock dividends. The dilutive
effect of outstanding stock options on any year presented is not material.
Cash dividends per share are based upon the number of shares outstanding at
date of declaration, retroactively adjusted for stock splits and stock
dividends.
(q) Reclassifications
Certain prior year amounts were reclassified to conform to current year
presentation.
NOTE 2 REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 REGULATORY MATTERS (CONTINUED)
average assets (as defined). Management believes, as of December 31, 1996, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1996, the most recent notification from the Michigan
Financial Institutions Bureau categorized the Bank as WELL CAPITALIZED under the
regulatory framework for prompt corrective action. To be categorized as WELL
CAPITALIZED the Bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
CONSOLIDATED.................................. $ 71,541 13.02% $ 43,970 8.00% $ 54,962 10.00%
Pinnacle Bank................................. 68,370 12.50 43,771 8.00 54,714 10.00
TIER I CAPITAL (TO RISK WEIGHTED ASSETS):
CONSOLIDATED.................................. $ 65,898 11.99% $ 21,985 4.00% $ 32,977 6.00%
Pinnacle Bank................................. 62,727 11.46 21,886 4.00 32,829 6.00
TIER I CAPITAL (TO AVERAGE ASSETS):
CONSOLIDATED.................................. $ 65,898 6.36% $ 41,476 4.00% $ 51,844 5.00%
Pinnacle Bank................................. 62,727 6.06 41,381 4.00 51,726 5.00
</TABLE>
NOTE 3 ACQUISITION
On October 1, 1996, the Company, through Pinnacle Bank, purchased Starke's,
Inc., a local insurance agency, through the issuance of 99,451 shares of
Pinnacle common stock. The assets acquired were $1,241,000 and the transaction
was accounted for using the pooling of interests method with no restatement of
prior periods as amounts involved were not material. This acquisition will
provide another source of fee income and add financial products to sell to our
existing customers and markets.
On December 1, 1995, the Company acquired all of the outstanding stock of
Maco Bancorp, Inc., a Delaware corporation and registered savings and loan
holding company headquartered in Merrillville, Indiana ("Maco"), for a purchase
price of $41,944,000 (the "Purchase Price"). Approximately 50% of the Purchase
Price was paid in cash ($20,959,000) and the balance was paid in Pinnacle common
stock valued at $20,985,000. The acquisition of Maco was accounted for as a
purchase. All assets (approximately $412,800,000) and all liabilities
(approximately $384,200,000) of Maco and its subsidiaries (First Federal Savings
Bank of Indiana, Brookview Real Estate Ltd. and First Insurance, Inc.) were
adjusted to fair value as of the effective date creating goodwill in the amount
of $13,350,000 which is being amortized on a straight line basis over 15 years.
Premiums and discounts on the fair value adjustments amounted to approximately
$3,895,000 and $830,000, respectively. The operating results of Maco have been
included in the Company's financial statements since the date of acquisition.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (Statement 107), requires that the Company
disclose estimated fair values for its financial instruments in its consolidated
financial statements. Carrying and fair values and estimating methods and
assumptions are presented below:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks........................................ $ 30,290 $ 30,290 $ 24,681 $ 24,681
Federal funds sold............................................. 15,750 15,750 3,850 3,850
Interest-bearing deposits with financial institutions.......... 3,223 3,223 41,511 41,511
Securities available-for-sale.................................. 372,157 372,157 287,532 287,532
Loans, net..................................................... 603,921 601,602 512,607 515,184
Accrued interest receivable.................................... 9,001 9,001 5,611 5,611
---------- ---------- ---------- ----------
Financial Liabilities:
Noninterest-bearing deposits................................... $ 78,365 $ 78,365 $ 50,400 $ 50,400
Interest-bearing deposits...................................... 682,904 686,910 652,700 654,137
Securities sold under repurchase agreements, and other
borrowings................................................... 225,361 228,282 127,154 127,319
Accrued interest payable....................................... 1,575 1,575 1,337 1,337
---------- ---------- ---------- ----------
</TABLE>
Loan commitments are not included in the table above, as their estimated
fair value is immaterial.
SECURITIES:
The carrying value for short term investments, which include federal funds
sold and interest-bearing deposits with financial institutions, approximate fair
value because they mature in one year or less and do not present unanticipated
credit concerns. The fair value of longer-term investments and mortgage backed
securities, except certain obligations of states and political subdivisions, is
estimated based on bid prices published in reliable financial publications or
bid quotations received from securities dealers. The fair value of certain
obligations of states and political subdivisions are not readily available
through market sources other than dealer quotations, so fair value estimates are
based on quoted market prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being valued.
Statement 107 specifies that fair values of securities should be calculated
based on the value of one unit without regard to any premium or discount that
may result from concentrations of ownership of a financial instruments, possible
tax ramifications, or estimated transaction costs.
LOANS:
Fair value is estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, and consumer, including credit card loans.
Each loan category is further segmented into fixed and adjustable rate interest
terms.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value of performing loans, except credit card loans, is calculated by
discounting scheduled cash flows through the estimated maturity using the
current rates at which similar loans would be made to borrowers with similar
credit ratings with the same remaining maturities. The estimate of the maturity
is based on industry forecast experience with repayments for each loan
classification. The fair value of variable rate loans repricing within three
months and credit card loans were assumed to be at carrying value.
Fair value for nonperforming loans is based on recent external appraisals.
If appraisals are not available, estimated cash flows are discounted using a
rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
Fair value for credit card loans is based on the current carrying value of
existing loans at December 31, 1996 and 1995. This estimate does not include the
value that relates to estimated cash flows from new loans generated from
existing cardholders over the remaining life of the portfolio.
LIABILITIES:
Under Statement 107, the fair value of deposits with no stated maturity,
such as demand deposits, savings, NOW accounts and money market accounts, is
equal to the amount payable on demand as of December 31, 1996 and 1995. The fair
value of time deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
similar remaining maturities.
The carrying amounts for securities sold under repurchase agreements, and
certain other borrowings, approximate fair value because they mature in 90 days
or less. The fair value of certain other borrowings with maturities of greater
that 90 days are based on the discounted value of contractual cash.
The fair value estimates above do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT:
The value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties.
LIMITATIONS:
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of particular financial
instruments. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage servicing
operations, premises and equipment, and intangible assets. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in many of the estimates.
NOTE 5 CASH AND DUE FROM BANKS
The Bank is required to maintain certain daily reserve balances on hand in
accordance with Federal Reserve Board requirements. The reserve balances
maintained in accordance with such requirements at December 31, 1996 and 1995,
were $4,690,000 and $4,908,000, respectively.
NOTE 6 SECURITIES
The following summarizes the amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for available-for-sale securities
by major security type at December 31, 1996.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities....................................... $ 10,046 $ 56 $ -- $ 10,102
Obligations of other U.S. government agencies and
corporations................................................. 160,434 320 (1,021) 159,733
Obligations of states and political subdivisions............... 20,936 540 (3) 21,473
Corporate securities........................................... 350 4 -- 354
Equity securities.............................................. 12,138 -- (28) 12,110
Mortgage backed securities..................................... 168,897 453 (965) 168,385
---------- ----------- ----------- ----------
Total........................................................ $ 372,801 $ 1,373 $ (2,017) $ 372,157
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 SECURITIES (CONTINUED)
The following summarizes the amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for available-for-sale securities
by major security type at December 31, 1995.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S.Treasury securities........................................ $ 9,577 $ 223 $ -- $ 9,800
Obligations of other U.S. government agencies and
corporations................................................. 91,925 485 (130) 92,280
Obligations of states and political subdivisions............... 19,406 702 (8) 20,100
Corporate securities........................................... 10,275 16 (28) 10,263
Equity securities.............................................. 6,328 -- (16) 6,312
Mortgage backed securities..................................... 148,298 775 (296) 148,777
---------- ----------- ----- ----------
Total........................................................ $ 285,809 $ 2,201 $ (478) $ 287,532
---------- ----------- ----- ----------
---------- ----------- ----- ----------
</TABLE>
Maturities of investment securities classified as available-for-sale at
December 31, 1996 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
----------------------
AMORTIZED
COST FAIR VALUE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
No maturity........................................................... $ 12,138 $ 12,110
Due in one year or less............................................... 3,894 3,936
Due after one year through five years................................. 24,083 24,359
Due after five years through ten years................................ 60,674 60,829
Due after ten years................................................... 103,115 102,538
Mortgage-backed securities............................................ 168,897 168,385
---------- ----------
Total............................................................... $ 372,801 $ 372,157
---------- ----------
---------- ----------
</TABLE>
Proceeds from sales of securities during 1996, 1995 and 1994 were
$139,338,000, $69,007,000, and $14,149,000, respectively. Gross gains of
$803,000, $575,000, and $97,000 for 1996, 1995, and 1994, respectively, and
gross losses of $150,000, $225,000, and $33,000 were realized on those sales for
1996, 1995, and 1994, respectively. During 1996, 1995, and 1994 there were no
sales of securities classified as held-to-maturity.
On December 1, 1995, securities held-to-maturity (including those acquired
from First Federal) were reclassified to available-for-sale pursuant to the FASB
issuance of "A Guide to Implementation of Statement 115" that allowed entities
to reassess the appropriateness of the reclassification of all securities. At
the date of transfer, these securities held an amortized cost of $204,974,000
and a net unrealized gain of $530,000. During 1994, Federal Home Loan Bank Stock
of $1,553,000 was transferred from securities held-to-maturity to securities
available-for-sale for the purpose of conforming with accounting guidelines.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 SECURITIES (CONTINUED)
Mortgage-backed securities include mortgage-backed securities and
collateralized mortgage obligations. The mortgage-backed securities represent
participating interest of pools of long-term first mortgage loans originated and
serviced by the issuers of the securities. Collateralized mortgage obligations
are debt securities that are secured by mortgage loans or other mortgage-backed
securities. These securities are not considered to be a high risk.
Securities with an amortized cost of $337,889,000 and $251,771,000 at
December 31, 1996 and 1995, respectively, were pledged to secure public deposits
and securities sold under agreements to repurchase and for other purposes as
required by law or contract.
The Company did not have any investment securities of states (including
their political subdivisions) that individually exceeded 10% of stockholders'
equity at December 31, 1996 and 1995.
NOTE 7 LOANS
The following summarizes loans by classification at December 31 of each
year.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate mortgages................................................. $ 276,941 $ 268,911
Commercial loans...................................................... 210,315 154,044
Consumer loans........................................................ 114,112 92,826
Economic development bonds and other tax exempt loans................. 8,196 2,678
---------- ----------
Total............................................................... $ 609,564 $ 518,459
---------- ----------
---------- ----------
</TABLE>
The Company's mortgage servicing portfolio for borrowers totaled $62.0
million at December 31, 1996.
The recorded investment in loans determined to be impaired at December 31,
1996 totaled $848,000, of which the collateral values are equal to or greater
than the recorded investment. In addition, a specific loan loss reserve of
$191,000 has been assigned to all of these loans. As of December 31, 1996, the
average recorded investment in impaired loans approximated $1,099,000. For the
year, interest income recorded on such loans totaled $101,000, of which $53,000
has been recorded on a cash basis.
The following summarizes nonaccrual loans and loans greater than 90 days
delinquent which are still accruing interest at December 31 of each year.
<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
90 DAYS NON- 90 DAYS
NON- ACCRUAL PAST DUE ACCRUAL PAST DUE
----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate Mortgages................................ $ 293 $ 1,849 $ 2,581 $ 556
Commercial Loans..................................... 388 1,773 577 52
Consumer Loans....................................... 80 294 163 67
----- ----------- --------- -----
Total.............................................. $ 761 $ 3,916 $ 3,321 $ 675
----- ----------- --------- -----
----- ----------- --------- -----
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 LOANS (CONTINUED)
At December 31, 1996, if nonaccrual loans had been maintained current in
accordance with their original terms, additional interest income of $118,000
would have been realized. For years ended December 31, 1995 and 1994, additional
interest income of $81,000 and $87,000 would have been realized.
In addition to the loans classified as nonaccrual and greater than 90 days
delinquent still accruing interest at December 31, 1996 and 1995, there were
other loans of approximately $10,218,000 in 1996 and $9,600,000 in 1995, where
management is closely following the borrowers' ability to continue to comply
with loan payment terms. Current conditions do not warrant classification as
nonperforming, nor is any principal loss on these loans considered likely at
this time. The Company's market area is considered to be Southwest Michigan and
Northern Indiana. The Company is not dependent upon any single industry or
business for its banking opportunities.
Certain officers, directors, and entities with which they are affiliated
have borrowed funds from the Company. These loans were made in the ordinary
course of business on substantially the same terms as loans to other persons
and, in the opinion of management, do not involve more than the normal risks of
collectibility or present other unfavorable features. Such loans at December 31,
1996 and 1995 aggregated approximately $12,580,000 and $11,043,000 respectively.
The net increase of $1,537,000 in such loans resulted from new loans of
$5,102,000 and collections on loans $3,565,000.
The following summarizes the activity in the allowance for loan losses.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year....................................... $ 5,852 $ 5,014 $ 5,215
Provisions charged against income................................ 375 225 125
Recoveries....................................................... 351 259 272
Allowance of acquired financial institutions..................... -- 1,098 --
--------- --------- ---------
6,578 6,596 5,612
Loans charged off................................................ (935) (744) (598)
--------- --------- ---------
Balance, end of year............................................. $ 5,643 $ 5,852 $ 5,014
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 8 PREMISES AND EQUIPMENT, NET
The following summarizes premises and equipment by classification at
December 31.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Land and land improvements........................................... $ 2,124 $ 2,124
Buildings............................................................ 11,314 10,069
Furniture, fixtures and equipment.................................... 7,723 7,056
--------- ---------
Subtotal........................................................... 21,161 19,249
Less accumulated depreciation........................................ 8,475 6,703
--------- ---------
Premises and equipment, net........................................ $ 12,686 $ 12,546
--------- ---------
--------- ---------
</TABLE>
Depreciation expense charged to operations was $1,345,000, $789,000, and
$793,000 in 1996, 1995, and 1994, respectively.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 TIME CERTIFICATES OF DEPOSIT
The following summarizes time certificates of deposit in amounts of $100,000
or more and their remaining maturities, included in interest-bearing deposits at
December 31.
<TABLE>
<CAPTION>
1996
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
Three months or less............................................................ $ 31,843
Three through six months........................................................ 22,530
Six through twelve months....................................................... 6,179
Over twelve months.............................................................. 732
-----------
Total......................................................................... $ 61,284
-----------
-----------
</TABLE>
Interest expense related to time deposits of $100,000 or more approximated
$3,418,000, $1,641,000, and $638,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
NOTE 10 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS & OTHER BORROWINGS
The following is a schedule of securities sold under repurchase agreements
and other borrowings at December 31 of each year.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities sold under repurchase agreements........................ $ 22,972 $ 12,402
Fed funds purchased................................................ 42,900 --
Advances from the Federal Home Loan Bank........................... 159,489 96,752
Other borrowings................................................... -- 18,000
---------- ----------
Total............................................................ $ 225,361 $ 127,154
---------- ----------
---------- ----------
</TABLE>
Securities sold under repurchase agreements, which mature daily, represent
an indebtedness of the Company secured by certain securities. At December 31,
1996, 1995, and 1994, the interest cost with regard to daily averages was 3.90%,
3.41%, and 2.95%, respectively. Securities with an amortized cost of
$20,710,000, and $14,149,000, an estimated fair value of approximately
$20,726,000, and $14,317,000, were pledged as collateral for these agreements at
December 31, 1996, 1995, and 1994, respectively.
Federal funds purchased, which mature daily, had an interest cost with
regard to daily averages of 5.70%, and 4.64% at December 31, 1996, and 1995,
respectively.
Advances from the Federal Home Loan Bank represent borrowings from Federal
Home Loan Banks. Advances of $122,900,000, and $32,500,000, were drawn upon
during 1996, and 1995, respectively. In addition, the acquisition of Maco added
$61,500,000 in advances from Federal Home Loan Banks and an additional
$19,000,000 net in advances in December 1995, for a total of $80,500,000 in
advances at First Federal as of December 31, 1995. At December 31, 1996, 1995,
and 1994, respectively, the interest cost with regard to daily averages was
5.80%, 6.22%, and 5.73%, with maturities of three to sixty months. These
borrowings are secured by Federal Home Loan Stock (carried at $11,388,000) and
by all eligible first mortgage loans on one-to-four family held by Pinnacle Bank
(approximately $408,868,000 at December 31, 1996).
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 INCOME TAXES
Federal income taxes (benefits) reported in the consolidated statements of
income for the years ended December 31, 1996, 1995, and 1994 include the
following components.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Federal
Current........................................................ $ 4,861 $ 2,990 $ 2,673
Deferred....................................................... (229) (380) (340)
State
Current........................................................ 501 -- --
Deferred....................................................... (32) -- --
--------- --------- ---------
Income tax expense............................................. $ 5,101 $ 2,610 $ 2,333
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following federal income tax expense differs from the amounts computed
by applying the federal income tax rate of 35% in 1996 and 34% in 1995 and 1994
to pretax income at December 31 of each year.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax.......................................... $ 4,989 $ 3,083 $ 2,592
Tax exempt interest, net......................................... (385) (325) (367)
Amortization of goodwill......................................... 327 42 42
State income tax, net of federal benefit......................... 305 -- --
Other, net....................................................... (135) (190) 66
--------- --------- ---------
Income tax expense........................................... $ 5,101 $ 2,610 $ 2,333
--------- --------- ---------
--------- --------- ---------
</TABLE>
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 INCOME TAXES (CONTINUED)
The following presents the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities at
December 31 of each year.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Loan loss reserve..................................................... $ 1,524 $ 833
Deferred loan fees.................................................... 58 458
Deferred directors fees............................................... 395 364
Depreciation.......................................................... 179 179
Capital loss carryforward............................................. 61 61
Unrealized losses on securities available-for-sale.................... 220 --
Alternative minimum tax credit carry forward.......................... 0 563
Other................................................................. 81 361
--------- ---------
Total gross deferred tax assets..................................... 2,518 2,819
Less valuation allowance.............................................. (61) (61)
Net deferred tax assets............................................. $ 2,457 $ 2,758
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Deposit base premium.................................................. $ (185) $ (245)
Pension............................................................... (271) (270)
Purchase discount..................................................... (1,369) (1,932)
Unrealized gains on securities available-for-sale..................... -- (586)
Other................................................................. (57) (217)
--------- ---------
Total gross deferred tax liabilities................................ (1,882) (3,250)
--------- ---------
Net deferred tax asset/(liability).................................... $ 575 $ (492)
--------- ---------
--------- ---------
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1996 and
1995 was $61,000 with no change during 1996. The valuation allowance is due to
capital losses from prior years which can only be utilized against subsequent
capital gains.
NOTE 12 RETIREMENT PLANS
The Company sponsors a defined benefit pension plan which provides benefits
to substantially all full time employees. Benefits under the plan are based on
the employees' years of service and compensation
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 RETIREMENT PLANS (CONTINUED)
during the five highest paid plan years of the last ten years preceding
retirement. The following present the components of net pension income at
December 31 of each year.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the year......................................... $ 463 $ 333 $ 283
Interest cost on projected benefit obligation......................................... 401 268 217
Actual return on plan assets.......................................................... (923) (1,093) (6)
Net amortization and deferral......................................................... 144 535 (551)
--------- --------- ---------
Net pension expense (income)........................................................ $ 85 $ 43 $ (57)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following presents the funded status of the Pinnacle Banks' plan and
amounts recognized in the consolidated balance sheets at December 31 of each
year.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of projected benefit obligation:
Accumulated benefit obligation:
Vested........................................................................ $ (3,440) $ (2,837) $ (1,785)
Nonvested..................................................................... (118) (109) (68)
Provision for future salary increases........................................... (2,580) (1,969) (1,560)
--------- --------- ---------
Projected benefit obligation.................................................... (6,138) (4,915) (3,413)
Plan assets at fair value......................................................... 8,048 7,253 4,811
--------- --------- ---------
Excess of plan assets over projected benefit obligation........................... 1,910 2,338 1,398
Unrecognized net transition asset................................................. (731) (799) (867)
Unrecognized net (gain)/loss...................................................... 16 (259) 342
Unrecognized prior service cost................................................... (35) (36) (36)
--------- --------- ---------
Prepaid pension cost, included in other assets.................................. $ 1,160 $ 1,244 $ 837
--------- --------- ---------
--------- --------- ---------
Major assumptions used:
Discount rate................................................................... 7.50% 7.75% 7.25%
Rate of increase in compensation levels......................................... 5.50% 6.00% 6.00%
Expected long-term rate on plan assets.......................................... 10.00% 10.00% 10.00%
--------- --------- ---------
</TABLE>
The plan assets were invested primarily in a collective investment trust at
December 31, 1996, 1995 and 1994.
The Company also sponsors a defined contribution 401(k) plan for the benefit
of all employees. The Company matches employee contributions at levels dependent
upon current operating results. In 1996, 1995, and 1994, the Company
contributions amounted to $63,000, $121,000 and $56,000, respectively. Employee
contributions to the plan are based upon optional percentages (ranging from 2%
to 10%) of before tax compensation.
NOTE 13 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has a Retiree Medical Plan which provides a portion of retiree
medical care premiums. The Company's level of contribution is based on an age
and service formula which provides benefits to substantially all retired
participants until December 31, 1997 and will provide benefits to active
participants
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
in a 100% co-pay basis until age 65. The components of the 1996 and 1995 net
periodic postretirement benefit cost are shown below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................................................. $ 0 $ -- $ --
Interest cost................................................................. 19 21 20
Net amortization and deferral................................................. 33 33 25
--------- --------- ---------
Net periodic postretirement benefit cost.................................... $ 52 $ 54 $ 45
--------- --------- ---------
--------- --------- ---------
</TABLE>
The funded status of the plan and amounts recognized in the consolidated
balance sheets are shown below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retired participants and beneficiaries........................................ $ (248) $ (281) $ (275)
Active participants........................................................... -- -- --
--------- --------- ---------
Accumulated postretirement benefit obligation............................... (248) (281) (275)
Plan assets at fair value..................................................... -- -- --
--------- --------- ---------
Excess of accumulated postretirement benefit obligation over plan assets...... (248) (281) (275)
Unrecognized transition obligation............................................ 193 226 260
Unrecognized loss/(gain)...................................................... (6) 2 (28)
--------- --------- ---------
Accrued postretirement benefit cost......................................... $ (61) $ (53) $ (43)
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 9.00%, 10.00% and 12.00% annual rate of increase
in the per capita cost of covered benefits (health care cost trend rate) was
assumed for 1996, 1995, and 1994, respectively; the rate was further assumed to
decline to 4.00% after 8 years. The health care cost trend rate assumption has
an increasing effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation by $25,000 and
$53,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost by $2,000 for years ended December 31,
1996, 1995 and 1994, respectively. The weighted average discount rate used in
determining the accumulated posrtretirement benefit obligation was 7.50% for
December 31, 1996 and 7.25% for December 31, 1995 and 1994, respectively.
NOTE 14 NON-QUALIFIED STOCK OPTION PLAN
At Pinnacle's 1993 Annual Stockholders Meeting, a non-qualified stock option
plan (the "Plan") was presented to and approved by the stockholders of the
Company. The Compensation Committee of Pinnacle's Board of Directors, none of
whom is eligible to participate in the Plan, awarded certain key employees
options to purchase shares of Pinnacle common stock at an exercise price which
approximates the fair market value of the grant period. The total number of
shares available under the Plan is 500,000 (all numbers have been restated to
reflect the two-for-one stock split effected in September 1993). All options are
fully vested at day of grant and will expire if not exercised within five years
of the date of grant.
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 NON-QUALIFIED STOCK OPTION PLAN (CONTINUED)
A summary of the aggregate activity for the Plan for 1996, 1995, and 1994 is
as follows:
<TABLE>
<CAPTION>
WTD. AVG. NUMBER OF
COMMON EXERCISE SHARES
SHARES PRICE EXERCISABLE
--------- ------------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1993................................. 23,350 $ 17.16 0
--------- ------ -----------
Granted.......................................................... 27,600 $ 17.95
Exercised........................................................ -- --
Forfeited or canceled............................................ -- --
--------- ------ -----------
Outstanding at December 31, 1994................................. 50,950 $ 17.59 5,837
--------- ------ -----------
Granted.......................................................... 71,725 $ 17.07
Exercised........................................................ -- --
Forfeited or canceled............................................ (400) $ 17.16
--------- ------ -----------
Outstanding at December 31, 1995................................. 122,275 $ 17.29 18,575
--------- ------ -----------
Granted.......................................................... 71,250 $ 21.16
Exercised........................................................ (4,739) $ 17.09
Forfeited or canceled............................................ (7,537) $ 18.54
--------- ------ -----------
Outstanding at December 31, 1996................................. 181,249 $ 18.75 49,243
--------- ------ -----------
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for its stock option plan.
If the alternative accounting related provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" had been adopted as of the beginning of 1995, the
effect on 1995 and 1996, income before taxes and net income would have been
immaterial.
At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $16.43 - $21.16 and 3.5
years, respectively.
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 SUPPLEMENTARY INCOME STATEMENT INFORMATION
Other than the items listed below, other noninterest income and other
noninterest expenses did not include any accounts that exceeded 1% of total
revenue, which is the sum of total interest income and total noninterest income.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Other noninterest income:
Service charges on deposit accounts............................................... $ 2,207 $ 1,530 $ 1,479
Trust Fees........................................................................ 601 533 485
Recoveries on distressed assets................................................... 250 296 262
Gain on sale of loans, net........................................................ 1,075 182 (11)
Merchant & loan servicing fees.................................................... 1,270 923 770
Other noninterest expenses:
Salaries and benefits............................................................. 10,843 7,100 6,073
Occupancy......................................................................... 2,055 1,097 1,033
Equipment......................................................................... 1,615 947 885
Professional and legal fees....................................................... 718 314 417
Amortization of intangibles....................................................... 1,283 525 458
FDIC insurance.................................................................... 3,196 552 808
Supplies.......................................................................... 915 455 418
Marketing and promotion........................................................... 1,481 695 298
</TABLE>
NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments are loan commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit risk
in excess of the amounts recognized in the consolidated balance sheets. The
contract amount of these instruments reflects the extent of involvement the
Company has in these financial instruments.
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The following presents financial instruments with off-balance sheet risk at
December 31 of each year.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit.......................................... $ 97,240 $ 79,551
Letters of credit..................................................... 1,511 777
--------- ---------
--------- ---------
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on management's
credit evaluation of the counter party. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Letters of credit written are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. All letters of
credit are short-term guarantees of one year or less. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loans to customers. The Company has a secured interest in various
assets as collateral supporting those commitments for which collateral is deemed
necessary. The extent of collateral held on those commitments at December 31,
1996 and 1995 is in excess of the committed amount.
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 PARENT COMPANY FINANCIAL INFORMATION
CONDENSED PARENT COMPANY ONLY BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks.................................................................. $ 1,926 $ 1,923
Interest-bearing deposits with financial institutions.................................... -- 18,100
Investment in subsidiary................................................................. 75,837 73,029
Other assets............................................................................. 1,598 1,178
--------- ---------
TOTAL ASSETS........................................................................... $ 79,361 $ 94,230
--------- ---------
--------- ---------
LIABILITIES
Notes payable and other liabilities...................................................... $ 1,312 $ 19,334
STOCKHOLDERS' EQUITY
Common stock............................................................................. 19,110 19,110
Additional paid-in capital............................................................... 44,526 44,174
Retained earnings........................................................................ 14,789 10,475
Net unrealized (losses)/gains on securities available-for-sale........................... (376) 1,137
--------- ---------
TOTAL STOCKHOLDERS' EQUITY............................................................. 78,049 74,896
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................. $ 79,361 $ 94,230
--------- ---------
--------- ---------
</TABLE>
CONDENSED PARENT COMPANY ONLY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Dividends from subsidiary......................................................... $ 4,975 $ 12,082 $ 2,376
Interest and other income......................................................... 812 170 43
--------- --------- ---------
TOTAL INCOME.................................................................... 5,787 12,252 2,419
--------- --------- ---------
EXPENSES
Compensation and benefits......................................................... 258 192 96
Other operating expenses.......................................................... 772 368 239
--------- --------- ---------
TOTAL EXPENSES.................................................................. 1,030 560 335
--------- --------- ---------
Income before federal income tax expense (benefit) and undistributed earnings of
subsidiary........................................................................ 4,757 11,692 2,084
Federal income tax benefit.......................................................... (74) (133) (97)
Equity in undistributed earnings of subsidiary...................................... 4,321 (5,366) 3,109
--------- --------- ---------
NET INCOME...................................................................... $ 9,152 $ 6,459 $ 5,290
--------- --------- ---------
--------- --------- ---------
</TABLE>
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED PARENT COMPANY ONLY STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1996 1995 1994
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 9,152 $ 6,459 $ 5,290
Equity in undistributed earnings of subsidiaries.............................. (4,321) 5,366 (3,109)
Other, net.................................................................... (109) (956) 69
---------- ---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 4,722 10,869 2,250
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease/(increase) in interest-bearing deposits with financial
institutions................................................................ 18,108 (18,000) --
Purchase acquisition, net of cash............................................. -- (20,466) --
Purchases of available-for-sale securities.................................... (507) -- --
Proceeds from paydowns of available-for-sale securities....................... 27 27 59
---------- ---------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............................ 17,628 (38,439) 59
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock........................................ 352 13,184 --
(Repayments)/Proceeds from short-term borrowings.............................. (18,000) 18,000 --
Dividends paid................................................................ (4,699) (2,790) (2,293)
---------- ---------- ---------
NET CASH USED BY FINANCING ACTIVITIES....................................... (22,347) 28,394 (2,293)
---------- ---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 3 824 16
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 1,923 1,099 1,083
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................ $ 1,926 $ 1,923 $ 1,099
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
NOTE 18 DIVIDENDS FROM HOLDING COMPANY
Pinnacle is a legal entity separate and distinct from its subsidiary.
Substantially all of Pinnacle's revenues result from dividends paid to it by
Peoples and First Federal and from earnings on investments. There are statutory
and regulatory requirements applicable to the payment of dividends by Peoples
and First Federal as well as by Pinnacle to its stockholders. Under the
foregoing dividend restrictions, Peoples, without obtaining government
approvals, could declare aggregate dividends in 1996 of approximately $17.2
million. First Federal was eligible to make capital distributions of
approximately $9.6 million at December 31, 1996.
On December 1, 1995 the Company, in conjunction with the acquisition of Maco
Bancorp, issued 862,500 shares in a public offering and issued 1,188,954 shares
to the sole shareholder of Maco resulting in total shares outstanding increasing
from 3,821,904, to 5,873,358.
Dividends paid in 1996 to the Company by its subsidiary amounted to
$4,975,000. Dividends paid in 1995 to the Company by its subsidiary, The Peoples
State Bank, amounted to $12,082,000 of which approximately $8,500,000 was used
for the cash portion of the Maco acquisition. In addition its subsidiary, First
Federal, paid dividends amounting to $4,000,000 used for debt reduction obtained
by way of the Maco acquisition. Dividends paid in 1994 to the Company by its
subsidiary, The Peoples State Bank, amounted to $2,376,000. Unless prior
regulatory approval is obtained, banking regulations limit the
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 DIVIDENDS FROM HOLDING COMPANY (CONTINUED)
amount of dividends that the Company's subsidiary can declare during 1997, to
the 1996 net profits, as defined in the Federal Reserve Act, plus retained net
profits for 1996 and 1995 of $14,900,000.
NOTE 19 COMMITMENTS AND CONTINGENT LIABILITIES
The Company has entered into indemnification agreements with the principal
sole stockholder of Maco, subject to certain conditions, to partially indemnify
Pinnacle from certain liabilities. Any claim on costs incurred by Pinnacle
related to such liabilities must be made by May 26, 1998. The indemnification
agreements relate to two transfer agreements and other various matters entered
into on May 4, 1995 between Maco and an affiliate of the principal sole
stockholder of Maco, that relate to litigation in effect prior to the
acquisition.
The first item relates to the 1988 acquisition of a distressed thrift by
Maco through an assistance agreement with the Federal Savings and Loan Insurance
Corporation ("FSLIC"). The Federal Deposit Insurance Corporation ("FDIC"),
successor-in-interest to FSLIC, has brought suit seeking payment of $3,000,000
allegedly due it under such agreement. Management believes the FDIC suit is
without merit and the indemnification agreement and a related escrow agreement
reduces any risk of loss to the Company. The second item relates to a
counterclaim brought against Maco as a result of a claim made against a third
party by Maco. The Company intends to vigorously defend these actions, even
though it is covered by the indemnification agreements.
There are various other matters of litigation pending against the Company
that have arisen during the normal course of business. Based upon discussions
with legal counsel, management believes that the aggregate liability, if any,
issuing from these matters will not be material to the financial results of the
Company.
On November 14, 1996, Pinnacle entered into a definitive agreement with
Indiana Federal Corporation (IFC) which will add approximately $837 million in
total assets. The transaction is contemplated as a merger of equals through the
issuance of one share of Pinnacle Common Stock for each share of IFC Common
Stock and it is anticipated to be accounted for using the pooling of interests
method. The acquisition, subject to shareholder and regulatory approval is
scheduled to close in the second quarter of 1997.
NOTE 20 SUBSEQUENT EVENT--ACQUISITION
On March 3, 1997, Pinnacle announced the acquisition of CB Bancorp, Inc.
("CB") of Michigan City, Indiana which will add approximately $227 million in
total assets. The fixed purchase price is equal to $35.00 per CB share, payable
in Pinnacle shares. If Pinnacle's average stock price exceeds $29.00, CB
shareholders will receive 1.2069 Pinnacle shares per CB share. If Pinnacle's
average stock price is less than $23.00 per share, CB shareholders will receive
1.5217 Pinnacle shares per CB share. The acquisition, subject to shareholder and
regulatory approval, is expected to close in the second quarter of 1997 and is
anticipated to be accounted for using the pooling of interests method.
70
<PAGE>
SELECTED QUARTERLY FINANCIAL INFORMATION
The following table provides a summary of unaudited quarterly financial
information of Pinnacle for the periods indicated.
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT STOCK PRICES)
<S> <C> <C> <C> <C>
1996
Interest income.................................. $ 17,158 $ 18,005 $ 18,635 $ 20,171
Net interest income.............................. 7,869 8,440 8,722 9,245
Provision for loan losses........................ 80 70 95 130
Income before income tax expense................. 3,622 4,214 1,908 4,509
Net income....................................... 2,444 2,580 1,261 2,867
Net income per share............................. 0.42 0.44 0.21 0.48
Stock price range................................ 18.25-20.50 20-21.75 19.50-24.75 23.25-25
1995
Interest income.................................. $ 8,331 $ 8,763 $ 8,848 $ 11,553
Net interest income.............................. 4,552 4,583 4,676 5,533
Provision for loan losses........................ 85 40 70 30
Income before income tax expense................. 2,129 2,230 2,285 2,425
Net income....................................... 1,472 1,535 1,568 1,884
Net income per share............................. 0.39 0.40 0.41 0.42
Stock price range................................ 15-17.50 15.75-17.75 15.50-17.50 16.50-18.50
</TABLE>
71
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 21, 1997, the directors and executive officers of Pinnacle are
as indicated in the following table. The table also indicates the positions held
by such persons at Pinnacle Bank.
<TABLE>
<CAPTION>
NAME AGE PINNACLE POSITION(S) PINNACLE BANK POSITION(S)
- --------------------------------------- --- -------------------------------- --------------------------------
<S> <C> <C> <C>
John P. Cunningham..................... 59 Director Director
Charles R. Edinger..................... 68 Director Director
John D. Fetters........................ 69 Director Director
Terrence A. Friedman................... 59 Director Director
Richard L. Schanze..................... 56 Director, Chairman and Chief Director, Chairman and Chief
Executive Officer Executive Officer
Kay F. Varga........................... 59 Director Director
Arnold L. Weaver....................... 51 Director, President and Chief Director, President and Chief
Operating Officer Operating Officer
Alton C. Wendzel....................... 66 Director Director
Donald E. Radde........................ 44 Executive Vice President and Director, Executive Vice
Secretary President, Chief Lending
Officer and Secretary
David W. Kolhagen...................... 39 Senior Vice President and Senior Vice President and Chief
Treasurer Financial Officer
LeAnn Krokker.......................... 38 Vice President, Executive Vice President, Executive
Marketing Officer Marketing Officer
John A. Newcomer....................... 45 Corporate Affairs Officer Corporate Affairs Officer
</TABLE>
John P. Cunningham has been a director of both Pinnacle and Pinnacle Bank
since May, 1996. He also is a member of the Retirement Committee, the
Compensation Committee and the Merger and Acquisition Committee of the Pinnacle
Board. He is also a member of the Retirement Committee and the Compensation
Committee of the Board of Directors of Pinnacle Bank. He is currently the Chief
Financial Officer of Whirlpool Corporation, a publicly-held appliance
manufacturer with securities listed on the New York Stock Exchange. In 1995 he
was the Chief Financial Officer of Maytag, a publicly-held appliance
manufacturer with securities listed on the New York Stock Exchange. Prior to
that time he was the Controller of IBM, a publicly-held company with securities
listed on the New York Stock Exchange.
Charles R. Edinger is a director of both Pinnacle and Pinnacle Bank and is a
member of the Audit Committee and the Trust Committee of the Board of Directors
of Pinnacle. He is also a member of the Audit Committee and the Trust Committee
of the Board of Directors of Pinnacle Bank. He is currently the President of
Anderson Building Materials, Co., a steel fabricating company.
John D. Fetters is a director of both Pinnacle and Pinnacle Bank and is a
member of the Compensation Committee of the Board of Directors of Pinnacle. He
is also a member of the Compensation Committee of the Board of Directors of
Pinnacle Bank. He is currently the President of Sanitary Dry Cleaners, Inc., a
dry cleaning company.
Terrence A. Friedman is a director of both Pinnacle and Pinnacle Bank and is
a member of the Compensation Committee, the Loan Review Committee and the Merger
and Acquisition Committee of the Board of Directors of Pinnacle. He is also a
member of the Compensation Committee and the Loan
72
<PAGE>
Review Committee of the Board of Directors of Pinnacle Bank. He is currently the
President of Yale-South Haven Inc., a manufacturer of rubber components
primarily for the auto industry.
Richard L. Schanze is a director of both Pinnacle and Pinnacle Bank and is a
member of the Trust Committee, the Loan Review Committee and the Merger and
Acquisition Committee of the Board of Directors of Pinnacle, and the Trust
Committee and the Loan Review Committee of the Board of Directors of Pinnacle
Bank. He is currently the Chairman and Chief Executive Officer of Pinnacle and
the Chairman and Chief Executive Officer of Pinnacle Bank.
Kay F. Varga is a director of both Pinnacle and Pinnacle Bank and is a
member of the Trust Committee and the Audit Committee of the Board of Directors
of Pinnacle. She is also a member of the Trust Committee and the Audit Committee
of the Board of Directors of Pinnacle Bank. She is currently the President of
Thayer, Inc., a paper products distributor.
Arnold L. Weaver is a director of both Pinnacle and Pinnacle Bank and is a
member of the Trust Committee, the Loan Review Committee and the Merger and
Acquisition Committee of the Board of Directors of Pinnacle, and the Trust
Committee and the Loan Review Committee of the Board of Directors of Pinnacle
Bank. He is currently the President of Pinnacle and of Pinnacle Bank.
Alton C. Wendzel is a director of both Pinnacle and Pinnacle Bank and is a
member of the Audit Committee, the Loan Review Committee and the Merger and
Acquisition Committee of the Board of Directors of Pinnacle. He is also a member
of the Audit Committee and the Loan Review Committee of the Board of Directors
of Pinnacle Bank. He is currently the President of Greg Orchards and Produce,
Inc. and Coloma Frozen Foods, Inc., processors of fresh and frozen producer.
Donald E. Radde is an Executive Vice President and the Secretary of
Pinnacle. He is also a Director, an Executive Vice President, Chief Lending
Officer and Secretary of Pinnacle Bank.
David W. Kolhagen is a Senior Vice President and the Treasurer of Pinnacle
and a Senior Vice President and the Chief Financial Officer of Pinnacle Bank.
LeAnn Krokker is Vice President, Executive Marketing Officer of Pinnacle and
of Pinnacle Bank.
John A. Newcomer is the Corporate Affairs Officer of Pinnacle and of
Pinnacle Bank.
Directors of Pinnacle are elected annually by the stockholders of Pinnacle.
Executive officers of Pinnacle are appointed by the Pinnacle Board and serve
until their successors are appointed and qualified. No director or executive
officer of Pinnacle or Pinnacle Bank is related to any other director or to any
executive officer of Pinnacle or of any of its subsidiaries by blood, marriage
or adoption, and there are no arrangements or understandings between a director
or executive officer and any other person pursuant to which such person was
elected a director or executive officer of Pinnacle or any of its subsidiaries.
73
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to each of the five most highly compensated executive officers and/or
employees of Pinnacle and its subsidiaries (the "Named Pinnacle Executives") for
the last three completed fiscal years whose salary and bonus exceeded $100,000.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUT
---------------------------------------------- ------------------------------ ---------
OTHER ANNUAL RESTRICTED LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION STOCK AWARD(S) OPTIONS/SARS PAYOUT COMPENSATION
PRINCIPLE POSITION YEAR ($) ($) ($) (1) ($) (#) ($) ($) (2)
- ----------------------- --------- --------- --------- ------------- --------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard L. Schanze 1996 288,875 225,000 23,000 -- 9,500 -- 37,205
Chairman/CEO 1995 242,420 180,000 17,800 -- 15,300 -- 35,403
1994 222,410 130,000 15,100 -- 7,200 -- 5,219
Arnold L. Weaver 1996 208,875 75,000 23,000 -- 8,000 -- 5,559
President 1995 167,200 70,000 17,800 -- 10,600 -- 10,833
1994 147,410 45,000 15,100 -- 4,550 -- 5,404
Donald E. Radde 1996 132,875 40,000 -- -- 7,000 -- 4,800
Exec. Vice President 1995 106,620 28,000 -- -- 7,500 -- 5,920
1994 91,289 21,000 -- -- 2,500 -- 5,187
David W. Kolhagen 1996 97,375 35,000 -- -- 6,500 -- 7,116
Senior Vice
President/ 1995 82,280 30,000 -- -- 7,000 -- 8,534
CFO 1994 -- -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Amounts shown consist of director fees paid by Pinnacle and by Pinnacle
Bank.
(2) Amounts shown for 1996 consist of the following: (i) Mr. Schanze: matching
contributions under Pinnacle Bank's 401-k plan of $2,375, personal use of
Company-owned automobile of $3,304, and contributions under Pinnacle Bank's
Deferred Compensation Plan for Executive Officers of $31,526; (ii) Mr.
Weaver: matching contributions under Pinnacle Bank's 401-k plan of $2,375,
and personal use of Company-owned automobile of $3,184; (iii) Mr. Radde:
matching contributions under Pinnacle Bank's 401-k plan of $2,375 and
personal use of Company-owned automobile of $2,425; and (iv) Mr. Kolhagen:
matching contributions under Pinnacle Bank's 401-k plan of $2,375 and
personal use of Company-owned automobile of $4,741. Amounts shown for 1995
consist of the following: (i) Mr. Schanze: matching contributions under
Pinnacle Bank's 401-k plan of $4,620, personal use of Company-owned
automobile of $3,192, and contributions under Pinnacle Bank's Deferred
Compensation Plan for Executive Officers of $27,591; (ii) Mr. Weaver:
matching contributions under Pinnacle Bank's 401-k plan of $4,620, personal
use of Company-owned automobile of $3,770 and contributions under Pinnacle
Bank's Deferred Compensation Plan for Executive Officers of $2,443; (iii)
Mr. Radde: matching contributions under Pinnacle's 401-k plan of $4,620 and
personal use of Company-owned automobile of $1,300; and (iv) Mr. Kolhagen:
matching contributions under Pinnacle Bank's 401-k plan of $3,781 and
personal use of Company-owned automobile of $4,753. Amounts shown for 1994
consist of the following: (i) Mr. Schanze: matching contributions under
Pinnacle Bank's 401-k plan of $2,310, and personal use of Company-owned
automobile of $2,909; (ii) Mr. Weaver: matching contributions under Pinnacle
Bank's 401-k plan of $2,310, and personal use of Company-owned automobile of
$3,094; and (iii) Mr. Radde: matching contributions under Pinnacle Bank's
401-k plan of $1,790 and personal use of Company-owned automobile of $3,397.
74
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR. The following table sets forth
certain information concerning stock options/SARs granted during 1996 to the
Named Pinnacle Executives.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL
RATES OF
STOCK
PRICE
APPRECIATION
NUMBER OF % OF TOTAL FOR
SECURITIES OPTIONS/ SARS OPTION
UNDERLYING GRANTED TO EXERCISE OF TERM
OPTIONS/ SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------
NAME GRANT DATE GRANTED FISCAL YEAR ($/SH) DATE 5%
- -------------------------------------------- ----------- ------------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Schanze 07/96 9,500 13.33% $ 21.16 07/17/01 $ 55,538
Chairman/CEO
Arnold L. Weaver 07/96 8,000 11.22 21.16 07/17/01 46,768
President
Donald E. Radde 07/96 7,000 9.82 21.16 07/17/01 40,922
Executive Vice President
David W. Kolhagen 07/96 6,500 9.12 21.16 07/17/01 37,999
Senior Vice President, CFO
<CAPTION>
NAME 10%
- -------------------------------------------- ---------
<S> <C>
Richard L. Schanze $ 122,724
Chairman/CEO
Arnold L. Weaver 103,347
President
Donald E. Radde 90,428
Executive Vice President
David W. Kolhagen 83,969
Senior Vice President, CFO
</TABLE>
The above listed stock options were granted pursuant to Pinnacle's Executive
Long-Term Incentive Plan, which is administered by the Compensation Committee of
the Board of Directors of Pinnacle.
PENSION PLAN
The following table shows estimated annual benefits payable upon retirement
to, and credited years of services for, each of the Named Executive Officers.
<TABLE>
<CAPTION>
ANNUAL BENEFIT PER YEARS OF SERVICE
---------------------------------------------------------
ANNUAL COMP 15 20 25 30 MORE THAN 30
- ------------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 30,744 $ 40,992 $ 51,241 $ 61,489 $ 61,489
$ 150,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
$ 175,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
$ 200,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
$ 225,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
$ 250,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
$ 300,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
$ 400,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
$ 450,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
$ 500,000 $ 37,307 $ 49,742 $ 62,178 $ 74,614 $ 74,614
</TABLE>
The benefits shown above are payable in a straight-life annuity and are not
offset by any other benefits, including Social Security. The final average
annual compensation is determined under the defined benefit plan by the average
of the five highest consecutive years of annual compensation (including salary
and bonus payments) during the last ten years of employment, subject to a
maximum of $150,000 for all years. As of December 31, 1996, Mr. Schanze had 21
years of credited service, Mr. Weaver had 20 years of credited service, Mr.
Radde had 15 years of credited service, and Mr. Kolhagen had 16 years of
credited service.
EMPLOYMENT SEVERANCE COMPENSATION AGREEMENTS
Pinnacle and Pinnacle Bank have entered into "employment severance
compensation agreements" with Messrs. Schanze, Weaver, Radde and Kolhagen (each,
a "key manager"). Under the terms of these agreements, each key manager's annual
salary is established by the Board of Directors of Pinnacle or Pinnacle Bank,
and once such salary is established it may not be reduced without the consent of
such key manager unless the reduction (i) is made pursuant to a general
reduction in salaries for all similarly-situated officers, and (ii) is in an
amount or percentage comparable to such general reduction.
75
<PAGE>
Under the employment severance compensation agreements, in the event there
is a "change of control" and a key manager's employment is terminated, the key
manager is entitled to be paid an amount equal to two times his annual base
salary at the date of termination and an amount equal to two times the highest
bonus paid to him in any one year during the most recent five-year period. Upon
the occurrence of such events, a key manager is also entitled to (i) certain
life, health and other insurance benefits, reimbursement of certain expenses
(including reasonable travel expenses, and reasonable office and secretarial
expenses), executive car benefits, and financial counseling, all for a period of
two years after such termination, and (ii) reimbursement of reasonable
outplacement costs and certain legal expenses.
For purposes of the foregoing, a "change of control" shall have occurred if:
(i) Pinnacle and/or Pinnacle Bank sells substantially all of its assets to a
single purchaser or to a group of associated purchasers; (ii) at least one-half
of the outstanding corporate shares of Pinnacle and/or Pinnacle Bank are sold,
exchanged or otherwise disposed of, in one transaction; (iii) Pinnacle and/or
Pinnacle Bank elects to terminate its business or liquidate its assets; or (iv)
there is a merger or consolidation of Pinnacle and/or Pinnacle Bank in a
transaction in which the stockholders of Pinnacle and/or Pinnacle Bank receive
less than 50% of the outstanding voting shares of the new or continuing
corporation.
OTHER COMPENSATION ARRANGEMENTS
Under Pinnacle Bank's Deferred Compensation Plan for Executive Officers,
certain highly compensated employees of Pinnacle Bank or its affiliates may be
granted certain awards of deferred compensation. These awards, which must be
approved by the Board of Directors of Pinnacle Bank, may be granted annually.
All awards remain the property of Pinnacle Bank until paid out. Awards, together
with any accrued interest thereon, are to be distributed to a participant in
annual installments over a ten-year period beginning on the January 1 following
the calendar year in which such participant ceases to be an employee of Pinnacle
Bank or its affiliates. (In the event of a participant's death the balance of
his awards will be paid in full to his estate within 90 days of the date of his
death.) These accounts are credited with interest at the end of each month at
110% of the rate then being paid on certain U.S. Treasury securities.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996 only John D. Fetters, Terrence A. Friedman, and John P.
Cunningham, each a director of Pinnacle, served as members of the Compensation
Committee of the Board of Directors of Pinnacle. No officers or employees of
Pinnacle or Pinnacle Bank served as members of the Compensation Committee and no
executive officer of Pinnacle served as a member of the Compensation Committee
of another entity.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation policy of Pinnacle, as applicable to executive officers, is
designed to assure Pinnacle's ongoing ability to attract, retain and motivate,
while at the same time recognizing the contributions of those individuals upon
whose judgement, efforts and results Pinnacle is largely dependent for its
success and future. Pinnacle is cognizant of the fact it competes for qualified
individuals at the local and regional levels and to a lesser degree, nationally.
As a result, compensation for executive officers is monitored carefully.
To assist in this process, the Compensation Committee reviews information
from independent salary studies that include the financial industry and other
industrial classifications.
While Pinnacle and Pinnacle Bank establish objective annual goals in
targeted areas such as asset growth, earnings, loan originations, etc. and
progress toward these goals is reviewed, a specific "trigger level" is not
required to be reached in each area.
On a subjective basis, performance criteria encompass evaluation of each
officer's initiative and contribution to overall corporate performance, the
officer's managerial ability, the officer's leadership
76
<PAGE>
capacity and the officer's performance in any special projects which the officer
may have undertaken. No formula was used to determine the Chief Executive
Officer's, or other named executives', bonus or award of stock options. This was
the fourth year stock options were awarded and the previous award schedule was
taken into consideration while awarding 1996's stock options. In future years,
if awards are granted, the Compensation Committee will take into consideration
awards previously made to a potential recipient, the vesting schedule of such
awards, and the number of awards outstanding in the aggregate to all recipients.
In reviewing Mr. Schanze's total compensation, the primary focus of the
Compensation Committee was on Pinnacle's performance in 1996, which met
established goals. The Compensation Committee also considered Mr. Schanze's
contributions to various non-quantifiable community improvement activities and
the positive impact they have had upon Pinnacle and to various long-range
initiatives impacting the future of Pinnacle, including the acquisition
strategies currently in place.
Members of the Compensation Committee:
John D. Fetters John P. Cunningham Terrence A. Friedman
DIRECTOR COMPENSATION
Each director of Pinnacle is paid an annual retainer of $2,500 plus $500 for
each meeting of the Board of Directors of Pinnacle attended. Each director of
Pinnacle Bank is paid an annual retainer of $7,500 plus $500 for each meeting of
the Board of Directors of Pinnacle Bank attended. Members of committees of the
Board of Directors of Pinnacle Bank also receive $500 for each committee meeting
attended. Messrs. Schanze and Weaver have waived all fees for attending meetings
of committees of the Board of Directors of Pinnacle Bank in the past and intend
to continue to do so in the future.
Pinnacle and Pinnacle Bank each maintain deferred compensation plans under
which a director may elect to defer receipt of either all or 50% of directors'
fees otherwise payable during a calendar year to a later calendar year. Amounts
deferred are reflected as unsecured accounts payable on the books of the
appropriate corporation and are subject to claims of such corporation's general
creditors. These accounts are credited with interest at the end of each month at
110% of the rate being paid on U.S. Treasury Securities.
77
<PAGE>
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on Pinnacle's Common Stock against the cumulative total
return of the Standard & Poor's 500 Index and the Value Line Banks: Midwest
Index for the periods shown.
PINNACLE FINANCIAL SERVICES, INC.; STANDARD & POORS 500;
AND VALUE LINE BANKS: MIDWEST INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PINNACLE FINANCIAL
SERVICES STANDARD & POOR'S 500 BANKS:MIDWEST
<S> <C> <C> <C>
1991 $100.00 $100.00 $100.00
1992 $182.07 $107.79 $123.96
1993 $335.67 $118.66 $125.32
1994 $222.25 $120.55 $115.17
1995 $266.18 $166.78 $175.24
1996 $361.64 $204.32 $235.03
</TABLE>
TOTAL RETURN ANALYSIS*
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Pinnacle........................................ 100.00 182.07 335.67 222.25 266.18 361.64
Standard & Poor's 500........................... 100.00 107.79 118.66 120.55 166.78 204.32
Value Line Banks: Midwest....................... 100.00 123.96 125.32 115.77 175.24 235.03
</TABLE>
*Shows performance results through December 31, 1996 for Pinnacle Financial
Services, Inc. Common Stock, Standard & Poor's 500, and Banks: Midwest assuming
$100 was invested at the close of trading December 1991 and all dividends are
reinvested.
Source: Value Line, Inc.
78
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information provided by the persons indicated
with respect to the beneficial ownership (as defined under applicable rules of
the Commission) of shares of Pinnacle Common Stock by (i) each person known by
Pinnacle who is the owner of more than 5% of the outstanding shares of Pinnacle
Common Stock, (ii) each person who is a director or an executive officer of
Pinnacle, and (iii) all persons who are directors or executive officers of
Pinnacle as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS(1) NUMBER OF SHARES(2) BENEFICIAL OWNERSHIP(2)
- --------------------------------------------------------------------- ------------------- -------------------------
<S> <C> <C>
Cyrus A. Ansary...................................................... 1,188,954 19.9%
John P. Cunningham................................................... -0- *
Charles R. Edinger................................................... 34,072(3) *
John D. Fetters...................................................... 31,864 *
Terrence A. Friedman................................................. 35,288 *
David W. Kolhagen.................................................... 20,193(4)(5) *
LeAnn Krokker........................................................ 2,777(4)(6) *
John Newcomer........................................................ 2,836(4)(7) *
Donald E. Radde...................................................... 24,575(4)(8) *
Richard L. Schanze................................................... 281,504(9) 4.7(9)
Kay F. Varga......................................................... 8,471 *
Arnold L. Weaver..................................................... 34,138(4)(10) *
Alton C. Wendzel..................................................... 84,724(11) 1.4(11)
All directors and executive officers of Pinnacle as a group (13
persons)........................................................... 560,342(12) 9.2(12)
</TABLE>
- ------------------------
(1) Unless otherwise noted, Pinnacle believes that all persons named in the
table have (i) sole voting and investment power with respect to all shares
of Pinnacle Common Stock owned by them, except to the extent that authority
is shared by spouses under applicable law, and (ii) record and beneficial
ownership of such shares. The business address of Mr. Ansary is 1725 K
Street, N.W., Suite 410, Washington, D.C. 20006. The business address of all
other persons named in the table is 830 Pleasant Street, St. Joseph,
Michigan 48085.
(2) Number of shares and percentages with respect to beneficial ownership of
Pinnacle Common Stock are based on ownership of Pinnacle Common Stock as of
March 21, 1997, and have been calculated in accordance with Rule 13d-3(d)(1)
under the Exchange Act and assuming 5,977,548 shares of Pinnacle Common
Stock are issued and outstanding. An asterisk indicates beneficial ownership
of less than 1%.
(3) Includes 25,432 shares held jointly with spouse, 4,320 held by Mr. Edinger's
spouse and 4,320 held by Mr. Edinger.
(4) All shares are held jointly with spouse.
(5) Includes 17,500 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(6) Includes 2,226 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(7) Includes 1,688 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(8) Includes 19,400 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
79
<PAGE>
(9) Includes 39,200 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(10) Includes 27,700 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(11) Includes 78,972 shares of Pinnacle Common Stock held jointly with his
spouse and 5,752 shares of Pinnacle Common Stock held by a corporation of
which Mr. Wendzel is President.
(12) Includes 105,488 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The directors, officers and principal stockholders of Pinnacle and their
associates may have had in the past, and expect to have in the future,
transactions in the ordinary course of business with Pinnacle and its
subsidiaries. Such transactions were, and are expected to be, on substantially
the same terms as those prevailing at the time for comparable transactions with
others.
80
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits:
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT
REFERENCE
NUMBER EXHIBIT DESCRIPTION
- ---------------- ------------------------------------------------------------------------------------------------
<C> <S>
(3)(a)/(4)(a) Restated Articles of Incorporation of Pinnacle Financial Services, Inc. as filed with the
Department of Commerce of the State of Michigan on December 6, 1996 (incorporated by reference
to Exhibit (3)(a)/(4)(a) of the Registration Statement on Form S-4 of Pinnacle Financial
Services, Inc. (registration no. 333-19729)).
(3)(b)/(4)(b) By-laws of Pinnacle Financial Services, Inc. (incorporated by reference to Exhibit (3)(b)/
(4)(b) of the Registration Statement on Form S-2 of Pinnacle Financial Services, Inc.
(registration no. 33-95974)).
(4)(c) Specimen certificate for Pinnacle Financial Services, Inc. Common Stock (incorporated by
reference to Exhibit (4)(c) of the Registration Statement on Form S-2 of Pinnacle Financial
Services, Inc. (registration no. 33-95974)).
(10)(a) Agreement and Plan of Merger dated as of November 14, 1996 by and between Pinnacle Financial
Services, Inc. and Indiana Federal Corporation (without exhibits) (incorporated by reference
to Exhibit (2)/(10)(a) of the Registration Statement on Form S-4 of Pinnacle Financial
Services, Inc. (registration no. 333-19729)).
(10)(b) First Amendment to Agreement and Plan of Merger dated as of February 27, 1997 by and between
Pinnacle Financial Services, Inc. and Indiana Federal Corporation.*
(10)(c) Stock Option Agreement dated as of November 14, 1996 by and between Pinnacle Financial Services,
Inc. (as issuer) and Indiana Federal Corporation (as grantee) (incorporated by reference to
Exhibit (10)(b) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc.
(registration no. 333-19729)).
(10)(d) Stock Option Agreement dated as of November 14, 1996 by and between Pinnacle Financial Services,
Inc. (as grantee) and Indiana Federal Corporation (as issuer) (incorporated by reference to
Exhibit (10)(c) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc.
(registration no. 333-19729)).
(10)(e) Form of Agreement and Plan of Merger and Consolidation between Pinnacle Bank, a wholly-owned
subsidiary of Pinnacle Financial Services, Inc., and Indiana Federal Bank for Savings, a
wholly-owned subsidiary of Indiana Federal Corporation (incorporated by reference to Exhibit
(10)(d) of the Registration Statement on Form S-4 of Pinnacle Financial Services, Inc.
(registration no. 333-19729)).
(10)(f) First Amendment to Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan
(incorporated by reference to Exhibit (10)(e) of the Registration Statement on Form S-4 of
Pinnacle Financial Services, Inc. (registration no. 333-19729)).
(10)(g) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial
Services, Inc., The Peoples State Bank of St. Joseph and Richard L. Schanze (incorporated by
reference to Exhibit (10)(f) of the Registration Statement on Form S-4 of Pinnacle Financial
Services, Inc. (registration no. 333-19729)).
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT
REFERENCE
NUMBER EXHIBIT DESCRIPTION
- ---------------- ------------------------------------------------------------------------------------------------
<C> <S>
(10)(h) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial
Services, Inc., The Peoples State Bank of St. Joseph and Arnold L. Weaver (incorporated by
reference to Exhibit (10)(g) of the Registration Statement on Form S-4 of Pinnacle Financial
Services, Inc. (registration no. 333-19729)).
(10)(i) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial
Services, Inc., The Peoples State Bank of St. Joseph and Donald E. Radde (incorporated by
reference to Exhibit (10)(h) of the Registration Statement on Form S-4 of Pinnacle Financial
Services, Inc. (registration no. 333-19729)).
(10)(j) Employment Severance Compensation Agreement dated April 30, 1996 by and among Pinnacle Financial
Services, Inc., The Peoples State Bank of St. Joseph and David W. Kolhagen (incorporated by
reference to Exhibit (10)(i) of the Registration Statement on Form S-4 of Pinnacle Financial
Services, Inc. (registration no. 333-19729)).
(10)(k) The Retirement Plan for the Employees of Peoples State Bank of St. Joseph, as amended
(incorporated by reference to Exhibit (10)(i) of the Registration Statement on Form S-2 of
Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(l) Peoples State Bank of St. Joseph Savings Plan, as amended (incorporated by reference to Exhibit
(10)(j) of the Registration Statement on Form S-2 of Pinnacle Financial Services, Inc.
(registration no. 33-95974)).
(10)(m) Form of Deferred Compensation Agreement for Directors--Pinnacle Financial Services, Inc.
(incorporated by reference to Exhibit (10)(k) of the Registration Statement on Form S-2 of
Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(n) Form of Deferred Compensation Agreement for Directors--The Peoples State Bank of St. Joseph
(incorporated by reference to Exhibit (10)(l) of the Registration Statement on Form S-2 of
Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(o) Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan (incorporated by reference
to Exhibit (10)(m) of the Registration Statement on Form S-2 of Pinnacle Financial Services,
Inc. (registration no. 33-95974)).
(10)(p) Transfer Agreement dated May 4, 1995 by and between Maco Bancorp, Inc. (the
predecessor-in-interest to Pinnacle Financial Services, Inc.) and Cyrus A. Ansary
(incorporated by reference to Exhibit (99)(a) of the Registration Statement on Form S-2 of
Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(q) Transfer Agreement dated as of May 4, 1995 by and between Maco Bancorp, Inc. (the
predecessor-in-interest to Pinnacle Financial Services, Inc.) and Investment Services
International Co. (incorporated by reference to Exhibit (99)(b) of the Registration Statement
on Form S-2 of Pinnacle Financial Services, Inc. (registration no. 33-95974)).
(10)(r) Non-Competition Agreement dated December 1, 1995 by and between Pinnacle Financial Services,
Inc. and Cyrus A. Ansary (incorporated by reference to Exhibit (10)(d) of the Current Report
on Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995).
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT
REFERENCE
NUMBER EXHIBIT DESCRIPTION
- ---------------- ------------------------------------------------------------------------------------------------
<C> <S>
(10)(s) Escrow Agreement dated December 1, 1995 by and among Pinnacle Financial Services, Inc., Cyrus A.
Ansary and NationsBank Trust, N.A. (incorporated by reference to Exhibit (10)(e) of the
Current Report on Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995).
(10)(t) Standstill Agreement entered into by and between Pinnacle Financial Services, Inc. and Cyrus A.
Ansary (incorporated by reference to Exhibit (10)(f) of the Current Report on Form 8-K of
Pinnacle Financial Services, Inc. dated December 1, 1995).
(10)(u) Indemnification Agreement dated December 1, 1995 and executed and delivered by Cyrus A. Ansary
in favor of Pinnacle Financial Services, Inc. (incorporated by reference to Exhibit (10)(g) of
the Current Report on Form 8-K of Pinnacle Financial Services, Inc. dated December 1, 1995).
(10)(v) Peoples State Bank of St. Joseph (now Pinnacle Bank) Deferred Compensation Plan for Executive
Officers (incorporated by reference to Exhibit (10)(u) of the Registration Statement on Form
S-4 of Pinnacle Financial Services, Inc. (registration no. 333-19729)).
(10)(w) Agreement and Plan of Merger dated as of February 27, 1997 by and between Pinnacle Financial
Services, Inc. and CB Bancorp, Inc.*
(10)(x) Stock Option Agreement dated as of February 27, 1997 by and between Pinnacle Financial Services,
Inc. (as grantee) and CB Bancorp, Inc. (as issuer).*
(11) No statement re computation of per share earnings is required to be filed because the
computations can be clearly determined from the materials contained herein.
(21) List of subsidiaries of Pinnacle Financial Services, Inc.*
(23) Consent of KPMG Peat Marwick LLP, independent auditors.*
(24) Powers of attorneys.*
(27) Financial Data Schedule of registrant.*
</TABLE>
- ------------------------
* Filed herewith.
Management contracts and compensatory plans or arrangements:
The management contracts and compensatory plans or arrangements required to
be filed as exhibits and included in such list of exhibits are as follows:
<TABLE>
<S> <C>
(10)(f) First Amendment to Pinnacle Financial Services, Inc. Executive Long-Term Incentive
Plan.
(10)(g) Employment Severance Compensation Agreement dated April 30, 1996 by and among
Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Richard
L. Schanze.
(10)(h) Employment Severance Compensation Agreement dated April 30, 1996 by and among
Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Arnold
L. Weaver.
(10)(i) Employment Severance Compensation Agreement dated April 30, 1996 by and among
Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and Donald
E. Radde.
(10)(j) Employment Severance Compensation Agreement dated April 30, 1996 by and among
Pinnacle Financial Services, Inc., The Peoples State Bank of St. Joseph and David
W. Kolhagen.
(10)(k) The Retirement Plan for the Employees of Peoples State Bank of St. Joseph, as
amended.
</TABLE>
83
<PAGE>
<TABLE>
<S> <C>
(10)(l) Peoples State Bank of St. Joseph Savings Plan, as amended.
(10)(m) Form of Deferred Compensation Agreement for Directors--Pinnacle Financial Services,
Inc.
(10)(n) Form of Deferred Compensation Agreement for Directors--The Peoples State Bank of
St. Joseph.
(10)(o) Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan.
(10)(v) Peoples State Bank of St. Joseph (now Pinnacle Bank) Deferred Compensation Plan for
Executive Officers.
</TABLE>
Index to Financial Statements and Financial Statement Schedules:
<TABLE>
<CAPTION>
10-K
REPORT
PAGE(S)
-------------
<S> <C>
Financial Statements:
Report of independent auditors.......................................................................... 44
Consolidated balance sheets as of December 31, 1996 and 1995............................................ 45
Consolidated statements of income for each of the years ended December 31, 1996, 1995 and 1994.......... 46
Consolidated statements of stockholders' equity for each of the years ended December 31, 1996, 1995 and
1994.................................................................................................. 47
Consolidated statements of cash flows for each of the years ended December 31, 1996, 1995 and 1994...... 48
Notes to consolidated financial statements.............................................................. 49
</TABLE>
- ------------------------
All schedules for which provision is made in Regulation S-X either (i) are
not required under the related instructions or are inapplicable and, therefore,
have been omitted, or (ii) the information required is included in the
consolidated financial statements or the notes thereto that are a part hereof.
Reports on Form 8-K:
One report on Form 8-K dated November 14, 1996, was filed during the last
quarter of the period covered by this report, to report under Item 5,
registrant's planned merger with Indiana Federal Corporation, a Delaware
corporation.
FORM 10-K
COPIES OF THE COMPANY'S PINNACLE FINANCIAL SERVICES, INC.'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
AS FILED WITH SECURITIES AND EXCHANGE COMMISSION
WILL BE AVAILABLE AFTER APRIL 1, 1997, WITHOUT CHARGE, UPON WRITTEN REQUEST.
ALL WRITTEN REQUESTS SHOULD BE DIRECTED TO:
JOHN A. NEWCOMER, CORPORATE AFFAIRS OFFICER,
PINNACLE FINANCIAL SERVICES, INC.,
P.O. BOX 48, ST. JOSEPH, MICHIGAN 49085
(616) 983-6311
84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly cuased this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PINNACLE FINANCIAL SERVICES, INC.
Date: March 30, 1997 By: /s/ DAVID W. KOLHAGEN
-----------------------------------------
David W. Kolhagen
SENIOR VICE PRESIDENT AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- -------------------------------------- -----------------
<C> <S> <C>
*
------------------------------------ Chairman and Chief Executive Officer March 31, 1997
Richard L. Schanze (Principal Executive Officer)
/s/ DAVID W. KOLHAGEN
------------------------------------ Senior Vice President, and Treasurer March 31, 1997
David W. Kolhagen (Principal Financial Officer)
*
------------------------------------ Director March 31, 1997
John P. Cunningham
*
------------------------------------ Director March 31, 1997
Charles R. Edinger
*
------------------------------------ Director March 31, 1997
John D. Fetters
------------------------------------ Director
Terrence A. Friedman
*
------------------------------------ Director March 31, 1997
Richard L. Schanze
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- -------------------------------------- -----------------
<C> <S> <C>
*
------------------------------------ Director March 31, 1997
Kay F. Varga
*
------------------------------------ Director, President and Chief March 31, 1997
Arnold L. Weaver Operating Officer
------------------------------------ Director
Alton C. Wendzel
</TABLE>
<TABLE>
<S> <C>
By: /s/ DAVID W.
KOLHAGEN
-------------------------
David W. Kolhagen, as
attorney-in- fact for the
persons indicated
</TABLE>
86
<PAGE>
EXHIBIT (10)(b)
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment"),
dated as of February 27, 1997, between PINNACLE FINANCIAL SERVICES, INC., a
Michigan corporation ("Pinnacle"), and INDIANA FEDERAL CORPORATION, a
Delaware corporation ("IFC").
W I T N E S S E T H:
WHEREAS, Pinnacle and IFC entered into an Agreement and Plan of Merger
dated November 14, 1996 (the "Agreement"), but subsequently have determined
that certain amendments to the Agreement are necessary and appropriate and
therefore wish to amend the Agreement as set forth herein;
NOW THEREFORE, in consideration of the premises and the mutual and
dependent promises hereinafter contained, the parties do represent, warrant,
covenant and agree as follows:
1. Section 1.11 of the Agreement shall be and hereby is amended and
restated in its entirety to read as follows:
"1.11 BOARD OF DIRECTORS. At the Effective Time, the persons who
shall be the directors of the Surviving Corporation shall be determined
as follows:
(a) In the event that the transactions provided for under the
terms of the Agreement and Plan of Merger (the "CB Merger Agreement")
between Pinnacle and CB Bancorp, Inc., a Delaware corporation ("CB"),
have been consummated and become effective, then the Board of Directors
of the Surviving Corporation shall consist of Mr. Richard L. Schanze, as
well as Mr. Arnold L. Weaver and three (3) other persons named as directors
of the Surviving Corporation on behalf of the Board of Directors of
Pinnacle, and Mr. Donald A. Lesch, as well as Mr. Howard Silverman and
three (3) other persons named as directors of the Surviving Corporation
on behalf of the Board of Directors of IFC, and Mr. Joseph F. Heffernan.
(b) In the event that the transactions provided for under the
terms of the CB Merger Agreement have not been consummated and become
effective, then the Board of Directors of the Surviving Corporation shall
consist of Mr. Richard L. Schanze, as well as Mr. Arnold L. Weaver and
three (3) other persons named as directors of the Surviving Corporation
on behalf of the Board of Directors of Pinnacle, and Mr. Donald A Lesch,
as well as Mr. Howard Silverman and three (3) other persons named as
directors of the Surviving Corporation on behalf of the Board of Directors
of IFC; provided, that, in the event that the transactions provided for
under the terms of the CB Merger Agreement subsequently are consummated
and become effective, then the Board of Directors of the Surviving
Corporation shall consist of those persons named as directors
<PAGE>
of the Surviving Corporation in the preceding clause of this subsection (b)
and, in addition, Mr. Joseph F. Heffernan shall be named as a director of
the Surviving Corporation.
(c) In any case, at and following the Effective Time, under the
terms of the Standstill Agreement dated as of December 1, 1995, between
Pinnacle and Mr. Cyrus A. Ansary, Pinnacle may have certain obligations to
nominate Mr. Ansary for election as a director of Pinnacle and said
agreement shall be binding on Pinnacle as the Surviving Corporation. In
the event that Pinnacle, as the Surviving Corporation, becomes obligated to
nominate Mr. Ansary as a director of the Surviving Corporation, then the
Board of Directors at that time shall be increased in size by two (2)
persons, and Mr. Ansary shall be nominated as a director of the Surviving
Corporation pursuant to the terms of the Standstill Agreement dated as of
December 1, 1995, between Pinnacle and Mr. Ansary, and the Chairman shall
nominate for approval by the Board of Directors an additional person as a
director of the Surviving Corporation.
(d) Whenever the Board of Directors of the Surviving
Corporation is comprised of ten (10) or fewer persons, action of the
Board within the meaning of Section 523 of the MBCA, and for all other
purposes, shall require the favorable vote of six (6) or more of the
directors, and whenever the Board of Directors of the Surviving
Corporation is comprised of eleven (11) or twelve (12) persons, action
of the Board within the meaning of Section 523 of the MBCA, and for all
other purposes, shall require the favorable vote of seven (7) or more of
the directors."
2. Subsection (d) of Section 1.13 of the Agreement shall be and hereby
is amended and restated in its entirety to read as follows:
"(d) the directors of Pinnacle Bank as the surviving
institution following the Bank Merger shall be determined as follows:
(i) In the event that the transactions provided for under
the terms of Section 1.13 of the CB Merger Agreement have been
consummated and become effective, then the Board of Directors of
Pinnacle Bank as the surviving institution shall consist of twenty-one
(21) persons with nine (9) persons to be named as directors by the
Board of Directors of Pinnacle Bank, nine (9) persons to be named as
directors by the Board of Directors of IndFed Bank, and three (3)
persons to be named as directors by the Board of Directors of
Community Bank, a federal savings bank (one of which persons shall
be Mr. Joseph F. Heffernan);
- 2 -
<PAGE>
(ii) In the event that the transactions provided for under
the terms of Section 1.13 of the CB Merger Agreement have not been
consummated and become effective, then the Board of Directors of the
surviving institution shall consist of eighteen (18) persons with
nine (9) persons to be named as directors by the Board of Directors
of Pinnacle Bank and nine (9) persons to be named as directors by
IndFed Bank; provided, that, in the event that the transactions
provided for under the terms of Section 1.13 of the CB Merger Agreement
subsequently are consummated and become effective, then the Board of
Directors of the surviving institution shall consist of those
persons named as directors of the surviving institution in the
preceding clause of this subsection (d)(ii) and, in addition, three (3)
persons named as directors by the Board of Directors of Community Bank,
a federal savings bank (one of which persons shall be Mr. Joseph F.
Heffernan) shall be named as directors of the surviving institution;
and
(iii) The executive officers of Pinnacle Bank as the
surviving institution following the Bank Merger shall be those
appointed by the Board of Directors of the surviving institution
upon consummation of the Bank Merger, on the basis of recommendations
made by Mr. Schanze, as the Chairman of the parent Surviving
Corporation, Mr. Lesch, as the Vice Chairman of the parent Surviving
Corporation, and an outside consulting service to be engaged and
charged with reviewing and evaluating the qualifications of
candidates."
3. The meaning of the term "Material Adverse Effect", as defined in
Section 3.1 of the Agreement, and used in and throughout the Agreement, shall
be amended and restated in its entirety to provide as follows:
"As used in this Agreement, the term "Material Adverse Effect" means,
with respect to IFC, Pinnacle or the Surviving Corporation, as the case
may be, a material adverse effect on the business, results of
operations, financial condition, or (insofar as they can reasonably be
foreseen) prospects of such party and its Subsidiaries taken as a whole,
excluding for this purpose only, however, (i) the payment and/or
incurrence of (1) the one-time special assessment on institutions
holding deposits subject to assessment by the Savings Association
Insurance Fund ("SAIF") pursuant to The Deposit Insurance Funds Act of
1996 ("Funds Act") intended to increase SAIF's net worth as of October
1, 1996 to 1.25 percent of SAIF-insured deposits, and (2) transactional
expenses by IFC or Pinnacle in connection with the Merger, (ii) the
effects upon Pinnacle of the merger transaction, and all transactional
expenses with respect thereto, contemplated by the CB Merger Agreement,
whether or not consummated, and (iii) the effects upon Pinnacle of the
branch office swap transactions, and all
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<PAGE>
transactional expenses with respect thereto, contemplated by the
Purchase and Assumption Agreement executed, or to be executed, between
Shoreline Bank, as Seller, and Pinnacle Bank, as Buyer, and the Purchase
and Assumption Agreement executed, or to be executed, between Pinnacle
Bank, as Seller, and Shoreline Bank, as Buyer (collectively, the "Branch
Office Swap Agreements"), whether or not consummated, in any said case
to the extent having such an effect."
4. The entering into and performance of the CB Merger Agreement, and/or
the Branch Office Swap Agreements, and consummation of the transactions
contemplated thereby, by Pinnacle are hereby ratified, approved and
authorized, and are and shall be deemed to be expressly permitted for all
purposes under the Agreement and the Option Agreements (defined herein as in
the Agreement) and shall not constitute a "triggering event" under any Option
Agreement.
5. Except as amended hereby, the Agreement is ratified and confirmed in
all respects.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed by and on
behalf of each of the parties hereto as of the date first above written.
PINNACLE FINANCIAL SERVICES, INC.
By: /s/ Richard L. Schanze
-----------------------------
Richard L. Schanze
Chairman and Chief Executive
Officer
INDIANA FEDERAL CORPORATION
By: /s/ Donald A. Lesch
-----------------------------
Donald A. Lesch
Chairman and Chief
Executive Officer
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<PAGE>
AGREEMENT AND PLAN OF MERGER
BETWEEN
PINNACLE FINANCIAL SERVICES,INC.
AND
CB BANCORP, INC.
DATED AS OF MARCH 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Effects of the Merger. . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Conversion of CB Common Stock. . . . . . . . . . . . . . . . . . . 2
1.5 Pinnacle Common Stock. . . . . . . . . . . . . . . . . . . . . . . 3
1.6 Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.7 Articles of Incorporation. . . . . . . . . . . . . . . . . . . . . 3
1.8 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.9 Tax Consequences; Accounting Treatment . . . . . . . . . . . . . . 4
1.10 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.11 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . 4
1.12 Headquarters of Surviving Corporation. . . . . . . . . . . . . . . 5
1.13 Bank Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE II
EXCHANGE OF SHARES
2.1 Pinnacle to Make Shares and Cash in Lieu of Fractional Shares
Available. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Exchange of Shares . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PINNACLE
3.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Authority; No Violation. . . . . . . . . . . . . . . . . . . . . . 11
3.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . 12
3.5 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 13
3.7 Broker's Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.8 Absence of Certain Changes or Events . . . . . . . . . . . . . . . 14
3.9 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 15
3.10 Taxes and Tax Returns. . . . . . . . . . . . . . . . . . . . . . . 15
3.11 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.12 SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.13 Compliance with Applicable Law . . . . . . . . . . . . . . . . . . 18
3.14 Certain Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 19
3.15 Agreements with Regulatory Agencies. . . . . . . . . . . . . . . . 20
3.16 Other Activities of Pinnacle and its Subsidiaries. . . . . . . . . 20
3.17 Investment Securities. . . . . . . . . . . . . . . . . . . . . . . 21
3.18 Interest Rate Risk Management Instruments. . . . . . . . . . . . . 21
3.19 Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . 21
3.20 Environmental Liability. . . . . . . . . . . . . . . . . . . . . . 21
3.21 State Takeover Laws. . . . . . . . . . . . . . . . . . . . . . . . 22
3.22 Pooling of Interests . . . . . . . . . . . . . . . . . . . . . . . 22
i
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CB
4.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . 22
4.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.3 Authority; No Violation. . . . . . . . . . . . . . . . . . . . . . 24
4.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . 25
4.5 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 26
4.7 Broker's Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.8 Absence of Certain Changes or Events . . . . . . . . . . . . . . . 27
4.9 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 27
4.10 Taxes and Tax Returns. . . . . . . . . . . . . . . . . . . . . . . 27
4.11 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.12 SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.13 Compliance with Applicable Law . . . . . . . . . . . . . . . . . . 31
4.14 Certain Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 32
4.15 Agreements with Regulatory Agencies. . . . . . . . . . . . . . . . 32
4.16 Other Activities of CB and its Subsidiaries. . . . . . . . . . . . 33
4.17 Investment Securities. . . . . . . . . . . . . . . . . . . . . . . 33
4.18 Interest Rate Risk Management Instruments. . . . . . . . . . . . . 33
4.19 Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . 34
4.20 Environmental Liability. . . . . . . . . . . . . . . . . . . . . . 34
4.21 State Takeover Laws and Charter Provisions . . . . . . . . . . . . 34
4.22 Pooling of Interests . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Conduct of Businesses Prior to the Effective Time. . . . . . . . . 35
5.2 Conduct of CB Businesses Prior to the Effective Time . . . . . . . 35
5.3 Forbearances of Pinnacle . . . . . . . . . . . . . . . . . . . . . 35
5.4 Forbearances of CB . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . 38
6.2 Access to Information. . . . . . . . . . . . . . . . . . . . . . . 39
6.3 Stockholders' Approvals. . . . . . . . . . . . . . . . . . . . . . 40
6.4 Legal Conditions to Merger . . . . . . . . . . . . . . . . . . . . 40
6.5 Affiliates; Publication of Combined Financial Results. . . . . . . 40
6.6 Nasdaq National Market Listing . . . . . . . . . . . . . . . . . . 41
6.7 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . 41
6.8 Indemnification; Directors' and Officers' Insurance. . . . . . . . 46
6.9 Additional Agreements. . . . . . . . . . . . . . . . . . . . . . . 48
6.10 Advice of Changes. . . . . . . . . . . . . . . . . . . . . . . . . 48
6.11 Negotiations with Other Parties. . . . . . . . . . . . . . . . . . 48
ii
<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation To Effect the Merger . . . . 49
7.2 Conditions to Obligation of Pinnacle . . . . . . . . . . . . . . . 50
7.3 Conditions to Obligation of CB . . . . . . . . . . . . . . . . . . 53
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . 56
8.3 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.4 Extension; Waiver. . . . . . . . . . . . . . . . . . . . . . . . . 57
ARTICLE IX
GENERAL PROVISIONS
9.1 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
9.2 Nonsurvival of Representations, Warranties and Agreements. . . . . 58
9.3 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
9.4 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
9.5 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.8 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.10 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.11 Assignment; Third Party Beneficiaries. . . . . . . . . . . . . . . 60
9.12 Other Transactions . . . . . . . . . . . . . . . . . . . . . . . . 60
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of March 1, 1997, by and between
PINNACLE FINANCIAL SERVICES, INC., a Michigan corporation ("Pinnacle"), and CB
BANCORP, INC., a Delaware corporation ("CB").
WITNESSETH:
WHEREAS, the Boards of Directors of Pinnacle and CB have determined that it
is in the best interests of their respective companies and their stockholders to
consummate the business combination transaction provided for herein in which CB
will, subject to the terms and conditions set forth herein, merge with and into
Pinnacle (the "Merger"), so that Pinnacle is the surviving corporation
(hereinafter sometimes called the "Surviving Corporation") in the Merger; and
WHEREAS, as a condition to, and immediately after the execution of, this
Agreement, Pinnacle and CB are entering into a CB stock option agreement (the
"CB Option Agreement") attached hereto as Exhibit A; and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, in
accordance with the Michigan Business Corporation Act, as amended (the "MBCA"),
and the Delaware General Corporation Law, as amended (the "DGCL"), at the
Effective Time (as defined in Section 1.2), CB shall merge with and into
Pinnacle. Pinnacle shall be the Surviving Corporation in the Merger, and shall
continue its corporate existence under the laws of the State of Michigan. Upon
consummation of the Merger, the separate corporate existence of CB shall
terminate.
1.2 EFFECTIVE TIME. The Merger shall become effective as set forth in
certificates of merger (each, a "Certificate of Merger"), which shall specify an
effective date and time no earlier than the filing thereof with the appropriate
authorities of the State of Michigan, and with the appropriate authorities of
the State of Delaware, on the Closing Date (as defined in Section 9.1), or as
soon thereafter as practicable. The term "Effective Time" shall be the date and
time when the Merger becomes effective, as set forth in each Certificate of
Merger having been filed in accordance with the MBCA and DGCL.
<PAGE>
1.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
shall have the effects set forth in the MBCA and the DGCL.
1.4 CONVERSION OF CB COMMON STOCK. At the Effective Time, in each case,
subject to Section 2.2(e), by virtue of the Merger and without any action on the
part of Pinnacle, CB or the holder of any of the following securities:
(a) Each share of the common stock, par value $0.01 per share, of CB
(the "CB Common Stock") issued and outstanding immediately prior to the
Effective Time (other than shares of CB Common Stock held (x) in CB's treasury
or (y) directly or indirectly by CB or Pinnacle or any of their respective
wholly-owned Subsidiaries (as defined in Section 3.1) (except for Trust Account
Shares and DPC shares, as such terms are defined in Section 1.4(c) and as set
forth in the CB Disclosure Schedule)), shall be converted into the right to
receive that number of shares of the common stock, without par value, of
Pinnacle (the "Pinnacle Common Stock") determined by dividing $35.00 (the
"Exchange Value") by the average (the "Average Price") of the daily averages of
the closing bid and the closing ask prices per share of Pinnacle Common Stock as
reported by the Nasdaq National Market for the period of fifteen (15) business
days ending on the fifth (5th) business day prior to the Closing Date; provided,
however, that (i) in the event the Average Price as determined under the
foregoing provision is $29.00 or higher, the Exchange Value shall be divided by
$29.00 (resulting in the fractional number 1.2069) rather than said Average
Price (so that, in such case, each share of CB Common Stock issued and
outstanding so converted, would be converted into the right to receive 1.2069
shares of Pinnacle Common Stock), and (ii) in the event the Average Price as
determined under the foregoing provision is $23.00 or lower, the Exchange Value
shall be divided by $23.00 (resulting in the fractional number 1.5217) rather
than said Average Price (so that, in such case, each share of CB Common Stock
issued and outstanding so converted, would be converted into the right to
receive 1.5217 shares of Pinnacle Common Stock); and provided, further, no
fractional shares of Pinnacle Common Stock shall be issued pursuant hereto and,
in lieu thereof, any said fractional shares shall be paid the cash equivalent
value thereof based on the Average Price.
(b) All of the shares of CB Common Stock converted into the right to
receive shares of Pinnacle Common Stock, and cash in lieu of fractional shares,
pursuant to this Article I shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist as of the Effective Time,
and each certificate (each a "Common Certificate") previously representing any
such shares of CB Common Stock shall thereafter represent the right to receive
(i) a certificate representing the number of whole shares, and (ii) cash in lieu
of any fractional share, of Pinnacle Common Stock into which the shares of CB
Common Stock represented by such Common Certificate have been converted pursuant
to this Section 1.4 and Section 2.2. Common Certificates previously representing
shares of CB Common Stock shall be exchanged for certificates representing
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<PAGE>
whole shares, and cash in lieu of fractional shares, of Pinnacle Common Stock
upon the surrender of such Common Certificates in accordance with Section 2.2,
without any interest thereon. If, prior to the Effective Time, the outstanding
shares of CB Common Stock shall have been increased, decreased, changed into or
exchanged for a different number or kind of shares or securities as a result of
a reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in capitalization, then an
appropriate and proportionate adjustment shall be made to the Exchange Value.
(c) At the Effective Time, all shares of CB Common Stock that are
owned by CB as treasury stock and all shares of CB Common Stock that are owned,
directly or indirectly, by CB or Pinnacle or any of their respective wholly-
owned Subsidiaries (other than shares of CB Common Stock held, directly or
indirectly, in trust accounts, managed accounts and the like or otherwise held
in a fiduciary capacity that are beneficially owned by third parties (any such
shares, and shares of Pinnacle Common Stock which are similarly held, whether
held directly or indirectly by CB or Pinnacle, as the case may be, being
referred to herein as "Trust Account Shares") and other than any shares of CB
Common Stock held by CB or Pinnacle or any of their respective wholly-owned
Subsidiaries in respect of a debt previously contracted (any such shares of CB
Common Stock, and shares of Pinnacle Common Stock which are similarly held,
whether held directly or indirectly by CB or Pinnacle or any of their respective
Subsidiaries, being referred to herein as "DPC Shares") and as set forth in the
CB Disclosure Schedule) shall be cancelled and shall cease to exist and no stock
of Pinnacle or other consideration shall be delivered in exchange therefor.
1.5 PINNACLE COMMON STOCK. At and after the Effective Time, each share of
Pinnacle Common Stock issued and outstanding immediately prior to the Closing
Date shall remain an issued and outstanding share of common stock of the
Surviving Corporation and shall not be affected by the Merger. All shares of
Pinnacle Common Stock that are owned by CB or any of its wholly-owned
Subsidiaries (other than Trust Account Shares and DPC Shares) shall become
treasury stock of Pinnacle.
1.6 OPTIONS.
At the Effective Time, each option granted by CB to purchase shares of
CB Common Stock (including any option that has been awarded but has not yet
vested) which is outstanding and unexercised immediately prior thereto shall
cease to represent the option to acquire shares of CB Common Stock and shall be
converted automatically into the right to receive shares of Pinnacle Common
Stock in an amount determined by dividing the difference between the Exchange
Value and the exercise price of such option by the Average Price.
1.7 ARTICLES OF INCORPORATION. Subject to the terms and conditions of
this Agreement, at the Effective Time, the Articles
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<PAGE>
of Incorporation of Pinnacle shall be the Articles of Incorporation of the
Surviving Corporation, until thereafter amended in accordance with applicable
law.
1.8 BYLAWS. Subject to the terms and conditions of this Agreement, at the
Effective Time, the Bylaws of Pinnacle, with appropriate amendments to
incorporate the provisions of Section 1.11(d) of this Agreement, shall be the
Bylaws of the Surviving Corporation, until thereafter amended in accordance with
applicable law.
1.9 TAX CONSEQUENCES; ACCOUNTING TREATMENT. It is intended that (i) the
Merger shall constitute a reorganization within the meaning of Section
368(a)(i)(A) of the Code, (ii) this Agreement shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code, and (iii) the
Merger shall qualify for "pooling of interests" accounting treatment under
Accounting Principles Board Opinion No. 16 and SEC Accounting Series Releases
130 and 135, as amended.
1.10 MANAGEMENT. At the Effective Time, those persons who are the officers
of Pinnacle immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, serving in the same officer capacities, respectively,
together with such other persons who may be appointed as officers of the
Surviving Corporation by the Board of Directors of the Surviving Corporation.
1.11 BOARD OF DIRECTORS. At the Effective Time, the persons who shall be
the directors of the Surviving Corporation shall be determined as follows:
(a) In the event that the transactions provided for under the terms
of the Agreement and Plan of Merger dated as of November 14, 1996 (the "IFC
Merger Agreement"), between Pinnacle and Indiana Federal Corporation, a Delaware
corporation ("IFC"), have been consummated and become effective, then the Board
of Directors of the Surviving Corporation shall consist of Mr. Richard L.
Schanze, as well as Mr. Arnold L. Weaver and three (3) other persons named as
directors of the Surviving Corporation on behalf of the Board of Directors of
Pinnacle, and Mr. Donald A. Lesch, as well as Mr. Howard Silverman and three (3)
other persons named as directors of the Surviving Corporation on behalf of the
Board of Directors of IFC, and Mr. Joseph F. Heffernan.
(b) In the event that the transactions provided for under the terms
of the IFC Merger Agreement have not been consummated and become effective, then
the Board of Directors of the Surviving Corporation shall be comprised of those
persons who are the directors of Pinnacle immediately prior to the Effective
Time and Mr. Joseph F. Heffernan; provided, that, in the event that the
transactions provided for under the terms of the IFC Merger Agreement
subsequently are consummated and become effective, then the Board of Directors
of the Surviving Corporation shall consist of Mr. Richard L. Schanze, as well as
Mr. Arnold L. Weaver and
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<PAGE>
three (3) other persons named as directors of the Surviving Corporation on
behalf of the Board of Directors of Pinnacle, and Mr. Donald A. Lesch, as well
as Mr. Howard Silverman and three (3) other persons named as directors of the
Surviving Corporation on behalf of the Board of Directors of IFC, and Mr. Joseph
F. Heffernan.
(c) In any case, at and following the Effective Time, under the terms
of the Standstill Agreement dated as of December 1, 1995, between Pinnacle and
Mr. Cyrus A. Ansary, Pinnacle has certain obligations to nominate Mr. Ansary for
election as a director of Pinnacle and said agreement shall be binding on
Pinnacle as the Surviving Corporation. In the event that Pinnacle, as the
Surviving Corporation, becomes obligated to nominate Mr. Ansary as a director of
the Surviving Corporation, then the Board of Directors at that time shall be
increased in size by two (2) persons, and Mr. Ansary shall be nominated as a
director of the Surviving Corporation pursuant to the terms of the Standstill
Agreement dated as of December 1, 1995, between Pinnacle and Mr. Ansary, and the
Chairman shall nominate for approval by the Board of Directors an additional
person as a director of the Surviving Corporation.
(d) Whenever the Board of Directors is comprised of ten (10) or fewer
persons, action of the Board within the meaning of Section 523 of the MBCA, and
for all other purposes, shall require the favorable vote of six (6) or more of
the directors, and whenever the Board of Directors is comprised of eleven (11)
or twelve (12) persons, action of the Board within the meaning of Section 523 of
the MBCA, and for all other purposes, shall require the favorable vote of seven
(7) or more of the directors.
1.12 HEADQUARTERS OF SURVIVING CORPORATION. At the Effective Time, the
headquarters and principal executive offices of Pinnacle immediately prior to
the Effective Time shall be the headquarters and principal executive offices of
the Surviving Corporation.
1.13 BANK MERGER. At the Bank Merger Effective Time (as hereinafter
defined), Community Bank, a federal savings bank ("CB Bank"), the wholly-owned
subsidiary of CB, shall be merged (the "Bank Merger") with and into Pinnacle
Bank, a Michigan banking corporation ("Pinnacle Bank"), the wholly-owned
subsidiary of Pinnacle, pursuant to the terms and conditions set forth herein
and in the Agreement and Plan of Merger and Consolidation substantially in the
form attached hereto as Exhibit B (the "Bank Merger Agreement"). Upon
consummation of the Bank Merger, the separate existence of CB Bank shall cease,
and Pinnacle Bank shall continue as the surviving institution of the Bank
Merger. The name of Pinnacle Bank, as the surviving institution of the Bank
Merger, shall be "Pinnacle Bank". From and after the Bank Merger Effective Time
(as hereinafter defined), Pinnacle Bank as the surviving institution of the Bank
Merger shall possess all of the properties and rights and be subject to all of
the liabilities and obligations of Pinnacle Bank and CB Bank. The Bank Merger
shall become effective at the time the Bank Merger Agreement for such merger is
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endorsed and declared effective by the Financial Institutions Bureau of the
State of Michigan (the "Bank Merger Effective Time"). The parties shall cause
the Bank Merger to become effective as soon as practical following the Merger.
At the Bank Merger Effective Time:
(a) each share of CB Bank common stock issued and outstanding
immediately prior thereto shall, by virtue of the Bank Merger, be cancelled. No
new shares of the capital stock or other securities or obligations of CB Bank
shall be issued or be deemed issued with respect to or in exchange for such
cancelled shares, and such cancelled shares of common stock of CB Bank shall not
be converted into any shares or other securities or obligations of any other
entity;
(b) each share of Pinnacle Bank common stock issued and outstanding
immediately prior thereto shall remain an issued and outstanding share of common
stock of Pinnacle Bank as the surviving institution and shall not be affected by
the Bank Merger;
(c) the charter and bylaws of Pinnacle Bank, as then in effect, shall
be the Charter and Bylaws of Pinnacle Bank as the surviving institution of the
Bank Merger, and may thereafter be amended in accordance with applicable law;
and
(d) the directors of Pinnacle Bank as the surviving institution
following the Bank Merger shall be determined as follows:
(i) In the event that the transactions provided for under the
terms of the Agreement and Plan of Merger and Consolidation to be entered
into by and between Indiana Federal Bank for Savings and Pinnacle Bank
pursuant to the IFC Merger Agreement (the "InFed Bank Merger Agreement")
have been consummated and become effective, then the Board of Directors of
Pinnacle Bank as the surviving institution shall consist of twenty-one (21)
persons with eighteen (18) persons to be named as directors as provided in
the IFC Merger Agreement and three (3) persons to be named as directors by
the Board of Directors of CB Bank (one of which persons shall be
Mr. Joseph F. Heffernan).
(ii) In the event that the transactions provided for under the
terms of the InFed Bank Merger Agreement have not been consummated and
become effective, then the Board of Directors of Pinnacle Bank as the
surviving institution shall be comprised of those persons who are the
directors of Pinnacle Bank immediately prior to the Bank Merger Effective
Time and two (2) persons to be named as directors by the Board of Directors
of CB Bank (one of which persons shall be Mr. Joseph F. Heffernan);
provided, however, that in the event that the transactions provided for
under the terms of the InFed Bank Merger Agreement subsequently are
consummated and become effective, then the Board of Directors of Pinnacle
Bank as the surviving institution shall consist of twenty-one (21)
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persons with eighteen (18) persons to be named as directors as provided in
the IFC Merger Agreement and three (3) persons to be named as directors by
the Board of Directors of CB Bank.
ARTICLE II
EXCHANGE OF SHARES
2.1 PINNACLE TO MAKE SHARES AND CASH IN LIEU OF FRACTIONAL SHARES
AVAILABLE. Prior to the Effective Time, Pinnacle shall deposit, or shall cause
to be deposited, with Harris Trust and Savings Bank, Chicago, Illinois, or
another bank or trust company reasonably acceptable to each of Pinnacle and CB
(the "Exchange Agent"), for the benefit of the holders of Common Certificates,
for exchange in accordance with this Article II, certificates representing the
shares of Pinnacle Common Stock and cash for payment of consideration in lieu of
fractional shares (such certificates for shares of Pinnacle Common Stock,
together with cash for payment of consideration in lieu of fractional shares,
and any dividends or distributions with respect to any whole shares of Pinnacle
Common Stock, being hereinafter referred to as the "Exchange Fund") to be issued
and paid pursuant to Section 1.4 and Section 2.2(a) in exchange for outstanding
shares of CB Common Stock.
2.2 EXCHANGE OF SHARES.
(a) As soon as practicable after the Effective Time, and in no event
later than five (5) business days thereafter, the Exchange Agent shall mail to
each holder of record of one or more Common Certificates a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Common Certificates shall pass, only upon delivery of the Common
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Common Certificates in exchange for certificates representing
the shares of Pinnacle Common Stock and any cash in lieu of fractional shares
into which the shares of CB Common Stock represented by such Common Certificate
or Common Certificates shall have been converted pursuant to this Agreement.
Upon proper surrender of a Common Certificate for exchange and cancellation to
the Exchange Agent, together with such properly completed letter of transmittal,
duly executed, the holder of such Common Certificate shall be entitled to
receive in exchange therefor, as applicable, (i) a certificate representing that
number of whole shares of Pinnacle Common Stock, and (ii) a check representing
the amount of any cash in lieu of fractional shares, to which such holder of CB
Common Stock shall have become entitled pursuant to the provisions of Article I,
and the Common Certificate so surrendered shall forthwith be cancelled. No
interest will be paid or accrued on any cash in lieu of fractional shares or on
any unpaid dividends and distributions payable to holders of Common
Certificates.
(b) No dividends or other distributions declared with respect to
Pinnacle Common Stock with a record date following the
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Effective Time shall be paid to the holder of any unsurrendered Common
Certificate until the holder thereof shall surrender such Common Certificate in
accordance with this Article II.
(c) If any certificate representing shares of Pinnacle Common Stock
is to be issued in a name other than that in which the Common Certificate
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the Common Certificate so surrendered shall be properly
endorsed (or accompanied by an appropriate instrument of transfer) and otherwise
in proper form for transfer, and that the person requesting such exchange shall
pay to the Exchange Agent in advance any transfer or other taxes required by
reason of the issuance of a certificate representing shares of Pinnacle Common
Stock in any name other than that of the registered holder of the Common
Certificate surrendered, or required for any other reason, or shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(d) After the Effective Time, there shall be no transfers on the
stock transfer books of CB of shares of CB Common Stock which were issued and
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Common Certificates representing such shares are presented for transfer to
the Exchange Agent, they shall be cancelled and exchanged for certificates
representing shares of Pinnacle Common Stock and cash in lieu of fractional
shares as provided in this Article II.
(e) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Pinnacle Common Stock
shall be issued upon the surrender for exchange of Common Certificates, no
dividend or distribution with respect to Pinnacle Common Stock shall be payable
on or with respect to any fractional share, and such fractional share interests
shall not entitle the owner thereof to vote or to any other rights of a
stockholder of CB. In lieu of the issuance of any such fractional share,
Pinnacle shall pay to each former stockholder of CB who otherwise would be
entitled to receive such fractional share an amount in cash determined by
multiplying (i) the Average Price by (ii) the fraction of a share (rounded to
the nearest thousandth when expressed as an Arabic number) of Pinnacle Common
Stock to which such holder would otherwise be entitled to receive pursuant to
Section 1.4.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of CB for twelve (12) months after the Effective Time shall be paid
to Pinnacle. Any stockholders of CB who have not theretofore complied with this
Article II shall thereafter look only to Pinnacle for payment of the shares of
Pinnacle Common Stock, cash in lieu of any fractional shares and any unpaid
dividends and distributions on whole shares of Pinnacle Common Stock deliverable
in respect of each share of CB Common Stock such stockholder holds as determined
pursuant to this Agreement, in each case, without any interest thereon.
Notwithstanding the foregoing, none of CB, Pinnacle, the Exchange
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Agent or any other person shall be liable to any former holder of shares of CB
Common Stock for any amount delivered in good faith to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) In the event any Common Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Common Certificate to be lost, stolen or destroyed and, if
reasonably required by Pinnacle or the Exchange Agent, the posting by such
person of a bond in such amount as Pinnacle or the Exchange Agent may determine
is reasonably necessary as indemnity against any claim that may be made against
it with respect to such Common Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Common Certificate the shares of
Pinnacle Common Stock and any cash in lieu of fractional shares deliverable in
respect thereof pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PINNACLE
Except as disclosed in the Pinnacle disclosure schedule delivered to CB
concurrently herewith (the "Pinnacle Disclosure Schedule"), Pinnacle hereby
represents and warrants to CB as follows:
3.1 CORPORATE ORGANIZATION.
(a) Pinnacle is a corporation duly organized, validly existing and in
good standing under the laws of the State of Michigan. Pinnacle has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have a
Material Adverse Effect on Pinnacle. As used in this Agreement, the term
"Material Adverse Effect" means, with respect to CB, Pinnacle or the Surviving
Corporation, as the case may be, a material adverse effect on the on-going
business (including the continuing right and ability to conduct said business
and generate earnings therefrom), results of operations or financial condition
of such party and its Subsidiaries taken as a whole, excluding for this purpose
only, however, (i) the payment and/or incurrence of transactional expenses by CB
or Pinnacle in connection with the Merger; (ii) the effects upon Pinnacle to the
extent disclosed by the Pinnacle Disclosure Schedule delivered to CB with this
Agreement (and including the disclosure schedules of Pinnacle and IFC referenced
in the IFC Merger Agreement, copies of which have been delivered by Pinnacle to
CB, but excluding any Material Adverse Effect that may be subsequently disclosed
by a closing date disclosure schedule delivered pursuant to the IFC Merger
Agreement) of the transactions
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contemplated by, and all transactional expenses associated with the transactions
contemplated by, the IFC Merger Agreement, whether or not consummated, the
Pinnacle stock option agreement dated as of November 14, 1996 between Pinnacle
and IFC, and the IFC stock option agreement dated as of November 14, 1996
between Pinnacle and IFC (said stock option agreements being the "Pinnacle/IFC
Stock Option Agreements"), and (iii) the effects upon Pinnacle of the
transactions contemplated by, and all transactional expenses associated with the
transactions, contemplated by, the Purchase and Assumption Agreement executed,
or to be executed, between Shoreline Bank, as Seller, and Pinnacle Bank, as
Buyer, and the Purchase and Assumption Agreement executed, or to be executed,
between Pinnacle Bank, as Seller, and Shoreline Bank, as Buyer (collectively,
the "Branch Office Swap Agreements"), whether or not consummated, in any said
case to the extent having such an effect. As used in this Agreement, the word
"Subsidiary" when used with respect to any party means any bank, savings and
loan institution, corporation, partnership, limited liability company, or other
organization, whether incorporated or unincorporated, which is consolidated with
such party for financial reporting purposes. Pinnacle is duly registered as a
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"). True and complete copies of the Articles of Incorporation and
Bylaws of Pinnacle, as in effect as of the date of this Agreement, have
previously been made available by Pinnacle to CB.
(b) Each Pinnacle Subsidiary (i) is duly organized and validly
existing as a bank, savings and loan institution, corporation, partnership or
limited liability company under the laws of its jurisdiction of organization,
(ii) is duly qualified to do business and in good standing in all jurisdictions
(whether federal, state, local or foreign) where its ownership or leasing of
property or the conduct of its business requires it to be so qualified and in
which the failure to be so qualified would have a Material Adverse Effect on
Pinnacle, and (iii) has all requisite corporate power and authority to own or
lease its properties and assets and to carry on its business as now conducted.
(c) The minute books of Pinnacle accurately reflect in all material
respects all corporate actions held or taken since January 1, 1994 of its
stockholders and Board of Directors (including committees of the Board of
Directors of Pinnacle).
3.2 CAPITALIZATION.
(a) The authorized capital stock of Pinnacle consists of (i)
15,000,000 shares of Pinnacle Common Stock, of which as of February 26, 1997,
5,977,860 shares were issued and outstanding and no shares were held in
treasury. All of the issued and outstanding shares of Pinnacle Common Stock
have been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights, with no personal liability attaching to the
ownership thereof. As of the date of this Agreement, except pursuant to the
terms of (i) those options to purchase shares of Pinnacle Common Stock issued or
issuable under Pinnacle benefit
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plans (the "Pinnacle Stock Plans"), (ii) the Pinnacle/IFC Stock Option
Agreements, and (iii) the IFC Merger Agreement, Pinnacle does not have and is
not bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of Pinnacle Common Stock or any other equity securities of
Pinnacle or any securities representing the right to purchase or otherwise
receive any shares of Pinnacle Common Stock or any other equity securities of
Pinnacle. As of February 26, 1997, no shares of Pinnacle Common Stock were
reserved for issuance, except for (i) 494,949 shares reserved for issuance upon
the exercise of stock options pursuant to the Pinnacle Stock Plans and
(ii) shares reserved for issuance pursuant to the Pinnacle/IFC Stock Option
Agreements and the IFC Merger Agreement. Since January 1, 1996, Pinnacle has
not issued any shares of Pinnacle Common Stock or other equity securities of
Pinnacle, or any securities convertible into or exercisable for any shares of
Pinnacle Common Stock or other equity securities of Pinnacle, other than
pursuant to (i) the exercise of employee stock options granted prior to such
date, (ii) the Pinnacle/IFC Stock Option Agreements, and (iii) the IFC Merger
Agreement. The shares of Pinnacle Common Stock to be issued pursuant to the
Merger will be duly authorized and validly issued and, at the Effective Time,
all such shares will be fully paid, nonassessable and free of preemptive rights,
with no personal liability attaching to the ownership thereof.
(b) Pinnacle owns, directly or indirectly, all of the issued and
outstanding shares of capital stock of each of the Pinnacle Subsidiaries, free
and clear of any liens, pledges, charges, encumbrances and security interests
whatsoever ("Liens"), and all of such shares are duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof. No Pinnacle Subsidiary
has or is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of capital stock or any other equity security of such Subsidiary
or any securities representing the right to purchase or otherwise receive any
shares of capital stock or any other equity security of such Subsidiary.
3.3 AUTHORITY; NO VIOLATION.
(a) Pinnacle has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Pinnacle. The Board of Directors of Pinnacle has directed
that this Agreement and the transactions contemplated hereby be submitted to
Pinnacle's stockholders for approval at a meeting of such stockholders and,
except for the adoption of this Agreement by the affirmative vote of the holders
of a majority of the outstanding shares of Pinnacle Common Stock, no other
corporate proceedings on the part of Pinnacle are necessary to approve this
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Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Pinnacle and
(assuming due authorization, execution and delivery by CB) constitutes a valid
and binding obligation of Pinnacle, enforceable against Pinnacle in accordance
with its terms.
(b) Neither the execution and delivery of this Agreement by Pinnacle
nor the consummation by Pinnacle of the transactions contemplated hereby, nor
compliance by Pinnacle with any of the terms or provisions hereof, will (i)
violate any provision of the Articles of Incorporation or Bylaws of Pinnacle or
(ii) assuming that the consents and approvals referred to in Section 3.4 are
duly obtained, (x) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to Pinnacle or any of its
Subsidiaries or any of their respective properties or assets, or (y) violate,
conflict with, result in a breach of any provision of or the loss of any benefit
under, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of or a right
of termination or cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the respective properties or
assets of Pinnacle or any of its Subsidiaries under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Pinnacle or
any of its Subsidiaries is a party, or by which they or any of their respective
properties or assets may be bound or affected, except (in the case of clause (y)
above) for such violations, conflicts, breaches or defaults which, either
individually or in the aggregate, will not have or be reasonably likely to have
a Material Adverse Effect on Pinnacle or the Surviving Corporation.
3.4 CONSENTS AND APPROVALS. Except for (i) the filing of applications and
notices, as applicable, with the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") under the BHC Act and approval of such
applications and notices, (ii) the filing of any required applications with the
Office of Thrift Supervision (the "OTS"), (iii) the filing of any required
applications or notices with any state or foreign agencies and approval of such
applications and notices (the "State Approvals"), (iv) the filing with the
Securities and Exchange Commission (the "SEC") of a joint proxy statement in
definitive form relating to the meetings of Pinnacle's and CB's stockholders to
be held in connection with this Agreement and the transactions contemplated
hereby (and, if applicable, the meetings of Pinnacle's and IFC's stockholders to
be held in connection with the IFC Merger Agreement and the transactions
contemplated thereby) (the "Joint Proxy Statement") and the registration
statement on Form S-4 (the "S-4") in which the Joint Proxy Statement will be
included as a prospectus (which Joint Proxy Statement and S-4 may also describe
the transactions contemplated by the IFC Merger Agreement), (v) the filing of
Certificates of Merger with the appropriate authorities of the State of Michigan
pursuant to the MBCA and with the appropriate officials of the State of Delaware
pursuant to the
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DGCL, (vi) any notices to or filings with the Small Business Administration
("SBA"), (vii) any consent, authorizations, approvals, filings or exemptions in
connection with compliance with the applicable provisions of federal and state
securities laws relating to the regulation of broker-dealers or investment
advisers, and federal commodities laws relating to the regulation of futures
commission merchants and the rules and regulations thereunder and of any
applicable industry self-regulatory organization ("SRO"), and the rules of
Nasdaq, or which are required under consumer finance, mortgage banking and other
similar laws, (viii) such filings and approvals as are required to be made or
obtained under the securities or "Blue Sky" laws of various states in connection
with the issuance of the shares of Pinnacle Common Stock pursuant to this
Agreement, and (ix) the approval of this Agreement by the requisite vote of the
stockholders of Pinnacle and CB, no consents or approvals of or filings or
registrations with any court, administrative agency or commission or other
governmental authority or instrumentality (each a "Governmental Entity") or with
any third party are necessary in connection with (A) the execution and delivery
by Pinnacle of this Agreement and (B) the consummation by Pinnacle of the Merger
and the other transactions contemplated hereby.
3.5 REPORTS. Pinnacle and each of its Subsidiaries have timely filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that they were required to file since January 1,
1994 with (i) the Federal Reserve Board, (ii) the Federal Deposit Insurance
Corporation, (iii) any state regulatory authority (each a "State Regulator"),
(iv) the Office of the Comptroller of the Currency (the "OCC"), (v) the OTS,
(vi) the SEC and (vii) any SRO (collectively "Regulatory Agencies"), and all
other reports and statements required to be filed by them since January 1, 1994,
including, without limitation, any report or statement required to be filed
pursuant to the laws, rules or regulations of the United States, any state, or
any Regulatory Agency and have paid all fees and assessments due and payable in
connection therewith, except where the failure to file such report, registration
or statement or to pay such fees and assessments, either individually or in the
aggregate, will not have a Material Adverse Effect on Pinnacle. Except for
normal examinations conducted by a Regulatory Agency in the regular course of
the business of Pinnacle and its Subsidiaries, no Regulatory Agency has
initiated any proceeding or, to the best knowledge of Pinnacle, investigation
into the business or operations of Pinnacle or any of its Subsidiaries since
January 1, 1994, except where such proceedings or investigation are not likely,
either individually or in the aggregate, to have a Material Adverse Effect on
Pinnacle. There is no unresolved violation, criticism, or exception by any
Regulatory Agency with respect to any report or statement relating to any
examinations of Pinnacle or any of its Subsidiaries which, in the reasonable
judgment of Pinnacle, is likely, either individually or in the aggregate, to
have a Material Adverse Effect on Pinnacle.
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3.6 FINANCIAL STATEMENTS. Pinnacle has previously made available to CB
copies of (a) the consolidated balance sheets of Pinnacle and its Subsidiaries
as of December 31, for the fiscal years 1994 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the fiscal years 1993 through 1995, inclusive, as reported in
Pinnacle's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 filed with the SEC under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), in each case accompanied by the audit report of KPMG Peat
Marwick LLP, independent public accountants with respect to Pinnacle, and (b)
the unaudited consolidated balance sheet of Pinnacle and its Subsidiaries as of
September 30, 1996 and the related unaudited consolidated statements of income,
cash flows and changes in stockholders' equity for the nine-month period then
ended as reported in Pinnacle's Quarterly Report on Form 10-Q for the period
ended September 30, 1996 filed with the SEC under the Exchange Act (the
"Pinnacle September 30, 1996 Form 10-Q"). The December 31, 1995 consolidated
balance sheet of Pinnacle (including the related notes, where applicable) fairly
presents the consolidated financial position of Pinnacle and its Subsidiaries as
of the date thereof, and the other financial statements referred to in this
Section 3.6 (including the related notes, where applicable) fairly present
(subject, in the case of the unaudited statements, to recurring audit
adjustments normal in nature and amount) the results of the consolidated
operations and changes in stockholders' equity and consolidated financial
position of Pinnacle and its Subsidiaries for the respective fiscal periods or
as of the respective dates therein set forth; each of such statements (including
the related notes, where applicable) comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto; and each of such statements (including the
related notes, where applicable) has been prepared in all material respects in
accordance with generally accepted accounting principles ("GAAP") consistently
applied during the periods involved, except, in each case, as indicated in such
statements or in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q. The books and records of Pinnacle and its Subsidiaries
have been, and are being, maintained in all material respects in accordance with
GAAP and any other applicable legal and accounting requirements. All financial
statements and reports filed by or on behalf of Pinnacle with any Regulatory
Agency shall be furnished to CB as soon as practicable after being filed with
such Regulatory Agency.
3.7 BROKER'S FEES. Neither Pinnacle nor any Pinnacle Subsidiary nor any
of their respective officers or directors has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with the Merger or related transactions contemplated by this
Agreement, other than PL Capital, L.L.C. (a copy of which engagement agreement
has been disclosed by Pinnacle to CB) whose fees, commissions and expenses shall
be paid by Pinnacle.
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
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(a) Except as publicly disclosed in reports filed by Pinnacle with
Regulatory Agencies (the "Pinnacle Reports") prior to the date hereof, and
except for the one-time special assessment on institutions holding deposits
subject to assessment by the Savings Association Insurance Fund ("SAIF")
pursuant to the Deposit Insurance Funds Act of 1996 ("Funds Act") intended to
increase SAIF's net worth as of October 1, 1996 to 1.25 percent of SAIF insured
deposits, since December 31, 1995, (i) Pinnacle and its Subsidiaries taken as a
whole have not incurred any material liability, except in the ordinary course of
their business, and (ii) no event has occurred which has had, individually or in
the aggregate, a Material Adverse Effect on Pinnacle or the Surviving
Corporation.
(b) Except as publicly disclosed in Pinnacle Reports filed prior to
the date hereof, since December 31, 1995, Pinnacle and its Subsidiaries have
carried on their respective businesses in all material respects in the ordinary
and usual course.
(c) Since December 31, 1995, neither Pinnacle nor any of its
Subsidiaries has (i) except for such actions as are in the ordinary course of
business consistent with past practice or except as required by applicable law,
(A) increased the wages, salaries, compensation, pension, or other fringe
benefits or perquisites payable to any executive officer, employee, or director
from the amount thereof in effect as of December 31, 1995, or (B) granted any
severance or termination pay, entered into any contract to make or grant any
severance or termination pay, or paid any bonuses in excess of Pinnacle's 1995
salary and employee benefits expenses, or (ii) suffered any strike, work
stoppage, slowdown, or other labor disturbance which, in the reasonable judgment
of Pinnacle, is likely, either individually or in the aggregate, to have a
Material Adverse Effect on Pinnacle.
3.9 LEGAL PROCEEDINGS.
(a) Neither Pinnacle nor any of its Subsidiaries is a party to any,
and there are no pending or, to the best of Pinnacle's knowledge, threatened,
material legal, administrative, arbitral or other proceedings, claims, actions
or governmental or regulatory investigations of any nature against Pinnacle or
any of its Subsidiaries or challenging the validity or propriety of the
transactions contemplated by this Agreement as to which there is a reasonable
probability of an adverse determination and which, if adversely determined,
would, individually or in the aggregate, have a Material Adverse Effect on
Pinnacle.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction (other than those that apply to similarly situated bank holding
companies, savings and loan holding companies banks, or savings institutions)
imposed upon Pinnacle, any of its Subsidiaries or the assets of Pinnacle or any
of its Subsidiaries which has had, or might reasonably be expected to have, a
Material Adverse Effect on Pinnacle.
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3.10 TAXES AND TAX RETURNS.
(a) Each of Pinnacle and its Subsidiaries has duly filed all federal,
state, county, foreign and, to the best of Pinnacle's knowledge, local
information returns and tax returns required to be filed by it on or prior to
the date hereof (all such returns being accurate and complete in all material
respects) and has duly paid or made provisions for the payment of all Taxes (as
defined in Section 3.10(b)) and other governmental charges which have been
incurred or are due or claimed to be due from it by federal, state, county,
foreign or local taxing authorities on or prior to the date of this Agreement
(including, without limitation, if and to the extent applicable, those due in
respect of its properties, income, business, capital stock, deposits,
franchises, licenses, sales and payrolls) other than (i) Taxes or other charges
which are not yet delinquent or are being contested in good faith and have not
been finally determined, or (ii) information returns, tax returns, Taxes or
other governmental charges the failure to file, pay or make provision for,
either individually or in the aggregate, are not likely, in the reasonable
judgment of Pinnacle, to have a Material Adverse Effect on Pinnacle. The income
tax returns of Pinnacle and its Subsidiaries have been examined by the Internal
Revenue Service (the "IRS") and any liability with respect thereto has been
satisfied for all years to and including 1993, and either no material
deficiencies were asserted as a result of such examination for which Pinnacle
does not have adequate reserves or all such deficiencies were satisfied. To the
best of Pinnacle's knowledge, there are no material disputes pending, or claims
asserted for, Taxes or assessments upon Pinnacle or any of its Subsidiaries for
which Pinnacle does not have adequate reserves, nor has Pinnacle or any of its
Subsidiaries given any currently effective waivers extending the statutory
period of limitation applicable to any federal, state, county or local income
tax return for any period. In addition, (A) proper and accurate amounts have
been withheld by Pinnacle and its Subsidiaries from their employees for all
prior periods in compliance in all material respects with the tax withholding
provisions of applicable federal, state and local laws, except where failure to
do so would not have a Material Adverse Effect on Pinnacle, (B) federal, state,
county and local returns which are accurate and complete in all material
respects have been filed by Pinnacle and its Subsidiaries for all periods for
which returns were due with respect to income tax withholding, Social Security
and unemployment taxes, except where failure to do so would not have a Material
Adverse Effect on Pinnacle, (C) the amounts shown on such federal, state, local
or county returns to be due and payable have been paid in full or adequate
provision therefor has been included by Pinnacle in its consolidated financial
statements as of December 31, 1995, except where failure to do so would not have
a Material Adverse Effect on Pinnacle and (D) there are no Tax liens upon any
property or assets of Pinnacle or its Subsidiaries except liens for current
taxes not yet due or liens that would not have a Material Adverse Effect on
Pinnacle. Neither Pinnacle nor any of its Subsidiaries has been required to
include in income any adjustment pursuant to Section 481 of the Code by reason
of a voluntary change in accounting method initiated
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by Pinnacle or any of its Subsidiaries, and the IRS has not initiated or
proposed any such adjustment or change in accounting method, in either case
which has had or is reasonably likely to have a Material Adverse Effect on
Pinnacle. Except as set forth in the financial statements described in Section
3.6, neither Pinnacle nor any of its Subsidiaries has entered into a transaction
which is being accounted for as an installment obligation under Section 453 of
the Code, which would be reasonably likely to have a Material Adverse Effect on
Pinnacle.
(b) As used in this Agreement, the term "Tax" or "Taxes" means all
federal, state, county, local, and foreign income, excise, gross receipts, gross
income, ad valorem, profits, gains, property, capital, sales, transfer, use,
payroll, employment, severance, withholding, duties, intangibles, franchise,
backup withholding, and other taxes, charges, levies or like assessments
together with all penalties and additions to tax and interest thereon.
3.11 EMPLOYEES.
(a) The Pinnacle Disclosure Schedule sets forth a true and complete
list of each material employee benefit plan, arrangement or agreement that is
maintained as of the date of this Agreement (the "Pinnacle Benefit Plans") by
Pinnacle or any of its Subsidiaries or by any affiliated trade or business,
whether or not incorporated (an "ERISA Affiliate"), all of which together with
Pinnacle would be deemed a "single employer" within the meaning of Section 4001
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
(b) Pinnacle has heretofore delivered to CB true and complete copies
of each of the Pinnacle Benefit Plans and certain related documents, including,
but not limited to, (i) the actuarial report for such Pinnacle Benefit Plan (if
applicable) for each of the last two years, and (ii) the most recent
determination letter from the IRS (if applicable) for such Plan.
(c) (i) Each of the Pinnacle Benefit Plans has been operated and
administered in all material respects in compliance with applicable laws,
including, but not limited to, ERISA and the Code, (ii) each of the Pinnacle
Benefit Plans intended to be "qualified" within the meaning of Section 401(a) of
the Code is so qualified, (iii) with respect to each Pinnacle Benefit Plan which
is subject to Title IV of ERISA, the present value of accrued benefits under
such Pinnacle Benefit Plan, based upon the actuarial assumptions used for
funding purposes in the most recent actuarial report prepared by such Pinnacle
Benefit Plan's actuary with respect to such Pinnacle Benefit Plan, did not, as
of its latest valuation date, exceed the then current value of the assets of
such Pinnacle Benefit Plan allocable to such accrued benefits, (iv) no Pinnacle
Benefit Plan provides benefits, including, without limitation, death or medical
benefits (whether or not insured), with respect to current or former employees
of Pinnacle, its Subsidiaries or any ERISA Affiliate beyond their retirement or
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other termination of service, other than (A) coverage mandated by applicable
law, (B) death benefits or retirement benefits under any "employee pension plan"
(as such term is defined in Section 3(2) of ERISA), (C) deferred compensation
benefits accrued as liabilities on the books of Pinnacle, its Subsidiaries or
the ERISA Affiliates or (D) benefits the full cost of which is borne by the
current or former employee (or his beneficiary), (v) no material liability under
Title IV of ERISA has been incurred by Pinnacle, its Subsidiaries or any ERISA
Affiliate that has not been satisfied in full, and no condition exists that
presents a material risk to Pinnacle, its Subsidiaries or any ERISA Affiliate of
incurring a material liability thereunder, (vi) no Pinnacle Benefit Plan is a
"multiemployer pension plan" (as such term is defined in Section 3(37) of
ERISA), (vii) all contributions or other amounts payable by Pinnacle or its
Subsidiaries as of the Effective Time with respect to each Pinnacle Benefit Plan
in respect of current or prior plan years have been paid or accrued in
accordance with GAAP and Section 412 of the Code, (viii) neither Pinnacle, its
Subsidiaries nor any ERISA Affiliate has engaged in a transaction in connection
with which Pinnacle, its Subsidiaries or any ERISA Affiliate reasonably could be
subject to either a material civil penalty assessed pursuant to Section 409 or
502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976 of
the Code, and (ix) to the best knowledge of Pinnacle there are no pending,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the Pinnacle Benefit Plans or any trusts related
thereto which are, in the reasonable judgment of Pinnacle, likely, either
individually or in the aggregate, to have a Material Adverse Effect on Pinnacle.
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
material payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director or any
employee of Pinnacle or any of its affiliates from Pinnacle or any of its
affiliates under any Pinnacle Benefit Plan or otherwise, (ii) materially
increase any benefits otherwise payable under any Pinnacle Benefit Plan or (iii)
result in any acceleration of the time of payment or vesting of any such
benefits to any material extent.
3.12 SEC REPORTS. Pinnacle has previously made available to CB an accurate
and complete copy of each (a) final registration statement, prospectus, report,
schedule and definitive proxy statement filed since January 1, 1994 by Pinnacle
with the SEC pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act (the "Pinnacle Reports") and prior to the date hereof
and (b) communication mailed by Pinnacle to its stockholders since January 1,
1994 and prior to the date hereof, and no such registration statement,
prospectus, report, schedule, proxy statement or communication contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading,
except that information as of a later date shall be
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deemed to modify information as of an earlier date. Since January 1, 1994,
Pinnacle has timely filed all Pinnacle Reports and other documents required to
be filed by it under the Securities Act and the Exchange Act, and, as of their
respective dates, all Pinnacle Reports complied in all material respects with
the published rules and regulations of the SEC with respect thereto.
3.13 COMPLIANCE WITH APPLICABLE LAW. Pinnacle and each of its Subsidiaries
hold all material licenses, franchises, permits and authorizations necessary for
the lawful conduct of their respective businesses under and pursuant to all, and
have complied in all material respects with and are not in default in any
material respect under any, applicable law, statute, order, rule, regulation,
policy and/or guideline of any Governmental Entity relating to Pinnacle or any
of its Subsidiaries, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or default would not, individually
or in the aggregate, have a Material Adverse Effect on Pinnacle.
3.14 CERTAIN CONTRACTS.
(a) Neither Pinnacle nor any of its Subsidiaries is a party to or
bound by any contract, arrangement, commitment or understanding (whether written
or oral) (i) with respect to the employment of any directors, officers or
employees other than in the ordinary course of business consistent with past
practice, (ii) which, upon the consummation of the transactions contemplated by
this Agreement will (either alone or upon the occurrence of any additional acts
or events) result in any payment (whether of severance pay or otherwise)
becoming due from CB, Pinnacle, the Surviving Corporation, or any of their
respective Subsidiaries to any officer or employee thereof, (iii) which is a
"material contract" (as such term is defined in Item 601(b)(10) of Regulation
S-K of the SEC) to be performed after the date of this Agreement that has not
been filed or incorporated by reference in the Pinnacle Reports, (iv) which
materially restricts the conduct of any line of business by Pinnacle, (v) with
or to a labor union or guild (including any collective bargaining agreement) or
(vi) (including any stock option plan, stock appreciation rights plan,
restricted stock plan or stock purchase plan) any of the benefits of which will
be increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement, or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement. Pinnacle has previously made
available to CB true and correct copies of all employment and deferred
compensation agreements which are in writing and to which Pinnacle is a party.
Each contract, arrangement, commitment or understanding of the type described in
this Section 3.14(a), whether or not set forth in the Pinnacle Disclosure
Schedule, is referred to herein as a "Pinnacle Contract", and neither Pinnacle
nor any of its Subsidiaries knows of, or has received notice of, any violation
of the above by any of the other parties thereto which, individually or in the
aggregate, would have a Material Adverse Effect on Pinnacle.
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(b) (i) Each Pinnacle Contract is valid and binding on Pinnacle or
any of its Subsidiaries, as applicable, and in full force and effect, (ii)
Pinnacle and each of its Subsidiaries has in all material respects performed all
obligations required to be performed by it to date under each Pinnacle Contract,
except where such noncompliance, individually or in the aggregate, would not
have a Material Adverse Effect on Pinnacle, and (iii) no event or condition
exists which constitutes or, after notice or lapse of time or both, would
constitute, a material default on the part of Pinnacle or any of its
Subsidiaries under any such Pinnacle Contract, except where such default,
individually or in the aggregate, would not have a Material Adverse Effect on
Pinnacle.
3.15 AGREEMENTS WITH REGULATORY AGENCIES. Neither Pinnacle nor any of its
Subsidiaries is subject to any cease-and-desist or other order issued by, or is
a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or has been since
January 1, 1994, a recipient of any supervisory letter from, or since January 1,
1994, has adopted any board resolutions at the request of any Regulatory Agency
or other Governmental Entity that currently restricts in any material respect
the conduct of its business or that in any material manner relates to its
capital adequacy, its credit policies, its management or its business (each,
whether or not set forth in the Pinnacle Disclosure Schedule, a "Pinnacle
Regulatory Agreement"), nor has Pinnacle or any of its Subsidiaries been advised
since January 1, 1994, by any Regulatory Agency or other Governmental Entity
that it is considering issuing or requesting any such Regulatory Agreement.
3.16 OTHER ACTIVITIES OF PINNACLE AND ITS SUBSIDIARIES.
(a) Neither Pinnacle nor any of its Subsidiaries that is neither a
bank, a bank operating subsidiary or a bank service corporation, directly or
indirectly, engages in any activity prohibited by the Federal Reserve Board or
the OTS. Without limiting the generality of the foregoing, any equity
investment of Pinnacle and each Subsidiary that is not a bank, a bank operating
subsidiary or a bank service corporation is not prohibited by the Federal
Reserve Board or the OTS.
(b) Each Pinnacle Subsidiary which is a federally insured bank or
savings institution (a "Pinnacle Bank Subsidiary") currently performs all
personal trust, corporate trust and other fiduciary activities ("Trust
Activities") with requisite authority under applicable law of Governmental
Entities and in accordance in all material respects with the agreed-upon terms
of the agreements and instruments governing such Trust Activities, sound
fiduciary principles and applicable law and regulation (specifically including,
but not limited to, Section 9 of Title 12 of the Code of Federal Regulations)
where the failure to so perform would have a Material Adverse Effect on
Pinnacle; there is no investigation or inquiry of a material nature by any
Governmental Entity pending, or to the knowledge of Pinnacle, threatened,
against or affecting
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Pinnacle, or any Significant Subsidiary thereof relating to the compliance by
Pinnacle or any such Significant Subsidiary (as such term is defined in Rule
1-02(w) of Regulation S-X of the SEC) with sound fiduciary principles and
applicable regulations; and except where any such failure would not have a
Material Adverse Effect on Pinnacle, each employee of a Pinnacle Bank Subsidiary
had the authority to act in the capacity in which he or she acted with respect
to Trust Activities, in each case, in which such employee held himself or
herself out as a representative of a Pinnacle Bank Subsidiary; and each Pinnacle
Bank Subsidiary has established policies and procedures for the purpose of
complying with applicable laws of Governmental Entities relating to Trust
Activities, has followed such policies and procedures in all material respects
and has performed appropriate internal audit reviews of, and has engaged
independent accountants to perform audits of, Trust Activities, which audits
since January 1, 1994 have disclosed no material violations of applicable laws
of Governmental Entities or such policies and procedures.
3.17 INVESTMENT SECURITIES. Each of Pinnacle and its Subsidiaries has good
and marketable title to all securities held by it (except securities sold under
repurchase agreements or held in any fiduciary or agency capacity), free and
clear of any Lien, except to the extent such securities are pledged in the
ordinary course of business consistent with prudent banking practices to secure
obligations of Pinnacle or any of its Subsidiaries. Such securities are valued
on the books of Pinnacle in accordance with GAAP.
3.18 INTEREST RATE RISK MANAGEMENT INSTRUMENTS. All interest rate swaps,
caps, floors and option agreements and other interest rate risk management
arrangements, whether entered into for the account of Pinnacle or for the
account of a customer of Pinnacle or one of its Subsidiaries, were entered into
in the ordinary course of business and, to Pinnacle's knowledge, in accordance
with prudent banking practice and applicable rules, regulations and policies of
any Regulatory Authority and with counterparties believed to be financially
responsible at the time and are legal, valid and binding obligations of Pinnacle
or one of its Subsidiaries enforceable in accordance with their terms (except as
may be limited by bankruptcy, insolvency, moratorium, reorganization or similar
laws affecting the rights of creditors generally and the availability of
equitable remedies), and are in full force and effect. Pinnacle and each of its
Subsidiaries have duly performed in all material respects all of their material
obligations thereunder to the extent that such obligations to perform have
accrued; and, to Pinnacle's knowledge, there are no material breaches,
violations or defaults or allegations or assertions of such by any party
thereunder.
3.19 UNDISCLOSED LIABILITIES. Except for those liabilities that are fully
reflected or reserved against on the consolidated balance sheet of Pinnacle
included in the Pinnacle September 30, 1996 Form 10-Q and for liabilities
incurred in the ordinary course of business consistent with past practice since
September 30, 1996,
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neither Pinnacle nor any of its Subsidiaries has incurred any liability of any
nature whatsoever (whether absolute, accrued, contingent or otherwise and
whether due or to become due) that, either alone or when combined with all
similar liabilities, has had, or could reasonably be expected to have, a
Material Adverse Effect on Pinnacle.
3.20 ENVIRONMENTAL LIABILITY. Except as set forth in the Pinnacle
Disclosure Schedule, there are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature seeking to impose, or that could reasonably be expected to result in the
imposition, on Pinnacle or any of the Pinnacle Subsidiaries of any liability or
obligation arising under common law or under any local, state or federal
environmental statute, regulation or ordinance including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), pending or threatened against Pinnacle or any of
the Pinnacle Subsidiaries, which liability or obligation could reasonably be
expected to have a Material Adverse Effect on Pinnacle. To the knowledge of
Pinnacle, there is no reasonable basis for any such proceeding, claim, action or
governmental investigation that would impose any material liability or
obligation that could reasonably be expected to have a Material Adverse Effect
on Pinnacle. Neither Pinnacle nor any of the Pinnacle Subsidiaries is subject
to any agreement, order, judgment, decree, letter or memorandum by or with any
court, governmental authority, regulatory agency or third party imposing any
material liability or obligation that could reasonably be expected to have a
Material Adverse Effect on Pinnacle.
3.21 STATE TAKEOVER LAWS. The Board of Directors of Pinnacle has approved
the transactions contemplated by this Agreement and taken such action such that
the provisions of Chapter 7A of the MBCA and any other provisions of any state
or local "takeover" law applicable to Pinnacle will not apply to this Agreement
or any of the transactions contemplated hereby.
3.22 POOLING OF INTERESTS. Pinnacle has no reason to believe that the
Merger will not qualify as a "pooling of interests" for accounting purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CB
Except as disclosed in the CB disclosure schedule delivered to Pinnacle
concurrently herewith (the "CB Disclosure Schedule"), CB hereby represents and
warrants to Pinnacle as follows:
4.1 CORPORATE ORGANIZATION.
(a) CB is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. CB has the corporate power
and authority to own or lease all of its
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properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect on CB. CB is duly registered as a
savings and loan holding company under the Home Owners' Loan Act ("HOLA"). True
and complete copies of the Certificate of Incorporation and Bylaws of CB, as in
effect as of the date of this Agreement, have previously been made available by
CB to Pinnacle.
(b) Each CB Subsidiary (i) is duly organized and validly existing as
a bank, savings and loan institution, corporation, partnership or limited
liability company under the laws of its jurisdiction of organization, (ii) is
duly qualified to do business and in good standing in all jurisdictions (whether
federal, state, local or foreign) where its ownership or leasing of property or
the conduct of its business requires it to be so qualified and in which the
failure to be so qualified would have a Material Adverse Effect on CB, and (iii)
has all requisite corporate power and authority to own or lease its properties
and assets and to carry on its business as now conducted.
(c) The minute books of CB accurately reflect in all material
respects all corporate actions held or taken since January 1, 1994 of its
stockholders and Board of Directors (including committees of the Board of
Directors of CB).
4.2 CAPITALIZATION.
(a) The authorized capital stock of CB consists of (i) 500,000 shares
of preferred stock, par value $0.01 per share, none of which as of February 28,
1997 were issued or outstanding; and (ii) 1,500,000 shares of CB Common Stock,
of which as of February 28, 1997, 1,161,997 shares were issued and outstanding
and 122,241 shares were held in treasury. All of the issued and outstanding
shares of CB Common Stock have been duly authorized and validly issued and are
fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. As of the date of this Agreement,
except pursuant to the terms of (i) those options to purchase shares of CB
Common Stock issued or issuable under CB benefit plans (the "CB Stock Plans"),
and (ii) the CB Option Agreement, CB does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of CB Common
Stock or any other equity securities of CB or any securities representing the
right to purchase or otherwise receive any shares of CB Common Stock or any
other equity securities of CB. As of February 28, 1997, no shares of CB Common
Stock were reserved for issuance, except for 94,883 shares reserved for issuance
upon the exercise of stock options pursuant to the CB Stock Plans. Since
January 1, 1996, CB has not issued any shares of CB Common Stock or other
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equity securities of CB, or any securities convertible into or exercisable for
any shares of CB Common Stock or other equity securities of CB, other than
pursuant to the exercise of employee stock options granted prior to such date.
(b) CB owns, directly or indirectly, all of the issued and outstanding
shares of capital stock of each of the CB Subsidiaries, free and clear of any
Liens, and all of such shares are duly authorized and validly issued and are
fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. No CB Subsidiary has or is bound
by any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the purchase or issuance of any shares
of capital stock or any other equity security of such Subsidiary or any
securities representing the right to purchase or otherwise receive any shares of
capital stock or any other equity security of such Subsidiary.
4.3 AUTHORITY; NO VIOLATION.
(a) CB has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of CB. The Board of Directors of CB has directed that this
Agreement and the transactions contemplated hereby be submitted to CB's
stockholders for approval at a meeting of such stockholders and, except for the
adoption of this Agreement by the affirmative vote of the holders of a majority
of the outstanding shares of CB Common Stock, no other corporate proceedings on
the part of CB are necessary to approve this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by CB and (assuming due authorization, execution and
delivery by Pinnacle) constitutes a valid and binding obligation of CB,
enforceable against CB in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by CB nor
the consummation by CB of the transactions contemplated hereby, nor compliance
by CB with any of the terms or provisions hereof, will (i) violate any provision
of the Certificate of Incorporation or Bylaws of CB or (ii) assuming that the
consents and approvals referred to in Section 4.4 are duly obtained, (x) violate
any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to CB or any of its Subsidiaries or any of their
respective properties or assets, or (y) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the respective properties or
assets of CB or any of its Subsidiaries under, any of the terms, conditions or
provisions of any note,
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bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which CB or any of its Subsidiaries is a party, or
by which they or any of their respective properties or assets may be bound or
affected, except (in the case of clause (y) above) for such violations,
conflicts, breaches or defaults which, either individually or in the aggregate,
will not have or be reasonably likely to have a Material Adverse Effect on CB or
the Surviving Corporation.
4.4 CONSENTS AND APPROVALS. Except for (i) the filing of applications and
notices, as applicable, with the Federal Reserve Board under the BHC Act and
approval of such applications and notices, (ii) the filing of any required
applications with the OTS, (iii) the filing of any required applications or
notices for, and the receipt of, the State Approvals, (iv) the filing with the
SEC of the Joint Proxy Statement and the S-4 in which the Joint Proxy Statement
will be included as a prospectus, (v) the filing of Certificates of Merger with
the appropriate authorities of the State of Michigan pursuant to the MBCA and
with the appropriate officials of the State of Delaware pursuant to the DGCL,
(vi) any notices to or filings with the SBA, (vii) any consent, authorizations,
approvals, filings or exemptions in connection with compliance with the
applicable provisions of federal and state securities laws relating to the
regulation of broker-dealers or investment advisers, and federal commodities
laws relating to the regulation of futures commission merchants and the rules
and regulations thereunder and of any applicable industry SRO, and the rules of
Nasdaq, or which are required under consumer finance, mortgage banking and other
similar laws, (viii) such filings and approvals as are required to be made or
obtained under the securities or "Blue Sky" laws of various states in connection
with the issuance of the shares of Pinnacle Common Stock pursuant to this
Agreement, and (ix) the approval of this Agreement by the requisite vote of the
stockholders of Pinnacle and CB, no consents or approvals of or filings or
registrations with any Governmental Entity or with any third party are necessary
in connection with (A) the execution and delivery by CB of this Agreement and
(B) the consummation by CB of the Merger and the other transactions contemplated
hereby.
4.5 REPORTS. CB and each of its Subsidiaries have timely filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that they were required to file since January 1,
1994 with any of the Regulatory Agencies, and all other reports and statements
required to be filed by them since January 1, 1994, including, without
limitation, any report or statement required to be filed pursuant to the laws,
rules or regulations of the United States, any state, or any Regulatory Agency
and have paid all fees and assessments due and payable in connection therewith,
except where the failure to file such report, registration or statement or to
pay such fees and assessments, either individually or in the aggregate, will not
have a Material Adverse Effect on CB. Except for normal examinations conducted
by a Regulatory Agency in the regular course of the business of CB and its
Subsidiaries, no Regulatory Agency has
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initiated any proceeding or, to the best knowledge of CB, investigation into the
business or operations of CB or any of its Subsidiaries since January 1, 1994,
except where such proceedings or investigation are not likely, either
individually or in the aggregate, to have a Material Adverse Effect on CB.
There is no unresolved violation, criticism, or exception by any Regulatory
Agency with respect to any report or statement relating to any examinations of
CB or any of its Subsidiaries which, in the reasonable judgment of CB, is
likely, either individually or in the aggregate, to have a Material Adverse
Effect on CB.
4.6 FINANCIAL STATEMENTS. CB has previously made available to Pinnacle
copies of (a) the consolidated balance sheets of CB and its Subsidiaries as of
March 31, for the fiscal years 1995 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
fiscal years 1994 through 1996, inclusive, as reported in CB's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996 filed with the SEC under the
Exchange Act, in each case accompanied by the audit report of Crowe Chizek &
Company, L.L.P., independent public accountants with respect to CB, and (b) the
unaudited consolidated balance sheet of CB and its Subsidiaries as of
December 31, 1996 and the related unaudited consolidated statements of income,
cash flows and changes in stockholders' equity for the nine-month period then
ended as reported in CB's Quarterly Report on Form 10-Q for the period ended
December 31, 1996 filed with the SEC under the Exchange Act (the "CB
December 31, 1996 Form 10-Q"). The March 31, 1996 consolidated balance sheet of
CB (including the related notes, where applicable) fairly presents the
consolidated financial position of CB and its Subsidiaries as of the date
thereof, and the other financial statements referred to in this Section 4.6
(including the related notes, where applicable) fairly present (subject, in the
case of the unaudited statements, to recurring audit adjustments normal in
nature and amount) the results of the consolidated operations and changes in
stockholders' equity and consolidated financial position of CB and its
Subsidiaries for the respective fiscal periods or as of the respective dates
therein set forth; each of such statements (including the related notes, where
applicable) comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto; and each of such statements (including the related notes, where
applicable) has been prepared in all material respects in accordance with GAAP
consistently applied during the periods involved, except, in each case, as
indicated in such statements or in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q. The books and records of CB and
its Subsidiaries have been, and are being, maintained in all material respects
in accordance with GAAP and any other applicable legal and accounting
requirements. All financial statements and reports filed by or on behalf of CB
with any regulatory agency shall be furnished to Pinnacle as soon as practicable
after being filed with such Regulatory Agency.
4.7 BROKER'S FEES. Neither CB nor any CB Subsidiary nor any of their
respective officers or directors has employed any broker
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or finder or incurred any liability for any broker's fees, commissions or
finder's fees in connection with the Merger or related transactions contemplated
by this Agreement, other than Charles Webb & Company, a division of Keefe,
Bruyette & Woods, Inc. ("Charles Webb & Company") (a copy of which engagement
agreement has been disclosed by CB to Pinnacle) whose fees, commissions and
expenses shall be paid by CB.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as publicly disclosed in CB Reports (as defined in Section
4.12) filed prior to the date hereof, and except for the one-time special
assessment on institutions holding deposits subject to assessment by SAIF
pursuant to the Funds Act intended to increase SAIF's net worth as of October 1,
1996 to 1.25 percent on SAIF deposits, since March 31, 1996, (i) CB and its
Subsidiaries taken as a whole have not incurred any material liability, except
in the ordinary course of their business, and (ii) no event has occurred which
has had, individually or in the aggregate, a Material Adverse Effect on CB or
the Surviving Corporation.
(b) Except as publicly disclosed in CB Reports filed prior to the
date hereof, since March 31, 1996, CB and its Subsidiaries have carried on their
respective businesses in all material respects in the ordinary and usual course.
(c) Since March 31, 1996, neither CB nor any of its Subsidiaries has
(i) except for such actions as are in the ordinary course of business consistent
with past practice or except as required by applicable law, (A) increased the
wages, salaries, compensation, pension, or other fringe benefits or perquisites
payable to any executive officer, employee, or director from the amount thereof
in effect as of March 31, 1996, or (B) granted any severance or termination pay,
entered into any contract to make or grant any severance or termination pay, or
paid any bonuses in excess of CB's 1995 salary and employee benefits expenses,
or (ii) suffered any strike, work stoppage, slowdown, or other labor disturbance
which, in the reasonable judgment of CB, is likely, either individually or in
the aggregate, to have a Material Adverse Effect on CB.
4.9 LEGAL PROCEEDINGS.
(a) Neither CB nor any of its Subsidiaries is a party to any, and
there are no pending or, to the best of CB's knowledge, threatened, material
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against CB or any of its
Subsidiaries or challenging the validity or propriety of the transactions
contemplated by this Agreement or the CB Option Agreement as to which there is a
reasonable probability of an adverse determination and which, if adversely
determined, would, individually or in the aggregate, have a Material Adverse
Effect on CB.
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(b) There is no injunction, order, judgment, decree, or regulatory
restriction (other than those that apply to similarly situated bank holding
companies, savings and loan holding companies banks, or savings institutions)
imposed upon CB, any of its Subsidiaries or the assets of CB or any of its
Subsidiaries which has had, or might reasonably be expected to have, a Material
Adverse Effect on CB.
4.10 TAXES AND TAX RETURNS.
(a) Each of CB and its Subsidiaries has duly filed all federal,
state, county, foreign and, to the best of CB's knowledge, local information
returns and tax returns required to be filed by it on or prior to the date
hereof (all such returns being accurate and complete in all material respects)
and has duly paid or made provisions for the payment of all Taxes and other
governmental charges which have been incurred or are due or claimed to be due
from it by federal, state, county, foreign or local taxing authorities on or
prior to the date of this Agreement (including, without limitation, if and to
the extent applicable, those due in respect of its properties, income, business,
capital stock, deposits, franchises, licenses, sales and payrolls) other than
(i) Taxes or other charges which are not yet delinquent or are being contested
in good faith and have not been finally determined, or (ii) information returns,
tax returns, Taxes or other governmental charges the failure to file, pay or
make provision for, either individually or in the aggregate, are not likely, in
the reasonable judgment of CB, to have a Material Adverse Effect on CB. The
income tax returns of CB and its Subsidiaries have not been examined by the IRS.
No material deficiencies were asserted as a result of such examination for which
CB does not have adequate reserves or all such deficiencies were satisfied. To
the best of CB's knowledge, there are no material disputes pending, or claims
asserted for, Taxes or assessments upon CB or any of its Subsidiaries for which
CB does not have adequate reserves, nor has CB or any of its Subsidiaries given
any currently effective waivers extending the statutory period of limitation
applicable to any federal, state, county or local income tax return for any
period. In addition, (A) proper and accurate amounts have been withheld by CB
and its Subsidiaries from their employees for all prior periods in compliance in
all material respects with the tax withholding provisions of applicable federal,
state and local laws, except where failure to do so would not have a Material
Adverse Effect on CB, (B) federal, state, county and local returns which are
accurate and complete in all material respects have been filed by CB and its
Subsidiaries for all periods for which returns were due with respect to income
tax withholding, Social Security and unemployment taxes, except where failure to
do so would not have a Material Adverse Effect on CB, (C) the amounts shown on
such federal, state, local or county returns to be due and payable have been
paid in full or adequate provision therefor has been included by CB in its
consolidated financial statements as of March 31, 1996, except where failure to
do so would not have a Material Adverse Effect on CB and (D) there are no Tax
liens upon any property or assets of CB or its Subsidiaries except liens for
current taxes not yet due or
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liens that would not have a Material Adverse Effect on CB. Neither CB nor any
of its Subsidiaries has been required to include in income any adjustment
pursuant to Section 481 of the Code by reason of a voluntary change in
accounting method initiated by CB or any of its Subsidiaries, and the IRS has
not initiated or proposed any such adjustment or change in accounting method, in
either case which has had or is reasonably likely to have a Material Adverse
Effect on CB. Except as set forth in the financial statements described in
Section 4.6, neither CB nor any of its Subsidiaries has entered into a
transaction which is being accounted for as an installment obligation under
Section 453 of the Code, which would be reasonably likely to have a Material
Adverse Effect on CB.
(b) Any amount that is reasonably likely to be received (whether in
cash or property or the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any employee, officer or director
of CB or any of its affiliates who is a "Disqualified Individual" (as such term
is defined in proposed Treasury Regulation Section 1.280G-1) under any
employment, severance or termination agreement, other compensation arrangement
or CB Benefit Plan (as defined in Section 4.11(a)) currently in effect should
not be characterized as an "excess parachute payment" (as such term is defined
in Section 280G(b)(1) of the Code).
(c) No disallowance of a deduction under Section 162(m) of the Code
for employee remuneration of any amount paid or payable by CB or any Subsidiary
of CB under any contract, plan, program, arrangement or understanding would be
reasonably likely to have a Material Adverse Effect on CB.
4.11 EMPLOYEES.
(a) The CB Disclosure Schedule sets forth a true and complete list of
each material employee benefit plan, arrangement or agreement that, as of the
date of this Agreement, either is maintained by CB or any of its Subsidiaries or
any ERISA Affiliate, all of which together with CB would be deemed a "single
employer" within the meaning of Section 4001 of ERISA, or if not currently
maintained under which CB or any of its Subsidiaries or any ERISA Affiliate has
any liability to any current or former employees (the "CB Benefit Plans").
(b) CB has heretofore delivered to Pinnacle true and complete copies
of each of the CB Benefit Plans and certain related documents, including, but
not limited to, (i) the actuarial report for such CB Benefit Plan (if
applicable) for each of the last five years, (ii) the most recent determination
letter from the IRS (if applicable) for such CB Benefit Plan, (iii) the annual
reports for the most recent five years (Form 5500 series including all schedules
thereto), (iv) all agreements regarding plan assets with respect to the CB
Benefit Plans, and (v) a copy of the most recent summary plan description (if
applicable) of each CB Benefit Plan, together with any modifications thereto.
To CB's knowledge, such actuarial reports fairly present the financial condition
and
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results of operations of each such CB Benefit Plan in accordance with GAAP.
(c) (i) Each of the CB Benefit Plans has been operated and
administered in all material respects in compliance with applicable laws,
including, but not limited to, ERISA and the Code, (ii) each of the CB Benefit
Plans intended to be "qualified" within the meaning of Section 401(a) of the
Code is so qualified, (iii) with respect to each CB Benefit Plan which is
subject to Title IV of ERISA, and any "multiple employer pension plan" (as
defined in Section 413(e) of the Internal Revenue Code of 1986, as amended (the
"Code")), the present value of accrued benefits under such CB Benefit Plan,
(A) assuming all benefits are fully vested on a plan termination basis and based
upon the actuarial assumptions used for funding purposes in the most recent
actuarial report prepared by such CB Benefit Plan's actuary with respect to such
CB Benefit Plan, did not, as of its latest valuation date, exceed the then
current value of the assets of such CB Benefit Plan allocable to such accrued
benefits, and (B) since the last valuation date for each such CB Benefit Plan
and each ERISA Affiliate, no event has occurred or circumstance exists that
would increase the amount of benefits under any such CB Benefit Plan or that
would cause the excess of CB Benefit Plan assets over benefit liabilities (as
defined in Section 4001 of ERISA) to decrease, or the amount by which benefit
liabilities exceed assets to increase, (iv) no reportable event (as defined in
Section 4043 of ERISA and in the regulations issued thereunder) has occurred,
(v) no CB Benefit Plan provides benefits, including, without limitation, death
or medical benefits (whether or not insured), with respect to current or former
employees of CB, its Subsidiaries or any ERISA Affiliate beyond their retirement
or other termination of service, other than (A) coverage mandated by applicable
law, (B) death benefits or retirement benefits under any "employee pension plan"
(as such term is defined in Section 3(2) of ERISA), (C) deferred compensation
benefits accrued as liabilities on the books of CB, its Subsidiaries or the
ERISA Affiliates or (D) benefits the full cost of which is borne by the current
or former employee (or his beneficiary), (vi) no material liability under Title
IV of ERISA has been incurred by CB, its Subsidiaries or any ERISA Affiliate
that has not been satisfied in full, and no condition exists that presents a
material risk to CB, its Subsidiaries or any ERISA Affiliate of incurring a
material liability thereunder, (vii) none of CB, its Subsidiaries or any ERISA
Affiliate (A) has ever established, maintained, or contributed to or otherwise
participated in, or had an obligation to maintain, contribute to, or otherwise
participate in, any multiple employer pension plan or any "multiemployer pension
plan" (as such term is defined in Section 3(37) of ERISA) or (B) has withdrawn
from any multiple employer pension plan or any multiemployer pension plan with
respect to which there is any outstanding liability as of the date of this
Agreement, (viii) the Merger does not present a risk of, and shall not cause, or
could cause, the occurrence of any withdrawal from, or the participation,
termination, reorganization, or insolvency of, any multiple employer pension
plan or any multiemployer pension plan that could result in any liability of
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any of Pinnacle, Pinnacle's Subsidiaries, CB, its Subsidiaries, or any ERISA
Affiliate of any of the foregoing, to any multiple employer pension plan or any
multiemployer pension plan, (ix) none of CB, its Subsidiaries or any ERISA
Affiliate has received notice from any multiple employer pension plan or any
multiemployer pension plan that such multiemployer pension plan is in
reorganization or is insolvent, that increased contributions may be required to
avoid a reduction in plan benefits or the imposition of any excise tax, or that
such multiple employer pension plan or such multiemployer pension plan intends
to terminate or has terminated, (x) no multiple employer pension plan and no
multiemployer pension plan to which CB, its Subsidiaries or any ERISA Affiliate
contributes or has contributed is a party to any pending merger or asset or
liability transfer or is subject to any proceeding brought by the Pension
Benefit Guaranty Corporation, (xi) each of CB and its Subsidiaries has the right
to modify and terminate benefits to retirees (other than pensions) with respect
to both retired and active employees, (xii) all contributions or other amounts
payable by CB or its Subsidiaries as of the Effective Time with respect to each
CB Benefit Plan in respect of current or prior plan years have been paid or
accrued in accordance with GAAP and Section 412 of the Code, (xiii) neither CB,
its Subsidiaries nor any ERISA Affiliate has engaged in a transaction in
connection with which CB, its Subsidiaries or any ERISA Affiliate reasonably
could be subject to either a material civil penalty assessed pursuant to Section
409 or 502(i) of ERISA or a material tax imposed pursuant to Section 4975 or
4976 of the Code, and (xiv) to the best knowledge of CB there are no pending,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the CB Benefit Plans or any trusts related thereto
which are, in the reasonable judgment of CB, likely, either individually or in
the aggregate, to have a Material Adverse Effect on CB.
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
material payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director or any
employee of CB or any of its affiliates from CB or any of its affiliates under
any CB Benefit Plan or otherwise, (ii) materially increase any benefits
otherwise payable under any CB Benefit Plan or (iii) result in any acceleration
of the time of payment or vesting of any such benefits to any material extent.
4.12 SEC REPORTS. CB has previously made available to Pinnacle an accurate
and complete copy of each (a) final registration statement, prospectus, report,
schedule and definitive proxy statement filed since January 1, 1994 by CB with
the SEC pursuant to the Securities Act or the Exchange Act (the "CB Reports")
and prior to the date hereof and (b) communication mailed by CB to its
stockholders since January 1, 1994 and prior to the date hereof, and no such
registration statement, prospectus, report, schedule, proxy statement or
communication contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary in order
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to make the statements therein, in light of the circumstances in which they were
made, not misleading, except that information as of a later date shall be deemed
to modify information as of an earlier date. Since January 1, 1994, CB has
timely filed all CB Reports and other documents required to be filed by it under
the Securities Act and the Exchange Act, and, as of their respective dates, all
CB Reports complied in all material respects with the published rules and
regulations of the SEC with respect thereto.
4.13 COMPLIANCE WITH APPLICABLE LAW. CB and each of its Subsidiaries hold
all material licenses, franchises, permits and authorizations necessary for the
lawful conduct of their respective businesses under and pursuant to all, and
have complied in all material respects with and are not in default in any
material respect under any, applicable law, statute, order, rule, regulation,
policy and/or guideline of any Governmental Entity relating to CB or any of its
Subsidiaries, except where the failure to hold such license, franchise, permit
or authorization or such noncompliance or default would not, individually or in
the aggregate, have a Material Adverse Effect on CB.
4.14 CERTAIN CONTRACTS.
(a) Neither CB nor any of its Subsidiaries is a party to or bound by
any contract, arrangement, commitment or understanding (whether written or oral)
(i) with respect to the employment of any directors, officers or employees other
than in the ordinary course of business consistent with past practice, (ii)
which, upon the consummation of the transactions contemplated by this Agreement
will (either alone or upon the occurrence of any additional acts or events)
result in any payment (whether of severance pay or otherwise) becoming due from
CB, Pinnacle, the Surviving Corporation, or any of their respective Subsidiaries
to any officer or employee thereof, (iii) which is a "material contract" (as
such term is defined in Item 601(b)(10) of Regulation S-K of the SEC) to be
performed after the date of this Agreement that has not been filed or
incorporated by reference in the CB Reports, (iv) which materially restricts the
conduct of any line of business by CB, (v) with or to a labor union or guild
(including any collective bargaining agreement) or (vi) (including any CB
Benefit Plan, stock option plan, stock appreciation rights plan, restricted
stock plan or stock purchase plan) any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement, or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement. CB has previously made
available to Pinnacle true and correct copies of all employment and deferred
compensation agreements which are in writing and to which CB is a party. Each
contract, arrangement, commitment or understanding of the type described in this
Section 4.14(a), whether or not set forth in the CB Disclosure Schedule, is
referred to herein as a "CB Contract", and neither CB nor any of its
Subsidiaries knows of, or has received notice of, any violation of the above by
any of the
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other parties thereto which, individually or in the aggregate, would have a
Material Adverse Effect on CB.
(b) (i) Each CB Contract is valid and binding on CB or any of its
Subsidiaries, as applicable, and in full force and effect, (ii) CB and each of
its Subsidiaries has in all material respects performed all obligations required
to be performed by it to date under each CB Contract, except where such
noncompliance, individually or in the aggregate, would not have a Material
Adverse Effect on CB, and (iii) no event or condition exists which constitutes
or, after notice or lapse of time or both, would constitute, a material default
on the part of CB or any of its Subsidiaries under any such CB Contract, except
where such default, individually or in the aggregate, would not have a Material
Adverse Effect on CB.
4.15 AGREEMENTS WITH REGULATORY AGENCIES. Neither CB nor any of its
Subsidiaries is subject to any cease-and-desist or other order issued by, or is
a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or has been since
January 1, 1994, a recipient of any supervisory letter from, or since January 1,
1994, has adopted any board resolutions at the request of any Regulatory Agency
or other Governmental Entity that currently restricts in any material respect
the conduct of its business or that in any material manner relates to its
capital adequacy, its credit policies, its management or its business (each,
whether or not set forth in the CB Disclosure Schedule, a "CB Regulatory
Agreement"), nor has CB or any of its Subsidiaries been advised since January 1,
1994, by any Regulatory Agency or other Governmental Entity that it is
considering issuing or requesting any such Regulatory Agreement.
4.16 OTHER ACTIVITIES OF CB AND ITS SUBSIDIARIES.
(a) Neither CB nor any of its Subsidiaries that is neither a bank, a
bank operating subsidiary or a bank service corporation, directly or indirectly,
engages in any activity prohibited by the OTS. Without limiting the generality
of the foregoing, any equity investment of CB and each Subsidiary that is not a
bank, a bank operating subsidiary or a bank service corporation is not
prohibited by the Federal Reserve Board or the OTS.
(b) No CB Subsidiary which is a federally insured bank or savings
institution (a "CB Bank Subsidiary") currently performs any Trust Activities.
4.17 INVESTMENT SECURITIES. Each of CB and its Subsidiaries has good and
marketable title to all securities held by it (except securities sold under
repurchase agreements or held in any fiduciary or agency capacity), free and
clear of any Lien, except to the extent such securities are pledged in the
ordinary course of business consistent with prudent banking practices to secure
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obligations of CB or any of its Subsidiaries. Such securities are valued on the
books of CB in accordance with GAAP.
4.18 INTEREST RATE RISK MANAGEMENT INSTRUMENTS. All interest rate swaps,
caps, floors and option agreements and other interest rate risk management
arrangements, whether entered into for the account of CB or for the account of a
customer of CB or one of its Subsidiaries, were entered into in the ordinary
course of business and, to CB's knowledge, in accordance with prudent banking
practice and applicable rules, regulations and policies of any Regulatory
Authority and with counterparties believed to be financially responsible at the
time and are legal, valid and binding obligations of CB or one of its
Subsidiaries enforceable in accordance with their terms (except as may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the rights of creditors generally and the availability of equitable
remedies), and are in full force and effect. CB and each of its Subsidiaries
have duly performed in all material respects all of their material obligations
thereunder to the extent that such obligations to perform have accrued; and, to
CB's knowledge, there are no material breaches, violations or defaults or
allegations or assertions of such by any party thereunder.
4.19 UNDISCLOSED LIABILITIES. Except for those liabilities that are fully
reflected or reserved against on the consolidated balance sheet of CB included
in the CB December 31, 1996 Form 10-Q and for liabilities incurred in the
ordinary course of business consistent with past practice since December 31,
1996, neither CB nor any of its Subsidiaries has incurred any liability of any
nature whatsoever (whether absolute, accrued, contingent or otherwise and
whether due or to become due) that, either alone or when combined with all
similar liabilities, has had, or could reasonably be expected to have, a
Material Adverse Effect on CB.
4.20 ENVIRONMENTAL LIABILITY. Except as set forth in the CB Disclosure
Schedule, there are no legal, administrative, arbitral or other proceedings,
claims, actions, causes of action, private environmental investigations or
remediation activities or governmental investigations of any nature seeking to
impose, or that could reasonably be expected to result in the imposition, on CB
or any of the CB Subsidiaries of any liability or obligation arising under
common law or under any local, state or federal environmental statute,
regulation or ordinance including, without limitation, the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended
("CERCLA"), pending or threatened against CB or any of the CB Subsidiaries,
which liability or obligation could reasonably be expected to have a Material
Adverse Effect on CB. To the knowledge of CB, there is no reasonable basis for
any such proceeding, claim, action or governmental investigation that would
impose any material liability or obligation that could reasonably be expected
to have a Material Adverse Effect on CB. Neither CB nor any of the CB
Subsidiaries is subject to any agreement, order, judgment, decree, letter or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any material liability or obligation
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that could reasonably be expected to have a Material Adverse Effect
on CB.
4.21 STATE TAKEOVER LAWS AND CHARTER PROVISIONS. The Board of Directors of
CB has approved the transactions contemplated by this Agreement and taken such
action such that the provisions of the Certificate of Incorporation of CB
pertaining to certain "Business Combinations" shall not be applicable to the
transactions contemplated by this Agreement, and the provisions of Section 203
of the DGCL and any other provision of any state or local "takeover" law
applicable to CB will not apply to this Agreement or any of the transactions
contemplated hereby.
4.22 POOLING OF INTERESTS. CB has no reason to believe that the Merger
will not qualify as a "pooling of interests" for accounting purposes.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME. During the period
from the date of this Agreement to the Effective Time, except as expressly
contemplated or permitted by this Agreement (including the Pinnacle Disclosure
Schedule and the CB Disclosure Schedule), and the IFC Merger Agreement
(including the disclosure schedules of Pinnacle and IFC referenced therein),
Pinnacle shall, and shall cause each of its Subsidiaries to, (a) conduct its
business in the usual, regular and ordinary course consistent with past
practice, (b) use reasonable best efforts to maintain and preserve intact its
business organization, employees and advantageous business relationships and
retain the services of its key officers and key employees; and (c) use
reasonable best efforts to avoid taking any action which would adversely affect
or delay the ability of either Pinnacle or CB to obtain any necessary approvals
of any Regulatory Agency or other governmental authority required for the
transactions contemplated hereby or to perform its covenants and agreements
under this Agreement.
5.2 CONDUCT OF CB BUSINESSES PRIOR TO THE EFFECTIVE TIME. During the
period from the date of this Agreement to the Effective Time, except as
expressly contemplated or permitted by this Agreement (including the CB
Disclosure Schedule), CB shall, and shall cause each of its Subsidiaries to, (a)
conduct its business in the usual, regular and ordinary course consistent with
past practice, (b) use reasonable best efforts to maintain and preserve intact
its business organization, employees and advantageous business relationships and
retain the services of its key officers and key employees, (c) use reasonable
best efforts to avoid taking any action which would adversely affect or delay
the ability of either Pinnacle or CB to obtain any necessary approvals of any
Regulatory Agency or other governmental authority required for the transactions
contemplated hereby or to perform its covenants and agreements under this
Agreement, and (d) in a manner consistent with past practice and prudent banking
standards, charge off or
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establish provisions for all of its loans, receivables and other assets, or
portions thereof, deemed uncollectible by CB in accordance with generally
accepted accounting principles, applicable law or regulation, or classified as
"loss" or as directed by any regulatory authority; and, in a manner consistent
with past practice and prudent banking standards, maintain its allowance for
loan losses at a level which is adequate to provide for all known and reasonably
expected losses on assets outstanding and other inherent risks in its loan
portfolio.
5.3 FORBEARANCES OF PINNACLE. During the period from the date of this
Agreement to the Effective Time, except as set forth in the Pinnacle Disclosure
Schedule and, except as expressly contemplated or permitted by this Agreement or
the IFC Merger Agreement (including the disclosure schedules of Pinnacle and IFC
referenced therein, Pinnacle shall not, without the prior written consent of CB:
(a) take any action that would prevent or impede the Merger from
qualifying (i) for "pooling of interests" accounting treatment or (ii) as a
reorganization within the meaning of Section 368 of the Code; provided, however,
that nothing contained herein shall limit the ability of Pinnacle to exercise
its rights under the IFC Merger Agreement, Pinnacle/IFC Stock Option Agreements
and the CB Option Agreement;
(b) amend its Articles of Incorporation or its Bylaws; or
(c) agree to, or make any commitment to, take any of the actions
prohibited by this Section 5.3.
5.4 FORBEARANCES OF CB. During the period from the date of this Agreement
to the Effective Time, except as set forth in the CB Disclosure Schedule and,
except as expressly contemplated or permitted by this Agreement, CB shall not,
and CB shall not permit any of its respective Subsidiaries to, without the prior
written consent of Pinnacle:
(a) other than in the ordinary course of business consistent with
past practice, incur any indebtedness for borrowed money (other than short-term
indebtedness incurred to refinance short-term indebtedness and indebtedness of
CB or any of its Subsidiaries to CB or any of its Subsidiaries), assume,
guarantee, endorse or otherwise as an accommodation become responsible for the
obligations of any other individual, corporation or other entity, or make any
loan or advance (it being understood and agreed that incurrence of indebtedness
in the ordinary course of business shall include, without limitation, the
creation of deposit liabilities, purchases of Federal funds, sales of
certificates of deposit and entering into repurchase agreements); provided,
however, that CB may continue to access lines of credit to fund the Mortgage
Loan Reverse Repurchase Program currently operated by CB Bank in such amounts as
are reasonably necessary to operate that program;
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(b) (i) adjust, split, combine or reclassify any capital stock; (ii)
make, declare or pay any dividend or make any other distribution on, or directly
or indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock; (iii) grant any stock appreciation rights or grant
any individual, corporation or other entity any right to acquire any shares of
its capital stock (and no further or additional options to purchase stock shall
be granted pursuant to the CB Stock Plans); or (iv) issue any additional shares
of capital stock except pursuant to (A) the exercise of stock options or
warrants outstanding as of the date hereof, or (B) the CB Option Agreement;
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of
its properties or assets to any individual, corporation or other entity other
than a Subsidiary, or cancel, release or assign any indebtedness to any such
person or any claims held by any such person, except in the ordinary course of
business consistent with past practice or pursuant to contracts or agreements in
force at the date of this Agreement; provided, however, that CB may continue to
pursue workouts with the borrowers of those loans listed in Section 5.4(c) of
the CB Disclosure Schedule and such other loans as CB's management deems prudent
to workout in their reasonable judgement;
(d) except for transactions in the ordinary course of business
consistent with past practice or pursuant to contracts or agreements in force at
the date of this Agreement, make any material investment either by purchase of
stock or securities, contributions to capital, property transfers, or purchase
of any property or assets of any other individual, corporation or other entity
other than a Subsidiary thereof;
(e) except for transactions in the ordinary course of business
consistent with past practice, enter into or terminate any material contract or
agreement, or make any change in any of its material leases or contracts, other
than renewals of contracts and leases without material adverse changes of terms;
(f) increase in any manner the compensation or fringe benefits of any
of its employees or pay any pension or retirement allowance not required by any
existing plan or agreement to any such employees or become a party to, amend or
commit itself to any pension, retirement, profit-sharing or welfare benefit plan
or agreement or employment agreement with or for the benefit of any employee
other than in the ordinary course of business consistent with past practice or
accelerate the vesting of any stock options or other stock-based compensation;
(g) solicit, encourage or authorize or permit any individual,
corporation or other entity to solicit from any third party any inquiries or
proposals relating to the disposition of its business or assets, or the
acquisition of its voting securities, or the merger or business combination of
it or any of its Subsidiaries
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with any corporation or other entity other than as provided by this Agreement
(and CB shall promptly notify Pinnacle of all of the relevant details relating
to all inquiries and proposals which it may receive relating to any of such
matters);
(h) settle any claim, action or proceeding involving money damages,
except in the ordinary course of business consistent with past practice;
(i) take any action that would prevent or impede the Merger from
qualifying (i) for "pooling of interests" accounting treatment or (ii) as a
reorganization within the meaning of Section 368 of the Code; provided, however,
that nothing contained herein shall limit the ability of Pinnacle to exercise
its rights under the CB Option Agreement;
(j) amend its Certificate of Incorporation or its Bylaws;
(k) other than in prior consultation with Pinnacle, restructure or
materially change its investment securities portfolio or its gap position,
through purchases, sales or otherwise, or the manner in which the portfolio is
classified or reported;
(l) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect at any time prior to the
Effective Time, or in any of the conditions to the Merger set forth in Article
VII not being satisfied or in a violation of any provision of this Agreement,
except, in every case, as may be required by applicable law; or
(m) agree to, or make any commitment to, take any of the actions
prohibited by this Section 5.4.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 REGULATORY MATTERS.
(a) Pinnacle and CB shall promptly prepare and file with the SEC the
Joint Proxy Statement and Pinnacle shall promptly prepare and file with the SEC
the S-4, in which the Joint Proxy Statement will be included as a prospectus.
Each of Pinnacle and CB shall use all reasonable efforts to have the S-4
declared effective under the Securities Act as promptly as practicable after
such filing, and Pinnacle and CB shall thereafter mail or deliver the Joint
Proxy Statement to their respective stockholders. Pinnacle shall also use all
reasonable efforts to obtain all necessary state securities law or "Blue Sky"
permits and approvals required to carry out the transactions contemplated by
this Agreement, and CB shall furnish all information concerning CB and the
holders of CB
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Common Stock as may be reasonably requested in connection with any such action.
(b) The parties hereto shall cooperate with each other and use their
best efforts to promptly prepare and file all necessary documentation, to effect
all applications, notices, petitions and filings, to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to consummate
the transactions contemplated by this Agreement (including, without limitation,
the Merger), and to comply with the terms and conditions of all such permits,
consents, approvals and authorizations of all such Governmental Entities.
Pinnacle and CB shall have the right to review in advance, and, to the extent
practicable, each will consult the other on, in each case subject to applicable
laws relating to the exchange of information, all the information relating to
Pinnacle or CB, as the case may be, and any of their respective Subsidiaries,
which appear in any filing made with, or written materials submitted to, any
third party or any Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable. The parties
hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated herein.
(c) Pinnacle and CB shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Joint Proxy Statement, the S-4 or any other statement,
filing, notice or application made by or on behalf of Pinnacle, CB or any of
their respective Subsidiaries to any Governmental Entity in connection with the
Merger and the other transactions contemplated by this Agreement.
(d) Pinnacle and CB shall promptly advise each other upon receiving
any communication from any Governmental Entity whose consent or approval is
required for consummation of the transactions contemplated by this Agreement
which causes such party to believe that there is a reasonable likelihood that
any Requisite Regulatory Approval will not be obtained or that the receipt of
any such approval will be materially delayed.
6.2 ACCESS TO INFORMATION.
(a) Upon reasonable notice and subject to applicable laws relating to
the exchange of information, each of Pinnacle and CB shall, and shall cause each
of their respective Subsidiaries to, afford to the officers, employees,
accountants, counsel and other representatives of the other party, access,
during normal business
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hours during the period prior to the Effective Time, to all its properties,
books, contracts, commitments and records and, during such period, each of
Pinnacle and CB shall, and shall cause their respective Subsidiaries to, make
available to the other party (i) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of federal securities laws or federal or state banking laws,
savings and loan or savings association laws (other than reports or documents
which Pinnacle or CB, as the case may be, is not permitted to disclose under
applicable law) and (ii) all other information concerning its business,
properties and personnel as such party may reasonably request. Neither Pinnacle
nor CB nor any of their respective Subsidiaries shall be required to provide
access to or to disclose information where such access or disclosure would
violate or prejudice the rights of Pinnacle's or CB's, as the case may be,
customers, jeopardize the attorney-client privilege of the institution in
possession or control of such information or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or binding agreement entered
into prior to the date of this Agreement. The parties hereto will make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(b) Each of Pinnacle and CB agrees to keep confidential, and not
divulge to any other party or person (other than employees of, and attorneys,
accountants, financial advisors and other representatives for, any said party),
all non-public documents, information, records and financial statements received
from the other and, in addition, any and all reports, information and financial
information obtained through audits or other reviews conducted pursuant to this
Agreement (unless readily ascertainable from public or published information, or
trade sources, or already known or subsequently developed by a party
independently of any investigation or received from a third party not under an
obligation to the other party to keep such information confidential), and to use
the same only in connection with the transactions contemplated by this
Agreement; and if the transactions contemplated hereby are not consummated for
any reason, each party agrees to promptly return to the other party all written
materials furnished by the other party, and all copies thereof, in connection
with such investigation, and to destroy all documents and records in its
possession containing extracts or summaries of any such non-public information.
(c) No investigation by either of the parties or their respective
representatives shall affect the representations, warranties, covenants or
conditions of the other set forth herein.
6.3 STOCKHOLDERS' APPROVALS. Each of Pinnacle and CB shall call a meeting
of its stockholders to be held as soon as reasonably practicable for the purpose
of voting upon the requisite stockholder approvals required in connection with
this Agreement and the Merger, and each shall use its best efforts to cause such
meetings to occur on the same date. Pinnacle and CB will, through their
respective Boards of Directors, subject to their respective
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fiduciary obligations as determined by the respective Boards of Directors,
recommend to their respective stockholders approval of this Agreement and the
Merger.
6.4 LEGAL CONDITIONS TO MERGER. Each of Pinnacle and CB shall, and shall
cause its Subsidiaries to, use their best efforts (a) to take, or cause to be
taken, all actions necessary, proper or advisable to comply promptly with all
legal requirements which may be imposed on such party or its Subsidiaries with
respect to the Merger and, subject to the conditions set forth in Article VII
hereof, to consummate the transactions contemplated by this Agreement and (b) to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity and any other third party which is required to be obtained by Pinnacle or
CB or any of their respective Subsidiaries in connection with the Merger and the
other transactions contemplated by this Agreement.
6.5 AFFILIATES; PUBLICATION OF COMBINED FINANCIAL RESULTS.
(a) Each of Pinnacle and CB shall use its best efforts to cause each
director, executive officer and other person who is an "affiliate" (for purposes
of Rule 145 under the Securities Act and for purposes of qualifying the Merger
for "pooling of interests" accounting treatment) of such party to deliver to the
other party hereto, as soon as practicable after the date of this Agreement, and
prior to the date of the stockholders' meetings called by Pinnacle and CB to
approve this Agreement, a written agreement, in the form of Exhibit C hereto,
providing that such person will not sell, pledge, transfer or otherwise dispose
of any shares of Pinnacle Common Stock or CB Common Stock held by such
"affiliate" and, in the case of the "affiliates" of CB, the shares of Pinnacle
Common Stock to be received by such "affiliate" in the Merger: (i) in the case
of shares of Pinnacle Common Stock to be received by "affiliates" of CB in the
Merger, except in compliance with the applicable provisions of the Securities
Act and the rules and regulations thereunder; and (ii) except to the extent and
under the conditions permitted therein, during the period commencing 30 days
prior to the Merger and ending at the time of the publication of financial
results covering at least 30 days of combined operations of Pinnacle and CB.
(b) The Surviving Corporation shall use its best efforts to publish
as promptly as reasonably practical but in no event later than 90 days after the
end of the first month after the Effective Time in which there are at least 30
days of post-Merger combined operations (which month may be the month in which
the Effective Time occurs), combined sales and net income figures as
contemplated by and in accordance with the terms of SEC Accounting Series
Release No. 135.
6.6 NASDAQ NATIONAL MARKET LISTING. Pinnacle shall cause the shares of
Pinnacle Common Stock to be issued in the Merger to be approved for trading and
reporting on the Nasdaq National Market,
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subject to official notice of issuance, prior to the Effective Time.
6.7 EMPLOYEE BENEFIT PLANS.
(a) From and after the Effective Time, unless otherwise mutually
determined, the employee benefit plans, arrangements and agreements maintained
by Pinnacle (the "Pinnacle Benefit Plans") and CB Benefit Plans in effect as of
the date of this Agreement shall remain in effect with respect to employees of
Pinnacle or CB (or their Subsidiaries) covered by such plans at the Effective
Time until such time as the Surviving Corporation shall, subject to applicable
law, the terms of this Agreement and the terms of such plans, adopt new benefit
plans (the "New Benefit Plans") with respect to employees of the Surviving
Corporation and its Subsidiaries in substantial conformance with the Pinnacle
Benefit Plans in effect as of the Effective Time, in replacement and
substitution for the CB Benefit Plans (including, without limitation, non-
qualified stock option agreements, incentive stock option agreements, the
Employee Stock Ownership Plan maintained by CB Bank (the "CB Bank ESOP"),
deferred compensation plans and agreements, supplemental retirement income
agreements, severance agreements, employment agreements and stock option and
incentive plans benefitting current or former directors, officers or employees
of CB or its Subsidiaries, or their predecessors) which shall be cancelled,
terminated or frozen to the extent permitted by applicable law. Prior to the
Closing Date, Pinnacle shall review, evaluate and analyze the Pinnacle Benefit
Plans and CB Benefit Plans and shall develop and propose appropriate New Benefit
Plans for the employees covered thereby subsequent to the Merger in substantial
conformance with the Pinnacle Benefit Plans in effect as of the Effective Time,
in replacement and substitution for the CB Benefit Plans which shall be
cancelled, terminated or frozen to the extent permitted by applicable law. It
is the intention of Pinnacle and CB that Pinnacle shall develop New Benefit
Plans, effective as of the Effective Time, or as soon thereafter as permitted by
law and practicable, which, among other things, (i) treat similarly situated
employees on a substantially equivalent basis, taking into account all relevant
factors, including, without limitation, duties, geographic location, tenure,
qualifications and abilities, and (ii) do not discriminate between employees of
the Surviving Corporation who were covered by Pinnacle Benefit Plans, on the one
hand, and those covered by CB Benefit Plans, on the other, prior to the
Effective Time, but (iii) with the overall view that the CB Benefit Plans would
be cancelled, terminated or frozen, and replaced by the Pinnacle Benefit Plans
for times following the Effective Time to the extent permitted by applicable
law. The New Benefit Plans (x) shall treat CB's employees who become employees
of Pinnacle ("Continuing Employee") at the Effective Time as new employees, but
shall provide credit, in accordance with the terms of the applicable CB Benefit
Plan, for purposes of vesting and eligibility to participate (but not for
purposes of benefit accrual), for each Continuing Employee's service with CB
immediately prior to the Effective Time, and (y) shall not deprive Continuing
Employees and their covered dependents of any partial or
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complete coverage in connection with any preexisting condition or previous
medical treatments.
(b) Immediately prior to the Effective Time, CB shall make certain
payments to Messrs. Joseph Heffernan, George L. Koehm, Daniel R. Buresh, James
D. Neff, Allen E. Jones and Marvin L. Kominiarek, Jr. in the amounts set forth
for each said individual, respectively, in the Acknowledgments executed and
delivered by each such individual in the forms attached hereto as Exhibits D-1,
D-2, D-3, D-4, D-5 and D-6, respectively (the "Acknowledgments"); and, as set
forth in and provided by said Acknowledgments, in consideration of said
payments, (i) the Employment Agreement dated as of December 23, 1992, as
amended, among CB, CB Bank and Mr. Joseph Heffernan (the "Bank Employment
Agreement"), (ii) each of the Change in Control Agreements dated as of
December 23, 1992 between CB Bank and each of Messrs. George L. Koehm, Daniel R.
Buresh, James D. Neff, Allen E. Jones and Marvin L. Kominiarek, Jr. (the "Bank
Change in Control Agreements"), (iii) the Employment Agreement dated as of
December 23, 1992, as amended, between CB and Mr. Joseph Heffernan (the "CB
Employment Agreement"), and (iv) each of the Change in Control Agreements dated
as of December 23, 1992 between CB and each of Messrs. George L. Koehm,
Daniel R. Buresh, Allen E. Jones, and Marvin L. Kominiarek, Jr. (the "CB Change
in Control Agreements"), shall be deemed to be fully satisfied and terminated
for all purposes.
(c) Upon the Effective Time, Pinnacle shall offer to employ on an "at
will" basis each of Messrs. Joseph Heffernan, George L. Koehm, Daniel R. Buresh
and James D. Neff, respectively, with certain terms regarding base salary
amounts, insurance coverages and severance benefits as provided in Severance
Agreements with each of said persons in the forms attached hereto as Exhibits E-
1, E-2, E-3 and E-4, respectively (the "Severance Agreements"). In the event
that any said person declines such employment at and following the Effective
Time and does not enter into his respective Severance Agreement with Pinnacle,
CB shall make a severance payment immediately prior to the Effective Time to
said person in the amount specified for said person in his respective
Acknowledgment and Pinnacle shall provide said person with certain continuing
insurance coverages as set forth in and provided by said person's respective
Acknowledgment.
(d) At or immediately prior to the Effective Time, and in connection
with the Merger, CB shall make payments under the Outside Directors' Emeritus
Plan (the "Directors' Emeritus Plan") to those directors of CB and CB Bank who
are eligible to receive benefits thereunder in the amounts set forth in the CB
Disclosure Schedule, which accurately sets forth all such amounts payable
thereunder. CB covenants, represents and warrants to Pinnacle (i) that the CB
Disclosure Schedule includes a true and complete list of all persons eligible to
receive benefits under the Directors' Emeritus Plan and the amount of benefits
payable to each person so listed at the Effective Time and in connection with
the Merger, (ii) that except as otherwise disclosed in such list no one is
entitled to receive any benefits under the Directors' Emeritus
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Plan, (iii) that the payment to each person so listed of the corresponding
amounts so listed shall, in each case, constitute full and complete satisfaction
of all liabilities and obligations of CB, CB Bank and Pinnacle under the
Directors' Emeritus Plan, and (iv) that upon the payment of all such amounts the
Directors' Emeritus Plan shall terminate and be of no further force or effect.
(e) On or prior to the Effective Time, CB will terminate the Board of
Directors Deferred Compensation Plan and shall pay to those directors who have
deferred board fees under such plan such balances as are then held under such
plan for such directors. CB covenants, represents and warrants to Pinnacle
(i) that the CB Disclosure Schedule includes a true and complete list of all
directors who have deferred board fees under such plan and the balances payable
to such persons under such plan, (ii) that except as otherwise disclosed in such
list no one is entitled to receive any benefits under such plan, (iii) that the
payment to each person so listed of the corresponding balance so listed shall,
in each case, constitute full and complete satisfaction of all liabilities and
obligations of CB, CB Bank and Pinnacle under such plan, and (iv) that upon the
payment of all such amounts such plan shall terminate and be of no further force
or effect.
(f) CB shall fund the secular trusts under CB's Supplemental
Retirement Plan (the "CB SERP") with the contributions required for 1997 prior
to the Effective Time, as set forth on the CB Disclosure Schedule. Pinnacle
acknowledges that the "change in control" provisions of the CB SERP will be
triggered by the Merger and that, consequently, CB will be obligated to make
certain payments under the CB SERP at the Effective Time and in the amounts set
forth in the CB Disclosure Schedule, which accurately sets forth all amounts
payable thereunder. CB may contribute to the secular trusts under the CB SERP
the minimum amount of funds necessary to satisfy all amounts so due thereunder
in connection with the Merger as set forth in the CB Disclosure Schedule and
Pinnacle agrees that after the secular trusts under the CB SERP are funded with
all amounts so due, the secular trusts may make payments at the Effective Time
to the officers set forth in the CB Disclosure Schedule in the amounts set forth
in the CB Disclosure Schedule. CB covenants, represents and warrants to
Pinnacle (i) that the CB Disclosure Schedule includes a true and complete list
of all persons eligible to receive benefits under the CB SERP and the benefits
payable to such persons under the CB SERP, (ii) that except as otherwise
disclosed in such list no one is entitled to receive any benefits under the CB
SERP, and (iii) that the payment to each person so listed of the corresponding
benefits so listed shall, in each case, constitute full and complete
satisfaction of all liabilities and obligations of CB, CB Bank and Pinnacle
under the CB SERP.
(g) During the period commencing on the date of this Agreement and
ending on the Effective Time, CB may make contributions to its Employee Stock
Ownership Plan (the "CB Bank ESOP"), including but not limited to amounts
required to make scheduled principal and interest payments with respect to the
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indebtedness of the CB Bank ESOP to CB as of the date of this Agreement during
each calendar quarter pro-rated on a daily basis for partial quarters from the
date of this Agreement through the Effective Time; provided, however, that such
contributions shall be conditioned on their being allowed as a deduction by CB
for federal income tax purposes and shall be returned to CB or its successors to
the extent that any such deduction shall be disallowed. Prior to making any
contribution to the CB Bank ESOP, CB shall deliver to Pinnacle a certified copy
of a resolution adopted by CB's Board of Directors authorizing such
contribution, stating the specific dollar amount thereof, and expressly
providing for the contingency set forth in the preceding sentence. CB shall
take such actions as are necessary to cause the termination of the CB Bank ESOP
immediately prior to the Effective Time, conditioned upon receipt from the
Internal Revenue Service of a determination letter confirming that such
termination does not adversely affect the qualification of the CB Bank ESOP
under sections 401(a) or 409 of the Code. CB shall select such counsel and
other professional advisors as it shall determine to be necessary or appropriate
to advise it in connection with the termination. All assets of the CB Bank ESOP
remaining after the satisfaction of any outstanding indebtedness and the payment
of all expenses, shall, to the extent permissible under applicable law, be
allocated to the individual accounts of eligible participants and distributed to
them as soon as practicable following the later of the date of receipt of a
favorable determination letter or the Effective Time. In the event that such a
favorable determination letter is not obtained, Pinnacle will, to the extent
reasonably practical, maintain the CB Bank ESOP until all plan assets may be
distributed on a tax-qualified basis to participants participating in the CB
Bank ESOP at the Effective Time. In the event that the CB Bank ESOP is not
completely distributed prior to the Effective Time, Pinnacle shall assume
sponsorship of the CB Bank ESOP, and shall appoint a successor plan
administrator who shall be such person as Pinnacle shall select with prior
written approval of CB (which approval shall not be unreasonably withheld), for
the purpose of completing the termination of the ESOP and the distribution of
its assets. Notwithstanding anything to the contrary herein express or applied,
neither Pinnacle nor CB, nor any of their respective Subsidiaries, shall take
any action with respect to the CB Bank ESOP that would result in a violation of
Section 415 of the Code.
(h) CB may, but shall not be required to, terminate its 401(k)
Financial Institutions Thrift Plan (the "CB 401(k) Plan") as of any date prior
to the Effective Time, conditioned upon receipt from the Internal Revenue
Service of a determination letter confirming that such termination does not
adversely affect the qualification of the CB 401(k) Plan under Section 401(a) of
the Code. CB shall select such counsel and other professional advisors as it
shall determine to be necessary or appropriate to advise it and Pinnacle in
connection with the termination. All assets of the CB 401(k) Plan remaining
after the satisfaction of any outstanding indebtedness and the payment of all
expenses, shall, to the extent permissible under applicable law and without
liability to CB or Pinnacle, be allocated to the individual accounts of eligible
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participants and distributed to them as soon as practicable following the later
of the date of receipt of a favorable determination letter or the Effective
Time. In the event that the CB 401(k) Plan is not completely distributed prior
to the Effective Time, at the Effective Time, Pinnacle shall assume sponsorship
of the CB 401(k) Plan, and shall appoint a successor plan administrator who
shall be such person as Pinnacle shall select with the prior written approval of
CB (which approval shall not be unreasonably withheld) for the purpose of
completing the termination of the 401(k) Plan and the distribution of its assets
to the extent permissible under applicable law and without liability to CB or
Pinnacle.
(i) Subject to the requirements of ERISA and the Code, prior to the
Effective Time, CB shall take all action necessary to withdraw from the
Financial Institutions Retirement Fund ("Retirement Fund"), through which CB
currently sponsors its defined benefit pension plan (the "CB Plan"). Such
withdrawal shall take place so that there is no qualified successor plan (as
defined in the Retirement Fund) in existence at any applicable time. If, and
only if, assuming all Retirement Fund benefits are vested on a plan termination
basis and are based upon the most recent actuarial assumptions prepared by the
Retirement Fund's actuary, the total of such benefits exceed, on the withdrawal
date, the then current value of the assets of such Retirement Fund, CB may
increase the CB Plan benefits to the extent of such excess, less (1) any
expenses incurred in connection with the withdrawal from participation in the
Retirement Fund and increasing CB Plan benefits; and (2) the continuing
administrative costs and expenses of retirants' benefits remaining in the
Retirement Fund. Notwithstanding the foregoing or anything to the contrary,
withdrawal from the Retirement Fund shall not occur or be permitted in the event
it would create a liability for which CB or Pinnacle would be responsible.
Prior to withdrawing from the Retirement Fund or increasing CB Plan benefits, CB
shall deliver to Pinnacle a copy of all resolutions adopted by CB's Board to
effect the withdrawal from participation in the Retirement Fund and the
amendment of the CB Plan and for the contingencies outlined in this
Section 6.7(i) and shall deliver to Pinnacle all other documentation relating to
the withdrawal from participation and amendment of the CB Plan.
(j) Subject to and except as otherwise expressly provided in the
provisions of this Section 6.7, the Surviving Corporation agrees to honor in
accordance with their terms all benefits vested as of the Effective Time under
the Pinnacle Benefit Plans or the CB Benefit Plans or under other contracts,
arrangements, commitments, or understandings described in the Pinnacle
Disclosure Schedule and the CB Disclosure Schedule.
(k) Except to the extent otherwise expressly provided in this
Agreement, nothing in this Section 6.7 shall be interpreted as preventing the
Surviving Corporation from amending, modifying or terminating any Pinnacle
Benefit Plans, CB Benefit Plans, or other
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contracts, arrangements, commitments or understandings, in accordance with their
terms and applicable law.
6.8 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
(a) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative,
including, without limitation, any such claim, action, suit, proceeding or
investigation in which any individual who is now, or has been at any time prior
to the date of this Agreement, or who becomes prior to the Effective Time, a
director or officer or employee of CB or any of its Subsidiaries, including any
entity specified in the CB Disclosure Schedule (the "Indemnified Parties"), is,
or is threatened to be, made a party based in whole or in part on, or arising in
whole or in part out of, or pertaining to (i) the fact that he is or was a
director, officer or employee of CB, any of the CB Subsidiaries or any entity
specified in the CB Disclosure Schedule, or any of their respective predecessors
or (ii) this Agreement, the Option Agreements or any of the transactions
contemplated hereby or thereby, whether in any case asserted or arising before
or after the Effective Time, the parties hereto agree to cooperate and use their
best efforts to defend against and respond thereto. It is understood and agreed
that after the Effective Time, Pinnacle shall indemnify and hold harmless, as
and to the fullest extent permitted by law (and, as relates to acts or times
prior to the Effective Time, to the fullest extent permitted by law pertaining
to CB or any of its Subsidiaries at such time, including the provisions of
Section 11 of CB's Certificate of Incorporation), each such Indemnified Party
against any losses, claims, damages, liabilities, costs, expenses (including
reasonable attorney's fees and expenses in advance of the final disposition of
any claim, suit, proceeding or investigation to each Indemnified Party to the
fullest extent permitted by law upon receipt of any undertaking required by
applicable law), judgments, fines and amounts paid in settlement in connection
with any such threatened or actual claim, action, suit, proceeding or
investigation, and in the event of any such threatened or actual claim, action,
suit, proceeding or investigation (whether asserted of arising before or after
the Effective Time), the Indemnified Parties may retain counsel reasonably
satisfactory to them after consultation with Pinnacle; provided, however, that
(A) Pinnacle shall have the right to assume the defense thereof and upon such
assumption Pinnacle shall not be liable to any Indemnified Party for any legal
expenses of other counsel or any other expenses subsequently incurred by any
Indemnified Party in connection with the defense thereof, except that if
Pinnacle elects not to assume such defense or counsel for the Indemnified
Parties reasonably advises the Indemnified Parties that there are issues which
raise conflicts of interest between Pinnacle and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with Pinnacle, and Pinnacle shall pay the reasonable fees and
expenses of such counsel for the Indemnified Parties, (B) Pinnacle shall be
obligated pursuant to this paragraph to pay for only one firm of counsel for all
Indemnified Parties, unless an Indemnified
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Party shall have reasonably concluded, based on the advice of counsel, that in
order to be adequately represented, separate counsel is necessary for such
Indemnified Party, in which case, Pinnacle shall be obligated to pay for such
separate counsel, (C) Pinnacle shall not be liable for any settlement effected
without its prior written consent (which consent shall not be unreasonably
withheld) and (D) Pinnacle shall have no obligation hereunder to any Indemnified
Party when and if a court of competent jurisdiction shall ultimately determine,
and such determination shall have become final and nonappealable, that
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. Any Indemnified Party wishing to claim
Indemnification under this Section 6.8, upon learning of any such claim, action,
suit, proceeding or investigation, shall notify Pinnacle thereof, provided that
the failure to so notify shall not affect the obligations of Pinnacle under this
Section 6.8 except to the extent such failure to notify materially prejudices
Pinnacle. Pinnacle's obligations under this Section 6.8 continue in full force
and effect for a period of six years from the Effective Time (or the period of
the applicable statute of limitations, if longer); provided, however, that all
rights to indemnification in respect of any claim (a "Claim") asserted or made
within such period shall continue until the final disposition of such Claim.
(b) Pinnacle shall use its best efforts to cause the individuals
serving as officers and directors of CB, its Subsidiaries or any entity
specified in the CB Disclosure Schedule immediately prior to the Effective Time
to be covered for a period of six (6) years from the Effective Time (or the
period of the applicable statute of limitations, if longer) by the directors'
and officers' liability insurance policy maintained by CB or any of the CB
Subsidiaries (provided that Pinnacle may substitute therefor policies of the
same or substantially similar coverage and amounts containing terms and
conditions which are not less advantageous in any material respect than such
policy) with respect to acts or omissions occurring prior to the Effective Time
which were committed by such officers and directors in their capacity as such;
provided, however, that in no event shall Pinnacle be required to expend more
than 150% of the current amount expended by CB or any of the CB Subsidiaries
(the "Insurance Amount") to maintain or procure insurance coverage pursuant
hereto; and provided, further, that if Pinnacle is unable to maintain or obtain
the insurance called for by this Section 6.8(b), Pinnacle shall use its best
efforts to obtain as much comparable insurance as available for the Insurance
Amount.
(c) In the event Pinnacle or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Pinnacle
assume the obligations set forth in this Section 6.8.
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(d) The provisions of this Section 6.8 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
6.9 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement (including, without limitation, any merger between a Subsidiary of
Pinnacle and a Subsidiary of CB) or to vest the Surviving Corporation with full
title to all properties, assets, rights, approvals, immunities and franchises of
any of the parties to the Merger, the proper officers and directors of each
party to this Agreement and their respective Subsidiaries shall take all such
necessary action as may be reasonably requested by, and at the sole expense of,
Pinnacle.
6.10 ADVICE OF CHANGES. Pinnacle and CB shall promptly advise the other
party of any change or event having a Material Adverse Effect on it or which it
believes would or would be reasonably likely to cause or constitute a material
breach of any of its representations, warranties or covenants contained herein.
6.11 NEGOTIATIONS WITH OTHER PARTIES. So long as this Agreement remains in
effect and no notice of termination has been given under this Agreement, CB
shall not authorize or knowingly permit any of its representatives, directly or
indirectly, to entertain, solicit or encourage negotiations with any person or
entity or any group of persons or entities (a "Potential Acquiror") concerning
any "Acquisition Proposal" (as hereinafter defined) other than Pinnacle pursuant
to this Agreement. The preceding sentence shall not be construed to prohibit
the Board of Directors of CB from providing, or authorizing or permitting their
respective representatives to provide, to any person making an unsolicited
Acquisition Proposal, any information that is public or published information or
readily ascertainable from such information, or from discussing and considering
any such unsolicited Acquisition Proposal if it is advised in writing by legal
counsel that such actions are advisable under applicable law in order to
discharge their fiduciary duties to stockholders. As used in this Agreement,
"Acquisition Proposal" means any (i) proposal pursuant to which any corporation,
partnership, person or other entity or group, other than Pinnacle, would acquire
or participate in a merger or other business combination involving CB or any of
the CB Bank Subsidiaries, directly or indirectly; (ii) proposal by which any
corporation, partnership, person or other entity or group, other than Pinnacle,
would acquire the right to vote 10% or more of the capital stock of CB or any of
the CB Bank Subsidiaries entitled to vote thereon for the election of directors;
(iii) acquisition of 10% or more of the assets of CB or any of the CB Bank
Subsidiaries, other than in the ordinary course of business; or (iv) acquisition
in excess of 10% of the outstanding capital stock of CB or any of the CB Bank
Subsidiaries, other than as contemplated by this Agreement.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) STOCKHOLDER APPROVALS. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the respective
requisite affirmative votes of the holders of Pinnacle Common Stock and CB
Common Stock entitled to vote thereon.
(b) NASDAQ LISTING. The shares of Pinnacle Common Stock which shall
be issued to the stockholders of CB upon consummation of the Merger shall have
been authorized for trading and reporting on the Nasdaq National Market, subject
to official notice of issuance.
(c) OTHER APPROVALS. All regulatory approvals required to consummate
the transactions contemplated hereby shall have been obtained and shall remain
in full force and effect and all statutory waiting periods in respect thereof
shall have expired (all such approvals and the expiration of all such waiting
periods being referred to herein as the "Requisite Regulatory Approvals").
(d) S-4. The S-4 shall have become effective under the Securities
Act and no stop order suspending the effectiveness of the S-4 shall have been
issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(e) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction
or decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of the
Merger or any of the other transactions contemplated by this Agreement shall be
in effect. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits, materially restricts or makes illegal consummation of the Merger.
(f) FEDERAL TAX OPINION. Pinnacle and CB each shall have received an
opinion of their respective tax counsel, addressed to Pinnacle or CB, as the
case may be, in form and substance reasonably satisfactory to Pinnacle and CB,
dated as of the Effective Time, substantially to the effect that, on the basis
of facts, representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the Effective Time:
(i) The Merger will constitute a tax free reorganization under
Section 368(a)(1)(A) of the Code and Pinnacle and CB will each be a party
to the reorganization;
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(ii) No gain or loss will be recognized by Pinnacle or CB as a
result of the Merger;
(iii) No gain or loss will be recognized by the stockholders of CB
who exchange their CB Common Stock solely for Pinnacle Common Stock
pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in Pinnacle Common Stock);
(iv) The tax basis of the Pinnacle Common Stock received by
stockholders who exchange all of their CB Common Stock solely for Pinnacle
Common Stock in the Merger will be the same as the tax basis of the CB
Common Stock surrendered in exchange therefor (reduced by any amount
allocable to a fractional share interest for which cash is received); and
(v) The holding period of Pinnacle Common Stock received by
stockholders of CB in the Merger will include the period during which the
shares of CB Common Stock surrendered in exchange therefor were held;
provided, such CB Common Stock was held as a capital asset by the holder of
such CB Common Stock at the Effective Time. In rendering such opinion,
counsel may require and rely upon representations contained in certificates
of officers of Pinnacle, CB and others.
(g) POOLING OF INTERESTS. Pinnacle and CB shall each have received a
letter, effective as of the Effective Time, from their respective independent
accountants addressed to Pinnacle or CB, as the case may be, to the effect that
the Merger will qualify for "pooling of interests" accounting treatment.
7.2 CONDITIONS TO OBLIGATION OF PINNACLE. The obligation of Pinnacle to
effect the Merger is also subject to the satisfaction or waiver by Pinnacle at
or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of CB set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except (i) to the extent
such representations and warranties speak as of an earlier date and (ii) for any
changes to the CB Disclosure Schedule that are disclosed by CB to Pinnacle in
the form of an updated CB disclosure schedule delivered to Pinnacle as of the
Closing Date (the "Closing Date CB Disclosure Schedule")) as of the Closing Date
as though made on and as of the Closing Date. Pinnacle shall have received a
certificate signed on behalf of CB by the Chief Executive Officer and the Chief
Financial Officer of CB to the foregoing effect, and to which any Closing Date
CB Disclosure Schedule shall be appended.
(b) PERFORMANCE OF OBLIGATIONS OF CB. CB shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and Pinnacle shall have received a
certificate signed on
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behalf of CB by the Chief Executive Officer and the Chief Financial Officer of
CB to such effect.
(c) ENVIRONMENTAL MATTERS. On or before April 30, 1997, Pinnacle
shall have received, reviewed and approved an assessment report or reports of a
firm or firms of environmental engineers or consultants satisfactory to Pinnacle
concluding, in effect, that there are no present or past conditions relating to
any properties of CB or any of the CB Subsidiaries involving or resulting from a
past or present storage, spill, discharge, leak, emission, injection, escape,
dumping or release of any kind whatsoever of any substance or exposure of any
type of any workplace or to any medium, including, but not limited to, air,
land, surface waters or underground waters, or from any generation,
transportation, treatment, storage or disposal of waste materials, raw materials
or products of any kind or from the storage, use or handling of any hazardous or
toxic materials or other substances.
(d) COMFORT LETTERS. Pinnacle shall have received "comfort" letters
from Crowe Chizek & Company, L.L.P., dated (x) the effective date of the S-4 and
(y) not earlier than five (5) days preceding the Closing Date, in each case
substantially to the effect that: (i) based upon a review (and audit of year-end
statements) of CB's consolidated financial statements dated as of March 31,
1996, September 30, 1996, each subsequent year-end and quarter-end and the most
recent interim month-end consolidated financial statements of CB available prior
to the date of any said letter, nothing has come to their attention that has
caused them to believe that any adjustments would be required to be made to
restate said financial statements in a manner conforming to GAAP; (ii) they are
independent public accountants with respect to CB and the CB Subsidiaries within
the meaning of the Securities Act and the Exchange Act and the applicable
published rules and regulations thereunder; (iii) in their opinion, the audited
consolidated financial statements of CB examined by them and included or
incorporated by reference in the S-4 and the prospectus and reported therein by
them, comply as to form in all material respects with the applicable accounting
requirements of the Exchange Act, the Securities Act and the applicable
published rules and regulations thereunder, as appropriate; (iv) on the basis of
certain procedures and inquiries including a reading of the latest available
unaudited interim consolidated financial statements of CB, inquiries of
officials of CB responsible for financial and accounting matters, and a reading
of the minutes of the Boards of Directors and stockholders of CB and the CB
Subsidiaries (which procedures and inquiries do not constitute an examination
made in accordance with generally accepted auditing standards and would not
necessarily reveal any material changes in the consolidated financial position
or results of operations of CB), nothing came to their attention that caused
them to believe that (A) the unaudited consolidated financial statements of CB
included or incorporated by reference in the S-4 and the prospectus do not
comply as to form in all material respects with the applicable accounting
requirements of the Exchange Act and the Securities Act, as appropriate, or that
the unaudited consolidated financial statements are not in
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conformity with GAAP applied on a basis consistent with that of the audited
consolidated financial statements or that as of the most recent month-end
preceding the Closing Date there has been any material change in the capital
stock of CB, except as a result of the exercise of employee stock options
granted prior to September 30, 1996, or the CB Subsidiaries or any increase in
consolidated long-term debt of CB or the CB Subsidiaries or any reduction in
consolidated stockholders' equity as compared with the amounts of those items
set out in the audited consolidated statement of condition at March 31, 1996 and
with any subsequent unaudited consolidated statement of condition included or
incorporated by reference in the S-4 and the prospectus, except for changes and
the amount of such reduction, if any, derived from CB's accounts and records,
which are described in such letter or are set forth in the S-4 and the
prospectus, or (B) since March 31, 1996 any dividends were paid on the CB Common
Stock except as described in such letter; and (v) in addition to the limited
procedures referred to in clause (iv) above, they have carried out certain
specified procedures with respect to certain accounts or percentages and
financial information which appear in the S-4 and the prospectus and which have
been reasonably specified by Pinnacle, as described in such letter.
(e) LEGAL OPINION. CB shall have delivered to Pinnacle an opinion,
dated the Closing Date, of counsel for CB, satisfactory to Pinnacle and its
counsel, to the effect set forth on Exhibit F. In rendering their opinion,
counsel to CB may rely on certificates of officers of CB, opinions of other
counsel, the authenticity of all signatures on documents believed to be genuine
and such other evidence as they may deem necessary or desirable.
(f) FAIRNESS OPINION. Pinnacle shall have received the favorable
opinion from PL Capital, L.L.C. or other investment banking advisory firm
satisfactory to Pinnacle in connection with the deliberations of its Board of
Directors approving this Agreement and confirmed at or about the time the S-4 is
declared effective and the Joint Proxy Statement is distributed that
consummation of the Merger transaction contemplated by this Agreement upon the
terms and conditions provided in this Agreement is fair to the stockholders of
Pinnacle from a financial point of view.
(g) NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred since December 31, 1996 which has, or is likely to have, a Materially
Adverse Effect on CB or upon the right of CB or any of the CB Subsidiaries to
conduct, or the continuing successful operation of, any material or significant
part of their businesses as presently conducted, including, without limitation,
the Mortgage Loan Reverse Repurchase Program operated by CB Bank.
(h) NET WORTH. The difference between the total consolidated assets
of CB and the total consolidated liabilities of CB (the "Net Worth") as of the
last day of the calendar month immediately preceding the Closing Date (the
"Determination Date"),
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as determined in accordance with generally accepted accounting principles
consistently applied shall be not less than the Net Worth shown on the
December 31, 1996 consolidated balance sheet of CB, after taking into account
any and all dividends paid or declared or other distributions made, but
excluding any and all costs and expenses incurred by CB with respect to the
Merger transaction through and including the Closing Date. In calculating said
Net Worth it shall be assumed that the value of CB's securities held for sale
is, as of the Determination Date, equivalent to its value on December 31, 1996.
Purchaser shall have received a certificate to said effect signed by appropriate
officers of CB and by Crowe Chizek & Company, L.L.P.
(i) EMPLOYMENT MATTERS. The Acknowledgments described in Section
6.7(b) shall have been executed and delivered by the respective parties
thereto as provided in Section 6.7 of this Agreement.
7.3 CONDITIONS TO OBLIGATION OF CB. The obligation of CB to effect the
Merger is also subject to the satisfaction or waiver by CB at or prior to the
Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Pinnacle set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and (except (i) to the
extent such representations and warranties speak as of an earlier date and
(ii) for any changes to the Pinnacle Disclosure Schedule that are disclosed by
Pinnacle to CB in the form of an updated Pinnacle disclosure schedule delivered
to CB as of the Closing Date, including copies of updated disclosure schedules
of Pinnacle and IFC delivered with respect to the IFC Merger Agreement (the
"Closing Date Pinnacle Disclosure Schedule")) as of the Closing Date as though
made on and as of the Closing Date. CB shall have received a certificate signed
on behalf of Pinnacle by the Chief Executive Officer and the Chief Financial
Officer of Pinnacle to the foregoing effect, and to which any Closing Date
Pinnacle Disclosure Schedule shall be appended.
(b) PERFORMANCE OF OBLIGATIONS OF PINNACLE. Pinnacle shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and CB shall have
received a certificate signed on behalf of Pinnacle by the Chief Executive
Officer and the Chief Financial Officer of Pinnacle to such effect.
(c) COMFORT LETTERS. CB shall have received "comfort" letters from
KPMG Peat Marwick, L.L.P., dated (x) the effective date of the S-4 and (y) not
earlier than five (5) days preceding the Closing Date, in each case
substantially to the effect that: (i) based upon a review (and audit of year-end
statements) of Pinnacle's consolidated financial statements dated as of
December 31, 1995, September 30, 1996, each subsequent year-end and quarter-end
and the most recent interim month-end consolidated financial statements of
Pinnacle available prior to the date of any
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said letter, nothing has come to their attention that has caused them to believe
that any adjustments would be required to be made to restate said financial
statements in a manner conforming to GAAP, other than such adjustments, if any,
as are specifically noted and disclosed, none of which adjustments shall be
materially adverse; (ii) they are independent public accountants with respect to
Pinnacle and the Pinnacle Subsidiaries within the meaning of the Securities Act
and the Exchange Act and the applicable published rules and regulations
thereunder; (iii) in their opinion, the audited consolidated financial
statements of Pinnacle examined by them and included or incorporated by
reference in the S-4 and the prospectus and reported therein by them, comply as
to form in all material respects with the applicable accounting requirements of
the Exchange Act, the Securities Act and the applicable published rules and
regulations thereunder, as appropriate; (iv) on the basis of certain procedures
and inquiries including a reading of the latest available unaudited interim
consolidated financial statements of Pinnacle, inquiries of officials of
Pinnacle responsible for financial and accounting matters, and a reading of the
minutes of the Boards of Directors and stockholders of Pinnacle and the Pinnacle
Subsidiaries (which procedures and inquiries do not constitute an examination
made in accordance with generally accepted auditing standards and would not
necessarily reveal material adverse changes in the consolidated financial
position or results of operations of Pinnacle), nothing came to their attention
that caused them to believe that the unaudited consolidated financial statements
of Pinnacle included or incorporated by reference in the S-4 and the prospectus
do not comply as to form in all material respects with the applicable accounting
requirements of the Exchange Act and the Securities Act, as appropriate, or that
the unaudited consolidated financial statements are not in conformity with GAAP
applied on a basis consistent with that of the audited consolidated financial
statements or that as of the most recent month-end preceding the Closing Date
there has been any material change in the capital stock of Pinnacle, except as a
result of the exercise of employee stock options granted prior to September 30,
1996, or the Pinnacle Subsidiaries or any increase in consolidated long-term
debt of Pinnacle or the Pinnacle Subsidiaries or any reduction in consolidated
stockholders' equity as compared with the amounts of those items set out in the
audited consolidated statement of condition at December 31, 1995 and with any
subsequent unaudited consolidated statement of condition included or
incorporated by reference in the S-4 and the prospectus, except for changes and
the amount of such reduction, if any, derived from Pinnacle's accounts and
records, which are described in such letter or are set forth in the S-4 and the
prospectus; and (v) in addition to the limited procedures referred to in clause
(iv) above, they have carried out certain specified procedures with respect to
certain accounts or percentages and financial information which appear in the S-
4 and the prospectus and which have been reasonably specified by CB, as
described in such letter.
(d) LEGAL OPINION. Pinnacle shall have delivered to CB an opinion,
dated the Closing Date, of counsel for Pinnacle,
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satisfactory to CB and its counsel, to the effect set forth on Exhibit G. In
rendering their opinion, counsel to Pinnacle may rely on certificates of
officers of Pinnacle, opinions of other counsel, the authenticity of all
signatures on documents believed to be genuine and such other evidence as they
may deem necessary or desirable.
(e) FAIRNESS OPINION. CB shall have received the favorable opinion
from Charles Webb & Company in connection with the deliberations of its Board of
Directors approving this Agreement and confirmed at or about the time the S-4 is
declared effective and the Joint Proxy Statement is distributed that
consummation of the Merger transaction contemplated by this Agreement upon the
terms and conditions provided in this Agreement is fair to the stockholders of
CB from a financial point of view.
(f) NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred since December 31, 1996 which has, or is likely to have, a Materially
Adverse Effect on Pinnacle or upon the right of Pinnacle or any of the Pinnacle
Subsidiaries to conduct, or the continuing successful operation of, any material
or significant part of their businesses as presently conducted.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of Pinnacle or CB:
(a) by mutual consent of Pinnacle and CB in a written instrument, if
the Board of Directors of each so determines by a vote of a majority of the
members of its entire Board;
(b) by either the Board of Directors of Pinnacle or the Board of
Directors of CB if any Governmental Entity which must grant a Requisite
Regulatory Approval has denied approval of the Merger and such denial has become
final and nonappealable or any Governmental Entity of competent jurisdiction
shall have issued a final nonappealable order permanently enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this Agreement;
(c) by either the Board of Directors of Pinnacle or the Board of
Directors of CB if the Merger shall not have been consummated on or before the
first anniversary of the date of this Agreement, unless the failure of the
Closing (as defined in Section 9.1) to occur by such date shall be due to the
failure of the party seeking to terminate this Agreement to perform or observe
the covenants and agreements of such party set forth herein;
(d) by either the Board of Directors of Pinnacle or the Board of
Directors of CB (provided that the terminating party is
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not then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any of
the covenants or agreements or any of the representations or warranties set
forth in this Agreement on the part of the other party, which breach is not
cured within forty-five (45) days following written notice to the party
committing such breach, or which breach, by its nature or timing, cannot be
cured prior to the Closing Date;
(e) by either Pinnacle or CB if any approval of the stockholders of
Pinnacle or CB required for the consummation of the Merger shall not have been
obtained by reason of the failure to obtain the required vote at a duly held
meeting of stockholders or at any adjournment or postponement thereof;
(f) by either Pinnacle or CB if any of the conditions specified by
Article VII to the obligation of the terminating party have not been satisfied
on the Closing Date (provided that the failure of satisfaction of any said
condition shall not have been caused by the material breach of the terminating
party);
(g) by Pinnacle if the Closing Date CB Disclosure Schedule discloses
any change from the CB Disclosure Schedule which has, or is likely to have, a
Material Adverse Effect on CB or any of the CB Subsidiaries; or by CB if the
Closing Date Pinnacle Disclosure Schedule (including copies of updated
disclosure schedules of Pinnacle and IFC delivered with respect to the IFC
Merger Agreement) discloses any change from the Pinnacle Disclosure Schedule
which has, or is likely to have, a Material Adverse Effect on Pinnacle or any of
the Pinnacle Subsidiaries; or
(h) by CB if prior to the Closing Date there becomes a reasonable
likelihood that the tax free reorganization treatment for federal income tax
purposes accorded to the merger of Maco Bancorp, Inc. with and into Pinnacle
effective December 1, 1995, will not be sustained.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Pinnacle or CB as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, and none of Pinnacle, CB, any of their
respective Subsidiaries or any of the officers or directors of any of them shall
have any liability of any nature whatsoever hereunder, or in connection with the
transactions contemplated hereby, except that (i) Sections 6.2(b), 8.2, 9.2 and
9.3, shall survive any termination of this Agreement, and (ii) notwithstanding
anything to the contrary contained in this Agreement, neither Pinnacle nor CB
shall be relieved or released from any liabilities or damages arising out of its
willful breach of any provision of this Agreement.
8.3 AMENDMENT. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of Pinnacle
or CB;
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provided, however, that after any approval of the transactions contemplated by
this Agreement by the respective stockholders of Pinnacle or CB, there may not
be, without further approval of such stockholders, any amendment of this
Agreement which changes the amount or the form of the consideration to be
delivered to the holders of CB Common Stock hereunder other than as contemplated
by this Agreement. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions contained herein; provided, however,
that after any approval of the transactions contemplated by this Agreement by
the respective stockholders of Pinnacle or CB, there may not be, without further
approval of such stockholders, any extension or waiver of this Agreement or any
portion thereof which reduces the amount or changes the form of the
consideration to be delivered to the holders of CB Common Stock hereunder other
than as contemplated by this Agreement. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension or waiver
or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
ARTICLE IX
GENERAL PROVISIONS
9.1 CLOSING. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") will take place at 10:00 a.m. on a date
and at a place to be specified by the parties, which shall be no later than five
(5) business days after the satisfaction or waiver (subject to applicable law)
of the latest to occur of the conditions set forth in Article VII hereof, unless
extended by mutual agreement of the parties (the "Closing Date").
9.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement (other than pursuant to
the CB Option Agreement, which shall terminate in accordance with its terms)
shall survive the Effective Time, except for those covenants and agreements
contained herein and therein which by their terms apply in whole or in part
after the Effective Time.
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9.3 EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expense; provided, however, that two-thirds of the costs and
expenses of printing and mailing the Joint Proxy Statement in connection with
the Merger shall be borne by Pinnacle and the balance thereof, up to a maximum
amount not to exceed $25,000, shall be borne by CB.
9.4 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Pinnacle to:
Pinnacle Financial Services, Inc.
830 Pleasant Street
St. Joseph, Michigan 49085
Attention: Richard L. Schanze, Chairman and CEO
Fax: (616) 853-5567
with copies to:
Miller, Canfield, Paddock and Stone, P.L.C.
1400 N. Woodward Ave., Suite 100
Bloomfield Hills, Michigan 48304
Attention: J. Kevin Trimmer, Esq.
Fax: (810) 258-3036
and
(b) if to CB, to:
CB Bancorp, Inc.
126 East Fourth Street
Michigan City, Indiana 46360
Attention: Joseph F. Heffernan, Chairman, President
and CEO
Fax: (202) 966-9409
with copies to:
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Attention: Lori M. Beresford, Esq.
Fax: (202) 966-9409
9.5 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained
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in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". No provision of this
Agreement shall be construed to require Pinnacle, CB or any of their respective
Subsidiaries or affiliates to take any action which would violate any applicable
law, rule or regulation.
9.6 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
9.7 ENTIRE AGREEMENT. This Agreement (including the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.
9.8 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without regard to any
applicable conflicts of law.
9.9 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
9.10 PUBLICITY. Except as otherwise required by applicable law or the
rules of NASDAQ, neither Pinnacle nor CB shall, or shall permit any of its
Subsidiaries to, issue or cause the publication of any press release or other
public announcement with respect to, or otherwise make any public statement
concerning, the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld.
9.11 ASSIGNMENT; THIRD PARTY BENEFICIARIES. Neither this Agreement nor any
of the rights, interests or obligations shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns. Except as otherwise specifically
provided in Section 6.8, this Agreement (including the documents and instruments
referred to herein) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
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9.12 OTHER TRANSACTIONS. Prior to the date hereof, CB has been provided
with copies of, and CB has reviewed, the IFC Merger Agreement (including the
disclosure schedules of Pinnacle and IFC referenced therein), the Pinnacle/IFC
Stock Option Agreements and the Branch Office Swap Agreements. The entering
into and performance of the IFC Merger Agreement, the Pinnacle/IFC Stock Option
Agreements and/or the Branch Office Swap Agreements, and consummation of the
transactions contemplated thereby, by Pinnacle are hereby ratified, approved and
authorized by CB, and are and shall be deemed to be expressly permitted for all
purposes under this Agreement. Immediately after the execution of this
Agreement, Pinnacle and CB shall execute and deliver the CB Option Agreement.
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IN WITNESS WHEREOF, Pinnacle and CB have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
PINNACLE FINANCIAL SERVICES, INC.
By: _________________________________
Richard L. Schanze
Chairman and
Chief Executive Officer
CB BANCORP, INC.
By: _________________________________
Joseph F. Heffernan
Chairman, President and
Chief Executive Officer
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SCHEDULE OF EXHIBITS
Exhibit A - CB Option Agreement
Exhibit B - Bank Merger Agreement
Exhibit C - Affiliate Letter Agreement
Exhibit D - Forms of Acknowledgments (Exhibits D-1, D-2, D-3, D-4, D-5
and D-6)
Exhibit E - Forms of Severance Agreements (Exhibits E-1, E-2, E-3
and E-4)
Exhibit F - Opinion of CB Counsel
Exhibit G - Opinion of Pinnacle Counsel
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated as of March 1, 1997, between CB BANCORP,
INC., a Delaware corporation ("Issuer"), and PINNACLE FINANCIAL SERVICES, INC.,
a Michigan corporation ("Grantee").
WITNESSETH:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), which agreement has been
executed by the parties hereto immediately prior to this Stock Option Agreement
(the "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement and
in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined):
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to 115,037
fully paid and nonassessable shares of Issuer's Common Stock, par value $ 0.01
per share ("Common Stock"), at a price of $28.50 per share (the "Option Price");
provided, however, that in no event shall the number of shares of Common Stock
for which this Option is exercisable exceed 9.9% of the Issuer's issued and
outstanding shares of Common Stock without giving effect to any shares subject
to or issued pursuant to the Option. The number of shares of Common Stock that
may be received upon the exercise of the Option and the Option Price are subject
to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are
either (i) issued or otherwise become outstanding after the date of this
Agreement (other than pursuant to this Agreement) or (ii) redeemed, repurchased,
retired or otherwise cease to be outstanding after the date of the Agreement,
the number of shares of Common Stock subject to the Option shall be increased or
decreased, as appropriate, so that, after an event described in either clause
(i) or (ii), such number equals 9.9% of the number of shares of Common Stock
then issued and outstanding without giving effect to any shares subject or
issued pursuant to the Option. Nothing contained in this Section 1(b) or
elsewhere in this Agreement shall be deemed to authorize Issuer or Grantee to
breach any provision of the Merger Agreement.
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2. (a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, and from time to time, if, but only if, both an Initial
Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined), provided that the Holder shall have
sent the written notice of such exercise (as provided in subsection (e) of this
Section 2) within 60 days following such Subsequent Triggering Event. Each of
the following shall be an Exercise Termination Event: (i) the Effective Time
(as defined in the Merger Agreement) of the Merger; (ii) termination of the
Merger Agreement in accordance with the provisions thereof if such termination
occurs prior to the occurrence of an Initial Triggering Event, except a
termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement
(unless the breach by Issuer giving rise to such right of termination is non-
volitional); or (iii) the passage of 12 months after termination of the Merger
Agreement if such termination follows the occurrence of an Initial Triggering
Event or is a termination by Grantee pursuant to Section 8.1(d) of the Merger
Agreement (unless the breach by Issuer giving rise to such right of termination
is non-volitional) (provided that if an Initial Triggering Event continues or
occurs beyond such termination and prior to the passage of such 12-month period,
the Exercise Termination Event shall be 12 months from the expiration of the
Last Triggering Event but in no event more than 18 months after such
termination). The "Last Triggering Event" shall mean the last Initial
Triggering Event to expire. The term "Holder" shall mean the holder or holders
of the Option.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer
Subsidiary"), without having received Grantee's prior written consent,
shall have entered into an agreement to engage in an Acquisition
Transaction (as hereinafter defined) with any person (the term "person" for
purposes of this Agreement having the meaning assigned thereto in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules and regulations thereunder) other than
Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the
Board of Directors of Issuer shall have recommended that the stockholders
of Issuer approve or accept any Acquisition Transaction. For purposes of
this Agreement, "Acquisition Transaction" shall mean (w) a merger or
consolidation, or any similar transaction, involving Issuer or any
Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC")) of
Issuer, (x) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (y) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the
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voting power of Issuer, or (z) any substantially similar transaction;
provided, however, that in no event shall any merger, consolidation,
purchase or similar transaction involving only the Issuer and one or more
of its Subsidiaries or involving only any two or more of such Subsidiaries,
be deemed to be an Acquisition Transaction, provided that any such
transaction is not entered into in violation of the terms of the Merger
Agreement; and provided, further, that any transaction described in this
sentence that is expressly permitted by the Merger Agreement shall not be
deemed to be an Acquisition Transaction;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed or publicly announced its intention to authorize, recommend or
propose, to engage in an Acquisition Transaction with any person other than
Grantee or a Grantee Subsidiary, or the Board of Directors of Issuer shall
have publicly withdrawn or modified, or publicly announced its interest to
withdraw or modify, in any manner adverse to Grantee, its recommendation
that the stockholders of Issuer approve the transactions contemplated by
the Merger Agreement;
(iii) Any person other than Grantee, any Grantee Subsidiary or any
Issuer Subsidiary acting in a fiduciary capacity in the ordinary course of
its business (and other than any person who (a) as of the date hereof
beneficially owns 10% or more of the outstanding shares of Common Stock and
(b) would be eligible to use Schedule 13G but for the fact that such person
owns 10% or more of the outstanding shares of Common Stock) shall have
acquired beneficial ownership or the right to acquire beneficial ownership
of 10% or more of the outstanding shares of Common Stock (the term
"beneficial ownership" for purposes of this Agreement having the meaning
assigned thereto in Section 13(d) of the 1934 Act, and the rules and
regulations thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary
shall have made a bona fide proposal to Issuer or its stockholders by
public announcement or written communication that is or becomes the subject
of public disclosure to engage in an Acquisition Transaction;
(v) After a bona fide proposal by public announcement or written
communication is made by a third party to Issuer or its stockholders to
engage in an Acquisition Transaction, Issuer shall have breached any
covenant or obligation contained in the Merger Agreement and such breach
(x) would entitle Grantee to terminate the Merger Agreement and (y) shall
not have been cured prior to the Notice Date (as defined below); or
(vi) Any person other than Grantee or any Grantee Subsidiary,
other than in connection with a transaction to
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which Grantee has given its prior written consent, shall have filed an
application or notice with the Federal Reserve Board, the Office of Thrift
Supervision (the "OTS"), or other federal or state bank regulatory
authority, which application or notice has been accepted for processing,
for approval to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 20%
or more of the then outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (b) of this Section 2, except that the
percentage referred to in clause (y) shall be 20%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Initial Triggering Event or Subsequent Triggering Event of which it has
notice (together, a "Triggering Event"), it being understood that the giving of
such notice by Issuer shall not be a condition to the right of the Holder to
exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
notification to or approval of the Federal Reserve Board, the OTS or any other
regulatory agency is required in connection with such purchase, the Holder shall
promptly file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise would run
pursuant to this sentence shall run instead from the date on which any required
notification periods have expired or been terminated or such approvals have been
obtained and any requisite waiting period or periods shall have passed. Any
exercise of the Option shall be deemed to occur on the Notice Date relating
thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this
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Section 2, Issuer shall deliver to the Holder a certificate or certificates
representing the number of shares of Common Stock purchased by the Holder and,
if the Option should be exercised in part only, a new Option evidencing the
rights of the Holder thereof to purchase the balance of the shares purchasable
hereunder, and the Holder shall deliver to Issuer a copy of this Agreement and a
letter agreeing that the Holder will not offer to sell or otherwise dispose of
such shares in violation of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing hereunder
may be endorsed with a restrictive legend that shall read substantially as
follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on
file at the principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a written
request therefor."
It is understood and agreed that: (i) the reference to the
resale restrictions of the Securities Act of 1933, as amended (the "1933 Act"),
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the Holder shall have delivered to Issuer a copy of a
letter from the staff of the SEC, or an opinion of counsel, in form and
substance reasonably satisfactory to Issuer, to the effect that such legend is
not required for purposes of the 1933 Act; (ii) the reference to the provisions
to this Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference; and (iii) the
legend shall be removed in its entirety if the conditions in the preceding
clauses (i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
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(j) Notwithstanding anything to the contrary contained in this
Agreement, the Issuer shall not be obligated to issue shares of Common Stock
upon the exercise of the Option (i) in the absence of any required governmental
or regulatory approval or consent necessary for the Issuer to issue shares or
for the Grantee to exercise the Option, (ii) in the event and for so long as the
Grantee is in material breach of its representations, warranties, covenants or
obligations under the Merger Agreement (unless excused by reason of the material
breach of the Issuer of any of its representations, warranties, covenants or
obligations under the Merger Agreement), or (iii) so long as any injunction or
decree or ruling issued by a court of competent jurisdiction is in effect which
prohibits the sale or delivery of the Common Stock.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. Section 18a and regulations
promulgated thereunder and (y) in the event, under the Bank Holding Company Act
of 1956, as amended (the "BHCA"), the Change in Bank Control Act of 1978, as
amended, the Home Owners' Loan Act, as amended, the Change in Savings and Loan
Control Act of 1978, as amended, or any other federal or state banking or
savings and loan law, prior approval of or notice to the Federal Reserve Board,
the OTS or to any other federal or state regulatory authority is necessary
before the Option may be exercised, cooperating fully with the Holder in
preparing such applications or notices and providing such information to the
Federal Reserve Board, the OTS or such other federal or state regulatory
authority as they may require) in order to permit the Holder to exercise the
Option and Issuer duly and effectively to issue shares of Common Stock pursuant
hereto; and (iv) promptly to take all action provided herein to protect the
rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Stock Option
Agreements and related Options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
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satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise of
the Option and the Option Price shall be subject to adjustment from time to time
as provided in this Section 5. In the event of any change in, or distributions
in respect of, the Common Stock by reason of stock dividends, split-ups,
mergers, recapitalizations, combinations, subdivisions, conversions, exchanges
of shares, distributions on or in respect of the Common Stock that would be
prohibited under the terms of the Merger Agreement, or the like, the type and
number of shares of Common Stock purchasable upon exercise hereof and the Option
Price shall be appropriately adjusted in such manner as shall fully preserve the
economic benefits provided hereunder and proper provision shall be made in any
agreement governing any such transaction to provide for such proper adjustment
and the full satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event that occurs prior
to an Exercise Termination Event, Issuer shall, at the request of Grantee
delivered within 90 days of such Subsequent Triggering Event (whether on its own
behalf or on behalf of any subsequent holder of this Option (or part thereof) or
any of the shares of Common Stock issued pursuant hereto), promptly prepare,
file and keep current a shelf registration statement under the 1933 Act covering
this Option and any shares issued and issuable pursuant to this Option and shall
use its reasonable best efforts to cause such registration statement to become
effective and remain current in order to permit the sale or other disposition of
this Option and any shares of Common Stock issued upon total or partial exercise
of this Option ("Option Shares") in accordance with any plan of disposition
requested by Grantee. Issuer will use its reasonable best efforts to cause such
registration statement first to become effective and then to remain effective
for such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be reasonably
necessary to effect such sales or other dispositions. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of the Option or Option
Shares as provided above, Issuer is in registration with respect to an
underwritten public offering of shares of Common Stock, and if in the good faith
judgment of the managing underwriter or managing underwriters, or, if none, the
sole underwriter or underwriters, of such offering the inclusion of the Holder's
Option or Option Shares would interfere
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with the successful marketing of the shares of Common Stock offered by Issuer,
the number of Option Shares otherwise to be covered in the registration
statement contemplated hereby may be reduced; and provided, however, that after
any such required reduction the number of Option Shares to be included in such
offering for the account of the Holder shall constitute at least 25% of the
total number of shares to be sold by the Holder and Issuer in the aggregate; and
provided further, however, that if such reduction occurs, then the Issuer shall
file a registration statement for the balance as promptly as practical and no
reduction shall thereafter occur. Each such Holder shall provide all
information reasonably requested by Issuer for inclusion in any registration
statement to be filed hereunder. If requested by any such Holder in connection
with such registration, Issuer shall become a party to any underwriting
agreement relating to the sale of such shares, but only to the extent of
obligating itself in respect of representations, warranties, indemnities and
other agreements customarily included in secondary offering underwriting
agreements for the Issuer. Upon receiving any request under this Section 6 from
any Holder, Issuer agrees to send a copy thereof to any other person known to
Issuer to be entitled to registration rights under this Section 6, in each case
by promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies. Notwithstanding anything to the
contrary contained herein, in no event shall Issuer be obligated to effect more
than two registrations pursuant to this Section 6 by reason of the fact that
there shall be more than one Grantee as a result of any assignment or division
of this Agreement.
7. (a) Immediately prior to the occurrence of a Repurchase Event (as
defined below), (i) following a request of the Holder, delivered prior to an
Exercise Termination Event, Issuer (or any successor thereto) shall repurchase
the Option from the Holder at a price (the "Option Repurchase Price") equal to
the amount by which (A) the Market/Offer Price (as defined below) exceeds (B)
the Option Price, multiplied by the number of shares for which this Option may
then be exercised and (ii) at the request of the owner of Option Shares from
time to time (the "Owner"), delivered within 90 days of such occurrence (or such
later period as provided in Section 10), Issuer shall repurchase such number of
the Option Shares from the Owner as the Owner shall designate at a price (the
"Option Share Repurchase Price") equal to the Market/Offer Price multiplied by
the number of Option Shares so designated. The term "Market/Offer Price" shall
mean the highest of (i) the price per share of Common Stock at which a tender
offer or exchange offer therefor has been made, (ii) the price per share of
Common Stock to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the
three-month period immediately preceding the date the Holder gives notice of the
required repurchase of this Option or the Owner gives notice of the required
repurchase of Option Shares, as the case may be, or (iv) in the event of a sale
of all or a substantial portion of Issuer's assets, the sum of the price paid in
such sale for such assets and the current market value of the remaining assets
of Issuer as determined by a nationally recognized
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investment banking firm mutually selected by the Holder or the Owner, as the
case may be, on the one hand, and the Issuer, on the other, divided by the
number of shares of Common Stock of Issuer outstanding at the time of such sale.
In determining the Market/Offer Price, the value of consideration other than
cash shall be determined by a nationally recognized investment banking firm
mutually selected by the Holder or Owner, as the case may be, on the one hand,
and the Issuer, on the other.
(b) The Holder and the Owner, as the case may be, may exercise its
right to require Issuer to repurchase the Option and any Option Shares pursuant
to this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that the Holder
or the Owner, as the case may be, elects to require Issuer to repurchase this
Option and/or the Option Shares in accordance with the provisions of this
Section 7. Within the latter to occur of (x) five business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver
or cause to be delivered to the Holder the Option Repurchase Price and/or to the
Owner the Option Share Repurchase Price therefor or the portion thereof that
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify the Holder and/or the Owner and thereafter deliver
or cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering to the Holder and/or the
Owner, as appropriate, the Option Repurchase Price and the Option Share
Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its
best efforts to obtain all required regulatory and legal approvals and to file
any required notices as promptly as practicable in order to accomplish such
repurchase), the Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder
and/or the Owner, as appropriate, that portion of the Option Repurchase Price or
the Option Share Repurchase Price that Issuer is not prohibited from delivering;
and (ii) deliver, as appropriate, either (A) to the Holder, a new Stock Option
Agreement evidencing the right of the Holder to purchase that number of shares
of Common Stock obtained by multiplying the number of shares of Common Stock for
which the surrendered Stock Option Agreement was exercisable at the time of
delivery of the
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notice of repurchase by a fraction, the numerator of which is the Option
Repurchase Price less the portion thereof theretofore delivered to the Holder
and the denominator of which is the Option Repurchase Price, or (B) to the
Owner, a certificate for the Option Shares it is then so prohibited from
repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be
deemed to have occurred (i) upon the consummation of any merger, consolidation
or similar transaction involving Issuer or any purchase, lease or other
acquisition of all or a substantial portion of the assets of Issuer, other than
any such transaction which would not constitute an Acquisition Transaction
pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition
by any person of beneficial ownership of 50% or more of the then outstanding
shares of Common Stock, provided that no such event shall constitute a
Repurchase Event unless a Subsequent Triggering Event shall have occurred prior
to an Exercise Termination Event. The parties hereto agree that Issuer's
obligations to repurchase the Option or Option Shares under this Section 7 shall
not terminate upon the occurrence of an Exercise Termination Event unless no
Subsequent Triggering Event shall have occurred prior to the occurrence of an
Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of the Holder, of either (x) the Acquiring Corporation
(as hereinafter defined) or (y) any person that controls the Acquiring
Corporation.
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, and (iii) the transferee of all or substantially all of
Issuer's assets.
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(2) "Substitute Common Stock" shall mean the common stock
issued by the issuer of the Substitute Option upon exercise of the
Substitute Option.
(3) "Assigned Value" shall mean the Market/Offer Price, as
defined in Section 7.
(4) "Average Price" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher than
the closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person, as
the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided, that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to the Holder. The issuer of the Substitute Option
shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement, which shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value multiplied
by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the number of shares of Substitute Common Stock
for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 9.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than 9.9%
of the shares of Substitute Common Stock outstanding prior to exercise but for
this clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of (i) the
value of the Substitute Option without giving effect to the limitation in this
clause (e) over (ii) the value of the Substitute Option after giving effect to
the limitation in this clause (e). This difference in value shall be determined
by a nationally recognized investment banking firm selected by the Holder or the
Owner, as the case may be, and reasonably acceptable to the Acquiring
Corporation.
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(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "Substitute
Option Repurchase Price") equal to (x) the amount by which (i) the Highest
Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the
Substitute Option, multiplied by the number of shares of Substitute Common Stock
for which the Substitute Option may then be exercised plus (y) Grantee's
reasonable out-of-pocket expenses (to the extent not previously reimbursed), and
at the request of the owner (the "Substitute Share Owner") of shares of
Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer
shall repurchase the Substitute Shares at a price (the "Substitute Share
Repurchase Price") equal to (x) the Highest Closing Price multiplied by the
number of Substitute Shares so designated plus (y) Grantee's reasonable Out-of-
Pocket Expenses (to the extent not previously reimbursed). The term "Highest
Closing Price" shall mean the highest closing price for shares of Substitute
Common Stock within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as
the case may be, may exercise its respective right to require the Substitute
Option Issuer to repurchase the Substitute Option and the Substitute Shares
pursuant to this Section 9 by surrendering for such purpose to the Substitute
Option Issuer, at its principal office, the agreement for such Substitute Option
(or, in the absence of such an agreement, a copy of this Agreement) and
certificates for Substitute Shares accompanied by a written notice or notices
stating that the Substitute Option Holder or the Substitute Share Owner, as the
case may be, elects to require the Substitute Option Issuer to repurchase the
Substitute Option and/or the Substitute Shares in accordance with the provisions
of this Section 9. As promptly as practicable, and in any event within five
business days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that the Substitute Option Issuer is prohibited
under applicable law or regulation from repurchasing the Substitute Option
and/or the Substitute Shares in part or in full, the Substitute Option Issuer
following a request for repurchase
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pursuant to this Section 9 shall immediately so notify the Substitute Option
Holder and/or the Substitute Share Owner and thereafter deliver or cause to be
delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute Share
Repurchase Price, respectively, which it is no longer prohibited from
delivering, within five business days after the date on which the Substitute
Option Issuer is no longer so prohibited; provided, however, that if the
Substitute Option Issuer is at any time after delivery of a notice of repurchase
pursuant to subsection (b) of this Section 9 prohibited under applicable law or
regulation from delivering to the Substitute Option Holder and/or the Substitute
Share Owner, as appropriate, the Substitute Option Repurchase Price and the
Substitute Share Repurchase Price, respectively, in full (and the Substitute
Option Issuer shall use its best efforts to receive all required regulatory and
legal approvals as promptly as practicable in order to accomplish such
repurchase), the Substitute Option Holder or Substitute Share Owner may revoke
its notice of repurchase of the Substitute Option or the Substitute Shares
either in whole or to the extent of the prohibition, whereupon, in the latter
case, the Substitute Option Issuer shall promptly (i) deliver to the Substitute
Option Holder or Substitute Share Owner, as appropriate, that portion of the
Substitute Option Repurchase Price or the Substitute Share Repurchase Price that
the Substitute Option Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) to the Substitute Option Holder, a new
Substitute Option evidencing the right of the Substitute Option Holder to
purchase that number of shares of the Substitute Common Stock obtained by
multiplying the number of shares of the Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of the
notice of repurchase by a fraction, the numerator of which is the Substitute
Option Repurchase Price less the portion thereof theretofore delivered to the
Substitute Option Holder and the denominator of which is the Substitute Option
Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the
Substitute Common Shares it is then so prohibited from repurchasing.
10. The 90-day period for exercise of certain rights under Sections 2, 6,
7 and 13 shall be extended: (i) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights, and for the expiration of
all statutory waiting periods; and (ii) to the extent necessary to avoid
liability under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to
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<PAGE>
consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. Neither of the parties hereto may assign any of its rights or
obligations under this Option Agreement or the Option created hereunder to any
other person, without the express written consent of the other party, except
that in the event a Subsequent Triggering Event shall have occurred prior to an
Exercise Termination Event, Grantee, subject to the express provisions hereof,
may assign in whole or in part its rights and obligations hereunder within 90
days following such Subsequent Triggering Event (or such later period as
provided in Section 10); provided, however, that until the date 15 days
following the date on which the Federal Reserve Board and/or the OTS approves an
application by Grantee if required under applicable law to acquire the shares of
Common Stock subject to the Option, Grantee may not assign its rights under the
Option except in (i) a widely dispersed public distribution, (ii) a private
placement in which no one party acquires the right to purchase in excess of 2%
of the voting shares of Issuer, (iii) an assignment to a single party (e.g., a
broker or investment banker) for the purpose of conducting a widely dispersed
public distribution on Grantee's behalf, or (iv) any other manner approved by
the Federal Reserve Board or the OTS, as applicable.
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<PAGE>
14. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to cause the
shares of Common Stock issuable hereunder to be approved for trading and
reporting on the Nasdaq National Market, upon official notice of issuance and
applying to the Federal Reserve Board and/or the OTS if required under
applicable law for approval to acquire the shares issuable hereunder.
15. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
16. If any term, provision, covenant or restriction contained in the
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
17. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
18. This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
19. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
20. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
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<PAGE>
21. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors except as
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided herein.
22. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
CB BANCORP, INC.
By: _________________________________________
Joseph F. Heffernan
Chairman, President and
Chief Executive Officer
PINNACLE FINANCIAL SERVICES, INC.
By: _________________________________________
Richard L. Schanze
Chairman and Chief Executive Officer
A-17
<PAGE>
EXHIBIT B
AGREEMENT AND PLAN OF MERGER AND CONSOLIDATION
COMMUNITY BANK WITH AND INTO
PINNACLE BANK
UNDER THE CHARTER OF PINNACLE BANK
THIS AGREEMENT AND PLAN OF MERGER AND CONSOLIDATION (the "Plan of Merger"),
dated as of ________________, 1997, by and between the Board of Directors of
COMMUNITY BANK, a federal savings bank ("CB Bank"), with its principal office at
126 East Fourth Street, Michigan City, Indiana 46360, and the Board of Directors
of PINNACLE BANK, a Michigan banking corporation ("Pinnacle Bank"), with its
principal office at 830 Pleasant Street, St. Joseph, Michigan 49085.
W I T N E S S E T H:
WHEREAS, CB Bancorp, Inc., a Delaware corporation and the parent
corporation of CB Bank, and Pinnacle Financial Services, Inc., a Michigan
corporation and the parent corporation of Pinnacle Bank, have entered into an
Agreement and Plan of Merger dated as of ______________, 1997 (the
"Reorganization Agreement"), providing for, among other things, the merger and
consolidation of CB Bank with and into, and under the charter of, Pinnacle Bank,
with Pinnacle Bank being the Surviving Bank; and
WHEREAS, Pinnacle Bank and CB Bank have determined that it is in their
mutual best interests to merge, with CB Bank being merged and consolidated with
and into, and under the charter of, Pinnacle Bank, with Pinnacle Bank being the
Surviving Bank.
NOW, THEREFORE, the plan for the consummation of such merger and
consolidation (the "Bank Merger") is as follows:
FIRST: The Consolidating Banks are Pinnacle Bank and CB Bank. Upon the
Bank Merger Effective Time (as hereinafter defined), CB Bank shall be merged and
consolidated with and into, and under the charter of, Pinnacle Bank and Pinnacle
Bank shall be the Surviving Bank.
SECOND: As to each Consolidating Bank, the designation and number of
outstanding shares of capital stock are as follows:
A. The total authorized capital stock of Pinnacle Bank immediately
prior to the Bank Merger Effective Time shall be _____ shares of common
stock, par value $_____ per share (the "Pinnacle Bank Common Stock"), all
of which immediately prior to the Bank Merger Effective Time shall be
issued and outstanding. All of the shares of Pinnacle Bank Common Stock
which are issued and outstanding as of the effective record date may be
voted at any meeting of the shareholder of
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Pinnacle Bank at which this Plan of Merger is submitted for approval.
B. The total authorized capital stock of CB Bank immediately prior
to the Bank Merger Effective Time shall be _____ shares of common stock,
par value $_____ per share (the "CB Bank Common Stock"), all of which
immediately prior to the Bank Merger Effective Time shall be issued and
outstanding. All of the shares of CB Bank Common Stock which are issued
and outstanding as of the effective record date may be voted at any meeting
of the shareholder of CB Bank at which this Plan of Merger is submitted for
approval.
THIRD: The terms and conditions of the Bank Merger are as follows:
A. The Bank Merger shall be consummated and become effective,
subject to the terms and conditions of the Reorganization Agreement and
this Plan of Merger, following the Effective Time (defined herein as in the
Reorganization Agreement), which shall be held as provided in Section 1.13
of the Reorganization Agreement following, among other things, the
requisite approval of the transactions contemplated hereby by the
shareholders of CB Bank and Pinnacle Bank, and the receipt of all requisite
approvals, consents and licenses of all regulatory and other governmental
authorities for consummation of the Bank Merger. The time of ______, local
time, on the day on which such Bank Merger shall become effective is herein
referred to as the "Bank Merger Effective Time".
B. At the Bank Merger Effective Time:
l. The Articles of Incorporation of Pinnacle Bank shall
thereupon be and constitute the Articles of Incorporation of the Surviving
Bank until the same shall thereafter be altered or amended in accordance
with applicable law.
2. The Bylaws of Pinnacle Bank shall thereupon be and
constitute the Bylaws of the Surviving Bank until the same shall thereafter
be altered, amended or repealed.
3. The directors of the Surviving Bank shall be the following
persons: ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, and ____________.
4. The officers of the Surviving Bank shall be those persons
who are appointed by the Board of Directors of the Surviving Bank promptly
following the Bank Merger Effective Time.
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C. From and after the Bank Merger Effective Time, the separate
existence of the Consolidating Banks shall cease and be merged and
consolidated into one, the Surviving Bank, which shall possess all of the
rights, privileges, powers and franchises as well of a public as of a
private nature, and shall be subject to all of the restrictions,
disabilities and duties of each of the Consolidating Banks so merged and
consolidated; and all and singular the rights, privileges, powers and
franchises of each of the Consolidating Banks, and all property, real,
personal and mixed, and all debts due to either of said Consolidating Banks
on whatever account, as well for stock subscriptions as all other things in
action or belonging to each of the Consolidating Banks shall, without the
necessity of delivery of any deeds, bills of sale or other instruments of
transfer, be vested in the Surviving Bank resulting from the Bank Merger;
and all property, rights, privileges, powers and franchises, and all and
every other interest shall be thereafter as effectually the property of the
Surviving Bank as they were of the several and respective Consolidating
Banks and the title to any real estate vested by deed or otherwise, in
either of such Consolidating Banks, shall not revert or be in any way
impaired by reason of the Bank Merger.
D. From and after the Bank Merger Effective Time, all rights of
creditors and all liens upon any property of either of the Consolidating
Banks shall be preserved unimpaired and all debts, liabilities and duties
of the respective Consolidating Banks shall thenceforth attach to said
Surviving Bank, and may be enforced against the Surviving Bank to the same
extent as if said debts, liabilities and duties had been incurred or
contracted by it.
E. From and after the Bank Merger Effective Time, any action or
proceeding, whether civil, criminal or administrative, pending by or
against either Consolidating Bank shall be prosecuted as if the Bank Merger
had not taken place, or the Surviving Bank may be substituted in such
action or proceeding in place of the Consolidating Bank as a party thereto.
F. At the Bank Merger Effective Time, each share of Pinnacle Bank
Common Stock authorized, issued and outstanding immediately prior to the
Bank Merger Effective Time shall by virtue of the Bank Merger and without
any action on the part of either of the Consolidating Banks, the Surviving
Bank, or the holder thereof automatically be converted into one (1) share
of common stock, par value $_____ per share, of the Surviving Bank.
G. At the Bank Merger Effective Time, each share of CB Bank Common
Stock authorized, issued and outstanding immediately prior to the Bank
Merger Effective Time shall by virtue of the Bank Merger and without any
action on the part of either of the Consolidating Banks, the Surviving Bank
or
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the holder thereof automatically be cancelled, and such cancelled share of
CB Bank Common Stock shall not be converted into any shares of capital
stock or other securities of the Surviving Bank or any other entity.
H. On the Bank Merger Effective Time, the holder of the certificate
representing shares of Pinnacle Bank Common Stock outstanding at such time
shall cease to have any rights with respect to such shares and its sole
rights shall be with respect to the shares of common stock, par value
$_____ per share, of the Surviving Bank into which its shares of Pinnacle
Bank Common Stock have been converted by the Bank Merger as hereinabove
provided.
I. As of the Bank Merger Effective Time, each certificate evidencing
shares of Pinnacle Bank Common Stock which have been converted into shares
of common stock, par value $_____ per share, of the Surviving Bank pursuant
to Subsection F of this Article Third shall by virtue of the Bank Merger
and without any action on the part of either of the Consolidating Banks,
the Surviving Bank, or the holder thereof automatically be deemed to
constitute, and shall at all times thereafter constitute, a certificate
representing the number of shares of common stock, par value $_____ per
share, of the Surviving Bank into which the shares of Pinnacle Bank Common
Stock have been converted by the Bank Merger as hereinabove provided. As
of said Bank Merger Effective Time, and at all times thereafter, each
certificate which represented issued and outstanding shares of Pinnacle
Bank Common Stock immediately prior to the Bank Merger Effective Time shall
be deemed for all purposes to evidence ownership of the shares of common
stock, par value $_____ per share, of the Surviving Bank into which such
shares of Pinnacle Bank Common Stock have been converted pursuant to the
Bank Merger.
FOURTH: This Plan of Merger will be terminated and the Bank Merger
abandoned automatically in the event of the termination or abandonment of the
Reorganization Agreement pursuant to the terms and conditions thereof.
FIFTH: Any of the terms or conditions of this Plan of Merger may be
waived at any time by whichever of the Consolidating Banks is, or the
shareholders of which are, entitled to the benefit thereof by action taken by
the Board of Directors of such Consolidating Banks or may be amended or modified
in whole or in any part at any time prior to or subsequent to the vote(s) of the
shareholder of CB Bank and/or the shareholder of Pinnacle Bank hereon by an
agreement in writing after authorization by the Boards of Directors of the
Consolidating Banks; PROVIDED, HOWEVER, that such action shall be taken by the
Board of Directors of CB Bank and/or the Board of Directors of Pinnacle Bank
only if, in the judgment of such Board, such waiver or such amendment or
modification will not have a materially adverse effect on the benefits intended
under this Plan of Merger to the shareholder of CB Bank or the shareholder of
Pinnacle Bank, as the case may be.
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<PAGE>
SIXTH: If at any time the Surviving Bank shall consider or be advised
that any further assignments, conveyances or assurances in law are necessary or
desirable to vest, perfect or confirm of record in the Surviving Bank the title
to any property or rights of the Consolidating Banks or otherwise to carry out
the provisions hereof, the proper officers of the Consolidating Banks
immediately prior to the Bank Merger Effective Time shall execute and deliver
any and all proper deeds, assignments and assurances in law, and do all things
necessary or proper to vest, perfect or confirm title to such property or rights
in the Surviving Bank and otherwise to carry out the provisions hereof.
IN WITNESS WHEREOF, the respective Boards of Directors, Presidents and
Secretaries of Community Bank and Pinnacle Bank have executed this Agreement and
Plan of Merger under the respective seals thereof, all as of the day and year
first above written.
Attest: COMMUNITY BANK
By _________________________ By____________________________
Secretary President
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
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<PAGE>
The signatories above being not less than a majority of all of the Directors of
Community Bank.
[Seal of Bank]
Attest: PINNACLE BANK
By _________________________ By _____________________________
Secretary President
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
The signatories above being not less than a majority of all of the Directors of
Pinnacle Bank.
[Seal of Bank]
STATE OF INDIANA )
: ss.
COUNTY OF _________ )
On this ____ day of ___________, 199_, before me, a Notary Public for the
State and County aforesaid, personally came ________________, as President, and
________________, as Secretary, of Community Bank, a federal savings bank, and
each in his said capacity acknowledged the foregoing instrument to be the act
and
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deed of said corporation and the seal affixed thereto to be its seal; and came
also ____________, ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, and ____________, being not less than a majority of the entire
Board of Directors of said corporation, and each of them acknowledged said
instrument to be the act and deed of said corporation and of himself/herself as
director thereof.
WITNESS my official seal and signature this day and year aforesaid.
(Seal of Notary) ______________________________
, Notary Public
_____________ County, Indiana
My Commission Expires: _______
STATE OF MICHIGAN )
: ss.
COUNTY OF _________ )
On this ____ day of ____________, 199_, before me, a Notary Public for the
State and County aforesaid, personally came ________________, as President, and
___________________, as Secretary, of Pinnacle Bank, a Michigan banking
corporation, and each in his said capacity acknowledged the foregoing instrument
to be the act and deed of said corporation and the seal affixed thereto to be
its seal; and came also ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, ____________, and ____________, being not less than a majority of
the entire Board of Directors of said corporation, and each of them acknowledged
said instrument to be the act and deed of said corporation and of
himself/herself as director thereof.
WITNESS my official seal and signature this day and year aforesaid.
(Seal of Notary) ______________________________
, Notary Public
_____________ County, Michigan
My Commission Expires: _______
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<PAGE>
EXHIBIT C
AFFILIATE'S AGREEMENT
Pinnacle Financial Services, Inc.
830 Pleasant Street
St. Joseph, Michigan 49085
and
CB Bancorp, Inc.
126 East Fourth Street
Michigan City, Indiana 46360
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Merger dated as of
_____________, 1997 (the "Merger Agreement"), by and between Pinnacle Financial
Services, Inc., a Michigan corporation ("Pinnacle"), and CB Bancorp, Inc., a
Delaware corporation ("CB"), which Merger Agreement provides for the merger (the
"Merger") of CB with and into Pinnacle in a transaction in which, among other
things, shares of common stock, $0.01 par value per share, of CB ("CB Common
Stock"), will be converted into the right to receive shares of common stock,
without par value, of Pinnacle ("Pinnacle Common Stock"), as more fully provided
therein.
The undersigned has been informed (i) that the Merger constitutes a
transaction covered by Rule 145 under the Securities Act of 1933, as amended
(the "Securities Act"); (ii) that the undersigned may be deemed to be an
"affiliate" of CB and/or Pinnacle within the meaning of Rule 145; and (iii) that
the shares of CB Common Stock and/or Pinnacle Common Stock held by the
undersigned, and, if applicable, the shares of Pinnacle Common Stock which the
undersigned may acquire in connection with the Merger, may only be disposed of
in conformity with the provisions hereof. In addition, the undersigned has been
informed that the treatment of the Merger as a pooling-of-interests for
financial accounting purposes is dependent upon the accuracy of certain of the
representations and the compliance with certain of the agreements set forth
herein.
The capitalized terms used and not defined herein shall have the meaning
set forth in the Merger Agreement.
1. The undersigned, after inquiry of any agent with discretionary power
to transfer either the undersigned's shares of CB Common Stock or the
undersigned's shares of Pinnacle Common Stock, represents, warrants and
covenants to Pinnacle as follows:
(a) The undersigned has full power to execute this Affiliate's
Agreement and to make the representations,
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warranties and agreements herein, and to perform his or her obligations
hereunder.
(b) The undersigned is currently the owner of that number of shares
of CB Common Stock set forth in Schedule 1 hereto (the "CB Shares") and has
held the CB Shares at all times since ___________, 1997, unless otherwise
set forth in Schedule 1.
(c) The undersigned is currently the owner of that number of shares
of Pinnacle Common Stock set forth in Schedule 2 hereto (the "Pinnacle
Shares") and has held the Pinnacle Shares at all times since ___________,
1997, unless otherwise set forth in Schedule 2.
(d) The undersigned, for a period beginning not less than thirty (30)
days prior to the Effective Time and ending on the date Pinnacle publishes
financial results covering a period of at least thirty (30) days of
combined operations of CB and Pinnacle following the Effective Time, shall
not sell, transfer or otherwise dispose of, or reduce the undersigned's
risk of ownership or investment in, (i) any of the CB Shares, (ii) any of
the Pinnacle Shares or (iii) any shares of Pinnacle Common Stock received
or acquired by the undersigned (A) pursuant to, or in connection with, the
Merger, or (B) pursuant to, or in connection with, the exercise of any
option, warrant or other instrument (collectively, the "Additional Pinnacle
Shares"); PROVIDED, HOWEVER, that the undersigned may (i) exchange the CB
Shares for shares of Pinnacle Common Stock in the Merger, and (ii) may make
bona fide gifts or distributions without consideration so long as the
recipients thereof agree not to sell, transfer or otherwise dispose of such
Pinnacle Common Stock or CB Common Stock, as the case may be, except as
provided herein.
(e) The undersigned will not sell, transfer or dispose of any shares
of Pinnacle Common Stock which the undersigned may receive or acquire in
connection with the Merger or any securities which may be paid as a
dividend or otherwise distributed thereon or with respect thereto or issued
or delivered in exchange or substitution therefor (all such shares and
other securities herein sometimes collectively referred to as "Restricted
Securities"), or any option, right or other interest with respect to any
Restricted Securities, unless such sale, transfer or disposition is
effected (i) pursuant to an exemption from the registration requirements of
the Securities Act as provided in Section 3 hereof, or (ii) pursuant to an
effective registration statement under, and in compliance with, the
Securities Act; PROVIDED, HOWEVER, that the undersigned may make bona fide
gifts or distributions without consideration so long as the recipients
thereof agree not to sell, transfer or otherwise dispose of such Pinnacle
Common Stock except as provided herein.
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(f) The undersigned has not engaged in a Sale of any shares of CB
Common Stock at any time since ___________, 1997, unless otherwise set
forth in Schedule 1.
(g) The undersigned has not engaged in a Sale of any shares of
Pinnacle Common Stock at any time since ___________, 1997, unless otherwise
set forth in Schedule 2.
(h) The undersigned is not aware of or participating in any plan or
intention on the part of the shareholders of CB (a "Plan") to engage in a
sale, exchange, transfer, redemption or reduction in any way of the
undersigned's risk of ownership by short sale or otherwise, or other
disposition, directly or indirectly (such actions being collectively
referred to as a "Sale"), of Pinnacle Common Stock to be received by
shareholders of CB pursuant to the Merger that will reduce ownership of
Pinnacle Common Stock by such shareholders of CB to a number of shares
having, in the aggregate, a value at the Effective Date of Merger of less
than 50% of the total fair market value of the CB Common Stock outstanding
immediately prior to the Merger. For purposes of this representation,
shares of the CB Common Stock disposed of in a Sale prior to the Merger and
in contemplation of the Merger will be considered to be outstanding stock
of CB immediately prior to the Merger that was exchanged for Pinnacle
Common Stock in the Merger and then disposed of pursuant to a Plan.
2. Pinnacle agrees to use its best efforts to file all reports and data
with the Securities and Exchange Commission (the "Commission") necessary to
permit the undersigned to sell Restricted Securities pursuant to, and otherwise
in conformity with, Rule 145(d) under the Securities Act.
3. Pinnacle acknowledges that the provisions of Section 1(e) of this
Affiliate's Agreement will be satisfied as to any Sale by the undersigned of
Restricted Securities pursuant to Rule 145(d) under the Securities Act, as
evidenced by a broker's letter stating that the requirements of Rule 145 have
been met; PROVIDED, HOWEVER, that if counsel for Pinnacle or CB reasonably
believes that the provisions of Rule 145 have not been complied with, or if
requested by Pinnacle in connection with a proposed disposition, the undersigned
shall furnish to Pinnacle a copy of a "no action" letter or other communication
from the Commission or an opinion of counsel in form and substance satisfactory
to Pinnacle, and its counsel, to the effect that the applicable provisions of
paragraphs (c), (e), (f) and (g) of Rule 144 under the Securities Act have been
complied with or that the disposition may be otherwise effected in the manner
requested in compliance with the Securities Act.
4. The undersigned also understands that stop transfer instructions may
be given to the transfer agent for Pinnacle with respect to the Restricted
Securities, and that there may be placed on the certificates evidencing the
Restricted Securities, or any substitutions therefor, a legend stating in
substance:
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"THE SECURITIES REPRESENTED BY THIS CERTIFICATE MUST BE SOLD PURSUANT TO
RULE 145(d) PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
PROVISIONS OF THE SECURITIES ACT OF 1933, OR UNDER SOME OTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, INASMUCH AS THE SHARES
REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED IN A TRANSACTION DESCRIBED IN
RULE 145 BY PERSONS WHO MAY BE DEEMED TO BE "AFFILIATES" OF A PARTY TO THE
TRANSACTION AND THE RESALE OF THE SHARES REPRESENTED BY THIS CERTIFICATE HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. CURRENTLY, UNDER
RULE 145(d)(2), THIS RESTRICTION LAPSES ON __________________, 199__ (TWO (2)
YEARS FROM CLOSING) UNLESS THE HOLDER OF THIS CERTIFICATE IS AN "AFFILIATE" OF
THE ISSUER AT THE TIME OF SUCH SALE. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE MAY ONLY BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN ACCORDANCE
WITH THE TERMS OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF AND PINNACLE
FINANCIAL SERVICES, INC., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICES OF PINNACLE FINANCIAL SERVICES, INC."
Pinnacle agrees that such stop transfer instructions and legend will be
promptly removed if the provisions of Section 3 are complied with, or if the
undersigned causes to be delivered to Pinnacle a letter from the staff of the
Commission or an opinion of counsel in form and substance satisfactory to
Pinnacle, and its counsel, to the effect that such legend is not required for
purposes of the Securities Act.
5. This Affiliate's Agreement shall be binding upon and enforceable
against administrators, executors, representatives, heirs, legatees and divisees
of the undersigned and any pledgee holding any Restricted Securities of the
undersigned as collateral.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned has executed the foregoing Affiliate's
Agreement as of the _________ day of _________________, 1997.
Very truly yours,
___________________________________
AGREED TO AND ACCEPTED:
Pinnacle Financial Services, Inc.
______________________________
By:
Title:
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SCHEDULE 1
NUMBER OF CB SHARES OWNED
CB Shares Sold Since ___________, 1997
(Description of each transaction should include date
of sale, number of shares sold and sale price.)
- ----------------------------------------------------
<PAGE>
SCHEDULE 2
NUMBER OF PINNACLE SHARES OWNED
Pinnacle Shares Sold Since ___________, 1997
(Description of each transaction should include date
of sale, number of shares sold and sale price.)
- ----------------------------------------------------
<PAGE>
EXHIBITS D-1, D-2, D-3, D-4, D-5 AND D-6
FORMS OF "ACKNOWLEDGMENTS"
D-1
<PAGE>
EXHIBIT D-1
ACKNOWLEDGMENT
1. I, Joseph F. Heffernan, acknowledge that provided that either (a)
Pinnacle Financial Services, Inc. ("Pinnacle") enters into a severance agreement
with me at the effective time of merger (the "Effective Time") between CB
Bancorp, Inc. and Pinnacle providing for a severance benefit as set forth in the
Severance Agreement attached as Exhibit E-1 to the Agreement and Plan of Merger
dated as of March 1, 1997 between Pinnacle and CB Bancorp, Inc. ("Agreement"),
or (b) CB Bancorp, Inc. pays to me the severance amount described in paragraph 2
hereof and Pinnacle abides by the provisions of the last sentence of paragraph 3
hereof, the payment of $341,000 will constitute full settlement of any and all
rights which I may have pursuant to the Employment Agreements between CB
Bancorp, Inc. and me and Community Bank, a Federal Savings Bank and me, dated as
of December 23, 1992, as amended from time to time (the "Employment
Agreements").
2. I further acknowledge that if I choose not to accept employment at and
following the Effective Time with Pinnacle and do not enter into a severance
agreement with Pinnacle as set forth in Paragraph 1 hereof. CB Bancorp, Inc.
will pay me an amount of severance pay equal to $563,794 at the Effective
Time plus required gross-up.
3. I further acknowledge that if I choose to accept employment at and
following the Effective Time with Pinnacle and enter into a severance agreement
with Pinnacle, I will be provided at no cost to me with the life, medical,
dental and disability benefits provided by Pinnacle to other Pinnacle employees
and that upon my termination of service with Pinnacle, Pinnacle will cause to be
continued life, medical, dental and disability coverage substantially identical
to the coverage maintained by Pinnacle for me prior to my termination of service
with Pinnacle for a period of (36) thirty-six months following my termination of
service with Pinnacle. I further acknowledge that in the event I do not enter
into a severance agreement with Pinnacle, Pinnacle will at no cost to me cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained for me immediately prior to the Effective
Time, for 36 months from the Effective Time.
4. I, Joseph F. Heffernan for myself and my heirs, executors,
administrators, successors and assigns, hereby irrevocably and unconditionally
release and forever discharge Pinnacle, CB Bancorp, Inc and Community Bank
("each a Releasee") of and from all actions, causes of action, suits, debts,
dues sums of money, accounts, reckonings, bonds, bills, specialties, covenants,
contracts, controversies, agreements, promises, variances, trespasses! damages,
judgments, executions, claims, and demands whatsoever, in law, admiralty or
equity, which against the Releasee, I or my heirs, executors, administrators,
successors or assigns ever had, now have or hereafter can, shall or may have by
reason of any matter, cause or thing whatsoever for payment of any
D1-1
<PAGE>
amount owed pursuant to the Employment Agreements over and above the amounts
described herein under paragraphs l, 2 and 3.
IN WITNESS WHEREOF, I have executed this Instrument this ____ day of
________________, 1997.
_______________________________________
Joseph F. Heffernan
D1-2
<PAGE>
EXHIBIT D-2
ACKNOWLEDGMENT
1. I, George L. Koehm, acknowledge that provided that either (a) Pinnacle
Financial Services, Inc. ("Pinnacle") enters into a severance agreement with me
at the effective time of merger (the "Effective Time") between CB Bancorp, Inc
and Pinnacle providing for a severance benefit as set forth in the Severance
Agreement attached as Exhibit E-2 to the Agreement and Plan of Merger dated as
of March 1, 1997 between Pinnacle and CB Bancorp, Inc. ("Agreement"), or (b) CB
Bancorp, Inc. pays to me the severance amount described in paragraph 2 hereof
and Pinnacle abides by the provisions of the last sentence of paragraph 3
hereof, the payment of $96,000 will constitute full settlement of any and all
rights which I may have pursuant to the Change in Control Agreements between CB
Bancorp, Inc. and me and Community Bank, a Federal Savings Bank and me, dated as
of December 23, 1992, as amended from time to time (the "Change in Control
Agreements").
2. I further acknowledge that if I choose not to accept employment at and
following the Effective Time with Pinnacle and do not enter into a severance
agreement with Pinnacle as set forth in Paragraph 1 hereof, CB Bancorp, Inc.
will pay me an amount of severance pay equal to $181,860 at the Effective Time.
3. I further acknowledge that if I choose to accept employment at and
following the Effective Time with Pinnacle and enter into a severance agreement
with Pinnacle, I will be provided at no cost to me with the life, medical,
dental and disability benefits provided by Pinnacle to other Pinnacle employees
and that upon my termination of service with Pinnacle, Pinnacle will cause to be
continued life, medical, dental and disability coverage substantially identical
to the coverage maintained by Pinnacle for me prior to my termination of service
with Pinnacle for a period of (24) twenty-four months following my termination
of service with Pinnacle. I further acknowledge that in the event I do not enter
into a severance agreement with Pinnacle, Pinnacle will at no cost to me cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained for me immediately prior to the Effective
Time, as defined in the Agreement for 24 months from the Effective Time.
4. I, George L. Koehm for myself and my heirs, executors, administrators,
successors and assigns, hereby irrevocably and unconditionally release and
forever discharge Pinnacle, CB Bancorp, Inc and Community Bank ("each a
Releasee") of and from all actions, causes of action, suits, debts, dues sums of
money, accounts, reckonings, bonds, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages, judgments,
executions, claims, and demands whatsoever, in law, admiralty or equity, which
against the Releasee, I or my heirs, executors, administrators, successors or
assigns ever had, now have or hereafter can, shall or may have by reason of any
matter, cause or thing whatsoever for payment of any amount owed
D2-1
<PAGE>
pursuant to the Change in Control Agreements over and above the amounts
described herein under paragraphs 1, 2 and 3.
IN WITNESS WHEREOF, I have executed this Instrument this ____ day of
_____________, 1997.
_______________________________________
George L. Koehm
D2-2
<PAGE>
EXHIBIT D-3
ACKNOWLEDGMENT
1. I, Daniel R. Buresh, acknowledge that provided that either (a)
Pinnacle Financial Services, Inc. ("Pinnacle") enters into a severance agreement
with me at the effective time of merger (the "Effective Time") between CB
Bancorp, Inc. and Pinnacle providing for a severance benefit as set forth in the
Severance Agreement attached as Exhibit E-3 to the Agreement and Plan of Merger
dated as of March 1, 1997 between Pinnacle and CB Bancorp, Inc. ("Agreement"),
or (b) CB Bancorp, Inc. pays to me the severance amount described in paragraph 2
hereof and Pinnacle abides by the provisions of the last sentence of paragraph 3
hereof, the payment of $98,000 will constitute full settlement of any and all
rights which I may have pursuant to the Change in Control Agreements between CB
Bancorp, Inc. and me and Community Bank, a Federal Savings Bank and me, dated as
of December 23, 1992, as amended from time to time (the "Change in Control
Agreements").
2. I further acknowledge that if I choose not to accept employment at and
following the Effective Time with Pinnacle and do not enter into a severance
agreement with Pinnacle as set forth in Paragraph 1 hereof, CB Bancorp, Inc.
will pay me an amount of severance pay equal to $168,022 at the Effective Time.
3. I further acknowledge that if I choose to accept employment at and
following the Effective Time with Pinnacle and enter into a severance agreement
with Pinnacle, I will be provided at no cost to me with the life, medical,
dental and disability benefits provided by Pinnacle to other Pinnacle employees
and that upon my termination of service with Pinnacle, Pinnacle will cause to be
continued life, medical, dental and disability coverage substantially identical
to the coverage maintained by Pinnacle for me prior to my termination of service
with Pinnacle for a period of (24) twenty-four months following my termination
of service with Pinnacle. I further acknowledge that in the event I do not enter
into a severance agreement with Pinnacle, Pinnacle will at no cost to me cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained for me immediately prior to the Effective
Time, for 24 months from the Effective Time.
4. I, Daniel R. Buresh for myself and my heirs, executors,
administrators, successors and assigns, hereby irrevocably and unconditionally
release and forever discharge Pinnacle, CB Bancorp, Inc and Community Bank
("each a Releasee") of and from all actions, causes of action, suits, debts,
dues sums of money, accounts, reckonings, bonds. bills, specialties, covenants,
contracts, controversies, agreements, promises, variances, trespasses, damages,
judgments, executions, claims, and demands whatsoever, in law, admiralty or
equity, which against the Releasee, I or my heirs, executors, administrators,
successors or assigns ever had, now have or hereafter can, shall or may have by
reason of any matter, cause or thing whatsoever for payment of any amount owed
D3-1
<PAGE>
pursuant to the Change in Control Agreements over and above the amounts
described herein under paragraphs 1, 2 and 3.
IN WITNESS WHEREOF, I have executed this Instrument this ____ day of
______________, 1997.
_______________________________________
Daniel R. Buresh
D3-2
<PAGE>
EXHIBIT D-4
ACKNOWLEDGMENT
1. I, James D. Neff, acknowledge that provided that either (a) Pinnacle
Financial Services, Inc. ("Pinnacle") enters into a severance agreement with me
at the effective time of merger (the "Effective Time") between CB Bancorp, Inc.
and Pinnacle providing for a severance benefit as set forth in the Severance
Agreement attached as Exhibit E-4 to the Agreement and Plan of Merger dated as
of March 1, 1997 between Pinnacle and CB Bancorp, Inc. ("Agreement"), or (b) CB
Bancorp, Inc. pays to me the severance amount described in paragraph 2 hereof
and Pinnacle abides by the provisions of the last sentence of paragraph 3
hereof, the payment of $135,400 will constitute full settlement of any and all
rights which I may have pursuant to the Change in Control Agreements between CB
Bancorp, Inc. and me and Community Bank, a Federal Savings Bank and me, dated as
of December 23, 1992, as amended from time to time (the "Change in Control
Agreements").
2. I further acknowledge that if I choose not to accept employment at and
following the Effective Time with Pinnacle and do not enter into a severance
agreement with Pinnacle as set forth in Paragraph 1 hereof, CB Bancorp, Inc.
will pay me an amount of severance pay equal to $230,434 at the Effective Time.
3. I further acknowledge that if I choose to accept employment at and
following the Effective Time with Pinnacle and enter into a severance agreement
with Pinnacle, I will be provided at no cost to me with the life, medical,
dental and disability benefits provided by Pinnacle to other Pinnacle employees
and that upon my termination of service with Pinnacle, Pinnacle will cause to be
continued life, medical, dental and disability coverage substantially identical
to the coverage maintained by Pinnacle for me prior to my termination of service
with Pinnacle for a period of (24) twenty-four months following my termination
of service with Pinnacle. I further acknowledge that in the event I do not enter
into a severance agreement with Pinnacle, Pinnacle will at no cost to me cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained for me immediately prior to the Effective
Time, for 24 months from the Effective Time.
4. I, James D. Neff for myself and my heirs, executors, administrators,
successors and assigns, hereby irrevocably and unconditionally release and
forever discharge Pinnacle, CB Bancorp, Inc and Community Bank ("each a
Releasee") of and from all actions? causes of action, suits, debts, dues sums of
money, accounts, reckonings, bonds, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages, judgments,
executions, claims, and demands whatsoever, in law, admiralty or equity, which
against the Releasee, I or my heirs, executors, administrators, successors or
assigns ever had, now have or hereafter can, shall or may have by reason of any
matter, cause or thing whatsoever for payment of any amount owed
D4-1
<PAGE>
pursuant to the Change in Control Agreements over and above the amounts
described herein under paragraphs 1, 2 and 3.
IN WITNESS WHEREOF, I have executed this Instrument this ____ day of
_______________, 1997.
_______________________________________
James D. Neff
D4-2
<PAGE>
EXHIBIT D-5
ACKNOWLEDGMENT
1. I, Marvin L. Kominiarek, Jr., acknowledge that the payment of
$113,964, will constitute full settlement of any and all rights which I may have
pursuant to the Change in Control Agreements between CB Bancorp, Inc. and me and
Community Bank, a Federal Savings Bank ("Bank"), and me, dated as of December
23, 1992, as amended from time to time (the "Change in Control Agreements").
2. I further acknowledge that upon my termination of service with CB
Bancorp. Inc. and the Bank immediately prior to the effective time of merger
(the "Effective Time") between CB Bancorp, Inc. and Pinnacle Financial Services,
Inc. ("Pinnacle"), or termination of service with Pinnacle following the
Effective Time, Pinnacle will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained for me by
CB Bancorp, Inc. or Pinnacle, as the case may be, prior to my termination of
service with CB Bancorp, Inc. or Pinnacle, as the case may be, for a period of
(24) twenty-four months following my termination of service.
3. I, Marvin L. Kominiarek, Jr., for myself and my heirs, executors,
administrators, successors and assigns, hereby irrevocably and unconditionally
release and forever discharge Pinnacle, CB Bancorp, Inc. and Community Bank
("each a Releasee") of and from all actions, causes of action, suits, debts,
dues sums of money, accounts, reckonings, bonds, bills, specialties, covenants,
contracts, controversies, agreements, promises, variances, trespasses, damages,
judgments, executions, claims, and demands whatsoever, in law, admiralty or
equity, which against the Releasee, I or my heirs, executors, administrators,
successors or assigns ever had, now have or hereafter can, shall or may have by
reason of any matter, cause or thing whatsoever for payment of any amount owed
pursuant to the Change in Control Agreements over and above the amounts
described herein under paragraphs 1 and 2.
IN WITNESS WHEREOF, I have executed this Instrument this ____ day of
_________________, 1997.
_______________________________________
Marvin L. Kominiarek, Jr.
D5-1
<PAGE>
EXHIBIT D-6
ACKNOWLEDGMENT
1. I, Allen E. Jones, acknowledge that the payment of $87,152, will
constitute full settlement of any and all rights which I may have pursuant to
the Change in Control Agreements between CB Bancorp, Inc. and me and Community
Bank, a Federal Savings Bank ("Bank"), and me, dated as of December 23, 1992, as
amended from time to time (the "Change in Control Agreements").
2. I further acknowledge that upon my termination of service with CB
Bancorp, Inc. and the Bank immediately prior to the effective time of merger
(the "Effective Time") between CB Bancorp, Inc. and Pinnacle Financial Services,
Inc. ("Pinnacle"), or termination of service with Pinnacle following the
Effective Time, Pinnacle will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained for me by
CB Bancorp, Inc. or Pinnacle, as the case may be, prior to my termination of
service with CB Bancorp, Inc. or Pinnacle, as the case may be, for a period of
(24) twenty-four months following my termination of service.
3. I, Allen E. Jones, for myself and my heirs, executors, administrators,
successors and assigns, hereby irrevocably and unconditionally release and
forever discharge Pinnacle, CB Bancorp, Inc. and Community Bank ("each a
Releasee") of and from all actions, causes of action, suits, debts, dues sums of
money, accounts, reckonings, bonds, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages, judgments,
executions, claims, and demands whatsoever, in law, admiralty or equity, which
against the Releasee, I or my heirs, executors, administrators, successors or
assigns ever had, now have or hereafter can, shall or may have by reason of any
matter, cause or thing whatsoever for payment of any amount owed pursuant to the
Change in Control Agreements over and above the amounts described herein under
paragraphs 1 and 2.
IN WITNESS WHEREOF, I have executed this Instrument this ____ day of
__________________, 1997.
_______________________________________
Allen E. Jones
D6-1
<PAGE>
EXHIBITS E-1, E-2, E-3 AND E-4
FORMS OF "SEVERANCE AGREEMENTS"
E-1
<PAGE>
EXHIBIT E-1
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of ______________, 1997, by and between
Pinnacle Financial Services, Inc. ("Pinnacle"), a corporation organized under
the laws of Michigan, with its principal administrative office at 830 Pleasant
Street, St. Joseph, Michigan 49085, and Joseph F. Heffernan (the "Executive").
WHEREAS, Pinnacle will acquire CB Bancorp, Inc. ("CB Bancorp"), and its
wholly owned subsidiary, Community Bank, a Federal Savings Bank ("Bank")
(collectively the "Acquired Entities"), in accordance with and pursuant to the
Agreement and Plan of Merger by and between Pinnacle and CB Bancorp, dated as of
the 1st day of March, 1997 (the "Merger Agreement");
WHEREAS, the employment of the Executive with the Acquired Entities will be
terminated upon the effective time of the acquisition of such entities by
Pinnacle; and
WHEREAS, Pinnacle desires to provide assurance in the form of certain
severance benefits offered hereunder to Executive in order to retain the
services of the Executive based on his knowledge of the Acquired Entities, his
expertise in the field of financial management and his knowledge of the savings
and loan industry, including the mortgage repurchase program operated by CB
Bancorp and the Bank prior to the Effective Date, as defined in the Merger
Agreement;
THEREFORE, in consideration of the mutual promises set forth herein, it is
agreed by and between Pinnacle and Executive:
1. DESCRIPTION OF SERVICES.
Following the consummation of the Merger, Executive shall serve as an
employee of Pinnacle and/or its affiliates, in such capacity as may be mutually
agreed by Pinnacle and Executive. As an employee of Pinnacle and/or its
affiliates, Executive will provide Pinnacle and its affiliates with the benefit
of his special knowledge, skill, contacts and business experience in the savings
and loan industry, particularly as his knowledge relates to the business
previously conducted by CB Bancorp and the Bank.
2. TERMS.
(a) Executive shall be employed as an "at will " employee, and said
employment may be terminated at any time, whether for "Cause" or any reason
whatsoever, subject to the provisions of Sections 4 and 5 of this Agreement.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts
E1-1
<PAGE>
to the faithful performance of his duties hereunder including activities and
services related to the organization, operation and management of Pinnacle and
participation in community and civic organizations; provided, however, that,
with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with Pinnacle, or materially affect the performance of Executive's
duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Section 1 and 2. Pinnacle
shall pay Executive as compensation a salary of not less than $175,000 per year
("Base Salary"). Such Base Salary shall be payable bi-monthly. During the
period of this Agreement, Executive's Base Salary shall be reviewed at least
annually; the first such review will be made no later than one year from the
date of this Agreement. Any increase in base salary shall then become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), Pinnacle shall provide Executive at no cost to Executive
with all such other benefits as are provided uniformly to permanent full-time
employees of Pinnacle and principal subsidiary, Pinnacle Bank. Base Salary
shall include any amounts of compensation deferred by Executive under a
qualified plan maintained by Pinnacle or Pinnacle Bank.
(b) Executive will be entitled to participate in or receive benefits under
any employee benefit plans including, but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit plan
or arrangement made available by Pinnacle in the future to its employees,
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of Pinnacle in which
Executive is eligible to participate. Nothing paid to the Executive under any
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean termination of service with Pinnacle for any reason,
including the termination by Pinnacle of Executive's full-time employment
hereunder, and termination upon the retirement, resignation or death of
Executive; provided that an Event of Termination shall not include termination
of Executive by Pinnacle for Cause as defined in Section 5.
E1-2
<PAGE>
(b) Upon the occurrence of an Event of Termination, Pinnacle shall pay
Executive, or in the event of his death, his beneficiary or beneficiaries, or
his estate, as the case may be, as severance pay or liquidated damages, or both
an amount equal to the greater of $223,000 or one times Executive's then current
Base Salary and any bonuses paid or to be paid during the year of termination.
At the election of the Executive, which election is to be made within thirty
(30) days of the Date of Termination following an Event of Termination, such
payment may be made in a lump sum or paid in equal monthly installments during
the thirty-six (36) months following the Executive's termination of service. In
the event that no election is made, payment to the Executive will be made on a
monthly basis in equal installments over thirty-six (36) months.
(c) Upon an Event of Termination, Pinnacle will, at no cost to Executive,
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by Pinnacle and its
affiliates for Executive prior to his termination of service. Such coverage and
payments shall cease upon the expiration of thirty-six (36) months.
5. TERMINATION FOR CAUSE.
The terms "Termination for Cause" or "Cause" in relation to a termination
of employment shall mean termination because of the Executive's intentional or
persistent failure to perform stated duties of a material nature, personal
dishonesty which results in material loss to Pinnacle or one of its affiliates,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses) or final cease and desist order which results in material loss
to Pinnacle or one of its affiliates or any material breach of this Agreement.
For purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of Pinnacle or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination which shall include a copy of
a resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive any payment under Section 4 of this Agreement, or any other
compensation or other benefits for any period after Termination for Cause.
6. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party
E1-3
<PAGE>
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
7. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 7 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to Pinnacle as may reasonably be required by Pinnacle in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party.
8. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle.
9. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
10. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and
E1-4
<PAGE>
part thereof shall to the full extent consistent with law continue in full force
and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of Pinnacle, in accordance with the rules of
the American Arbitration Association then in effect.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by Pinnacle, if Executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement.
17. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under this
Agreement, in the same manner and to the same extent that Pinnacle would be
required to perform if no such succession or assignment had taken place.
18. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
E1-5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
_________, 1997.
Pinnacle Financial Services, Inc.
By:______________________________
[Name]
[Title]
_________________________________
Joseph F. Heffernan
Executive
E1-6
<PAGE>
EXHIBIT E-2
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of ________________, 1997, by and
between Pinnacle Financial Services, Inc. ("Pinnacle"), a corporation organized
under the laws of Michigan, with its principal administrative office at 830
Pleasant Street, St. Joseph, Michigan 49085, and George L. Koehm (the
"Executive").
WHEREAS, Pinnacle will acquire CB Bancorp, Inc. ("CB Bancorp"), and its
wholly owned subsidiary, Community Bank, a Federal Savings Bank ("Bank")
(collectively the "Acquired Entities"), in accordance with and pursuant to the
Agreement and Plan of Merger by and between Pinnacle and CB Bancorp, dated as of
the 1st day of March, 1997 (the "Merger Agreement");
WHEREAS, the employment of the Executive with the Acquired Entities will be
terminated upon the effective time of the acquisition of such entities by
Pinnacle; and
WHEREAS, Pinnacle desires to provide assurance in the form of certain
severance benefits offered hereunder to Executive in order to retain the
services of the Executive based on his knowledge of the Acquired Entities, his
expertise in the field of financial management and his knowledge of the savings
and loan industry, including the mortgage repurchase program operated by CB
Bancorp and the Bank prior to the Effective Date, as defined in the Merger
Agreement;
THEREFORE, in consideration of the mutual promises set forth herein, it is
agreed by and between Pinnacle and Executive:
1. DESCRIPTION OF SERVICES.
Following the consummation of the Merger, Executive shall serve as an
employee of Pinnacle and/or its affiliates, in such capacity as may be mutually
agreed by Pinnacle and Executive. As an employee of Pinnacle and/or its
affiliates, Executive will provide Pinnacle and its affiliates with the benefit
of his special knowledge, skill, contacts and business experience in the savings
and loan industry, particularly as his knowledge relates to the business
previously conducted by CB Bancorp and the Bank.
2. TERMS.
(a) Executive shall be employed as an "at will " employee, and said
employment may be terminated at any time,whether for "Cause" or any reason
whatsoever, subject to the provisions of Sections 4 and 5 of this Agreement.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote
E2-1
<PAGE>
substantially all his business time, attention, skill, and efforts to the
faithful performance of his duties hereunder including activities and services
related to the organization, operation and management of Pinnacle and
participation in community and civic organizations; provided, however, that,
with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with Pinnacle, or materially affect the performance of Executive's
duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Section 1 and 2. Pinnacle
shall pay Executive as compensation a salary of not less than $53,000 per year
("Base Salary"). Such Base Salary shall be payable bi-monthly. During the period
of this Agreement, Executive's Base Salary shall be reviewed at least annually;
the first such review will be made no later than one year from the date of this
Agreement. Any increase in base salary shall then become the "Base Salary" for
purposes of this Agreement. In addition to the Base Salary provided in this
Section 3(a), Pinnacle shall provide Executive at no cost to Executive with all
such other benefits as are provided uniformly to permanent full-time employees
of Pinnacle and principal subsidiary, Pinnacle Bank. Base Salary shall include
any amounts of compensation deferred by Executive under a qualified plan
maintained by Pinnacle or Pinnacle Bank.
(b) Executive will be entitled to participate in or receive benefits under
any employee benefit plans including, but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit plan
or arrangement made available by Pinnacle in the future to its employees,
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of Pinnacle in which
Executive is eligible to participate. Nothing paid to the Executive under any
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive' s term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean termination of service with Pinnacle for any reason,
including the termination by Pinnacle of Executive' s full-time employment
hereunder, and termination upon the retirement, resignation or death of
Executive; provided that an Event of Termination shall not include termination
of Executive by Pinnacle for Cause as defined in Section 5.
E2-2
<PAGE>
(b) Upon the occurrence of an Event of Termination, Pinnacle shall pay
Executive, or in the event of his death, his beneficiary or beneficiaries, or
his estate, as the case may be, as severance pay or liquidated damages, or both
an amount equal to the greater of $85,000 or one times Executive's then current
Base Salary and any bonuses paid or to be paid during the year of termination.
At the election of the Executive, which election is to be made within thirty
(30) days of the Date of Termination following an Event of Termination, such
payment may be made in a lump sum or paid in equal monthly installments during
the twenty-four (24) months following the Executive's termination of service. In
the event that no election is made, payment to the Executive will be made on a
monthly basis in equal installments over twenty-four (24) months.
(c) Upon an Event of Termination, Pinnacle will, at no cost to Executive,
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by Pinnacle and its
affiliates for Executive prior to his termination of service. Such coverage and
payments shall cease upon the expiration of twenty-four (24) months.
5. TERMINATION FOR CAUSE.
The terms "Termination for Cause" or "Cause" in relation to a termination
of employment shall mean termination because of the Executive's intentional or
persistent failure to perform stated duties of a material nature, personal
dishonesty which results in material loss to Pinnacle or one of its affiliates,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses) or final cease and desist order which results in material loss
to Pinnacle or one of its affiliates or any material breach of this Agreement.
For purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of Pinnacle or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination which shall include a copy of
a resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive any payment under Section 4 of this Agreement,or any other
compensation or other benefits for any period after Termination for Cause.
6. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party
E2-3
<PAGE>
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
7. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 7 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to Pinnacle as may reasonably be required by Pinnacle in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party.
8. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle.
9. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
10. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and
E2-4
<PAGE>
part thereof shall to the full extent consistent with law continue in full force
and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of Pinnacle, in accordance with the rules of
the American Arbitration Association then in effect.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by Pinnacle, if Executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement.
17. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under this
Agreement, in the same manner and to the same extent that Pinnacle would be
required to perform if no such succession or assignment had taken place.
18. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
E2-5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
________________, 1997.
Pinnacle Financial Services, Inc.
By: ___________________________________
[Name]
[Title]
_______________________________________
George L. Koehm
Executive
E2-6
<PAGE>
EXHIBIT E-3
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of ______________, 1997, by and between
Pinnacle Financial Services, Inc. ("Pinnacle"), a corporation organized under
the laws of Michigan, with its principal administrative office at 830 Pleasant
Street, St. Joseph, Michigan 49085, and Daniel R. Buresh (the "Executive").
WHEREAS, Pinnacle will acquire CB Bancorp, Inc. ("CB Bancorp"), and its
wholly owned subsidiary, Community Bank, a Federal Savings Bank ("Bank")
(collectively the "Acquired Entities"), in accordance with and pursuant to the
Agreement and Plan of Merger by and between Pinnacle and CB Bancorp, dated as of
the 1st day of March, 1997 (the "Merger Agreement");
WHEREAS, the employment of the Executive with the Acquired Entities will be
terminated upon the effective time of the acquisition of such entities by
Pinnacle; and
WHEREAS, Pinnacle desires to provide assurance in the form of certain
severance benefits offered hereunder to Executive in order to retain the
services of the Executive based on his knowledge of the Acquired Entities, his
expertise in the field of financial management and his knowledge of the savings
and loan industry, including the mortgage repurchase program operated by CB
Bancorp and the Bank prior to the Effective Date, as defined in the Merger
Agreement;
THEREFORE, in consideration of the mutual promises set forth herein, it is
agreed by and between Pinnacle and Executive:
1. DESCRIPTION OF SERVICES.
Following the consummation of the Merger, Executive shall serve as an
employee of Pinnacle and/or its affiliates, in such capacity as may be mutually
agreed by Pinnacle and Executive. As an employee of Pinnacle and/or its
affiliates, Executive will provide Pinnacle and its affiliates with the benefit
of his special knowledge, skill, contacts and business experience in the savings
and loan industry, particularly as his knowledge relates to the business
previously conducted by CB Bancorp and the Bank.
2. TERMS.
(a) Executive shall be employed as an "at will" employee, and said
employment may be terminated at any time, whether for "Cause" or any reason
whatsoever, subject to the provisions of Sections 4 and 5 of this Agreement.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts
E3-1
<PAGE>
to the faithful performance of his duties hereunder including activities and
services related to the organization, operation and management of Pinnacle and
participation in community and civic organizations; provided, however, that,
with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with Pinnacle, or materially affect the performance of Executive's
duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Section 1 and 2. Pinnacle
shall pay Executive as compensation a salary of not less than $53,000 per year
("Base Salary"). Such Base Salary shall be payable bi-monthly. During the
period of this Agreement, Executive's Base Salary shall be reviewed at least
annually; the first such review will be made no later than one year from the
date of this Agreement. Any increase in base salary shall then become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), Pinnacle shall provide Executive at no cost to Executive
with all such other benefits as are provided uniformly to permanent full-time
employees of Pinnacle and principal subsidiary, Pinnacle Bank. Base Salary
shall include any amounts of compensation deferred by Executive under a
qualified plan maintained by Pinnacle or Pinnacle Bank.
(b) Executive will be entitled to participate in or receive benefits under
any employee benefit plans including, but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit plan
or arrangement made available by Pinnacle in the future to its employees,
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of Pinnacle in which
Executive is eligible to participate. Nothing paid to the Executive under any
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean termination of service with Pinnacle for any reason,
including the termination by Pinnacle of Executive's full-time employment
hereunder, and termination upon the retirement, resignation or death of
Executive; provided that an Event of Termination shall not include termination
of Executive by Pinnacle for Cause as defined in Section 5.
E3-2
<PAGE>
(b) Upon the occurrence of an Event of Termination, Pinnacle shall pay
Executive, or in the event of his death, his beneficiary or beneficiaries, or
his estate, as the case may be, as severance pay or liquidated damages, or both
an amount equal to the greater of $70,000 or one times Executive's then current
Base Salary and any bonuses paid or to be paid during the year of termination.
At the election of the Executive, which election is to be made within thirty
(30) days of the Date of Termination following an Event of Termination, such
payment may be made in a lump sum or paid in equal monthly installments during
the twenty-four (24) months following the Executive's termination of service.
In the event that no election is made, payment to the Executive will be made on
a monthly basis in equal installments over twenty-four (24) months.
(c) Upon an Event of Termination, Pinnacle will, at no cost to Executive,
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by Pinnacle and its
affiliates for Executive prior to his termination of service. Such coverage and
payments shall cease upon the expiration of twenty-four (24) months.
5. TERMINATION FOR CAUSE.
The terms "Termination for Cause" or "Cause" in relation to a termination
of employment shall mean termination because of the Executive's intentional or
persistent failure to perform stated duties of a material nature, personal
dishonesty which results in material loss to Pinnacle or one of its affiliates,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses) or final cease and desist order which results in material loss
to Pinnacle or one of its affiliates or any material breach of this Agreement.
For purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of Pinnacle or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination which shall include a copy of
a resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive any payment under Section 4 of this Agreement, or any other
compensation or other benefits for any period after Termination for Cause.
6. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party
E3-3
<PAGE>
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
7. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 7 during
the term of this Agreement and for one (l) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to Pinnacle as may reasonably be required by Pinnacle in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party.
8. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle.
9. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
10. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and
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<PAGE>
part thereof shall to the full extent consistent with law continue in full force
and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of Pinnacle, in accordance with the rules of
the American Arbitration Association then in effect.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by Pinnacle, if Executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement.
17. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under this
Agreement, in the same manner and to the same extent that Pinnacle would be
required to perform if no such succession or assignment had taken place.
18. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
_______________, 1997.
Pinnacle Financial Services, Inc.
By: ___________________________________
[Name]
[Title]
_______________________________________
Daniel R. Buresh
Executive
E3-6
<PAGE>
EXHIBIT E-4
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of _____________, 1997, by and between
Pinnacle Financial Services, Inc. ("Pinnacle"), a corporation organized under
the laws of Michigan, with its principal administrative office at 830 Pleasant
Street, St. Joseph, Michigan 49085, and James D. Neff (the "Executive").
WHEREAS, Pinnacle will acquire CB Bancorp, Inc. ("CB Bancorp"), and its
wholly owned subsidiary, Community Bank, a Federal Savings Bank ("Bank")
(collectively the "Acquired Entities"), in accordance with and pursuant to the
Agreement and Plan of Merger by and between Pinnacle and CB Bancorp, dated as of
the 1st day of March, 1997 (the "Merger Agreement");
WHEREAS, the employment of the Executive with the Acquired Entities will be
terminated upon the effective time of the acquisition of such entities by
Pinnacle; and
WHEREAS, Pinnacle desires to provide assurance in the form of certain
severance benefits offered hereunder to Executive in order to retain the
services of the Executive based on his knowledge of the Acquired Entities, his
expertise in the field of financial management and his knowledge of the savings
and loan industry, including the mortgage repurchase program operated by CB
Bancorp and the Bank prior to the Effective Date, as defined in the Merger
Agreement;
THEREFORE, in consideration of the mutual promises set forth herein, it is
agreed by and between Pinnacle and Executive:
1. DESCRIPTION OF SERVICES.
Following the consummation of the Merger, Executive shall serve as an
employee of Pinnacle and/or its affiliates, in such capacity as may be mutually
agreed by Pinnacle and Executive. As an employee of Pinnacle and/or its
affiliates, Executive will provide Pinnacle and its affiliates with the benefit
of his special knowledge, skill, contacts and business experience in the savings
and loan industry, particularly as his knowledge relates to the business
previously conducted by CB Bancorp and the Bank.
2. TERMS.
(a) Executive shall be employed as an "at will " employee, and said
employment may be terminated at any time,whether for "Cause" or any reason
whatsoever, subject to the provisions of Sections 4 and 5 of this Agreement.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including
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<PAGE>
activities and services related to the organization, operation and management of
Pinnacle and participation in community and civic organizations; provided,
however, that, with the approval of the Board, as evidenced by a resolution of
such Board, from time to time, Executive may serve, or continue to serve, on the
boards of directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with Pinnacle, or materially affect the performance of Executive's
duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Section 1 and 2. Pinnacle
shall pay Executive as compensation a salary of not less than $70,400 per year
("Base Salary"). Such Base Salary shall be payable bi-monthly. During the period
of this Agreement, Executive's Base Salary shall be reviewed at least annually;
the first such review will be made no later than one year from the date of this
Agreement. Any increase in base salary shall then become the "Base Salary" for
purposes of this Agreement. In addition to the Base Salary provided in this
Section 3(a), Pinnacle shall provide Executive at no cost to Executive with all
such other benefits as are provided uniformly to permanent full-time employees
of Pinnacle and principal subsidiary, Pinnacle Bank. Base Salary shall include
any amounts of compensation deferred by Executive under a qualified plan
maintained by Pinnacle or Pinnacle Bank.
(b) Executive will be entitled to participate in or receive benefits under
any employee benefit plans including, but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit plan
or arrangement made available by Pinnacle in the future to its employees,
subject to and on a basis consistent with the terms, conditions and overall
administration of such plans and arrangements. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of Pinnacle in which
Executive is eligible to participate. Nothing paid to the Executive under any
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean termination of service with Pinnacle for any reason,
including the termination by Pinnacle of Executive's full-time employment
hereunder, and termination upon the retirement, resignation or death of
Executive; provided that an Event of Termination shall not include termination
of Executive by Pinnacle for Cause as defined in Section 5.
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<PAGE>
(b) Upon the occurrence of an Event of Termination, Pinnacle shall pay
Executive, or in the event of his death, his beneficiary or beneficiaries, or
his estate, as the case may be, as severance pay or liquidated damages, or both
an amount equal to the greater of $95,000 or one times Executive's then current
Base Salary and any bonuses paid or to be paid during the year of termination.
At the election of the Executive, which election is to be made within thirty
(30) days of the Date of Termination following an Event of Termination, such
payment may be made in a lump sum or paid in equal monthly installments during
the twenty-four (24) months following the Executive's termination of service. In
the event that no election is made, payment to the Executive will be made on a
monthly basis in equal installments over twenty-four (24) months.
(c) Upon an Event of Termination, Pinnacle will, at no cost to Executive,
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by Pinnacle and its
affiliates for Executive prior to his termination of service. Such coverage and
payments shall cease upon the expiration of twenty-four (24) months.
5. TERMINATION FOR CAUSE.
The terms "Termination for Cause" or "Cause" in relation to a termination
of employment shall mean termination because of the Executive's intentional or
persistent failure to perform stated duties of a material nature, personal
dishonesty which results in material loss to Pinnacle or one of its affiliates,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses) or final cease and desist order which results in material loss
to Pinnacle or one of its affiliates or any material breach of this Agreement.
For purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of Pinnacle or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a Notice of Termination which shall include a copy of
a resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board (excluding the Executive for purposes of said
computation) at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying termination for Cause
and specifying the particulars thereof in detail. The Executive shall not have
the right to receive any payment under Section 4 of this Agreement,or any other
compensation or other benefits for any period after Termination for Cause.
6. NOTICE.
(a) Any purported termination by Pinnacle or by Executive shall be
communicated by Notice of Termination to the other party
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<PAGE>
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
7. POST-TERMINATION OBLIGATIONS.
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 7 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to Pinnacle as may reasonably be required by Pinnacle in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party.
8. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of Pinnacle.
9. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and Pinnacle and their respective successors and assigns.
10. MODIFICATION.
This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and
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<PAGE>
part thereof shall to the full extent consistent with law continue in full force
and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of Pinnacle, in accordance with the rules of
the American Arbitration Association then in effect.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by Pinnacle, if Executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement.
17. SUCCESSOR TO PINNACLE.
Pinnacle shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Pinnacle, expressly and
unconditionally to assume and agree to perform Pinnacle's obligations under this
Agreement, in the same manner and to the same extent that Pinnacle would be
required to perform if no such succession or assignment had taken place.
18. APPLICABLE LAW.
This Agreement shall be governed by the laws of the State of Michigan
applicable to contracts made and wholly to be performed within such state.
E4-5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
_________________, 1997.
Pinnacle Financial Services, Inc.
By: ______________________________
[Name]
[Title]
__________________________________
James D. Neff
Executive
E4-6
<PAGE>
EXHIBIT F
FORM OF OPINION OF COUNSEL TO CB BANCORP, INC.
____________, 1997
Pinnacle Financial Services, Inc.
830 Pleasant Street
St. Joseph, Michigan 49083
Re: CB Bancorp, Inc.
Ladies and Gentlemen:
We have acted as counsel to CB Bancorp, Inc., a Delaware corporation
("CB"), in connection with the contemplated merger of CB with and into Pinnacle
Financial Services, Inc., a Michigan corporation ("Pinnacle"), pursuant to that
certain Agreement and Plan of Merger dated as of ___________, 1997, between
Pinnacle and CB (the "Agreement").
In our capacity as counsel to CB, we have examined the Proxy Statement
dated __________, 1997, filed by CB with the Securities and Exchange Commission
(the "Commission") pursuant to Rule 14a-6 of the rules and regulations of the
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). We have also examined signed copies of the Agreement. This opinion is
being rendered pursuant to Section 7.2(e) of the Agreement. (Capitalized terms
not otherwise defined herein shall be defined herein as in the Agreement.)
With respect to various questions of fact material to this opinion, we have
relied upon (i) the representations and warranties made by the several parties
in the Agreement and the documents referred to therein and (ii) certificates of
officers of CB. We have also examined such certificates of public officials,
documents and records of CB and other certificates, opinions and instruments and
have made such other investigations as we have deemed necessary in connection
with the opinions hereinafter set forth. In the course of our examinations and
investigations, we have assumed the authenticity of all documents submitted to
us as originals, the genuineness of all signatures, the legal capacity of
natural persons and conformity to originals of all documents submitted to us as
copies. We have further assumed that the Agreement and each other agreement
entered into in connection with consummation of the transactions contemplated by
the Agreement have been duly authorized by each party thereto other than CB,
have been duly executed and delivered by each such other party, and constitute
valid and binding obligations of each such other party, enforceable in
accordance with their respective terms and conditions, and each such other party
has taken all steps necessary to comply with all laws, rules, orders, rulings
and regulations applicable to it to permit such party to enter into and perform
its obligations. Our conclusions hereunder are specifically qualified by
reference to, and are based solely upon, laws, rulings and regulations in effect
on the date hereof and are subject to modification to the extent
F-1
<PAGE>
such laws, rulings and regulations are changed in the future. Based upon and
subject to the foregoing, and subject to the qualifications, if any, that
follow, it is our opinion that:
A. CB is a corporation validly existing and in good standing under the
laws of the State of Delaware, with corporate power to carry on its business
substantially as described in the Proxy Statement, and is registered as a
savings and loan holding company under the Home Owners' Loan Act. Based upon
review of corporate records of CB and certificates of public officials and
officers of CB, CB's authorized and outstanding capital stock is as set forth in
the Agreement and the CB Disclosure Schedule and the Closing Date CB Disclosure
Schedule, and all of the shares of its outstanding capital stock are duly and
validly authorized and issued, and, except as otherwise disclosed in the
Agreement, to our knowledge, there are no outstanding options, warrants,
agreements, contracts, calls, commitments or demands of any character to which
CB is a party relating to the capital stock of CB.
B. Community Bank is a federal savings bank validly existing under the
laws of the United States, and has corporate power to carry on its business in
the State of Indiana.
C. The execution, delivery and performance of the Agreement have been
duly authorized and approved by all necessary corporate action on the part of
CB, and the Agreement has been duly executed and delivered by CB and constitutes
the valid and binding obligations of CB, enforceable in accordance with its
respective terms, subject to considerations of bankruptcy, insolvency,
reorganization, receivership, moratorium, fraudulent conveyance and the like and
to general equitable principles (regardless of whether considered in a
proceeding in equity or at law), and to standards of commercial reasonableness
and good faith, and, to the best of our knowledge, the consummation by CB of the
transactions contemplated by the Agreement will not result in any breach or
violation of, or default of a material nature under any judgment, decree,
mortgage, agreement, indenture or other instrument known to us applicable to CB.
D. Based upon receipt of approvals from regulatory agencies, certificates
of public officials and officers of CB, all such approvals, consents,
authorizations or modifications as may be required to permit the performance by
CB of its obligations under the Agreement have been obtained.
E. Except as set forth in the CB Disclosure Schedule and the Closing Date
CB Disclosure Schedule to the Agreement, we do not know of any material
litigation, proceeding or governmental investigation pending against or relating
to CB or any of its subsidiaries, its properties or businesses, or the
transactions contemplated by the Agreement which will result in any material
liability to CB or any of its subsidiaries.
The opinions set forth above are limited to the Federal law of the United
States of America and the General Corporation Law of the
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<PAGE>
State of Delaware and the Business Corporation Act of the State of Michigan.
Whenever any opinion herein contained refers to the existence or absence of
facts "to the best of our knowledge", "to our knowledge", or "to our awareness"
or otherwise such existence or absence of facts is based on our knowledge,
actual knowledge or awareness, it is intended to signify that no information has
come to the attention of those attorneys who have represented CB in this
transaction (collectively, the "Designated Attorneys") which would give the
Designated Attorneys actual knowledge of the existence or absence of such facts.
Except to the extent expressly set forth herein, the Designated Attorneys have
not undertaken any independent investigation or made inquiry of any other
lawyers of Muldoon, Murphy & Faucette, or employees thereof, to determine the
existence or absence of such facts, and no inference as to our knowledge or of
the existence or absence of such facts should be drawn from our representation
of CB.
Our opinions are subject to generally applicable rules of law which (i)
limit the availability of a remedy under certain circumstances where another
remedy has been elected, (ii) limit the enforceability of provisions releasing,
exculpating, or exempting a party from, or requiring indemnification of a party
for, liability for its own action or inaction, to the extent the action or
inaction involves negligence, recklessness, willful misconduct, or unlawful
conduct, (iii) provide that agreements to indemnify a party for violations of
securities laws are unenforceable, (iv) may, where less than all of a contract
may be unenforceable, limit the enforceability of the balance of the contract to
circumstances in which the unenforceable portion is not an essential part of the
agreed exchange, or (v) may permit a party who has materially failed to render
or offer performance required by the contract to cure that failure unless
permitting a cure would unreasonably hinder the aggrieved party from making
substitute arrangements for performance or it was important in the circumstances
to the aggrieved party that performance occur by the date stated in the
contract.
This opinion is solely for your information. It is not to be quoted in
whole or in part or otherwise referred to (except in a list of closing
documents), nor is it to be filed with any governmental agency or other person
without our prior written consent. Other than you, no one is entitled to rely
on this opinion.
We express no opinion as to any matter not addressed herein and no opinion
as to matters addressed herein other than as expressly set forth herein.
Sincerely,
MULDOON, MURPHY & FAUCETTE
F-3
<PAGE>
EXHIBIT G
FORM OF OPINION OF COUNSEL TO PINNACLE FINANCIAL SERVICES, INC.
____________, 1997
CB Bancorp, Inc.
126 East Fourth Street
Michigan City, Indiana 46360
Re: Pinnacle Financial Services, Inc.
Ladies and Gentlemen:
We have acted as counsel to Pinnacle Financial Services, Inc., a Michigan
corporation ("Pinnacle"), in connection with the contemplated merger of CB
Bancorp, Inc., a Delaware corporation ("CB"), with and into Pinnacle, pursuant
to that certain Agreement and Plan of Merger dated as of ___________, 1997,
between Pinnacle and CB (the "Agreement").
In our capacity as counsel to Pinnacle, we have examined the Proxy
Statement dated __________, 1997, filed by Pinnacle with the Securities and
Exchange Commission (the "Commission") pursuant to Rule 14a-6 of the rules and
regulations of the Commission under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). We have also examined signed copies of the
Agreement. This opinion is being rendered pursuant to Section 7.3(d) of the
Agreement. (Capitalized terms not otherwise defined herein shall be defined
herein as in the Agreement.)
With respect to various questions of fact material to this opinion, we have
relied upon (i) the representations and warranties made by the several parties
in the Agreement and the documents referred to therein and (ii) certificates of
officers of Pinnacle. We have also examined such certificates of public
officials, documents and records of Pinnacle and other certificates, opinions
and instruments and have made such other investigations as we have deemed
necessary in connection with the opinions hereinafter set forth. In the course
of our examinations and investigations, we have assumed the authenticity of all
documents submitted to us as originals, the genuineness of all signatures, the
legal capacity of natural persons and conformity to originals of all documents
submitted to us as copies. We have further assumed that the Agreement and each
other agreement entered into in connection with consummation of the transactions
contemplated by the Agreement have been duly authorized by each party thereto
other than Pinnacle, have been duly executed and delivered by each such other
party, and constitute valid and binding obligations of each such other party,
enforceable in accordance with their respective terms and conditions, and each
such other party has taken all steps necessary
G-1
<PAGE>
to comply with all laws, rules, orders, rulings and regulations applicable to it
to permit such party to enter into and perform its obligations. Our conclusions
hereunder are specifically qualified by reference to, and are based solely upon,
laws, rulings and regulations in effect on the date hereof and are subject to
modification to the extent such laws, rulings and regulations are changed in the
future. Based upon and subject to the foregoing, and subject to the
qualifications, if any, that follow, it is our opinion that:
A. Pinnacle is a corporation validly existing and in good standing under
the laws of the State of Michigan, with corporate power to carry on its business
substantially as described in the Proxy Statement, and is registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended. Based
upon review of corporate records of Pinnacle and certificates of public
officials and officers of Pinnacle, Pinnacle's authorized and outstanding
capital stock is as set forth in the Agreement and the Pinnacle Disclosure
Schedule and the Closing Date Pinnacle Disclosure Schedule, and all of the
shares of its outstanding capital stock are duly and validly authorized and
issued, and, except as otherwise disclosed in the Agreement, to our knowledge,
there are no outstanding options, warrants, agreements, contracts, calls,
commitments or demands of any character to which Pinnacle is a party relating to
the capital stock of Pinnacle.
B. Pinnacle Bank is a banking corporation validly existing and in good
standing under the laws of the State of Michigan, and has corporate power to
carry on its business in the State of Michigan.
C. The execution, delivery and performance of the Agreement have been
duly authorized and approved by all necessary corporate action on the part of
Pinnacle, and the Agreement has been duly executed and delivered by Pinnacle and
constitutes the valid and binding obligations of Pinnacle, enforceable in
accordance with its respective terms, subject to considerations of bankruptcy,
insolvency, reorganization, receivership, moratorium, fraudulent conveyance and
the like and to general equitable principles (regardless of whether considered
in a proceeding in equity or at law), and to standards of commercial
reasonableness and good faith, and, to the best of our knowledge, the
consummation by Pinnacle of the transactions contemplated by the Agreement will
not result in any breach or violation of, or default of a material nature under
any judgment, decree, mortgage, agreement, indenture or other instrument known
to us applicable to Pinnacle.
D. Based upon receipt of approvals from regulatory agencies, certificates
of public officials and officers of Pinnacle, all such approvals, consents,
authorizations or modifications as may be required to permit the performance by
Pinnacle of its obligations under the Agreement have been obtained.
E. Except as set forth in the Pinnacle Disclosure Schedule and the
Closing Date Pinnacle Disclosure Schedule to the Agreement,
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<PAGE>
we do not know of any material litigation, proceeding or governmental
investigation pending against or relating to Pinnacle or any of its
subsidiaries, its properties or businesses, or the transactions contemplated by
the Agreement which will result in any material liability to Pinnacle or any of
its subsidiaries.
The opinions set forth above are limited to the Federal law of the United
States of America, the General Corporation Law of the State of Delaware and the
laws of the State of Michigan.
Whenever any opinion herein contained refers to the existence or absence of
facts "to the best of our knowledge", "to our knowledge", or "to our awareness"
or otherwise such existence or absence of facts is based on our knowledge,
actual knowledge or awareness, it is intended to signify that no information has
come to the attention of those attorneys who have represented Pinnacle in this
transaction (collectively, the "Designated Attorneys") which would give the
Designated Attorneys actual knowledge of the existence or absence of such facts.
Except to the extent expressly set forth herein, the Designated Attorneys have
not undertaken any independent investigation or made inquiry of any other
lawyers of Miller, Canfield, Paddock and Stone, P.L.C., or employees thereof, to
determine the existence or absence of such facts, and no inference as to our
knowledge or of the existence or absence of such facts should be drawn from our
representation of Pinnacle.
Our opinions are subject to generally applicable rules of law which (i)
limit the availability of a remedy under certain circumstances where another
remedy has been elected, (ii) limit the enforceability of provisions releasing,
exculpating, or exempting a party from, or requiring indemnification of a party
for, liability for its own action or inaction, to the extent the action or
inaction involves negligence, recklessness, willful misconduct, or unlawful
conduct, (iii) provide that agreements to indemnify a party for violations of
securities laws are unenforceable, (iv) may, where less than all of a contract
may be unenforceable, limit the enforceability of the balance of the contract to
circumstances in which the unenforceable portion is not an essential part of the
agreed exchange, or (v) may permit a party who has materially failed to render
or offer performance required by the contract to cure that failure unless
permitting a cure would unreasonably hinder the aggrieved party from making
substitute arrangements for performance or it was important in the circumstances
to the aggrieved party that performance occur by the date stated in the
contract.
This opinion is solely for your information. It is not to be quoted in
whole or in part or otherwise referred to (except in a list of closing
documents), nor is it to be filed with any governmental agency or other person
without our prior written consent. Other than you, no one is entitled to rely
on this opinion.
G-3
<PAGE>
We express no opinion as to any matter not addressed herein and no opinion
as to matters addressed herein other than as expressly set forth herein.
Sincerely,
MILLER, CANFIELD, PADDOCK AND
STONE, P.L.C.
G-4
<PAGE>
SCHEDULES
Pinnacle Disclosure Schedule
CB Disclosure Schedule
G-5
<PAGE>
STOCK OPTION AGREEMENT
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated as of March 1, 1997, between CB BANCORP,
INC., a Delaware corporation ("Issuer"), and PINNACLE FINANCIAL SERVICES, INC.,
a Michigan corporation ("Grantee").
WITNESSETH:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), which agreement has been
executed by the parties hereto immediately prior to this Stock Option Agreement
(the "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement and
in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined):
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to 115,037
fully paid and nonassessable shares of Issuer's Common Stock, par value $ 0.01
per share ("Common Stock"), at a price of $28.50 per share (the "Option Price");
provided, however, that in no event shall the number of shares of Common Stock
for which this Option is exercisable exceed 9.9% of the Issuer's issued and
outstanding shares of Common Stock without giving effect to any shares subject
to or issued pursuant to the Option. The number of shares of Common Stock that
may be received upon the exercise of the Option and the Option Price are subject
to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are
either (i) issued or otherwise become outstanding after the date of this
Agreement (other than pursuant to this Agreement) or (ii) redeemed, repurchased,
retired or otherwise cease to be outstanding after the date of the Agreement,
the number of shares of Common Stock subject to the Option shall be increased or
decreased, as appropriate, so that, after an event described in either clause
(i) or (ii), such number equals 9.9% of the number of shares of Common Stock
then issued and outstanding without giving effect to any shares subject or
issued pursuant to the Option. Nothing contained in this Section 1(b) or
elsewhere in this Agreement shall be deemed to authorize Issuer or Grantee to
breach any provision of the Merger Agreement.
<PAGE>
2. (a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, and from time to time, if, but only if, both an Initial
Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined), provided that the Holder shall have
sent the written notice of such exercise (as provided in subsection (e) of this
Section 2) within 60 days following such Subsequent Triggering Event. Each of
the following shall be an Exercise Termination Event: (i) the Effective Time
(as defined in the Merger Agreement) of the Merger; (ii) termination of the
Merger Agreement in accordance with the provisions thereof if such termination
occurs prior to the occurrence of an Initial Triggering Event, except a
termination by Grantee pursuant to Section 8.1(d) of the Merger Agreement
(unless the breach by Issuer giving rise to such right of termination is non-
volitional); or (iii) the passage of 12 months after termination of the Merger
Agreement if such termination follows the occurrence of an Initial Triggering
Event or is a termination by Grantee pursuant to Section 8.1(d) of the Merger
Agreement (unless the breach by Issuer giving rise to such right of termination
is non-volitional) (provided that if an Initial Triggering Event continues or
occurs beyond such termination and prior to the passage of such 12-month period,
the Exercise Termination Event shall be 12 months from the expiration of the
Last Triggering Event but in no event more than 18 months after such
termination). The "Last Triggering Event" shall mean the last Initial
Triggering Event to expire. The term "Holder" shall mean the holder or holders
of the Option.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer
Subsidiary"), without having received Grantee's prior written consent,
shall have entered into an agreement to engage in an Acquisition
Transaction (as hereinafter defined) with any person (the term "person" for
purposes of this Agreement having the meaning assigned thereto in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules and regulations thereunder) other than
Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the
Board of Directors of Issuer shall have recommended that the stockholders
of Issuer approve or accept any Acquisition Transaction. For purposes of
this Agreement, "Acquisition Transaction" shall mean (w) a merger or
consolidation, or any similar transaction, involving Issuer or any
Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC")) of
Issuer, (x) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (y) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or
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otherwise) of securities representing 10% or more of the voting power of
Issuer, or (z) any substantially similar transaction; provided, however,
that in no event shall any merger, consolidation, purchase or similar
transaction involving only the Issuer and one or more of its Subsidiaries
or involving only any two or more of such Subsidiaries, be deemed to be an
Acquisition Transaction, provided that any such transaction is not entered
into in violation of the terms of the Merger Agreement; and provided,
further, that any transaction described in this sentence that is expressly
permitted by the Merger Agreement shall not be deemed to be an Acquisition
Transaction;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed or publicly announced its intention to authorize, recommend or
propose, to engage in an Acquisition Transaction with any person other than
Grantee or a Grantee Subsidiary, or the Board of Directors of Issuer shall
have publicly withdrawn or modified, or publicly announced its interest to
withdraw or modify, in any manner adverse to Grantee, its recommendation
that the stockholders of Issuer approve the transactions contemplated by
the Merger Agreement;
(iii) Any person other than Grantee, any Grantee Subsidiary or any
Issuer Subsidiary acting in a fiduciary capacity in the ordinary course of
its business (and other than any person who (a) as of the date hereof
beneficially owns 10% or more of the outstanding shares of Common Stock and
(b) would be eligible to use Schedule 13G but for the fact that such person
owns 10% or more of the outstanding shares of Common Stock) shall have
acquired beneficial ownership or the right to acquire beneficial ownership
of 10% or more of the outstanding shares of Common Stock (the term
"beneficial ownership" for purposes of this Agreement having the meaning
assigned thereto in Section 13(d) of the 1934 Act, and the rules and
regulations thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary
shall have made a bona fide proposal to Issuer or its stockholders by
public announcement or written communication that is or becomes the subject
of public disclosure to engage in an Acquisition Transaction;
(v) After a bona fide proposal by public announcement or written
communication is made by a third party to Issuer or its stockholders to
engage in an Acquisition Transaction, Issuer shall have breached any
covenant or obligation contained in the Merger Agreement and such breach
(x) would entitle Grantee to terminate the Merger Agreement and (y) shall
not have been cured prior to the Notice Date (as defined below); or
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(vi) Any person other than Grantee or any Grantee Subsidiary,
other than in connection with a transaction to which Grantee has given its
prior written consent, shall have filed an application or notice with the
Federal Reserve Board, the Office of Thrift Supervision (the "OTS"), or
other federal or state bank regulatory authority, which application or
notice has been accepted for processing, for approval to engage in an
Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 20%
or more of the then outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (b) of this Section 2, except that the
percentage referred to in clause (y) shall be 20%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Initial Triggering Event or Subsequent Triggering Event of which it has
notice (together, a "Triggering Event"), it being understood that the giving of
such notice by Issuer shall not be a condition to the right of the Holder to
exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
notification to or approval of the Federal Reserve Board, the OTS or any other
regulatory agency is required in connection with such purchase, the Holder shall
promptly file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise would run
pursuant to this sentence shall run instead from the date on which any required
notification periods have expired or been terminated or such approvals have been
obtained and any requisite waiting period or periods shall have passed. Any
exercise of the Option shall be deemed to occur on the Notice Date relating
thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option.
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(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder, and the Holder
shall deliver to Issuer a copy of this Agreement and a letter agreeing that the
Holder will not offer to sell or otherwise dispose of such shares in violation
of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing hereunder
may be endorsed with a restrictive legend that shall read substantially as
follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on
file at the principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a written
request therefor."
It is understood and agreed that: (i) the reference to the
resale restrictions of the Securities Act of 1933, as amended (the "1933 Act"),
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the Holder shall have delivered to Issuer a copy of a
letter from the staff of the SEC, or an opinion of counsel, in form and
substance reasonably satisfactory to Issuer, to the effect that such legend is
not required for purposes of the 1933 Act; (ii) the reference to the provisions
to this Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference; and (iii) the
legend shall be removed in its entirety if the conditions in the preceding
clauses (i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation,
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issue and delivery of stock certificates under this Section 2 in the name of
the Holder or its assignee, transferee or designee.
(j) Notwithstanding anything to the contrary contained in this
Agreement, the Issuer shall not be obligated to issue shares of Common Stock
upon the exercise of the Option (i) in the absence of any required governmental
or regulatory approval or consent necessary for the Issuer to issue shares or
for the Grantee to exercise the Option, (ii) in the event and for so long as the
Grantee is in material breach of its representations, warranties, covenants or
obligations under the Merger Agreement (unless excused by reason of the material
breach of the Issuer of any of its representations, warranties, covenants or
obligations under the Merger Agreement), or (iii) so long as any injunction or
decree or ruling issued by a court of competent jurisdiction is in effect which
prohibits the sale or delivery of the Common Stock.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. Section 18a and regulations
promulgated thereunder and (y) in the event, under the Bank Holding Company Act
of 1956, as amended (the "BHCA"), the Change in Bank Control Act of 1978, as
amended, the Home Owners' Loan Act, as amended, the Change in Savings and Loan
Control Act of 1978, as amended, or any other federal or state banking or
savings and loan law, prior approval of or notice to the Federal Reserve Board,
the OTS or to any other federal or state regulatory authority is necessary
before the Option may be exercised, cooperating fully with the Holder in
preparing such applications or notices and providing such information to the
Federal Reserve Board, the OTS or such other federal or state regulatory
authority as they may require) in order to permit the Holder to exercise the
Option and Issuer duly and effectively to issue shares of Common Stock pursuant
hereto; and (iv) promptly to take all action provided herein to protect the
rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common
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<PAGE>
Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any Stock Option Agreements and related Options for which this Agreement
(and the Option granted hereby) may be exchanged. Upon receipt by Issuer of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Agreement, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of
like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer, whether
or not the Agreement so lost, stolen, destroyed or mutilated shall at any time
be enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise of
the Option and the Option Price shall be subject to adjustment from time to time
as provided in this Section 5. In the event of any change in, or distributions
in respect of, the Common Stock by reason of stock dividends, split-ups,
mergers, recapitalizations, combinations, subdivisions, conversions, exchanges
of shares, distributions on or in respect of the Common Stock that would be
prohibited under the terms of the Merger Agreement, or the like, the type and
number of shares of Common Stock purchasable upon exercise hereof and the Option
Price shall be appropriately adjusted in such manner as shall fully preserve the
economic benefits provided hereunder and proper provision shall be made in any
agreement governing any such transaction to provide for such proper adjustment
and the full satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event that occurs prior
to an Exercise Termination Event, Issuer shall, at the request of Grantee
delivered within 90 days of such Subsequent Triggering Event (whether on its own
behalf or on behalf of any subsequent holder of this Option (or part thereof) or
any of the shares of Common Stock issued pursuant hereto), promptly prepare,
file and keep current a shelf registration statement under the 1933 Act covering
this Option and any shares issued and issuable pursuant to this Option and shall
use its reasonable best efforts to cause such registration statement to become
effective and remain current in order to permit the sale or other disposition of
this Option and any shares of Common Stock issued upon total or partial exercise
of this Option ("Option Shares") in accordance with any plan of disposition
requested by Grantee. Issuer will use its reasonable best efforts to cause such
registration statement first to become effective and then to remain effective
for such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be reasonably
necessary to effect such sales or other dispositions. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of the Option or Option
Shares as provided
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<PAGE>
above, Issuer is in registration with respect to an underwritten public offering
of shares of Common Stock, and if in the good faith judgment of the managing
underwriter or managing underwriters, or, if none, the sole underwriter or
underwriters, of such offering the inclusion of the Holder's Option or Option
Shares would interfere with the successful marketing of the shares of Common
Stock offered by Issuer, the number of Option Shares otherwise to be covered in
the registration statement contemplated hereby may be reduced; and provided,
however, that after any such required reduction the number of Option Shares to
be included in such offering for the account of the Holder shall constitute at
least 25% of the total number of shares to be sold by the Holder and Issuer in
the aggregate; and provided further, however, that if such reduction occurs,
then the Issuer shall file a registration statement for the balance as promptly
as practical and no reduction shall thereafter occur. Each such Holder shall
provide all information reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If requested by any such Holder in
connection with such registration, Issuer shall become a party to any
underwriting agreement relating to the sale of such shares, but only to the
extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in secondary offering
underwriting agreements for the Issuer. Upon receiving any request under this
Section 6 from any Holder, Issuer agrees to send a copy thereof to any other
person known to Issuer to be entitled to registration rights under this Section
6, in each case by promptly mailing the same, postage prepaid, to the address of
record of the persons entitled to receive such copies. Notwithstanding anything
to the contrary contained herein, in no event shall Issuer be obligated to
effect more than two registrations pursuant to this Section 6 by reason of the
fact that there shall be more than one Grantee as a result of any assignment or
division of this Agreement.
7. (a) Immediately prior to the occurrence of a Repurchase Event (as
defined below), (i) following a request of the Holder, delivered prior to an
Exercise Termination Event, Issuer (or any successor thereto) shall repurchase
the Option from the Holder at a price (the "Option Repurchase Price") equal to
the amount by which (A) the Market/Offer Price (as defined below) exceeds (B)
the Option Price, multiplied by the number of shares for which this Option may
then be exercised and (ii) at the request of the owner of Option Shares from
time to time (the "Owner"), delivered within 90 days of such occurrence (or such
later period as provided in Section 10), Issuer shall repurchase such number of
the Option Shares from the Owner as the Owner shall designate at a price (the
"Option Share Repurchase Price") equal to the Market/Offer Price multiplied by
the number of Option Shares so designated. The term "Market/Offer Price" shall
mean the highest of (i) the price per share of Common Stock at which a tender
offer or exchange offer therefor has been made, (ii) the price per share of
Common Stock to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the
three-month period immediately preceding the date the Holder
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gives notice of the required repurchase of this Option or the Owner gives notice
of the required repurchase of Option Shares, as the case may be, or (iv) in the
event of a sale of all or a substantial portion of Issuer's assets, the sum of
the price paid in such sale for such assets and the current market value of the
remaining assets of Issuer as determined by a nationally recognized investment
banking firm mutually selected by the Holder or the Owner, as the case may be,
on the one hand, and the Issuer, on the other, divided by the number of shares
of Common Stock of Issuer outstanding at the time of such sale. In determining
the Market/Offer Price, the value of consideration other than cash shall be
determined by a nationally recognized investment banking firm mutually selected
by the Holder or Owner, as the case may be, on the one hand, and the Issuer, on
the other.
(b) The Holder and the Owner, as the case may be, may exercise its
right to require Issuer to repurchase the Option and any Option Shares pursuant
to this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that the Holder
or the Owner, as the case may be, elects to require Issuer to repurchase this
Option and/or the Option Shares in accordance with the provisions of this
Section 7. Within the latter to occur of (x) five business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver
or cause to be delivered to the Holder the Option Repurchase Price and/or to the
Owner the Option Share Repurchase Price therefor or the portion thereof that
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify the Holder and/or the Owner and thereafter deliver
or cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering to the Holder and/or the
Owner, as appropriate, the Option Repurchase Price and the Option Share
Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its
best efforts to obtain all required regulatory and legal approvals and to file
any required notices as promptly as practicable in order to accomplish such
repurchase), the Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder
and/or the Owner, as appropriate, that
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portion of the Option Repurchase Price or the Option Share Repurchase Price that
Issuer is not prohibited from delivering; and (ii) deliver, as appropriate,
either (A) to the Holder, a new Stock Option Agreement evidencing the right of
the Holder to purchase that number of shares of Common Stock obtained by
multiplying the number of shares of Common Stock for which the surrendered Stock
Option Agreement was exercisable at the time of delivery of the notice of
repurchase by a fraction, the numerator of which is the Option Repurchase Price
less the portion thereof theretofore delivered to the Holder and the denominator
of which is the Option Repurchase Price, or (B) to the Owner, a certificate for
the Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be
deemed to have occurred (i) upon the consummation of any merger, consolidation
or similar transaction involving Issuer or any purchase, lease or other
acquisition of all or a substantial portion of the assets of Issuer, other than
any such transaction which would not constitute an Acquisition Transaction
pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition
by any person of beneficial ownership of 50% or more of the then outstanding
shares of Common Stock, provided that no such event shall constitute a
Repurchase Event unless a Subsequent Triggering Event shall have occurred prior
to an Exercise Termination Event. The parties hereto agree that Issuer's
obligations to repurchase the Option or Option Shares under this Section 7 shall
not terminate upon the occurrence of an Exercise Termination Event unless no
Subsequent Triggering Event shall have occurred prior to the occurrence of an
Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of the Holder, of either (x) the Acquiring Corporation
(as hereinafter defined) or (y) any person that controls the Acquiring
Corporation.
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(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, and (iii) the transferee of all or substantially all of
Issuer's assets.
(2) "Substitute Common Stock" shall mean the common stock
issued by the issuer of the Substitute Option upon exercise of the
Substitute Option.
(3) "Assigned Value" shall mean the Market/Offer Price, as
defined in Section 7.
(4) "Average Price" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher than
the closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person, as
the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided, that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to the Holder. The issuer of the Substitute Option
shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement, which shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value multiplied
by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the number of shares of Substitute Common Stock
for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 9.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than 9.9%
of the
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shares of Substitute Common Stock outstanding prior to exercise but for this
clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer")
shall make a cash payment to Holder equal to the excess of (i) the value of the
Substitute Option without giving effect to the limitation in this clause (e)
over (ii) the value of the Substitute Option after giving effect to the
limitation in this clause (e). This difference in value shall be determined by
a nationally recognized investment banking firm selected by the Holder or the
Owner, as the case may be, and reasonably acceptable to the Acquiring
Corporation.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "Substitute
Option Repurchase Price") equal to (x) the amount by which (i) the Highest
Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the
Substitute Option, multiplied by the number of shares of Substitute Common Stock
for which the Substitute Option may then be exercised plus (y) Grantee's
reasonable out-of-pocket expenses (to the extent not previously reimbursed), and
at the request of the owner (the "Substitute Share Owner") of shares of
Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer
shall repurchase the Substitute Shares at a price (the "Substitute Share
Repurchase Price") equal to (x) the Highest Closing Price multiplied by the
number of Substitute Shares so designated plus (y) Grantee's reasonable Out-of-
Pocket Expenses (to the extent not previously reimbursed). The term "Highest
Closing Price" shall mean the highest closing price for shares of Substitute
Common Stock within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as
the case may be, may exercise its respective right to require the Substitute
Option Issuer to repurchase the Substitute Option and the Substitute Shares
pursuant to this Section 9 by surrendering for such purpose to the Substitute
Option Issuer, at its principal office, the agreement for such Substitute Option
(or, in the absence of such an agreement, a copy of this Agreement) and
certificates for Substitute Shares accompanied by a written notice or notices
stating that the Substitute Option Holder or the Substitute Share Owner, as the
case may be, elects to require the Substitute Option Issuer to repurchase the
Substitute Option and/or the Substitute Shares in accordance with the provisions
of this Section 9. As promptly as practicable, and in any event within five
business days after the surrender of the Substitute Option and/or certificates
representing Substitute
-12-
<PAGE>
Shares and the receipt of such notice or notices relating thereto, the
Substitute Option Issuer shall deliver or cause to be delivered to the
Substitute Option Holder the Substitute Option Repurchase Price and/or to the
Substitute Share Owner the Substitute Share Repurchase Price therefor or, in
either case, the portion thereof which the Substitute Option Issuer is not then
prohibited under applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited
under applicable law or regulation from repurchasing the Substitute Option
and/or the Substitute Shares in part or in full, the Substitute Option Issuer
following a request for repurchase pursuant to this Section 9 shall immediately
so notify the Substitute Option Holder and/or the Substitute Share Owner and
thereafter deliver or cause to be delivered, from time to time, to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the
portion of the Substitute Share Repurchase Price, respectively, which it is no
longer prohibited from delivering, within five business days after the date on
which the Substitute Option Issuer is no longer so prohibited; provided,
however, that if the Substitute Option Issuer is at any time after delivery of a
notice of repurchase pursuant to subsection (b) of this Section 9 prohibited
under applicable law or regulation from delivering to the Substitute Option
Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively, in
full (and the Substitute Option Issuer shall use its best efforts to receive all
required regulatory and legal approvals as promptly as practicable in order to
accomplish such repurchase), the Substitute Option Holder or Substitute Share
Owner may revoke its notice of repurchase of the Substitute Option or the
Substitute Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, the Substitute Option Issuer shall promptly (i)
deliver to the Substitute Option Holder or Substitute Share Owner, as
appropriate, that portion of the Substitute Option Repurchase Price or the
Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
10. The 90-day period for exercise of certain rights under Sections 2, 6,
7 and 13 shall be extended: (i) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights, and for the expiration of
all statutory waiting
-13-
<PAGE>
periods; and (ii) to the extent necessary to avoid liability under Section 16(b)
of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. Neither of the parties hereto may assign any of its rights or
obligations under this Option Agreement or the Option created hereunder to any
other person, without the express written consent of the other party, except
that in the event a Subsequent Triggering Event shall have occurred prior to an
Exercise Termination Event, Grantee, subject to the express provisions hereof,
may assign in whole or in part its rights and obligations hereunder within 90
days following such Subsequent Triggering Event
-14-
<PAGE>
(or such later period as provided in Section 10); provided, however, that until
the date 15 days following the date on which the Federal Reserve Board and/or
the OTS approves an application by Grantee if required under applicable law to
acquire the shares of Common Stock subject to the Option, Grantee may not assign
its rights under the Option except in (i) a widely dispersed public
distribution, (ii) a private placement in which no one party acquires the right
to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment
to a single party (e.g., a broker or investment banker) for the purpose of
conducting a widely dispersed public distribution on Grantee's behalf, or (iv)
any other manner approved by the Federal Reserve Board or the OTS, as
applicable.
14. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to cause the
shares of Common Stock issuable hereunder to be approved for trading and
reporting on the Nasdaq National Market, upon official notice of issuance and
applying to the Federal Reserve Board and/or the OTS if required under
applicable law for approval to acquire the shares issuable hereunder.
15. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
16. If any term, provision, covenant or restriction contained in the
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
17. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
18. This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, regardless of
-15-
<PAGE>
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
19. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
20. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
21. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors except as
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided herein.
22. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
-16-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
CB BANCORP, INC.
By: _________________________________
Joseph F. Heffernan
Chairman, President and
Chief Executive Officer
PINNACLE FINANCIAL SERVICES, INC.
By: _________________________________
Richard L. Schanze
Chairman and Chief Executive
Officer
-17-
<PAGE>
EXHIBIT 21
SUBSIDIARIES
OF
PINNACLE FINANCIAL SERVICES, INC.
Pinnacle Bank, a Michigan banking corporation
Starke's Inc., a Michigan corporation (a wholly-owned subsidiary of Pinnacle
Bank)
Crescent Mortgage, Inc., an Indiana corporation (a wholly-owned subsidiary of
Pinnacle Bank)
Brookview Real Estate, Ltd., an Indiana corporation (a wholly-owned subsidiary
of Pinnacle Bank)
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
The Board of Directors
Pinnacle Financial Services, Inc.
We consent to incorporation by reference in the registration statement of Form
S-8 (Registration Statement Number 33-8488) of Pinnacle Financial Services,
Inc. of our report dated March 3, 1997, relating to the consolidated balance
sheets of Pinnacle Financial Services, Inc. and its subsidiary as of December
31, 1996 and 1995, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the December 31, 1996
annual report on Form 10-K of Pinnacle Financial Services, Inc.
KPMG Peat Marwick LLP
Chicago, Illinois
March 28, 1997
<PAGE>
EXHIBIT 24
PINNCLE FINANCIAL SERVICES, INC.
KNOW ALL MEN by these presents that John P. Cunningham does hereby make,
constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver,
and John A. Newcomer and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended
December 31, 1996, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the 31st day of March, 1997.
/s/ John P. Cunningham
----------------------------------------
John P. Cunningham
<PAGE>
PINNCLE FINANCIAL SERVICES, INC.
KNOW ALL MEN by these presents that Charles R. Edinger does hereby make,
constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver,
and John A. Newcomer and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended
December 31, 1996, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the 31st day of March, 1997.
/s/ Charles R. Edinger
----------------------------------------
Charles R. Edinger
<PAGE>
PINNCLE FINANCIAL SERVICES, INC.
KNOW ALL MEN by these presents that John D. Fetters does hereby make,
constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver,
and John A. Newcomer and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended
December 31, 1996, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the 29th day of March, 1997.
/s/ John D. Fetters
----------------------------------------
John D. Fetters
<PAGE>
PINNCLE FINANCIAL SERVICES, INC.
KNOW ALL MEN by these presents that Richard L. Schanze does hereby make,
constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver,
and John A. Newcomer and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended
December 31, 1996, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the 31st day of March, 1997.
/s/ Richard L. Schanze
----------------------------------------
Richard L. Schanze
<PAGE>
PINNCLE FINANCIAL SERVICES, INC.
KNOW ALL MEN by these presents that Kay F. Varga does hereby make,
constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver,
and John A. Newcomer and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended
December 31, 1996, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the 31st day of March, 1997.
/s/ Kay F. Varga
----------------------------------------
Kay F. Varga
<PAGE>
PINNCLE FINANCIAL SERVICES, INC.
KNOW ALL MEN by these presents that Arnold L. Weaver does hereby make,
constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver,
and John A. Newcomer and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended
December 31, 1996, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the 29th day of March, 1997.
/s/ Arnold L. Weaver
----------------------------------------
Arnold L. Weaver
<PAGE>
PINNCLE FINANCIAL SERVICES, INC.
KNOW ALL MEN by these presents that David W. Kolhagen does hereby make,
constitute and appoint Richard L. Schanze, David W. Kolhagen, Arnold L. Weaver,
and John A. Newcomer and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Pinncle Financial Services, Inc. for the year ended
December 31, 1996, and any and all amendments thereto; such Form 10-K and each
such amendment to be in such form and to contain such terms and provisions as
said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the 29th day of March, 1997.
/s/ David W. Kolhagen
----------------------------------------
David W. Kolhagen
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,290
<INT-BEARING-DEPOSITS> 3,223
<FED-FUNDS-SOLD> 15,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 372,157
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 609,564
<ALLOWANCE> 5,643
<TOTAL-ASSETS> 1,069,121
<DEPOSITS> 761,269
<SHORT-TERM> 113,961
<LIABILITIES-OTHER> 4,442
<LONG-TERM> 111,400
0
0
<COMMON> 19,110
<OTHER-SE> 58,939
<TOTAL-LIABILITIES-AND-EQUITY> 1,069,121
<INTEREST-LOAN> 50,009
<INTEREST-INVEST> 23,021
<INTEREST-OTHER> 939
<INTEREST-TOTAL> 73,969
<INTEREST-DEPOSIT> 30,536
<INTEREST-EXPENSE> 39,693
<INTEREST-INCOME-NET> 34,276
<LOAN-LOSSES> 375
<SECURITIES-GAINS> 653
<EXPENSE-OTHER> 26,956<F1>
<INCOME-PRETAX> 14,253
<INCOME-PRE-EXTRAORDINARY> 14,253
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,152
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.55
<YIELD-ACTUAL> 3.79
<LOANS-NON> 761
<LOANS-PAST> 3,916
<LOANS-TROUBLED> 227
<LOANS-PROBLEM> 10,157
<ALLOWANCE-OPEN> 5,852
<CHARGE-OFFS> 934
<RECOVERIES> 350
<ALLOWANCE-CLOSE> 5,643
<ALLOWANCE-DOMESTIC> 5,643
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Includes 2,374 for Special SAIF Assessment
</FN>
</TABLE>
