<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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)
MICHIGAN 38-2671129
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
830 PLEASANT STREET, ST. JOSEPH, MICHIGAN 49085
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 983-6311
Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]
The number of common shares, no par value, outstanding was 5,981,132 at
June 30, 1997.
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
FORM 10-Q
June 30, 1997
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1997; June 30, 1996; December 31, 1996 3
--
Consolidated Statements of Income
Six Months Ended June 30, 1997 and 1996 4
--
Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 1997 and 1996 5
--
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997, 1996 and 1995 6
--
Notes to Consolidated Financial Statements 7
--
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 9
--
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 34
--
Signatures 35
--
2
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
(Dollars in thousands, except per share data) 6/30/97 6/30/96 12/31/96
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 25,193 $ 21,423 $ 30,290
Federal funds sold 3,500 - 15,750
-----------------------------------------
Total cash and cash equivalents 28,693 21,423 46,040
Interest-bearing deposits with financial institutions 905 2,051 3,223
Securities available-for-sale:
Taxable 366,953 322,755 350,685
Tax-exempt 34,808 18,892 21,472
Loans, net of unearned income:
Real estate 268,311 284,926 276,941
Commercial 225,700 179,098 210,315
Tax-exempt 7,124 2,494 8,196
Consumer 117,862 99,865 114,112
-----------------------------------------
Subtotal Loans 618,997 566,383 609,564
Less allowance for loan losses 5,726 5,815 5,643
-----------------------------------------
Net loans 613,271 560,568 603,921
Premises and equipment, net 13,577 12,685 12,686
Accrued interest receivable and other assets 33,346 31,230 31,094
-----------------------------------------
Total assets $ 1,091,553 $ 969,604 $ 1,069,121
-----------------------------------------
-----------------------------------------
LIABILITIES:
Deposits:
Noninterest bearing demand $ 66,146 $ 55,418 $ 78,365
Interest-bearing demand 73,220 75,852 76,665
Savings 271,787 261,054 260,689
Time 355,575 344,528 344,242
-----------------------------------------
Total deposits 766,728 736,852 759,961
Federal Home Loan Bank advances 185,021 121,063 159,489
Securities sold under repurchase agreements and other borrowings 54,874 34,548 67,180
Accrued interest payable and other liabilities 4,656 5,247 4,442
-----------------------------------------
Total liabilities 1,011,279 897,710 991,072
STOCKHOLDERS' EQUITY:
Common Stock; no par value; 15,000,000 shares authorized;
5,981,132 shares issued and outstanding at June 30, 1997;
5,977,548 shares issued and outstanding at December 31, 1996;
and 5,873,558 shares issued and outstanding at June 30, 1996 19,110 19,110 19,110
Additional paid in capital 44,588 43,915 44,526
Retained earnings 18,059 13,150 14,789
Net unrealized gain (loss) on securities available-for-sale (1,483) (4,281) (376)
-----------------------------------------
Total stockholders' equity 80,274 71,894 78,049
-----------------------------------------
Total liabilities and stockholders' equity $ 1,091,553 $ 969,604 $ 1,069,121
-----------------------------------------
-----------------------------------------
</TABLE>
3
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in thousands, except per share data) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 13,522 $ 12,286 $ 26,547 $ 23,863
Tax-exempt 116 42 238 86
Interest and dividends on securities:
Available-for-sale
Taxable 7,081 5,373 13,652 10,140
Tax-exempt 298 260 571 524
Interest on federal funds sold 18 15 61 105
Interest on interest-bearing deposits with financial institutions 13 29 44 445
--------------------------------------------------------
Total interest income 21,048 18,005 41,113 35,163
INTEREST EXPENSE:
Interest on deposits 7,892 7,467 15,639 14,848
Interest on Federal Home Loan Bank advances 2,889 1,627 5,413 3,097
Interest on securities sold under repurchase and other borrowings 886 471 1,630 909
--------------------------------------------------------
Total interest expense 11,667 9,565 22,682 18,854
--------------------------------------------------------
Net interest income 9,381 8,440 18,431 16,309
Provision for loan losses 325 70 560 150
--------------------------------------------------------
Net interest income, after provision for loan losses 9,056 8,370 17,871 16,159
--------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 796 485 1,546 936
Trust income 165 176 330 320
Securities gains and losses, net 178 36 237 270
Other income 1,308 1,299 2,225 2,054
--------------------------------------------------------
Total noninterest income 2,447 1,996 4,338 3,580
NONINTEREST EXPENSES:
Salaries and benefits 2,886 2,707 5,651 5,229
Occupancy expense 537 479 1,148 1,001
Equipment expense 410 376 831 756
FDIC insurance premiums 53 227 149 446
Other expense 2,672 2,363 4,968 4,471
--------------------------------------------------------
Total noninterest expenses 6,558 6,152 12,747 11,903
--------------------------------------------------------
Income before federal income tax expense 4,945 4,214 9,462 7,836
Income tax expense 1,834 1,634 3,381 2,812
--------------------------------------------------------
Net income $ 3,111 $ 2,580 $ 6,081 $ 5,024
--------------------------------------------------------
--------------------------------------------------------
Net income per common share $ 0.52 $ 0.44 $ 1.02 $ 0.86
--------------------------------------------------------
--------------------------------------------------------
Weighted average shares outstanding 5,980,873 5,873,516 5,979,763 5,873,438
--------------------------------------------------------
--------------------------------------------------------
Cash dividends declared per common share $ 0.235 $ 0.21 $ 0.47 $ 0.40
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
4
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON SECURITIES
COMMON PAID-IN RETAINED AVAILABLE-FOR
(Dollars in thousands) STOCK CAPTITAL EARNINGS SALE TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 19,110 44,174 10,475 1,137 74,896
Net income - - 5,024 - 5,024
Common stock issuance, net of stock
offering costs - (259) - - (259)
Cash dividends declared, $.40 per share - - (2,349) - (2,349)
Change in unrealized losses for securities
available-for-sale, net of tax effect
of $(2,917) - - - (5,418) (5,418)
-----------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 19,110 43,915 13,150 (4,281) 71,894
Net income - 4,128 - 4,128
Common stock issuance - 611 - - 611
Cash dividends declared, $.635 per share - (2,489) - (2,489)
Change in unrealized gains for securities
available-for-sale, net of tax effect
of $466 - - 3,905 3,905
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 19,110 44,526 14,789 (376) 78,049
Net income - 6,081 - 6,081
Common stock issuance - 62 - - 62
Cash dividends declared, $.47 per share - (2,811) - (2,811)
Change in unrealized gains for securities
available-for-sale, net of tax effect
of $(757) - - (1,107) (1,107)
-----------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 19,110 44,588 18,059 (1,483) 80,274
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
5
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(Dollars in thousands) 1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,081 $ 5,024 $ 3,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,295 1,292 581
Net amortization on loans and securities 480 733 610
Provision for loan losses 560 150 125
Deferred federal income taxes - 35 (153)
Mortgage loans originated for sale (7,578) (40,759) (1,961)
Proceeds from sales of loans 39,405 30,220 6,846
Gain on sale of securities, net (237) (270) (181)
Gain on sale of loans, net (593) (480) (51)
Increase in interest receivable and other assets (2,131) (407) (945)
Increase in interest payable and other liabilities 214 (1,167) 268
------------------------------------------
NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES 37,496 (5,629) 8,146
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans, excluding loan sales,
purchases, and originated for sale (34,185) (15,286) (14,828)
Purchases of loans (7,276) (22,415) (7,129)
Purchases of securities available-for-sale (92,319) (131,404) (49,293)
Purchases of securities held-to-maturity - - (494)
Proceeds from sales of securities available-for-sale 50,453 47,996 37,502
Proceeds from maturities and paydowns of securities
available-for-sale 10,475 21,231 3,253
Proceeds from maturities and paydowns of securities
held-to-maturity - - 6,126
Net increase in interest-bearing deposits with financial institutions 2,318 39,460 1,026
Capital expenditures (1,553) (779) (370)
------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (72,087) (61,197) (24,207)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 6,767 35,129 16,476
Net increase in securities sold under repurchase agreements
and other borrowings 13,226 27,080 6,549
Common stock issued 62 (259) -
Dividends paid (2,811) (2,232) (1,338)
------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES 17,244 59,718 21,687
------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (17,347) (7,108) 5,626
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 46,040 28,531 14,750
------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,693 $ 21,423 $ 20,376
------------------------------------------
------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 22,517 $ 18,741 $ 7,733
Federal income taxes paid $ 3,315 $ 2,895 $ 1,862
Loans transferred to other real estate owned $ 751 $ 74 $ 516
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Pinnacle Financial Services, Inc. (together with its subsidiary, the
"Company") have been prepared in conformity with generally accepted
accounting principles for interim financial information and with the
instruction for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all necessary adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. The operating results for the six month period ended
June 30, 1997 are not necessarily indicative of the results to be expected
for the year ending December 31, 1997.
For further information, refer to the consolidated financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 as filed with the Securities
and Exchange Commission.
NOTE 2: ACCOUNTING FOR IMPAIRED LOANS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standard SFAS No. 114 (as amended by SFAS No. 118), "Accounting
by Creditors for Impairment of a Loan".
Impaired loans under SFAS 114 and SFAS 118 are nonaccrual loans and
restructured loans. All nonaccrual loans are considered as impaired loans.
Additionally, loans are considered impaired if principal and/or interest is
considered at risk, even if the loan is current with all payments of
principal and interest. Impaired loans follow the same criteria as other
loans with valuation reserves established at the period deemed to be
impaired.
Nonperforming loans are comprised of loans which the accrual of
interest has been discontinued, loans contractually past due 90 days or
more as the interest and/or principal and not included in nonaccrual loans.
Loans are generally placed on a nonaccrual basis when, in the opinion of
management, collection of principal or interest payments is unlikely.
Income on such loans is then recognized only to the extent that cash is
received and where future collection of principal is probable.
NOTE 3: ACCOUNTING FOR TRANSFERS AND SERVICING FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES
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. The Company
adopted this statement on January 1, 1997, and it did not have a material
effect on the Company's financial condition, results of operations, or
liquidity.
7
<PAGE>
NOTE 4: COMMITMENTS - PROPOSED ACQUISITIONS
On November 14, 1996, the Company 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 to be accounted for using the pooling
of interests method. The acquisition has received shareholder and
regulatory approval and was closed on August 1, 1997.
On March 3, 1997, the Company announced the execution of a definitive
agreement to acquire 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 shares of
Pinnacle Common Stock, and it is to be accounted for using the
pooling-of-interests method. The final exchange rate was 1.2095 shares of
Pinnacle Common Stock for each share issued and outstanding of CB Common
Stock based on an average Pinnacle stock price of $28.938 per share. The
acquisition has received shareholder and regulatory approval and was closed
on August 1, 1997.
NOTE 5: PER COMMON SHARE DATA
Earnings per share are calculated by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Common stock equivalents are
calculated using the treasury stock method.
NOTE 6: POST PERIOD CLOSING ACQUISITION
Effective August 1, 1997, the Company acquired 100% of the
outstanding common stock of Indiana Federal Corporation located in
Valparaiso, Indiana. The acquisition was accounted for as a pooling of
interest, with 4,790,736 shares of the Company's common stock issued as
consideration. IFC's main subsidiary, Indiana Federal Savings Bank was
merged with and into the Company's subsidiary, Pinnacle Bank, located in
St. Joseph, Michigan.
Effective August 1, 1997, the Company acquired 100% of the
outstanding common stock of CB Bancorp, Inc. located in Michigan City,
Indiana. The acquisition was accounted for as a pooling of interest, with
1,553,144 shares of the Company's common stock issued as consideration.
CB's main subsidiary, Community Bank was merged with and into the
Company's subsidiary, Pinnacle Bank, located in St. Joseph, Michigan.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides information regarding the
financial condition and results of operations of Pinnacle Financial
Services, Inc. (the "Company" or "Pinnacle") for the six month period
ended June 30, 1997 and are not necessarily indicative of results to be
attained for any other period. This discussion should be read in
conjunction with the consolidated financial statements, results of
operations and related notes, and with the statistical information and
financial data appearing in this report as well as the 1996 Annual Report
on Form 10-K of Pinnacle Financial Services, Inc.
DESCRIPTION OF THE COMPANY
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 "The
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 services 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 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 through 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 a
tourism-driven economic growth.
9
<PAGE>
Pinnacle had approximately $1.1 billion in total assets as of June 30,
1997. Pinnacle returned 1.14% on average assets for the second quarter of
1997 as compared to 1.08% for the same period of 1996. Pinnacle returned
1.14% on average assets for the six months ended June 30, 1997 as compared
to 1.07% for the same period of 1996.
For the second quarter of 1997, Pinnacle's return on average equity
was 16.30% as compared to 14.17% for the same period of 1996. Pinnacle's
return on average equity was 15.94% for the six months ended June 30, 1997
as compared to 13.63% for the same period of 1996.
Pinnacle believes its success is in part attributable to a growth
strategy that, since the beginning of 1995, has (i) increased assets by
more than 167% (with total assets growing to $1.1 billion by June 30,
1997), and (ii) increased net loans by more than 115% (with net loans
growing to approximately $613.3 million at June 30, 1997). Pinnacle's loan
to deposit ratio was approximately 80.7% at June 30, 1997. Pinnacle's
growth has been generated internally through customer retention and
cross-selling programs and externally through acquisitions. Since 1988,
Pinnacle has consummated seven acquisitions, four of which involved
thrifts, including the two which closed on August 1, 1997.
Through its acquisition strategy, Pinnacle seeks to diversify and
expand both its market area and its asset base, and to increase its
profitability.
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 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. On August 1, 1997, with the consummation of the
two announced acquisitions, Mr. Ansary holds approximately 10% 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 31, 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 the Maco Acquisition, Pinnacle acquired First
Insurance, Inc., an Indiana corporation engaged primarily in the sale of
multi-peril homeowners insurance to borrowers of Pinnacle Bank. On 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 independent "full-line" insurance agency. On December 31,
1996, First Insurance, Inc. was merged with and into Starke's, Inc..
10
<PAGE>
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 March 1, 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 contemplated the merger of each of IFC and
CB with and into Pinnacle, with Pinnacle being the surviving entity. These
transactions qualified as "pooling of interests" for accounting and
financial reporting purposes and increased the total assets of Pinnacle by
more than $1.0 billion. Consummation of these transactions was
August 1, 1997.
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.
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 strategy to achieve growth will be successful.
11
<PAGE>
OVERVIEW AND FINANCIAL CONDITION
NET INCOME
For the three months ended June 30, 1997, the Company reported net
income of approximately $3.1 million or $.52 per share, as compared to net
income of approximately $2.6 million, or $.44 per share for three months
ended June 30, 1996, an increase in net income of 20.6% and 18.2% on a per
share basis. For the six months ended June 30, 1997, the Company reported
net income of approximately $6.1 million or $1.02 per share, as compared to
net income of approximately $5.0 million or $.86 per share for the same
period in 1996. The increase in net income was largely the result of
higher levels of net interest income associated with higher levels of
earning assets, as average earning assets grew by $134.5 million or 15.0%
in the second quarter of 1997 as compared to the second quarter of 1996.
Presented below is an income statement analysis, expressed on a
per-share basis, comparing the quarter and six months ended June 30, 1997,
to the same period in 1996. A more detailed discussion and analysis of the
major factors outlined below is provided in following sections of this
report.
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
------------- ------------
<S> <C> <C>
Net income per share - Period ended June 30, 1996 $ .43 (1) $ .84 (2)
Pre-tax increase (decrease) in 1997, as compared to 1996
resulting from changes in:
Net interest income (taxable equivalent) .17 .38
Provision for loan losses (.04) (.07)
Noninterest income .08 .13
Noninterest expense (.07) (.14)
------ ------
Pre-tax increase .14 .30
Income tax expense (.05) (.12)
------ ------
Net income per share - Period ended June 30, 1997 $ .52 $1.02
------ ------
------ ------
</TABLE>
(1) Net income per share restated based on 5,980,873 average shares
outstanding.
(2) Net income per share restated based on 5,979,763 average shares
outstanding.
12
<PAGE>
BALANCE SHEET
Total assets at June 30, 1997 and at December 31, 1996 were
approximately $1.1 billion. Total assets at June 30, 1996 were $969.6
million. Average earning assets equaled 94.3% of total average assets for
the quarter ended June 30, 1997 as compared to 94.2% of total average
assets for the quarter ended June 30, 1996. The following table summarizes
the components of Pinnacle's total assets, loans, net, total deposits and
stockholders' equity for the time periods indicated.
OVERVIEW AND FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At June 30, At June 30, At December 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
(Dollars in Thousands)
Total assets $1,091,553 $ 969,604 $1,069,121
Loans, net 613,271 560,568 603,921
Deposits 766,728 736,852 759,961
Stockholders' equity 80,274 71,894 78,049
</TABLE>
Loan, net, at June 30, 1997 were approximately $613.3 million, which
was $9.4 million greater than loans, net, at December 31, 1996 of $603.9
million. Commercial and tax exempt loans grew $14.3 million, or 6.5%, to
$232.8 million at June 30, 1997 as compared to the December 31, 1996 total
of $218.5 million. Consumer loans, consisting primarily of home equity
loans, were $117.9 million at June 30, 1997, an increase of $3.8 million,
or 3.3% , over the December 31, 1996 total of $114.1 million. Real estate
loans declined $8.6 million, or 3.1%, to $268.3 million at June 30, 1997
from $276.9 million at December 31, 1996. The decline in real estate loans
during the second quarter of 1997 reflects management's decision to reduce
Pinnacle's level of real estate loans as a percentage of total loans
outstanding. This reduction was accomplished through the continued sale of
originated loans in the secondary market.
Loans, net, at June 30, 1997 were approximately $52.7 million greater
than loans, net, at June 30, 1996 of $560.6 million, reflecting Pinnacle's
greater emphasis on commercial and consumer lending in its Indiana markets
following its December 31, 1995 acquisition of Maco Bancorp, Inc..
Commercial and tax exempt loans grew $51.2 million to $232.8 million at
June 30, 1997, or 28.2%, over the June 30, 1996 total of $181.6 million.
Consumer loans (which consisted primarily of home equity loans) were $117.9
million at June 30, 1997, an increase of $18.0 million and 18.1% over the
June 30, 1996 total of $99.9 million. Real estate loans at June 30, 1997
totaled $268.3 million as compared to $284.9 million at June 30, 1996.
Total deposits at June 30, 1997 were $766.7 million as compared to
$760.0 million at December 31, 1996 and $736.9 million at June 30, 1996.
The slight increase in total deposits since December 31, 1996 was in the
savings and time account balances. Savings deposits increased $11.1
million (to $271.2 million) and time deposits increased $11.4 million (to
$355.6 million), while noninterest bearing demand deposits decreased $12.3
million (to $66.1 million) mainly because of seasonal deposits at December
31, 1996 were shifted to interest bearing accounts. The growth in deposits
since June 30,
13
<PAGE>
1996 resulted from an $10.7 million increase in noninterest bearing
deposits, a $10.7 million increase in savings deposits and an $11.1 million
increase in time deposits.
Federal Home Loan Bank advances, securities sold under repurchase
agreements and other borrowings were approximately $239.9 million at June
30, 1997, as compared to $226.7 million at December 31, 1996 and $155.6
million at June 30, 1996. These increases reflect the use of these funding
sources to match specific investment securities purchases with like
maturities or pricing terms and to fund strong loan growth during 1996 and
1997. Stockholders' equity was approximately $80.3 million at June 30,
1997 as compared to $78.0 million at December 31, 1996 and $71.9 million
at June 30, 1996. The increase in stockholders' equity since December
31, 1996 resulted from net income earned for 1997 offset by changes in
the market values of securities available-for-sale and dividends paid.
The increase in stockholders' equity since June 30, 1996 reflects net
income earned since that date and changes in the market values of
securities available-for-sale offset by dividends paid.
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 16.30%
for the second quarter of 1997 compared to 14.17% for the second quarter of
1996. Pinnacle's return on average equity was 15.94% for the six months
ended June 30, 1997 as compared to 13.63% for the same period of 1996.
Return on average assets measures how profitably the total assets of
Pinnacle are invested. Return on average assets was 1.14% for the second
quarter of 1997 compared to 1.08% for the second quarter of 1996. Pinnacle
returned 1.14% on average assets for the six months ended June 30, 1997 as
compared to 1.07% for the same period of 1996.
The Company recognizes the importance of maximizing the use of capital
to provide improved returns to our stockholders. This has been
accomplished in the past by the way of growth through acquisition of other
financial institutions. While it is management's intention to seize upon
favorable opportunities which may arise with respect to community banks or
other financial institutions in the future, at the present time there are
no ongoing negotiations for any acquisitions.
On December 1, 1995 the Company acquired Maco Bancorp and its
subsidiaries of First Federal Savings Bank of Indiana, Brookview Real
Estate, and First Insurance, Inc., headquartered in Merrillville, Indiana
and on October 1, 1996 the Company acquired Starke's, Inc., a Michigan
corporation and an independent "full-line" insurance agency.
Pinnacle's most recent acquisitions occurred on August 1, 1997, when
the Company acquired Indiana Federal Corporation, a Delaware corporation
and a registered savings and loan holding company and CB Bancorp, Inc., a
Delaware corporation and a registered savings and loan holding company.
14
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income for the three months ended June 30, 1997 was approximately
$3.1 million, a 20.6% increase as compared to net income of $2.6 million
for the same period in 1996. This increase was largely the result of
higher levels of net interest income associated with higher levels of
earning assets.
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.
15
<PAGE>
The following table sets forth certain information with respect to Pinnacles's
consolidated net-interest income for the quarter ended June 30, 1997, 1996,
and 1995.
<TABLE>
<CAPTION>
SUMMARY OF CONSOLIDATED NET INTEREST INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 1,355 $ 18 5.33% $ 1,099 $ 15 5.49% $ 3,048 $ 46 6.05%
Interest-bearing deposits
with financial institution 290 13 17.98% 3,228 29 3.61% 1,691 25 5.93%
U.S. Treasury and government agencies 293,768 5,450 7.44% 211,161 3,526 6.72% 60,816 971 6.40%
Other Securities (2) 116,712 2,069 7.11% 127,575 2,232 7.04% 42,014 701 6.69%
Loans (1)(2) 621,624 13,694 8.84% 556,180 12,347 8.93% 305,538 7,147 9.38%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,033,749 21,244 8.24% 899,243 18,149 8.12% 413,107 8,890 8.63%
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 21,451 18,666 13,529
Premises and equipment, net 13,344 12,618 7,011
Allowance for loan losses (5,637) (5,786) (5,005)
Other assets 33,539 30,215 9,788
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,096,466 $21,244 $954,956 $18,149 $438,430 $ 8,890
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing demand $ 75,389 $ 352 1.87% $ 77,198 $ 387 2.02% 44,173 $ 214 1.94%
Savings and money market accounts 268,938 2,549 3.80% 261,610 2,380 3.66% 130,200 1,358 4.18%
Time deposits of $100,000 or more 69,099 980 5.69% 27,715 395 5.73% 26,403 - 0.00%
Other time deposits 286,750 4,011 5.61% 308,557 4,287 5.59% 123,727 2,157 6.99%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 700,176 7,892 4.52% 675,080 7,449 4.44% 324,503 3,729 4.61%
- ----------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances 194,499 2,889 5.96% 114,297 1,627 5.73% 15,505 245 6.34%
Federal funds purchased and
securities sold 65,286 886 5.44% 39,296 489 5.00% 20,900 242 4.64%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 959,961 11,667 4.87% 828,673 9,565 4.64% 360,908 4,216 4.69%
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 55,639 47,882 37,611
Other liabilities 4,277 5,356 2,702
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,019,877 881,911 401,221
Stockholders' equity 76,569 73,045 37,209
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
Stockholders' equity $1,096,446 $954,956 $438,430
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 9,577 $ 8,584 $ 4,674
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest rate margin (3) 3.72% 3.84% 4.54%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of these computations, nonaccrual loans and unearned income
are included in the daily average loan amount 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.
16
<PAGE>
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-earning 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>
RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------------------------------------------------
1997/1996 1997/1996
QUARTER ENDED JUNE 30, CHANGE IN INTERST DUE TO: CHANGE IN INTERST DUE TO:
- --------------------------------------------------------------------------------------------------------------------------
RATE & NET RATE NET
(Dollars in thousands) VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME CHANGE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 14 $ (2) $ (9) $ 3 $ (118) (17) $ 104 $ (31)
Interest-bearing deposits
with financial institution (106) 464 (374) (16) 91 (39) (48) 4
U.S. Treasury and government
agencies 5,551 1,520 (5,147) 1,924 9,622 195 (7,262) 2,555
Other securites (1) (765) 89 513 (163) 5,724 147 (4,340) 1,531
Loans (1) 5,844 (501) (3,996) 1,347 23,510 (1,375) (16,935) 5,200
-------------------------------------------------------------------------------------------
Total interest-earning
assets $10,538 $ 1,570 $(9,013) $ 3,095 $ 38,829 $(1,089) $(28,481) $9,259
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing demand $ (37) $ (116) $ 118 $ (35) $ 641 $ 35 $ (503) $ 173
Savings and money market
accounts 268 366 (465) 169 5,493 (677) (3,794) 1,022
Time deposits of $100,000
or more 2,371 (11) (1,775) 585 -- 1,513 (1,118) 395
Other time deposits (1,219) 62 881 (276) 12,920 (1,732) (9,058) 2,130
-------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,383 301 (1,241) 443 19,054 (861) (14,473) 3,720
-------------------------------------------------------------------------------------------
Federal Home Loan Bank
advances 4,596 263 (3,597) 1,262 6,263 (95) (4,786) 1,382
Federal funds purchased and
securities sold 1,300 173 (1,076) 397 854 75 (682) 247
-------------------------------------------------------------------------------------------
Total interest-bearing
Liabilities 7,279 737 (5,914) 2,102 26,171 (881) (19,941) 5,349
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net interest income 3,259 833 (3,099) 993 12,658 (208) (8,540) 3,910
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
(1) Income from state and political subdivisions securities and loans are
stated on a tax equivalent basis.
17
<PAGE>
The following table sets forth certain information with respect to Pinnacle's
consolidated net-interest income for the six months ended June 30, 1997, 1996,
and 1995.
<TABLE>
<CAPTION>
SUMMARY OF CONSOLIDATED NET INTEREST INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 2,295 $ 61 5.36% $ 3,978 $ 105 5.31% $ 2,108 $ 63 6.03%
Interest-bearing deposits
with financial institution 1,736 44 5.11% 16,275 445 5.50% 1,419 40 5.68%
U.S. Treasury and government
agencies 283,399 10,438 7.43% 194,449 5,478 6.70% 58,645 1,891 6.50%
Other securities (2) 115,436 4,044 7.06% 131,289 4,426 6.78% 44,703 1,481 6.68%
Loans (1)(2) 614,841 26,895 8.82% 538,979 23,988 8.95% 300,750 13,878 9.31%
---------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,017,707 41,482 8.22% 884,970 35,442 8.05% 407,625 17,353 8.58%
---------------------------------------------------------------------------------------------------
Cash and due from banks 22,066 19,694 13,172
Premises and equipment, net 13,097 12,584 6,998
Allowance for loan losses (5,633) (5,811) (5,007)
Other Assets 32,224 28,794 9,911
---------------------------------------------------------------------------------------------------
Total assets $1,079,461 $41,482 $940,231 $35,442 $432,699 $17,353
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing demand $ 75,688 $ 715 1.90% $ 76,193 $ 784 2.07% $ 44,503 $ 426 1.93%
Savings and money market
accounts 268,600 5,080 3.80% 258,160 4,750 3.70% 132,122 2,717 4.15%
Time deposits of $100,000
or more 67,667 1,898 5.66% 35,524 1,027 5.81% 24,103 694 5.81%
Other time deposits 286,126 7,966 5.61% 295,429 8,287 5.64% 119,419 3,168 5.35%
---------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 698,081 15,639 4.52% 665,306 14,848 4.49% 320,147 7,005 4.41%
---------------------------------------------------------------------------------------------------
Federal Home Loan Bank
advances 184,010 5,413 5.93% 107,941 3,097 5.77% 13,713 415 6.10%
Federal funds purchased
and securities sold 62,646 1,630 5.25% 39,334 909 4.65% 22,547 575 5.14%
---------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 944,737 22,682 4.84% 812,581 18,854 4.67% 356,407 7,995 4.52%
---------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 53,445 47,883 37,193
Other liabilities 4,345 5,641 2,718
---------------------------------------------------------------------------------------------------
Total liabilities 1,002,527 866,105 396,318
Stockholders' equity 76,934 74,126 36,381
---------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,079,461 $940,231 $432,699
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Net interest income $18,800 $16,588 $ 9,358
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Net interest rate margin (3) 3.73% 3.77% 4.63%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</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.
18
<PAGE>
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-earning 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>
RATE/VOLUME ANALYSIS
- ---------------------------------------------------------------------------------------------------------------------------------
1997/1996 1997/1996
SIX MONTHS ENDED JUNE 30, CHANGE IN INTEREST DUE TO: CHANGE IN INTEREST DUE TO:
- ---------------------------------------------------------------------------------------------------------------------------------
RATE & NET RATE & NET
(Dollars in thousands) VOLUME RATE VOLUME CHANGE VOLUME RATE VOLUME CHANGE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ (89) $ 2 $ 43 $ (44) $ 113 (15) $ (56) $ 42
Interest-bearing deposits with
financial institution (800) (83) 462 (401) 844 (3) (436) 405
U.S. Treasury and government agencies 5,960 1,419 (3,419) 3,960 8,827 117 (4,357) 4,587
Other securities (1) (1,075) 368 325 (382) 5,784 45 (2,884) 2,945
Loans (1) 6,790 (701) (3,182) 2,907 22,179 (1,083) (10,986) 10,110
---------------------------------------------------------------------------------------
Total interest-earning assets $10,786 $ 1,025 $(5,771) $6,040 $37,747 $ (939) $(18,719) $18,089
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing demand $ (10) $ (130) $ 71 $ (69) $ 612 $ 62 $ (316) $ 358
Savings and money market accounts 386 258 (334) 310 5,231 (595) (2,603) 2,033
Time deposits of $100,000 or more 1,868 (53) (944) 871 664 - (331) 333
Other time deposits (525) (89) 293 (321) 9,417 346 (4,644) 5,119
---------------------------------------------------------------------------------------
Total interest-bearing deposits 1,719 (14) (914) 791 15,924 (187) (7,894) 7,843
---------------------------------------------------------------------------------------
Federal Home Loan Bank advances 4,389 173 (2,246) 2,316 5,748 (45) (3,021) 2,682
Federal funds purchased and
securities sold 1,084 236 (599) 721 863 (110) (419) 334
---------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 7,192 $ 395 $(3,759) $3,828 $22,535 $ (342) $(11,334) $10,859
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Net interest income $ 3,594 $ 630 $(2,012) $2,212 $15,212 $ (597) $ (7,385) $ 7,230
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
(1) Income from state and political subdivisions securities and loans are
stated on a tax equivalent basis.
19
<PAGE>
Net interest income on a tax-equivalent basis was approximately $9.6 million for
the second quarter of 1997 as compared to $8.6 million for the second quarter of
1996. The increase of 11.6% was due primarily to the increase in average
earning assets which grew $134.5 million or 15.0% for the quarter ended June 30,
1997 as compared to the same period ended June 30, 1996. Net interest income
was decreased by the lower net interest margin of 3.72% for the three months
ended June 30, 1997 as compared to 3.84% for the same period of 1996. Higher
yields associated with the increase in loans and higher yields on investments
increased the yields on interest earning assets by .12% to 8.24% for the second
quarter of 1997 as compared to 8.12% for the second quarter of 1996 while the
cost of funds increased .23% to 4.87% in the second quarter of 1997 as compared
to 4.64% for the same period of 1996.
Net interest income on a tax-equivalent basis was approximately $18.8 million
for the six months ended June 30, 1997 as compared to $16.6 million for the six
months ended June 30, 1996. The increase of 13.3% was due primarily to the
increase in average earning assets which grew $132.7 million or 15.0% for the
six months ended June 30, 1997 as compared to the same period ended June 30,
1996. Net interest income was decreased by the lower net interest margin of
3.73% for the six months ended June 30, 1997 as compared to 3.77% for the same
period of 1996. Higher yields associated with the increase in loans and higher
yields on investments increased the yields on interest earning assets by .17% to
8.22% for the six months ended June 30, 1997 as compared to 8.05% for the six
months ended June 30, 1996 while the cost of funds increased .17% to 4.84% in
the second quarter of 1997 as compared to 4.67% for the same period of 1996.
20
<PAGE>
NONINTEREST INCOME
The following table reflects various components of noninterest income
for each time period reported.
NONINTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Service charges on deposit accounts $ 796 $ 485 $1,546 $ 936
Trust fees 165 176 330 320
Investment services fees 60 98 112 158
Merchant and loan service fees 438 414 685 630
Recoveries on distressed assets 39 98 189 126
Gain (loss) on sale of loans, net 416 288 593 480
Investment securities gains, net 178 36 237 270
Other income 355 401 646 660
------ ------ ------ ------
Total noninterest income $2,447 $1,996 $4,338 $3,580
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Noninterest income for the three months ended June 30, 1997 was
approximately $2.4 million as compared to $2.0 million for the same period
in 1996. Service charges on deposit accounts increased $311 million or
64.1% as fee based deposit accounts were introduced in the Company's
Indiana market including a new line of checking accounts. Gain on sale of
loans, net increased $128,000 or 44.4% as the Company increased loan sale
activity in the second quarter. Noninterest income for the six months
ended June 30, 1997 was approximately $4.3 million as compared to $3.6
million for the same period in 1996. Service charges on deposit accounts
provided most of the increase by growing to $1.5 million as compared to
$936,000 for the six month period ended June 30, 1996, an increase of
65.2%. Gain on sale of loans, net also increased $113,000 or 23.5%. All
other areas of noninterest income were consistent with prior years.
21
<PAGE>
NONINTEREST EXPENSE
The following table presents the major components of noninterest
expense for each period reported.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Salaries $2,059 $2,162 $ 4,236 $ 4,142
Benefits 827 545 1,415 1,087
------- ------- ------- -------
Total salaries and benefits 2,886 2,707 5,651 5,229
Occupancy expense 537 479 1,148 1,001
Equipment expense 410 376 831 756
Postage and delivery 209 146 388 303
Supplies 188 290 448 483
Marketing and promotion 450 364 742 588
Professional services 275 175 548 288
FDIC insurance 53 227 149 446
Amortization of intangibles 317 312 634 652
Other expense 1,233 1,076 2,208 2,157
------- ------- ------- -------
Total noninterest expense $6,558 $6,151 $12,747 $11,903
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Noninterest expense for the three months ended June 30, 1997 was
$6.6 million as compared to $6.2 million for the same period in 1996.
Total salaries and benefits increased $179,000 or 6.6% to $2.9 million
for the three months ended June 30, 1997 as compared to the same period
for 1996. Occupancy expense increased $58,000 for the first quarter of
1997 or 12.1% as a new short term lease was written in Indiana at a
higher cost and additional space was leased in the Michigan corporate
offices. Postage expense increased $63,000, or 43.2%, primarily from
mailing requirements for the new line of checking accounts. Marketing
costs also increased $86,000 for the three months ended June 30, 1997, or
23.6%, primarily related to the introduction of the new line of checking
accounts in the Indiana market. Professional services expenses increased
$100,000 in first quarter of 1997, or 57.1%, as the Company incurred
costs associated with a consulting firm to assist in the implementation
of an organizational structure to meet the demands of a larger
institution after the two mergers as well as to eliminate inefficient
processes and procedures. FDIC insurance expense decreased $174,000 for
the second quarter of 1997, or 76.7%, as compared to the same period in
1996 as the improvement in the fund balances in the Savings Association
Insurance Fund was fully capitalized in 1996 which allowed it to reduce
assessments. Supplies expense decreased $102,000, or 35.2%, primarily
because of costs incurred in the second quarter of 1996 associated with
the bank name change.
22
<PAGE>
Noninterest expense for the six months ended June 30, 1997 was $12.7
million as compared to $11.9 million for the same period in 1996.
Salaries and benefits increased $422,000 or 8.1% to $5.7 million for the
six months ended June 30, 1997 as compared to the same period in 1996.
Occupancy expense increased $147,000, or 14.7%, for the first six months
of 1997, primarily related to new leased property. Postage expense
increased $85,000, or 28.1%, because of additional mailings associated
with the checking account products in the Indiana market. Marketing
expenses increased $154,000, or 26.2%, also associated with marketing
efforts for the checking program in the Indiana market. Professional
services expenses increased $260,000, or 90.3%, in the first six months
of 1997 as a consulting firm was hired in late 1996 to assist in the
review of organizational structure and processes and procedures
efficiencies. FDIC insurance expense decreased $297,000, or 66.6%, in
the first six months of 1997 as compared to the same period of 1996 as
the Savings Association Insurance Fund was fully capitalized and premiums
were reduced.
INCOME TAXES
Income taxes were approximately $1.8 million for the three months
ended June 30, 1997 and approximately $1.6 million for the same period in
1996. The increase was the result of higher levels of earnings. The
effective tax rate was 37.1% for the second quarter of 1997 as compared to
38.8% for the same period in 1996. Income taxes were approximately $3.4
million for the six months ended June 30, 1997 and approximately $2.8
million for the same period in 1996. The increase was the result of higher
levels of earnings. The effective tax rate was 35.7% for the second
quarter of 1997 as compared to 35.9% for the same period in 1996.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Average earning assets equaled 94.3% of total average assets for the
second quarter ended June 30, 1997 as compared to 94.2% of total average
assets during the same period in 1996. 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 second quarter of 1997 were $621.6
million as compared to $556.2 million for the same period in 1996, an
increase of $65.4. million, or 11.8%. The growth was primarily in
commercial loans and consumer home equity loans as greater emphasis and
management was placed on this type of lending in the new Indiana market
entered in 1995. Average loans outstanding for the six months ended June
30, 1997 were $614.8 million as compared to $539.0 million for the same
period in 1996, an increase of $75.8 million, or 14.1%. The growth was also
primarily in commercial loans and consumer home equity loans.
Average investment securities, interest-bearing deposits with
financial institutions and fed funds sold were $412.1 million for the
second quarter of 1997 as compared to $343.1 million for the same period in
1996, an increase of $69.0 million, or 20.1%, as the Company increased the
level of adjustable rate securities that were matched with short-term FHLB
advances. Average investment securities, interest-bearing deposits with
financial institutions and fed funds sold were $402.9 million for the six
months ended June 30, 1997 as compared to $346.0 million for the same
period in 1996, an increase of $56.9 million, or 16.4%.
23
<PAGE>
LIQUIDITY AND FUNDING
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
June 30, 1997, cash and due from banks, federal funds sold, and money
market instruments equaled approximately $29.6 million. Additional
liquidity, is provided by the ability to borrow from the Federal Reserve
Bank and Federal Home Loan Bank of Indianapolis. As of June 30, 1997,
Pinnacle had borrowed $185.0 million from the Federal Home Loan Bank of
Indianapolis to match longer term loans and specific securities with
matching maturities and repricing features.
Pinnacle identified investment securities totaling approximately
$401.8 million and $372.2 million, respectively, as being
available-for-sale at June 30, 1997 and December 31, 1996, respectively,
which consequently is available to meet liquidity needs of Pinnacle.
Proceeds from the sales of securities available-for-sale amounts to
$33.1 million in the second quarter of 1997 and $25.0 million in the same
period of 1996, with resulting net gains of $178,000 and $35,000,
respectively. Proceeds from the sale of securities available-for-sale
amounted to $50.5 million in the six month period ended June 30, 1997 and
$48.0 million in the same period of 1996, with resulting net gains of
$237,000 and $270,000, respectively. At June 30, 1997, net unrealized
losses in Pinnacle's total security portfolio amounted to $1.5 million and
$4.3 million at June 30, 1996.
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. As Pinnacle is a legal entity
separate and distinct from its bank subsidiary, substantially all of
Pinnacle's revenue results from dividends paid to it by Pinnacle Bank and
from earnings on investments. Dividends paid to Pinnacle by Pinnacle Bank
amounted to $1.4 million for the second quarter of 1997 and $1.3 million
for the second quarter of 1996. Dividends paid to Pinnacle by Pinnacle
Bank amounted to $2.8 million for the six month period ended June 30, 1997
and $2.0 million for the same period of 1996. Under current regulations,
the amount of dividends that Pinnacle Bank can declare in 1997 is limited
to its 1997 net profits (as defined in the Federal Reserve Act) plus
retained profits for 1996 and 1995, unless regulatory approval is obtained.
SHORT-TERM BORROWINGS
The following table shows short-term borrowings and average interest
rates for each time period reported.
24
<PAGE>
<TABLE>
<CAPTION>
SHORT TERM BORROWINGS
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1996 1995
--------------------------------------
(Dollars in thousands)
<C> <C> <C> <C>
FEDERAL FUNDS PURCHASED:
Balance at end of period $ 9,925 $ 10,425 $ -
Weighted average interest rate at end of quarter 6.97% 5.50% 0.00%
Maximum amount outstanding (1) $ 16,294 $ 17,632 $ 5,189
Average amount outstanding $ 9,110 $ 14,413 $ 3,498
Weighted average interest rate during quarter 5.77% 6.15% 6.28%
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Balance at end of period $ 43,292 $ 22,746 $ 10,431
Weighted average interest rate at end of quarter 5.03% 3.99% 3.62%
Maximum amount outstanding (1) $ 52,693 $ 24,288 $ 15,431
Average amount outstanding $ 54,611 $ 23,566 $ 16,043
Weighted average interest rate during quarter 5.17% 3.91% 4.70%
</TABLE>
- --------------------------------------
(1) Based on amount outstanding at month end during quarter
Federal Home Loan Bank advances, securities sold under repurchase
agreements and other borrowings increased $84.3 million, or 54.2%, to
approximately $239.9 million at June 30, 1997. The increase was primarily
used to match specific adjustable rate security purchases of approximately
$40 million and to match fund approximately $30 million in longer term 15
year home equity loans.
ASSET QUALITY
ALLOWANCE FOR LOAN LOSSES
The following table summarizes the loan loss experience and provides a
breakdown of allowance for loan losses during the quarter and six months
ended June 30, 1997 and 1996.
25
<PAGE>
LOAN LOSS ANALYSIS TABLE
<TABLE>
<CAPTION>
QUARTER-TO-DATE YEAR-TO-DATE
JUNE 30, JUNE 30,
(Dollars in thousands) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans Outstanding at end of period,
net of unearned discount $ 618,997 $ 566,383
-------------------------------------------------------
-------------------------------------------------------
Average loans for the period $ 621,624 $ 614,841 $ 612,474 $ 538,979
-------------------------------------------------------
-------------------------------------------------------
Allowance for loans losses,
beginning of period $ 5,651 $ 5,803 $ 5,643 $ 5,852
-------------------------------------------------------
Charge-offs for period:
Commercial loans 93 - 133 40
Real Estate loans 12 5 12 28
Home Equity loans 19 3 19 3
Consumer loans 176 159 410 317
-------------------------------------------------------
Total charge-offs 300 167 574 388
-------------------------------------------------------
Recoveries for period:
Commercial loans 1 64 1 116
Real Estate loans 11 10 19 14
Consumer loans 38 35 77 71
-------------------------------------------------------
Total recoveries 50 109 97 201
-------------------------------------------------------
Net charge-offs for the period 250 58 477 187
-------------------------------------------------------
Allowance recorded for
acquired loans - - - -
Provision for loan losses 325 70 560 150
-------------------------------------------------------
Allowance for loan losses,
end of period $ 5,726 $ 5,815 $ 5,726 $ 5,815
-------------------------------------------------------
-------------------------------------------------------
Ratio of net charge-offs during the
period to average loans outstanding 0.04% 0.01% 0.08% 0.03%
-------------------------------------------------------
-------------------------------------------------------
Allocation of allowance for loan losses:
Commercial loans $ 3,038 $ 3,245
Real Estate loans 1,352 1,461
Home Equity loans 737 492
Consumer loans 599 617
-------------------------------------------------------
Total allowance for loan losses $ 5,726 $ 5,815
-------------------------------------------------------
-------------------------------------------------------
Percentage of loans to total gross loans:
Commercial loans 37% 31%
Real Estate loans 43% 50%
Home Equity loans 13% 10%
Consumer loans 6% 8%
Economic development bonds and
other tax exempt loans 1% 1%
-------------------------------------------------------
Total 100% 100%
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
26
<PAGE>
For the three months ended June 30, 1997, the provision for loan
losses totaled $325,000 as compared to $70,000 for the same period in 1996.
The increase was attributable mainly to loan growth and an increase in net
charge-offs primarily in consumer loans and lower levels of recoveries in
real estate loans of $192,000 in the second quarter as compared to the
second quarter of 1996. For the six months ended June 30, 1997, the
provision for loan losses totaled $560,000 as compared to $150,000 for the
same period in 1996. Net charge-offs for the period ended June 30, 1997
was $477,000 as compared to $187,000 for the same period in 1996. Pinnacle
management believes the increase in provisions for loan losses is primarily
from the lending emphasis changing to commercial and home equity lending
which generally carry higher reserve provisions and not to any general
decline in credit quality.
The allowance for loan losses totaled approximately $5.7 million at
June 30, 1997 as compared to approximately $5.8 million at June 30, 1996
and the allowance as a percentage of total loans was .93% and 1.03%
respectively, for such dates indicated. 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
loss experience, the composition of loan portfolio, and management's
evaluation of the collectability of specific loans.
NONPERFORMING ASSETS
Nonperforming assets include nonaccruing loans, restructured loans,
contractually past due 90 days or more but still accruing loans, and other
real estate owned. The following table presents detailed information
concerning nonperforming assets at June 30, 1997 and December 31, 1996.
27
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming assets (a) :
Nonaccruing loans:
Real estate $ 288 $ 293
Commercial 3,137 388
Home equity 27 -
Other 64 80
- ---------------------------------------------------------------------------------------------------
Total nonaccruing loans 3,516 761
Contractually past due but still accruing loans (a)
Real estate $ 1,300 $ 1,849
Commercial 2,168 1,773
Home equity 263 161
Other 141 133
- ---------------------------------------------------------------------------------------------------
Total contractually past due but still accruing loans (a) 3,872 3,916
Restructured loans 177 227
- ---------------------------------------------------------------------------------------------------
Total nonperforming loans 7,565 4,904
Other real estate owned 1,532 1,698
- ---------------------------------------------------------------------------------------------------
Total nonperforming assets $ 9,097 $ 6,602
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Nonperforming loans / loans 1.22% 0.80%
Nonperforming assets / loans and other real estate owned 1.47% 1.08%
Reserve for possible loan losses / nonperforming loans 75.69% 115.07%
Reserve for possible loan losses / nonperforming assets 62.94% 85.47%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(a) Accruing loans past due 90 days or more.
The increase in total nonperforming loans from December 31, 1996 to
June 30, 1997 is primarily due to an increase in commercial nonaccruing
loans of $2.7 million.
Management's determination regarding the accrual of interest on loans
that were 90 days or more past due but still accruing is based on the
availability and sufficiency of collateral and the status of collection
efforts. In the present lending environment, certain of such loans could
become nonperforming assets and/or result in charge-offs in the future.
Management continues to focus on asset quality and its potential
impact on the provision and the reserve for possible loan losses. The
Company believes that it has responded appropriately to the current
economic environment, and is prepared to forego transactions which do not
meet is quality standards.
28
<PAGE>
Effective January 1, 1995, the Company adopted the Financial
Accounting Standard Board's Statement of Financial Accounting Standards
("SFAS") 114, Accounting by Creditors for Impairment of a Loan and SFAS
118, "Accounting by Creditors for Impairment of a Loan Income Recognition
and Disclosures". A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due. Under SFAS 114 and SFAS 118, "impaired" loans
must be measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate, or, as a practical
expedient, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral-dependent. SFAS 114 and SFAS 118 do
not apply to certain groups of small-balance homogeneous loans that are
collectively evaluated for impairment, loans that are measured at fair
value or at the lower of cost or fair value, leases, or debt securities,
Prior to January 1, 1995, the Company's impaired loans were described as,
and included in, nonaccrual loans. The adoption of the Statements had no
effect on the Company's nonperforming assets or financial statements.
SFAS 114 and SFAS 118 also require additional disclosures. As a
result, the Company has expanded its accounting policy regarding the
recognition of interest income on loans to read as follows: "Interest
income is not accrued on loans where management has determined that the
borrowers may be unable to meet contractual principal and/or interest
obligations, or where interest or principal is 90 days or more past due,
unless the loans are adequately secured and in the process of collection.
When a loan is placed on nonaccrual status (which includes "impaired"
loans), interest accruals cease and uncollected accrued interest is
reversed and charged against current income. Nonaccrual loans are
generally not returned to accruing status until principal and interest
payments have been brought current and full collectibility is reasonably
assured. Cash receipts on nonaccrual loans are generally applied to the
principal balance until the remaining balance is considered fully
collectible, at which time interest income may be recognized according to
the revised terms."
As of June 30, 1997, under SFAS 114 and SFAS 118, the Company's
impaired loans totaled $806,000 (of which $298,000 were on a nonaccrual
basis). The related allowance for loan loss on these impaired loans at
June 30, 1997, was $396,000. The Company's impaired loans averaged
$828,000 for the six months ended June 30, 1997. Interest income of
approximately $25,000 was recognized, all of which was on an accrual basis,
on impaired loans for the six months ended June 30, 1997. Charge-offs of
approximately $73,000 were recognized on impaired loans during the six
months ended June 30, 1997.
The levels of the provision and reserve for possible loan losses are
based on management's ongoing assessment of the Company's credit exposure
and consideration of a number of factors, including prevailing and
anticipated economic conditions, assigned risk ratings on credit exposures,
the diversification and size of the loan portfolio, the results of the most
recent regulatory examinations available to the Company, the current and
projected financial status and creditworthiness of borrowers, certain
off-balance sheet credit risks, the nature and level of nonperforming
assets and loans that have been identified as potential problems, the
adequacy of collateral, past and expected loss experience and other factors
deemed relevant by management. The Company's risk rating system and the
quarterly reporting process for problem and vulnerable credits are utilized
by management in determining the adequacy of the Company's reserve for
possible loan losses.
29
<PAGE>
Net charge-offs were $250,000 in the second quarter of 1997, compared
to $58,000 in the second quarter of 1996. In the second quarter of 1997
and 1996, respectively, net charge-offs included $92,000 and -$64,000
(recoveries) related to commercial borrowers, $157,000 and $127,000 in
consumer credits and $1,000 and -$5,000 (recoveries) in real estate
credits.
Net charge-offs were $477,000 for the six months ended June 30, 1997,
compared to $187,000 for the same period of 1996. For the six month period
ended June 30, 1997 and 1996, respectively, net charge-offs included
$132,000 and -$76,000 (recoveries) related to commercial borrowers,
$352,000 and $249,000 in consumer credits and -$7,000 (recoveries) and
$14,000 in real estate credits.
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 $3.9 million and $3.6 million at June 30, 1997 and December
31, 1996, 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 June 30, 1997 and 1996 did not exceed 1% of its total assets.
LOAN CONCENTRATIONS
As of June 30, 1997 and December 31, 1996, there were no
concentrations of loans to individual borrowers that exceed 10% of total
loans.
CAPITAL
CAPITAL COMPONENTS
The Federal Reserve Board measures capital adequacy for bank holding
companies on the basis of a risk-based capital framework and a leverage
ratio. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
established a capital-based supervisory system of prompt corrective action
for all depository institutions. The bank regulatory agencies implementing
rule under FDICIA defines "well-capitalized" institutions (the highest
possible rating) as those whose capital ratios equal or exceed all the
following: Tier I Risk-Based Ratio, 6.00%, Total Risk-Based Ratio, 10.00%,
and Tier I Leverage Ratio, 5.00%. At June 30, 1997 and December 31, 1996,
the Company and its subsidiary reported capital ratios in excess of these
well capitalized standards.
The Company's and the Bank's actual capital amounts and rations are also
presented in the table.
30
<PAGE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1997
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $ 75,398 13.92% $ 43,322 8.00% $ 54,153 10.00%
Pinnacle Bank 72,353 13.42 43,119 8.00 53,898 10.00
TIER I CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $ 69,672 12.87% $ 21,661 4.00% $ 32,492 6.00%
Pinnacle Bank 66,627 12.36 21,559 4.00 32,339 6.00
TIER I CAPITAL (TO AVERAGE ASSETS):
Consolidated $ 69,672 6.39% $ 46,379 4.00% $ 57,974 5.00%
Pinnacle Bank 66,627 6.12 43,577 4.00 54,471 5.00
</TABLE>
Pinnacle accounts for investment securities in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting of Certain Investments in Debt and Equity Securities. The
unrealized holding gains and losses, net of related tax effect, on
available-for-sale securities are reportable as a separate component of
stockholders equity until realized. However, for determining risk-based
capital ratios, only unrealized holding losses on equity securities are
considered as a component of qualifying capital.
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 rate, 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 results 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 increase 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.
31
<PAGE>
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 following
table sets forth management's estimate of the projected maturities and/or
repricing of Pinnacle's assets and liabilities as of June 30, 1997. 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>
JUNE 30, 1997 INTEREST RATE SENSITIVITY PERIOD
- ---------------------------------------------------------------------------------------------------------------------------------
0 - 3 4 - 6 7 - 9 10 - 12 OVER 1
(Dollars in thousands) MONTHS MONTHS MONTHS MONTHS YEAR TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits
with financial institutions $ 4,405 $ - $ - $ - $ - $ 4,405
Securities available for sale 101,258 35,320 9,909 5,693 249,581 401,761
Loans 180,103 32,968 28,251 28,094 349,581 618,997
Nonearning assets - - - - - 66,390
------------------------------------------------------------------------------------
Total Assets $ 285,766 $ 68,288 $ 38,160 $ 33,787 $ 599,162 $1,091,553
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
FUNDING SOURCES:
Interest-bearing demand $ - $ 47,767 $ - $ - $ 25,453 $ 73,220
Savings and time deposits 155,679 172,762 26,754 21,599 250,568 627,362
Federal Home Loan Bank
advances 55,500 10,000 33,900 22,600 63,021 185,021
Other borrowings 43,559 - 11,315 - - 54,874
Noninterest bearing sources - - - - - 151,076
------------------------------------------------------------------------------------
Total funding sources $ 254,738 $ 230,529 $ 71,969 $ 44,199 $ 339,042 $1,091,553
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
REPRICING/MATURITY GAP
Period $ 31,028 $(162,241) $ (33,809) $ (10,412) $ 260,120
Cumulative $ 31,028 $(131,213) $(165,022) $(175,434) $ 84,686
Cumulative rate sensitivity
assets/Cumulative rate
sensitivity funding sources 112.18% 72.96% 70.39% 70.83% 109.00%
------------------------------------------------------------------------------------
</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 NEW ACCOUNTING STANDARDS
32
<PAGE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 12). SFAS No. 128 supersedes APB Opinion 15, "Earnings Per
Share", and specifies the computation, presentation and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. SFAS No. 128 was issued to
simplify the computations of EPS and to make the U.S. standard more
compatible with the EPS standards of the International Accounting Standards
Committee. It replaces the presentation of primary and fully-diluted EPS
with a presentation of basic and diluted EPS, respectively. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares of outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock, or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to fully-diluted
EPS under APB 15.
SFAS No. 128 is effective for financial statements for both interim
and annual periods ending December 15, 1997 and is not expected to have a
material impact on the Company.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129). SFAS No 129 provides
required disclosures for the capital structure of both public and nonpublic
companies and is effective for financial statements for periods ending
after December 15, 1997. The required disclosures had been included in a
number of separate statements and opinions. As such, the issuance of SFAS
No. 129 is not expected to require significant revision of prior
disclosures.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes standards
for reporting and the presentation of comprehensive income and its
components in a full set of general purpose financial statements. SFAS
No. 130 is effective for both interim and annual periods beginning after
December 15, 1997 and is not expected to have a material impact on the
Company.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS
No. 131 establishes standards for the way public business enterprises are
to report information about operating segments in annual financial
statements and requires those enterprises to report selected information
about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for financial periods beginning
after December 15, 1997 and is not expected to have a material impact on
the Company.
33
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 -- Financial Data Schedule
b. Reports on Form 8-K
None
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE FINANCIAL SERVICES, INC.
DATE: August 14, 1997 By: /s/ David W. Kolhagen
-----------------------------------
David W. Kolhagen
Senior Vice President & Chief
Financial Officer
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 25,193
<INT-BEARING-DEPOSITS> 905
<FED-FUNDS-SOLD> 3,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 401,761
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 618,997
<ALLOWANCE> 5,726
<TOTAL-ASSETS> 1,091,553
<DEPOSITS> 766,728
<SHORT-TERM> 175,217
<LIABILITIES-OTHER> 4,656
<LONG-TERM> 64,678
0
0
<COMMON> 19,110
<OTHER-SE> 61,164
<TOTAL-LIABILITIES-AND-EQUITY> 1,091,553
<INTEREST-LOAN> 26,785
<INTEREST-INVEST> 14,223
<INTEREST-OTHER> 105
<INTEREST-TOTAL> 41,113
<INTEREST-DEPOSIT> 15,639
<INTEREST-EXPENSE> 22,682
<INTEREST-INCOME-NET> 18,431
<LOAN-LOSSES> 560
<SECURITIES-GAINS> 237
<EXPENSE-OTHER> 12,747
<INCOME-PRETAX> 9,462
<INCOME-PRE-EXTRAORDINARY> 9,462
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,081
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 3.73
<LOANS-NON> 3,516
<LOANS-PAST> 3,872
<LOANS-TROUBLED> 177
<LOANS-PROBLEM> 3,900
<ALLOWANCE-OPEN> 5,643
<CHARGE-OFFS> 574
<RECOVERIES> 97
<ALLOWANCE-CLOSE> 5,726
<ALLOWANCE-DOMESTIC> 5,726
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
