<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------
PINNACLE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MICHIGAN 6711 38-2671129
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
830 PLEASANT STREET
ST. JOSEPH, MICHIGAN 49085
(616) 983-6311
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
RICHARD L. SCHANZE
PINNACLE FINANCIAL SERVICES, INC.
830 PLEASANT STREET, ST. JOSEPH, MICHIGAN 49085
(616) 983-6311
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
J. KEVIN TRIMMER, ESQ. JAMES S. FLEISCHER, ESQ.
MILLER, CANFIELD, PADDOCK AND STONE, SILVER, FREEDMAN & TAFF, L.L.P.
P.L.C. 1100 NEW YORK AVENUE, N.W., SUITE 700
1400 N. WOODWARD AVE., SUITE 100 WASHINGTON, D.C. 20005
BLOOMFIELD HILLS, MICHIGAN 48304 (202) 414-6100
(810) 645-5000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(1)(2) PRICE(1)(2) FEE(2)
<S> <C> <C> <C> <C>
Common Stock................................ 5,004,220 shares $22.75 $113,846,005 $34,498.79
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) The proposed maximum aggregate offering price is based on, and the
registration fee has been computed pursuant to Rule 457(f)(1) under the
Securities Act of 1933, as amended, based on, (i) the average of the high
and low prices for shares of common stock of Indiana Federal Corporation
reported on the Nasdaq National Market on January 9, 1997 ($22.75), and (ii)
the maximum number of such shares (5,004,220 shares) that may be exchanged
for the securities being registered. The proposed maximum offering price per
share has been determined by dividing the maximum aggregate offering price
by the number of shares being registered.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[PINNACLE LETTERHEAD]
, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Pinnacle Financial Services, Inc. ("Pinnacle"), which will be held at the Mendel
Center, 2755 Napier Avenue, Benton Harbor, Michigan, at :00 a.m., local time,
on , , 1997 (the "Pinnacle Special Meeting").
At the Pinnacle Special Meeting, Pinnacle stockholders will be asked to
consider and vote upon a proposal (the "Merger Proposal") to approve and adopt
(i) the Agreement and Plan of Merger dated as of November 14, 1996 (the "Merger
Agreement"), by and between Pinnacle and Indiana Federal Corporation ("IFC"),
and (ii) all of the transactions contemplated by the Merger Agreement
(including, without limitation, the Merger).
The Merger Agreement provides for a "merger of equals" with IFC. Upon
consummation of the Merger, (i) IFC will be merged with and into Pinnacle (the
"Merger"), with Pinnacle being the surviving corporation, and (ii) each issued
and outstanding share of common stock of IFC will be converted into one share of
common stock of Pinnacle. Conditions to the consummation of the Merger include,
among other things, requisite stockholder and regulatory approvals and the
receipt of certain opinions and certificates.
The Board of Directors of Pinnacle (the "Pinnacle Board") believes that the
Merger will be advantageous to, and is in the best interests of, Pinnacle and
its stockholders. Pinnacle believes that the Merger with IFC presents a unique
opportunity to expand Pinnacle's existing financial operations in its
southwestern Michigan and northern Indiana markets and to create a larger and
stronger institution better able to compete with its regional and national
competitors. In addition, Pinnacle believes that it will realize earnings growth
over the intermediate to long term from consolidating the operations and
improving the efficiency of Pinnacle and IFC. Pinnacle will draw on its
experience with previous acquisitions in seeking to achieve an effective
consolidation of its operations with those of IFC.
THE PINNACLE BOARD HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU
VOTE FOR THE MERGER PROPOSAL AT THE PINNACLE SPECIAL MEETING.
The accompanying Notice and Joint Proxy Statement/Prospectus set forth the
voting rights of holders of Pinnacle Common Stock with respect to these matters,
and describe the matters to be acted upon at the Pinnacle Special Meeting.
Stockholders are urged to review carefully the attached Joint Proxy Statement/
Prospectus, which contains a description of the Merger Proposal, the Merger
Agreement and its terms and conditions, and the transactions contemplated by the
Merger Agreement.
Your continuing interest in the business of Pinnacle is appreciated. Because
of the significance of the Merger to Pinnacle, your participation in the
Pinnacle Special Meeting, in person or by proxy, is especially important.
Accordingly, whether or not you plan to attend the Pinnacle Special Meeting,
please sign, date and mail the enclosed Proxy promptly in the postage-paid
envelope that has been provided to you for your convenience. If you wish to vote
in accordance with the recommendations of the Pinnacle Board, it is not
necessary to specify your choices; you may merely sign, date and return the
enclosed Proxy.
Sincerely,
Richard L. Schanze
Chief Executive Officer
<PAGE>
[PINNACLE LETTERHEAD]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Pinnacle
Financial Services, Inc. ("Pinnacle"), will be held at the Mendel Center, 2755
Napier Avenue, Benton Harbor, Michigan, at :00 a.m., local time, on ,
, 1997 (the "Pinnacle Special Meeting"), for the following purposes,
all of which are more fully described in the accompanying Proxy Statement:
1. To consider and vote upon a proposal to approve and adopt (i) the
Agreement and Plan of Merger dated as of November 14, 1996 (the "Merger
Agreement"), by and between Pinnacle and Indiana Federal Corporation
("IFC"), and (ii) all of the transactions contemplated by the Merger
Agreement. Such transactions include the merger of IFC with and into
Pinnacle (the "Merger"), with Pinnacle being the surviving corporation.
Upon consummation of the Merger, each issued and outstanding share of
common stock, $.01 par value per share of IFC, other than certain shares
specified in the Merger Agreement, will be converted into the right to
receive one share of common stock, no par value per share, of Pinnacle
("Pinnacle Common Stock").
2. To transact such other business as may properly come before the Pinnacle
Special Meeting or any adjournments or postponements thereof. The Board
of Directors of Pinnacle is not aware of any other business to come
before the Pinnacle Special Meeting.
The Board of Directors of Pinnacle has fixed the close of business on
, 1997 as the record date for the determination of stockholders
entitled to notice of and to vote at the Pinnacle Special Meeting and any
adjournments or postponements thereof. Only stockholders of record at the close
of business on such date are entitled to notice of and to vote at the Pinnacle
Special Meeting and any adjournments or postponements thereof. A list of
Pinnacle stockholders entitled to vote at the Pinnacle Special Meeting will be
available for examination, during ordinary business hours, at the Pinnacle
Special Meeting.
Pinnacle Common Stock constitutes the only security of Pinnacle whose
holders are entitled to vote upon the proposal to be presented at the Pinnacle
Special Meeting.
Your vote is important regardless of the number of shares you own. Each
stockholder is requested to sign, date and return the enclosed Proxy without
delay in the enclosed postage-paid envelope. You may revoke your Proxy at any
time prior to its exercise. Any stockholder of record present at the Pinnacle
Special Meeting or at any adjournments or postponements thereof may revoke his
or her Proxy and vote personally on each matter brought before the Pinnacle
Special Meeting.
Donald E. Radde
Secretary
, 1997
THE BOARD OF DIRECTORS OF PINNACLE RECOMMENDS THAT YOU VOTE FOR THE ABOVE
PROPOSAL.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE.
<PAGE>
[IFC LETTERHEAD]
, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Indiana Federal Corporation ("IFC"), which will be held at
, at :00 a.m., local time, on ,
, 1997 (the "IFC Special Meeting").
At the IFC Special Meeting, IFC stockholders will be asked to consider and
vote upon a proposal (the "Merger Proposal") to approve and adopt (i) the
Agreement and Plan of Merger dated as of November 14, 1996 (the "Merger
Agreement"), by and between Pinnacle Financial Services, Inc. ("Pinnacle") and
IFC, and (ii) all of the transactions contemplated by the Merger Agreement
(including, without limitation, the Merger).
The Merger Agreement provides for a "merger of equals" with Pinnacle. Upon
consummation of the Merger, (i) IFC will be merged with and into Pinnacle (the
"Merger"), with Pinnacle being the surviving corporation, and (ii) each issued
and outstanding share of common stock of IFC will be converted into one share of
common stock of Pinnacle. Conditions to the consummation of the Merger include,
among other things, requisite stockholder and regulatory approvals and the
receipt of certain opinions and certificates.
The Board of Directors of IFC (the "IFC Board") believes that the Merger
will be advantageous to, and is in the best interests of, IFC and its
stockholders. IFC believes that the Merger with Pinnacle will create a
significantly stronger retail franchise stretching from the northwestern Indiana
and Chicagoland market across to southwestern Michigan. The IFC Board believes
the "merger of equals" will create additional acquisition opportunities in its
expanded market area and will create a larger and stronger institution better
able to complete with its regional and national competitors.
THE IFC BOARD HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE
FOR THE MERGER PROPOSAL AT THE IFC SPECIAL MEETING.
The accompanying Notice and Joint Proxy Statement/Prospectus set forth the
voting rights of holders of IFC Common Stock with respect to these matters, and
describe the matters to be acted upon at the IFC Special Meeting. Stockholders
are urged to review carefully the attached Joint Proxy Statement/Prospectus,
which contains a description of the Merger Proposal, the Merger Agreement and
its terms and conditions, and the transactions contemplated by the Merger
Agreement.
Your continuing interest in the business of IFC is appreciated. Because of
the significance of the Merger to IFC, your participation in the IFC Special
Meeting, in person or by proxy, is especially important. Accordingly, whether or
not you plan to attend the IFC Special Meeting, please sign, date and mail the
enclosed Proxy promptly in the postage-paid envelope that has been provided to
you for your convenience. If you wish to vote in accordance with the
recommendations of the IFC Board, it is not necessary to specify your choices;
you may merely sign, date and return the enclosed Proxy.
Sincerely,
Donald A. Lesch
Chairman of the Board
<PAGE>
[IFC LETTERHEAD]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Indiana
Federal Corporation ("IFC") will be held at ,
at :00 a.m., local time, on , , 1997 (the "IFC Special
Meeting"), for the following purposes, all of which are more fully described in
the accompanying Proxy Statement:
1. To consider and vote upon a proposal to approve and adopt (i) the
Agreement and Plan of Merger dated as of November 14, 1996 (the "Merger
Agreement"), by and between Pinnacle Financial Services, Inc.
("Pinnacle") and IFC, and (ii) all of the transactions contemplated by
the Merger Agreement. Such transactions include the merger of IFC with
and into Pinnacle (the "Merger"), with Pinnacle being the surviving
corporation. Upon consummation of the Merger, each issued and outstanding
share of common stock, $.01 par value per share, of IFC, other than
certain shares specified in the Merger Agreement, will be converted into
the right to receive one share of common stock, no par value per share,
of Pinnacle.
2. To transact such other business as may properly come before the IFC
Special Meeting or any adjournments or postponements thereof. The Board
of Directors of IFC is not aware of any other business to come before the
IFC Special Meeting.
The Board of Directors of IFC has fixed the close of business on
, 1997 as the record date for the determination of stockholders
entitled to notice of and to vote at the IFC Special Meeting and any
adjournments or postponements thereof. Only stockholders of record at the close
of business on such date are entitled to notice of and to vote at the IFC
Special Meeting and any adjournments or postponements thereof. A list of IFC
stockholders entitled to vote at the IFC Special Meeting will be available for
examination, during ordinary business hours, at IFC's principal executive office
for 10 days prior to the IFC Special Meeting, as well as at the IFC Special
Meeting.
Your vote is important regardless of the number of shares you own. Each
stockholder is requested to sign, date and return the enclosed Proxy without
delay in the enclosed postage-paid envelope. You may revoke your Proxy at any
time prior to its exercise. Your proxy will not be used if you attend and vote
at the IFC Special Meeting in person.
By Order of the Board of Directors
Donald A. Lesch
Chairman of the Board
, 1997
THE BOARD OF DIRECTORS OF IFC RECOMMENDS THAT YOU VOTE FOR THE ABOVE PROPOSAL.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE.
<PAGE>
<TABLE>
<S> <C>
PINNACLE FINANCIAL SERVICES, INC. PINNACLE FINANCIAL SERVICES, INC.
AND PROSPECTUS
INDIANA FEDERAL CORPORATION 5,004,220 SHARES OF COMMON STOCK,
JOINT PROXY STATEMENT NO PAR VALUE PER SHARE
</TABLE>
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") is being furnished to stockholders of Pinnacle Financial
Services, Inc. ("Pinnacle") in connection with the solicitation of proxies by
the Board of Directors of Pinnacle (the "Pinnacle Board") to be used at the
Special Meeting of Stockholders of Pinnacle to be held on , 1997
(including any adjournments or postponements thereof, the "Pinnacle Special
Meeting"). At the Pinnacle Special Meeting, holders of the common stock, no par
value per share, of Pinnacle (the "Pinnacle Common Stock") will consider and
vote upon a proposal (the "Merger Proposal") to approve and adopt (i) the
Agreement and Plan of Merger dated as of November 14, 1996 (the "Merger
Agreement"), between Pinnacle and Indiana Federal Corporation ("IFC"), and (ii)
all of the transactions contemplated by the Merger Agreement (including, without
limitation, the merger of IFC with and into Pinnacle (the "Merger"), with
Pinnacle being the surviving corporation).
This Joint Proxy Statement/Prospectus is also being furnished to
stockholders of Indiana Federal Corporation in connection with the solicitation
of proxies by the Board of Directors of IFC (the "IFC Board") to be used at the
Special Meeting of Stockholders of IFC to be held on , 1997
(including any adjournments or postponements thereof, the "IFC Special Meeting,"
and together with the Pinnacle Special Meeting, the "Special Meetings"). At the
IFC Special Meeting, holders of common stock, $0.1 par value per share, of IFC
(the "IFC Common Stock") will consider and vote upon the Merger Proposal.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Pinnacle with respect to up to 5,004,220 shares of Pinnacle Common Stock to be
issued or reserved for issuance in connection with the Merger. Upon consummation
of the Merger each share of IFC Common Stock, other than certain shares
specified in the Merger Agreement, will be automatically converted into the
right to receive one (1) share of Pinnacle Common Stock (the "Exchange Ratio").
This Joint Proxy Statement/Prospectus does not cover any resales of Pinnacle
Common Stock to be received by stockholders of IFC upon consummation of the
Merger, and no person is authorized to make use of this Joint Proxy
Statement/Prospectus in connection with any such resale.
Pinnacle Common Stock and IFC Common Stock are traded on the Nasdaq National
Market. The closing sales prices of Pinnacle Common Stock and IFC Common Stock
were $24.75 and $19.50, respectively, on November 13, 1996 (the last trading day
prior to the public announcement of the Merger), and were $ and $ ,
respectively, on , 1997 (the last practicable trading day prior to
the mailing of this Joint Proxy Statement/Prospectus).
THE SHARES OF PINNACLE COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR
ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is , 1997. This
Joint Proxy Statement/ Prospectus and the accompanying forms of proxy are first
being mailed to stockholders of Pinnacle and IFC on or about , 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................... 2
SUMMARY................................................................................................... 4
The Companies........................................................................................... 4
The Special Meetings.................................................................................... 4
The Merger.............................................................................................. 6
Interests of Certain Persons in the Merger.............................................................. 9
Management and Operations After the Merger.............................................................. 9
Certain Federal Income Tax Consequences................................................................. 10
Acquisition of Maco Bancorp, Inc........................................................................ 10
Comparison of Stockholders' Rights...................................................................... 11
Summary Condensed Consolidated Historical Financial and Operating Data of Pinnacle Financial Services,
Inc................................................................................................... 12
Summary Condensed Consolidated Historical Financial and Operating Data of Indiana Federal Corporation... 13
Summary Unaudited Pro Forma Condensed Combined Financial and Operating Data of Pinnacle Financial
Services, Inc. and Indiana Federal Corporation........................................................ 14
Comparative Per Share Data.............................................................................. 16
Comparative Stock Prices................................................................................ 17
THE COMPANIES............................................................................................. 18
Pinnacle Financial Services, Inc........................................................................ 18
Indiana Federal Corporation............................................................................. 19
THE SPECIAL MEETINGS...................................................................................... 19
Matters to be Considered at the Special Meetings........................................................ 19
Votes Required.......................................................................................... 20
Voting of Proxies....................................................................................... 21
Revocability of Proxies................................................................................. 22
Record Dates; Shares Entitled to Vote; Quorums.......................................................... 22
No Dissenters' Rights/No Appraisal Rights............................................................... 22
Solicitation of Proxies................................................................................. 22
THE MERGER................................................................................................ 23
Merger Structure........................................................................................ 23
Merger Consideration.................................................................................... 24
Background of the Merger................................................................................ 25
Reasons for the Merger.................................................................................. 27
Recommendations of the Boards of Directors.............................................................. 30
Opinion of Pinnacle Financial Advisor................................................................... 30
Opinion of IFC Financial Advisor........................................................................ 36
Certain Forward-Looking Information..................................................................... 42
Effective Time.......................................................................................... 42
Conversion of Shares.................................................................................... 42
Procedures for Exchange of Certificates................................................................. 43
Distributions to Stockholders........................................................................... 44
Representations and Warranties.......................................................................... 44
Conduct of Business Pending the Merger and Other Agreements............................................. 44
Conditions to the Consummation of the Merger............................................................ 47
</TABLE>
i
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Expenses................................................................................................ 49
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Extension and Waiver; Amendment; Termination............................................................ 49
No Solicitation of Transactions......................................................................... 50
Regulatory Approvals Required for the Merger............................................................ 51
Interests of Certain Persons in the Merger.............................................................. 52
Anticipated Accounting Treatment........................................................................ 52
Resale of Pinnacle Common Stock; Restrictions on Transfer............................................... 53
No Dissenters' Rights/No Appraisal Rights............................................................... 54
Stock Option Agreements................................................................................. 54
PRO FORMA COMBINED FINANCIAL INFORMATION.................................................................. 59
Pinnacle Financial Services, Inc. and Indiana Federal Corporation Unaudited Pro Forma Combined Statement
of Income Summary..................................................................................... 59
Pinnacle Financial Services, Inc. and Indiana Federal Corporation Unaudited Pro Forma Combined
Statements of Income.................................................................................. 61
Pinnacle Financial Services, Inc. and Indiana Federal Corporation Unaudited Pro Forma Combined Balance
Sheet................................................................................................. 67
Notes to Pinnacle Financial Services, Inc. and Indiana Federal Corporation Unaudited Pro Forma Combined
Financial Statements.................................................................................. 69
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................................................ 69
MANAGEMENT AND OPERATIONS AFTER THE MERGER................................................................ 72
Directors............................................................................................... 72
Executive Officers...................................................................................... 73
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................................................... 74
ACQUISITION OF MACO BANCORP, INC.......................................................................... 75
General................................................................................................. 75
Standstill Agreement.................................................................................... 75
Transfer Agreements; Indemnification Agreement; Escrow Agreement; Non-Competition Agreement............. 76
Potential Adverse Tax Consequences...................................................................... 77
CERTAIN REGULATORY CONSIDERATIONS......................................................................... 78
General................................................................................................. 78
Payment of Dividends.................................................................................... 79
Certain Transactions with Affiliates.................................................................... 80
Capital................................................................................................. 81
Support of Subsidiary Banks............................................................................. 83
FDIC Insurance Assessments.............................................................................. 83
Regulation of Proposed Acquisitions..................................................................... 85
Recent Legislation...................................................................................... 86
Qualified Thrift Lender ("QTL") Test.................................................................... 87
Mortgage Regulation..................................................................................... 87
DESCRIPTION OF PINNACLE COMMON STOCK...................................................................... 88
COMPARISON OF STOCKHOLDERS' RIGHTS........................................................................ 90
General................................................................................................. 90
Board of Directors; Removal of Directors................................................................ 90
Stockholder Voting Requirements......................................................................... 91
Anti-Takeover Laws and Charter Provisions............................................................... 92
Special Meetings of Stockholders........................................................................ 93
</TABLE>
ii
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Director Liability and Indemnification.................................................................. 93
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IFC Rights Agreement.................................................................................... 94
Payment of Dividends.................................................................................... 95
Charter Amendments...................................................................................... 95
Other Matters........................................................................................... 95
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PINNACLE......... 97
Overview and Financial Condition........................................................................ 97
Results of Operations................................................................................... 99
Analysis of Financial Condition......................................................................... 107
Capital Components...................................................................................... 110
Liquidity............................................................................................... 111
Interest Rate Sensitivity............................................................................... 112
Impact of Inflation and Changing Prices................................................................. 113
Effects of New Accounting Pronouncements................................................................ 114
Recent Legislation...................................................................................... 114
BUSINESS OF PINNACLE...................................................................................... 115
General................................................................................................. 115
Strategies to Achieve Growth............................................................................ 115
Lending Practices....................................................................................... 116
Investment Activities................................................................................... 121
Sources of Funds........................................................................................ 122
Trust Services.......................................................................................... 123
Competition............................................................................................. 124
Employees............................................................................................... 124
Legal Proceedings....................................................................................... 124
Properties.............................................................................................. 124
MANAGEMENT OF PINNACLE.................................................................................... 125
Current Directors and Executive Officers................................................................ 125
Management Remuneration................................................................................. 126
Pension Plan............................................................................................ 128
Employment Severance Compensation Agreements............................................................ 128
BENEFICIAL OWNERSHIP OF PINNACLE COMMON STOCK............................................................. 129
LEGAL MATTERS............................................................................................. 130
EXPERTS................................................................................................... 130
STOCKHOLDER PROPOSALS..................................................................................... 131
PINNACLE CONSOLIDATED FINANCIAL STATEMENTS................................................................ F-1
Index to Pinnacle Consolidated Financial Statements..................................................... F-1
Consolidated Statements of Income, Nine Months Ended September 30, 1996 and 1995 (unaudited)............ F-2
Consolidated Balance Sheets at September 30, 1995, September 30, 1996 and December 31, 1995
(unaudited)........................................................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity, Nine Months Ended September 30, 1996 and
1995 (unaudited)...................................................................................... F-4
Consolidated Statements of Cash Flows, Nine Months Ended September 30, 1996 and 1995 (unaudited)........ F-5
Independent Auditors' Report............................................................................ F-6
</TABLE>
iii
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PAGE
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Consolidated Balance Sheets at December 31, 1995 and 1994............................................... F-7
<S> <C>
Consolidated Statements of Income, Years Ended December 31, 1995, 1994 and 1993......................... F-8
Consolidated Statements of Stockholders' Equity at December 31, 1995, 1994 and 1993..................... F-9
Consolidated Statements of Cash Flows, Years Ended December 31, 1995, 1994 and 1993..................... F-10
Notes to Consolidated Financial Statements.............................................................. F-11
MACO CONSOLIDATED FINANCIAL STATEMENTS.................................................................... G-1
Index to Maco Consolidated Financial Statements......................................................... G-1
Report of Independent Auditors.......................................................................... G-2
Consolidated Statements of Financial Condition September 30, 1995 and 1994.............................. G-3
Consolidated Statements of Operations Years ended September 30, 1995, 1994, and 1993.................... G-4
Consolidated Statements of Stockholder's Equity Years ended September 30, 1995, 1994 and 1993........... G-5
Consolidated Statements of Cash Flows Years ended September 30, 1995, 1994 and 1993..................... G-6
Notes to Consolidated Financial Statements.............................................................. G-7
ANNEXES
Annex A--Agreement and Plan of Merger dated as of November 14, 1996 (without exhibits)
Annex B--Opinion of ABN-AMRO Chicago Corporation
Annex C--Opinion of Sandler O'Neill & Partners, L.P.
Annex D--Pinnacle Financial Services, Inc. Supplementary Financial Information
</TABLE>
iv
<PAGE>
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PINNACLE OR
IFC. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS
NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF PINNACLE OR IFC SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO SUCH DATE. ALL INFORMATION CONTAINED IN
THIS JOINT PROXY STATEMENT/PROSPECTUS RELATING TO PINNACLE AND ITS SUBSIDIARIES
HAS BEEN SUPPLIED BY PINNACLE AND ALL INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS RELATING TO IFC AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY
IFC.
AVAILABLE INFORMATION
Pinnacle and IFC are both subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information concerning either Pinnacle or IFC can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material also can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
electronic filings of Pinnacle and IFC with the Commission. The address of the
Commission's Web site is "http:// www.sec.gov".
Pinnacle has filed with the Commission a Registration Statement on Form S-4
(registration no. 333- ) (together with any amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Pinnacle Common Stock to be issued or
reserved for issuance in connection with the Merger. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. Such additional information may
be inspected and copied as set forth above. Statements contained in this Joint
Proxy Statement/Prospectus or in any document incorporated in this Joint Proxy
Statement/Prospectus by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Pinnacle (File No.
0-17937) pursuant to the Exchange Act are incorporated by reference in this
Joint Proxy Statement/Prospectus:
1. Pinnacle's Annual Report on Form 10-K for the year ended December
31, 1995 (the "1995 Pinnacle 10-K").
2. All other reports filed by Pinnacle pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the fiscal year covered by the
1995 Pinnacle 10-K.
3. The portions of Pinnacle's Proxy Statement for the Annual Meeting of
Stockholders of Pinnacle held April 30, 1996 that have been incorporated by
reference in the 1995 Pinnacle 10-K.
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Such incorporation by reference will not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
The following documents filed with the Commission by IFC (File No. 0-17379)
pursuant to the Exchange Act are incorporated by reference in this Joint Proxy
Statement/Prospectus:
1. IFC's Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 IFC 10-K").
2. All other reports filed by IFC pursuant to Section 13(a) or 15(d) of
the Exchange Act since the end of the fiscal year covered by the 1995 IFC
10-K.
3. The portions of IFC's Proxy Statement for the Annual Meeting of
Stockholders of IFC held April 24, 1996 that have been incorporated by
reference in the 1995 IFC 10-K.
4. IFC's Registration Statement on Form 8-A dated March 4, 1992,
describing the rights in respect of IFC Common Stock (the "IFC Rights")
issued pursuant to the Stockholder Protection Rights Agreement dated as of
February 26, 1992, as amended by the Amendment to Stockholder Protection
Rights Agreement dated as of November 14, 1996, between IFC and Harris Trust
and Savings Bank, as Rights Agent (the "IFC Rights Agreement").
Such incorporation by reference will not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
All documents filed with the Commission by Pinnacle and IFC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
effectiveness of the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part and prior to the date of the Pinnacle Special
Meeting or the date of the IFC Special Meeting, as applicable, are incorporated
herein by reference and such documents will be deemed to be a part hereof from
the date of filing of such documents. Any statement contained in this Joint
Proxy Statement/Prospectus or in a document incorporated or deemed to be
incorporated by reference herein will be deemed to be modified or superseded for
purposes of this Joint Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON
WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO PINNACLE, TO
DONALD E. RADDE, SECRETARY, PINNACLE FINANCIAL SERVICES, INC., 830 PLEASANT
STREET, ST. JOSEPH, MICHIGAN 49085, TELEPHONE: (616) 983-6311; OR IN THE CASE OF
DOCUMENTS RELATING TO IFC, TO BRENDA A. SHEETZ, SECRETARY, INDIANA FEDERAL
CORPORATION, 56 WASHINGTON STREET, VALPARAISO, INDIANA 46383, TELEPHONE: (219)
462-4131. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, REQUESTS SHOULD
BE RECEIVED BY , , 1997.
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/ PROSPECTUS OR IN DOCUMENTS INCORPORATED HEREIN BY
REFERENCE. AS THIS SUMMARY IS NECESSARILY INCOMPLETE, REFERENCE IS MADE TO, AND
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION
CONTAINED HEREIN, THE ANNEXES ATTACHED HERETO AND THE INFORMATION INCORPORATED
HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO READ THIS JOINT PROXY
STATEMENT/PROSPECTUS AND THE ANNEXES ATTACHED HERETO IN THEIR ENTIRETY AND WITH
CARE. CERTAIN CAPITALIZED TERMS WHICH ARE USED BUT NOT DEFINED IN THIS SUMMARY
ARE DEFINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
THE COMPANIES
PINNACLE. Pinnacle Financial Services, Inc. is a registered bank holding
company organized under the laws of the State of Michigan in 1986. Pinnacle is
one of the leading community-banking institutions in southwestern Michigan and
northern Indiana. Through its wholly-owned subsidiary, Pinnacle Bank, a Michigan
state banking corporation formerly known as "The Peoples State Bank of St.
Joseph" ("Pinnacle Bank"), Pinnacle conducts a full-service commercial and
retail banking and thrift business through 16 branch offices located in
southwestern Michigan and 14 branch offices and two loan production offices
located in 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. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "THE
COMPANIES--Pinnacle Financial Services, Inc.," "INTERESTS OF CERTAIN PERSONS IN
THE MERGER," "ACQUISITION OF MACO BANCORP, INC.," "SELECTED CONSOLIDATED
FINANCIAL DATA OF PINNACLE," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF PINNACLE," "BUSINESS OF PINNACLE,"
"MANAGEMENT OF PINNACLE," "BENEFICIAL OWNERSHIP OF PINNACLE COMMON STOCK,"
"PINNACLE CONSOLIDATED FINANCIAL STATEMENT," and "ANNEX D--PINNACLE FINANCIAL
SERVICES, INC. SUPPLEMENTARY FINANCIAL INFORMATION."
IFC. Indiana Federal Corporation is a registered savings and loan holding
company organized under the laws of the State of Delaware in 1988. IFC 's
principal operating subsidiary is Indiana Federal Bank for Savings, a federal
savings bank ("IndFed Bank"). IndFed Bank conducts its activities from a network
of 15 full service offices located in Valparaiso and other northwest Indiana
communities. IndFed Bank also operates three loan production offices in
Highland, Mishawaka, and Valparaiso, Indiana. Based on IndFed Bank's total
assets of $714 million at December 31, 1995, IndFed Bank is the third largest
thrift institution headquartered in Indiana. IFC's principal executive offices
are located at 56 Washington Street, Valparaiso, Indiana 46383, and its
telephone number is (219) 462-4131. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "THE COMPANIES--Indiana Federal Corporation."
Prior to the execution of the Merger Agreement and the Stock Option
Agreements, Pinnacle had not engaged in any transactions with IFC, and except to
the extent contemplated by, or resulting from, the Merger Agreement, the Stock
Option Agreements and the transactions contemplated thereby, Pinnacle is not
affiliated with IFC.
THE SPECIAL MEETINGS
DATES, TIMES AND PLACES OF MEETINGS
PINNACLE. A special meeting of the stockholders of Pinnacle will be held at
the Mendel Center, 2755 East Napier Avenue, Benton Harbor, Michigan, at :00
a.m., local time, on , , 1997. See "THE SPECIAL MEETINGS."
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IFC. A special meeting of the stockholders of IFC will be held at
, at :00 a.m., local time, on , ,
1997. See "THE SPECIAL MEETINGS."
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
At the Special Meetings, holders of Pinnacle Common Stock and IFC Common
Stock will consider and vote upon a proposal to approve and adopt (i) the
Agreement and Plan of Merger dated as of November 14, 1996 between Pinnacle and
IFC, and (ii) all of the transactions contemplated by the Merger Agreement
(including, without limitation, the merger of IFC with and into Pinnacle, with
Pinnacle being the surviving corporation). Stockholders will also consider and
vote upon such other matters as may properly be brought before the Special
Meetings. See "THE SPECIAL MEETINGS--Matters to be Considered at the Special
Meetings."
A conformed copy of the Agreement and Plan of Merger dated as of November
14, 1996 (without exhibits) is attached to this Joint Proxy Statement/Prospectus
as Annex A and is incorporated herein by reference.
VOTES REQUIRED
PINNACLE. Approval of the Merger Proposal requires the affirmative vote of
a majority of the outstanding shares of Pinnacle Common Stock, with each such
share entitled to one vote. Approval of the Pinnacle Merger Proposal by the
requisite vote of Pinnacle stockholders is a condition to, and is required for,
consummation of the Merger. The record date for the Pinnacle Special Meeting is
, 1997. Only Pinnacle stockholders at the close of business on
such date are entitled to notice of, and to vote at, the Pinnacle Special
Meeting. See "THE SPECIAL MEETINGS--Votes Required."
As of , 1997, directors and executive officers of Pinnacle and
their affiliates were beneficial owners of , or %, of the
outstanding shares of Pinnacle Common Stock (including shares of
Pinnacle Common Stock which may be acquired upon the exercise of options which
are exercisable within 60 days of such date). The directors and executive
officers of Pinnacle have indicated that they intend to vote all shares of
Pinnacle Common Stock owned by them for approval and adoption of the Merger
Proposal. As of , 1997, directors and executive officers of IFC
and their affiliates were beneficial owners of , or %, of the
outstanding shares of Pinnacle Common Stock. The directors and executive
officers of IFC have indicated that they intend to vote all shares of Pinnacle
Common Stock owned by them for approval and adoption of the Merger Proposal.
The affirmative vote of a majority of the shares represented at the Pinnacle
Special Meeting may authorize the adjournment of the Pinnacle Special Meeting;
provided, however, that no proxy which was voted against any proposal will be
voted in favor of adjournment to solicit further proxies for such proposal.
As of , 1997, Pinnacle subsidiaries had or shared the right to
vote, as a consequence of shares held in a fiduciary capacity for third parties,
approximately , or %, of the outstanding shares of Pinnacle Common
Stock. Such Pinnacle subsidiaries have indicated that they currently intend to
vote all shares of Pinnacle Common Stock as to which they have sole voting power
for approval and adoption of the Merger Proposal, subject to the exercise of
their fiduciary duties. As of , 1997, IFC subsidiaries had or
shared the right to vote, as a consequence of shares held in a fiduciary
capacity for third parties, approximately , or %, of the
outstanding shares of Pinnacle Common Stock. Such IFC subsidiaries have
indicated that they currently intend to vote all shares of Pinnacle Common Stock
as to which they have sole voting power for approval and adoption of the
Pinnacle Merger Proposal, subject to the exercise of their fiduciary duties.
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IFC. Approval of the Merger Proposal requires the affirmative vote of a
majority of the outstanding shares of IFC Common Stock, with each such share
entitled to one vote. Approval of the Merger Proposal by the requisite vote of
IFC stockholders is a condition to, and is required for, consummation of the
Merger. The record date for the IFC Special Meeting is , 1997.
Only IFC stockholders at the close of business on such date are entitled to
notice of, and to vote at, the IFC Special Meeting. See "THE SPECIAL
MEETINGS--Votes Required," and "--Record Dates; Shares Entitled to Vote;
Quorums."
As of , 1997, directors and executive officers of IFC and
their affiliates were beneficial owners of , or %, of the
outstanding shares of IFC Common Stock (including shares of IFC Common
Stock which may be acquired upon the exercise of options which are exercisable
within 60 days of such date). The directors and executive officers of IFC have
indicated that they intend to vote all shares of IFC Common Stock owned by them
for approval and adoption of the Merger Proposal. As of , 1997,
directors and executive officers of Pinnacle and their affiliates were
beneficial owners of , or %, of the outstanding shares of IFC
Common Stock. The directors and executive officers of Pinnacle have indicated
that they intend to vote all shares of IFC Common Stock owned by them for
approval and adoption of the Merger Proposal.
As of , 1997, IFC subsidiaries had or shared the right to
vote, as a consequence of shares held in a fiduciary capacity for third parties,
approximately , or %, of the outstanding shares of IFC Common
Stock. Such IFC subsidiaries have indicated that they currently intend to vote
all shares of IFC Common Stock as to which they have sole voting power for
approval and adoption of the Merger Proposal, subject to the exercise of their
fiduciary duties. As of , 1997, Pinnacle subsidiaries had or
shared the right to vote, as a consequence of shares held in a fiduciary
capacity for third parties, approximately , or %, of the
outstanding shares of IFC Common Stock. Such Pinnacle subsidiaries have
indicated that they currently intend to vote all shares of IFC Common Stock as
to which they have sole voting power for approval and adoption of the Merger
Proposal, subject to the exercise of their fiduciary duties.
The affirmative vote of a majority of the shares represented at the IFC
Special Meeting may authorize the adjournment of the IFC Special Meeting;
provided, however, that no proxy which was voted against any proposal will be
voted in favor of adjournment to solicit further proxies for such proposal.
THE MERGER
MERGER STRUCTURE
Pursuant to the Merger Agreement, and at the effective time (the "Effective
Time") set forth in certificates of merger (each, a "Certificate of Merger") to
be filed with the Department of Consumer and Industry Services of the State of
Michigan and the Secretary of State of the State of Delaware on the closing date
with respect to the Merger (the "Closing Date"), IFC will merge with and into
Pinnacle, with Pinnacle being the surviving corporation in the Merger. The name
of the combined corporation following consummation of the Merger will be
"Pinnacle Financial Services, Inc." Pursuant to the Agreement and Plan of Merger
and Consolidation (the "Subsidiary Bank Merger Agreement") to be executed by and
between IndFed Bank and Pinnacle Bank, IndFed Bank will merge with and into
Pinnacle Bank (the "Subsidiary Bank Merger"), with Pinnacle Bank being the
surviving bank in the Subsidiary Bank Merger. The name of the combined bank will
be "Pinnacle Bank." It is expected that the Subsidiary Bank Merger will occur
simultaneously with the Merger or as soon thereafter as is practicable. See "THE
MERGER-- Merger Structure."
MERGER CONSIDERATION
Upon consummation of the Merger, each outstanding share of IFC Common Stock
(other than certain shares specified in the Merger Agreement) will be
automatically converted into the right to receive
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one (1) share of Pinnacle Common Stock. Each share of Pinnacle Common Stock
outstanding immediately prior to consummation of the Merger will remain
outstanding and unchanged as a result of the Merger. See "THE MERGER--Merger
Consideration."
REASONS FOR THE MERGER
The Board of Directors of Pinnacle and the Board of Directors of IFC believe
that the terms of the Merger are fair to and in the best interests of their
respective institutions and stockholders and that the Merger will (i) result in
a combined entity that will be stronger than Pinnacle or IFC alone, (ii) enhance
acquisition and other opportunities for growth and diversification and (iii)
improve the competitive position of the combined corporation in the rapidly
changing marketplace for banking and financial services. See "THE
MERGER--Reasons for the Merger."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
PINNACLE. The Pinnacle Board approved the Merger Agreement and the Stock
Option Agreements and recommends that Pinnacle stockholders vote FOR the
approval and adoption of the Merger Proposal (which approval and adoption shall
constitute, among other things, approval of the Merger and of the issuance of
shares of Pinnacle Common Stock to holders of shares of IFC Common Stock). See
"THE MERGER--Recommendations of the Boards of Directors."
IFC. The IFC Board approved the Merger Agreement and the Stock Option
Agreements and recommends that IFC stockholders vote FOR the approval and
adoption of the Merger Proposal (which approval and adoption shall constitute,
among other things, approval of the Merger and of the conversion of shares of
IFC Common Stock into shares of Pinnacle Common Stock). See "THE MERGER--
Recommendations of the Boards of Directors."
OPINIONS OF FINANCIAL ADVISORS
PINNACLE. ABN-AMRO Chicago Corporation has delivered to the Pinnacle Board
its oral opinion as of November 14, 1996, which opinion was subsequently
confirmed in writing, that as of November 14, 1996 the consideration to be paid
by Pinnacle in the Merger was fair to Pinnacle stockholders from a financial
point of view as of November 14, 1996. For information on the assumptions made,
matters considered and limits of the reviews by ABN-AMRO Chicago Corporation,
see "THE MERGER--Opinion of Pinnacle Financial Advisor" and the opinion of
ABN-AMRO Chicago Corporation attached to this Joint Proxy Statement/Prospectus
as Annex B.
IFC. Sandler O'Neill & Partners, L.P. ("Sandler O'Neill") has delivered to
the IFC Board its written opinions, as of November 14, 1996, and as of
, 1997, that, as of such dates, the Exchange Ratio was fair to
stockholders of IFC from a financial point of view. For information on the
assumptions made, matters considered and limits of the reviews by Sandler
O'Neill, see "THE MERGER--Opinion of IFC Financial Advisor" and the opinion of
Sandler O'Neill & Partners, L.P. attached to this Joint Proxy
Statement/Prospectus as Annex C.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Consummation of the Merger is subject to various conditions, including,
among other things, obtaining satisfactory and requisite stockholder and
regulatory approvals, and receipt of certain opinions (including opinions in
respect of certain Federal income tax consequences of the Merger) and
certificates. IFC and Pinnacle are in compliance with all conditions and other
requirements required to have been satisfied prior to the date hereof. See "THE
MERGER--Conditions to the Consummation of the Merger."
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NO SOLICITATION OF TRANSACTIONS
The Merger Agreement prohibits Pinnacle, IFC, and their respective
subsidiaries from, directly or indirectly, authorizing or permitting any of
their respective officers, directors, employees, representatives or agents to
entertain, solicit, encourage or take any other action to facilitate any
inquiries or the making of any proposal which constitutes, or may lead to, any
"acquisition proposal" for Pinnacle or IFC. However, the Pinnacle Board or the
IFC Board may consider an unsolicited "acquisition proposal" if it is advised by
its counsel that such action is required to discharge its fiduciary duties to
stockholders. See "THE MERGER -- No Solicitation of Transactions."
REGULATORY APPROVALS REQUIRED
The Merger is subject to prior approval by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Certain aspects of the
Merger will also require notifications to, and/or approvals from, certain other
Federal authorities and certain state authorities. There can be no assurances as
to if or when any necessary regulatory agency or other governmental approvals
required for the transactions contemplated by the Merger Agreement (the
"Requisite Regulatory Approvals") will be obtained. There can also be no
assurances that any such approvals will not contain a condition or requirement
which causes such approvals to fail to satisfy the conditions to the
consummation of the Merger. There can be no assurance that the Department of
Justice will not challenge the Merger or as to the result of any such challenge,
if made. See "THE MERGER--Regulatory Approvals Required" and "CERTAIN REGULATORY
CONSIDERATIONS."
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling-of-interests" for accounting
and financial reporting purposes. The Merger Agreement provides that a condition
to the consummation of the Merger is receipt by Pinnacle of a letter from KPMG
Peat Marwick LLP and receipt by IFC of a letter from Ernst & Young LLP regarding
the appropriateness of "pooling-of-interests" accounting for the Merger under
generally accepted accounting principles if closed and consummated in accordance
with the Merger Agreement. See "THE MERGER--Anticipated Accounting Treatment"
and "MERGER AGREEMENT--Conditions to the Consummation of the Merger."
NO DISSENTERS' RIGHTS/NO APPRAISAL RIGHTS
Holders of shares of Pinnacle Common Stock will not have dissenters' rights
under the Michigan Business Corporation Act, as amended (the "MBCA"), in
connection with, or as a result of, the matters to be acted upon at the Pinnacle
Special Meeting. Holders of shares of IFC Common Stock will not have dissenters'
rights under the Delaware General Corporation Law, as amended (the "DGCL"), in
connection with, or as a result of, the matters to be acted upon at the IFC
Special Meeting. See "THE SPECIAL MEETINGS--No Dissenters' Rights/No Appraisal
Rights" and "THE MERGER--No Dissenters' Rights/No Appraisal Rights."
STOCK OPTION AGREEMENTS
As an inducement to IFC to enter into the Merger Agreement, Pinnacle (as
issuer) and IFC (as grantee) entered into the Pinnacle Stock Option Agreement,
dated November 14, 1996 (the "Pinnacle Stock Option Agreement"), pursuant to
which Pinnacle granted IFC an option to purchase from Pinnacle 591,678 shares of
Pinnacle Common Stock (subject to adjustment, but in no event to exceed 9.9% of
the then outstanding Pinnacle Common Stock), at a price of $24.625 per share
(the "Pinnacle Option"). IFC may exercise the Pinnacle Option only upon the
occurrence of certain events described therein (none of which has occurred as of
the date hereof). At the request of the holder of the Pinnacle Option, under
certain circumstances, Pinnacle will repurchase, pursuant to a formula price set
out in the Pinnacle Stock
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Option Agreement, the Pinnacle Option and any shares of Pinnacle Common Stock
purchased upon the exercise of the Pinnacle Option and beneficially owned by
such holder at that time.
As an inducement to Pinnacle to enter into the Merger Agreement, IFC (as
issuer) and Pinnacle (as grantee) entered into the IFC Stock Option Agreement,
dated November 14, 1996 (the "IFC Stock Option Agreement," and together with the
Pinnacle Stock Option Agreement, the "Stock Option Agreements"), pursuant to
which IFC granted Pinnacle an option to purchase from IFC 470,361 shares of IFC
Common Stock (subject to adjustment, but in no event to exceed 9.9% of the then
outstanding IFC Common Stock), at a price of $19.875 per share (the "IFC
Option"). Pinnacle may exercise the IFC Option only upon the occurrence of
certain events described therein (none of which has occurred as of the date
hereof). At the request of the holder of the IFC Option, under certain
circumstances, IFC will repurchase, pursuant to a formula price set out in the
IFC Stock Option Agreement, the IFC Option and any shares of IFC Common Stock
purchased upon the exercise of the IFC Option and beneficially owned by such
holder at that time.
The Stock Option Agreements are intended to increase the likelihood that the
Merger will be consummated in accordance with the terms set forth in the Merger
Agreement. Consequently, certain aspects of the Stock Option Agreements may have
the effect of discouraging persons who might now or prior to the consummation of
the Merger be interested in acquiring all of or a significant interest in
Pinnacle or IFC from considering or proposing such an acquisition. See "THE
MERGER--Stock Option Agreements."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Pinnacle's management and the Pinnacle Board, and IFC's
management and the IFC Board, respectively, may be deemed to have certain
interests in the Merger that are in addition to their interests as stockholders
of Pinnacle or IFC, as the case may be. The Pinnacle Board and the IFC Board
were aware of these interests and considered them, among other matters, in
approving the Merger Agreement, the Stock Option Agreements, and the
transactions contemplated thereby. See "INTERESTS OF CERTAIN PERSONS IN THE
MERGER."
MANAGEMENT AND OPERATIONS AFTER THE MERGER
DIRECTORS
From and after the Effective Time, the Board of Directors of the combined
corporation will consist of a single class of directors comprised of 10 persons.
Such persons will include Mr. Richard L. Schanze (the current Chairman and Chief
Executive Officer of Pinnacle), Mr. Arnold L. Weaver (the current President of
Pinnacle), and three other persons to be named as directors of the surviving
corporation on behalf of the Pinnacle Board, and Mr. Donald A. Lesch (the
current Chairman of the Board and Chief Executive Officer of IFC), Mr. Howard
Silverman, and three other persons to be named as directors of the surviving
corporation on behalf of the IFC Board. As of the date of this Joint Proxy
Statement/Prospectus, no additional directors of the combined operations have
been designated by the Pinnacle Board or the IFC Board. See "MANAGEMENT AND
OPERATIONS AFTER THE MERGER--Directors."
EXECUTIVE OFFICERS
The executive officers of the combined corporation will consist of certain
members of Pinnacle's senior management and certain members of IFC's senior
management. Mr. Schanze will be the Chairman of the combined corporation
following the Merger, and Mr. Lesch will be the Vice Chairman and President of
the combined corporation following the Merger. As of the date of this Joint
Proxy Statement/ Prospectus, no additional executive officers of the combined
corporation have been designated. From time to time prior to the consummation of
the Merger, decisions may be made with respect to the management and operations
of the combined corporation following the Merger, including the selection of
additional
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directors and executive officers of the combined corporation. See "MANAGEMENT
AND OPERATIONS AFTER THE MERGER--Executive Officers."
SUBSIDIARY BANK MERGER
In connection with the Merger, and pursuant to the Subsidiary Bank Merger
Agreement, IndFed Bank will be merged with and into Pinnacle Bank. The directors
of Pinnacle Bank following the Subsidiary Bank Merger will consist of 18
persons, with nine persons to be named as directors by the Board of Directors of
Pinnacle Bank and nine persons to be named as directors by the Board of
Directors of IndFed Bank. The executive officers of Pinnacle Bank following the
Subsidiary Bank Merger will be those appointed by the Board of Directors of
Pinnacle Bank on the basis of recommendations made by Mr. Schanze, as the
Chairman of Pinnacle following the Effective Time, Mr. Donald A. Lesch, as the
Vice Chairman and President of Pinnacle following the Effective Time, and an
outside consulting service to be engaged and charged with reviewing and
evaluating the qualifications of candidates. See "MANAGEMENT AND OPERATIONS
AFTER THE MERGER--Operations."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon there being delivered
opinions of counsel to Pinnacle and IFC, dated as of the Effective Time,
substantially to the effect that for Federal income tax purposes the Merger will
constitute a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended. Based on such opinions, and among other
things, no gain or loss will be recognized by Pinnacle or IFC, and no gain or
loss will be recognized by stockholders of IFC who exchange their shares of IFC
Common Stock solely for shares of Pinnacle Common Stock. See "THE
MERGER--Conditions to the Consummation of the Merger" and "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
ACQUISITION OF MACO BANCORP, INC.
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 merged with and into Pinnacle Bank effective December 31,
1996 ("First Federal") and Mr. Ansary became the largest single Pinnacle
stockholder. Mr. Ansary currently holds approximately 20% of the shares of
Pinnacle Common Stock outstanding. Upon consummation of the Merger, Mr. Ansary
will hold approximately 11.2% of the shares of Pinnacle Common Stock then
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. Pursuant to the Standstill
Agreement, Mr. Ansary has been instructed to vote all shares of Pinnacle Common
Stock owned beneficially by him in favor of the Merger Proposal. The voting and
other restrictions imposed on Mr. Ansary's beneficial ownership of Pinnacle
Common Stock under the Standstill Agreement will terminate upon consummation of
the Merger. See "ACQUISITION OF MACO BANCORP, INC."
10
<PAGE>
COMPARISON OF STOCKHOLDERS' RIGHTS
The rights of stockholders of IFC are currently governed by the Certificate
of Incorporation and By-laws of IFC, the IFC Rights Agreement and the DGCL. Upon
consummation of the Merger, IFC stockholders who receive shares of Pinnacle
Common Stock in the Merger will become stockholders of Pinnacle, and their
rights will be governed by the Restated Articles of Incorporation and By-laws of
Pinnacle, and the MBCA. See "COMPARISON OF STOCKHOLDERS' RIGHTS."
11
<PAGE>
SUMMARY CONDENSED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING
DATA OF PINNACLE FINANCIAL SERVICES, INC.
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA AND PER SHARE DOLLAR AMOUNTS)
The following table presents certain condensed consolidated historical
financial and operating data of Pinnacle for each of the years in the five year
period ended December 31, 1995 and for each of the nine month periods ended
September 30, 1996 and 1995. The following table should be read in conjunction
with the consolidated financial statements of Pinnacle, including the notes
thereto, which appear elsewhere in this Joint Proxy Statement/Prospectus. See
"PINNACLE CONSOLIDATED FINANCIAL STATEMENTS." See also "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE." In the opinion of management of Pinnacle, the data
presented for the nine month periods ended September 30, 1996 and 1995 reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such data. Results for the nine month periods ended
September 30, 1996 and 1995 are not necessarily indicative of results that may
be expected for any other interim period or the year as a whole.
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS
ENDED SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Net interest income.................. $ 25,031 $ 13,757 $ 19,344 $ 17,106 $ 16,929 $ 13,662 $ 12,582
Provision for loan losses............ 245 195 225 125 360 1,094 918
Non-interest income.................. 5,596 3,223 4,586 3,756 4,174 3,857 3,456
Non-interest expense(1).............. 20,638 10,141 14,636 13,114 13,451 10,355 9,710
--------- --------- --------- --------- --------- --------- ---------
Income before income tax............. 9,744 6,644 9,069 7,623 7,292 6,070 5,410
Provision for income tax............. 3,459 2,069 2,610 2,333 2,255 1,792 1,597
Extraordinary items/accounting
changes............................ -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 6,285 $ 4,575 $ 6,459 $ 5,290 $ 5,037 $ 4,278 $ 3,813
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PER SHARE DATA:(2).....................
Net income per share................. $ 1.07 $ 1.20 $ 1.62 $ 1.38 $ 1.32 $ 1.12 $ 1.00
Cash dividends declared per share.... 0.61 0.57 0.76 0.62 0.53 0.48 0.43
Book value per share................. 12.51 10.22 12.75 9.20 8.86 7.98 7.34
Tangible book value per share........ 10.17 9.56 10.09 8.46 8.02 7.02 6.26
BALANCE SHEET DATA:
Total assets......................... $1,018,440 $ 448,506 $ 911,446 $ 409,438 $ 409,572 $ 394,880 $ 323,803
Loans................................ 588,154 309,815 518,459 290,330 264,010 262,623 218,866
Allowance for loan losses............ 5,676 4,865 5,852 5,014 5,215 5,881 2,022
Securities........................... 360,076 96,961 287,532 91,533 119,889 96,080 69,038
Deposits............................. 744,821 380,011 703,100 352,037 363,014 352,319 286,007
Long-term debt....................... -- -- -- -- -- -- --
Stockholders' equity................. 73,481 39,046 74,896 35,148 33,878 30,494 28,050
PERFORMANCE RATIOS (unaudited):
Return on average assets(3).......... 0.88% 1.41% 1.36% 1.30% 1.27% 1.32% 1.20%
Return on average stockholders'
equity(3).......................... 11.42 16.81 15.91 15.40 15.77 14.73 14.17
Net interest margin.................. 3.80 4.62 4.43 4.61 4.67 4.69 4.41
Non-interest income to average
assets(3).......................... 0.78 1.00 0.96 0.92 1.05 1.19 1.08
Non-interest expense to average
assets(3).......................... 2.89 3.13 3.07 3.22 3.39 3.19 3.04
CAPITAL RATIOS (unaudited):(4)
Stockholders' equity to assets....... 7.22% 8.71% 8.22% 8.58% 8.27% 7.72% 8.66%
Tier 1 capital to total assets....... 6.31 8.42 6.62 8.62 7.87 7.37 8.21
Tier 1 capital to risk based
assets............................. 12.23 12.27 11.97 12.70 12.59 11.59 12.09
</TABLE>
- ------------------------------
(1) The amount shown for the nine months ended September 30, 1996 includes $2.4
million as a result of the assessment of a one-time charge against financial
institutions with deposits insured by the Savings Association Insurance Fund
(the "SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
(2) Per share data have been restated to reflect all stock dividends and stock
splits.
(3) Performance ratios for the nine months ended September 30, 1996 and 1995 are
stated on an annualized basis.
(4) For definitions and further information relating to Pinnacle's regulatory
capital requirements, see "CERTAIN REGULATORY CONSIDERATIONS--Capital."
12
<PAGE>
SUMMARY CONDENSED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING
DATA OF INDIANA FEDERAL CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA AND PER SHARE DOLLAR AMOUNTS)
The following table presents certain condensed consolidated historical
financial and operating data of IFC for each of the years in the five year
period ended December 31, 1995 and for the nine month periods ended September
30, 1996 and 1995. The following table should be read in conjunction with the
consolidated financial statements of IFC, including the notes thereto, which are
incorporated by reference in this Joint Proxy Statement/Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Pinnacle has been advised by
IFC that, in the opinion of management of IFC, the data presented for the nine
month periods ended September 30, 1996 and 1995 reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the nine month periods ended September
30, 1996 and 1995 are not necessarily indicative of results that may be expected
for any other interim period or for the year as a whole.
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Net interest income.................... $ 18,461 $ 19,102 $ 25,315 $ 21,208 $ 20,856 $ 19,945 $ 18,565
Provision for loan losses.............. 465 177 177 179 1,097 1,395 1,683
Non-interest income.................... 2,945 3,164 4,679 4,471 4,579 3,710 2,855
Non-interest expense(1)................ 17,153 14,506 20,195 15,172 13,678 12,388 12,021
Income before income tax............... 3,788 7,583 9,622 10,328 10,660 9,872 7,716
Provision for income tax............... 587 2,135 2,318 3,066 3,076 3,891 3,409
Extraordinary items/accounting
changes.............................. -- -- -- -- (429) 250 --
--------- --------- --------- --------- --------- --------- ---------
Net income(2)........................ $ 3,201 $ 5,448 $ 7,304 $ 7,262 $ 7,155 $ 6,231 $ 4,307
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PER SHARE DATA:(3)
Net income per share................... $ 0.67 $ 1.12 $ 1.51 $ 1.50 $ 1.45 $ 1.27 $ 0.85
Cash dividends declared per share...... 0.64 0.70 0.86 0.72 0.53 0.40 0.30
Book value per share................... 14.77 14.65 14.98 13.81 13.54 12.65 11.71
Tangible book value per share.......... 13.78 13.27 13.89 13.11 13.36 12.45 11.48
BALANCE SHEET DATA:
Total assets........................... $ 809,123 $ 718,581 $ 721,333 $ 717,574 $ 639,148 $ 602,377 $ 568,375
Loans.................................. 609,718 544,881 529,348 518,272 420,180 403,951 406,895
Allowance for loan losses.............. 6,856 6,685 6,655 6,101 5,356 4,392 3,210
Securities............................. 121,782 98,884 99,410 137,418 92,367 154,698 126,815
Deposits............................... 559,187 523,227 532,896 510,475 430,829 416,081 427,062
Long-term debt......................... -- -- -- -- -- -- --
Stockholders' equity................... 69,957 68,943 70,730 64,315 63,090 59,816 56,113
PERFORMANCE RATIOS (unaudited):
Return on average assets(4)............ 0.63% 1.01% 1.00% 1.19% 1.13% 1.08% 0.76%
Return on average stockholders'
equity(4)............................ 6.87 10.96 10.74 11.28 11.57 10.78 7.72
Net interest margin.................... 3.65 3.79 3.78 3.70 3.48 3.65 3.43
Non-interest income to average
assets(4)............................ 0.52 0.59 0.64 0.73 0.72 0.65 0.50
Non-interest expense to average
assets(4)............................ 2.89 2.70 2.77 2.49 2.15 2.16 2.12
CAPITAL RATIOS (unaudited):(5)
Stockholders' equity to assets......... 8.65% 9.59% 9.81% 8.96% 9.87% 9.93% 9.87%
Tier 1 capital to total assets......... 8.15 8.80 9.05 8.84 9.75 9.78 9.70
Tier 1 capital to risk based assets.... 11.99 13.66 14.06 14.68 17.03 15.96 15.13
</TABLE>
- ------------------------------
(1) The amount shown for the nine months ended September 30, 1996 includes $2.8
million as a result of the assessment of a one-time charge against financial
institutions with deposits insured by the SAIF of the FDIC.
(2) The after-tax effect of the one-time SAIF Assessment was approximately $1.7
million.
(3) Per share data have been restated to reflect all stock dividends and stock
splits.
(4) Performance ratios for the nine months ended September 30, 1996 and 1995 are
stated on an annualized basis. The calculations include the SAIF Assessment
which has not been annualized given its one-time occurrence. The 1996
performance ratios excluding the SAIF Assessment would be as follows: Return
on average assets: 0.86%; return on average stockholders' equity: 9.30%; and
non-interest expense to average assets: 2.51% (other than the return on
average assets and the return on average stockholders' equity for the nine
months ended September 30, 1996).
(5) For definitions and further information relating to IFC's regulatory capital
requirements, see "CERTAIN REGULATORY CONSIDERATIONS--Capital."
13
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
AND OPERATING DATA OF PINNACLE FINANCIAL SERVICES, INC.
AND INDIANA FEDERAL CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA AND PER SHARE DOLLAR AMOUNTS)
The following table sets forth certain unaudited pro forma condensed
combined financial and operating data for Pinnacle giving effect to the Merger,
which will be accounted for as a "pooling-of-interests," as if it and the Maco
Acquisition had occurred as of the beginning of the earliest period indicated
and after giving effect to the pro forma adjustments described in the Notes to
Pinnacle Financial Services, Inc. and Indiana Federal Corporation Unaudited Pro
Forma Combined Financial Statements. For a description of "pooling-of-interests"
accounting with respect to the Merger, see "THE MERGER-- Anticipated Accounting
Treatment." This information should be read in conjunction with the historical
consolidated financial statements of Pinnacle, including the notes thereto,
which appear elsewhere in this Joint Proxy Statement/Prospectus, the historical
consolidated financial statements of IFC, including the notes thereto, which are
incorporated by reference in this Joint Proxy Statement/Prospectus, and the
consolidated historical financial data for Pinnacle and IFC and the other pro
forma financial information, including the notes thereto, which appear elsewhere
in this Joint Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE," "PINNACLE CONSOLIDATED FINANCIAL STATEMENTS," and "PRO
FORMA COMBINED FINANCIAL INFORMATION." The effect of the expected one-time
merger and restructuring charges of approximately $ million have been
reflected in the pro forma combined balance sheet; however, since the expected
merger and restructuring charges are nonrecurring, they have not been reflected
in the pro forma combined statements of income. See "PRO FORMA COMBINED
FINANCIAL INFORMATION--Notes to Pinnacle Financial Services, Inc. and Indiana
Federal Corporation Unaudited Pro Forma Combined Financial Statements." The pro
forma financial data do not give effect to the anticipated cost savings in
connection with the Merger and are not necessarily indicative of either the
results that actually would have
14
<PAGE>
occurred had the Merger and the Maco Acquisition been consummated on the dates
indicated or the results that may be obtained in the future.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Net interest income...................... $43,492 $41,100 $55,694 $49,639 $49,820
Provision for loan losses................ 710 432 522 484 1,457
Non-interest income...................... 8,541 7,460 10,485 9,022 14,288
Non-interest expense(1).................. 37,791 32,197 44,723 36,815 36,614
Income before income tax expense......... 13,532 15,931 20,934 21,362 26,037
Income tax expense....................... 4,046 5,077 6,058 7,088 8,859
Net income(2)............................ 9,486 10,854 14,876 14,274 17,178
PER SHARE DATA:
Net income per share (primary)........... $0.89 $1.01 $1.37 $1.33 $1.59
Net income per share (fully diluted)..... $0.89 $1.01 $1.37 $1.33 $1.59
Cash dividends declared per share........ $0.61 $0.57 $0.76 $0.62 $0.53
Book value per share (period end)........ $13.12
Average common shares outstanding
(primary).............................. 10,678,834 10,736,679 10,872,808 10,701,156 10,799,330
</TABLE>
<TABLE>
<CAPTION>
AT, OR FOR THE
NINE MONTHS ENDED,
SEPTEMBER 30, 1996
------------------------
<S> <C>
BALANCE SHEET DATA:
Total assets.................................... $ 1,821,718
Loans........................................... 1,197,872
Allowance for loan losses....................... 12,532
Securities...................................... 481,858
Deposits........................................ 1,304,008
Long-term debt.................................. --
Stockholders' equity(2)......................... 139,197
</TABLE>
- ------------------------
(1) The amount shown for the nine months ended September 30, 1996 includes $5.2
million as a result of the assessment of a one-time charge against financial
institutions with deposits insured by the SAIF of the FDIC.
(2) Pro forma net income for the year ended December 31, 1993 reflects net
income from continuing operations but does not include an extraordinary
items/accounting changes charge of $4.96 million for Maco and an
extraordinary items/accounting changes credit of $429,000 for IFC. Inclusion
of these items in pro forma net income for the year ended December 31, 1993
would increase such net income to $21,708,000. See "PRO FORMA COMBINED
FINANCIAL INFORMATION--Notes to Pinnacle Financial Services, Inc. and
Indiana Federal Corporation Unaudited Pro Forma Combined Financial
Statements."
15
<PAGE>
COMPARATIVE PER SHARE DATA
(Unaudited)
The following table sets forth for the Pinnacle Common Stock and the IFC
Common Stock certain historical, pro forma and pro forma equivalent per share
financial information. The pro forma data do not give effect to the anticipated
cost savings in connection with the Merger and are not necessarily indicative of
either the results that would have occurred had the Merger and the Maco
Acquisition been consummated on the dates indicated or the results that may be
obtained in the future. The information presented herein should be read in
conjunction with the unaudited pro forma combined financial information,
including the notes thereto, appearing elsewhere in this Joint Proxy
Statement/Prospectus. See "PRO FORMA COMBINED FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PINNACLE COMMON STOCK
Earnings per share(1)
Historical.................................................. $ 1.07 $ 1.20 $ 1.62 $ 1.38 $ 1.32
Pro forma(2)................................................ 0.89 1.01 1.37 1.33 1.59
Cash dividends declared per share
Historical.................................................. 0.61 0.57 0.76 0.62 0.53
Book value per share--end of period
Historical.................................................. 12.51 10.22 12.75 9.20 8.86
Pro forma(3)................................................ 13.12 12.88 13.26 11.94 11.44
IFC COMMON STOCK
Earnings per share(1)
Historical.................................................. $ 0.67 $ 1.12 $ 1.51 $ 1.50 $ 1.54
Equivalent pro forma(4)..................................... 0.89 1.01 1.37 1.33 1.59
Cash dividends declared per share
Historical.................................................. 0.64 0.695 0.86 0.72 0.53
Equivalent pro forma(4)..................................... 0.61 0.57 0.76 0.62 0.53
Book value per share--end of period
Historical.................................................. 14.77 14.65 14.98 13.81 13.54
Equivalent pro forma(4)..................................... 13.12 12.88 13.26 11.94 11.44
</TABLE>
- ------------------------
(1) Earnings per share have been calculated using income from continuing
operations. In calculating pro forma earnings per share, no adjustments have
been made to reflect the effect of repurchases of Pinnacle Common Stock or
IFC Common Stock subsequent to the stated period.
(2) Gives effect to the Merger and the Maco Acquisition as if they had occurred
at the beginning of each period presented.
(3) Gives effect to the Merger and the Maco Acquisition as if they had occurred
at the end of the period. The September 30, 1996 pro forma book value per
share includes the after-tax impact of the expected one-time merger and
restructuring charges of approximately $4.2 million (after-tax). See "PRO
FORMA COMBINED FINANCIAL INFORMATION--Notes to Pinnacle Financial Services,
Inc. and Indiana Federal Corporation Unaudited Pro Forma Combined Financial
Statements."
(4) Equivalent pro forma amounts have been calculated using the Exchange Ratio
of one (1) share of Pinnacle Common Stock for each share of IFC Common
Stock.
16
<PAGE>
COMPARATIVE STOCK PRICES
Pinnacle Common Stock and IFC Common Stock are listed for quotation on the
Nasdaq National Market. Pinnacle Common Stock is listed under the symbol "PNFI"
and IFC Common Stock is listed under the symbol "IFSL." If the Merger is
consummated, IFC Common Stock will cease to be listed on the Nasdaq National
Market and public trading of such shares will cease. Although transactions in
Pinnacle Common Stock have been, and are expected to continue to be, facilitated
by market-makers (including ABN-AMRO Chicago Corporation), there can be no
assurance that an established or liquid trading market in Pinnacle Common Stock
will continue. The following table sets forth, for the periods indicated, the
high and low sale prices per share of the Pinnacle Common Stock and the high and
low sale prices per share of the IFC Common Stock, all 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 IFC
COMMON STOCK COMMON STOCK
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1995 First Quarter........................ $ 17.50 $ 15.00 $ 18.00 $ 15.50
Second Quarter....................... 17.75 15.75 17.75 16.00
Third Quarter........................ 17.50 15.50 18.75 16.50
Fourth Quarter....................... 18.50 16.50 21.25 17.75
1996 First Quarter........................ 20.50 18.25 21.25 18.75
Second Quarter....................... 21.75 20.00 21.50 16.25
Third Quarter........................ 24.75 19.50 21.00 18.25
Fourth Quarter....................... 25.00 23.25 23.00 19.50
1997 First Quarter (through ,
1997)................................
</TABLE>
On November 13, 1996, the last trading day before the announcement of the
execution of the Merger Agreement, the last sales price of the Pinnacle Common
Stock as reported on the Nasdaq National Market was $24.75 per share, and the
last sales price for the IFC Common Stock as reported on the Nasdaq National
Market was $19.50 per share (or approximately $24.75 per share of IFC Common
Stock on an equivalent pro forma per share basis).
On , 1997 (the last practicable date prior to the mailing of
this Joint Proxy Statement/Prospectus), the last sales price of the Pinnacle
Common Stock as reported on the Nasdaq National Market was $ per share,
and the last sales price for the IFC Common Stock as reported by Nasdaq National
Market was $ per share (or approximately $ per share of IFC Common
Stock on an equivalent pro forma per share basis).
IFC STOCKHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE
PINNACLE COMMON STOCK AND THE IFC COMMON STOCK. NO ASSURANCE CAN BE GIVEN
CONCERNING THE MARKET PRICE OF THE PINNACLE COMMON STOCK BEFORE OR AFTER THE
DATE ON WHICH THE MERGER IS CONSUMMATED. THE MARKET PRICE OF THE PINNACLE COMMON
STOCK WILL FLUCTUATE BETWEEN THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS
AND THE DATE ON WHICH THE MERGER IS CONSUMMATED AND THEREAFTER. BECAUSE THE
EXCHANGE RATIO IS FIXED AND BECAUSE THE MARKET PRICE OF THE PINNACLE COMMON
STOCK IS SUBJECT TO FLUCTUATION, THE VALUE OF THE SHARES OF PINNACLE COMMON
STOCK THAT HOLDERS OF IFC COMMON STOCK WILL RECEIVE IN THE MERGER MAY INCREASE
OR DECREASE PRIOR TO AND FOLLOWING THE MERGER.
On , 1997, there were approximately holders of record
of the Pinnacle Common Stock and approximately holders of record of the
IFC Common Stock.
17
<PAGE>
THE COMPANIES
PINNACLE FINANCIAL SERVICES, INC.
Pinnacle Financial Services, Inc. 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 (then known as "Peoples State
Bank of St. Joseph") into a wholly-owned subsidiary of Pinnacle.
Pinnacle is one of the leading community-banking institutions in
southwestern Michigan and northern Indiana. Through its wholly-owned subsidiary,
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
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 tourism-driven economic growth.
Pinnacle had approximately $1.0 billion in total assets as of September 30,
1996. Pinnacle returned 0.88% on average assets for the nine-month period ended
September 30, 1996. This compares to 1.41% for the same period in 1995 and
1.36%, 1.30% and 1.27% for each of the years in the three year period ended
December 31, 1995. For the nine months ended September 30, 1996, Pinnacle's
return on average equity was 11.42%. 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 158%
(with total assets growing to approximately $1.0 billion September 30, 1996),
and (ii) increased net loans by more than 124% (with total loans growing to
approximately $588.2 million at September 30, 1996). Pinnacle's loan to deposit
ratio was approximately 79% at September 30, 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.
Pinnacle's executive offices are located at 830 Pleasant Street, St. Joseph,
Michigan 49085, and its telephone number is (616) 983-6311.
For additional information concerning Pinnacle, see "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE," "INTERESTS OF CERTAIN PERSONS IN THE MERGER,"
"ACQUISITION OF MACO BANCORP, INC." "SELECTED CONSOLIDATED FINANCIAL DATA OF
PINNACLE," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
18
<PAGE>
RESULTS OF OPERATIONS OF PINNACLE," "BUSINESS OF PINNACLE," "MANAGEMENT OF
PINNACLE," "BENEFICIAL OWNERSHIP OF PINNACLE COMMON STOCK," "PINNACLE
CONSOLIDATED FINANCIAL STATEMENTS," and "ANNEX D--PINNACLE FINANCIAL SERVICES,
INC. SUPPLEMENTARY FINANCIAL INFORMATION."
INDIANA FEDERAL CORPORATION
Indiana Federal Corporation is a registered savings and loan holding company
organized under the laws of the State of Delaware in 1988. IFC's principal
operating subsidiary is IndFed Bank. IndFed Bank was organized in 1887 and has
operated as a federally-chartered savings and loan association since 1934.
IndFed Bank is principally engaged in the business of attracting savings
deposits from the general public and investing these funds, together with
borrowings and other funds, to originate one- to four-family residential real
estate loans, consumer loans, income-producing property loans, commercial
business loans and agricultural real estate and operating loans. IndFed Bank
conducts its activities from a network of 15 full service offices located in
Valparaiso and other northwest Indiana communities. IndFed Bank also operates
three loan production offices in Highland, Mishawaka, and Valparaiso, Indiana.
Based on IndFed Bank's total assets of $714 million at December 31, 1995, IndFed
Bank is the third largest thrift institution headquartered in Indiana. IndFed
Bank is a member of the Federal Home Loan Bank System and a stockholder in the
Federal Home Loan Bank of Indianapolis.
On December 12, 1994, IFC completed the acquisition of American Bancorp,
Inc. ("ABI"), and its wholly-owned subsidiary, American State Bank ("American"),
a commercial bank organized under the laws of the State of Indiana. Upon
acquisition, ABI was merged into IFC and American was merged into IndFed Bank.
On January 31, 1995, IFC completed the acquisition of NCB Corp. ("NCB"), and its
wholly owned subsidiary NorCen Bank ("NorCen"), an Indiana state chartered
savings bank, located in Culver, Indiana. Similarly, upon acquisition, NCB was
merged into IFC and NorCen was merged into IndFed Bank.
IFC's executive offices are located at 56 Washington Street, Valparaiso,
Indiana 46383, and its telephone number is (219) 465-6607.
For additional information concerning IFC, see "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
THE SPECIAL MEETINGS
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
At the Special Meetings, holders of Pinnacle Common Stock and IFC Common
Stock will consider and vote upon a proposal to approve and adopt (i) the Merger
Agreement, and (ii) all of the transactions contemplated by the Merger Agreement
(including, without limitation, the Merger). Stockholders will also consider and
vote upon such other matters as may properly be brought before the Special
Meetings.
THE PINNACLE BOARD APPROVED THE MERGER AGREEMENT AND THE STOCK OPTION
AGREEMENTS AND RECOMMENDS THAT PINNACLE STOCKHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER PROPOSAL (WHICH APPROVAL AND ADOPTION SHALL CONSTITUTE,
AMONG OTHER THINGS, APPROVAL OF THE MERGER AND THE ISSUANCE OF SHARES OF
PINNACLE COMMON STOCK TO HOLDERS OF SHARES OF IFC COMMON STOCK).
THE IFC BOARD APPROVED THE MERGER AGREEMENT AND THE STOCK OPTION AGREEMENTS
AND RECOMMENDS THAT IFC STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE
MERGER PROPOSAL (WHICH APPROVAL AND ADOPTION SHALL CONSTITUTE, AMONG OTHER
THINGS, APPROVAL OF THE MERGER AND THE CONVERSION OF SHARES OF IFC COMMON STOCK
INTO THE RIGHT TO RECEIVE SHARES OF PINNACLE COMMON STOCK).
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VOTES REQUIRED
PINNACLE. The affirmative vote of a majority of the outstanding shares of
Pinnacle Common Stock is required to approve and adopt the Merger Proposal. Each
share of Pinnacle Common Stock is entitled to one vote with respect to the
Merger Proposal. Approval of the Merger Proposal by the requisite vote of
Pinnacle stockholders is a condition to, and is required for, the consummation
of the Merger.
As of , 1997, directors and executive officers of Pinnacle and
their affiliates were beneficial owners of , or %, of the
outstanding shares of Pinnacle Common Stock (including shares of Pinnacle
Common Stock which may be acquired upon the exercise of options which are
exercisable within 60 days of such date). The directors and executive officers
of Pinnacle have indicated that they intend to vote all shares of Pinnacle
Common Stock owned by them for approval and adoption of the Merger Proposal. As
of , 1997, directors and executive officers of IFC and their
affiliates were beneficial owners of , or %, of the outstanding
shares of Pinnacle Common Stock. The directors and executive officers of IFC
have indicated that they intend to vote all shares of Pinnacle Common Stock
owned by them for approval and adoption of the Merger Proposal. See "ACQUISITION
OF MACO BANCORP, INC. -- Standstill Agreement."
As of , 1997, Pinnacle subsidiaries had or shared the right to
vote, as a consequence of shares held in a fiduciary capacity for third parties,
approximately , or %, of the outstanding shares of Pinnacle Common
Stock. Such Pinnacle subsidiaries have indicated that they currently intend to
vote all shares of Pinnacle Common Stock as to which they have sole voting power
for approval and adoption of the Merger Proposal, subject to the exercise of
their fiduciary duties. As of , 1997, IFC subsidiaries had or shared
the right to vote, as a consequence of shares held in a fiduciary capacity for
third parties, approximately , or %, of the outstanding shares of
Pinnacle Common Stock. Such IFC subsidiaries have indicated that they currently
intend to vote all shares of Pinnacle Common Stock as to which they have sole
voting power for approval and adoption of the Merger Proposal, subject to the
exercise of their fiduciary duties.
The affirmative vote of a majority of the shares represented at the Pinnacle
Special Meeting may authorize the adjournment of the Pinnacle Special Meeting;
provided, however, that no proxy which was voted against any proposal will be
voted in favor of adjournment to solicit further proxies for such proposal.
IFC. The affirmative vote of a majority of the outstanding shares of IFC
Common Stock is required to approve and adopt the Merger Proposal. Each share of
IFC Common Stock is entitled to one vote with respect to the Merger Proposal.
Approval of the Merger Proposal by the requisite vote of IFC stockholders is a
condition to, and is required for, the consummation of the Merger.
As of , 1997, directors and executive officers of IFC and their
affiliates were beneficial owners of , or %, of the outstanding
shares of IFC Common Stock (including shares of IFC Common Stock which may be
acquired upon the exercise of options which are exercisable within 60 days of
such date). The directors and executive officers of IFC have indicated that they
intend to vote all shares of IFC Common Stock owned by them for approval and
adoption of the Merger Proposal. As of , 1997, directors and
executive officers of Pinnacle and their affiliates were beneficial owners of
, or %, of the outstanding shares of IFC Common Stock. The directors
and executive officers of Pinnacle have indicated that they intend to vote all
shares of IFC Common Stock owned by them for approval and adoption of the Merger
Proposal.
As of , 1997, IFC subsidiaries had or shared the right to vote,
as a consequence of shares held in a fiduciary capacity for third parties,
approximately , or %, of the outstanding shares of IFC Common Stock.
Such IFC subsidiaries have indicated that they currently intend to vote all
shares of IFC Common Stock as to which they have sole voting power for approval
and adoption of the Merger Proposal, subject to the exercise of their fiduciary
duties. As of , 1997, Pinnacle subsidiaries
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had or shared the right to vote, as a consequence of shares held in a fiduciary
capacity for third parties, approximately , or %, of the outstanding
shares of IFC Common Stock. Such Pinnacle subsidiaries have indicated that they
currently intend to vote all shares of IFC Common Stock as to which they have
sole voting power for approval and adoption of the Merger Proposal, subject in
each case to the exercise of their fiduciary duties.
The affirmative vote of a majority of the shares represented at the IFC
Special Meeting may authorize the adjournment of the IFC Special Meeting;
provided, however, that no proxy which was voted against any proposal will be
voted in favor of adjournment to solicit further proxies for such proposal.
VOTING OF PROXIES
PINNACLE. Shares of Pinnacle Common Stock represented by properly executed
proxies received at or prior to the Pinnacle Special Meeting will be voted at
the Pinnacle Special Meeting in the manner specified by the holders of such
shares. Properly executed proxies which do not contain voting instructions will
be voted FOR the Merger Proposal. Management of Pinnacle believes that brokers
who hold shares of Pinnacle Common Stock for customers are not authorized to
vote on the Merger Proposal without specific voting instructions as to such
proposal (a "broker nonvote"). Moreover, solely for purposes of determining
whether the Merger Proposal has received the stockholder vote required for
approval, each of a "broker nonvote" and an abstention is functionally
equivalent to a vote "against" the Merger Proposal. If any other matters are
properly presented at the Pinnacle Special Meeting for consideration, including,
among other things, consideration of a motion to adjourn the Pinnacle Special
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the relevant
form of proxy enclosed herewith and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment; provided, however,
that no proxy voted against any proposal will be voted in favor of adjournment
to solicit further proxies for such proposal. Pinnacle knows of no other matters
to be brought before the Pinnacle Special Meeting other than those referred to
in this Joint Proxy Statement/Prospectus, but if any other business should
properly come before the Pinnacle Special Meeting, the persons named in the
proxy, or authorized substitutes, intend to vote in accordance with their best
judgment.
HOLDERS OF PINNACLE COMMON STOCK ARE URGED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IFC. Shares of IFC Common Stock represented by properly executed proxies
received at or prior to the IFC Special Meeting will be voted at the IFC Special
Meeting in the manner specified by the holders of such shares. Properly executed
proxies which do not contain voting instructions will be voted FOR the Merger
Proposal. Management of IFC believes that brokers who hold shares of IFC Common
Stock for customers are NOT authorized to vote on the Merger Proposal without
specific voting instructions as to such proposal. Moreover, solely for purposes
of determining whether the Merger Proposal has received the stockholder vote
required for approval, each of a "broker nonvote" and an abstention is
functionally equivalent to a vote "against" the Merger Proposal. If any other
matters are properly presented at the IFC Special Meeting for consideration,
including, among other things, consideration of a motion to adjourn the IFC
Special Meeting to another time and/or place (including, without limitation, for
the purpose of soliciting additional proxies), the persons named in the relevant
form of proxy enclosed herewith and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment; provided, however,
that no proxy voted against any proposal will be voted in favor of adjournment
to solicit further proxies for such proposal. IFC knows of no other matters to
be brought before the IFC Special Meeting other than those referred to in this
Joint Proxy Statement/Prospectus, but if any other business should properly come
before the IFC Special Meeting, the persons named in the proxy, or authorized
substitutes, intend to vote in accordance with their best judgment.
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HOLDERS OF IFC COMMON STOCK ARE URGED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
REVOCABILITY OF PROXIES
PINNACLE. The grant of a proxy on the enclosed Pinnacle form of proxy does
not preclude a stockholder from voting in person or otherwise revoking a proxy.
Attendance at the Pinnacle Special Meeting will not in and of itself constitute
revocation of a proxy. A stockholder may revoke a proxy at any time prior to its
exercise by filing with the Secretary of Pinnacle a duly executed revocation or
a proxy bearing a later date or by voting in person at the Pinnacle Special
Meeting.
IFC. The grant of a proxy on the enclosed IFC form of proxy does not
preclude a stockholder from voting in person or otherwise revoking a proxy.
Attendance at the IFC Special Meeting will not in and of itself constitute
revocation of a proxy. A stockholder may revoke a proxy at any time prior to its
exercise by filing with the Secretary of IFC a duly executed revocation or a
proxy bearing a later date or by voting in person at the IFC Special Meeting.
RECORD DATES; SHARES ENTITLED TO VOTE; QUORUMS
PINNACLE. Only holders of record of Pinnacle Common Stock at the close of
business on , 1997 will be entitled to receive notice of and to vote
at the Pinnacle Special Meeting. At , 1997, Pinnacle had issued and
outstanding approximately shares of Pinnacle Common Stock. Shares
representing a majority of the aggregate number of outstanding shares of
Pinnacle Common Stock entitled to vote must be represented in person or by proxy
at the Pinnacle Special Meeting in order for a quorum to be present at the
Pinnacle Special Meeting. "Broker nonvotes" and abstentions are counted for
purposes of determining a quorum.
IFC. Only holders of record of IFC Common Stock at the close of business on
, 1997 will be entitled to receive notice of and to vote at the IFC
Special Meeting. At , 1997, IFC had issued and outstanding
approximately shares of IFC Common Stock. Shares representing a
majority of the aggregate number of outstanding shares of IFC Common Stock
entitled to vote must be represented in person or by proxy at the IFC Special
Meeting in order for a quorum to be present at the IFC Special Meeting. "Broker
nonvotes" and abstentions are counted for purposes of determining a quorum.
NO DISSENTERS' RIGHTS/NO APPRAISAL RIGHTS
PINNACLE. Holders of shares of Pinnacle Common Stock will not have
dissenters' rights under the MBCA in connection with, or as a result of, the
matters to be acted upon at the Pinnacle Special Meeting. Holders of shares of
IFC Common Stock will not have appraisal rights under the DGCL in connection
with, or as a result of, the matters to be acted upon at the IFC Special
Meeting.
SOLICITATION OF PROXIES
PINNACLE. Pinnacle will bear the cost of soliciting proxies from its
stockholders, including the cost of printing and mailing this Joint Proxy
Statement/Prospectus to Pinnacle stockholders. In addition to solicitation by
mail, proxies may be solicited by telephone, telegram, in person or by other
forms of communication. Arrangements will be made with brokerage firms,
nominees, fiduciaries and other custodians for the forwarding of solicitation
materials to the beneficial owners of shares held of record by such persons, and
Pinnacle will reimburse such persons for their reasonable out-of-pocket expenses
in connection therewith. Proxies will be solicited on behalf of Pinnacle by mail
or personally, or by telephone, telegraph or datagram, by directors, officers
and regular employees of Pinnacle and its subsidiaries (none of whom shall
receive any additional compensation for such services, but will be reimbursed
for reasonable out-of-pocket expenses incurred in connection with such
solicitation). In addition, Morrow & Co., Inc. will
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assist in the solicitation of proxies by Pinnacle for a fee of approximately
$12,000, plus reasonable out-of-pocket expenses.
IFC. IFC will bear the cost of soliciting proxies from its stockholders,
including the cost of printing and mailing this Joint Proxy Statement/Prospectus
to IFC stockholders. In addition to solicitation by mail, proxies may be
solicited by telephone, telegram, in person or by other forms of communication.
Arrangements will be made with brokerage firms, nominees, fiduciaries and other
custodians for the forwarding of solicitation materials to the beneficial owners
of shares held of record by such persons, and IFC will reimburse such persons
for their reasonable out-of-pocket expenses in connection therewith. Proxies
will be solicited on behalf of IFC by mail or personally, or by telephone,
telegraph or datagram, by directors, officers and regular employees of IFC and
its subsidiaries (none of whom shall receive any additional compensation for
such services, but will be reimbursed for reasonable out-of-pocket expenses
incurred in connection with such solicitation). In addition, Regan & Associates
Inc. will assist in the solicitation of proxies by IFC for a fee of $3,750, plus
reasonable out-of-pocket expenses.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
THE MERGER
THE FOLLOWING DISCUSSION DESCRIBES THE MERGER AND SUMMARIZES CERTAIN
PROVISIONS OF THE AGREEMENT AND PLAN OF MERGER DATED AS OF NOVEMBER 14, 1996
BETWEEN PINNACLE AND IFC AND THE RELATED STOCK OPTION AGREEMENTS. AS SUCH
DESCRIPTIONS AND SUMMARIES ARE NECESSARILY INCOMPLETE, REFERENCE IS MADE TO, AND
SUCH DESCRIPTIONS AND SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY, THE MERGER
AGREEMENT AND THE STOCK OPTION AGREEMENTS. A CONFORMED COPY OF THE MERGER
AGREEMENT (WITHOUT EXHIBITS) IS ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS ANNEX A AND IS INCORPORATED HEREIN BY REFERENCE.
STOCKHOLDERS ARE URGED TO READ THE MERGER AGREEMENT CAREFULLY.
MERGER STRUCTURE
MERGER. Subject to the terms and conditions of the Merger Agreement and in
accordance with the MBCA and the DGCL, at the Effective Time IFC will merge with
and into Pinnacle, with Pinnacle being the surviving corporation. Thus, at the
Effective Time (i) the separate corporate existence of IFC will terminate, (ii)
Pinnacle will succeed to the assets and liabilities of IFC, and (iii) each
outstanding share of IFC Common Stock (other than certain shares specified in
the Merger Agreement) will be automatically converted into the right to receive
one (1) share of Pinnacle Common Stock. After the Effective Time, the combined
corporation will continue its corporate existence under the MBCA and the name
"Pinnacle Financial Services, Inc." Pinnacle's Restated Articles of
Incorporation, as in effect at the Effective Time, will be the articles of
incorporation of the combined corporation and Pinnacle's By-Laws, as in effect
immediately prior to the Effective Time, will be the by-laws of the combined
corporation. Each share of Pinnacle Common Stock outstanding immediately prior
to consummation of the Merger will remain outstanding and unchanged as a result
of the Merger.
SUBSIDIARY BANK MERGER. In connection with the Merger, and pursuant to an
Agreement and Plan of Merger and Consolidation to be executed by and between
Indiana Federal Bank for Savings, a federal savings bank and wholly-owned
subsidiary of IFC, and Pinnacle Bank, a Michigan banking corporation and
wholly-owned subsidiary of Pinnacle, IndFed Bank will be merged with and into
Pinnacle Bank. The directors of Pinnacle Bank following the Subsidiary Bank
Merger will consist of 18 persons, with nine persons to be named as directors by
the Board of Directors of Pinnacle Bank and nine persons to be named as
directors by the Board of Directors of IndFed Bank. The executive officers of
Pinnacle Bank following the Subsidiary Bank Merger will be those appointed by
the Board of Directors of Pinnacle Bank on the basis of recommendations made by
Mr. Richard L. Schanze, as the Chairman of Pinnacle following the Effective
Time, Mr. Donald A. Lesch, as the Vice Chairman and President of Pinnacle
following the Effective Time, and an outside consulting service to be engaged
and charged with reviewing and evaluating
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the qualifications of candidates. The parties' obligations to effect the
Subsidiary Bank Merger are conditioned upon (i) the Effective Time of the Merger
having occurred, and (ii) all Requisite Regulatory Approvals relating to the
Subsidiary Bank Merger having been filed, occurred or obtained and continue to
be in full force and effect. The Subsidiary Bank Merger Agreement may be
terminated by mutual consent of the parties at any time and will be terminated
automatically in the event the Merger Agreement is terminated.
MERGER CONSIDERATION
Upon consummation of the Merger, except as described below, each outstanding
share of IFC Common Stock (other than certain shares specified in the Merger
Agreement) will be automatically converted into the right to receive one (1)
share of Pinnacle Common Stock. The Exchange Ratio of one (1) share of Pinnacle
Common Stock for each share of IFC Common Stock was determined through arms-
length negotiations between Pinnacle and IFC, each of which was advised during
such negotiations by its respective financial advisor.
At the Effective Time, each option granted by IFC to purchase shares of IFC
Common Stock which is outstanding and unexercised immediately prior thereto
(excluding any and all IFC Rights, all of which are to be redeemed, and thereby
extinguished, terminated and cancelled without any right of exercise, prior to
the Effective Time) shall cease to represent a right to acquire shares of IFC
Common Stock and shall be converted automatically into an option to purchase
shares of Pinnacle Common Stock in the same amount and at the same exercise
price subject to the terms of the IFC benefit plans under which they were issued
(collectively, the "IFC Stock Plans").
At the Effective Time, each option granted by Pinnacle to purchase shares of
Pinnacle Common Stock which is outstanding and unexercised immediately prior
thereto will continue to represent a right to acquire shares of Pinnacle Common
Stock and will remain an issued and outstanding option to purchase from
Pinnacle, as the surviving corporation, shares of Pinnacle Common Stock in the
same amount and at the same exercise price subject to the terms of the Pinnacle
benefit plans under which they were issued (collectively, the "Pinnacle Stock
Plans") and the agreements evidencing grants thereunder, and will not be
affected by the Merger.
Based upon the number of IFC stock options, Pinnacle stock options, shares
of Pinnacle Common Stock and shares of IFC Common Stock issued and outstanding
as of , 1997, at the Effective Time IFC Stockholders would own
shares of Pinnacle Common Stock representing approximately % of the then
outstanding voting power of Pinnacle. Such percentage would range from
approximately % to %, depending on whether and to the extent the
shares of Pinnacle Common Stock and IFC Common Stock issuable upon exercise or
vesting of outstanding Pinnacle Stock Options and IFC Stock Options are issued.
For purposes of calculating such percentages, it was assumed that no additional
shares of Pinnacle Common Stock have been issued except as contemplated by the
preceding sentence.
On November 13, 1996 (the last full trading day preceding the joint public
announcement by Pinnacle and IFC of the execution of the Merger Agreement), the
last sale price of the Pinnacle Common Stock on the Nasdaq National Market was
$24.75 per share and the last sale price of the IFC Common Stock on the Nasdaq
National Market was $19.50 per share (or approximately $24.75 per share of IFC
Common Stock on an equivalent pro forma per share basis). On , 1997
(the last practicable trading day preceding the mailing of this Joint Proxy
Statement/Prospectus), the last sale price of the Pinnacle Common Stock on the
Nasdaq National Market was $ per share and the last sale price of the IFC
Common Stock on the Nasdaq National Market was $ per share (or
approximately $ per share of IFC Common Stock on an equivalent pro forma
per share basis).
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BACKGROUND OF THE MERGER
In recent years, both Pinnacle and IFC have achieved substantial growth
primarily through mergers and acquisitions. Through these mergers and
acquisitions, Pinnacle and IFC have attempted to diversify and expand their
respective market areas and asset bases and to increase profitability. The
Merger represents a continuation of each entity's acquisition strategy of
combining with financial institutions conducting business in areas in which it
already has or expects to gain a significant market position.
In 1993, representatives of IFC and Maco Bancorp, Inc., the Delaware
corporation and registered savings and loan holding company acquired by Pinnacle
on December 1, 1995, discussed the possibility of a business combination between
IFC and Maco. These discussions did not result in any definitive agreements. The
representatives of IFC involved in these discussions included Messrs. Peter R.
Candela and Donald A. Lesch, the President and Chairman of the Board,
respectively, of IFC. The representatives of Maco involved in these discussions
included Mr. Cyrus A. Ansary, then a director, an executive officer and a
significant stockholder of Maco.
On December 1, 1995, Pinnacle acquired all of the outstanding capital stock
of Maco, for aggregate consideration of $41.9 million through the merger of Maco
with and into Pinnacle. As a result of Pinnacle's acquisition of Maco, Mr.
Ansary became the largest single stockholder of Pinnacle, with approximately 20%
of the shares of Pinnacle Common Stock outstanding on , 19 . Mr.
Aloia became and is currently the President and Chief Operating Officer of First
Federal, a wholly-owned subsidiary of Pinnacle. See "ACQUISITION OF MACO
BANCORP, INC."
On June 13, 1996, at the suggestion of Mr. Gary Aloia (then the President
and Chief Operating Officer of First Federal and currently a Senior Vice
President of Pinnacle Bank) and Mr. Lesch, Mr. Richard L. Schanze, the Chairman
and Chief Executive Officer of Pinnacle, and Mr. Arnold L. Weaver, the President
of Pinnacle, met with Mr. Lesch to discuss the growth strategies, operating
philosophies and performance of Pinnacle and IFC, as well as recent developments
affecting Pinnacle and IFC, and regional and national developments in the
financial services industry. Although this meeting did not result in any
understanding or agreement regarding a business combination, in light of the
perceived similarity and compatibility of each institution's business strategies
and operating philosophies and the ever-changing market for financial services,
Mr. Schanze and Mr. Lesch both felt that a business combination could strengthen
the competitive position of both institutions, generate cost savings for both
institutions, and enhance acquisition and other business opportunities.
Accordingly, they decided that it would be worthwhile to further explore the
possibility of Pinnacle and IFC affiliating. Mr. Aloia was in attendance at this
meeting.
Following the June 13, 1996 meeting, Mr. Lesch contacted Sandler O'Neill,
IFC's financial advisors, regarding the possibility of Pinnacle and IFC
affiliating. Similarly, Mr. Schanze contacted ABN-AMRO Chicago Corporation,
Pinnacle's financial advisors, for the same purpose. Subsequently, Sandler
O'Neill, on behalf of IFC, and ABN-AMRO Chicago Corporation, on behalf of
Pinnacle, began to explore the strategic, business and operational
compatibility, as well as the rationale and potential value of a business
combination between IFC and Pinnacle.
In May and June, 1996, IFC had preliminary discussions with another
financial institution concerning the possibility of a business combination.
Although a confidentiality agreement was executed, these discussions were not
extensively pursued and did not result in any definitive agreements.
During the months of July, August, September, October and November, 1996,
Pinnacle's and IFC's financial advisors, as well as Messrs. Schanze, Weaver, and
Lesch and/or a small number of senior officers of Pinnacle and IFC, met or
otherwise had discussions on multiple occasions to explore the strategic,
business and operational compatibility of the two institutions as well as the
rationale and potential value of a business combination between IFC and
Pinnacle. They also considered and discussed the potential structure and the
business, cultural and social implications of such a combination. In August,
1996,
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members of Pinnacle's management team commenced a due diligence investigation of
IFC and its businesses. Beginning in September, 1996, and in connection with
such due diligence investigation, Pinnacle's management team received assistance
from ABN-AMRO Chicago Corporation, PL Capital LLC, Banc Financial Group, Inc.
and Landmark Technologies, Inc. At the same time, members of IFC's management
team, together with Sandler O'Neill and IFC's legal advisors, commenced a due
diligence investigation of Pinnacle.
On July 2, 1996, Mr. Schanze and Mr. Weaver, together with representatives
of ABN-AMRO Chicago Corporation met with Mr. Lesch to discuss a business
combination model that had been developed by Sandler O'Neill. On July 9, 1996
and August 8, 1996, Mr. Schanze met with Mr. Lesch to discuss general business
combination issues. The discussions related to, among other things, the
structure and documentation of the potential transaction, strategic and
management issues and valuation issues. On August 22, 1996, the parties entered
into a customary confidentiality agreement. In addition, following a meeting of
Mr. Schanze and Mr. Lesch in August 1996, Pinnacle's and IFC's legal counsels
began the process of drafting an agreement regarding a possible business
combination of Pinnacle and IFC.
On September 18, October 3, and October 16, 1996, Mr. Schanze described the
preliminary discussions between the parties to the Pinnacle Board. At such
meetings, members of Pinnacle's senior management made presentations which set
forth the reasons for the Merger and the potential benefits to Pinnacle and its
stockholders from the Merger. Pinnacle's financial advisors discussed the
strategic, business and operational compatibility, rationale and financial
aspects of the transaction.
On July 18, August 22, September 19, and October 17, 1996, Mr. Lesch
described the preliminary discussions between the parties to the IFC Board. At
such meetings, members of IFC's senior management made presentations which set
forth the reasons for the Merger and the potential benefits to IFC and its
stockholders from the Merger, and IFC's financial advisors discussed the
strategic, business and operational compatibility, rationale and financial
aspects of the transaction. At the November 14, 1996 meeting of the IFC Board,
IFC's legal advisors reviewed the IFC Board's obligations in consideration of
the Merger.
Mr. Schanze and Mr. Lesch continued discussions concerning the proposed
transaction and each institution's management team continued to conduct its due
diligence investigation of the other institution's businesses. They also
continued to negotiate issues in the Merger Agreement and the Stock Option
Agreements. During the period beginning August 1, 1996 and ending November 14,
1996, the Exchange Ratio was determined by the parties on the basis of
arm's-length negotiations between the parties.
At a special meeting of the Pinnacle Board held on November 14, 1996, Mr.
Schanze and senior management of Pinnacle again reviewed the reasons for and the
potential benefits of the Merger; Pinnacle's legal advisors reviewed the terms
of the Merger Agreement and Stock Option Agreements; and Pinnacle's financial
advisors made a presentation regarding the financial terms and fairness, from a
financial point of view, of the Exchange Ratio to holders of Pinnacle Common
Stock. After discussion and consideration of the factors discussed below under
"--Reasons for the Merger," the Pinnacle Board (with eight directors present and
one director absent) unanimously approved and authorized the execution of the
Merger Agreement and the Stock Option Agreements.
At a special meeting of the IFC Board on November 14, 1996, Mr. Lesch and
senior management of IFC again reviewed the reasons for and the potential
benefits of the Merger; IFC's legal advisors reviewed the terms of the Merger
Agreement and Stock Option Agreements; and IFC's financial advisors made a
presentation regarding the financial terms and fairness, from a financial point
of view, of the Exchange Ratio to holders of IFC Common Stock. After discussion
and consideration of the factors discussed below under "--Reasons for the
Merger," the IFC Board (with seven directors present and one director absent)
unanimously approved and authorized the execution of the Merger Agreement and
the Stock Option Agreements.
The Merger Agreement and the Stock Option Agreements were entered into on
November 14, 1996.
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REASONS FOR THE MERGER
GENERAL. The Merger is expected to create a stronger, more competitive,
financial institution with the size and capabilities to better meet the
challenges of the ever-changing market for financial products and services in
northern Indiana and southwestern Michigan. Moreover, the combined corporation
is expected to be able to provide a broader array of financial services and
products to the depositors, customers and communities currently served by
Pinnacle and IFC, and to take advantage of opportunities for growth and
diversification that would not be available to either institution on its own.
In reaching their decisions to approve the Merger Agreement and the Stock
Option Agreements, the Pinnacle Board and IFC Board each determined that the
Merger is preferable to the other alternatives available to Pinnacle and IFC,
because of their belief that a "merger of equals" uniting Pinnacle and IFC (two
financially sound institutions with complementary businesses and business
strategies) will create a stronger combined institution with greater size,
flexibility, breadth of services, efficiency, capital strength and profitability
than either Pinnacle or IFC possesses on a stand-alone basis or would be able to
achieve through such other alternatives. The Pinnacle Board and the IFC Board
each believes that each institution is currently well managed and possesses
compatible management philosophies and strategic focus to that of the other;
that each institution will contribute complementary business strengths resulting
in a well-diversified combined institution; and that the enhanced capitalization
of the combined institution will allow it to take advantage of future
acquisition opportunities that might otherwise be unavailable to either
institution.
The Pinnacle Board and the IFC Board also considered that the Merger would
represent a strategic alliance between Pinnacle and IFC and that stockholders of
Pinnacle and IFC would realize the expected long-term benefits of such alliance
(including, but not limited to, the future stock value and earnings per share of
the combined corporation, the combined corporation's financial strength and its
consequent enhanced ability to invest in its existing businesses as well as
develop new products and services, the cost savings to be realized through
consolidation of operations, the potential for cross-marketing services to
customers of the two companies, the opportunity to diversify earnings, the
business synergies that might be realized, and the potential effect of the
Merger on the perception of the combined corporation's businesses by the
financial markets). In evaluating the Merger, each of the Pinnacle Board and IFC
Board and their respective managements discussed the critical importance of
successfully integrating, and building on the strengths of, the management teams
and cultures of both companies, and considered the uncertainties inherent in any
such combination of two sizable companies.
PINNACLE. In reaching its conclusion to approve the Merger Agreement and
the Stock Option Agreements, the Pinnacle Board consulted with Pinnacle
management, as well as with its financial and legal advisors, and considered the
factors described above under "--General" and a number of additional factors,
including the following:
(i) The Pinnacle Board considered the effectiveness of the Merger in
implementing and accelerating Pinnacle's basic long-term external growth
strategy. The Merger represents a continuation of Pinnacle's acquisition
strategy of combining with financial institutions in markets where Pinnacle
already has or expects to gain a significant market position. By expanding
Pinnacle's existing operations in northern Indiana, the Merger is expected
to provide Pinnacle with a stronger market position in northern Indiana, a
significant midwestern market in close proximity to the larger market for
financial services in and around metropolitan Chicago, Illinois.
(ii) The Pinnacle Board analyzed the financial condition, businesses and
prospects of Pinnacle and IFC (including, but not limited to, information
with respect to their respective recent and historic stock and earnings
performance and their respective relatively strong credit position and
access to the capital markets). The Pinnacle Board considered the detailed
financial analyses, pro forma and other information with respect to Pinnacle
and IFC discussed by ABN-AMRO Chicago Corporation, its own knowledge of
Pinnacle, IFC and their respective businesses, and the results of Pinnacle's
due
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diligence review of IFC's business. The Pinnacle Board also considered the
anticipated revenue enhancements and operating efficiencies for the combined
corporation and the likelihood that the Merger, on a pro forma basis, would
be accretive to the combined corporation's earnings per share and book value
per share in the longer term.
(iii) The Pinnacle Board considered the oral opinion of ABN-AMRO Chicago
Corporation, subsequently confirmed in writing, that, as of November 14,
1996, the Exchange Ratio was fair to holders of Pinnacle Common Stock from a
financial point of view. See "--Fairness Opinions of Financial
Advisors--Pinnacle."
(iv) The Pinnacle Board considered the terms of the Merger Agreement and
the Stock Option Agreements, which are reciprocal in nature. The Pinnacle
Board also considered certain other information regarding the Merger,
including the terms and structure of the Merger, the proposed arrangements
with respect to the board of directors and management structure of the
combined corporation following the Merger, and that major business functions
would be located in St. Joseph, Michigan even though the corporate
headquarters of the combined corporation would be located in Valparaiso,
Indiana.
(v) The Pinnacle Board considered the effect on Pinnacle stockholders'
value of Pinnacle continuing as a stand-alone entity compared to the effect
of Pinnacle combining with IFC in a "merger of equals" in light of the
factors summarized above with respect to the financial condition and
prospects of the two companies on a stand-alone basis and of the combined
corporation. In particular, the Pinnacle Board believed that Pinnacle, as an
independent institution, would have reduced opportunities to participate in
the consolidation process currently occurring in the financial services
industry and to generate cost savings and that no alternative transaction
that was deemed feasible would have produced a similar level of cost
savings. The Pinnacle Board also noted that the Merger would not preclude
the acquisition of the combined corporation in the future by a larger
financial institution.
(vi) The Pinnacle Board also considered the current and prospective
economic and competitive environment facing each institution and other
financial institutions, and the likelihood of the Merger being approved by
the appropriate regulatory authorities.
(vii) The Pinnacle Board considered the anticipated cost savings and
operating efficiencies available to the combined corporation from the
Merger. Given the substantial prior experience of both Pinnacle and IFC in
effecting successful mergers (including Pinnacle's merger with Maco Bancorp,
Inc. in 1995 and IFC's acquisitions of American Bancorp, Inc. and NCB Corp.
since 1994), the Pinnacle Board believes that the operations of Pinnacle and
IFC can be effectively consolidated and integrated within a reasonable time
following the Closing Date.
(viii) The Pinnacle Board considered the expectation that the Merger will
be a tax-free transaction to Pinnacle and its stockholders.
(ix) The Pinnacle Board considered the effect of the Merger on
Pinnacle's other constituencies, including its senior management and other
employees and the communities and customers served by Pinnacle.
The foregoing discussion of the information and factors considered by the
Pinnacle Board is not intended to be exhaustive but is believed to include all
material factors considered by the Pinnacle Board. In reaching its determination
to approve and recommend the Merger, the Pinnacle Board did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given differing weights to different factors. After deliberating with
respect to the Merger and the other transactions contemplated by the Merger
Agreement, considering, among other things, the matters discussed above and the
opinion of ABN-AMRO Chicago Corporation referred to above, the Pinnacle Board
unanimously (with eight directors present and one director absent) approved and
adopted the Merger Agreement, the
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Stock Option Agreements, and the transactions contemplated thereby, as being in
the best interests of Pinnacle and its stockholders. THE PINNACLE BOARD IS
UNANIMOUS IN ITS RECOMMENDATION THAT HOLDERS OF PINNACLE COMMON STOCK VOTE "FOR"
APPROVAL AND ADOPTION OF THE MERGER PROPOSAL.
IFC. In reaching its conclusion to approve the Merger Agreement and the
Stock Option Agreements, the IFC Board consulted with IFC management, as well as
with its financial and legal advisors, considered the factors described above
under "--General" and a number of additional factors, including the following:
(i) The IFC Board considered the effectiveness of the Merger in
implementing and accelerating IFC's basic long-term external growth
strategy. The Merger represents a continuation of IFC's acquisition strategy
of combining with financial institutions in markets where IFC already has or
expects to gain a significant market position. By expanding IFC's existing
operations in northern Indiana and providing IFC immediate access to
Pinnacle's existing operations in southwestern Michigan, the Merger is
expected to provide IFC with a stronger market position in northern Indiana
and with the opportunity to expand into a significant midwestern market in
close proximity to its current market.
(ii) The IFC Board analyzed the financial condition, businesses and
prospects of Pinnacle and IFC, including, but not limited to, information
with respect to their respective recent and historic stock and earnings
performance and their respective relatively strong credit position and
access to the capital markets. The IFC Board considered the detailed
financial analyses, pro forma and other information with respect to Pinnacle
and IFC discussed by Sandler O'Neill, its own knowledge of IFC, Pinnacle and
their respective businesses, and the results of IFC's due diligence review
of Pinnacle's businesses. The IFC Board also considered the anticipated
revenue enhancements and operating efficiencies for the combined corporation
and the likelihood that the Merger, on a pro forma basis, would be accretive
to the combined corporation's earnings per share and book value per share in
the longer term.
(iii) The IFC Board considered the written opinion of Sandler O'Neill
that, as of November 14, 1996, the Exchange Ratio was fair to stockholders
of IFC from a financial point of view. See "--Fairness Opinions of Financial
Advisors--IFC."
(iv) The IFC Board considered the terms of the Merger Agreement and the
Stock Option Agreements, which were reciprocal in nature. The IFC Board also
considered certain other information regarding the Merger, including the
terms and structure of the Merger, the proposed arrangements with respect to
the board of directors and management structure of the combined corporation
following the Merger, and that the corporate headquarters of the combined
corporation would be located in Valparaiso, Indiana, with major business
functions being located in St. Joseph, Michigan.
(v) The IFC Board considered the effect on IFC stockholders' value of
IFC continuing as a stand-alone entity compared to the effect of IFC
combining with Pinnacle in a "merger of equals" in light of the factors
summarized above with respect to the financial condition and prospects of
the two companies on a stand-alone basis and of the combined corporation. In
particular, the IFC Board believed that IFC, as an independent institution,
would have reduced opportunities to participate in the consolidation process
currently occurring in the financial services industry and to generate cost
savings and that no alternative transaction that was deemed feasible would
have produced a similar level of cost savings. The IFC Board also noted that
the Merger would not preclude the acquisition of the combined corporation in
the future by a larger financial institution.
(vi) The IFC Board also considered the current and respective economic
and competitive environment facing each institution and other financial
institutions, and the likelihood of the Merger being approved by the
appropriate regulatory authorities.
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(vii) The IFC Board considered the anticipated cost savings and operating
efficiencies available to the combined corporation from the Merger. Given
the substantial prior experience of both Pinnacle and IFC in effecting
successful mergers (including Pinnacle's merger with Maco Bancorp, Inc. in
1995 and IFC's acquisitions of American Bancorp, Inc. and NCB Corp. since
1994), the IFC Board believes that the operations of Pinnacle and IFC can be
effectively consolidated and integrated within a reasonable time following
the Closing Date.
(viii) The IFC Board considered the expectation that the Merger will be a
tax-free transaction to IFC and its stockholders.
(ix) The IFC Board considered the effect of the Merger on IFC's other
constituencies, including its senior management and other employees,
customers and communities served by IFC.
The foregoing discussion of the information and factors considered by the
IFC Board is not intended to be exhaustive but is believed to include all
material factors considered by the IFC Board. In reaching its determination to
approve and recommend the Merger, the IFC Board did not assign any relative or
specific weights to the foregoing factors, and individual directors may have
given differing weights to different factors. After deliberating with respect to
the Merger and the other transactions contemplated by the Merger Agreement,
considering, among other things, the matters discussed above and the opinion of
Sandler O'Neill referred to above, the IFC Board unanimously (with seven
directors present and one director absent) approved and adopted the Merger
Agreement, the Stock Option Agreements, and the transactions contemplated
thereby, including the Stock Option Agreements, as being in the best interests
of IFC and its stockholders. THE IFC BOARD IS UNANIMOUS IN ITS RECOMMENDATION
THAT HOLDERS OF IFC COMMON STOCK VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
PROPOSAL.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
PINNACLE. For the reasons described above, at the meeting held on November
14, 1996, the Pinnacle Board unanimously (with eight directors present and one
director absent) approved and adopted the Merger Agreement, the Stock Option
Agreements and the transactions contemplated thereby as being in the best
interests of Pinnacle and its stockholders. THE PINNACLE BOARD RECOMMENDS THAT
PINNACLE STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL.
IFC. For the reasons described above, at the meeting held on November 14,
1996, the IFC Board unanimously (with seven directors present and one director
absent) approved and adopted the Merger Agreement, the Stock Option Agreements
and the transactions contemplated thereby as being in the best interests of IFC
and its stockholders. THE IFC BOARD RECOMMENDS THAT IFC STOCKHOLDERS VOTE FOR
THE MERGER PROPOSAL.
OPINION OF PINNACLE FINANCIAL ADVISOR
GENERAL. Pursuant to an engagement letter dated July 16, 1996 between
Pinnacle and ABN-AMRO Chicago Corporation, Pinnacle retained ABN-AMRO Chicago
Corporation to act as its sole financial advisor in connection with the Merger
and related matters. As part of its engagement, ABN-AMRO Chicago Corporation
agreed, if requested by Pinnacle, to render an opinion with respect to the
fairness from a financial point of view to Pinnacle stockholders of the
consideration to be paid by Pinnacle in the Merger. ABN-AMRO Chicago Corporation
is a nationally recognized specialist in the financial services industry in
general and in midwestern banks and thrifts in particular. ABN-AMRO Chicago
Corporation is regularly engaged in evaluations of similar businesses and in
advising institutions with regard to mergers and acquisitions, as well as
raising debt and equity capital for such institutions. Pinnacle selected ABN-
AMRO Chicago Corporation as its financial advisor based upon its qualifications,
expertise and reputation in such capacity, as well as ABN-AMRO Chicago
Corporation's existing relationship and familiarity with Pinnacle.
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At the November 14, 1996 meeting of the Pinnacle Board, ABN-AMRO Chicago
Corporation delivered its oral opinion that the consideration to be paid by
Pinnacle in the Merger (the amount of which was determined by Pinnacle and IFC
on the basis of arm's-length negotiations between Pinnacle and IFC) was fair to
Pinnacle stockholders from a financial point of view as of November 14, 1996.
ABN-AMRO Chicago Corporation subsequently delivered to the Pinnacle Board a
written opinion dated as of the date of this Joint Proxy Statement/Prospectus
confirming its oral opinion. No limitations were imposed by Pinnacle on ABN-AMRO
Chicago Corporation with respect to the investigations made or the procedures
followed in rendering its opinion.
THE FULL TEXT OF ABN-AMRO CHICAGO CORPORATION'S WRITTEN OPINION TO THE
PINNACLE BOARD, DATED AS OF THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS OF
REVIEW BY ABN-AMRO CHICAGO CORPORATION, IS ATTACHED HERETO AS ANNEX B AND IS
INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ CAREFULLY AND IN ITS
ENTIRETY IN CONJUNCTION WITH THIS JOINT PROXY STATEMENT/PROSPECTUS. THE
FOLLOWING SUMMARY OF ABN-AMRO CHICAGO CORPORATION'S OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. ABN-AMRO CHICAGO
CORPORATION'S OPINION IS ADDRESSED TO THE PINNACLE BOARD AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY STOCKHOLDER OF PINNACLE OR IFC AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER.
In connection with its opinion, ABN-AMRO Chicago Corporation has, among
other things: (i) reviewed the Merger Agreement and this Joint Proxy
Statement/Prospectus; (ii) reviewed certain historical business and financial
information relating to Pinnacle and IFC; (iii) reviewed other pertinent
internally-generated reports with regard to the separate businesses and
prospects of Pinnacle and IFC including, among other things, the strategic
objectives of each corporation and the potential benefits which might be
realized through consummation of the Merger; (iv) participated in senior
management discussions of Pinnacle and IFC with regard to said strategic
objectives which might be realized through consummation of the Merger; (v)
reviewed public information regarding other selected comparable publicly-traded
companies deemed relevant to the proposed business combination; (vi) reviewed
the financial terms and data of selected comparable business combinations
between banks, thrifts and bank and thrift holding companies deemed relevant to
the proposed business combination; (vii) reviewed the historical market
performance and trading volume of Pinnacle Common Stock and IFC Common Stock;
(viii) reviewed certain information pertaining to prospective cost savings
and/or revenue enhancements relative to the proposed business combination; (ix)
reviewed and evaluated the current stock distribution and ownership of Pinnacle
Common Stock and IFC Common Stock, as well as the pro forma distribution and
ownership following consummation of the Merger, based upon the contribution of
Pinnacle's assets, liabilities, stockholders' equity and earnings to the
combined entity; and (x) conducted such other financial studies, analyses and
investigations as ABN-AMRO Chicago Corporation deemed appropriate. The oral and
written opinions provided by ABN-AMRO Chicago Corporation to Pinnacle were
necessarily based upon economic, monetary, financial market and other relevant
conditions as of the dates thereof.
In connection with its review and arriving at its opinion, ABN-AMRO Chicago
Corporation relied upon the accuracy and completeness of the financial
information and other pertinent information provided by Pinnacle and IFC to
ABN-AMRO Chicago Corporation for purposes of rendering its opinion. ABN-AMRO
Chicago Corporation did not assume any obligation to independently verify any of
the provided information as being complete and accurate in all material
respects. With regard to the financial forecasts established and developed for
Pinnacle and IFC and provided to ABN-AMRO Chicago Corporation by the respective
managements, as well as projections of cost savings, revenue enhancements and
operating synergies, ABN-AMRO Chicago Corporation assumed that these materials
had been reasonably prepared on bases reflecting the best available estimates
and judgments of Pinnacle and IFC as to the future performance of the separate
and combined entities and that the projections provided a reasonable basis upon
which ABN-AMRO Chicago Corporation could form its opinion. Neither Pinnacle nor
IFC publicly discloses such internal management projections of the type provided
to ABN-AMRO Chicago Corporation in connection with ABN-AMRO Chicago
Corporation's role as financial advisor to Pinnacle in review of the Merger.
Therefore, such projections cannot be assumed to have been prepared with a view
towards
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public disclosure. The projections were based upon numerous variables and
assumptions that are inherently uncertain, including, but notwithstanding,
factors relative to the general economic and competitive conditions facing
Pinnacle and IFC. Accordingly, actual results could vary significantly from
those set forth in the respective projections.
ABN-AMRO Chicago Corporation does not claim to be an expert in the
evaluation of loan portfolios or the allowance for loan losses with respect
thereto and therefore assumes that such allowances for Pinnacle and IFC are
adequate to cover such losses. In addition, ABN-AMRO Chicago Corporation does
not assume responsibility for the review of individual credit files nor make an
independent evaluation, appraisal or physical inspection of the assets or
individual properties of Pinnacle or IFC, nor was ABN-AMRO Chicago Corporation
provided with such appraisals. Furthermore, ABN-AMRO Chicago Corporation assumes
that the Merger will be consummated in accordance with the terms set forth in
the Merger Agreement, without any waiver of any material terms or conditions by
Pinnacle and that obtaining the necessary regulatory approvals for the Merger
will not have an adverse effect on either separate institution or the combined
entity. Moreover, in each analysis that involves per share data for Pinnacle or
the combined entity, ABN-AMRO Chicago Corporation adjusted the data to reflect
full dilution, i.e. the exercise of all outstanding options and/or warrants. In
particular, ABN-AMRO Chicago Corporation assumes that the Merger will be
recorded as a "pooling-of-interests" in accordance with generally accepted
accounting principles.
In connection with rendering its opinion to the Pinnacle Board, ABN-AMRO
Chicago Corporation performed a variety of financial and comparative analyses
which are briefly summarized below. Such summary of analyses does not purport to
be a complete description of the analyses performed by ABN-AMRO Chicago
Corporation. Moreover, ABN-AMRO Chicago Corporation believes that these analyses
must be considered as a whole and that selecting portions of such analyses and
the factors considered by it, without considering all such analyses and factors,
could create an incomplete scope of the process underlying the analyses and,
more importantly, the opinion derived from them. The preparation of a financial
advisor's opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analyses or a summary description of such
analyses. In its full analysis, ABN-AMRO Chicago Corporation also accounted for
the assessment of general economic, financial market and other financial
conditions. Furthermore, ABN-AMRO Chicago Corporation drew from its past
experience in similar transactions, as well as its experience in the valuation
of securities and its knowledge of the banking industry on a whole. Any
estimates contained in ABN-AMRO Chicago Corporation's analyses were not
necessarily indicative of future results or values which may significantly
diverge more or less favorably from such estimates. Estimates of company
valuations do not purport to be appraisals or necessarily reflect the prices at
which companies or their respective securities actually may be sold. Most
notably, none of the analyses performed by ABN-AMRO Chicago Corporation were
assigned a greater significance by ABN-AMRO Chicago Corporation than any other
in deriving its opinion.
The analyses performed by ABN-AMRO Chicago Corporation in rendering its
opinion are briefly described below.
COMPARABLE COMPANY ANALYSIS. ABN-AMRO Chicago Corporation reviewed and
compared actual stock market data and actual and estimated selected financial
information for selected peer groups of companies comparable to (i) Pinnacle
with corresponding information for 20 publicly-traded midwestern banking
organizations with assets between $750 million and $1.5 billion ("Selected
Pinnacle Peer Group"); (ii) the combined entity with information for 28
publicly-traded banking organizations with assets between $1.5 billion and $2.5
billion ("Selected Post-Merger Bank Peer Group"); and (iii) the combined entity
with information for 20 publicly-traded thrift organizations with assets between
$1.5 billion and $2.5 billion ("Selected Post-Merger Thrift Peer Group").
The Selected Pinnacle Peer Group were: Republic Bancorp Inc., Owosso, MI;
First Financial Corporation, Terre Haute, IN; Peoples First Corporation,
Paducah, KY; Mid-America Bancorp, Louisville, KY; Heritage Financial Services,
Tinley Park, IL; Irwin Financial Corporation, Columbus, IN; F&M
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Bancorporation, Inc., Kaukauna, WI; Area Bancshares Corporation, Owensboro, KY;
Pinnacle Banc Group, Inc., Oak Brook, IL; Mississippi Valley Bancshares, St.
Louis, MO; National City Bancshares, Inc., Evansville, IN; CBT Corporation,
Paducah, KY; Farmers Capital Bank Corp., Frankfort, KY; Second Bancorp, Inc.,
Warren, OH; National City Bancorporation, Minneapolis, MN; Citizens Bancshares,
Salineville, OH; Independent Bank Corporation, Ionia, MI; Michigan Financial
Corporation, Marquete, MI; First Oak Brook Bancshares, Oak Brook, IL; and Old
Second Bancorp, Inc., Aurora, IL.
The analysis of the Selected Pinnacle Peer Group indicated, among other
things, that based on the market prices as of November 7, 1996 and financial
data as of June 30, 1996 or September 30, 1996, (i) the average multiple of
price to respective last twelve months' earnings was 13.4 for the Selected
Pinnacle Peer Group as compared to a corresponding multiple of 16.6 for
Pinnacle, (ii) the average multiple of price to 1996 estimated earnings was 12.7
for the Selected Pinnacle Peer Group (based on a published consensus market
estimate) as compared to a corresponding multiple of 13.8 for Pinnacle (also
based on a published consensus market estimate), (iii) the average multiple of
price to 1997 estimated earnings was 11.5 for the Selected Pinnacle Peer Group
(based on a published consensus market estimate) as compared to a corresponding
multiple of 12.1 for Pinnacle (also based on a published consensus market
estimate), (iv) the average ratio of price to book value per share was 170.5%
for the Selected Pinnacle Peer Group as compared to a corresponding ratio of
197.8% for Pinnacle, (v) the average ratio of price to tangible book value per
share was 182.3% for the Selected Pinnacle Peer Group as compared to a
corresponding ratio of 243.4% for Pinnacle, (vi) the average ratio of tangible
equity as a percentage of tangible assets was 8.92% for the Selected Pinnacle
Peer Group as compared to a corresponding ratio of 6.58% for Pinnacle, (vii) the
average return on average assets was 1.27% for the Selected Pinnacle Peer Group
as compared to a corresponding return of 0.94% for Pinnacle, (viii) the average
return on average equity was 13.5% for the Selected Pinnacle Peer-Group as
compared to a corresponding return of 12.0% for Pinnacle, (ix) the average ratio
of non-performing assets as a percentage of total assets was 0.52% for the
Selected Pinnacle Peer Group as compared to a corresponding ratio of 0.29% for
Pinnacle, and (x) the average ratio of loan loss reserves as a percentage of
non-performing assets was 248.8% for the Selected Pinnacle Peer Group as
compared to a corresponding ratio of 353.6% for Pinnacle.
The Selected Post-Merger Bank Peer Group were: First Commonwealth Financial,
Indiana, PA; Trust Company of New Jersey, Jersey City, NJ; Community First
Bankshares, Fargo, ND; Hancock Holding Company, Gulfport, MS; United Bankshares,
Inc., Charleston, WV; First Financial Bancorp., Hamilton, OH; Mid Am, Inc.,
Bowling Green, OH; Corus Bankshares, Inc., Chicago, IL; F & M National
Corporation, Winchester, VA; Jefferson Bankshares, Inc., Charlottesville, VA;
USBANCORP Inc., Johnstown, PA; UST Corporation, Boston, MA; 1st Source
Corporation, South Bend, IN; Chittenden Corporation, Burlington, VT; Trans
Financial, Inc., Bowling Green, KY; Firstbank of Illinois Co., Springfield, IL;
First Commerce Bancshares, Lincoln, NE; Pikeville National Corporation,
Pikeville, KY; F.N.B. Corporation, Hermitage, PA; Hubco, Inc., Mahwah, NJ; First
Western Bancorp Inc., New Castle, PA; Silicon Valley Bancshares, Santa Clara,
CA; Chemical Financial Corporation, Midland, MI; Capital Bancorp, Miami, FL;
Brenton Banks, Inc., Des Moines, IA; Park National Corporation, Newark, OH; and
Carolina First Corporation, Greenville, SC.
The analysis of the Selected Post-Merger Bank Peer Group indicated, among
other things, that based on the market prices as of November 7, 1996 and
financial data as of June 30, 1996 or September 30, 1996, (i) the average
multiple of price to respective last twelve months' earnings was 14.0, (ii) the
average multiple of price to 1996 estimated earnings was 13.0 (based on a
published consensus market estimate), (iii) the average multiple of price to
1997 estimated earnings was 11.7 (based on a published consensus market
estimate), (iv) the average ratio of price to book value per share was 183.7%,
(v) the average ratio of price to tangible book value per share was 193.7%, (vi)
the average ratio of tangible equity as a percentage of tangible assets was
8.27%, (vii) the average return on average assets was 1.20%, (viii) the average
return on average equity was 13.6%, (ix) the average ratio of non-performing
assets as a percentage of total assets was 0.69%, and (x) the average ratio of
loan loss reserves as a percentage of non-performing assets was 278.8%.
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The Selected Post-Merger Thrift Peer Group were: PFF Bancorp, Inc., Pomona,
CA; Standard Financial, Inc., Chicago, IL; America First Financial Fund, San
Francisco, CA; Bankers Corp., Perth Amboy, NJ; BankAtlantic Bancorp, Inc., Fort
Lauderdale, FL; CENFED Financial Corp., Pasadena, CA; First Republic Bancorp,
San Francisco, CA; Commonwealth Bancorp, Inc., Valley Forge, PA; Northwest
Savings Bank, MHC, Warren, PA; ML Bancorp, Inc., Villanova, PA; Reliance
Bancorp, Inc., Garden City, NY; Anchor BanCorp Wisconsin, Madison, WI; InterWest
Bancorp, Inc., Oak Harbor, WA; Haven Bancorp, Inc., Woodhaven, NY; Harris
Savings Bank, MHC, Harrisburg, PA; Sterling Financial Corp., Spokane, WA; JSB
Financial, Inc., Lynbrook, NY; First Financial Holdings Inc., Charleston, SC;
CFX Corporation, Keene, NH; and First Colorado Bancorp, Inc., Lakewood, CO.
The analysis of the Selected Post-Merger Thrift Peer Group indicated, among
other things, that based on the market prices as of November 7, 1996 and
financial data as of June 30, 1996 or September 30, 1996, (i) the average
multiple of price to respective last twelve months' earnings was 14.8, (ii) the
average multiple of price to 1996 estimated earnings was 12.4 (based on a
published consensus market estimate), (iii) the average multiple of price to
1997 estimated earnings was 11.2 (based on a published consensus market
estimate), (iv) the average ratio of price to book value per share was 128.0%,
(v) the average ratio of price to tangible book value per share was 137.5%, (vi)
the average ratio of tangible equity as a percentage of tangible assets was
7.51%, (vii) the average return on average assets was 0.70%, (viii) the average
return on average equity was 8.1%, (ix) the average ratio of non-performing
assets as a percentage of total assets was 0.95%, and (x) the average ratio of
loan loss reserves as a percentage of non- performing assets was 150.8%.
COMPARABLE TRANSACTIONS ANALYSIS. ABN-AMRO Chicago Corporation reviewed and
compared actual information for comparable pending or closed transactions it
deemed pertinent to the Merger, including: (i) twenty midwestern thrift
transactions with sellers' assets between $500 million and $1.5 billion
("Selected Thrift Transactions"); and (ii) thirteen merger-of-equals
transactions involving banks and/or thrifts with assets between $100 million and
$5.0 billion ("Selected Merger-of-Equals").
The Selected Thrift Transactions were (note: selling company is in italics):
Mutual Savings Bank, Milwaukee, WI/FIRST FEDERAL BANCSHARES, EAU CLAIRE, WI; MAF
Bancorp, Clarendon Hills, IL/N.S. BANCORP, CHICAGO, IL; Commercial Federal,
Omaha, NE/RAILROAD FINANCIAL, WICHITA, KS; CNB Bancshares Inc., Evansville,
IN/UFBANCORP INC., EVANSVILLE, IN; Fifth Third Bancorp, Cincinnati, OH/ FALLS
FINANCIAL INC., CUYAHOGA FALLS, OH; NBD Bancorp, Detroit, Ml/DEERBANK CORP,
DEERFIELD, IL; Firstar Corp, Milwaukee, WI/INVESTORS BANK CORP, WAYZATA, MN;
FirstMerit Corp, Akron, OH/CIVISTA CORPORATION, CANTON, OH; NBD Bancorp,
Detroit, MI/AMERIFED FINANCIAL CORP, JOLIET, IL; First Banks, Inc., Creve Coeur,
MO/RIVER VALLEY FSB, PEORIA, IL; Fifth Third Bancorp, Cincinnati, OH/CUMBERLAND
FEDERAL, LOUISVILLE, KY; Roosevelt Financial, Chesterfield, MO/HOME FEDERAL
BANCORP OF MO, ST. LOUIS, MO; Mercantile Bancorp, St. Louis, MO/UNITED POSTAL
BANCORP, ST. LOUIS, MO; Huntington Bancshares, Columbus, OH/RAILROADMEN'S FS&LA,
INDIANAPOLIS, IN; Standard Federal Bank, Troy, MI/HERITAGE BANKCORP, TAYLOR, MI;
PNC Bank Corp, Pittsburgh, PA/GATEWAY FED CORP, CINCINNATI, OH; Metropolitan
Financial, Minneapolis, MN/WESTERN FINANCIAL, OVERLAND PARK, KS; TCF Financial
Corp, Minneapolis, MN/REPUBLIC CAPITAL GROUP, MILWAUKEE, WI; Charter One
Financial, Cleveland, OH/WOMEN'S FEDERAL SB, CLEVELAND, OH; and First Financial
Corp, Stevens Point, WI/UNITED FEDERAL BANK, GALESBURG, IL.
The analysis of the Selected Thrift Transactions indicated, among other
things, that based on the announced transaction value, (i) the average multiple
of deal price to respective last twelve months' earnings was 13.7, (ii) the
average ratio of deal price to book value per share was 154.4%, (iii) the
average ratio of deal price to tangible book value per share was 164.2%, and
(iv) the average tangible book premium as a percentage of core deposits was
6.86%.
The Selected Merger-of-Equals were: Hinsdale Financial Corp, Hinsdale,
IL/Liberty Bancorp, Chicago, IL; United Security Bancshares, Thomasville,
AL/First Bancshares, Grove Hill, AL; Mid-Peninsula
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Bancorp, Palo Alto, CA/ Cupertino National Bancorp, Cupertino, CA; Northern IL
Financial, Wauconda, IL/Premier Financial Services, Freeport, IL; Home
Interstate Bancorp, Signal Hill, CA/CU Bancorp, Encino, CA; Republic Bancorp.,
Philadelphia, PA/ExecuFirst Bancorp, Philadelphia, PA; National Bankshares,
Blacksburg, VA/Bank of Tazewell County, Tazewell, VA; National Commerce Corp,
Birmingham, AL/Alabama National, Shoal Creek, AL; New England Commercial
Bancorp, Windsor, CT/Equity Bank, Wethersfield, CT; Main Street Community,
Waltham, MA/Lexington Savings Bank, Lexington, MA; Commercial Bancorp, Salem,
OR/West Coast Bancorp, Newport, OR; Community Bancorp, Rhinebeck, NY/Fishkill
National, Beacon, NY; and Triangle Bancorp, Raleigh, NC/New East Bancorp,
Raleigh, NC.
The analysis of the Selected Merger-of-Equals indicated, among other things,
that based on the announced transaction value (note: deal pricing assumes the
"seller" to be the merger partner listed second in each transaction above), (i)
the average multiple of deal price to respective last twelve months' earnings
was 12.2, (ii) the average ratio of deal price to book value per share was
125.7%, (iii) the average ratio of deal price to tangible book value per share
was 139.5%; and (iv) the average tangible book premium as a percentage of core
deposits was 4.46%.
CONTRIBUTION ANALYSIS. ABN-AMRO Chicago Corporation analyzed the
contribution of each of Pinnacle and IFC to, among other things, the pro forma
assets, common equity and tangible common equity of the combined entity as of
September 30, 1996. This analysis showed, among other things, that Pinnacle
would have contributed 55.7%, 51.3% and 47.8% of the pro forma assets, common
equity and tangible common equity, respectively, of the combined entity at
September 30, 1996. Similarly, ABN-AMRO Chicago Corporation analyzed the
contribution to pro forma net income for the projected years ending December 31,
1996, 1997 and 1998, which showed that Pinnacle would have contributed, for such
periods, 59.1%, 60.1%, and 57.2%, respectively to the net income of the combined
entity. Based upon the Exchange Ratio set forth in the Merger Agreement, the
holders of Pinnacle Common Stock will then own approximately 55.4% of the
outstanding common stock of the combined entity upon completion of the Merger.
ACCRETION/DILUTION ANALYSIS. On the basis of the range of projections
prepared by the respective managements of Pinnacle and IFC, for the calendar
years 1997, 1998, 1999, 2000, 2001 and the range of projected net cost savings,
revenue enhancements and synergy benefits provided to ABN-AMRO Chicago
Corporation, ABN-AMRO Chicago Corporation compared pro forma net income, book
value and tangible book value for the combined entity to the stand-alone
projections for Pinnacle. This analysis assumed synergistic after-tax cost
savings for the calendar years 1997, 1998, 1999, 2000, 2001 and transaction
expenses, which are assumed to be incurred in 1997, in accordance with the range
of projections provided to ABN-AMRO Chicago Corporation.
The accretion/dilution analysis showed, among other things, that the Merger
would result in a projected earnings dilution of 16.7% in 1997 for holders of
Pinnacle Common Stock, after accounting for one-time expenses related to the
transaction, and earnings accretion of 2.0%, 1.6%, 1.3% 0.9%, in calendar years
1998, 1999, 2000, 2001 respectively. The analysis also showed that the Merger
would result in accretion to book value ranging from 3.4% to 8.0%, and accretion
to tangible book value ranging from 5.5% to 14.1%.
DISCOUNTED CASH FLOW ANALYSIS. ABN-AMRO Chicago Corporation performed
discounted cash flow analyses with regard to Pinnacle on a stand-alone basis and
with regard to the combined entity, using the earnings and cost savings
projections provided by Pinnacle and IFC. ABN-AMRO Chicago Corporation utilized
a range of discount rates between 12.5% and 17.5% as well as a range of terminal
multiples applied to calendar year 2001 projected earnings of $3.06 and $3.09 on
a stand-alone basis and a pro forma basis, respectively. The discount rates were
selected by ABN-AMRO Chicago Corporation as reasonable estimates of the cost of
capital to Pinnacle and of the combined entity. The selected terminal rates
reflect the range of price-to-earnings multiples paid in similar merger
transactions. The analyses resulted in
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ranges of present values between $20.94 and $32.49 per share on a stand-alone
basis and in ranges of present values between $21.06 and $32.70 per share on a
pro forma combined basis.
OTHER ANALYSES. ABN-AMRO Chicago Corporation also reviewed certain other
information regarding selected pro forma industry rankings, the institutional
and inside ownership of Pinnacle Common Stock and IFC Common Stock and the
historical performance, trading volume and other relevant market information of
Pinnacle Common Stock and IFC Common Stock.
No other company used as a comparison in the above analyses is identical to
Pinnacle, IFC or the combined entity; and no other transaction is identical to
the Merger. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial market and operating characteristics of the
companies and other factors that could affect the public trading volume of the
companies to which Pinnacle, IFC and the combined entity are being compared.
For its financial advisory services provided to Pinnacle, upon closing of
the Merger, ABN-AMRO Chicago Corporation will be paid a fee of $500,000. In
addition, Pinnacle has agreed to reimburse ABN-AMRO Chicago Corporation for all
reasonable out-of-pocket expenses, not to exceed $10,000, incurred by it on
Pinnacle's behalf, as well as indemnify ABN-AMRO Chicago Corporation against
certain liabilities, including any which may arise under the federal securities
laws.
ABN-AMRO Chicago Corporation is a member of all principal securities
exchanges in the United States; and in its conduct of its broker-dealer
activities has from time to time purchased securities from, and sold securities
to, Pinnacle and/or IFC. As a market maker, ABN-AMRO Chicago Corporation had
also purchased and sold the securities of Pinnacle and/or IFC for ABN-AMRO
Chicago Corporation's own account and for the accounts of its customers. Two
affiliates of ABN-AMRO Chicago Corporation manage limited partnerships which
invest in publicly-traded securities of banking institutions. Additionally, ABN-
AMRO Chicago Corporation manages two group trusts which invest in
publicly-traded securities of banking institutions. Together, these investment
pools, known as The Banc Funds, have reported ownership of 41,100 shares of
Pinnacle Common Stock and 37,515 shares of IFC Common Stock.
OPINION OF IFC FINANCIAL ADVISOR
GENERAL. Pursuant to a letter agreement dated as of November 13, 1996 (the
"Sandler O'Neill Agreement"), IFC retained Sandler O'Neill as an independent
financial advisor in connection with strategic planning and merger and
acquisition transactions. Sandler O'Neill is a nationally recognized investment
banking firm whose principal business specialty is banks and savings
institutions and, in that connection, is regularly engaged in the valuation of
such businesses and their securities in connection with mergers and acquisitions
and other corporate transactions.
Pursuant to the terms of the Sandler O'Neill Agreement, Sandler O'Neill
acted as financial advisor to IFC in connection with the Merger. In connection
therewith, at the November 14, 1996 meeting at which the IFC Board approved and
adopted the Merger Agreement, Sandler O'Neill delivered a written opinion to the
IFC Board that, as of November 14, 1996, the consideration to be received by the
holders of shares of IFC Common Stock pursuant to the Merger Agreement (the
amount of which was determined by Pinnacle and IFC on the basis of arm's-length
negotiations between Pinnacle and IFC) was fair, from a financial point of view,
to such stockholders. Sandler O'Neill has also delivered a written opinion (the
"Sandler O'Neill Fairness Opinion"), dated as of the date of this Joint Proxy
Statement/Prospectus which is substantially similar to its November 14, 1996
opinion. THE FULL TEXT OF THE SANDLER O'NEILL FAIRNESS OPINION, WHICH SETS FORTH
THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND QUALIFICATIONS
AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS JOINT
PROXY STATEMENT/ PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THE
DESCRIPTION OF SUCH OPINION SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SAID ANNEX C. HOLDERS OF IFC COMMON STOCK ARE URGED TO READ THE
SANDLER O'NEILL FAIRNESS OPINION IN ITS ENTIRETY IN CONNECTION WITH THEIR
CONSIDERATION OF THE PROPOSED
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MERGER. THE SANDLER O'NEILL FAIRNESS OPINION SHOULD NOT BE CONSTRUED BY THE
HOLDERS OF SHARES OF IFC COMMON STOCK OR PINNACLE COMMON STOCK AS A
RECOMMENDATION AS TO HOW THEY SHOULD VOTE AT THE IFC SPECIAL MEETING OR THE
PINNACLE SPECIAL MEETING.
In connection with rendering its opinion dated November 14, 1996, Sandler
O'Neill performed a variety of financial analyses. The following is a summary of
such analyses, but does not purport to be a complete description of Sandler
O'Neill's analysis. The preparation of a fairness opinion is a complex process
involving subjective judgments and is not necessarily susceptible to a partial
analysis or summary description. Sandler O'Neill believes that its analyses must
be considered as a whole and that selecting portions of such analyses and the
factors considered therein, without considering all factors and analyses, could
create an incomplete view of the analyses and processes underlying the Sandler
O'Neill Fairness Opinion. In performing its analyses, Sandler O'Neill made
numerous assumptions with respect to industry performance, business and economic
conditions and various other matters, many of which cannot be predicted and are
beyond the control of Pinnacle, IFC and Sandler O'Neill. Any estimates contained
in Sandler O'Neill's analyses are not necessarily indicative of future results
or values, which may be significantly more or less favorable than such
estimates. Estimates on the values of companies do not purport to be appraisals
or necessarily reflect the prices at which companies or their securities may
actually be sold. Such estimates are inherently subject to uncertainty and,
accordingly, none of IFC, Pinnacle or Sandler O'Neill assumes responsibility for
their accuracy.
STOCK TRADING HISTORY. Sandler O'Neill examined the history of the trading
prices and the volume of IFC Common Stock and Pinnacle Common Stock, and the
relationship between the movements in the prices of the IFC and the Pinnacle
Common Stock, respectively, to movements in certain stock indices, including the
Standard & Poor's 500 Index, the Nasdaq Banking Index and a composite group of
publicly traded savings institutions (in the case of IFC) and publicly traded
commercial banks (in the case of Pinnacle) in geographic proximity and of
similar asset size.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES. In preparing its
presentation, Sandler O'Neill used publicly available information to compare
selected financial and market trading information, including book value,
tangible book value, earnings, asset quality ratios, loan loss reserve levels,
profitability and capital adequacy, of IFC and two different groups of selected
savings institutions. The first group consisted of the following 14
publicly-traded savings institutions (the "Regional Thrift Group") which operate
in the same general geographic region as IFC and are of comparable size: First
Indiana Corporation, D & N Financial Corporation, FirstFederal Financial Svcs,
CFSB Bancorp, Inc., Ottawa Financial Corporation, Mutual Savings Bank, FSB, Home
Federal Bancorp, FirstFed Bancshares, FFY Financial Corp., Avondale Financial
Corp., Security First Corp., Strongsville Savings Bank, First Defiance
Financial, and Calumet Bancorp, Inc. Sandler O'Neill also compared IFC to a
group of 10 publicly-traded savings institutions of comparable size which were
considered to be highly-valued (the "Highly-Valued Group") by investors. The
Highly-Valued Group was comprised of: InterWest Bancorp., Inc., Eagle Financial
Corp., American Federal Bank, FSB, WSFS Financial Corporation, Magna Bancorp,
Inc., Dime Financial Corp., Great Southern Bancorp, Inc., Coastal Financial
Corp., Glacier Bancorp, Inc., and PVF Capital Corp. The analysis compared
publicly available period-end financial information as of and for the periods
ended December 31, 1991 through June 30, 1996. The following comparisons are
based upon the June 30, 1996 financial information. The data described below
with respect to the Regional Thrift Group and the Highly-Valued Group consists
of the median data for such groups.
The total assets of IFC were approximately $750 million, compared to $630
million for the Regional Thrift Group and approximately $1.0 billion for the
Highly-Valued Group. The annual growth rate of assets for IFC was positive
2.10%, compared to a positive growth rate of approximately 7% for the Regional
Thrift Group and approximately 9% for the Highly-Valued Group. The total equity
of IFC was approximately $70 millon, compared to approximately $70 million for
the Regional Thrift Group and approximately $71 million for the Highly-Valued
Group. The tangible equity to total assets ratio was 8.82% for IFC, compared to
8.20% for the Regional Thrift Group and 6.97% for the Highly-Valued Group. The
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net loans to assets ratio for IFC was approximately 75%, compared to
approximately 76% for the Regional Thrift Group and approximately 64% for the
Highly-Valued Group. The cash and securities to total assets ratio was
approximately 19% for IFC, compared to approximately 20% for the Regional Thrift
Group and approximately 30% for the Highly-Valued Group. Total deposits were
approximately $564 million for IFC, compared to approximately $475 million for
the Regional Thrift Group and approximately $655 million for the Highly-Valued
Group. IFC had a gross loans to total deposits ratio of approximately 99%,
compared to approximately 104% for the Regional Thrift Group and approximately
101% for the Highly-Valued Group. The total borrowings to total asset ratio for
IFC was approximately 14%, compared to approximately 14% for the Regional Thrift
Group and approximately 24% for the Highly-Valued Group. The ratio of non-
performing loans to total assets for IFC was 0.69%, compared to 0.24% for the
Regional Thrift Group and .77% for the Highly-Valued Group. The ratio of
non-performing assets to total assets for IFC was 1.26%, compared to 0.31% for
the Regional Thrift Group and 0.82% for the Highly-Valued Group. The ratio of
loan loss reserves to non-performing loans for IFC was 131.40%, compared to
approximately 262.5% for the Regional Thrift Group and approximately 153.0% for
the Highly-Valued Group. The net interest margin of IFC was 3.76%, compared to
3.58% for the Regional Thrift Group and 3.97% for the Highly-Valued Group. The
ratio of non-interest income to average assets for IFC was 0.62%, compared to
0.54% for the Regional Thrift Group and 1.21% for the Highly-Valued Group. The
ratio of non-interest expense to average assets was 2.87% for IFC, compared to
2.28% for the Regional Thrift Group and 2.53% for the Highly-Valued Group. The
efficiency ratio of IFC was 66.23%, compared to approximately 57% for the
Regional Thrift Group and approximately 55% for the Highly-Valued Group. The
overhead ratio of IFC was 59.23%, compared to approximately 52% for the Regional
Thrift Group and approximately 46% for the Highly-Valued Group. The return on
average assets for IFC was .91%, compared to 0.91% for the Regional Thrift Group
and 1.45% for the Highly-Valued Group. The return on average equity for IFC was
9.37%, compared to approximately 7.8% for the Regional Thrift Group and
approximately 17.4% for the Highly-Valued Group. The price to tangible book
value for IFC was 146.53%, compared to approximately 138% for the Regional
Thrift Group and approximately 200% for the Highly-Valued Group. The price to
earnings per share multiple for IFC was 14.89x, compared to approximately 15.8x
for the Regional Thrift Group and 12.3x for the Highly-Valued Group.
Sandler O'Neill also used publicly available information to perform a
similar comparison of selected financial and market trading information for
Pinnacle and two different groups of selected banking institutions. The first
group consisted of the following 15 publicly-traded commercial banks (the
"Regional Bank Group") which operate in the same general geographic region: Park
National Corporation, Republic Bancorp Inc., First Financial Corporation,
Heritage Financial Services, Irwin Financial Corporation, National City
Bancshares, Inc., Second Bancorp, Inc., Citizens Bancshares, Pinnacle Banc
Group, Inc., Michigan Financial Corporation, Independent Bank Corporation, Old
Second Bancorp, Inc., First Oak Brook Bancshares, Ambanc Corp., and First
Merchants Corp. Sandler O'Neill also compared Pinnacle to a group of 13
publicly-traded commercial banks of comparable size which were considered to be
highly-valued (the "Highly-Valued Bank Group") by investors. The Highly-Valued
Bank Group was comprised of: Park National Corporation, National Penn
Bancshares, Inc., Texas Regional Bancshares, Inc., Heritage Financial Services,
Irwin Financial Corporation, Westernbank Puerto Rico, F&M Bancorporation, Inc.,
CVB Financial Corp., Mississippi Valley Bancshares, MainStreet Bank Group, Inc.,
Citizens Bancshars, Independent Bank Corporation, and Arrow Financial
Corporation. The analysis compared publicly available period-end financial
information as of and for the periods ending December 31, 1991 through June 30,
1996. The following comparisons are based upon the June 30, 1996 financial
information. The data described below with respect to the Regional Bank Group
and the Highly-Valued Bank Group consists of the median data for such groups.
The total assets of Pinnacle were approximately $970 million, compared to
$850 million for the Regional Bank Group and $1.1 billion for the Highly-Valued
Bank Group. The annual growth rate of assets for Pinnacle was positive 122%,
compared to a positive growth rate of approximately 9% for the Regional Bank
Group and approximately 18% for the Highly-Valued Bank Group. The total equity
of
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Pinnacle was approximately $72 million, compared to approximately $80 millon for
the Regional Bank Group and approximately $80 million for the Highly-Valued Bank
Group. The tangible equity to total assets ratio was 5.88% for Pinnacle,
compared to approximately 8.9% for the Regional Bank Group and approximately
7.7% for the Highly-Valued Bank Group. The net loans to total assets ratio for
Pinnacle was approximately 53.61%, compared to approximately 58.4% for the
Regional Bank Group and approximately 63.4% for the Highly-Valued Bank Group.
The cash and securities to total assets ratio was approximately 38% for
Pinnacle, compared to approximately 33% for the Regional Bank Group and
approximately 32% for the Highly-Valued Bank Group. Total deposits were
approximately $740 million for Pinnacle, compared to approximately $680 million
for the Regional Bank Group and approximately $895 million for the Highly-Valued
Bank Group. Pinnacle had a gross loans to total deposits ratio of approximately
71%, compared to approximately 76% for the Regional Bank Group and approximately
82% for the Highly-Valued Bank Group. The total borrowings to total assets ratio
for Pinnacle was approximately 16%, compared to approximately 10% for the
Regional Bank Group and approximately 7% for the Highly-Valued Bank Group. The
total non-performing loans to total assets ratio for Pinnacle was 0.29%,
compared to 0.32% for the Regional Thrift Group and 0.31% for the Highly-Valued
Bank Group. The non-performing assets to total assets ratio for Pinnacle was
0.41%, compared to 0.39% for the Regional Thrift Group and 0.39% for the
Highly-Valued Bank Group. The ratio of loan loss reserves to non-performing
loans for Pinnacle was 209%, compared to approximately 218% for the Regional
Bank Group and approximately 281% for the Highly-Valued Bank Group. The ratio of
loan loss reserves to non-performing assets for Pinnacle was approximately 145%,
compared to approximately 188% for the Regional Bank Group and approximately
223% for the Highly-Valued Bank Group. The net interest margin of Pinnacle was
3.93%, compared to 4.47% for the Regional Bank Group and 5.10% for the
Highly-Valued Bank Group. The ratio of non-interest income to average assets for
Pinnacle was .76%, compared to .85% for the Regional Bank Group and .83% for the
Highly-Valued Bank Group. The ratio of non-interest expense to average assets
was 2.70% for Pinnacle, compared to 2.87% for the Regional Bank Group and 3.07%
for the Highly-Valued Bank Group. The efficiency ratio of Pinnacle was 57.28%,
compared to approximately 57.4% for the Regional Bank Group and approximately
56.2% for the Highly-Valued Bank Group. The overhead ratio of Pinnacle was
48.46%, compared to approximately 47.9% for the Regional Bank Group and
approximately 48.2% for the Highly-Valued Bank Group. The return on average
assets for Pinnacle was 1.16%, compared to 1.24% for the Regional Bank Group and
1.38% for the Highly-Valued Bank Group. The return on average equity for
Pinnacle was 14.26%, compared to approximately 12.8% for the Regional Bank Group
and approximately 17.5% for the Highly-Valued Bank Group. The price to tangible
book value for Pinnacle was 229.15%, compared to approximately 190% for the
Regional Bank Group and approximately 216% for the Highly-Valued Bank Group. The
price to earnings per share multiple for Pinnacle was 13.17x, compared to 12.7x
for the Regional Bank Group and 12.4x for the Highly-Valued Bank Group.
ANALYSIS OF SELECTED MERGER TRANSACTIONS. Sandler O'Neill reviewed 44
transactions announced from January 1, 1996 to October 10, 1996 involving public
savings institutions nationwide as targets for transaction values over $15
million ("All Transactions") and 10 transactions announced from January 1, 1996
to September 16, 1996 involving public savings institutions in the Midwest
("Regional Transactions"). Sandler O'Neill reviewed the ratios of price to
earnings, price to book value, price to tangible book value, price to deposits,
price to assets, and deposit premium paid in each such transaction and computed
high, low, mean and median ratios and premiums for the respective groups of
transactions. Based upon the median multiples for All Transactions, Sandler
O'Neill derived an imputed range of values per share of IFC Common Stock of
$19.66 to $25.56. Based upon the median multiples for Regional Transactions,
Sandler O'Neill derived an imputed range of values per share of IFC Common Stock
of $18.97 to $31.75.
In addition, Sandler O'Neill reviewed transactions announced from January 1,
1996 to October 24, 1996 involving public bank institutions nationwide as
targets with transaction values over $15 million ("All Transactions") and 10
transactions announced from January 1, 1996 to October 11, 1996 involving public
bank institutions in the Midwest ("Regional Transactions"). Sandler O'Neill
reviewed the ratios of price to
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earnings, price to book value, price to tangible book value, price to deposits,
price to assets, and deposit premium paid in each such transaction and computed
high, low, mean, and median ratios and premiums for the respective groups of
transactions. Based upon the median multiples for All Transactions, Sandler
O'Neill derived an imputed range of values per share of the pro forma Pinnacle
Common Stock of $26.87 to $37.13. Based upon the median multiples for Regional
Transactions, Sandler O'Neill derived an imputed range of values per share of
the Pinnacle Common Stock of $24.70 to $37.31.
SUMMARY CONTRIBUTION ANALYSIS. Sandler O'Neill computed the contribution to
the combined entity's September 30, 1996 pro forma financial results
attributable to each of IFC and Pinnacle. The computation showed that IFC and
Pinnacle contributed to the combined company approximately 44.27% and 55.73%,
respectively, of total assets, 43.89% and 56.11%, respectively, of total
liabilities, 48.77% and 51.23%, respectively, of total equity, 52.22% and
47.78%, respectively, of total tangible equity, 40.77% and 59.23%, respectively,
of net income available to common shares (absent of IFC's SAIF assessment), and
45.10% and 54.90% of pro forma ownership of the combined entity (using the
Exchange Ratio of 1.00).
DISCOUNTED DIVIDEND STREAM AND TERMINAL VALUE ANALYSIS. Sandler O'Neill
also performed an analysis which estimated the future stream of after-tax
dividend flows of IFC through the year 2001 under various circumstances,
assuming IFC performed in accordance with the earnings forecasts of its
management and certain variations thereof (including variation with respect to
the growth rate of assets, net interest spread, non-interest income,
non-interest expense and dividend payout ratio). To approximate the terminal
value of IFC Common Stock at the end of the five-year period, Sandler O'Neill
applied price to earnings multiples ranging from 8x to 17x and applied multiples
of book value ranging from 80.0% to 180.0%. The dividend income streams and
terminal values were then discounted to present values using different discount
rates (ranging from 10% to 16.0%) chosen to reflect different assumptions
regarding required rates of return of holders of prospective buyers of IFC
Common Stock. This analysis, assuming the current dividend payout ratio,
indicated an imputed range of values per share of IFC Common Stock between
$13.55 and $31.72 when applying the price to earnings multiples, and an imputed
range of values per share of IFC Common Stock between $11.22 and $26.49 when
applying multiples of book value. In connection with its analysis, Sandler
O'Neill extensively used sensitivity analyses to illustrate the effects changes
in the underlying assumptions would have on the resulting present value, and
discussed these changes with the IFC Board.
In addition, Sandler O'Neill performed an analysis which estimated the
future stream of after-tax dividend flows of Pinnacle on pro-forma basis,
assuming consummation of the Merger (the "Combined Company") through the year
2002 under various circumstances, assuming (i) the operations of the Combined
Company attributable to IFC performed in accordance with the earnings forecasts
of IFC's management and certain variations thereof, as described in the previous
paragraph; (ii) the operations of the Combined Company attributable to Pinnacle
performed in accordance with the earnings forecasts of Pinnacle's management and
certain variations thereof (including variation with respect to the growth rate
of assets, net interest spread, non-interest income, non-interest expense and
dividend payout ratio); and (iii) the Combined Company's realized cost savings
equal to 16.82% of IFC's projected non-interest expenses (other than the expense
of deposit insurance). To approximate the terminal value of the Combined
Company's common stock at the end of the five-year period, Sandler O'Neill
applied price to earnings multiples ranging from 10x to 20x and applied
multiples of book value ranging from 100.0% to 200.0%. The dividend income
streams and terminal values were then discounted to present values using
different discount rates (ranging from 9.0% to 13.5%) chosen to reflect
different assumptions regarding required rates of return of holders of
prospective buyers of the Combined Company's common stock. This analysis,
assuming the current dividend payout ratio, indicated an imputed range of values
of the one (1) share of Pinnacle Common Stock to be received in the Merger for
each share of IFC Common Stock of between $23.58 and $51.49 when applying the
price to earnings multiples, and an imputed range of values of the shares of
Pinnacle Common Stock to be received in the Merger for each share of IFC Common
Stock of between $16.59 and $34.38 when applying multiples of book value. In
connection with its analysis,
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Sandler O'Neill extensively used sensitivity analyses to illustrate the effects
changes in the underlying assumptions would have on the resulting present value,
and discussed these changes with the IFC Board.
In connection with rendering the Sandler O'Neill Fairness Opinion, Sandler
O'Neill confirmed the appropriateness of its reliance on the analysis used to
render its November 14, 1996 opinion by performing procedures to update certain
of such analyses and by reviewing the assumptions upon which they were based and
the factors considered in connection therewith. Sandler O'Neill also reviewed,
among other things: (i) the Merger Agreement and exhibits thereto; (ii) the
Stock Option Agreements; (iii) a draft of this Joint Proxy Statement/Prospectus;
(iv) Pinnacle's audited consolidated financial statements and management's
discussion and analysis of the condition and results of operations contained in
its annual report to stockholders for the year ended December 31, 1995; (v)
IFC's audited consolidated financial statements and management's discussion and
analysis of the financial condition and results of operations contained in its
annual report to stockholders for the fiscal year ended December 31, 1995; (vi)
Pinnacle's unaudited consolidated financial statements and management's
discussion and analysis of the financial condition and results of operations
contained in its Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, June 30, and September 30, 1996, respectively; (vii) IFC's unaudited
consolidated financial statements and management's discussion and analysis of
the financial condition and results of operations contained in its Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, June 30, and
September 30, 1996, respectively; (viii) certain financial analyses and
forecasts of IFC prepared by and reviewed with management of IFC and the views
of senior management of IFC regarding IFC's past and current business
operations, results thereof, financial condition and future prospect; (ix)
certain financial analyses and forecasts of Pinnacle prepared by and reviewed
with management of Pinnacle and the views of senior management of Pinnacle
regarding Pinnacle's past and current business operations, results thereof,
financial conditions and future prospects; (x) the pro forma impact of the
Merger on Pinnacle; (xi) the historical reported price and trading activity for
Pinnacle Common Stock and IFC Common Stock, including a comparison of certain
financial and stock market information for Pinnacle and IFC with similar
information for certain other companies the securities of which are publicly
traded; (xii) the financial terms of recent business combinations in the savings
institution and banking industries; (xiii) the current market environment
generally and the banking environment in particular; and (xiv) such other
information, financial studies, analyses and investigations and financial,
economic and market criteria as Sandler O'Neill considered relevant. Sandler
O'Neill was not asked to, and did not, solicit indications of interest in a
potential transaction from other third parties.
In performing its review, Sandler O'Neill assumed and relied upon, without
independent verification, the accuracy and completeness of all the financial
information, analyses and other information reviewed by and discussed with it,
and Sandler O'Neill did not make an independent evaluation or appraisal of the
specific assets, the collateral securing assets or the liabilities of Pinnacle
or IFC or any of their subsidiaries, or the collectibility of any such assets
(relying, where relevant, on the analyses and estimates of Pinnacle and IFC).
With respect to the financial projections reviewed with each company's
management, Sandler O'Neill assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
respective managements of the respective future financial performances of
Pinnacle and IFC and that such performances will be achieved. Sandler O'Neill
also assumed that there has been no material change in Pinnacle's or IFC's
assets, financial condition, results of operations, business or prospects since
the date of the last financial statements noted above. Sandler O'Neill assumed
that the Merger will qualify for "pooling-of-interests" accounting treatment and
has further assumed that Pinnacle will remain as a going concern for all periods
relevant to its analyses and that the conditions precedent in the Merger
Agreement are not waived.
Under the Sandler O'Neill Agreement, IFC will pay Sandler O'Neill a
transaction fee in connection with the Merger, a substantial portion of which is
contingent upon the consummation of the Merger. Under the terms of the Sandler
O'Neill Agreement, IFC will pay Sandler O'Neill a transaction fee equal to
$775,000, of which 25% was paid upon execution of the Merger Agreement and 75%
will be paid if the
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Merger is consummated. IFC has also paid Sandler O'Neill a fee of $50,000 for
rendering the Sandler O'Neill Fairness Opinion, all of which amount will be
credited towards the fee payable to Sandler O'Neill upon consummation of the
Merger. IFC has also agreed to reimburse Sandler O'Neill for its reasonable
out-of-pocket expenses incurred in connection with its engagement and to
indemnify Sandler O'Neill and its affiliates and their respective partners,
directors, officers, employees, agents, and controlling persons against certain
expenses and liabilities, including liabilities under securities laws.
CERTAIN FORWARD-LOOKING INFORMATION
This Joint Proxy Statement/Prospectus contains certain forward-looking
information concerning possible or assumed future results of the combined
companies or the benefits of the Merger. Such information is subject to risks
and uncertainties. Pinnacle and IFC have identified certain important factors in
addition to those discussed elsewhere in this Joint Proxy Statement/ Prospectus
and in the documents incorporated herein by reference, which could cause actual
results to differ materially from any such results which might be projected,
forecast, estimated or budgeted in forward-looking information. All of such
factors are difficult to predict and many are beyond the control of Pinnacle and
IFC. These important factors include: (i) future economic conditions in the
regional and national markets in which the companies compete; (ii) financial
market conditions, including, but not limited to, changes in interest rates;
(iii) inflation; (iv) changing competition; (v) the ability to carry out
business plans; (vi) the ability to enter new markets successfully and
capitalize on growth opportunities; and (vii) adverse changes in applicable law,
regulations or rules governing financial institutions and environmental, tax or
accounting matters.
EFFECTIVE TIME
The Effective Time will be as set forth in Certificates of Merger which will
be filed with the Department of Consumer and Industry Services of the State of
Michigan and the Secretary of State of the State of Delaware on the closing date
with respect to the Merger. The Closing Date will occur on a date to be
specified by the parties which will be no later than five business days after
the satisfaction or waiver (subject to applicable law) of the latest to occur of
the conditions precedent to the Merger set forth in the Merger Agreement.
Pinnacle and IFC each anticipate that the Merger will be consummated prior to
June 30, 1997. However, the consummation of the Merger could be delayed as a
result of delays in obtaining any necessary regulatory agency or other
governmental approvals required for the transactions contemplated by the Merger
Agreement. There can be no assurances as to if or when such approvals will be
obtained or that the Merger will be consummated. If the Merger is not effected
on or before November 14, 1997, the Merger Agreement may be terminated by either
Pinnacle or IFC, unless the failure to effect the Merger by such date is due to
the failure of the party seeking to terminate the Merger Agreement to perform or
observe the covenants and agreements of such party set forth therein. See "--
Conditions to the Consummation of the Merger" and "--Regulatory Approvals
Required for the Merger."
CONVERSION OF SHARES
At the Effective Time, each share IFC Common Stock outstanding, other than
shares of IFC Common Stock held in IFC's treasury or held by IFC or Pinnacle or
any of their respective wholly-owned subsidiaries (except, in both cases, for
shares 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 ("Trust Account Shares") or in respect of a debt previously
contracted ("DPC Shares")), will be converted into the right to receive one (1)
share of Pinnacle Common Stock. If, prior to the Effective Time, the outstanding
shares of Pinnacle Common Stock or IFC Common Stock 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 Ratio.
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At the Effective Time, all shares of IFC Common Stock owned by IFC as
treasury stock and all shares of IFC Common Stock owned, directly or indirectly,
by IFC or Pinnacle or any of their respective wholly-owned subsidiaries (other
than Trust Account Shares and DPC Shares), will be cancelled and will cease to
exist and no stock of Pinnacle or other consideration shall be delivered in
exchange therefor.
Shares of Pinnacle Common Stock issued and outstanding immediately prior to
the Effective Time will remain issued and outstanding and be unaffected by the
Merger, and holders of such stock will not be required to exchange the
certificates representing such stock or take any other action by reason of the
consummation of the Merger. However, all shares of Pinnacle Common Stock owned
by IFC or any of its wholly-owned subsidiaries (other than Trust Account Shares
and DPC Shares) will become treasury stock of Pinnacle.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
At or prior to the Effective Time, Pinnacle will deposit, or cause to be
deposited, with Harris Trust and Savings Bank, Chicago, Illinois (the "Exchange
Agent"), for the benefit of the holders of certificates of IFC Common Stock,
certificates representing the shares of Pinnacle Common Stock to be issued
pursuant to the Merger Agreement in exchange for outstanding shares of IFC
Common Stock.
As soon as is practicable after the Effective Time, and in no event later
than five business days thereafter, a form of transmittal letter will be mailed
by the Exchange Agent to the holders of IFC Common Stock. The form of
transmittal letter will contain instructions with respect to the surrender of
certificates representing IFC Common Stock.
IFC STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY AND
SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNLESS AND UNTIL THE IFC
STOCKHOLDER RECEIVES A LETTER OF TRANSMITTAL FOLLOWING THE EFFECTIVE TIME.
Dividends or other distributions declared with respect to Pinnacle Common
Stock with a record date following the Effective Time will not be paid to the
holder of any certificate representing shares of IFC Common Stock until such
certificates have been surrendered for exchange. In addition, after the
Effective Time, holders of unsurrendered IFC Common Stock will not be entitled
to vote at any meeting of Pinnacle stockholders at which Pinnacle stockholders
are eligible to vote until such holders have exchanged their IFC Common Stock
for Pinnacle Common Stock. If certificates representing shares of IFC Common
Stock are presented after the Effective Time, they will be cancelled and
exchanged for the relevant certificate representing shares of Pinnacle Common
Stock.
Fractional shares of Pinnacle Common Stock will not be issued to any holder
of IFC Common Stock upon consummation of the Merger.
None of Pinnacle, IFC, the Exchange Agent or any other person will be liable
to any former holder of IFC Common Stock for any amount delivered in good faith
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
If a certificate for IFC Common Stock has been lost, stolen or destroyed,
the Exchange Agent will issue the consideration properly payable in accordance
with the Merger Agreement upon receipt of appropriate evidence as to such loss,
theft or destruction, appropriate evidence as to the ownership of such
certificate by the claimant, and appropriate and customary indemnification.
For a description of Pinnacle Common Stock, see "DESCRIPTION OF PINNACLE
COMMON STOCK." For a description of the differences between the rights of
holders of Pinnacle Common Stock and the rights of holders of IFC Common Stock,
see "COMPARISON OF STOCKHOLDERS' RIGHTS."
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DISTRIBUTIONS TO STOCKHOLDERS
The Merger Agreement provides that neither Pinnacle nor IFC shall 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 except, (i) in the case of Pinnacle, for regular
quarterly cash dividends on Pinnacle Common Stock at a rate not in excess of
$0.25 per share of Pinnacle Common Stock, (ii) in the case of IFC, for regular
quarterly cash dividends on IFC Common Stock at a rate not in excess of $0.21
per share of IFC Common Stock, (iii) for dividends paid by any wholly-owned
subsidiaries of each of Pinnacle and IFC to Pinnacle or IFC or any of their
subsidiaries, respectively, and (iv) for dividends paid in the ordinary course
of business by any subsidiaries (whether or not wholly-owned) of each of
Pinnacle and IFC. The Merger Agreement also obligates each of Pinnacle and IFC
to coordinate with the other the declaration of any dividends in respect of
Pinnacle Common Stock and IFC Common Stock and the record dates and payment
dates relating thereto, it being the intent of Pinnacle and IFC that after the
date of the Merger Agreement holders of Pinnacle Common Stock or IFC Common
Stock do not receive two dividends, or fail to receive one dividend, for any
quarter with respect to their shares of Pinnacle Common Stock and/or IFC Common
Stock and any shares of Pinnacle Common Stock any such holder receives in
exchange for shares of IFC Common Stock in the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties of Pinnacle and
IFC as to, among other things, (i) the corporate organization and existence of
each party and its subsidiaries; (ii) the capitalization of each party and its
subsidiaries; (iii) the corporate power and authority of each party and the
compliance of the Merger Agreement with (a) the charter and by-laws of each
party, (b) applicable law, and (c) certain material agreements; (iv)
governmental and third-party approvals; (v) the timely filing of required
regulatory reports; (vi) each party's financial statements and filings with the
Commission; (vii) each party's brokers' fees; (viii) the absence of certain
changes in each party's business since December 31, 1995; (ix) the absence of
material legal proceedings; (x) the filing and accuracy of each party's tax
returns; (xi) each party's employee benefit plans and related matters; (xii) the
material accuracy and completeness of the filings made by each party with the
Commission; (xiii) each party's compliance with applicable law; (xiv) the
absence of material defaults under certain contracts; (xv) agreements between
each party and regulatory agencies; (xvi) the activities of the subsidiaries of
each party; (xvii) investment securities; (xviii) interest rate risk management
instruments; (xix) the absence of undisclosed liabilities; (xx) environmental
liabilities; (xxi) the inapplicability to the transactions contemplated by the
Merger Agreement of Chapter 7A of the MBCA and Section 203 of the DGCL, relating
to certain business combinations specified in such statutes; and (xxii)
"pooling-of-interests" accounting treatment. IFC has also made representations
and warranties as to the inapplicability of the IFC Rights Agreement to the
transactions contemplated by the Merger Agreement and the IFC Stock Option
Agreement and the redemption, extinguishing, termination and cancellation of the
IFC Rights.
In the event the Merger is consummated, all representations and warranties
of Pinnacle and IFC will expire with and be terminated as of the Effective Time.
CONDUCT OF BUSINESS PENDING THE MERGER AND OTHER AGREEMENTS
Pursuant to the Merger Agreement, prior to the Effective Time Pinnacle and
IFC have each agreed to, and to cause their respective subsidiaries to, (i)
conduct its business in the usual, regular and ordinary course consistent with
past practice, (ii) 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 (iii) take no
action which would adversely affect or delay the ability of either Pinnacle or
IFC to obtain any Requisite Regulatory Approvals or to perform its covenants and
agreements under the Merger Agreement or the Stock Option Agreements.
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Pinnacle and IFC have also agreed to use their best efforts to promptly
prepare and file all necessary documentation to effect all applications,
notices, petitions and filings, and to obtain and to cooperate in obtaining
permits, consents, approvals and authorizations of all third parties and
governmental entities necessary or advisable to consummate the transactions
contemplated by the Merger Agreement and to comply with the terms and conditions
of all such permits, consents, approvals and authorizations. Pinnacle and IFC
have each agreed upon request to furnish to the other party all information
concerning themselves and their subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Merger. Pinnacle and IFC have also agreed, subject to the
terms and conditions of the Merger Agreement, to use their best efforts 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 and to consummate the Merger. Pinnacle also agreed to cause the
shares of Pinnacle Common Stock to be issued in the Merger to be listed for
quotation on the Nasdaq National Market, subject to official notice of issuance,
prior to the Effective Time. Pinnacle and IFC also agreed that the employee
benefit plans in place on the date the Merger Agreement was entered into with
respect to employees of Pinnacle and IFC, as the case may be, will remain in
effect for such employees until such time as the combined company adopts new
benefit plans covering employees of both parties who continue to be employed by
the combined company (the "New Benefit Plans"). These New Benefit Plans will
substantially conform to the benefit plans of Pinnacle in effect as of the
Effective Time. Pinnacle and IFC have stated their intention to develop the New
Benefit Plans, effective as of the Effective Time or as soon thereafter as
practicable, and to have the New Benefit Plans, among other things, 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. Moreover, the New Benefit Plans
will not discriminate between employees of the combined corporation who were
covered by the benefit plans of Pinnacle, on the one hand, and those covered by
the benefit plans of IFC, on the other hand, at the Effective Time. Pinnacle and
IFC also reached certain agreements with respect to directors' and officers'
indemnification and insurance, and with respect to dividends. See "INTERESTS OF
CERTAIN PERSONS IN THE MERGER."
Each of Pinnacle and IFC have further agreed to give the other party access
to all of its properties, books, contracts, commitments and records and to
furnish information concerning its businesses, properties and personnel, subject
to the restrictions set forth in the Merger Agreement.
In addition, except as expressly contemplated by the Merger Agreement or
specified in a schedule thereto or as contemplated by the Stock Option
Agreements, each of Pinnacle and IFC has agreed that, without the consent of the
other party, it and its subsidiaries will not, among other things:
(i) 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 Pinnacle or any of its subsidiaries to Pinnacle or
any of its subsidiaries, on the one hand, or of IFC or any of its
subsidiaries to IFC or any of its subsidiaries, on the other hand),
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;
(ii) adjust, split, combine or reclassify any capital stock; or 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
(except, (a) in the case of Pinnacle, for regular quarterly cash
dividends at a rate not in excess of $.25 per share of Pinnacle Common
Stock, (b) in the case of IFC, for regular quarterly cash dividends on
IFC Common Stock at a rate not in excess of $.21 per share of IFC
Common Stock, (c) for dividends paid by any of the wholly-owned
subsidiaries of each of IFC and Pinnacle to IFC or Pinnacle or any of
their subsidiaries, respectively, and
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(d) for dividends paid in the ordinary course of business by any
subsidiaries (whether or not wholly-owned) of each of IFC and
Pinnacle);
(iii) grant any stock appreciation rights or grant any individual,
corporation or other entity any right to acquire any shares of its
capital stock (except as otherwise agreed in writing by Pinnacle and
IFC); or issue any additional shares of capital stock except pursuant
to (a) the exercise of stock options or warrants outstanding as of
November 14, 1996, (b) the Stock Option Agreements, or (c) as otherwise
described in this paragraph (iii);
(iv) 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 the Merger
Agreement;
(v) 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 the Merger 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;
(vi) 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;
(vii) 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;
(viii) solicit, encourage or authorize 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 of it or any of its
subsidiaries with any corporation or other entity other than as
provided by the Merger Agreement (and each party will promptly notify
the other of all of the relevant details relating to all inquiries and
proposals which it may receive relating to any of such matters);
(ix) settle any claim, action or proceeding involving money damages, except
in the ordinary course of business consistent with past practice;
(x) take any action (other than the exercise of its rights under the IFC
Stock Option Agreement or the Pinnacle Stock Option Agreement, as the
case may be) that would prevent or impede the Merger from qualifying (a)
for "pooling-of-interests" accounting treatment or (b) as a
"reorganization" within the meaning of Section 368 of the Code;
(xi) amend its certificate of incorporation or articles of incorporation, as
the case may be, or its by-laws;
(xii) other than in prior consultation with the other party, 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;
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(xiii) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in the
Merger 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 the Merger Agreement not being satisfied or in
a violation of any provision of the Merger Agreement, except, in every
case, as may be required by applicable law; or
(xiv) agree to, or make any commitment to, take any of the actions listed
above.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Each party's obligation to effect the Merger is subject to the satisfaction
or waiver, where permissible, of the following conditions at or prior to the
Effective Time:
(i) the Merger Agreement and the transactions contemplated thereby shall
have been adopted and approved by the respective requisite affirmative
votes of the holders of Pinnacle Common Stock and IFC Common Stock
entitled to vote thereon;
(ii) the shares of Pinnacle Common Stock which are to be issued to IFC
stockholders upon consummation of the Merger shall have been authorized
for listing on the Nasdaq National Market, subject to official notice
of issuance;
(iii) the Requisite Regulatory Approvals shall have been obtained and will
remain in full force and effect and all statutory waiting periods with
respect to such approvals will have expired;
(iv) the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part shall have become effective and no
stop order suspending the effectiveness will have been issued and no
proceedings for that purpose will have been initiated or threatened by
the Commission;
(v) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger or any of the other
transactions contemplated by the Merger Agreement shall be in effect and
no statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any court,
administrative agency or commission or other governmental authority or
instrumentality which prohibits or makes illegal consummation of the
Merger;
(vi) each party shall have received an opinion of its legal counsel (Silver,
Freedman & Taff, L.L.P. in the case of IFC, and Miller, Canfield,
Paddock and Stone, P.L.C. in the case of Pinnacle), in form and
substance reasonably satisfactory to IFC and Pinnacle, 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:
(a) the Merger will constitute a tax-free reorganization under Section
368(a)(1)(A) of the Code and IFC and Pinnacle will each be a party to
the reorganization, (b) no gain or loss will be recognized by IFC or
Pinnacle as a result of the Merger, (c) no gain or loss will be
recognized by the stockholders of IFC who exchange their IFC Common
Stock solely for Pinnacle Common Stock pursuant to the Merger, (d) the
tax basis of the Pinnacle Common Stock received by stockholders who
exchange all of their IFC Common Stock solely for Pinnacle Common Stock
in the Merger will be the same as the tax basis of the IFC Common Stock
surrendered in exchange therefor and (e) the holding period of Pinnacle
Common Stock received by stockholders of IFC in the Merger will include
the period during which the shares of IFC Common Stock surrendered in
exchange therefor were held (provided that such IFC Common Stock was
held as a capital asset by the holder of such IFC Common Stock at the
Effective Time);
(vii) each party shall have received an opinion of the other party's legal
counsel in form and substance reasonably satisfactory to such party and
its legal counsel, dated as of the Effective Time, as to (a) the
corporate organization and existence of the other party and its
subsidiaries; (b) the
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capitalization of the other party and its subsidiaries; (c) the
corporate power and authority of the other party and the compliance of
the Merger Agreement with (1) the charter and by-laws of the other
party, (2) applicable law, and (3) certain material agreements; (d)
governmental and third-party approvals; and (e) the absence of material
legal proceedings;
(viii) each party shall have received a letter from its independent certified
public accountants (Ernst & Young LLP in the case of IFC, and KPMG Peat
Marwick LLP in the case of Pinnacle) addressed to such party, regarding
the appropriateness of "pooling-of-interests" accounting for the Merger
under generally accepted accounting principles if closed and
consummated in accordance with the Merger Agreement;
(ix) each party shall have received a "comfort letter" from the other
party's independent certified public accountants regarding certain
financial information of such other party included or incorporated by
reference in the Registration Statement of which this Joint Proxy
Statement/ Prospectus is a part;
(x) each party shall have received a letter from its financial advisors
(Sandler O'Neill in the case of IFC, and ABN-AMRO Chicago Corporation in
the case of Pinnacle) addressed to IFC or Pinnacle, as the case may be,
to the effect that consummation of the Merger upon the terms and
conditions of the Merger Agreement is fair to such party's stockholders
from a financial point of view;
(xi) representations and warranties of the other party to the Merger
Agreement shall be true and correct in all material respects as of the
date of the Merger Agreement and (except to the extent such
representations and warranties speak as of an earlier date and except
for any changes to a party's disclosure schedule delivered to the other
party as of the Closing Date) as of the Closing Date as though made on
the Closing Date;
(xii) party shall have performed in all material respects all obligations
required to be performed by it under the Merger Agreement at or prior
to the Closing Date; and
(xiii) vent or circumstance shall have occurred which has, or is likely to
have a materially adverse effect on the other party or upon the right
of the other party or any of its subsidiaries to conduct their
businesses as presently conducted.
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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
condition that all of the IFC Rights be redeemed at a cost to IFC of not more
than $0.01 per each share of the IFC Common Stock issued and outstanding, that
all of said IFC Rights be extinguished, terminated and cancelled, without any
right of exercise, and that all of the IFC Rights only represent the right to
receive the Redemption Price in cash from IFC or Pinnacle, as the surviving
corporation, following the Merger.
No assurance can be provided as to if or when the Requisite Regulatory
Approvals necessary to consummate the Merger will be obtained or whether all of
the other conditions precedent to the Merger will be satisfied or waived by the
party permitted to do so. If the Merger is not effected on or before November
14, 1997, the Merger Agreement may be terminated by either Pinnacle or IFC,
unless the failure to effect the Merger by such date is due to the failure of
the party seeking to terminate the Merger Agreement to perform or observe
covenants and agreements of such party set forth therein.
EXPENSES
The Merger Agreement provides that Pinnacle and IFC will each pay its own
expenses in connection with the Merger and the transactions contemplated
thereby, except that Pinnacle and IFC will divide equally all printing costs,
filing fees and registration fees in connection with the Merger Agreement, this
Joint Proxy Statement/Prospectus and the Registration Statement of which this
Joint Proxy Statement/ Prospectus is a part.
EXTENSION AND WAIVER; AMENDMENT; TERMINATION
EXTENSION AND WAIVER. At any time prior to the Effective Time, Pinnacle and
IFC, by action taken or authorized by their respective Boards of Directors, may,
to the extent legally allowed, (i) extend the time for the performance of any of
the obligations or other acts of the other party, (ii) waive any inaccuracies in
the representations and warranties contained in the Merger Agreement or in any
document delivered pursuant the Merger Agreement and (iii) waive compliance with
any of the agreements or conditions contained in the Merger Agreement; except
that after any approval of the.transactions contemplated by the Merger Agreement
by the respective stockholders of IFC or Pinnacle, there may not be, without
further approval of such stockholders, any extension or waiver of the Merger
Agreement which reduces the amount or changes the form of the consideration to
be delivered to the holders of IFC Common Stock.
AMENDMENT. Subject to compliance with applicable law, the Merger Agreement
may be amended by Pinnacle and IFC, 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 IFC, except that after any approval of the transactions contemplated by the
Merger Agreement by the respective stockholders of Pinnacle or IFC, there may
not be, without further approval of such stockholders, any amendment of the
Merger Agreement which changes the amount or the form of the consideration to be
delivered to the holders of IFC Common Stock under the Merger Agreement, other
than as contemplated by the Merger Agreement. In the event the parties
contemplate an amendment to the Merger Agreement of the type which by law or
pursuant to the foregoing may not be made without stockholder approval, Pinnacle
and/or IFC, as the case may be, may resolicit proxies from the stockholders of
Pinnacle and/or of IFC, as the case may be, to obtain such approval.
TERMINATION. The Merger Agreement provides that the Merger may be
terminated at any time prior to the Effective Time, whether before or after
approval by Pinnacle's or IFC's stockholders:
(i) by mutual consent of Pinnacle and IFC 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 of directors;
(ii) by either the Pinnacle Board or the IFC Board if any governmental
entity which must grant a Requisite Regulatory Approval has denied approval
of the Merger and such denial has become final
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and non-appealable or any governmental entity of competent jurisdiction has
issued a final non-appealable order enjoining or otherwise prohibiting the
consummation of the transactions contemplated by the Merger Agreement;
(iii) by either the Pinnacle Board or IFC Board if the Merger is not
consummated on or before November 14, 1997, unless the failure of the
closing to occur by such date is due to the failure of the party seeking to
terminate the Merger Agreement to perform or observe the covenants and
agreements of such party set forth therein;
(iv) by either the Pinnacle Board or IFC Board (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained in the Merger Agreement) if
there has been a material breach of any of the covenants or agreements or
any of the representations or warranties set forth in the Merger Agreement
on the part of the other party, which breach is not cured within 45 days
following written notice to the party committing such breach, or which
breach, by its nature, cannot be cured prior to the Closing Date;
(v) by either Pinnacle or IFC if required Pinnacle or IFC stockholder
approvals have not been obtained by reason of the failure to obtain the
required vote at a duly held meeting of stockholders or any adjournment or
postponement thereof;
(vi) by either Pinnacle or IFC if any of the conditions to the
consummation of the Merger specified by Article VII of the Merger Agreement
to the obligation of the terminating party have not been satisfied on the
Closing Date; or
(vii) by Pinnacle if the disclosure schedule of IFC delivered to Pinnacle
on the Closing Date discloses any change from the disclosure schedule
delivered to Pinnacle by IFC in connection with the execution of the Merger
Agreement which has, or is likely to have, a material adverse effect on IFC
or any of IFC's wholly-owned subsidiaries; or by IFC if the disclosure
schedule of Pinnacle delivered to IFC on the Closing Date discloses any
change from the disclosure schedule delivered to IFC by Pinnacle in
connection with the execution of the Merger Agreement which has, or is
likely to have, a Material Adverse Effect on Pinnacle or any of Pinnacle's
wholly-owned subsidiaries.
Any termination pursuant to the foregoing shall be made by written notice
from the party seeking termination to the other party.
In the event of termination of the Merger Agreement, the Merger Agreement
will become void and have no effect except (i) for certain specified provisions
of the Merger Agreement dealing with confidentiality, the effect of termination,
the nonsurvival of representations and warranties, and expenses, and (ii) that
neither party will be relieved or released from any liabilities or damages
arising out of the willful breach by the other party of any provisions of the
Merger Agreement.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement prohibits IFC and its subsidiaries from, directly or
indirectly, authorizing or permitting any of their respective representatives or
affiliates to entertain, solicit, encourage or participate in any negotiations
concerning any "acquisition proposal," for IFC. The Merger Agreement also
prohibits Pinnacle and its subsidiaries from, directly or indirectly,
authorizing or permitting any of their respective representatives or affiliates
to entertain, solicit, encourage or participate in any negotiations concerning
any "acquisition proposal," for Pinnacle. For these purposes, an "acquisition
proposal" is defined as any (i) proposal pursuant to which any corporation,
partnership, person or other entity or group, other than a party to the Merger
Agreement, would acquire or participate in a merger or other business
combination involving Pinnacle, IFC or any of their respective subsidiaries,
directly or indirectly; (ii) proposal by which any corporation, partnership,
person or other entity or group, other than a party to the Merger Agreement,
would acquire the right to vote 10% or more of the capital stock of Pinnacle,
IFC or any of their respective subsidiaries entitled to vote thereon for the
election of directors; (iii) acquisition of 10% or more of the
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assets of Pinnacle, IFC or any of their respective subsidiaries; or (iv)
acquisition in excess of 10% of the outstanding capital stock of Pinnacle, IFC
or any of their respective subsidiaries, in each case other than as contemplated
by the Merger Agreement.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Pinnacle and IFC have agreed to use their best efforts to obtain the
Requisite Regulatory Approvals, which include approval from the Federal Reserve
Board and various state regulatory authorities, and intend to complete the
filing of applications and notifications to obtain such Requisite Regulatory
Approvals promptly after the date of this Joint Proxy Statement/Prospectus. The
Merger cannot proceed in the absence of the Requisite Regulatory Approvals.
There can be no assurance that such Requisite Regulatory Approvals will be
obtained, and, if obtained, there can be no assurance as to the date of any such
approvals or the absence of any litigation challenging such approvals. There can
likewise be no assurance that the United States Department of Justice (the
"Department of Justice") or any state attorney general will not attempt to
challenge the Merger on antitrust grounds or, if such a challenge is made, as to
the result thereof.
Pinnacle and IFC are not aware of any other material governmental approvals
or actions that are required prior to the parties' consummation of the Merger
other than those described below. It is presently contemplated that if any such
additional governmental approvals or actions are required, such approvals or
actions will be sought. There can be no assurance, however, that any such
additional approvals or actions will be obtained.
FEDERAL RESERVE BOARD. The Merger is subject to approval by the Federal
Reserve Board pursuant to Section 4 of the Bank Holding Company Act of 1956, as
amended (the "BHCA"). Pinnacle and IFC have filed the required application and
notification with the Federal Reserve Board for approval of the Merger.
In reviewing a transaction under the applicable statutes, the Federal
Reserve Board will consider the financial and managerial resources of the
companies and their subsidiary banks and the convenience and needs of the
communities to be served. As part of, or in addition to, consideration of the
above factors, it is anticipated that the Federal Reserve Board will consider
the regulatory status of Pinnacle and IFC, current and projected economic
conditions in the Midwest and the overall capital and safety and soundness
standards established by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") and the regulations promulgated thereunder.
In addition, under the Community Reinvestment Act of 1977, as amended (the
"CRA"), the Federal Reserve Board must take into account the record of
performance of each of Pinnacle and IFC in meeting the credit needs of the
entire community, including low and moderate income neighborhoods, served by
each company. Pinnacle's bank subsidiary has a satisfactory CRA rating with its
Federal regulator. IFC's thrift subsidiary has an outstanding CRA rating with
its Federal regulator. No bank or thrift subsidiary of either Pinnacle or IFC
has received any negative comments from its respective Federal regulator in its
last CRA examination relating to such ratings which were material and remain
unresolved.
The Federal Reserve Board will furnish notice and a copy of the application
for approval of the Merger to the Federal Deposit Insurance Corporation and the
appropriate state regulatory authorities. These agencies have 30 days to submit
their views and recommendations to the Federal Reserve Board. Furthermore, the
BHCA and Federal Reserve Board regulations require publication of notice of, and
the opportunity for public comment on, the application submitted by Pinnacle and
IFC for approval of the Merger and authorize the Federal Reserve Board to hold a
public hearing in connection therewith if the Federal Reserve Board determines
that such a hearing would be appropriate. Any such hearing or comments provided
by third parties could prolong the period during which the application is
subject to review by the Federal Reserve Board.
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In general, the Federal Reserve Board and the Department of Justice will
examine the impact of the Merger on competition in various product and
geographic markets, including competition for deposits and loans, especially
loans to small and middle market businesses.
Pinnacle's and IFC's rights to exercise their respective options under the
Stock Option Agreements are also subject to the prior approval of the Federal
Reserve Board, to the extent that the exercise of their respective options under
the Stock Option Agreements would result in Pinnacle or IFC, as the case may be,
owning more than 5% of the outstanding shares of IFC Common Stock or Pinnacle
Common Stock, respectively. In considering whether to approve Pinnacle's or
IFC's right to exercise its respective option, including its respective right to
purchase more than 5% of the outstanding shares of IFC Common Stock or Pinnacle
Common Stock, as the case may be, the Federal Reserve Board would generally
apply the same statutory criteria it would apply to its consideration of
approval of the Merger.
The acquisition by a bank holding company such as Pinnacle of a single
savings association is not subject to interstate banking limitations; however,
the acquisition of any additional savings associations other than in emergency
circumstances must be specifically authorized by the laws of the state in which
the additional savings association is located.
STATE REGULATORY AUTHORITIES. Applications or notifications have been filed
with the Financial Institutions Bureau of the State of Michigan and the
Department of Financial Institutions of the State of Indiana. These regulators
will review such applications or notifications pursuant to standards which are
similar to certain of the standards employed by the Federal Reserve Board, as
described above. In addition, the Merger may be reviewed by the attorneys
general in Indiana and Michigan. Such authorities may be empowered under the
applicable state laws and regulations to investigate and/or disapprove the
Merger under the circumstances and based upon the review set forth in applicable
state laws and regulations. There can be no assurance that one or more state
attorneys general will not file an antitrust action to enjoin the Merger.
THERE CAN BE NO ASSURANCE THAT THE REGULATORY AUTHORITIES HAVING
JURISDICTION WILL APPROVE THE MERGER AND IF THE MERGER IS APPROVED, THERE CAN BE
NO ASSURANCE AS TO THE DATE OF SUCH APPROVALS. THERE CAN ALSO BE NO ASSURANCE
THAT ANY SUCH APPROVALS WILL NOT CONTAIN A MATERIALLY BURDENSOME CONDITION OR
REQUIREMENT WHICH CAUSES SUCH APPROVALS TO FAIL TO SATISFY THE CONDITIONS TO
CONSUMMATION OF THE MERGER SET FORTH IN THE MERGER AGREEMENT. THERE CAN LIKEWISE
BE NO ASSURANCE THAT THE DEPARTMENT OF JUSTICE OR ONE OR MORE STATE ATTORNEYS
GENERAL WILL NOT CHALLENGE THE MERGER, OR IF SUCH A CHALLENGE IS MADE, AS TO THE
RESULT THEREOF.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Pinnacle's management and the Pinnacle Board, and IFC's
management and the IFC Board may be deemed to have certain interests in the
Merger that are in addition to their interests as stockholders of Pinnacle or
IFC, as the case may be. The Pinnacle Board and the IFC Board were aware of
these interests and considered them, among other matters, in approving the
Merger Agreement, the Stock Option Agreements and the transactions contemplated
thereby. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER."
ANTICIPATED ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a
"pooling-of-interests" transaction under generally accepted accounting
principles. Under such method of accounting, holders of IFC Common Stock will be
deemed to have combined their existing voting common stock interest with that of
holders of Pinnacle Common Stock by exchanging their shares of IFC Common Stock
for shares of Pinnacle Common Stock. Accordingly, the book value of the assets,
liabilities and stockholders' equity of IFC, as reported on its consolidated
balance sheet, will be carried over to the consolidated balance sheet of the
combined corporation at their recorded amounts and no goodwill will be created.
The combined corporation will be able to include in its consolidated income the
consolidated income of both IFC and Pinnacle
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for the entire fiscal year in which the Merger occurs (however, certain expenses
incurred to effect the Merger must be treated as current charges against income
rather than adjustments to the balance sheet), and the reported income of the
separate institutions for prior periods will be combined and restated as income
of the combined corporation. The unaudited pro forma combined financial
information contained in this Joint Proxy Statement/Prospectus has been prepared
using the "pooling-of-interests" accounting method to account for the Merger and
includes the earnings and assets of Maco as if the Maco Acquisition had occurred
as of the beginning of the earliest period presented. See "PRO FORMA COMBINED
FINANCIAL INFORMATION."
The Merger Agreement provides that a condition to the consummation of the
Merger is receipt by Pinnacle of a letter from KPMG Peat Marwick LLP and receipt
by IFC of a letter from Ernst & Young LLP regarding the appropriateness of
"pooling-of-interests" accounting for the Merger under generally accepted
accounting principles if closed and consummated in accordance with the Merger
Agreement. In the event such condition is not met, Pinnacle or IFC may terminate
the Merger Agreement.
The issuance of shares of IFC Common Stock pursuant to the IFC Stock Option
Agreement, or the issuance of shares of Pinnacle Common Stock pursuant to the
Pinnacle Stock Option Agreement, may prevent the Merger from qualifying as a
"pooling-of-interests" for accounting purposes. In such event, the Merger
Agreement may be terminated at the option of either Pinnacle or IFC. See "MERGER
AGREEMENT--Extensions and Waiver; Amendment; Termination."
RESALE OF PINNACLE COMMON STOCK; RESTRICTIONS ON TRANSFER
The Pinnacle Common Stock issued pursuant to the Merger will be freely
transferable under the Securities Act, except for shares issued to any IFC
stockholder who may be deemed to be an affiliate of Pinnacle for purposes of
Rule 144 promulgated under the Securities Act ("Rule 144") or an affiliate of
IFC for purposes of Rule 145 promulgated under the Securities Act ("Rule 145")
(each an "Affiliate"). Affiliates will include persons (generally executive
officers, directors and 10% stockholders) who control, are controlled by, or are
under common control with (i) Pinnacle or IFC at the time of the IFC Special
Meeting or (ii) the combined corporation at or after the Effective Time.
Rule 144 and Rule 145 will restrict the sale of Pinnacle Common Stock
received in the Merger by Affiliates and certain of their family members and
related interests. Generally speaking, during the two years following the
Effective Time, those persons who are Affiliates of IFC at the time of the IFC
Special Meeting, provided they are not Affiliates of Pinnacle at or following
the Effective Time, may publicly resell any Pinnacle Common Stock received by
them in the Merger, subject to certain limitations as to, among other things,
the amount of Pinnacle Common Stock sold by them in any three-month period and
as to the manner of sale. After the two-year period, such Affiliates may resell
their shares without such restrictions so long as there is adequate current
public information with respect to the combined corporation as required by Rule
144. Persons who become Affiliates of Pinnacle prior to, or at or after the
Effective Time, may publicly resell the Pinnacle Common Stock received by them
in the Merger subject to similar limitations and subject to certain filing
requirements specified in Rule 144.
The ability of Affiliates to resell shares of Pinnacle Common Stock received
in the Merger under Rule 144 or Rule 145 as summarized herein generally will be
subject to Pinnacle's having satisfied its Exchange Act reporting requirements
for specified periods prior to the time of sale. Affiliates also would be
permitted to resell Pinnacle Common Stock received in the Merger pursuant to an
effective registration statement under the Securities Act or another available
exemption from the registration requirements of the Securities Act.
This Joint Proxy Statement/Prospectus does not cover any resales of Pinnacle
Common Stock received by persons who may be deemed to be Affiliates of Pinnacle
or IFC in the Merger.
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Commission guidelines regarding qualifying for the "pooling-of-interests"
method of accounting also limit sales of shares of the acquiring and acquired
company by affiliates of either company in a business combination. Commission
guidelines indicate further that the "pooling-of-interests" method of accounting
will generally not be challenged on the basis of sales by affiliates of the
acquiring or acquired company if they do not dispose of any of the shares of the
corporation they own or shares of a corporation they receive in connection with
a merger during the period beginning 30 days before the merger and ending when
financial results covering at least 30 days of post-merger operations of the
combined entity have been published.
Each of IFC and Pinnacle has agreed in the Merger Agreement to use its best
efforts to cause each person who is an Affiliate (for purposes of Rule 145 and
for purposes of qualifying the Merger for "pooling-of-interests" accounting
treatment) of such party to deliver to the other party a written agreement
intended to ensure compliance with the Securities Act and preserve the ability
to treat the Merger as a "pooling-of-interests." In addition, Pinnacle, as the
surviving corporation, has agreed in the Merger Agreement to use its best
efforts to publish not 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, combined sales and net income figures as contemplated by and in
accordance with the terms of the Commission's Accounting Series Release No. 135.
NO DISSENTERS' RIGHTS/NO APPRAISAL RIGHTS
Holders of shares of Pinnacle Common Stock will not have dissenters' rights
under the MBCA in connection with, or as a result of, the matters to be acted
upon at the Pinnacle Special Meeting. Holders of shares of IFC Common Stock will
not have dissenters' rights under the DGCL in connection with, or as a result
of, the matters to be acted upon at the IFC Special Meeting.
STOCK OPTION AGREEMENTS
Concurrently with the execution of the Merger Agreement, Pinnacle (as
issuer) and IFC (as grantee) entered into the Pinnacle Stock Option Agreement,
pursuant to which Pinnacle granted to IFC the Pinnacle Option. At the same time,
IFC (as issuer) and Pinnacle (as grantee) entered into the IFC Stock Option
Agreement, pursuant to which IFC granted to Pinnacle the IFC Option. Pinnacle
and IFC approved and entered into the Stock Option Agreements to induce each
other to enter into the Merger Agreement. The Stock Option Agreements are
intended to increase the likelihood that the Merger will be consummated in
accordance with the terms of the Merger Agreement. Consequently, certain aspects
of the Stock Option Agreements may have the effect of discouraging persons who
might now or prior to the Effective Time be interested in acquiring all of or a
significant interest in Pinnacle or IFC from considering or proposing such an
acquisition.
Except as otherwise noted below, the terms and conditions of the Pinnacle
Stock Option Agreement and the IFC Stock Option Agreement are identical in all
material respects. For purposes of this Section, except as otherwise noted, (i)
the Pinnacle Stock Option Agreement or the IFC Option Agreement, as the case may
be, is sometimes referred to as the "Issuer Option Agreement", (ii) Pinnacle, as
issuer of the Pinnacle Common Stock, and IFC, as issuer of the IFC Common Stock,
upon the exercise of the Pinnacle Option and the IFC Option, respectively, are
sometimes individually referred to as the "Issuer", (iii) Pinnacle and IFC, as
the holder of the IFC Option and the Pinnacle Option, respectively, are
sometimes individually referred to as the "Optionee", (iv) the Pinnacle Option
or the IFC Option, as the case may be, is sometimes referred to as the "Issuer
Option" and (v) the Pinnacle Common Stock and the IFC Common Stock is referred
to as "Issuer Common Stock."
The Pinnacle Stock Option Agreement provides for the purchase by IFC of
591,678 shares (the "Pinnacle Option Shares" or the "Issuer Option Shares", as
the case may be) of Pinnacle Common Stock at an exercise price of $24.625 per
share, payable in cash. The Pinnacle Option Shares, if issued pursuant to
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the Pinnacle Option Agreement, will in no event exceed 9.9% of the Pinnacle
Common Stock issued and outstanding without giving effect to the issuance of any
Pinnacle Common Stock pursuant to the Pinnacle Option.
The IFC Stock Option Agreement provides for the purchase by Pinnacle of
470,361 shares (the "IFC Option Shares" or the "Issuer Option Shares", as the
case may be) of IFC Common Stock at an exercise price of $19.875 per share,
payable in cash. The IFC Stock Option Shares, if issued pursuant to the IFC
Option Agreement, will in no event exceed 9.9% of the IFC Common Stock issued
and outstanding without giving effect to the issuance of any IFC Common Stock
pursuant to the IFC Option.
The number of shares of Issuer Common Stock subject to the Issuer Option
will be increased or decreased to the extent that the Issuer issues additional
shares of Issuer Common Stock (otherwise than pursuant to an exercise of the
Issuer Option) or redeems, repurchases, retires or otherwise causes to be no
longer outstanding shares of Issuer Common Stock such that the number of shares
of Issuer Common Stock subject to the Issuer Option continues to equal 9.9% of
the Issuer Common Stock then issued and outstanding, without giving effect to
the issuance of shares of Issuer Common Stock pursuant to an exercise of the
Issuer Option. In the event of any change in, or distributions in respect of,
the Issuer Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of shares,
distributions on or in respect of the Issuer Common Stock that would be
prohibited under the terms of the Merger Agreement, or the like, the type and
number of shares of Issuer Common Stock subject to the Issuer Option, and the
applicable exercise price per Issuer Option Share, will be appropriately
adjusted in such manner as to fully preserve the economic benefits provided
under the Issuer Option Agreement.
The Optionee or any other holder or holders of the Issuer Option
(collectively, the "Holder") may exercise the Issuer Option, in whole or in
part, by sending notice within 90 days (subject to extension as provided in the
Issuer Option Agreement) after the occurrence of both an "Initial Triggering
Event" and a "Subsequent Triggering Event" (as such terms are defined herein)
prior to termination of the Issuer Option. The term "Initial Triggering Event"
is defined as the occurrence of any of the following events:
(i) the Issuer or any of its subsidiaries (each an "Issuer Subsidiary"),
without having received the Optionee's prior written consent, shall have
entered into an agreement to engage in an Acquisition Transaction (as
defined herein) with any person (the term "person" for purposes of the
Issuer Option Agreement having the meaning assigned thereto in Sections
3(a)(9) and 13(d)(3) of the Exchange Act, and the rules and regulations
thereunder) other than the Optionee or any of its subsidiaries (each an
"Optionee Subsidiary") or the Board of Directors of the Issuer shall have
recommended that the stockholders of the Issuer approve or accept any such
Acquisition Transaction. For purposes of the Issuer Option Agreement,
"Acquisition Transaction" shall mean (w) a merger or consolidation, or any
similar transaction, involving the Issuer or any "Significant Subsidiary"
(as such term is defined in Rule 1-02 of Regulation S-X promulgated by the
Commission) of the Issuer, (x) a purchase, lease, or other acquisition of
all or a substantial portion of the assets or deposits of the Issuer or any
Significant Subsidiary of the 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 voting power of the 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 Issuer Subsidiaries, be deemed to be an
Acquisition Transaction, provided 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) the Issuer or any Issuer Subsidiary, without having received
Optionee's prior written consent, shall have authorized, recommended,
proposed, or publicly announced its intention to authorize,
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recommend, or propose, to engage in an Acquisition Transaction with any
person other than the Optionee or an Optionee Subsidiary, or the Board of
Directors of the Issuer shall have publicly withdrawn or modified, or
publicly announced its interest to withdraw or modify, in any manner adverse
to the Optionee, its recommendation that the stockholders of the Issuer
approve the transactions contemplated by the Merger Agreement;
(iii) any person other than the Optionee, any Optionee 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 of the Issuer
Option Agreement, beneficially owned 10% or more of the outstanding shares
of the Issuer Common Stock, and (b) would have been eligible to use Schedule
13G but for the fact that such person owned 10% or more of the outstanding
shares of the Issuer Common Stock) shall have acquired beneficial ownership
or the right to acquire beneficial ownership of 10% or more of the
outstanding shares of the Issuer Common Stock (the term "beneficial
ownership" for purposes of the Issuer Option Agreement having the meaning
assigned thereto in Section 13(d) of the Exchange Act, and the rules and
regulations thereunder);
(iv) any person other than the Optionee or any Optionee Subsidiary shall
have made a bona fide proposal to the 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 an overture is made by a third party to the Issuer or its
stockholders to engage in an Acquisition Transaction, the Issuer shall have
breached any covenant or obligation contained in the Merger Agreement and
such breach (x) would entitle the Optionee to terminate the Merger Agreement
and (y) shall not have been cured prior to the date of the written notice
exercising the Issuer Option; or
(vi) any person other than the Optionee or any Optionee Subsidiary,
other than in connection with a transaction to which the Optionee has given
its prior written consent, shall have filed an application or notice with
the Federal Reserve Board 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.
"Subsequent Triggering Event" is defined as either (A) the acquisition by
any person of beneficial ownership of 20% or more of the then outstanding Issuer
Common Stock, or (B) the occurrence of the Initial Triggering Event described in
clause (i) above, except that the percentage referred to in subclause (y)
thereof shall be 20%.
Within 90 days (subject to extension as provided in the Issuer Option
Agreement) after a Subsequent Triggering Event prior to the termination of the
Issuer Option, the Optionee (on behalf of itself or any subsequent Holder) may
demand that the Issuer Option and the related Issuer Option Shares be registered
under the Securities Act. Upon such demand, the Issuer must effect such
registration promptly, subject to certain exceptions. The Optionee is entitled
to two such registrations.
The Issuer Option terminates (i) at the Effective Time, (ii) upon
termination of the Merger Agreement in accordance with the terms of the Merger
Agreement prior to the occurrence of an Initial Triggering Event except a
termination by the Optionee due to the material breach by the Issuer of any
representation, warranty, covenant or other agreement in the Merger Agreement
(unless the breach by the Issuer giving rise to such right of termination is
nonvolitional), or (iii) 12 months after termination of the Merger Agreement
following the occurrence of an Initial Triggering Event or if the termination is
by the Optionee due to the material breach by the Issuer of any representation,
warranty, covenant or other agreement in the Merger Agreement (unless the breach
by the Issuer giving rise to such right of termination is nonvolitional)
(provided that if an Initial Triggering Event occurs after or continues beyond
such termination and prior to the passage of such 12-month period, the Issuer
Option will terminate twelve
56
<PAGE>
months from the expiration of the last Initial Triggering Event to expire, but
in no event more than 18 months after such termination).
Immediately prior to the occurrence of a "Repurchase Event" (as hereinafter
defined), the Issuer is required (i) at the request of the holder delivered
prior to termination of the Issuer Option, to repurchase the Issuer Option from
the holder at a price (the "Issuer Option Repurchase Price" ) equal to the
amount by which (x) the "Market/Offer Price" (as hereinafter defined) exceeds
(y) the then applicable Issuer Option exercise price, multiplied by the number
of shares for which the Issuer Option may then be exercised; and (ii) at the
request of the owner of Issuer Option Shares from time to time (the "Owner")
delivered within 90 days of such occurrence, to repurchase such number of the
Issuer Option Shares from the Owner as the Owner designates at a price per share
(the "Issuer Option Share Repurchase Price") equal to the Market/Offer Price.
"Market/Offer Price" means the highest of (A) the price per share of the Issuer
Common Stock at which a tender offer or exchange offer therefor has been made,
(B) the price per share of the Issuer Common Stock to be paid by any third party
pursuant to an agreement with the Issuer, (C) the highest closing price for
shares of the Issuer Common Stock within the six-month period immediately
preceding the date the Holder gives notice of the required repurchase of the
Issuer Option or the Owner gives notice of the required repurchase of the Issuer
Option Shares, as the case may be, and (D) in the event of the sale of all or a
substantial portion of the 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 the
Issuer divided by the number of shares of the Issuer Common Stock then
outstanding. "Repurchase Event" means (i) the consummation of any merger,
consolidation or similar transaction involving the Issuer or any purchase, lease
or other acquisition of all or a substantial portion of the assets of the
Issuer, other than any such transaction which would not constitute an
Acquisition Transaction (as defined above) or (ii) the acquisition by any person
of beneficial ownership of 50% or more of then outstanding shares of the Issuer
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" (as defined in the Stock Option Agreements).
In the event that prior to termination of the Issuer Option, the Issuer
enters into an agreement (i) to consolidate with or merge into any person other
than the Optionee 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 the Optionee or one of its subsidiaries to merge into the Issuer with
the Issuer as the continuing or surviving corporation, but, in connection
therewith, the then outstanding shares of the Issuer Common Stock are changed
into or exchanged for securities of any other person or cash or any other
property, or the then outstanding shares of the Issuer Common Stock 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 transfer all or
substantially all of its assets to any entity other than the Optionee or one of
its subsidiaries, then such agreement shall provide that the Issuer Option be
converted into or exchanged for an option (a "Substitute Option") to purchase
shares of common stock of, at the holder's option, either (x) the continuing or
surviving corporation of a merger or consolidation or the transferee of all or
substantially all of the Issuer's assets, or (y) the person controlling such
continuing or surviving corporation or transferee. The number of shares subject
to the Substitute Option and the exercise price per share will be determined in
accordance with a formula in the Issuer Option Agreement. To the extent
possible, the Substitute Option will contain terms and conditions that are the
same as those in the Issuer Option.
The issuer of the Substitute Option will be required to repurchase the
Substitute Option at the request of the holder thereof and to repurchase any
shares of such issuer's common stock ("Substitute Common Stock") issued upon
exercise of a Substitute Option ("Substitute Shares of Issuer Common Stock") at
the request of the owner thereof. The repurchase price for a Substitute Option
will equal the amount by which (A) the "Highest Closing Price" (as hereinafter
defined) exceeds (B) 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 the Optionee's reasonable out-of-pocket expenses.
The
57
<PAGE>
repurchase price for Substitute Shares of Issuer Common Stock shall equal the
Highest Closing Price multiplied by the number of Substitute Shares of Issuer
Common Stock to be repurchased, plus the Optionee's reasonable out-of-pocket
expenses. "Highest Closing Price" means the highest closing price for shares of
Substitute Common Stock within the six-month period immediately preceding the
date the holder gives notice of the required repurchase of the Substitute Option
or the owner gives notice of the required repurchase of Substitute Shares of
Issuer Common Stock, as the case may be.
Neither the Issuer nor the Optionee may assign any of its respective rights
and obligations under the Issuer Option Agreement or the Issuer Option to any
other person without the other party's express written consent, except that if a
Subsequent Triggering Event occurs prior to termination of the Issuer Option,
within 90 days thereafter (subject to extension as provided in the Issuer Option
Agreement), the Optionee, subject to the provisions of the Issuer Option
Agreement, may assign, in whole or in part, its rights and obligations
thereunder; provided, however, that until 15 days after the Federal Reserve
Board approves an application by the Optionee to acquire the Issuer Option
Shares, the Optionee may not assign its rights under the Issuer 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
the Issuer, (iii) an assignment to a single party for the purpose of conducting
a widely dispersed public distribution on the Optionee's behalf, or (iv) any
other manner approved by the Federal Reserve Board.
The rights and obligations of the Issuer and the Optionee under the Issuer
Option Agreement are subject to receipt of any required regulatory approvals,
and both parties have agreed to use their best efforts in connection therewith.
These include, but are not limited to, causing the shares of the Issuer Common
Stock to be listed for quotation on the Nasdaq National Market upon official
notice of issuance and applying to the Federal Reserve Board for approval to
acquire the Issuer Option Shares.
58
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Pinnacle Financial Services, Inc. and Indiana Federal
Corporation Unaudited Pro Forma Combined Statement of Income Summary combines
the historical Consolidated Statements of Income of Pinnacle and IFC giving
effect to the Merger, which will be accounted for as a "pooling-of-interests,"
as if it and the Maco Acquisition had been effective as of the beginning of the
earliest period indicated and after giving effect to the pro forma adjustments
described in the Notes to Pinnacle Financial Services, Inc. and Indiana Federal
Corporation Unaudited Pro Forma Combined Financial Statements. For a description
of "pooling-of-interests" accounting with respect to the Merger, see "THE MERGER
- -- Anticipated Accounting Treatment." This information should be read in
conjunction with the historical consolidated financial statements of Pinnacle,
including the notes thereto, which appear elsewhere in this Joint Proxy
Statement/Prospectus, the historical consolidated financial statements of IFC,
including the notes thereto, which are incorporated by reference in this Joint
Proxy Statement/Prospectus, and the condensed consolidated historical financial
data for Pinnacle and IFC and the other pro forma financial information,
including the notes thereto, which appear elsewhere in this Joint Proxy
Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"PINNACLE CONSOLIDATED FINANCIAL STATEMENTS." The effect of the expected
one-time merger and restructuring charges of approximately $4.2 million
(after-tax) have been reflected in the unaudited pro forma combined balance
sheet; however, since the expected merger and restructuring charges are
nonrecurring they have not been reflected in the unaudited pro forma combined
statements of income. (See "-- Notes to Pinnacle Financial Services, Inc. and
Indiana Federal Corporation Unaudited Pro Forma Combined Financial Statements"
for details of the expected one-time merger and restructuring charges.) The pro
forma financial data do not give effect to any anticipated cost savings in
connection with the Merger and are not necessarily indicative of either the
results that actually would have occurred had the Merger and
59
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME SUMMARY (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the Maco Acquisition been consummated on the dates indicated or the results that
may be obtained in the future.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable................................ $72,178 $68,670 $92,763 $71,053 $75,444
Tax-exempt............................. 282 328 427 414 557
Interest and dividends on securities:
Taxable................................ 21,236 18,609 25,816 22,698 23,441
Tax-exempt............................. 830 847 1,145 1,256 1,073
Interest on federal funds sold........... 213 257 343 267 349
Interest on due from banks............... 460 679 979 548 680
------------ ------------ ------------ ------------ ------------
Total interest income.................. 95,199 89,390 121,473 96,236 101,544
------------ ------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits..................... 40,732 37,672 51,602 39,644 42,678
Interest on securities sold under
repurchase agreements and other
borrowings............................. 10,975 10,618 14,177 6,953 9,046
------------ ------------ ------------ ------------ ------------
Total interest expense................. 51,707 48,290 65,779 46,597 51,724
------------ ------------ ------------ ------------ ------------
Net interest income........................ 43,492 41,100 55,694 49,639 49,820
Provision for loan losses.................. 710 432 522 484 1,457
------------ ------------ ------------ ------------ ------------
Net interest income after provision for
loan losses.............................. 42,782 40,668 55,172 49,155 48,363
------------ ------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Other.................................... 8,132 6,844 9,700 8,888 13,327
Securities gains, net.................... 409 616 785 134 961
------------ ------------ ------------ ------------ ------------
Total non-interest income.............. 8,541 7,460 10,485 9,022 14,288
NON-INTEREST EXPENSE:
Salaries and benefits.................... 14,325 14,069 19,516 16,510 15,519
Occupancy and equipment.................. 5,097 5,059 7,286 6,012 5,848
Other.................................... 18,369 13,069 17,921 14,293 15,247
------------ ------------ ------------ ------------ ------------
Total non-interest expense............. 37,791 32,197 44,723 36,815 36,614
Income before income tax expense........... 13,532 15,931 20,934 21,362 26,037
Income tax expense....................... 4,046 5,077 6,058 7,088 8,859
------------ ------------ ------------ ------------ ------------
Net income(1)............................ $9,486 $10,854 $14,876 $14,274 $17,178
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
NET INCOME PER SHARE:
Primary.................................. $0.89 $1.01 $1.37 $1.33 $1.59
Fully diluted............................ $0.89 $1.01 $1.37 $1.33 $1.59
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary.................................. 10,678,834 10,736,679 10,872,808 10,701,156 10,799,330
Fully diluted............................ 10,678,834 10,736,679 10,872,808 10,701,156 10,799,330
</TABLE>
60
<PAGE>
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Pinnacle Financial Services, Inc. and Indiana Federal
Corporation Unaudited Pro Forma Combined Statement of Income combine the
historical Consolidated Statements of Income of Pinnacle and IFC giving effect
to the Merger, which will be accounted for as a "pooling-of-interests," as if it
and the Maco Acquisition had been effective as of the beginning of the earliest
period indicated and after giving effect to the pro forma adjustments described
in the Notes to Pinnacle Financial Services, Inc. and Indiana Federal
Corporation Unaudited Pro Forma Combined Financial Statements. For a description
of "pooling-of-interests" accounting with respect to the Merger, see "THE MERGER
- -- Anticipated Accounting Treatment." This information should be read in
conjunction with the historical consolidated financial statements of Pinnacle,
including the notes thereto, which appear elsewhere in this Joint Proxy
Statement/Prospectus, the historical consolidated financial statements of IFC,
including the notes thereto, which are incorporated by reference in this Joint
Proxy Statement/Prospectus, and the condensed consolidated historical financial
data for Pinnacle and IFC and the other pro forma financial information,
including the notes thereto, which appear elsewhere in this Joint Proxy
Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"PINNACLE CONSOLIDATED FINANCIAL STATEMENTS." The effect of the expected one
time merger and restructuring charges of approximately $4.2 million (after-tax)
have been reflected in the unaudited pro forma combined balance sheet; however,
since the expected merger and restructuring charges are nonrecurring they have
not been reflected in the unaudited pro forma combined statements of income.
(See "-- Notes to Pinnacle Financial Services, Inc. and Indiana Federal
Corporation Unaudited Pro Forma Combined Financial Statements" for details of
the expected one-time merger and restructuring charges.) The pro forma financial
data do not give effect to any anticipated cost savings in connection with the
Merger and are not
61
<PAGE>
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
necessarily indicative of either the results that actually would have occurred
had the Merger and the Maco Acquisition been consummated on the dates indicated
or the results that may be obtained in the future.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------
PINNACLE IFC PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable................................................. $36,501 $35,677 $72,178
Tax-exempt.............................................. 136 146 282
Interest and dividends on securities:
Taxable................................................. 15,771 5,465 21,236
Tax-exempt.............................................. 785 45 830
Interest on federal funds sold............................ 150 63 213
Interest on due from banks................................ 455 5 460
---------- ---------- ----------- ------------
Total interest income................................... 53,798 41,401 95,199
---------- ---------- ----------- ------------
INTEREST EXPENSE:
Interest on deposits...................................... 22,583 18,149 40,732
Interest on securities sold under repurchase agreements
and other borrowings.................................... 6,184 4,791 10,975
---------- ---------- ----------- ------------
Total interest expense ................................. 28,767 22,940 51,707
---------- ---------- ----------- ------------
Net interest income......................................... 25,031 18,461 43,492
Provision for loan losses................................... 245 465 710
---------- ---------- ----------- ------------
Net interest income after provision for loan losses......... 24,786 17,996 42,782
---------- ---------- ----------- ------------
NON-INTEREST INCOME:
Other..................................................... 5,239 2,893 8,132
Securities gains, net..................................... 357 52 409
---------- ---------- ----------- ------------
Total non-interest income............................... 5,596 2,945 8,541
NON-INTEREST EXPENSES:
Salaries and benefits..................................... 7,851 6,474 14,325
Occupancy and equipment................................... 2,744 2,353 5,097
Other..................................................... 10,043 8,326 18,369
---------- ---------- ----------- ------------
Total non-interest expense.............................. 20,638 17,153 37,791
Income before income tax expense.......................... 9,744 3,788 13,532
Income tax expense........................................ 3,459 587 4,046
---------- ---------- ----------- ------------
Net income................................................ $6,285 $3,201 $9,486
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
Net Income Per Share:
Primary................................................... $1.07 $0.67 $0.89
Fully diluted............................................. $1.07 $0.67 $0.89
Weighted Average Shares Outstanding:
Primary................................................... 5,873,541 4,805,293 10,678,834
Fully diluted............................................. 5,873,541 4,805,293 10,678,834
</TABLE>
62
<PAGE>
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
-----------------------------------------------------------------------------------------------
PURCHASE ADJUSTED
PINNACLE MACO ACCOUNTING PINNACLE IFC PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable..................... $20,865 $13,104 $(158)(2) $33,811 $34,859 $68,670
Tax-exempt.................. 168 -- 168 160 328
Interest and dividends on
securities:
Taxable..................... 4,017 8,756 62(3) 12,318 6,291 18,609
Tax-exempt.................. 667 129 (517)(4) 796 51 847
Interest on federal funds
sold........................ 182 -- 182 75 257
Interest on due from banks.... 43 620 663 16 679
---------- ---------- ------------- ---------- ---------- ----------- ----------
Total interest income....... 25,942 22,609 (613) 47,938 41,452 89,390
---------- ---------- ------------- ---------- ---------- ----------- ----------
INTEREST EXPENSE:
Interest on deposits.......... 10,932 10,082 21,014 16,658 37,672
Interest on securities sold
under repurchase agreements
and other borrowings........ 1,253 4,240 (566)(5) 4,927 5,691 10,618
---------- ---------- ------------- ---------- ---------- ----------- ----------
Total interest expense...... 12,185 14,322 (566) 25,941 22,349 48,290
---------- ---------- ------------- ---------- ---------- ----------- ----------
Net interest income............. 13,757 8,287 (47) 21,997 19,103 41,100
Provision for loan losses....... 195 60 255 177 432
---------- ---------- ------------- ---------- ---------- ----------- ----------
Net interest income after
provision for loan losses..... 13,562 8,227 (47) 21,742 18,926 40,668
---------- ---------- ------------- ---------- ---------- ----------- ----------
NON-INTEREST INCOME:
Other......................... 3,042 1,078 4,120 2,724 6,844
Securities gains (losses),
net......................... 181 (5) 176 440 616
---------- ---------- ------------- ---------- ---------- ----------- ----------
Total non-interest income... 3,223 1,073 4,296 3,164 7,460
NON-INTEREST EXPENSE:
Salaries and benefits......... 4,807 2,604 7,411 6,658 14,069
Occupancy and equipment....... 1,387 1,281 89(6) 2,757 2,302 5,059
Other......................... 3,947 2,954 621(7) 7,522 5,547 13,069
---------- ---------- ------------- ---------- ---------- ----------- ----------
Total non-interest
expense................... 10,141 6,839 710 17,690 14,507 32,197
Income before income tax
expense..................... 6,644 2,461 (757) 8,348 7,583 15,931
Income tax expense............ 2,069 919 (46)(8) 2,942 2,135 5,077
---------- ---------- ------------- ---------- ---------- ----------- ----------
Net income.................... $4,575 $1,542 $(711) $5,406 $5,448 $10,854
---------- ---------- ------------- ---------- ---------- ----------
---------- ---------- ------------- ---------- ---------- ----------
Net Income Per Share:
Primary....................... $1.20 $0.92 $1.12 $1.01
Fully diluted................. $1.20 $0.92 $1.12 $1.01
Weighted Average Shares
Outstanding:
Primary....................... 3,821,904 2,051,454 5,873,358 4,863,321 10,736,679
Fully diluted................. 3,821,904 2,051,454 5,873,358 4,863,321 10,736,679
</TABLE>
63
<PAGE>
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------------------
PURCHASE ADJUSTED
PINNACLE MACO ACCOUNTING PINNACLE IFC PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(9) ADJUSTMENTS HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ------------- ------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable..................... $29,542 $16,749 $(210)(2) $46,081 $46,682 $92,763
Tax-exempt.................. 214 -- 214 213 427
Interest and dividends on
securities:
Taxable..................... 6,321 11,909 82(3) 17,716 8,100 25,816
(596)(4)
Tax-exempt.................. 905 172 1,077 68 1,145
Interest on federal funds
sold........................ 257 -- 257 86 343
Interest on due from banks.... 256 702 958 21 979
---------- ------------- ------------- ---------- ---------- ----------- ----------
Total interest income....... 37,495 29,532 (724) 66,303 55,170 121,473
---------- ------------- ------------- ---------- ---------- ----------- ----------
INTEREST EXPENSE:
Interest on deposits.......... 16,093 13,086 29,179 22,423 51,602
Interest on securities sold
under repurchase agreements
and other borrowings........ 2,058 5,339 (652)(5) 6,745 7,432 14,177
---------- ------------- ------------- ---------- ---------- ----------- ----------
Total interest expense...... 18,151 18,425 (652) 35,924 29,855 65,779
---------- ------------- ------------- ---------- ---------- ----------- ----------
Net interest income............. 19,344 11,107 (72) 30,379 25,315 55,694
Provision for loan losses....... 225 120 345 177 522
---------- ------------- ------------- ---------- ---------- ----------- ----------
Net interest income after
provision for loan losses..... 19,119 10,987 (72) 30,034 25,138 55,172
---------- ------------- ------------- ---------- ---------- ----------- ----------
NON-INTEREST INCOME:
Other......................... 4,236 1,225 5,461 4,239 9,700
Securities gains (losses),
net......................... 350 (5) 345 440 785
---------- ------------- ------------- ---------- ---------- ----------- ----------
Total non-interest income... 4,586 1,220 5,806 4,679 10,485
NON-INTEREST EXPENSE:
Salaries and benefits......... 7,100 3,461 10,561 8,955 19,516
Occupancy and equipment....... 2,044 1,674 118(6) 3,836 3,450 7,286
Other......................... 5,492 3,811 828(7) 10,131 7,790 17,921
---------- ------------- ------------- ---------- ---------- ----------- ----------
Total non-interest expense.. 14,636 8,946 946 24,528 20,195 44,723
Income before income tax
expense..................... 9,069 3,261 (1,018) 11,312 9,622 20,934
Income tax expense ........... 2,610 1,195 (65)(8) 3,740 2,318 6,058
---------- ------------- ------------- ---------- ---------- ----------- ----------
Net income.................... $6,459 $2,066 $(953) $7,572 $7,304 $14,876
---------- ------------- ------------- ---------- ---------- ----------
---------- ------------- ------------- ---------- ---------- ----------
Net Income Per Share:
Primary....................... $1.62 $1.25 $1.51 $1.37
Fully diluted................. $1.62 $1.25 $1.51 $1.37
Weighted Average Shares
Outstanding:
Primary....................... 3,996,137 2,051,454 6,047,591 4,825,217 10,872,808
Fully diluted................. 3,996,137 2,051,454 6,047,591 4,825,217 10,872,808
</TABLE>
64
<PAGE>
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------------------------------------------------
PURCHASE ADJUSTED
PINNACLE MACO ACCOUNTING PINNACLE IFC PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(10) ADJUSTMENTS HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- -------------- ------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable.................... $22,949 $13,221 $(210)(2) $35,960 $35,093 $71,053
Tax-exempt................. 209 -- 209 205 414
Interest and dividends on
securities:
Taxable.................... 4,626 10,603 82(3) 14,715 7,983 22,698
Tax-exempt................. 998 163 (596)(4) 1,161 95 1,256
Interest on federal funds
sold....................... 110 -- 110 157 267
Interest on due from banks... 76 432 508 40 548
---------- -------------- ------------- ---------- ---------- ----------- ----------
Total interest income...... 28,968 24,419 (724) 52,663 43,573 96,236
---------- -------------- ------------- ---------- ---------- ----------- ----------
INTEREST EXPENSE:
Interest on deposits......... 11,316 11,849 23,165 16,479 39,644
Interest on securities sold
under repurchase agreements
and other borrowings....... 546 1,173 (652)(5) 1,067 5,886 6,953
---------- -------------- ------------- ---------- ---------- ----------- ----------
Total interest expense..... 11,862 13,022 (652) 24,232 22,365 46,597
---------- -------------- ------------- ---------- ---------- ----------- ----------
Net interest income............ 17,106 11,397 (72) 28,431 21,208 49,639
Provision for loan losses...... 125 180 305 179 484
---------- -------------- ------------- ---------- ---------- ----------- ----------
Net interest income after
provision for loan losses.... 16,981 11,217 (72) 28,126 21,029 49,155
---------- -------------- ------------- ---------- ---------- ----------- ----------
NON-INTEREST INCOME:
Other........................ 3,692 795 4,487 4,401 8,888
Securities gains, net........ 64 -- 64 70 134
---------- -------------- ------------- ---------- ---------- ----------- ----------
Total non-interest income.. 3,756 795 4,551 4,471 9,022
NON-INTEREST EXPENSE:
Salaries and benefits........ 6,073 3,030 9,103 7,407 16,510
Occupancy and equipment...... 1,918 1,471 118(6) 3,507 2,505 6,012
Other........................ 5,123 3,082 828(7) 9,033 5,260 14,293
---------- -------------- ------------- ---------- ---------- ----------- ----------
Total non-interest
expense.................. 13,114 7,583 946 21,643 15,172 36,815
Income before income tax
expense.................... 7,623 4,429 (1,018) 11,034 10,328 21,362
Income tax expense........... 2,333 1,754 (65)(8) 4,022 3,066 7,088
---------- -------------- ------------- ---------- ---------- ----------- ----------
Net income................... $5,290 $2,675 $(953) $7,012 $7,262 $14,274
---------- -------------- ------------- ---------- ---------- ----------
---------- -------------- ------------- ---------- ---------- ----------
Net Income Per Share:
Primary...................... $1.38 $1.19 $1.50 $1.33
Fully diluted................ $1.38 $1.19 $1.50 $1.33
Weighted Average Shares
Outstanding:
Primary...................... 3,821,904 2,051,454 5,873,358 4,827,798 10,701,156
Fully diluted................ 3,821,904 2,051,454 5,873,358 4,827,798 10,701,156
</TABLE>
65
<PAGE>
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------------------------------------------------------
PURCHASE ADJUSTED
PINNACLE MACO ACCOUNTING PINNACLE IFC PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(11) ADJUSTMENTS HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- -------------- ------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable.................... $22,879 $18,101 $(210)(2) $40,770 $34,674 $75,444
Tax-exempt................. 194 -- 194 363 557
Interest and dividends on
securities:
Taxable.................... 4,863 7,575 82(3) 11,924 11,517 23,441
(596)(4)
Tax-exempt................. 978 -- 978 95 1,073
Interest on federal funds
sold....................... 272 -- 272 77 349
Interest on due from banks... 163 499 662 18 680
---------- -------------- ------------- ---------- ---------- ----------- ----------
Total interest income...... 29,349 26,175 (724) 54,800 46,744 101,544
---------- -------------- ------------- ---------- ---------- ----------- ----------
INTEREST EXPENSE:
Interest on deposits......... 12,029 13,340 25,369 17,309 42,678
Interest on securities sold
under repurchase agreements
and other borrowings....... 391 728 (652)(5) 467 8,579 9,046
---------- -------------- ------------- ---------- ---------- ----------- ----------
Total interest expense..... 12,420 14,068 (652) 25,836 25,888 51,724
---------- -------------- ------------- ---------- ---------- ----------- ----------
Net interest income............ 16,929 12,107 (72) 28,964 20,856 49,820
Provision for loan losses...... 360 -- 360 1,097 1,457
---------- -------------- ------------- ---------- ---------- ----------- ----------
Net interest income after
provision for loan losses.... 16,569 12,107 (72) 28,604 19,759 48,363
---------- -------------- ------------- ---------- ---------- ----------- ----------
NON-INTEREST INCOME:
Other........................ 4,108 5,535 9,643 3,684 13,327
Securities gains, net........ 66 -- 66 895 961
---------- -------------- ------------- ---------- ---------- ----------- ----------
Total non-interest income.. 4,174 5,535 9,709 4,579 14,288
NON-INTEREST EXPENSE:
Salaries and benefits........ 6,071 2,984 9,055 6,464 15,519
Occupancy and equipment...... 1,956 1,536 118(6) 3,610 2,238 5,848
Other........................ 5,424 4,019 828(7) 10,271 4,976 15,247
---------- -------------- ------------- ---------- ---------- ----------- ----------
Total non-interest
expense.................. 13,451 8,539 946 22,936 13,678 36,614
Income before federal income
tax expense................ 7,292 9,103 (1,018) 15,377 10,660 26,037
Federal income tax expense... 2,255 3,593 (65)(8) 5,783 3,076 8,859
---------- -------------- ------------- ---------- ---------- ----------- ----------
Net income from continuing
operations(1).............. $5,037 $5,510 $(953) $9,594 $7,584 $17,178
---------- -------------- ------------- ---------- ---------- ----------
---------- -------------- ------------- ---------- ---------- ----------
Net Income From Continuing
Operations Per Share:
Primary...................... $1.32 $1.63 $1.54 $1.59
Fully diluted................ $1.32 $1.63 $1.54 $1.59
Weighted Average Shares
Outstanding:
Primary...................... 3,821,904 2,051,454 5,873,358 4,925,972 10,799,330
Fully diluted................ 3,821,904 2,051,454 5,873,358 4,925,972 10,799,330
</TABLE>
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PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Pinnacle Financial Services, Inc. and Indiana Federal
Corporation Unaudited Pro Forma Combined Balance Sheet combines the historical
Consolidated Balance Sheets of Pinnacle and IFC giving effect to the Merger,
which will be accounted for as a "pooling-of-interests," as if it had been
effective on September 30, 1996. For a description of "pooling-of-interests"
accounting with respect to the Merger, see "THE MERGER --Anticipated Accounting
Treatment." This information should be read in conjunction with the historical
consolidated financial statements of Pinnacle, including the notes thereto,
which appear elsewhere in this Joint Proxy Statement/Prospectus, the historical
consolidated financial statements of IFC, including the notes thereto, which are
incorporated by reference in this Joint Proxy Statement/Prospectus, and the
condensed consolidated historical financial data for Pinnacle and the IFC and
the other pro forma financial information, including the notes thereto, which
appear elsewhere in this Joint Proxy Statement/Prospectus. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "PINNACLE CONSOLIDATED FINANCIAL
STATEMENTS." The effect of the expected one-time merger and restructuring
charges of approximately $4.2 million (after-tax) have been reflected in the
unaudited pro forma combined balance sheet; however, since the expected merger
and restructuring charges are nonrecurring they have not been reflected in the
unaudited pro forma combined statements of income. (See "-- Notes to Pinnacle
Financial Services, Inc. and Indiana Federal Corporation Unaudited Pro Forma
Combined Financial Statements" for details of the expected one-time merger and
restructuring charges.) The pro forma financial data do not give effect to any
anticipated cost savings in connection with the Merger and are not necessarily
indicative of either the results that actually would have occurred had
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<PAGE>
PINNACLE FINANCIAL SERVICES, INC. AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the Merger and the Maco Acquisition been consummated on September 30, 1996 or
the results that may be obtained in the future.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------------------------------------------
PINNACLE (AS IFC (AS PRO FORMA PRO FORMA
REPORTED)(12) REPORTED) ADJUSTMENTS COMBINED
----------------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash due from banks............................. $ 27,796 $ 23,569 $(5,845)(13) $ 45,520
Federal funds sold.............................. 4,327 -- 4,327
Due from banks-interest bearing................. 364 66 430
Investment securities........................... 360,076 121,782 481,858
Loans........................................... 588,154 609,718 1,197,872
Allowance for loan losses....................... (5,676) (6,856) (12,532)
Other assets.................................... 43,399 60,844 104,243
----------------- ------------- ----------- ----------
Total assets.................................. $1,018,440 $ 809,123 $(5,845) $1,821,718
----------------- ------------- ----------- ----------
----------------- ------------- ----------- ----------
LIABILITIES:
Deposits:
Non-interest-bearing demand deposits.......... $ 65,153 $ 34,011 $ 99,164
Interest-bearing demand deposits.............. 74,824 52,035 126,859
Savings deposits.............................. 267,693 135,950 403,643
Time deposits................................. 337,151 337,191 674,342
----------------- ------------- ----------- ----------
Total deposits.............................. 744,821 559,187 1,304,008
Securities sold under agreements to repurchase and
other borrowings................................ 193,315 173,244 366,559
Other liabilities................................. 6,823 6,735 $(1,604)(13) 11,954
----------------- ------------- ----------- ----------
Total liabilities............................... 944,959 739,166 (1,604) 1,682,521
STOCKHOLDERS' EQUITY:
Common stock.................................... 19,110 58 (58)(14) 19,110
Additional paid-in-capital...................... 43,946 27,568 (8,696)(14) 62,818
Retained earnings............................... 13,177 51,611 (4,241)(13) 60,310
Net unrealized (loss) on securities-for-sale.... (2,752) (289) (237)(14) (3,041)
Less: Treasury stock & employee stock ownership
plan obligation................................. -- (8,991) 8,991(14) --
----------------- ------------- ----------- ----------
Total stockholders' equity.................... 73,481 69,957 (4,241) 139,197
----------------- ------------- ----------- ----------
Total liabilities and stockholders' equity.... $1,018,440 $ 809,123 $(5,845) $1,821,718
----------------- ------------- ----------- ----------
----------------- ------------- ----------- ----------
PER SHARE DATA:
Shares outstanding:
Primary....................................... 5,875,121 4,737,130 10,612,251
Diluted....................................... 5,875,121 4,737,130 10,612,251
Book value per share:
Primary....................................... $12.51 $14.77 $13.12
Diluted....................................... $12.51 $14.77 $13.12
</TABLE>
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<PAGE>
NOTES TO PINNACLE FINANCIAL SERVICES, INC., AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Net income for the year ended December 31, 1993 reflects net income from
continuing operations but does not include an extraordinary items/accounting
changes charge of $4.96 million for Maco and an extraordinary
items/accounting changes credit of $429,000 for IFC.
(2) Reflects amortization of premium on $1.47 million of loans acquired through
the Maco Acquisition over the average remaining life of seven years (or
$210,000 per year).
(3) Reflects accretion of discount on $545,000 of investment securities
acquired through the Maco Acquisition over the average remaining life of
6.65 years (or $82,000 per year).
(4) Reflects reduction of interest income on securities of $622,000
attributable to (i) the conversion of First Federal investment securities
(having maturities of 90 days or less) to cash to fund a $4.0 million
special dividend from First Federal to Pinnacle and to repay certain Maco
indebtedness immediately following consummation of the Maco Acquisition, and
(ii) the conversion of Pinnacle Bank investment securities to cash to fund a
$7.5 million special dividend from Pinnacle Bank to Pinnacle to fund part of
the cash portion of the Purchase Price paid in the Maco Acquisition.
(5) Reflects reduced interest expense associated with the repayment of certain
Maco indebtedness aggregating $5.88 million.
(6) Reflects additional depreciation on premises over the average lives of the
assets of Maco acquired in the Maco Acquisition.
(7) Reflects amortization of $12.4 million of goodwill arising from the Maco
Acquisition on a straight line basis over a 15 year period.
(8) Reflects income tax expense attributable to purchase accounting adjustments
associated with the Maco Acquisition at the statutory federal income tax
rate of 34%.
(9) Reflects audited results of Maco for its fiscal year ended September 30,
1995.
(10) Reflects audited results of Maco for its fiscal year ended September 30,
1994.
(11) Reflects audited results of Maco for its fiscal year ended September 30,
1993.
(12) Reflects historical results of Maco since the December 1, 1995 consummation
of the Maco Acquisition.
(13) Reflects expected one-time merger and restructuring charges of
approximately $5.845 million (pre-tax) to be incurred in 1997 in connection
with the attainment of annualized pre-tax cost savings of approximately $3.5
million. (While there can be no assurances that such cost savings will in
fact be realized, they are expected to be realized primarily through
reductions in staff, elimination or consolidation of certain branches,
consolidation of the parties' banking and thrift businesses, the
consolidation of certain offices, data processing and other redundant
back-office operations and staff functions.) This is expected to result in a
tax credit of $1.604 million from the one-time charges and a $40.241 million
after-tax charge to retained earnings in the unaudited pro forma condensed
combined balance sheet.
The pro forma entries are displayed below:
<TABLE>
<S> <C> <C>
Debit--Retained earnings............................. $4,241,000
Debit--Other liabilities--taxes payable.............. $1,604,000
Credit--Cash....................................... $5,845,000
</TABLE>
69
<PAGE>
NOTES TO PINNACLE FINANCIAL SERVICES, INC., AND INDIANA FEDERAL CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following provides details of the estimated pre-tax charges:
<TABLE>
<S> <C> <C>
Personnel............................................ $1,250,000
Benefit plans........................................ 1,760,000
Facilities and data processing....................... 900,000
Other Merger expenses................................ 1,935,000
---------
Total charges.................................... $5,845,000
---------
---------
</TABLE>
(14) Reflects accounting of the Merger as a "pooling-of-interests," through the
exchange of 4,737,130 shares of Pinnacle Common Stock for an equivalent
number of shares of IFC Common Stock.
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<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of IFC's management and the IFC Board, and Pinnacle's
management and the Pinnacle Board may be deemed to have certain interests in the
Merger that are in addition to their interests as stockholders of IFC or
Pinnacle, as the case may be. The IFC Board and the Pinnacle Board were aware of
these interests and considered them, among other matters, in approving the
Merger Agreement and the transactions contemplated thereby.
The directors, officers and principal stockholders of IFC 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. 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 IFC 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.
DIRECTORSHIPS AND OFFICERSHIPS. The Merger Agreement provides that, from
and after the Effective Time, the Board of Directors of the combined corporation
will consist of a single class of directors comprised of 10 persons. Such
persons will include Richard L. Schanze (the current Chairman and Chief
Executive Officer of Pinnacle), Mr. Arnold L. Weaver (the current President of
Pinnacle), and three other persons to be named as directors of the surviving
corporation on behalf of the Pinnacle Board. Such persons will also include Mr.
Donald A. Lesch (the current Chairman of the Board and Chief Executive Officer
of IFC), Mr. Howard Silverman, and three other persons to be named as directors
of the surviving corporation on behalf of the IFC Board. Under the terms of the
Standstill Agreement between Pinnacle and Mr. Cyrus A. Ansary, Pinnacle has
certain obligations to nominate Mr. Ansary for election as a director of
Pinnacle. 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 of the combined corporation will be increased in
size to a total of 12 persons, and Mr. Ansary will be nominated as a director of
the surviving corporation pursuant to the terms of the Standstill Agreement, and
the Chairman of the surviving corporation will nominate for approval by the
Board of Directors of the combined corporation a twelfth person as a director of
the surviving corporation. See "MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER."
At the Effective Time, Mr. Schanze will be the Chairman of the Board and the
Chief Executive Officer of the surviving corporation, and Mr. Lesch will be the
Vice Chairman, President and Chief Operating Officer of the surviving
corporation. See "MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER."
The directors of Pinnacle Bank following the Subsidiary Bank Merger will
consist of 18 persons, with nine persons to be named as directors by the Board
of Directors of Pinnacle Bank and nine persons to be named as directors by the
Board of Directors of IndFed Bank. The executive officers of Pinnacle Bank
following the Subsidiary Bank Merger will be those appointed by the Board of
Directors of Pinnacle Bank following the Subsidiary Bank Merger, on the basis of
recommendations made by Mr. Schanze, as the Chairman of Pinnacle, Mr. Lesch, as
the Vice Chairman of Pinnacle, and an outside consulting service to be engaged
and charged with reviewing and evaluating the qualifications of candidates. See
"MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER."
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. The Merger Agreement
provides that, in the event of any threatened or actual claim or proceeding in
which any person who is or has been a director, officer or employee of IFC, its
subsidiaries or any of their predecessors (the "Indemnified Parties") is, or is
threatened to be, made a party based in whole or in part on, or pertaining to,
(i) the fact that such person was a director, officer or employee of IFC, its
subsidiaries or any of their predecessors, or (ii) the Merger Agreement, the
Stock Option Agreements or the transactions contemplated thereby, the combined
corporation will, subject to the conditions set forth in the Merger Agreement,
indemnify such person to the fullest extent permitted by law against any
liability or expense incurred in connection with any such claim
71
<PAGE>
or proceeding. The Merger Agreement provides that the combined corporation's
obligation to indemnify any Indemnified Party will continue for a period of at
least six years following the Effective Time, provided that rights to
indemnification in respect of any claim asserted or made within such period will
continue until final disposition of such claim. The Merger Agreement further
provides that the combined corporation will, subject to the conditions set forth
in the Merger Agreement, use its best efforts to cause the persons serving as
officers and directors of IFC immediately prior to the Merger to be covered for
a period of at least six years following the Effective Time by IFC's directors'
and officers' liability insurance policy (or any equivalent substitute
therefor), provided that the combined corporation will not be required to expend
more than 150% of the current amount expended by IFC to procure such insurance.
PINNACLE EMPLOYMENT SEVERANCE COMPENSATION AGREEMENTS. Pinnacle and
Pinnacle Bank have entered into "employment severance compensation agreements"
with Messrs. Schanze and Weaver, Mr. Donald E. Radde (currently an Executive
Vice President of Pinnacle and Pinnacle Bank) and Mr. David W. Kolhagen
(currently a Senior Vice President and Chief Financial Officer of Pinnacle and
Pinnacle Bank) (each, a "key manager"). Under the terms of these agreements,
each key manager's annual salary is established by the Pinnacle Board 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.
Under these 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.
The Pinnacle Board (with Messrs. Schanze and Weaver abstaining from
considering this matter as members of the Pinnacle Board due to their conflict
of interest as interested parties) believes that the Merger does not constitute
a "change of control" for purposes of Pinnacle employment severance compensation
agreements. However, if the Merger constitutes a "change of control" for such
purposes, then, at December 31, 1996, the aggregate amounts payable to Messrs.
Schanze, Weaver, Radde and Kolhagen would be approximately $995,000, $535,000,
$359,000 and $305,000, respectively.
IFC EMPLOYMENT AGREEMENTS. IndFed Bank has entered into employment
agreements with Mr. Lesch and with Mr. Candela (the "IFC Employment Agreements")
which provide for an annual base salary in an amount not less than such
individual's current salary. The agreements are for a term of three years each
and provide for one year extension, at the end of the first year as well as any
subsequent year, at the discretion of the Board of Directors of IndFed Bank upon
the board's review of the remaining term. The agreements provide for termination
upon such individual's death, disability, for cause or in certain events
specified by regulations of IndFed Bank's primary regulator, the Director of the
Office of Thrift Supervision of the Department of Treasury (the "OTS"). The
employment agreements are terminable by Messrs. Lesch and Candela upon 90 days'
notice to IndFed Bank.
72
<PAGE>
The agreements each provide for payment to Messrs. Lesch and Candela of 299%
of their "base amount" of compensation (as defined under Section 280G(b)(3) of
the Internal Revenue Code of 1986, as amended) in the event there is a change in
control of IFC or IndFed Bank, where employment terminates involuntarily in
connection with such a change in control or within 12 months thereafter. Such
termination payment is provided on a similar basis in connection with the
voluntary termination of employment, where the change in control was at any time
or at any price opposed by the IFC Board. The Merger constitutes a change in
control for purposes of the IFC Employment Agreements. Accordingly, at December
31, 1996, if their employment terminated involuntarily in connection with the
Merger or within 12 months thereafter, Messrs. Lesch and Candela would be
entitled to payments of approximately $436,000 and $446,000, respectively. The
IFC Employment Agreements also provide, among other things, for participation in
an equitable manner in employee benefits applicable to executive personnel.
IFC and IndFed Bank have entered into Executive Supplemental Retirement
Income Agreements ("ESRIAs") with Messrs. Lesch and Candela, as well as with
certain other key officers. The ESRIAs are unfunded, non-qualified agreements
which provide for an annual benefit to each executive of an amount generally
equal to a stated percentage (of between 15% and 45%) of the executive's highest
five-year average "base compensation" (which includes salary, but excludes
bonuses and fringe benefits) paid by IFC and/or IndFed Bank, to be paid over a
15-year period. The ESRIAs also provide for disability and death benefits,
including a $10,000 burial expense payment. In addition, the ESRIAs for Messrs.
Lesch and Candela provide that they will be eligible to receive their full
supplemental benefit in the event their employment with IFC and/or IndFed Bank
is involuntarily terminated prior to reaching retirement age. Until disbursed,
the amounts payable under the ESRIAs are subject to the claims of general
creditors. Assuming Messrs. Lesch and Candela were involuntarily terminated from
the employment of IFC or IndFed Bank as of December 31, 1996, they would have
been eligible to receive, at normal retirement, an annual benefit of
approximately $145,000 and $63,000, respectively, under their ESRIA. The annual
benefit upon retirement at normal retirement age payable to each such individual
under their ESRIA is estimated, based on assumed salary increases, to be
approximately $145,000 and $63,000, respectively.
EMPLOYEE STOCK OPTIONS. At the Effective Time, each option granted by IFC
to purchase shares of IFC Common Stock which is outstanding and unexercised
immediately prior thereto (excluding any and all IFC Rights, all of which are to
be redeemed, and thereby extinguished, terminated and cancelled without any
right of exercise, prior to the Effective Time) will cease to represent a right
to acquire shares of IFC Common Stock and will be converted automatically into
an option to purchase shares of Pinnacle Common Stock in the same amount and at
the same exercise price (subject to the terms of the IFC benefit plans under
which they were issued and the agreements evidencing grants thereunder).
At the Effective Time, each option granted by Pinnacle to purchase shares of
Pinnacle Common Stock which is outstanding and unexercised immediately prior
thereto will continue to represent a right to acquire shares of Pinnacle Common
Stock and will remain an issued and outstanding option to purchase from
Pinnacle, as the surviving corporation, shares of Pinnacle Common Stock in the
same amount and at the same exercise price subject to the terms of the Pinnacle
benefit plans under which they were issued and the agreements evidencing grants
thereunder, and will not be affected by the Merger.
OTHER BENEFIT PLANS. Pinnacle and IFC have each represented and warranted
to the other party that the consummation of the Merger and the other
transactions contemplated in the Merger Agreement will not (i) result in any
material payment becoming due to any of their respective directors or employees
under any applicable employee benefit plan or otherwise, (ii) materially
increase any benefits otherwise payable under any applicable employee benefit
plan or (iii) result in any acceleration of the time of payment or vesting of
any such benefits to any material extent.
IFC RIGHTS. As of November 11, 1996, up to 4,751,131 rights in respect of
shares of IFC Common Stock were issued and outstanding under the IFC Rights
Agreement. The IFC Rights remain attached to
73
<PAGE>
the associated shares of IFC Common Stock and are not exercisable except under
the limited circumstances set forth in the IFC Rights Agreement. In connection
with the execution of the Merger Agreement, IFC amended the IFC Rights Agreement
to confirm that neither Pinnacle, nor any of its subsidiaries, nor any other
person, will be deemed to be an "Acquiring Person" (as defined in the IFC Rights
Agreement) (i) by virtue of the Merger Agreement, (ii) by virtue of any of the
transactions contemplated by the Merger Agreement or the IFC Stock Option
Agreement, or (iii) by virtue of the fact that Pinnacle is the "Beneficial
Owner" (as defined in the IFC Rights Agreement) solely of shares of IFC Common
Stock (A) of which Pinnacle or such subsidiary was the Beneficial Owner on
November 14, 1996, (B) acquired or acquirable pursuant to the grant or exercise
of the option granted pursuant to the IFC Stock Option Agreement, (C) acquired
or acquirable pursuant to a debt previously contracted before November 14, 1996
and (D) held directly or indirectly in trust accounts, managed accounts and the
like or otherwise held in a fiduciary capacity for third parties. Such amendment
to the IFC Rights Agreement provides, however, that in the event that Pinnacle
or any of its subsidiaries acquires beneficial ownership of any shares of IFC
Common Stock other than the shares described in clauses (A)-(D) above
("Subsequently Acquired Shares"), then the shares described in clauses (A) , (B)
and (C) above, together with such Subsequently Acquired Shares, will be
considered in determining whether Pinnacle or any of its subsidiaries has become
an Acquiring Person. Under the Merger Agreement, IFC must redeem the IFC Rights
prior to the Effective Time at a cost to IFC of not more than $0.01 per each
share of IFC Common Stock issued and outstanding. Consequently, all of said IFC
Rights will be extinguished, terminated and cancelled prior to the Effective
Time, without any right of exercise, and will only represent the right to
receive the Redemption Price in cash from IFC or Pinnacle, as the surviving
corporation, following the Merger.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Except as described below, it has not yet been determined which members of
Pinnacle's or IFC's senior management also will become executive officers or
directors of the combined corporation following the Merger or what such persons'
titles or functions will be. From time to time prior to consummation of the
Merger, decisions may be made with respect to the management and operations of
the combined corporation following the Merger, including the selection of
executive officers of the combined corporation.
Neither Pinnacle nor IFC is aware of any material relationships between
Pinnacle or its directors or executive officers and IFC or its directors or
executive officers, except as contemplated by the Merger Agreement or as
described herein or in the materials incorporated herein by reference. In the
ordinary course of business and from time to time (i) Pinnacle may do business
with IFC, and its subsidiaries may enter into banking transactions with certain
of IFC's executive officers and their affiliates, and (ii) IFC may do business
with Pinnacle, and its subsidiaries may enter into banking transactions with
certain of Pinnacle's executive officers and their affiliates.
DIRECTORS
From and after the Effective Time, the Board of Directors of the combined
corporation will consist of a single class of directors comprised of 10 persons.
Such persons will include Mr. Schanze, Mr. Weaver, and three other persons to be
named as directors of the surviving corporation on behalf of the Pinnacle Board,
and with Mr. Lesch, Mr. Silverman, and three other persons to be named as
directors of the surviving corporation on behalf of the IFC Board. Under the
terms of the Standstill Agreement between Pinnacle and Mr. Cyrus A. Ansary,
Pinnacle has certain obligations to nominate Mr. Ansary for election as a
director of Pinnacle. 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 of the combined corporation will be
increased in size to a total of 12 persons, and Mr. Ansary shall be nominated as
a director of the surviving corporation pursuant to the terms of the Standstill
Agreement, and the Chairman of the surviving corporation will nominate for
approval by the Board of Directors of the
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<PAGE>
combined corporation a twelfth person as a director of the surviving
corporation. Whenever the Board of Directors of the surviving corporation is
comprised of 10 or fewer persons, action of the Board within the meaning of
Section 523 of the MBCA, and for all other purposes, will require the favorable
vote of six or more of the directors, and whenever the Board of Directors of the
surviving corporation is comprised of 11 or 12 persons, action of the Board
within the meaning of Section 523 of the MBCA, and for all other purposes, will
require the favorable vote of seven or more of the directors. As of the date of
this Joint Proxy Statement/Prospectus, no additional directors have been
designated by the Pinnacle Board or the IFC Board.
The directors selected by Pinnacle and IFC will be divided as equally as
practicable among the various committees established by the Board of Directors
of the combined corporation in proportion to the aggregate representation of
such directors.
Additional information about Messrs. Schanze and Lesch and the directors of
Pinnacle and IFC appears elsewhere in this Joint Proxy Statement/Prospectus or
is contained in Pinnacle's and IFC's respective Annual Reports on Form 10-K for
the year ended December 31, 1995, which are incorporated by reference in this
Joint Proxy Statement/Prospectus. See "AVAILABLE INFORMATION," "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE," and "MANAGEMENT OF PINNACLE."
EXECUTIVE OFFICERS
The executive officers of the combined corporation will consist of certain
members of Pinnacle's senior management and certain members of IFC's senior
management. Mr. Schanze, the current Chairman of the Board and Chief Executive
Officer of Pinnacle, will be the Chairman of the combined corporation following
the Merger, and Mr. Lesch, the current Chairman of the Board and Chief Executive
Officer of IFC, will be the Vice Chairman and President of the combined
corporation following the Merger. As of the date of this Joint Proxy
Statement/Prospectus, no additional officers of the combined corporation have
been designated.
Additional information about Messrs. Schanze and Lesch and the executive
officers of Pinnacle and IFC, appears elsewhere in this Joint Proxy
Statement/Prospectus or is contained in Pinnacle's and IFC's respective Annual
Reports on Form 10-K for the year ended December 31, 1995, which are
incorporated by reference in this Joint Proxy Statement/Prospectus. See
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," and
"MANAGEMENT OF PINNACLE."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is a summary description of the material Federal
income tax consequences of the Merger. This summary is not a complete
description of all of the consequences of the Merger and, in particular, may not
address Federal income tax considerations that may affect the treatment of a
stockholder which, at the Effective Time, already owns some Pinnacle Common
Stock, is not a U.S. person, is a tax-exempt entity or an individual who
acquired IFC Common Stock pursuant to an employee stock option, or exercises
some form of control over IFC. In addition, no information is provided herein
with respect to the tax consequences of the Merger under applicable foreign,
state or local laws. Consequently, each IFC stockholder is advised to consult a
tax advisor as to the specific tax consequences of the transaction to that
stockholder. The following discussion is based on the Internal Revenue Code of
1986, as amended, as in effect on the date of this Joint Proxy
Statement/Prospectus, without consideration of the particular facts or
circumstances of any holder of IFC Common Stock.
THE MERGER. Consummation of the Merger is conditioned upon the receipt by
IFC and Pinnacle of an opinion of their respective tax counsel (Silver, Freedman
& Taff, L.L.P. in the case of IFC, and Miller, Canfield, Paddock and Stone,
P.L.C. in the case of Pinnacle), dated as of the Effective Time, substantially
to the effect that, on the basis of facts, representations and assumptions set
forth in such opinions which are consistent with the state of facts existing at
the Effective Time, for Federal income tax purposes the Merger will constitute a
reorganization within the meaning of Section 368 of the Code.
Based on such opinions, the material Federal income tax consequences of the
Merger will be:
(i) no gain or loss will be recognized by Pinnacle or by IFC as a result
of the Merger;
(ii) no gain or loss will be recognized by stockholders of IFC who
exchange their IFC Common Stock solely for Pinnacle Common Stock pursuant to
the Merger;
(iii) the tax basis of the Pinnacle Common Stock received by a IFC
stockholder who exchanges all of his or her IFC Common Stock solely for
Pinnacle Common Stock will be the same as such stockholder's tax basis in
the IFC Common Stock surrendered in exchange therefor; and
(iv) the holding period of the Pinnacle Common Stock received by a IFC
stockholder will include the period during which the IFC Common Stock
surrendered in exchange therefor was held (provided that such IFC Common
Stock was held by such IFC stockholder as a capital asset at the Effective
Time).
INFORMATION REPORTING AND BACKUP WITHHOLDING. Payments in respect of IFC
Common Stock may be subject to information reporting to the Internal Revenue
Service and to a 31% backup withholding tax. Backup withholding will not apply,
however, to a payment to a IFC stockholder or other payee if such stockholder or
payee completes and signs the substitute Form W-9 that will be included as part
of the transmittal letter or otherwise proves to the combined company and the
Exchange Agent that it is exempt from backup withholding.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. THE
DISCUSSION DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE
MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE,
EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE
RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY
SUCH CHANGES COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. EACH
PINNACLE STOCKHOLDER AND EACH IFC STOCKHOLDER SHOULD CONSULT SUCH STOCKHOLDER'S
OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO
SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND
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FOREIGN TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL LAWS OR OTHER
TAX LAWS.
ACQUISITION OF MACO BANCORP, INC.
GENERAL
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, for aggregate consideration of $41.9 million through the merger
of Maco with and into Pinnacle. The Purchase Price consisted of cash, a secured,
short-term, interest-bearing promissory note in the principal amount of $18.0
million, and shares of Pinnacle Common Stock then valued at approximately $21.0
million. The Acquisition Note was paid in full in March 1996. As a result of the
Maco Acquisition, Pinnacle became the sole stockholder of First Federal Savings
Bank of Indiana, a federal savings bank and then a wholly-owned subsidiary of
Maco. First Federal was merged with and into Pinnacle Bank effective December
31, 1996.
In connection with the Maco Acquisition, Pinnacle and Mr. Cyrus A. Ansary,
the sole stockholder of Maco, entered into the Standstill Agreement, an
indemnification agreement dated December 1, 1995 (the "Indemnification
Agreement"), an escrow agreement dated December 1, 1995 (the "Escrow Agreement")
and a non-competition agreement dated December 1, 1995 (the "Non-Competition
Agreement"). Prior to its acquisition by Pinnacle, Maco entered into two
transfer agreements (the "Transfer Agreements"), each providing for the transfer
of all of Maco's rights and liabilities arising out of certain litigation to
which it is a party to Mr. Ansary and to Investment Services International Co.
("ISIC"), an affiliate of Mr. Ansary.
The information contained in this Joint Proxy Statement/Prospectus with
respect to the Standstill Agreement, the Transfer Agreements, the
Indemnification Agreement, the Escrow Agreement and the Non-Competition
Agreement is a summary of the material provisions of those agreements, and, as
such, is qualified in its entirety by reference to those agreements, all of
which are included as exhibits to the Registration Statement (of which this
Joint Proxy Statement/Prospectus is a part).
Additionally, the pro forma information contained herein reflects the
earnings and assets of Maco as if the Maco Acquisition had occurred as of the
earliest period presented.
STANDSTILL AGREEMENT
Mr. Ansary is now, and following consummation of the Merger will be, the
largest single Pinnacle stockholder. He currently holds approximately 19.9% of
the shares of Pinnacle Common Stock outstanding. Upon consummation of the Merger
he will hold approximately 11.2% of the shares of Pinnacle Common Stock then
outstanding. Consequently, he may be able to exert influence on Pinnacle's
future strategic direction with regard to, among other things, the long-term
independence of Pinnacle. However, the Standstill Agreement obligates Mr.
Ansary, through December 31, 1999, subject to certain exceptions, to vote all
voting securities of which he is the beneficial owner in accordance with the
directions of Pinnacle's management.
Pursuant to the Standstill Agreement, Pinnacle granted Mr. Ansary certain
"piggyback" registration rights and certain limited demand registration rights
with respect to the shares of Pinnacle Common Stock that he holds. However,
under the terms of the Standstill Agreement, and except under limited
circumstances specified therein, Mr. Ansary may not voluntarily sell, transfer
any beneficial interest in, assign, pledge, hypothecate or otherwise dispose of
or encumber any Pinnacle Common Stock prior to December 1, 1997.
The Standstill Agreement also prohibits Mr. Ansary from, subject to certain
exceptions and without the prior written consent of the "Pinnacle Designee" (as
hereinafter defined), (i) selling or otherwise transferring his shares of
Pinnacle Common Stock; (ii) submitting any proposal for the vote of stockholders
of Pinnacle; (iii) becoming a member of a "group" within the meaning of Section
13(d)(3) of the Exchange
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Act with respect to Pinnacle Common Stock or any voting securities of Pinnacle;
(iv) acting in concert with others to influence or control the management of
Pinnacle; (v) inducing or attempting to induce or give encouragement to any
other person to initiate any proposal or tender or exchange offer for voting
securities or change of control of Pinnacle; or (vi) soliciting or participating
in the solicitation of proxies in opposition to management of Pinnacle. In
addition, under the Standstill Agreement Mr. Ansary is obligated, subject to
certain exceptions, to vote or cause to be voted all voting securities of which
he is the beneficial owner for persons nominated by the Pinnacle Board for
election to the Pinnacle Board, and, on all other matters, voting securities of
which Mr. Ansary is the beneficial owner must be voted strictly in accordance
with the written recommendations of the Pinnacle Designee. For purposes of the
Standstill Agreement, the "Pinnacle Designee" is the Chief Executive Officer of
Pinnacle or another individual specifically designated by the Pinnacle Board in
a resolution adopted by a majority of the directors of Pinnacle and identified
to Mr. Ansary in writing. Pursuant to the Standstill Agreement, Mr. Ansary has
been instructed to vote all shares of Pinnacle Common Stock beneficially owned
by him in favor of the Merger Proposal.
The Standstill Agreement provides that the foregoing limitations on Mr.
Ansary's beneficial ownership of Pinnacle Common Stock will terminate if, among
other things, the aggregate percentage of voting securities of Pinnacle
beneficially owned by the directors of Pinnacle as a group declines by more than
one-third from the aggregate percentage so held as of the date of the Maco
Acquisition. As the Merger will cause such aggregate percentage to decline by
more than one-third, the foregoing limitations will terminate upon consummation
of the Merger.
TRANSFER AGREEMENTS; INDEMNIFICATION AGREEMENT; ESCROW AGREEMENT;
NON-COMPETITION AGREEMENT
In connection with its 1988 acquisition of a distressed thrift, Maco entered
into an Assistance Agreement with the Federal Savings and Loan Insurance
Corporation (the "Assistance Agreement"). The FDIC, the successor-in-interest to
the Federal Savings and Loan Insurance Corporation, has brought suit against
Maco seeking payment by Maco of $3.0 million allegedly due it under the
Assistance Agreement. Maco disputed the FDIC claim, and management of Maco
believed it to be without merit. Moreover, Maco counterclaimed against the FDIC
and sued the United States of America for damages it claimed as a result of the
withdrawal of certain regulatory capital forbearances previously granted to it
by the Federal Home Loan Bank Board.
Maco and another entity affiliated with Mr. Ansary, Investment Services
International Co. ("ISIC"), also brought suit against the investment banking
firm of Friedman, Billings, Ramsey & Co. in connection with an earlier
acquisition effort by Maco and ISIC. In that action Friedman, Billings has
counterclaimed for reimbursement of legal expenses occasioned by the suit.
Effective May 4, 1995, Maco and Mr. Ansary entered into a Transfer Agreement
pursuant to which Maco transferred to Mr. Ansary all of its claims against the
FDIC and the United States of America arising with respect to the Assistance
Agreement, including rights to any settlement proceeds and benefits of any kind
in connection with its claims, in exchange for the assumption by Mr. Ansary of
Maco's obligations arising from the Assistance Agreement and the FDIC dispute,
including a commitment to pay all future costs of litigation and to indemnify
Maco and its successors (which includes Pinnacle as the successor of Maco)
against any such liability, but not including any tax effects on the tax returns
of Pinnacle (as the successor to Maco) arising from any results of the
litigation. Mr. Ansary has agreed that he will prepare and file all his federal,
state and local tax returns consistent with the Transfer Agreement, treating Mr.
Ansary personally as the sole and exclusive beneficial owner of the claims
relating to said litigation.
Effective May 4, 1995, Maco and ISIC entered into a second Transfer
Agreement pursuant to which Maco transferred to ISIC all of its claims against
Friedman, Billings arising with respect to the Friedman, Billings litigation,
including rights to any settlement proceeds and benefits of any kind in
connection with its claims, in exchange for the assumption by ISIC of Maco's
obligations arising with respect to the Friedman, Billings litigation, including
a commitment to pay all future costs of litigation and to indemnify
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Maco and its successors (which includes Pinnacle as the successor of Maco)
against any such liability, but not including any effects on the tax returns of
Pinnacle (as the successor to Maco) arising from any results of the litigation.
ISIC has agreed that it will prepare and file all its federal, state and local
tax returns consistent with this second Transfer Agreement, treating ISIC as the
sole and exclusive beneficial owner of the claims relating to said litigation.
Pursuant to the Indemnification Agreement, Mr. Ansary agreed, subject to
certain conditions, to partially indemnify Pinnacle from and against certain
liabilities. With respect to indemnification for certain contingent tax
liabilities of Maco, Mr. Ansary's indemnification obligations to Pinnacle are
limited to an aggregate of $1,175,000 and are subject to Pinnacle having borne
the first $750,000 of unreimbursed loss, and with respect to indemnification for
certain contingent liabilities of Maco to a former employee, Mr. Ansary's
indemnification obligations to Pinnacle are limited to an aggregate of $500,000
and are subject to Pinnacle having borne the first $250,000 of unreimbursed
loss. In each case, indemnification is not provided to cover any costs Pinnacle
may incur to litigate or defend against the indemnified liabilities. Mr.
Ansary's and ISIC's obligations with respect to the Transfer Agreements and the
Indemnification Agreement are secured by the deposit of assets having an initial
fair market value aggregating approximately $4.7 million by Mr. Ansary into
escrow pursuant to the Escrow Agreement. Under the terms of the Indemnification
Agreement, any claim for indemnification thereunder by Pinnacle must be made by
May 28, 1998. In the event of any loss by Pinnacle arising out of any matter
relating to the Transfer Agreements or the Indemnification Agreement, there can
be no assurance that Pinnacle will be able to successfully exercise its rights
under the Transfer Agreements, the Indemnification Agreement or the Escrow
Agreement or that the value of the assets placed in escrow pursuant to the
Escrow Agreement will be sufficient to reimburse Pinnacle for the full amount of
any such loss. However, management of Pinnacle believes that any unreimbursed
loss remaining after recourse to and enforcement of its rights would not be
expected to have a material adverse effect on the consolidated financial
position, results of operation, cash flows or capital position of Pinnacle and
its subsidiaries.
Pursuant to the Non-Competition Agreement, Mr. Ansary has agreed, effective
as of the closing of the Maco Acquisition and on behalf of himself and all of
his affiliates, not to engage in the banking and savings and loan business for a
period of three years following the consummation of the Maco Acquisition
anywhere within the States of Michigan and Indiana (other than as a stockholder
of Pinnacle). The Non-Competition Agreement does not, however, restrict Mr.
Ansary from holding passive investments of less than five percent of the
outstanding debt or equity securities of any publicly-held company (including,
without limitation, IFC). In consideration of the execution of the
Non-Competition Agreement, Pinnacle paid Mr. Ansary the additional sum of
$25,000 upon consummation of the Maco Acquisition.
POTENTIAL ADVERSE TAX CONSEQUENCES
Pinnacle's acquisition of Maco has been treated as a tax-free reorganization
under Section 368(a)(1)(A) of the Code. In order to be treated as such a
tax-free reorganization, Pinnacle's acquisition of Maco had to satisfy a
"continuity of interest" requirement. Under Revenue Procedure 77-37, this
"continuity of interest" requirement is satisfied if at least 50% of the
consideration received by the stockholders of the acquired entity in a merger
constitutes equity of the acquiring entity. Approximately 50% of the total
purchase price paid by Pinnacle upon consummation of the Maco Acquisition was
paid in shares of Pinnacle Common Stock. In determining whether Pinnacle's
acquisition of Maco satisfied the "continuity of interest" requirement, Pinnacle
assumed (i) that the transfer prior to the consummation of the Maco Acquisition
of certain litigation to which Maco is a party to ISIC and to Mr. Ansary,
pursuant to the Transfer Agreements, was not treated for tax purposes as part of
the consideration being received by the sole stockholder of Maco in Pinnacle's
acquisition of Maco, and (ii) that an outstanding promissory note in the
approximate amount of $1.5 million evidencing certain advances to Maco by Mr.
Ansary was treated as bona fide debt of Maco (and not equity) for tax purposes,
and therefore Pinnacle's assumption or payment of such promissory note was not
part of the consideration being received by the sole stockholder of Maco in
connection with the Maco Acquisition.
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In the event that (i) the transferred litigation were treated for tax
purposes as consideration paid to the sole stockholder of Maco in the Maco
Acquisition, and a positive net present value, after deduction of expenses, were
attributed to such litigation, and (ii) the promissory note was treated as
equity of Maco and the payment of such promissory note was treated for tax
purposes as consideration paid to the sole stockholder of Maco in the Maco
Acquisition, the percentage of the total consideration consisting of Pinnacle
Common Stock paid to the sole stockholder of Maco in the Maco Acquisition would
be reduced to less than 50%. Management of Pinnacle believes, however, that even
in such circumstances the percentage of the total consideration consisting of
Pinnacle Common Stock received by the sole stockholder of Maco in the Maco
Acquisition would still be sufficient to satisfy the "continuity of interest"
test as interpreted under applicable case law.
If the Maco Acquisition is not treated as a tax-free reorganization for
federal income tax purposes, the imposition of federal income taxes on Pinnacle
in connection with the Maco Acquisition would have a material adverse effect on
the results of operations of Pinnacle.
CERTAIN REGULATORY CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF CERTAIN STATUTES AND REGULATIONS AFFECTING
PINNACLE, IFC AND THEIR RESPECTIVE SUBSIDIARIES. THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY SUCH STATUTES AND REGULATIONS. A CHANGE IN APPLICABLE LAWS OR
REGULATIONS MAY HAVE A MATERIAL EFFECT ON PINNACLE, IFC, THEIR RESPECTIVE
SUBSIDIARIES AND THE RESPECTIVE BUSINESSES OF PINNACLE, IFC, AND THEIR
RESPECTIVE SUBSIDIARIES.
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 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.
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, IFC, and their respective
subsidiaries.
* * * * *
BANK HOLDING COMPANIES. As a bank holding company, Pinnacle is subject to
regulation under the BHCA and its examination and reporting requirements and is
subject to the supervision of the Federal Reserve Board.
Banking laws and regulations restrict transactions by insured banks owned by
a bank holding company, 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,
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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 SAIF of the FDIC, Pinnacle Bank is also
subject to regulation and examination by the FDIC.
SAVINGS AND LOAN HOLDING COMPANIES. As a savings and loan holding company,
IFC is subject to regulation under the Home Owners Loan Act of 1933, as amended
("HOLA"), and its examination and reporting requirements, and is subject to the
supervision of the OTS.
Under The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the OTS is granted broad power to impose restrictions on
savings and loan holding company activities if the OTS determines there is
reasonable cause to believe that the continuation by the holding company of any
activity constitutes a serious risk to the financial safety, soundness or
stability of a subsidiary thrift. The restrictions, issued in the form of a
directive, limit (i) the payment of dividends by the thrifts; (ii) transactions
between the thrift, the savings and loan holding company, and the subsidiaries
or affiliates of either; and (iii) any activities of the thrift that might
create a serious risk that the liabilities of the savings and loan holding
company or its other affiliates may be imposed on the thrift.
IFC's subsidiary savings bank, IndFed Bank, is subject to regulation and
examination by the OTS and by the FDIC because its deposits are insured by SAIF.
PAYMENT OF DIVIDENDS
PINNACLE. 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.
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IFC. IFC is also a legal entity separate and distinct from its
subsidiaries. Substantially all of IFC's revenues result from dividends paid to
it by IndFed Bank. Under regulations promulgated by the OTS, the amount of
dividends that may be paid by a thrift such as IndFed Bank are subject to
certain limitations. In general, these limitations depend upon whether or not
the thrift's capital equals or exceeds its fully phased-in capital requirement
immediately prior to, and on a pro forma basis after giving effect to, a
proposed dividend. A thrift which meets or exceeds its fully phased-in capital
requirement is categorized as a "Tier 1 association" and during any calendar
year may not, without the prior approval of the OTS, pay annual dividends in an
amount in excess of the higher of (i) its net income (as defined and interpreted
by regulation) to date for that year, plus the amount that would reduce by
one-half the thrift's "surplus capital ratio" at the beginning of the year, or
(ii) 75% of its net income over the most recent four-quarter period. For
purposes of determining the amount of dividends which may be paid by a thrift,
the term "surplus capital ratio" means the percentage by which the thrift's
capital-to-assets ratio exceeds the ratio of its fully phased-in capital
requirement to its assets. A thrift with capital equal to or in excess of its
minimum capital requirement, but less than its fully phased-in capital
requirement, is subject to more stringent limitations on the amount of dividends
that it may pay in any year without the prior approval of the OTS, while a
thrift that does not have capital in an amount equal to its minimum capital
requirement may not pay any dividends without the prior approval of the OTS. A
thrift which meets the fully phased-in capital requirements but which has
received notice from the OTS that it is in need of more than normal supervision
will be treated as a thrift in one of the other two classes noted above, at the
discretion of the OTS, unless the OTS determines that such treatment is not
necessary to ensure the thrift's safe and sound operation.
IndFed Bank is categorized as a "Tier 1 association" and, as such, was
eligible to make capital distributions of approximately $9.3 million at December
31, 1995.
OTHER FACTORS. The payment of dividends by Pinnacle and its subsidiaries
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. The OTS has indicated that the payment of dividends
by a thrift whose capital is decreasing because of substantial losses would be
an unsafe and unsound practice.
CERTAIN TRANSACTIONS WITH AFFILIATES
BANK HOLDING COMPANIES. 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 or nonsavings bank
affiliates are limited to the following 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
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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.
SAVINGS AND LOAN HOLDING COMPANIES. OTS regulations impose restrictions on
the extent to which a savings and loan holding company, such as IFC, its
subsidiaries and its affiliates may engage in "covered transactions" similar to
those applicable to banks. Such regulations also prohibit a thrift and its
subsidiaries from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services. In
addition, a thrift is generally prohibited from making any loan or extension of
credit to any affiliate unless the affiliate is engaged solely in activities
permissible to affiliates of thrifts under HOLA, and is generally prohibited
from purchasing any securities of any affiliate, other than a subsidiary. A
thrift and its subsidiaries may generally not purchase a low quality asset from
an affiliate unless the thrift, pursuant to an independent credit evaluation,
committed itself to purchase the asset prior to the time the asset was acquired
by the affiliate.
CAPITAL
GENERAL. Bank and thrift 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, thrifts 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, Pinnacle Bank, First Federal and IndFed Bank, including their
ability to pay dividends.
BANK HOLDING COMPANIES. 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 September 30, 1996, Pinnacle's ratio of Tier 1 Capital to
risk-based assets was 12.23%. At September 30, 1996, on a pro forma basis after
giving effect to the Merger, Pinnacle's ratio of Tier 1 Capital to risk-based
assets would be 11.71%.
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 September 30, 1996
was 6.31%. At September 30, 1996, on a pro forma combined basis after giving
effect to the Merger, Pinnacle's Tier 1 Capital leverage ratio would be 6.92%.
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. The Federal Reserve Board has not advised Pinnacle
of any specific minimum Tier 1 Capital leverage ratio applicable to it.
Pinnacle Bank is subject to similar capital requirements adopted by the
FDIC. At September 30, 1996, Pinnacle Bank had a Tier 1 Capital ratio and a
Total Capital ratio (computed under the 1992 guidelines) in
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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 to risk based assets 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 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 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.
Upon consummation of both the Merger and the Subsidiary Bank Merger,
Pinnacle expects that Pinnacle Bank will continue to meet its capital
requirements.
SAVINGS AND LOAN HOLDING COMPANIES. FIRREA and the regulations promulgated
by the OTS thereunder require thrifts to have minimum regulatory "Tangible
Capital" equal to at least 1.5% of adjusted total assets. In addition, thrifts
are required to maintain minimum regulatory "Core Capital" equal to 3% of
adjusted total assets, which, as discussed below, may be increased on a case by
case basis, and to comply with risk-based capital requirements comparable to
those applicable to banks, which currently require minimum risk-based capital
equal to 8% of total risk-adjusted assets. For purposes of determining
compliance with Core Capital and risk-based capital standards, thrifts may not
include supervisory goodwill in the Core Capital calculation.
The term "Tangible Capital" includes common stockholders' equity,
non-cumulative perpetual preferred stock and related surplus, minority interests
in equity accounts of consolidated subsidiaries and certain non-withdrawable
accounts and pledged deposits of mutual associations, minus goodwill and other
intangible assets and investments in non-includable subsidiaries. The term "Core
Capital" means Tangible Capital plus qualifying supervisory goodwill and certain
intangible assets.
At least 50% of a thrift's risk-based capital requirement must be met with
Core Capital, while the remainder may be met with supplementary, or "Tier II
Capital." "Tier II Capital" incudes general loss reserves, certain cumulative
perpetual preferred stock, certain hybrid debt-equity instruments and qualifying
subordinated debt. The risk-based capital regulations require the inclusion of
100% of the principal amount of mortgage loans sold with recourse ("recourse
servicing") for purposes of calculating risk-weighted assets. The assets are
then to be included in the appropriate risk-weight category based on the
requirements of the regulation for mortgage loans.
Under FIRREA, the OTS is required to establish capital requirements for
thrifts no less stringent than those established by the Comptroller with respect
to banks subject to its jurisdiction. The Comptroller has established capital
requirements for banks under its jurisdiction that are substantially similar to
bank
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holding company capital requirements adopted by the Federal Reserve Board and
described above. The Comptroller has increased its core capital requirements for
such banks, other than those with the highest supervisory rating. The OTS has
issued a proposed rule that similarly requires an increased level of Core
Capital for all thrifts other than the most highly rated thrifts. This new rule
will be applied by the OTS on a case by case basis. Under this new rule, certain
thrifts, which may include First Federal, will be required to have at least 4%
Core Capital.
At September 30, 1996, IFC had Tangible Capital and Core Capital equal to
6.1% of adjusted total assets, and risk-based capital equal to 9.9% of total
risk-adjusted assets. At September 30, 1996 on a pro forma basis after giving
effect to the Merger, Pinnacle would have Tangible Capital equal to 6.92% of
adjusted total assets, Core Capital equal to 6.92% of adjusted total assets and
risk-based capital equal to 11.71% of risk-adjusted total assets.
The OTS is permitted to establish, on an institution by institution basis,
individualized minimum capital requirements exceeding the general requirements
described above. Failure to meet the capital guidelines described above could
subject an insured thrift to a variety of sanctions, including asset growth
restrictions and termination of deposit insurance by the FDIC.
Upon consummation of the Merger, Pinnacle expects that IndFed Bank will
continue to meet applicable fully phased-in capital requirements. Upon
consummation of the merger of IndFed Bank with and into Pinnacle, Pinnacle
expects that Pinnacle Bank, as the surviving bank will continue to meet its
capital requirements.
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 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 banks are 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 and IndFed 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
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federally insured banks and thrifts, such as Pinnacle Bank and IndFed 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 and IndFed 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 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 ratio of 10% or greater, a Tier 1 Capital ratio of 6% or
greater, and a Tier 1 Capital 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 ratio of 8% or
greater, a Tier 1 Capital ratio 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.................................. .04% .07% .21%
Adequately Capitalized............................ .07% .14% .28%
Less than Adequately Capitalized.................. .14% .28% .31%
</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 either
Pinnacle or IFC. As of December 31, 1996, Pinnacle Bank and IndFed Bank were
each 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
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insured by SAIF and IFC paid an assessment of $2.8 million on approximately
$430.1 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 "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 previously 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 spread out among all FDIC insured
institutions. FICO bond servicing will require BIF members to pay 6.4 cents for
every $100 in insured 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.
With certain exceptions, a savings and loan holding company must obtain the
prior written approval of the OTS before acquiring control of a thrift or
savings and loan holding company through the acquisition of stock or through a
merger or some other business combination. HOLA was recently amended to provide
that prior written approval is not required if the acquiring entity is a bank
holding company registered under, and subject to, the BHCA. Because Pinnacle is
a bank holding company registered
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under, and subject to, the BHCA, prior written approval of the OTS is not
required in connection with the Merger.
RECENT LEGISLATION
COMMUNITY DEVELOPMENT ACT. 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
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.
INTERSTATE ACT. 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.
FDICIA. 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
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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.
QUALIFIED THRIFT LENDER ("QTL") TEST
Except in certain cases, HOLA requires savings associations to meet a QTL
test to avoid certain restrictions on their operations. Most savings
associations are required to maintain 65% of their "portfolio assets" (total
assets minus goodwill, intangibles, property used to conduct business and liquid
assets up to 20% of assets), in "qualified thrift investments" (primarily loans
and other investments related to residential real estate together with certain
other assets). As of September 30, 1996, IndFed Bank had 70.6% of its portfolio
assets in qualified thrift investments and therefore was a QTL under applicable
law.
A savings institution's failure to remain a QTL may result in: (i)
limitations on new investments and activities; (ii) imposition of branching
restrictions; (iii) loss of Federal Home Loan Bank borrowing privileges; and
(iv) limitations on the payments of dividends. If a savings institution that is
a subsidiary of a savings and loan holding company fails to regain QTL status
within one year of its loss of such status, the holding company must register as
and will be deemed to be a bank holding company subject to, among other things,
the business activity restrictions of the BHCA.
MORTGAGE REGULATION
In the origination of mortgage loans, Pinnacle, IFC and their respective
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 IFC are
participants in the secondary mortgage market with some or all of the following:
private institutional investors, Federal 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 IFC 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 IFC 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
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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.
DESCRIPTION OF PINNACLE COMMON STOCK
THE FOLLOWING DESCRIPTION OF PINNACLE COMMON STOCK DOES NOT PURPORT TO BE
COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
PINNACLE'S RESTATED ARTICLES OF INCORPORATION, WHICH ARE FILED AS AN EXHIBIT TO
THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS FORMS
A PART AND ARE INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING DESCRIPTION
SHOULD BE READ CAREFULLY BY THE IFC STOCKHOLDERS SINCE, AT THE EFFECTIVE TIME,
EACH ISSUED AND OUTSTANDING SHARE OF IFC COMMON STOCK WILL BE CONVERTED INTO ONE
(1) SHARE OF PINNACLE COMMON STOCK.
Pinnacle's total authorized capital stock currently consists of 15,000,000
shares of common stock, no par value per share. With respect to Pinnacle Common
Stock, as of the record date for the Pinnacle Special Meeting, shares
of Pinnacle Common Stock were issued and outstanding and shares of
Pinnacle Common Stock were reserved for issuance upon the exercise of various
options previously issued by Pinnacle. Upon consummation of the Merger, it is
expected that approximately shares of Pinnacle Common Stock will be
reserved for issuance upon the exercise of various options previously issued by
Pinnacle and IFC.
Holders of Pinnacle Common Stock are entitled to receive such dividends as
may from time to time be declared by the Pinnacle Board out of funds legally
available therefor. With respect to the election of directors, and every other
issue submitted to them as Pinnacle stockholders at a meeting of stockholders or
otherwise, holders of Pinnacle Common Stock are entitled to one vote per share
of Pinnacle Common Stock. Holders of Pinnacle Common Stock do not have
cumulative voting rights in the election of directors. In the event of
liquidation they are entitled to share ratably in all assets of Pinnacle
available for distribution to holders of shares of Pinnacle Common Stock.
Pinnacle Common Stock is not subject to mandatory redemption and holders of
shares of Pinnacle Common Stock do not have preemptive rights. Shares of
Pinnacle Common Stock redeemed or acquired by Pinnacle return to the status of
authorized and unissued shares of Pinnacle Common Stock and may be reissued by
the Pinnacle Board. All shares of Pinnacle Common Stock now issued and
outstanding are fully paid and nonassessable. See "COMPARISON OF STOCKHOLDERS'
RIGHTS."
The registrar and transfer agent for the Pinnacle Common Stock is Harris
Trust and Savings Bank.
Uncommitted authorized but unissued shares of Pinnacle Common Stock may be
issued from time to time to such persons and for such consideration as the
Pinnacle Board may determine and holders of the then outstanding shares of
Pinnacle Common Stock may or may not be given the opportunity to vote thereon,
depending upon the nature of any such transactions, applicable law, the rules
and policies of the National Association of Securities Dealers, Inc. and the
judgment of the Pinnacle Board regarding the submission of such issuance to
Pinnacle's stockholders. Pinnacle stockholders have no preemptive rights to
subscribe to newly issued shares.
Moreover, it is possible that additional shares of Pinnacle Common Stock
would be issued for the purpose of making an acquisition by an unwanted suitor
of a controlling interest in Pinnacle more difficult, time-consuming or costly
or to otherwise discourage an attempt to acquire control of Pinnacle. Under such
circumstances the availability of authorized and unissued shares of Pinnacle
Common Stock may make it more difficult for stockholders to obtain a premium for
their shares. Such authorized and unissued shares could be used to create voting
or other impediments or to frustrate a person seeking to obtain control of
Pinnacle by means of a merger, tender offer, proxy contest or other means. Such
shares could be privately
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placed with purchasers who might cooperate with the Pinnacle Board in opposing
such an attempt by a third party to gain control of Pinnacle. The issuance of
new shares of Pinnacle Common Stock could also be used to dilute ownership of a
person or entity seeking to obtain control of Pinnacle. Although Pinnacle does
not currently contemplate taking such action, shares of Pinnacle Common Stock
could be issued for the purposes and effects described above and the Pinnacle
Board reserves its rights (if consistent with its fiduciary responsibilities) to
issue such stock for such purposes.
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COMPARISON OF STOCKHOLDERS' RIGHTS
GENERAL
In the event the Merger is consummated and IFC is merged with and into
Pinnacle, stockholders of IFC whose shares of IFC Common Stock are converted
into shares of Pinnacle Common Stock will become stockholders of Pinnacle. The
rights of Pinnacle stockholders are governed by the Restated Articles of
Incorporation and By-laws of Pinnacle (collectively, the "Pinnacle Charter
Documents") and the Michigan Business Corporation Act, as amended. Currently,
the rights of IFC stockholders are governed by the Certificate of Incorporation
and By-laws of IFC (collectively, the "IFC Charter Documents"), the IFC Rights
Agreement and the Delaware General Corporation Law, as amended.
There are differences between the Pinnacle Charter Documents and the IFC
Charter Documents which will affect stockholders' rights. Moreover, although the
MBCA and the DGCL are similar in many respects, there are differences between
those statutes which may affect stockholders' rights.
Certain material differences between the rights of holders of Pinnacle
Common Stock and the rights of holders of IFC Common Stock are described and
summarized below. The following discussion is not meant to be relied upon as an
exhaustive list or a detailed description of such differences and is not
intended to constitute a detailed comparison or description of the provisions of
the Pinnacle Charter Documents, the IFC Charter Documents, the IFC Rights
Agreement, the MBCA or the DGCL. The following discussion is qualified in its
entirety by reference to the Pinnacle Charter Documents, the IFC Charter
Documents, the IFC Rights Agreement and the laws of the State of Michigan and of
the State of Delaware, and holders of IFC Common Stock are referred to the
complete text of such documents, agreements and laws.
BOARD OF DIRECTORS; REMOVAL OF DIRECTORS
The size of the whole IFC Board may not be less than seven or more than 15.
The IFC Board currently consists of eight members and the directors are divided
into three classes with the term of office of one of such classes expiring in
each year. At each annual meeting of stockholders, the successors to the
directors of the class whose term is expiring at that time are elected to hold
office for a term of three years. With respect to an election of directors, an
IFC stockholder is entitled to one vote for each share of IFC Common Stock held.
In contrast, the size of the whole Pinnacle Board may not be less than five or
more than 20, and the number constituting the whole Pinnacle Board, within such
limitation, may be determined from time to time by resolution of the Pinnacle
Board. The Pinnacle Board currently consists of eight members, all of whom are
elected annually by the stockholders of Pinnacle. With respect to an election of
directors, a Pinnacle stockholder is entitled to one vote for each share of
Pinnacle Common Stock held. Following consummation of the Merger, the Pinnacle
Board will consist of a single class of directors comprised of ten persons, all
of whom will be elected annually by the stockholders of Pinnacle. See "INTERESTS
OF CERTAIN PERSONS IN THE MERGER" and "MANAGEMENT AND OPERATIONS AFTER THE
MERGER."
IFC and Pinnacle stockholders have different rights with respect to the
removal of directors. Under the DGCL, directors serving on a classified board
may be removed only for cause unless the corporation's certificate of
incorporation provides otherwise. Because IFC's Certificate of Incorporation
contains no contrary provision, IFC directors are subject to removal by
stockholders only for cause. Moreover, IFC's Certificate of Incorporation
provides that any IFC director or the entire IFC Board may be removed only by
the affirmative vote of the holders of 75% or more of the shares of IFC Common
Stock voting separately as a class and at a meeting of stockholders called
expressly for such purpose. Under the MBCA, directors may be removed with or
without cause unless the corporation's articles of incorporation provides
otherwise. Because Pinnacle's Articles of Incorporation contain no contrary
provision, Pinnacle directors are subject to removal by stockholders with or
without cause and by the affirmative vote of a majority of shares entitled to
vote at an election of directors.
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STOCKHOLDER VOTING REQUIREMENTS
GENERAL. Pursuant to the DGCL, all matters submitted to a vote of IFC
stockholders, other than the election of directors (for which the affirmative
vote of a plurality of the votes cast at an election is required), the removal
of directors for cause, the amendment of IFC's By-laws and certain provisions of
IFC's Certificate of Incorporation, certain business combination transactions
involving a 15% stockholder or an affiliate thereof, and certain business
combination transactions which are subject to Section 9 of IFC's Certificate of
Incorporation, are determined by the holders of shares entitling them to
exercise a majority of the total voting power of IFC. Pursuant to the MBCA, all
matters submitted to a vote of Pinnacle stockholders, other than the election of
directors (for which, the affirmative vote of a plurality of the votes cast at
an election is required) and certain business combination transactions involving
a 10% stockholder or an affiliate thereof, are determined by a vote of the
holders of shares entitling them to exercise a majority of the voting power of
Pinnacle.
SUPERMAJORITY VOTING PROVISIONS OF THE IFC CHARTER DOCUMENTS. Section 9 of
IFC's Certificate of Incorporation provides that the affirmative vote of the
holders of 75% of the "IFC Voting Shares," voting as a single class, is required
to approve certain mergers or consolidations, certain sales, leases, exchanges,
mortgages, pledges, transfers or dispositions of assets, certain
recapitalizations or reclassifications of securities, certain issuances or
transfers of voting securities or securities convertible into or exercisable for
voting securities, and certain other business combination transactions involving
IFC or a subsidiary of IFC and a "Related Person" or an affiliate or associate
of a Related Person (collectively, a "Business Combination"). Section 9 of IFC's
Certificate of Incorporation defines the term "Voting Shares" to mean any shares
of IFC entitled to vote generally in the election of directors, and defines the
term "Related Person" to mean any person who is the beneficial owner of 10% or
more of the outstanding IFC Voting Shares of IFC. The term "Related Person"
includes any person who is a Related Person (i) as of the time any definitive
agreement relating to a Business Combination is entered into, or (ii) as of the
record date for the determination of stockholders entitled to notice of and to
vote on a Business Combination, or (iii) immediately prior to the consummation
of a Business Combination.
Section 9 of IFC's Certificate of Incorporation provides that the
supermajority voting provisions contained therein do not apply to any Business
Combination that either is approved by the affirmative vote of at least 75% of
IFC's "Continuing Directors" or satisfies certain price, form of consideration
and procedural requirements designed to ensure the fairness of such Business
Combination. Section 9 of IFC's Certificate of Incorporation defines the term
"Continuing Director" to mean any member of the IFC Board who is unaffiliated
with the Related Person and was a member of the IFC Board prior to the time that
such Related Person became a Related Person, and any successor of a Continuing
Director who is unaffiliated with such Related Person and is recommended to
succeed a Continuing Director by a majority of IFC's Continuing Directors.
By virtue of the approval of the Merger Agreement and the transactions
contemplated thereby by the requisite percentage of IFC's Continuing Directors,
the provisions of Section 9 of IFC's Certificate of Incorporation do not apply
to the Merger, the Stock Option Agreements or such transactions.
Section 9 of IFC's Certificate of Incorporation provides that any amendment,
addition, alteration, change or repeal of said Section 9, or any other amendment
of the Certificate of Incorporation or By-laws of IFC inconsistent with or
modifying or permitting circumvention of said Section 9, must first be proposed
by the IFC Board upon the affirmative vote of at least two-thirds of the
directors then in office at a duly constituted meeting of the IFC Board called
expressly for such purpose, and thereafter approved by the affirmative vote of
the holders of at least 75% of IFC's then outstanding Voting Shares, voting as a
single class. The foregoing supermajority voting requirement does not apply to
any such amendment, addition, alteration, change or repeal recommended to IFC's
stockholders by the affirmative vote of not less than 75% of the Continuing
Directors. For the purposes of the foregoing, if at the time when any such
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amendment, addition, alteration, change or repeal is under consideration there
is no proposed Business Combination, then the term "Continuing Directors" is
deemed to mean the entire IFC Board.
Section 14 of IFC's Certificate of Incorporation provides that no amendment,
addition, alteration, change, or repeal of any provision of IFC's Certificate of
Incorporation may be made, unless such is first proposed by the IFC Board, upon
the affirmative vote of at least two-thirds of the directors then in office at a
duly constituted meeting of the IFC Board called expressly for such purposes,
and thereafter approved by the stockholders by a majority of the total votes
eligible to be cast at a duly constituted meeting of stockholders called
expressly for such purpose; except that the affirmative vote of the holders of
at least 75% of the total votes eligible to be cast at such meeting of
stockholders shall be required to amend, add to, alter, change or repeal Section
6 (which governs the composition and classification of the IFC Board, the
removal of directors, and amendments to IFC's By-laws), Section 8 (which governs
the calling of special meetings of stockholders), Section 9 (which governs
Business Combinations), Section 10 (which governs indemnification of directors
and officers), and Section 11 (which limits the personal liability of directors)
of IFC's Certificate of Incorporation. Section 14 of IFC's Certificate of
Incorporation also provides that Section 9 of IFC's Certificate of Incorporation
may be amended, added to, altered, changed or repealed only as described in the
preceding paragraph.
Section 6 of IFC's Certificate of Incorporation provides that IFC's By-laws
may be adopted, altered, amended or repealed by either (i) the IFC Board upon
the affirmative vote of at least two-thirds of the directors then in office at a
duly constituted meeting of the IFC Board called expressly for such purpose, or
(ii) IFC's stockholders upon the affirmative vote of at least 75% of the total
votes eligible to be cast by such stockholders at a duly constituted meeting of
IFC's stockholders called expressly for such purpose.
SUPERMAJORITY VOTING PROVISIONS OF THE PINNACLE CHARTER DOCUMENTS. The
Pinnacle Charter Documents do not contain any supermajority voting provisions
analogous to the provisions of Section 6, Section 9 and Section 14 of IFC's
Certificate of Incorporation.
ANTI-TAKEOVER LAWS AND CHARTER PROVISIONS
IFC is subject to the provisions of Section 203 of the DGCL, which applies
to Delaware corporations with a class of voting stock listed on a national
securities exchange, authorized for quotation on an interdealer quotation
system, or held of record by more than 2,000 persons, and restricts transactions
which may be entered into by such a corporation and certain of its stockholders.
Section 203 provides, in essence, that a stockholder acquiring more than 15% of
the outstanding voting shares of a corporation subject to its provisions (an
"Interested Stockholder") may not, except with certain board of directors and/
or stockholder approvals, engage in certain business combinations with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder.
Section 203 of the DGCL defines the term "business combination" to encompass
a wide variety of transactions with or caused by an Interested Stockholder in
which the Interested Stockholder receives or could receive a benefit other than
on a pro rata basis with other stockholders, including mergers, certain asset
sales, certain issuances of additional shares to the Interested Stockholder,
transactions with the company which increase the proportionate interest of the
Interested Stockholder or transactions in which the Interested Stockholder
receives certain other benefits. By virtue of the prior approval of the Merger
Agreement, the Stock Option Agreements and the transactions contemplated thereby
by the IFC Board, the provisions of Section 203 of the DGCL do not apply to the
Merger, the Stock Option Agreements or such transactions.
In addition to the provisions of Section 203, the provisions of Section 9
and Section 14 of IFC's Certificate of Incorporation, the classification of the
IFC Board and the terms of the IFC Rights Agreement may have the effect of
deterring a third party from acquiring or attempting to acquire a controlling
interest in IFC in a transaction or series of transactions not supported by the
IFC Board.
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Pinnacle is subject to the Michigan "Fair Price" statute (Chapter 7A of the
MBCA), which applies to certain "business combinations" such as mergers,
substantial sales of assets or securities issuances and liquidation,
recapitalization or reorganization plans. Generally, such statute requires, for
a business combination with an "interested stockholder" (generally, the holder
of 10% or more of a class of a corporation's voting stock), an advisory
statement from the corporation's board of directors, the approval of holders of
90% of each class of the corporation's outstanding voting stock and the approval
of two-thirds of the holders of each such class other than the interested
stockholder. The supermajority voting requirements do not apply where the
interested stockholder's offer meets certain price, form of consideration and
procedural requirements designed to make such offers fair to all stockholders or
where the board of directors has approved the transaction with respect to a
particular interested stockholder prior to the interested stockholder becoming
an interested stockholder.
Pinnacle is also subject to the Michigan "Control Share Acquisition" statute
(Chapter 7B of the MBCA). Generally, such statute provides that an entity that
acquires "control shares" may vote the control shares on any matter only if a
majority of all shares, and of all non-"interested shares," entitled to vote and
of each class of stock entitled to vote as a class, approve such voting rights.
"Interested shares" are defined generally as those shares owned by officers of
the corporation, employee directors of the corporation and the entity making the
control share acquisition. Control shares are defined generally as shares that
when added to shares already owned by an entity, would give the entity voting
power in the election of directors within any of three thresholds: one-fifth,
one-third and a majority. The effect of the statute is to condition the
acquisition of voting control of a Michigan corporation on the approval of a
majority of its pre-existing disinterested stockholders.
The provisions of the Michigan "Fair Price" statute do not apply to the
Merger because the Merger will not alter the contract rights of the Pinnacle
Common Stock as set forth in Pinnacle's Articles of Incorporation. The
provisions of the Michigan "Control Share Acquisition" statute do not apply to
the Merger because, among other things, Pinnacle is a party to the Merger
Agreement and the Merger will be effected in compliance with the applicable
provisions of Chapter 7 of the MBCA.
SPECIAL MEETINGS OF STOCKHOLDERS
IFC's Certificate of Incorporation provides that a special meeting of
stockholders may be called by the Chairman of the Board or the President, or a
majority of the directors then in office. Under applicable provisions of the
DGCL, such a meeting may also be called by the IFC Board.
Pinnacle's By-laws provide that a special meeting of stockholders may be
called by the Pinnacle Board, or by the Chairman of the Board, the President,
the Vice Chairman of the Board, or the Secretary of Pinnacle. Pinnacle's By-laws
further provide that the Secretary of Pinnacle shall call a special meeting of
stockholders upon the written request of stockholders of record holding in the
aggregate 25% or more of the outstanding voting stock of Pinnacle. Any such
written request must also state the purpose or purposes of the meeting.
Notwithstanding the foregoing provisions of Pinnacle's By-laws, the MBCA
entitles the holders of not less than 10% of the shares of Pinnacle entitled to
vote at a meeting to apply to the circuit court of Berrien County, Michigan and,
upon good cause shown, such court will order a special meeting of stockholders
to be held. Unlike the MBCA, the DGCL does not provide stockholders with the
right to apply to the Delaware court of chancery or other court to cause a
special meeting of IFC stockholders to be held.
DIRECTOR LIABILITY AND INDEMNIFICATION
As permitted by the DGCL, IFC's Certificate of Incorporation provides that a
director of IFC will not be personally liable for monetary damages for breach of
the director's fiduciary duty as a director. Under the DGCL, a limitation on a
director's liability such as that contained in IFC's Certificate of
Incorporation does not eliminate or limit the director's liability for breaches
of the duty of loyalty, for acts or omissions
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not made in good faith or which involve intentional misconduct or a knowing
violation of law, the unlawful payment of dividends or for any transaction in
which the director derived an improper personal benefit. The MBCA contains a
provision similar to that relied upon by IFC in adopting its Certificate of
Incorporation to limit the liability of its directors, and Pinnacle has amended
its Articles of Incorporation to limit the liability of its directors in such
manner.
The DGCL and the MBCA provide similar rights to indemnity and expense
advancement for directors of corporations chartered under the laws of their
respective states. Accordingly, the rights to indemnity and expense advancement
provided to the directors of IFC and Pinnacle are essentially the same.
IFC RIGHTS AGREEMENT
On February 26, 1992, the IFC Board declared a dividend of one IFC Right for
each outstanding share of IFC Common Stock to IFC stockholders of record at the
close of business on March 6, 1992. As of November 14, 1996, up to 4,751,131 IFC
Rights were issued and outstanding. Each IFC Right entitles a registered holder
thereof, subject to the terms and conditions of the IFC Rights Agreement, to
purchase from IFC one share of IFC Common Stock at a price of $60.00 per share,
subject to adjustment. The IFC Rights remain attached to the associated shares
of IFC Common Stock and are not exercisable except under the limited
circumstances set forth in the IFC Rights Agreement and relating generally to
certain persons (an "Acquiring Person") acquiring, obtaining the right to
acquire or otherwise obtaining beneficial ownership of 10% or more of the then
outstanding shares of IFC Common Stock. Generally speaking, in the event that
any person becomes an Acquiring Person, then in each such case each holder of a
right (other than the Acquiring Person) will thereafter have the right to
receive, upon exercise thereof, shares of IFC Common Stock having a market value
equal to two times the exercise price of the IFC Rights. In the event of the
acquisition of IFC in a merger or other business combination transaction, the
holders of IFC Rights will be entitled to receive, upon exercise thereof, shares
of common stock of the acquiring corporation having a market value of two times
the exercise price of the IFC Rights. The IFC Board may, at its option, at any
time prior to the close of business on the date that an Acquiring Person becomes
an Acquiring Person for purposes of the IFC Rights Agreement, elect to redeem
all (but not less than all) the then outstanding IFC Rights at a redemption
price of $.01 per IFC Right (the "Redemption Price"). The IFC Rights will expire
on that date that is the earliest of (i) the date on which the IFC Board, acting
pursuant to Section 3.1(c) of the IFC Rights Agreement, elects to exchange each
outstanding IFC Right for one share of IFC Common Stock, subject to adjustment,
(ii) the date on which the IFC Board, acting pursuant to Section 5.1 of the IFC
Rights Agreement, elects to redeem all of the IFC Rights then outstanding at the
Redemption Price, and (iii) the close of business on March 6, 2002. Until the
exercise of the IFC Rights, the holders of the IFC Rights do not have rights as
stockholders of IFC.
In connection with the execution of the Merger Agreement and the Stock
Option Agreements, IFC amended the IFC Rights Agreement to confirm that neither
Pinnacle, nor any of its subsidiaries, nor any other person, will be deemed be
an Acquiring Person (i) by virtue of the Merger Agreement, (ii) by virtue of any
of the transactions contemplated by the Merger Agreement or the IFC Stock Option
Agreement, or (iii) by virtue of the fact that Pinnacle is the "Beneficial
Owner" (as defined in the IFC Rights Agreement) solely of shares of IFC Common
Stock (A) of which Pinnacle or such subsidiary was the Beneficial Owner on
November 14, 1996, (B) acquired or acquirable pursuant to the grant or exercise
of the option granted pursuant to the IFC Stock Option Agreement, (C) acquired
or acquirable pursuant to a debt previously contracted before November 14, 1996
and (D) held directly or indirectly in trust accounts, managed accounts and the
like or otherwise held in a fiduciary capacity for third parties. Such amendment
to the IFC Rights Agreement provides, however, that in the event that Pinnacle
or any of its subsidiaries acquires beneficial ownership of any shares of IFC
Common Stock other than the shares described in clauses (A)-(D) above
("Subsequently Acquired Shares"), then the shares described in clauses (A), (B)
and (C) above, together with such Subsequently Acquired Shares, will be
considered in determining whether Pinnacle or any of its subsidiaries has become
an Acquiring Person.
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Under the Merger Agreement, IFC must redeem the IFC Rights prior to the
Effective Time at a cost to IFC of not more than $0.01 per each share of IFC
Common Stock issued and outstanding. Consequently, all of said IFC Rights will
be extinguished, terminated and cancelled prior to the Effective Time, without
any right of exercise, and will only represent the right to receive the
Redemption Price in cash from IFC or Pinnacle, as the surviving corporation,
following the Merger.
Shares of Pinnacle Common Stock do not have any rights similar to the IFC
Rights or otherwise.
PAYMENT OF DIVIDENDS
Under the DGCL, a corporation may declare and pay dividends either out of
its surplus or, if there is no surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
Under the MBCA, a corporation may not make distributions to its stockholders
if, after giving effect to the distribution, the corporation would not be able
to pay its debts as they become due in the usual course of business, or the
corporation's total assets would be less than the sum of its total liabilities
plus, unless the corporation's articles of incorporation permit otherwise, the
amount that would be needed, if the corporation were to be dissolved at the time
of the distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.
In addition to the dividend restrictions imposed on IFC under the DGCL and
the dividend restrictions imposed on Pinnacle under the MBCA, IFC, Pinnacle and
their respective subsidiaries are subject to certain regulatory restrictions.
See "CERTAIN REGULATORY CONSIDERATIONS--Payment of Dividends" above.
CHARTER AMENDMENTS
Under the DGCL and the MBCA, a corporation's certificate or articles of
incorporation, respectively, may be amended by the affirmative vote of a
majority of the outstanding stock entitled to vote thereon, and a majority of
the outstanding stock entitled to vote thereon as a class, subject to such
supermajority vote requirements as may be provided for in the corporation's
certificate or articles of incorporation. Except for certain provisions thereof
which are subject to supermajority vote requirements as described above, IFC's
Certificate of Incorporation may be amended by the affirmative vote of a
majority of the outstanding shares of IFC Common Stock. Pinnacle's Articles of
Incorporation may be amended by the affirmative vote of a majority of the
outstanding shares of Pinnacle Common Stock.
Under the DGCL, the power to adopt, amend or repeal by-laws is vested
exclusively in the stockholders entitled to vote, unless the certificate of
incorporation confers such power upon the board of directors as well. IFC's
Certificate of Incorporation provides that, in general, IFC's By-laws may be
amended by the affirmative vote of two-thirds of the directors of IFC then in
office at a duly constituted meeting of the IFC Board called expressly for such
purpose, or by the vote of the holders of 75% of the total votes eligible to be
cast by stockholders at a duly constituted meeting of IFC's stockholders called
expressly for such purpose.
Under the MBCA, the stockholders or the board of directors of the
corporation may adopt, amend or repeal the by-laws unless the articles of
incorporation or by-laws of the corporation provide that the power to adopt new
by-laws is reserved exclusively to the stockholders or that the by-laws or any
particular by-law shall not be altered or repealed by the board of directors.
Pinnacle's By-laws provide that they may be amended or repealed by a majority
vote of the Pinnacle Board or by Pinnacle's stockholders.
OTHER MATTERS
The DGCL provides that, unless otherwise provided in a corporation's
certificate of incorporation, any action required or permitted to be taken at an
annual or special meeting of stockholders may be taken
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without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize such action at a meeting. IFC's Certificate
of Incorporation prohibits IFC stockholders the right to take action by written
consent. Consequently, such actions must be voted on.
Although the MBCA contains a provision permitting stockholder action by less
than unanimous written consent, it requires a provision to that effect to be
included in a corporation's articles of incorporation. Because Pinnacle's
Articles of Incorporation do not contain a provision authorizing stockholder
action by less than unanimous written consent, stockholders of IFC who become
stockholders of Pinnacle subsequent to the Merger will not have this right.
The MBCA provides somewhat broader dissenters' rights of appraisal than
those provided under the DGCL. The MBCA expressly authorizes stockholders of a
Michigan corporation to exercise dissenters' rights with respect to certain
amendments to the articles of incorporation of such Michigan corporation which
adversely affect the rights of the class of shares held by them, while the DGCL
provides that stockholders of a Delaware corporation may not exercise
dissenters' rights of appraisal in connection with such an amendment unless the
certificate of incorporation of such Delaware corporation so provides.
Similarly, the MBCA expressly permits stockholders to exercise dissenters'
rights of appraisal in connection with the sale or exchange of all or
substantially all of the property of a Michigan corporation if the stockholder
is entitled to vote thereon. The DGCL permits the exercise of such rights in
connection with such a transaction only if the Delaware corporation's
certificate of incorporation so provides. IFC's Certificate of Incorporation
does not provide for dissenters' rights of appraisal in either of the foregoing
situations.
The MBCA and the DGCL provide similar voting rights with respect to mergers,
sales of substantially all of the assets of a corporation and other
extraordinary corporate transactions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PINNACLE
The following discussion provides additional information regarding the
financial condition and the results of operations for Pinnacle for the nine
month periods ended September 30, 1996 and 1995 and for each of the years ended
December 31, 1995, 1994 and 1993. This discussion should be read in conjunction
with the consolidated financial statements of Pinnacle and the notes thereto
which appear elsewhere in this Joint Proxy Statement/Prospectus. See "PINNACLE
CONSOLIDATED FINANCIAL STATEMENTS."
OVERVIEW AND FINANCIAL CONDITION
On December 1, 1995, Pinnacle acquired all of the outstanding capital stock
of Maco Bancorp, Inc. in exchange for aggregate consideration of $41.9 million
through the merger of Maco with and into Pinnacle. The Purchase Price consisted
of cash, a secured, short-term interest-bearing promissory note in the principal
amount of $18.0 million, and shares of Pinnacle Common Stock then valued at
approximately $20.9 million. As a result of the Maco Acquisition, Pinnacle
became the sole stockholder of First Federal Savings Bank of Indiana, a federal
savings bank. See "ACQUISITION OF MACO BANCORP, INC."
The Maco Acquisition substantially increased the size of Pinnacle and its
operations. For example, Pinnacle's total assets, total loans, total deposits,
and total liabilities increased approximately 103.2%, 67.4%, 85.0% and 104.3%,
respectively, from approximately $448.5 million, $309.8 million, $380.0 million
and $409.5 million, respectively, at September 30, 1995, to approximately $911.4
million, $518.5 million, $703.1 million and $836.6 million, respectively, at
December 31, 1995. 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 nine months ended September 30, 1996 are not
necessarily comparable to the results for the nine months ended September 30,
1995, and results for the year ended December 31, 1995 are not necessarily
comparable to results for years ended on or before December 31, 1994. Results
for the nine months ended September 30, 1996 and 1995 are not necessarily
indicative of results that may be expected for any other interim period or for
the year as a whole.
Pinnacle's net income for the first nine months of 1996 totaled
approximately $6.3 million, or $1.07 per share, as compared to approximately
$4.6 million, or $1.20 per share, for the same period in 1995. The substantial
increase in net income for 1996 as compared to 1995 is attributable primarily to
the Maco Acquisition. For the year ended December 31, 1995, Pinnacle reported
net income of approximately $6.5 million, or $1.62 per share, as compared to net
income of approximately $5.3 million, or $1.38 per share, for the year ended
December 31, 1995, an increase of 22.6%, or 17.4% on a per share basis. Net
income for the year ended December 31, 1994 was 6.0% higher than the net income
of $5.0 million, or $1.32 per share, for the year ended December 31, 1993. The
earnings increase in 1995 as compared to 1994, and the earnings increase in 1994
as compared to 1993, were largely the result of higher levels of net interest
income that were associated with higher levels of interest earning assets.
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Since 1993, 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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------ ----------------------------------
1996 1995 1995 1994 1993
------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans........................................ $ 588,154 $ 309,815 $ 518,459 $ 290,330 $ 264,010
Total assets....................................... $ 1,018,440 $ 448,506 $ 911,446 $ 409,438 $ 409,572
Deposits........................................... $ 744,821 $ 380,011 $ 703,100 $ 352,037 $ 363,014
Stockholders' equity............................... $ 73,481 $ 39,046 $ 74,896 $ 35,148 $ 33,878
</TABLE>
Pinnacle has experienced significant loan growth since December 31, 1992.
Total loans at September 30, 1996 were approximately $588.2, which was $278.3
million greater than total loans at September 30, 1995. Total loans at December
31, 1995 were approximately $518.5 million, which was $228.1 million greater
than total loans at December 31, 1994. The substantial increases in total loans
at September 30, 1996 and December 31, 1995 relative to the comparable prior
periods were primarily the result of the Maco Acquisition. Of the growth in
total loans from December 31, 1994 to December 31, 1995, $209.6 million was
related to the Maco Acquisition and approximately $18.5 million, or 6.6%, was
the result of the banking activities of Pinnacle Bank. Total loans at December
31, 1994 were $290.3 million, approximately 10.0% greater than total loans at
December 31, 1993.
Total assets and total deposits remained relatively constant from December
31, 1992 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, 1995 were $911.4 million, or 122.6%
greater than total assets at December 31, 1994 of $409.4 million. Approximately
$444.8 million of this is attributable to the Maco Acquisition. The balance of
this increase resulted from the banking activities of Pinnacle Bank. Total
assets at December 31, 1993 were approximately $409.6 million. Total deposits at
December 31, 1995 were $703.1 million as compared to $352.0 million 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. Total deposits at
December 31, 1994 were $352.0 million as compared to $363.0 million at December
31, 1993. This 3.0% decline in total deposits was attributable to a declining
interest rate environment.
Securities sold under repurchase agreements and other borrowings were
approximately $193.3 million at September 30, 1996 and $25.6 million at
September 30, 1995, an increase of $167.7 million, or 654.8%. Of this increase,
$115.3 million resulted from the Maco Acquisition. 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 is attributable to the banking activities
of Pinnacle Bank, approximately $80.8 million is attributable to the Maco
Acquisition, and $18.0 million is 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 the nine months ended September 30, 1996 and 1995, average earning assets
were $895.3 million and $409.2 million, respectively. Return on average earning
assets for the nine months ended September 30, 1996 was 0.88% as compared to
1.41% for the same period in 1995. Excluding the one-time Special Assessment
against financial institutions with deposits insured by SAIF, the return on
average earning assets for the nine months ended September 30, 1996 would have
been 1.08%. 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 is
100
<PAGE>
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. Pinnacle's return on average assets, which
measures how profitably total assets are invested, was 1.36% for 1995 compared
to 1.30% for 1994 and 1.27% for 1993.
Stockholders' equity was approximately $73.5 million at September 30, 1996
as compared to $39.0 million at September 30, 1995. Primarily as a result of the
Maco Acquisition, stockholders' equity grew $39.8 million, or 113.4%, 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 is attributable to the
public stock offering that was associated with the Maco Acquisition and
completed on December 1, 1995, (ii) approximately $21.0 million is attributable
to the stock portion of the Purchase Price paid in the Maco Acquisition, (iii)
approximately $3.2 million is attributable to retained earnings generated
primarily through net income (net of dividends declared), and (iv) approximately
$2.4 million is attributable to net unrealized gains on securities
available-for-sale. Pinnacle's return on average stockholders' equity, which
measures how profitably stockholders' invested capital has been employed, was
11.42% for the nine months ended September 30, 1996 as compared to 16.81% for
the same period in 1995. Excluding the Special Assessment, Pinnacle's return on
average stockholders' equity would have been 14.05% for the nine months ended
September 30, 1996. Pinnacle's return on average stockholders' equity was 15.91%
for 1995 compared to 15.40% for 1994 and 15.77% for 1993. The ratio of average
stockholders' equity to average total assets was 8.52% in 1995, 8.44% in 1994
and 8.05% in 1993. The ratio of dividends declared to net income per share of
Pinnacle Common Stock was 46.9% in 1995, 44.9% in 1994 and 40.2% in 1993.
RESULTS OF OPERATIONS
NET INCOME. Net income for the first nine months of 1996 was approximately
$6.3 million as compared to net income of $4.6 million for the same period in
1995. This increase in net income is 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
approximately $6.5 million, a 22.1% increase over net income of approximately
$5.3 million for the year ended December 31, 1994. Net income for the year ended
December 31, 1994 was 5.0% higher than the $5.0 million in net income for the
year ended December 31, 1993.
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 Pinnacle's
earnings.
101
<PAGE>
AVERAGE BALANCES. The following table summarizes the changes in average
interest-earning assets and interest-bearing liabilities as well as the average
rates earned and paid on these assets and liabilities, respectively, for the
nine months ended September 30, 1996 and 1995. The table also details the
increase and decrease in income and expense for each major category of assets
and liabilities and analyzes the extent to which such variances are attributable
to volume and rate changes.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
---------------------------------------------------------------------------------------
NINE MONTH AVERAGE EARNING ASSETS
AVERAGE INTEREST RATES EARNED/PAID INTEREST
AND PAYING LIABILITIES INCOME/EXPENSE
--------------------------------- ----------------------------------------- ---------
INCREASE BASIS POINTS
1996 1995 (DECREASE) 1996 1995 INC/(DEC) 1996
--------- --------- ----------- ----- ----- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments.............. $ 15,110 $ 5,162 $ 9,948 5.35% 5.83% (0.48)% $ 605
Securities:
Available-for-sale................. 330,488 61,236 269,252 6.84 6.61 0.23 16,915
Held-to-maturity(1)................ -- 39,708 (39,708) -- 6.60 (6.60) --
Loans, net of unearned income(1)..... 549,740 303,107 246,633 8.92 9.31 (0.39) 36,699
--------- --------- ----------- ---------
Total interest-earning assets(1)... $ 895,338 $ 409,213 $ 486,125 8.09% 8.60% (0.51)% $ 54,219
--------- --------- ----------- ---------
--------- --------- -----------
NOW accounts......................... $ 76,388 $ 45,356 $ 31,032 2.04% 1.92 0.12% $ 1,165
Money market deposits................ 27,959 13,782 14,177 3.87 3.35 0.52 809
Savings deposits..................... 232,723 118,599 114,124 3.70 4.28 (0.59) 6,441
Time deposits........................ 336,058 147,796 188,262 5.63 5.55 0.08 14,168
Federal Home Loan Bank advances...... 114,351 12,799 101,552 5.76 6.07 (0.31) 4,932
Other borrowings..................... 36,817 18,878 17,939 4.54 4.76 (0.22) 1,252
--------- --------- ----------- ---------
Total interest-bearing
liabilities...................... $ 824,296 $ 357,210 $ 467,086 4.66% 4.56% 0.10% $ 28,767
--------- --------- ----------- ---------
--------- --------- -----------
Net interest margin/income(1)...... 3.80% 4.62% (0.82)% $ 25,452
---------
<CAPTION>
RATE/VOLUME VARIANCE ANALYSIS
INCREASE/(DECREASE) DUE TO:
--------------------------------------------
INCREASE VOLUME/
1995 (DECREASE) VOLUME RATE RATE TOTAL
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments.............. $ 225 $ 380 $ 434 $ (19) $ (35) $ 380
Securities:
Available-for-sale................. 3,026 13,889 13,305 105 479 13,889
Held-to-maturity(1)................ 1,959 (1,959) (1,959) (1,959) 1,959 (1,959)
Loans, net of unearned income(1)..... 21,109 15,590 17,176 (893) (693) 15,590
--------- ----------- --------- --------- ----------- ---------
Total interest-earning assets(1)... $ 26,319 $ 27,900 $ 28,956 $ (2,765) $ 1,709 $ 27,900
--------- ----------- --------- --------- ----------- ---------
NOW accounts......................... $ 651 $ 514 $ 445 $ 40 $ 29 $ 514
Money market deposits................ 345 464 355 53 56 464
Savings deposits..................... 3,799 2,642 3,656 (520) (494) 2,642
Time deposits........................ 6,137 8,031 7,817 88 125 8,031
Federal Home Loan Bank advances...... 581 4,351 4,610 (29) (229) 4,351
Other borrowings..................... 672 580 639 (31) (28) 580
--------- ----------- --------- --------- ----------- ---------
Total interest-bearing
liabilities...................... $ 12,185 $ 16,582 $ 17,522 $ (398) $ (542) $ 16,582
--------- ----------- --------- --------- ----------- ---------
Net interest margin/income(1)...... $ 14,134 $ 11,318 $ 11,434 $ (2,367) $ 2,251 $ 11,318
--------- ----------- --------- --------- ----------- ---------
</TABLE>
- ------------------------------
(1) Yields are presented on a tax-equivalent basis assuming statutory income tax
rates of 34% for 1996 and 1995.
102
<PAGE>
SUMMARY OF CONSOLIDATED NET INTEREST INCOME. The following table sets forth
certain information with respect to Pinnacle's consolidated net interest income
for each of the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993
----------------------------------- ----------------------------------- ---------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE
--------- ----------- ----------- --------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans(1)(2)......................... $ 322,851 $ 29,854 9.24% $ 274,757 $ 23,255 8.46% $ 256,970
U.S. Treasury and government
agencies.......................... 66,380 4,291 6.46 51,009 2,666 5.23 54,834
State and political
subdivisions(2)................... 15,472 1,318 8.44 18,035 1,543 8.56 16,678
Other Securities.................... 34,611 2,017 5.83 34,858 1,878 5.39 31,179
Interest-bearing deposits with
financial institutions............ 3,970 256 7.20 1,554 76 4.89 5,231
Federal funds sold.................. 4,458 257 5.76 2,748 110 4.00 9,086
--------- ----------- --------- ----------- ---------
Total interest-earning assets..... 447,742 37,993 8.49% 382,961 29,528 7.71% 373,978
Allowance for loan losses........... (5,023) (5,156) (5,559)
Cash and due from banks............. 14,515 12,617 11,537
Premises and equipment, net......... 7,633 7,008 7,133
Other............................... 11,540 9,525 9,501
--------- ----------- --------- ----------- ---------
Total assets...................... $ 476,407 $ 37,993 $ 406,955 $ 29,528 $ 396,590
--------- ----------- --------- ----------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand............. $ 48,223 939 1.95% $ 45,978 $ 810 1.76% $ 47,007
Savings............................. 143,006 5,905 4.13 141,511 4,585 3.24 125,062
Time deposits less than $100,000.... 136,450 7,608 5.58 116,107 5,283 4.55 127,925
Time deposits greater than
$100,000.......................... 27,882 1,641 5.89 14,918 638 4.28 17,430
--------- ----------- --------- ----------- ---------
Total interest-bearing deposits... 355,561 16,093 4.53 318,514 11,316 3.55 317,424
--------- ----------- --------- ----------- ---------
Securities sold under repurchase
agreements and other borrowings... 38,132 2,058 5.40 14,409 546 3.79 11,391
--------- ----------- --------- ----------- ---------
Total interest-bearing
liabilities..................... 393,693 18,151 4.61 332,923 11,862 3.56% 328,815
Demand deposits 39,028 37,587 33,391
Other liabilities................... 3,093 2,084 2,448
--------- --------- ---------
Total liabilities................. 435,814 372,59 364,65
Stockholders' equity................ 40,593 34,361 31,936
--------- --------- ---------
Total liabilities and
stockholders' equity............ $ 476,407 $ 406,955 $ 396,590
--------- ----------- --------- ----------- ---------
--------- --------- ---------
Net interest income............... $ 19,842 $ 17,666
----------- -----------
----------- -----------
Net interest margin(3)............ 4.43% 4.61%
<CAPTION>
AVERAGE
INTEREST RATE
----------- -----------
<S> <C> <C>
ASSETS:
Loans(1)(2)......................... $ 23,163 9.01%
U.S. Treasury and government
agencies.......................... 2,967 5.41
State and political
subdivisions(2)................... 1,431 8.58
Other Securities.................... 1,897 6.08
Interest-bearing deposits with
financial institutions............ 163 3.12
Federal funds sold.................. 272 2.99
-----------
Total interest-earning assets..... 29,893 7.99%
Allowance for loan losses...........
Cash and due from banks.............
Premises and equipment, net.........
Other...............................
-----------
Total assets...................... $ 29,893
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand............. $ 1,076 2.29%
Savings............................. 4,065 3.25
Time deposits less than $100,000.... 6,133 4.79
Time deposits greater than
$100,000.......................... 755 4.33
-----------
Total interest-bearing deposits... 12,029 3.79
-----------
Securities sold under repurchase
agreements and other borrowings... 391 3.43
-----------
Total interest-bearing
liabilities..................... 12,420 3.78%
Demand deposits
Other liabilities...................
Total liabilities.................
Stockholders' equity................
Total liabilities and
stockholders' equity............
-----------
Net interest income............... $ 17,473
-----------
-----------
Net interest margin(3)............ 4.67%
</TABLE>
- ------------------------
(1) For purposes of these computations, non-accrual 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.
103
<PAGE>
RATE/VOLUME ANALYSES. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected 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, and (iv) total change in rate and volume.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1995 VS. 1994(1) 1994 VS. 1993(1)
---------------------------------------------------- ---------------------------------------
DUE TO DUE TO
---------------------------------------------------- ---------------------------------------
INCREASE/
VOLUME RATE VOLUME/RATE (DECREASE) VOLUME RATE VOLUME/RATE
----------- --------- --------------- ----------- ----------- --------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(2)....................... $ 4,069 $ 2,171 $ 359 $ 6,599 $ 1,603 $ (1,413) $ (98)
U.S. Treasury and government
agencies................... 804 627 194 1,625 (207) (99) 5
State and political
subdivisions(2)............ (219) (7) 1 (225) 116 (3) (1)
Other Securities............... (13) 153 (1) 139 224 (215) (28)
Interest-bearing deposits with
financial institutions....... 118 24 38 180 (115) 93 (65)
Federal funds sold............. 68 48 31 147 (190) 92 (64)
----------- --------- ----- ----------- ----------- --------- -----
Total interest-earning
assets..................... $ 4,827 $ 3,016 $ 622 $ 8,465 $ 1,431 $ (1,545) $ (251)
----------- --------- ----- ----------- ----------- --------- -----
INTEREST-BEARING LIABILITIES:
Interest-bearing demand........ $ 40 $ 87 $ 2 $ 129 $ (24) $ (249) $ 7
Savings........................ 48 1,259 13 1,320 535 (13) (2)
Time deposits less than
$100,000..................... 926 1,196 203 2,325 (566) (307) 23
Time deposits greater than
$100,000..................... 555 240 208 1,003 (109) (9) 1
----------- --------- ----- ----------- ----------- --------- -----
Total interest-bearing
deposits................... 1,569 2,782 426 4,777 (164) (578) 29
Securities sold under
repurchase agreements and
other borrowings............. 899 232 381 1,512 104 41 10
----------- --------- ----- ----------- ----------- --------- -----
Total interest-bearing
liabilities................ $ 2,468 $ 3,014 $ 807 $ 6,289 $ (60) $ (537) $ 39
----------- --------- ----- ----------- ----------- --------- -----
Increase (decrease) in net
interest income............ $ 2,359 $ 2 $ (185) $ 2,176 $ 1,491 $ (1,008) $ (290)
----------- --------- ----- ----------- ----------- --------- -----
----------- --------- ----- ----------- ----------- --------- -----
<CAPTION>
INCREASE/
(DECREASE)
-------------
<S> <C>
INTEREST-EARNING ASSETS:
Loans(2)....................... $ 92
U.S. Treasury and government
agencies................... (301)
State and political
subdivisions(2)............ 112
Other Securities............... (19)
Interest-bearing deposits with
financial institutions....... (87)
Federal funds sold............. (162)
-----
Total interest-earning
assets..................... $ (365)
-----
INTEREST-BEARING LIABILITIES:
Interest-bearing demand........ $ (266)
Savings........................ 520
Time deposits less than
$100,000..................... (850)
Time deposits greater than
$100,000..................... (117)
-----
Total interest-bearing
deposits................... (713)
Securities sold under
repurchase agreements and
other borrowings............. 155
-----
Total interest-bearing
liabilities................ $ (558)
-----
Increase (decrease) in net
interest income............ $ 193
-----
-----
</TABLE>
- ------------------------------
(1) Prior year amounts were reclassified to conform to current year
presentation.
(2) Income from municipal securities and loans is stated on a tax-equivalent
basis.
104
<PAGE>
Net interest income on a tax-equivalent basis was approximately $25.5
million for the nine months ended September 30, 1996, as compared to $14.1
million for the nine months ended September 30, 1995. The substantial increase
in net interest income during 1996 over the same period in 1995 is due primarily
to the increase in average earning assets associated with the Maco Acquisition.
An increase in average earning assets for the nine months ended September 30,
1996 of $486.1 million increased net interest income by $11.3 million, while a
lower net interest margin of 3.80% for the nine months ended September 30, 1996,
as compared to 4.62% for the nine months ended September 30, 1995, resulted in a
decrease in net interest income of approximately $2.4 million. The 0.82%
decrease in net interest margin is attributable mainly to lower interest margins
at First Federal.
Net interest income on a tax-equivalent basis was $19.8 million for the year
ended December 31, 1995, an increase of approximately $2.2 million, or 12.3%,
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.
Net interest income on a tax-equivalent basis for the year ended December
31, 1994 was $193,000 higher than net interest income of approximately $17.5
million for the year ended December 31, 1993. During 1994, growth in the volume
of average loans of approximately $17.8 million increased net interest income by
$1.6 million, even though the average rate on earning assets declined to 7.71%
in 1994 from 7.99% in 1993. However, the decline in the average rate on earning
assets reduced net interest income by $1.0 million. In addition, net interest
margin declined to 4.61% in 1994 from 4.67% in 1993 and reduced net interest
income by $230,000. Thus, while total interest income for 1994 decreased
$365,000 from 1993, total interest expense for 1994 decreased $558,000 for 1994,
resulting in improved net interest income of $193,000 in 1994.
Total loans, commercial loans, consumer loans and real estate loans at
September 30, 1996 were approximately $588.2 million, approximately $201.1
million, approximately $105.1 million, and approximately $277.4 million,
respectively. Total loans, commercial loans, consumer loans and real estate
loans at September 30, 1995 were $309.8 million, approximately $133.4 million,
$69.4 million, and approximately $104.3 million, respectively. The substantial
increases in each of these categories of loans during 1996 are attributable
primarily to the Maco Acquisition.
Total loans at December 31, 1995 were approximately $518.5 million, an
increase of $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 is 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%, is 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%, is 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 were
$268.9 million, an increase of 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 is attributable to the Maco Acquisition.
105
<PAGE>
Total loans outstanding at December 31, 1994 increased $26.3 million over
the year earlier period. Commercial loans increased by $12.8 million during 1994
due to an improved business environment in southwestern Michigan. Consumer loans
increased by $13.0 million in 1994 primarily as a result of growth in Pinnacle
Bank's volume of home equity loan products. Real estate loans as of December 31,
1994 remained relatively unchanged due to a soft mortgage loan market in
southwestern Michigan and the continued sale of mortgage loans in the secondary
market.
Securities, federal funds sold, and interest-bearing deposits with financial
institutions were $364.8 million at September 30, 1996 and $108.7 million at
September 30, 1995. The substantial increase in this item in 1996 as compared to
1995 is attributable primarily to the Maco Acquisition. Securities, federal
funds sold and interest-bearing deposits with financial institutions increased
$240.2 million, or 259.2%, to approximately $332.9 million at December 31, 1995
as compared to approximately $92.7 million at December 31, 1994. The growth
during 1995 is primarily attributable to the Maco Acquisition, which added
$203.7 million to this item. Securities, federal funds sold and interest-bearing
deposits with financial institutions at December 31, 1994 decreased 24.0% from
$122.0 million at December 31, 1993 as lower yielding investments matured and
were used to fund growth in a higher yielding loan portfolio resulting from
local economic expansion.
Total deposits were $744.8 million at September 30, 1996 as compared to
$380.0 million at September 30, 1995. The substantial increase in total deposits
at September 30, 1996 as compared to September 30, 1995 is attributable
primarily to the Maco Acquisition. Total deposits increased by $351.1 million,
or 99.7%, to $703.1 million at December 31, 1995 from $352.0 million at December
31, 1994. Of this deposit growth, approximately $318.8 million is attributable
to the Maco Acquisition and approximately $32.3 million, or 9.2%, is
attributable to the banking activities of Pinnacle Bank. Demand deposit product
balances grew $43.1 million, or 49.4%, during 1995. Of this increase, $38.2
million resulted from the Maco Acquisition and $4.9 million, or 5.7%, resulted
from Pinnacle Bank's internal growth. Time deposits at December 31, 1995 totaled
$320.2 million as compared to $133.1 million on December 31, 1994, an increase
of approximately $187.1 million, or 140.5%. Of this increase, $161.7 million is
attributable to the Maco Acquisition and approximately $25.4 million, or 19.1%,
is attributable to the banking activities of Pinnacle Bank. Pinnacle management
believes that such internal growth is attributable to an increase in interest
rates during the first half of 1995 and a determination by customers 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
approximately $252.5 million at December 31, 1995, and virtually all of this
increase in savings products resulted from the Maco Acquisition.
Total deposits decreased 3.0% to $352.0 million at December 31, 1994 from
$363.0 million at December 31, 1993. Included in this decrease was a $16.1
million decrease in savings products in 1994 that was caused by a low interest
rate environment in which deposit customers sought higher yields from non-bank
competitors. However, time deposits grew by $3.1 million in 1994 after
depositors began to shift to longer term time products in the last quarter of
1994.
Securities sold under repurchase agreements and other borrowings were
approximately $193.3 million at September 30, 1996 and $25.6 million at
September 30, 1995. Of the substantial increase in this item at September 30,
1996 as compared to September 30, 1995, $115.4 million is attributable primarily
to the Maco Acquisition and First Federal's utilization of borrowings from the
Federal Home Loan Bank of Indianapolis as a source of funding for specific
matched investment purchases and loans. 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
106
<PAGE>
and certain investment security purchases with similar adjustable rate features
and maturities. In 1994, securities sold under repurchase agreements and other
borrowings increased $9.4 million as Pinnacle utilized alternative funding
sources provided by the Federal Home Loan Bank of Indianapolis to promote
matched funding for specific loan purposes.
Provision for Loan Losses. For the nine months ended September 30, 1996, the
provision for loan losses totaled $245,000 as compared to $195,000 for the same
period in 1995. Non-accrual loans increased to $968,000 at September 30, 1996 as
compared to $580,000 at September 30, 1995. Total non-performing loans to total
loans increased to 0.90% at September 30, 1996 as compared to 0.45% at September
30, 1995. Pinnacle's management believes that these increases are attributable
primarily to the Maco Acquisition and not to any general decline in loan credit
quality.
For the year ended December 31, 1995, the provision for loan losses totaled
$225,000 compared to $125,000 for the same period in 1994. This increase was
attributable mainly to loan growth in 1995 and an increase in net charge-offs in
1995 of $159,000. 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 is
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.
For the year ended December 31, 1994, the provision for loan losses totaled
$125,000 compared to $360,000 for the year ended December 31, 1993. This
decrease was primarily the result of an improvement in loan credit quality.
Nonaccrual loans decreased $973,000 during 1994 to $749,000, as compared to $1.7
million for the year ended December 31, 1993. Total nonperforming loans to total
loans was .60% at December 31, 1994 and .92% at December 31, 1993. Total past
due loans over 90 days decreased from $694,000 in 1993 to $490,000 in 1994.
NON-INTEREST INCOME. The following table reflects various components of
non-interest income for each time period reported.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Services charges on deposit accounts............................. $ 1,474 $ 1,116 $ 1,530 $ 1,479 $ 1,470
Trust fees....................................................... 47 403 533 485 352
Investment services fees......................................... 200 108 125 169 164
Merchant and loan service fees................................... 962 640 952 770 647
Recoveries on distressed assets.................................. 152 266 296 262 596
Gain (loss) on sale of loans, net................................ 943 97 182 (11) 352
Investment securities gains, net................................. 357 181 350 64 66
Other income..................................................... 1,029 412 618 538 527
--------- --------- --------- --------- ---------
Total non-interest income........................................ $ 5,596 $ 3,223 $ 4,586 $ 3,756 $ 4,174
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Non-interest income was approximately $5.6 million for the nine months ended
September 30, 1996 and approximately $3.2 million for the nine months ended
September 30, 1995. Of this $2.4 million increase in non-interest income, $1.5
million is attributable to the Maco Acquisition (including $277,000 attributable
to securities gains from the sale of securities available-for-sale). In
addition, at Pinnacle Bank deposit service charges increased $150,000, or 13.4%,
trust income increased $76,000, or 18.9% brokerage and investment fees increased
$92,000, or 85.2%, and other loan service fees increased $322,000, or 50.4%.
107
<PAGE>
Non-interest income for the year ended December 31, 1995 increased $830,000,
or 22.1%, to approximately $4.6 million 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 when 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.
Non-interest income for the year ended December 31, 1994 was approximately
$3.8 million, a nearly $418,000 decrease over non-interest income of
approximately $4.2 million for the year ended December 31, 1993. Low demand for
mortgage loan financing due to increased mortgage rates in 1994, and the related
downward pricing of sales in the secondary market, caused gains on sale of loans
to decrease $363,000 for the year ended December 31, 1994, resulting in net loss
of $11,000. This compares to a net gain for the year ended December 31, 1993 of
$352,000. Due to continued growth of managed trust assets, trust fees for the
year ended December 31, 1994 increased $133,000, or 37.8%, over trust fees of
$352,000 for the year ended December 31, 1993. For the year ended December 31,
1994, recoveries on distressed assets from Pinnacle's 1988 acquisition of First
State Bank of White Cloud decreased by $334,000 to $262,000, reflecting a
continued decline in the face value of such distressed assets.
NON-INTEREST EXPENSE. The following table presents the major components of
non-interest expense for the periods reported.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries................................................... $ 6,261 $ 3,789 $ 5,278 $ 4,776 $ 4,670
Benefits................................................... 1,590 1,018 1,822 1,297 1,401
--------- --------- --------- --------- ---------
Total salaries and benefits.............................. 7,851 4,807 7,100 6,073 6,071
Occupancy expense.......................................... 1,597 755 1,097 1,033 1,042
Equipment expense.......................................... 1,147 632 947 885 914
Postage and delivery....................................... 481 252 362 292 311
Supplies................................................... 739 325 455 418 366
Marketing and promotion.................................... 938 471 695 298 367
Professional services...................................... 786 243 314 417 663
FDIC insurance............................................. 3,046 420 552 808 739
Amortization of intangibles................................ 970 341 525 458 462
Other expense.............................................. 3,083 1,895 2,589 2,432 2,516
--------- --------- --------- --------- ---------
Total non-interest expense............................... $ 20,638 $ 10,141 $ 14,636 $ 13,114 $ 13,451
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Non-interest expense for the nine months ended September 30, 1996 was $20.6
million as compared to $10.1 million for the same period in 1995.
Of this 103.5% increase in non-interest expense, approximately $9.1 million
is 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 the changing of the name of First
Federal, consisted of $358,000 for the Special Assessment charged against
Pinnacle Bank, $244,000 for computer equipment upgrades, $153,000 for supplies,
$177,000 for marketing expenses, $84,000 for telephone expenses, and $183,000
for professional fees.
108
<PAGE>
Non-interest expense increased $1.5 million, or 11.6%, to $14.6 million 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%, during the period due to a decline in insurance premiums on bank
deposits.
For the year ended December 31, 1994, total non-interest expense decreased
$337,000, or approximately 2.5%, from total non-interest expense of
approximately $13.5 million in 1993. Professional services decreased $246,000 in
1994 from 1993 when Pinnacle hired outside consulting services to identify
operating efficiencies and incurred higher legal costs associated with
resolution of specific loan credits obtained in its 1992 acquisition of all of
the outstanding stock of Harbor Country of Three Oaks, Michigan, an $82 million
state bank.
INCOME TAXES. Federal income taxes were approximately $3.5 million for the
nine months ended September 30, 1996 and approximately $2.1 million for the nine
months ended September 30, 1995. The effective tax rates for such periods were
35.5% and 31.0%, respectively.
Federal income taxes were $2.6 million for the year ended December 31, 1995,
an increase of $277,000 over federal 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. In 1994, federal income taxes increased by $78,000 to
$2.3 million as compared to 1993. This increase was primarily the result of
increased earnings in 1994. The effective tax rates for 1995, 1994 and 1993 were
28.8%, 30.6% and 30.9%, respectively, with the decrease in 1995 associated with
the IRS settlement.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS. Average earning assets equaled 94.0% of total average
assets during the nine-month period ended September 30, 1996 and 94.6% for the
same period in 1995. Generally, the higher earning assets are to total assets,
the greater the contribution of Pinnacle's net interest margin to profitability.
Pinnacle's average earning asset ratio was 94.0% in 1995 and 94.1% in 1994.
Average loans outstanding through September 30, 1996 were $549.7 million.
Average loans outstanding through September 30, 1995 were $303.1 million. The
substantial increase in this item is attributable primarily to the Maco
Acquisition. Average loans outstanding in 1995 were approximately $322.9
million, or $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. Average loans outstanding increased $17.8
million, or 6.9%, in 1994 as compared to greater than average loans outstanding
in 1993. This increase also reflected improvements in the local economic
environment.
Average securities for the nine months ended September 30, 1996 was
approximately $330.5 million as compared to $100.9 million at September 30,
1995. The substantial increase in this item is attributable primarily to the
Maco Acquisition. Average securities increased approximately $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. Average securities increased $1.2 million in 1994 to
$103.9 million from $102.7 million in 1993. Security balances at December 31,
1995 totaled $287.5 million, an increase of approximately $196.0 million, or
214.1%, over security balances of approximately $95.1 million at December 31,
1994. This increase is primarily attributable to approximately
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<PAGE>
$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 loans were approximately $588.2 million at September 30, 1996 and
$309.8 million at September 30, 1995. During 1996, commercial loans increased by
$67.7 million, or 50.7%, while consumer loans (primarily home equity loans)
increased by $35.6 million or 51.3%. Pinnacle continues to service the loans it
originates, thereby providing additional fee income.
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 is attributable to the Maco Acquisition and
$15.4 million is 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. For the
year ended December 31, 1994, gross loans increased to $290.3 million as
compared to $264.0 million for the year ended December 31, 1993. During 1994,
loan growth was generated in both commercial loans, which increased by
approximately $12.8 million over 1993, and consumer loans, which increased by
approximately $13.0 million over 1993. However, mortgage loan growth was
relatively unchanged during 1994. Pinnacle continues to service the loans it
originates, thereby providing additional fee income.
To manage interest rate risk in its real estate portfolio, Pinnacle sold
approximately $80.7 million in originated mortgage loans during the nine months
ended September 30, 1996, compared to $4.2 million during the nine months ended
September 30, 1995. This increase is attributable primarily to the Maco
Acquisition and the $77.5 million of mortgage loans originated through First
Federal's large network of mortgage loan originators and sold in the secondary
market.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses totaled
approximately $5.7 million at September 30, 1996 as compared to $4.9 million as
of September 30, 1995. The allowance as a percentage of total loans was 0.97%
and 1.58%, respectively, for such periods. The allowance for loan losses totaled
approximately $5.9 million at December 31, 1995 as compared to $5.0 million at
December 31, 1994, and the allowance as a percentage of total loans was 1.1% and
1.7%, respectively, for such periods. 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 are attributable mainly to the
large amount of mortgage loans acquired in the Maco Acquisition that generally
carry a lower reserve per management's estimate. At December 31, 1994, the
allowance for loan losses decreased $201,000 from $5.2 million as of December
31, 1993. Improving credit quality accounted for the decrease in loan loss
provisions during 1994.
Net charge-offs for the nine months ended September 30, 1996 were $421,000,
or 0.1%, of average loans outstanding as compared to $344,000, or 0.08%, for the
nine months ended September 30, 1995. Net charge-offs for the year ended
December 31, 1995 were $485,000 or 0.15% of average loans outstanding as
110
<PAGE>
compared to $326,000 or .12%, for the year ended December 31, 1994 and $1.0
million, or 0.40%, for the year ended December 31, 1993. Recoveries on
previously charged-off loans were $259,000 in 1995 and $272,000 in 1994. At
September 30, 1996 and 1995, non-accrual loans amounted to $968,000 and $1.1
million, respectively. At December 31, 1995, nonaccrual loans amounted to
approximately $3.3 million (with $881,000 at Pinnacle Bank and $2.4 million at
First Federal). This compares to nonaccrual loans of $749,000 at December 31,
1994. Pinnacle's management believes that the steady level of nonaccrual loans
at Pinnacle Bank reflects good economic conditions and credit quality and that
the level at First Federal was at a manageable level given the nature of its
loans and related reserves.
Other loans of concern to Pinnacle management decreased to $10.3 million as
of September 30, 1996 as compared to $11.1 million as of September 30, 1995.
Other loans of concern to Pinnacle management increased $2.6 million in 1995 to
approximately $9.6 million. 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.
NON-EARNING ASSETS. Premises and equipment were $12.7 million at September
30, 1996 and $7.5 million at September 30, 1995. Capital improvements for the
first nine months in 1996 totaled $922,000 as compared to $1.1 million for the
first nine months in 1995. Premises and equipment increased to $12.5 million at
December 31, 1995 from $6.9 million at 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. During 1994, premises and equipment decreased slightly from $7.0
million at December 31, 1993.
Interest receivable and other assets were $30.7 million at September 30,
1996 and $10.6 million at September 30, 1995. Other real estate increased to
$1.3 million from $1.1 million for the same time periods. Interest receivable
and other assets increased to $28.7 million from approximately $9.8 million as
of December 31, 1995 and 1994, respectively. 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 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. In
1994, interest receivable and other assets decreased $116,000 from approximately
$9.9 million at December 31, 1993.
INTEREST-BEARING LIABILITIES. Average interest-bearing liabilities
increased $467.1 million, or 130.8%, for September 30, 1996 over the same period
in 1995. The increase resulted from increases in average time deposits of $188.3
million, average borrowings of $119.5 million, and average savings deposits of
$114.1 million.
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
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<PAGE>
$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 repaid in full
in March, 1996).
In 1994, average interest-bearing liabilities increased $4.1 million, or
1.3%, over 1993, due primarily to an increase in average savings accounts that
was partially offset by a decline in average time accounts.
OTHER LIABILITIES. Other liabilities were $6.8 million at September 30,
1996 and approximately $3.8 million at September 30, 1995. The increase was
attributable primarily to the Maco Acquisition. At December 31, 1995, other
liabilities increased $3.9 million, or 165.5%, to approximately $6.3 million
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. At December 31, 1994 other liabilities were
$145,000 higher than other liabilities of $2.2 million at December 31, 1993.
CAPITAL COMPONENTS
The following table details Pinnacle's capital components and ratios at
September 30, 1996 and at December 31, 1995, 1994, and 1993 based upon the
capital requirements set by regulatory agencies.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
---------------- ----------------------------------
1996 1995 1994 1993
---------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier I:
Common stockholders' equity.................... $ 73,481 $ 74,896 $ 35,148 $ 33,878
Net unrealized (gains) losses on securities
available-for-sale........................... 2,752 (1,137) 1,278 (373)
Less, net unrealized losses on equity
securities, goodwill and other intangibles... (12,754) (14,396) (1,251) (1,361)
-------- ---------- ---------- ----------
Total Tier I capital....................... $ 63,479 $ 59,363 $ 35,175 $ 32,144
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
Tier II:
Allowable portion of the reserve for possible
credit losses................................ $ 5,676 $ 5,852 3,482 3,216
Total Tier II capital...................... 5,676 5,852 3,482 3,216
-------- ---------- ---------- ----------
Total risk-based capital................... $ 69,155 $ 65,215 $ 38,657 $ 35,360
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
Risk-adjusted assets............................. $ 570,545 $ 495,978 $ 277,052 $ 255,288
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
Quarterly average total assets less deductible
intangibles.................................... $ 964,421 $ 548,448 $ 406,875 $ 407,182
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
REGULATORY ---------------- -------------------------------
MINIMUM 1996 1995 1994 1993
---------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Tier I capital/risk-adjusted assets...... 4.00% 11.13% 11.97% 12.70% 12.59%
Total risk-based capital/risk-adjusted
assets................................. 8.00% 12.12% 13.15% 13.95% 13.85%
Tier I capital/quarterly average total
assets less deductible intangibles
(leverage ratio)....................... 3.00% 6.58% 10.82% 8.65% 7.89%
to 5.00%
</TABLE>
112
<PAGE>
Tier I and total qualifying capital were approximately $63.5 million and
approximately $69.2 million, respectively, at September 30, 1996 and
approximately $59.4 million and $65.2 million, respectively, at December 31,
1995. Tier l and total qualifying capital increased approximately $24.2 million
and approximately $26.6 million, respectively, as of December 31, 1995 as
compared to December 31, 1994. These increases, which are primarily due to the
Maco Acquisition, include net proceeds of approximately $13.2 million of net
proceeds received from the issuance of 862,500 shares of Pinnacle Common Stock
in a public offering associated with the Maco Acquisition and the approximately
$21.0 million stock portion of the purchase price for Maco. Such increases were
partially offset by approximately $13.3 million of goodwill associated with the
Maco Acquisition. Retained earnings added approximately $3.2 million to Tier 1
and total qualifying capital in 1995.
On December 31, 1993, Pinnacle adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting of Certain
Investments in Debt and Equity Securities." The unrealized holding gains and
losses, net of related tax effect, on available-for-sale securities are
reportable as a separate component of stockholders' equity until realized.
However, for determining risk-based capital ratios, only unrealized holding
losses on equity securities are considered as a component of qualifying capital.
As of September 30, 1996, net unrealized losses on securities, net of tax
effect, totaled $2.8 million as compared to net unrealized gains on securities,
net of tax effect, of $223,000 for September 30, 1995. At December 31, 1995,
unrealized gains on securities available-for-sale, net of tax effect, totaled
$1.1 million as compared to net unrealized losses, net of tax effect, of
approximately $1.3 million at December 31, 1994. In determining risk-based
capital ratios, only unrealized losses on equity securities, net of tax effect,
are considered as a component of qualifying capital. These unrealized losses
totaled $11,000 at December 31, 1995 and $21,000 at December 31, 1994.
Pinnacle's Tier 1 and total risk-based capital to total risk-adjusted assets
ratio at December 31, 1995 were 11.97% and 13.15%, respectively, as compared to
12.70% and 13.95%, respectively, at December 31, 1994. In 1994, the net
increases in Tier 1 and total risk-adjusted capital were $3.0 million and
approximately $3.3 million, respectively, when compared to 1993.
Pinnacle's capital measurements at September 30, 1996 and December 31, 1995
are in excess of the minimum required by bank regulatory authorities, including
the Federal Reserve Board and the FDIC. At September 30, 1996 and December 31,
1995, Pinnacle also had total capital-to-risk based assets in excess of 10%,
meeting the "well-capitalized" bank regulatory requirements.
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 September 30, 1996, cash and due
from banks, federal funds sold, and money market instruments equaled
approximately $32.5 million. Additional liquidity is provided by the ability to
borrow from the Federal Reserve Bank and the Federal Home Loan Bank of
Indianapolis. As of September 30, 1996, Pinnacle had borrowed $150.0 million
from the Federal Home Loan Bank of Indianapolis to match longer term loans and
specific securities with matching maturities.
Pinnacle adopted SFAS No. 115 on December 31, 1993. Pinnacle identified
securities totaling approximately $360.1 million and $61.7 million,
respectively, as being available-for-sale at September 30, 1996 and September
30, 1995, respectively. Pinnacle classified all of its security portfolio at
December 1, 1995 as being available-for-sale. Consequently, this portfolio,
which totaled $287.5 million at December 31, 1995, 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 market value, thereby conforming such securities to
Pinnacle's interest 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-
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<PAGE>
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 $83.0
million for the first nine months of 1996 and $37.5 million for the first nine
months of 1995 with resulting net gains of $357,000 and $181,000, respectively.
At September 30, 1996, gross unrealized holding gains and gross unrealized
holding losses in Pinnacle's total security portfolio amounted to approximately
$894,000 and approximately $5.1 million, respectively. At September 30, 1995,
gross unrealized holding gains and gross unrealized holding losses in Pinnacle's
total security portfolio amounted to $569,000 and $230,000, respectively.
Proceeds from the sales of securities available-for-sale amounted to $69.0
million in 1995 and $14.1 million in 1994, with resulting gains of $350,000 and
$64,000, respectively. At December 31, 1995, gross unrealized holding gains and
gross unrealized holding losses in Pinnacle's total security portfolio amounted
to $2.2 million and $478,000, respectively. At December 31, 1994, gross
unrealized holding gains and gross unrealized holding losses in Pinnacle's total
security portfolio amounted to approximately $292,000 and $3.3 million,
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 First Federal and from earnings
on investments. Dividends paid to Pinnacle by Pinnacle Bank amounted to $2.4
million for the nine months ended September 30, 1996, $2.2 million for the nine
months ended September 30, 1995, $12.1 million in 1995, approximately $2.4
million in 1994, and $2.0 million in 1993. Dividends paid to Pinnacle by First
Federal amounted to $1.3 million for the nine months ended September 30, 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. See "CERTAIN REGULATORY
CONSIDERATIONS--Payment of Dividends" and "COMPARISON OF STOCKHOLDERS'
RIGHTS--Payment of Dividends."
INTEREST RATE SENSITIVITY
By effectively managing interest rate sensitivity, interest rate risk is
minimized by balancing the amount of interest-sensitive assets and
interest-sensitive liabilities repricing within each time period. 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. 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 December
31, 1995. In preparing the table, management of Pinnacle
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<PAGE>
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.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY/GAP
ANALYSIS AS OF DECEMBER 31, 1995
------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY PERIOD
------------------------------------------------------------------------------------
1 YEAR
0-3 4-6 7-9 10-12 THROUGH OVER
MONTHS MONTHS MONTHS MONTHS 5 YEARS 5 YEARS TOTAL
---------- ---------- ---------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits with
financial institutions........... $ 45,261 $ 100 $ -- $ -- $ -- $ -- $ 45,361
Securities available-for-sale...... 33,525 28,913 19,779 8,095 65,523 131,697 287,532
Loans.............................. 168,229 17,781 26,293 35,368 195,050 75,738 518,459
Non-earning assets................. -- -- -- -- -- -- 60,094
---------- ---------- ---------- ----------- ----------- ---------- ----------
Total Assets..................... $ 247,015 $ 46,794 $ 46,072 $ 43,463 $ 260,573 $ 207,435 $ 911,446
---------- ---------- ---------- ----------- ----------- ---------- ----------
---------- ---------- ---------- ----------- ----------- ---------- ----------
Funding Sources:
Interest-bearing demand............ $ 37,414 $ -- $ -- $ -- $ 42,652 $ -- $ 80,066
Savings and time deposits.......... 195,237 70,429 41,061 28,366 234,528 3,013 572,634
Securities sold under repurchase
agreements and other
borrowings....................... 77,902 -- 5,524 30,000 13,728 -- 127,154
Noninterest-bearing sources........ -- -- -- -- -- -- 131,592
---------- ---------- ---------- ----------- ----------- ---------- ----------
Total funding sources............ $ 310,553 $ 70,429 $ 46,585 $ 58,366 $ 290,908 $ 3,013 $ 911,446
---------- ---------- ---------- ----------- ----------- ---------- ----------
---------- ---------- ---------- ----------- ----------- ---------- ----------
Repricing/Maturity Gap
Period............................. $ (63,538) $ (23,635) $ (513) $ (14,903) $ (30,335) $ 204,422
Cumulative......................... $ (63,538) $ (87,173) $ (87,686) $ (102,589) $ (132,924) $ 71,498
Cumulative rate sensitivity
assets/Cumulative rate sensitivity
funding sources.................... 79.54% 77.12% 79.49% 78.89% 82.89% 109.17%
</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 rates 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.
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EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
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
included in, 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.
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 recently enacted 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.
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<PAGE>
BUSINESS OF PINNACLE
UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THE FOLLOWING DISCUSSION TO
"PINNACLE" ARE REFERENCES TO PINNACLE AND ITS SUBSIDIARIES COLLECTIVELY
(INCLUDING PINNACLE BANK). FOR ADDITIONAL INFORMATION REGARDING THE BUSINESS OF
PINNACLE, SEE "THE COMPANIES--PINNACLE FINANCIAL SERVICES, INC."
GENERAL
Pinnacle is a registered bank holding company which provides full-service
retail banking and trust services in southwestern Michigan and northern Indiana
through its wholly-owned subsidiary, Pinnacle Bank. Corporate policy, strategy,
and goals, as well as operational and administrative policies for Pinnacle Bank,
are established by the Pinnacle Board. In order to facilitate implementation of
policies at Pinnacle Bank, the directors of Pinnacle also serve as directors of
Pinnacle Bank.
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 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, in a transaction then valued at $41.9 million,
Pinnacle acquired Maco Bancorp, Inc. See "ACQUISITION OF MACO BANCORP, INC." 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 $1.0
billion at September 30, 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.
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 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.
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<PAGE>
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>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial.................................. $ 154,044 $ 120,414 $ 107,660 $ 97,456 $ 68,153
Real Estate................................. 268,911 103,016 103,568 110,208 92,951
Consumer.................................... 92,826 62,742 49,779 50,956 52,974
Economic development bonds and other
tax-exempt loans.......................... 2,678 4,158 3,003 4,003 4,788
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income............... 518,459 290,330 264,010 262,623 218,866
Allowance for loan losses................... (5,852) (5,014) (5,215) (5,881) (2,002)
---------- ---------- ---------- ---------- ----------
Net loans................................... $ 512,607 $ 285,316 $ 258,795 $ 256,742 $ 216,864
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
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<PAGE>
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>
1995 1994
--------------------- --------------------
VARIABLE FIXED VARIABLE FIXED
RATE RATE RATE RATE
---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in 1 year or less...................................... $ 31,468 $ 10,773 $ 76,435 $ 9,687
Due in 1 through 5 years................................... 30,553 37,595 782 33,510
Due after 5 years.......................................... 38,935 4,720 -- --
---------- --------- --------- ---------
Total.................................................... $ 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>
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis(1)............ $ 3,321 $ 749 $ 1,722 $ 5,424 $ 1,502
Accruing loans contractually past due 90 days or more as
to principal or interest payments(2)................... 675 490 694 858 1,435
Restructured loans....................................... 324 503 282 -- --
--------- --------- --------- --------- ---------
Total non-performing loans............................. $ 4,320 $ 1,742 $ 2,698 $ 6,282 $ 2,937
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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 $81,000, $87,000 and $79,000 would have been recorded
during the years ended December 31, 1995, 1994 and 1993, respectively.
(2) Excludes loans accounted for on a non-accrual basis.
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 $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, 1995, 1994 and 1993, did not exceed 1% of its total assets. As of
December 31, 1995, 1994 and 1993, 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
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<PAGE>
plant expansions. Pinnacle's commercial customers include, among others,
professionals, durable-goods manufacturers, service-related companies and retail
establishments.
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 every commercial real estate
loan transaction.
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
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<PAGE>
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.
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 area.
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.
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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>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of period, net of unearned
income.............................................. $ 518,459 $ 290,330 $ 264,010 $ 262,623 $ 218,866
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average loans for the period, net..................... $ 322,851 $ 274,757 $ 256,970 $ 216,289 $ 222,774
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, beginning of period........ $ 5,014 $ 5,215 $ 5,881 $ 2,022 $ 1,922
Charge-offs for period:
Commercial loans.................................... 73 284 907 621 446
Real Estate loans................................... 44 34 83 254 54
Consumer loans...................................... 627 280 419 627 495
---------- ---------- ---------- ---------- ----------
Total charge-offs................................. 744 598 1,409 1,502 995
---------- ---------- ---------- ---------- ----------
Recoveries for period:
Commercial loans.................................... 116 67 120 101 23
Real Estate loans................................... 23 42 90 11 26
Consumer loans...................................... 120 163 173 116 128
---------- ---------- ---------- ---------- ----------
Total recoveries.................................. 259 272 383 228 177
---------- ---------- ---------- ---------- ----------
Net charge-offs for the period........................ 485 326 1,026 1,274 818
---------- ---------- ---------- ---------- ----------
Allowance recorded for acquired loans................. 1,098 -- -- 4,039 --
Provision for loan losses............................. 225 125 360 1,094 918
---------- ---------- ---------- ---------- ----------
Total allowance for loan losses, end of period........ $ 5,852 $ 5,014 $ 5,215 $ 5,881 $ 2,022
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net charge-offs during the period to average
loans outstanding................................... .15% .12% .40% .59% .37%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allocation of allowance for loan losses:
Commercial loans.................................... $ 3,169 $ 2,855 $ 3,038 $ 3,635 $ 609
Real Estate loans................................... 1,475 1,189 1,181 1,174 616
Consumer loans...................................... 1,208 970 996 1,072 797
---------- ---------- ---------- ---------- ----------
Total allowance for loan losses................... $ 5,852 $ 5,014 $ 5,215 $ 5,881 $ 2,022
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Percentage of loans to total gross loans:
Commercial loans.................................... 29% 42% 41% 37% 31%
Real Estate loans................................... 52 35 39 42 43
Consumer loans...................................... 18 22 19 19 24
Economic development bonds and other tax-exempt
loans............................................. 1 1 1 2 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.
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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 at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities......................................................... $ -- $ -- $ --
Obligations of other U.S. government agencies and corporations................... -- -- --
Obligations of states and political subdivisions(1).............................. -- 16,103 15,449
Corporate securities............................................................. -- 15,616 20,830
Equity securities................................................................ -- -- 1,318
Mortgage-backed securities....................................................... -- 11,720 18,724
--------- --------- ---------
Total............................................................................ $ -- $ 43,439 $ 56,321
--------- --------- ---------
--------- --------- ---------
</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 31, 1993, the book
value of securities issued by the State of Michigan (including all of its
political subdivisions) totaled $3,941,000, with a market value of
$4,228,000.
The following table presents the amortized cost basis of securities
available-for-sale at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1995 1994 1993
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities........................................................ $ 9,577 $ 17,752 $ 25,919
Obligations of other U.S. government agencies and corporations.................. 91,925 7,258 3,884
Obligations of states and political subdivisions................................ 19,406 55 1,750
Corporate securities............................................................ 10,275 6,547 3,555
Equity securities............................................................... 6,328 1,803 250
Mortgage-backed securities...................................................... 148,298 16,616 27,645
---------- --------- ---------
Total........................................................................... $ 285,809 $ 50,031 $ 63,003
---------- --------- ---------
---------- --------- ---------
</TABLE>
At December 31, 1995 Pinnacle did not have any securities held-to-maturity.
123
<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, 1995
-----------------------
AMOUNT YIELD
---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury securities:
Within 1 year...................................................... $ 3,536 5.35%
After 1 but within 5 years......................................... 6,264 5.25
---------- ---
Subtotal........................................................... 9,800 5.29
---------- ---
Obligations of other U.S. government agencies and corporations:
Within 1 year...................................................... 15,959 5.77
After 1 but within 5 years......................................... 27,948 5.93
After 5 but within 10 years........................................ 38,430 7.36
After 10 years..................................................... 9,943 7.36
---------- ---
Subtotal........................................................... 92,280 6.65
---------- ---
Obligations of states and political subdivisions
Within 1 year...................................................... 944 5.61
After 1 but within 5 years......................................... 8,107 4.97
After 5 but within 10 years........................................ 9,166 5.45
After 10 years..................................................... 1,883 4.96
---------- ---
Subtotal........................................................... 20,100 5.22
---------- ---
Corporate Securities:
Within 1 year...................................................... 7,077 5.64
After 1 but within 5 years......................................... 3,091 6.70
After 5 but within 10 years........................................ -- --
After 10 years..................................................... 95 6.98
---------- ---
Subtotal........................................................... 10,263 5.97
---------- ---
Equity securities:
Within 1 year...................................................... 6,312 7.97
---------- ---
Mortgage-backed securities:
Within 1 year...................................................... 3,137 6.46
After 1 but within 5 years......................................... 17,333 6.26
After 5 but within 10 years........................................ 5,287 6.67
After 10 years..................................................... 123,010 6.56
---------- ---
Subtotal........................................................... 148,777 6.53
---------- ---
Total securities available-for-sale.................................... $ 287,532 6.45%
---------- ---
---------- ---
</TABLE>
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 bank subsidiary and its thrift 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.
124
<PAGE>
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 five 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,
-------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
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......... $ 39,028 0.00% $ 37,587 0.00% $ 33,391 0.00%
Interest-bearing demand deposits............ 48,223 1.95 45,978 1.76 47,007 2.29
Savings deposits............................ 143,006 4.13 141,511 3.24 125,062 3.25
Time deposits............................... 164,332 5.63 131,025 4.52 145,355 4.74
---------- ---------- ----------
Total................................... $ 394,589 $ 356,101 $ 350,815
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
---------------
(IN THOUSANDS)
<S> <C>
Three months or less......................................................... $ 17,424
Three through six months..................................................... 8,858
Six through twelve months.................................................... 6,324
Over twelve months........................................................... 12,052
-------
Total.................................................................... $ 44,658
-------
-------
</TABLE>
BORROWINGS. Pinnacle borrows from time to time for short-term funding
purposes. At September 30, 1996, total borrowings by Pinnacle were $193.3
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 September 30, 1996, Pinnacle had $150.0 million of advances from
the Federal Home Loan Bank of Indianapolis and $43.3 million of other borrowings
secured by securities sold under repurchase agreements.
TRUST SERVICES
Pinnacle's trust operations had approximately 330 trust accounts under
management as of September 30, 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 $92.8 million as of September 30, 1996. The growth of Pinnacle's
trust operations is attributable to concerted marketing efforts by Pinnacle.
125
<PAGE>
Its trust operations competes for business primarily with other banks and
brokerage companies in its market area.
COMPETITION
The banking and thrift 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.
LEGAL PROCEEDINGS
There are no material legal proceedings to which Pinnacle is a party or to
which any of its property is subject.
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
15 additional banking offices in Berrien and Van Buren counties, Michigan and 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. Of the branch offices and loan production offices in Indiana, 11
are owned and three are leased. Pinnacle also owns 17 automated teller machines,
of which nine are housed within its banking offices and eight are independently
located. At December 31, 1995, the properties and equipment of Pinnacle had an
aggregate net book value of $12.5 million.
126
<PAGE>
MANAGEMENT OF PINNACLE
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The current 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>
PINNACLE PINNACLE BANK
NAME AGE POSITION(S) 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 Executive Vice President, Chief
Secretary Lending Officer and Secretary
David W. Kolhagen................. 39 Vice President and Treasurer Vice President and Chief 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 of the Pinnacle
Board. He is also a member of the Trust Committee and the Loan Review 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 of the Board of Directors of Pinnacle. He is also
a member of the Loan Review 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 Audit Committee and the Compensation Committee of the Board of
Directors of Pinnacle. He is also a member of the Loan Review 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 of the Board of Directors of Pinnacle. He
is also a member of the Loan 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 Peoples and is a
member of 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 Audit Committee of the Board of Directors of Pinnacle. She is also
a member of the Trust Committee and the
127
<PAGE>
Loan Review 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 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 of the Board of Directors of Pinnacle. He is also
a member of 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
and of Pinnacle Bank. He is also the Chief Lending Officer 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.
Information regarding the remuneration of Pinnacle's management is set forth
below and is contained in Pinnacle's Proxy Statement for the Annual Meeting of
Stockholders held April 30, 1996, relevant portions of which are incorporated by
reference in this Joint Proxy Statement/Prospectus pursuant to Pinnacle's Annual
Report on Form 10-K for the year ended December 31, 1995. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION."
MANAGEMENT REMUNERATION
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
128
<PAGE>
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 $100,000.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
AWARDS
ANNUAL COMPENSATION ------------------------ PAYOUT
- ----------------------------------------------------------------------------- RESTRICTED -----------
OTHER ANNUAL STOCK OPTIONS LTIP
NAME AND SALARY BONUS COMPENSATION AWARD(S) /SARS PAYOUT
PRINCIPLE POSITION YEAR ($) ($) ($) ($) (#) ($)
- --------------------------- --------- --------- --------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard L. Schanze 1995 242,420 180,000 -- -- 15,300 --
Chairman/CEO 1994 222,410 130,000 -- -- 7,200 --
1993 209,747 130,000 -- -- 7,200 --
Arnold L. Weaver 1995 167,200 70,000 -- -- 10,600 --
President 1994 147,410 45,000 -- -- 4,550 --
1993 139,747 40,000 -- -- 4,550 --
Donald E. Radde 1995 106,620 28,000 -- -- 7,500 --
Exec. Vice President 1994 91,289 21,000 -- -- 2,500 --
1993 86,319 19,000 -- -- 2,400 --
David W. Kolhagen 1995 82,280 30,000 -- -- 7,000 --
Senior Vice President/CFO 1994 -- -- -- -- -- --
1993 -- -- -- -- -- --
<CAPTION>
- ---------------------------
ALL OTHER
NAME AND COMPENSATION
PRINCIPLE POSITION ($)
- --------------------------- ---------------
<S> <C>
Richard L. Schanze --
Chairman/CEO --
--
Arnold L. Weaver --
President --
--
Donald E. Radde --
Exec. Vice President --
--
David W. Kolhagen --
Senior Vice President/CFO --
--
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR. The following table sets forth
certain information concerning stock options/SARs granted during 1995 to the
Named Pinnacle Executives.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -----------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS/SARS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE OF PRICE APPRECIATION FOR
OPTIONS/ SARS EMPLOYEES IN BASE PRICE EXPIRATION OPTION TERM
------------- --------------- ------------- ----------- ------------------------
NAME GRANT DATE GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- ------------------------ ------------- ------------- --------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard L. Schanze 03/95 7,300 25.46% $ 16.43 03/19/01 $ 33,142 $ 73,219
Chairman/CEO 10/95 8,000 18.58 17.50 10/17/01 38,640 85,440
Arnold L. Weaver 03/95 4,600 16.04 16.43 03/19/01 20,884 46,138
President 10/95 6,000 13.94 17.50 10/17/01 28,980 64,080
Donald E. Radde 03/95 3,000 10.46 16.43 03/19/01 13,620 30,090
Exec. Vice Pres. 10/95 4,500 10.45 17.50 10/17/01 21,735 48,060
David W. Kolhagen
Senior Vice President, 03/95 2,500 8.71 16.43 03/19/01 11,350 25,075
CFO 10/95 4,500 10.45 17.50 10/17/01 21,735 48,060
</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.
129
<PAGE>
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 $ 30,869 $ 41,158 $ 51,448 $ 61,737 $ 61,737
$150,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
$175,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
$200,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
$225,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
$250,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
$300,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
$400,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
$450,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
$500,000 $ 37,431 $ 49,908 $ 62,385 $ 74,862 $ 74,862
</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, 1995, Mr. Schanze had 20
years of credited service, Mr. Weaver had 19 years of credited service, Mr.
Radde had 14 years of credited service, and Mr. Kolhagen had 15 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.
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.
130
<PAGE>
BENEFICIAL OWNERSHIP OF PINNACLE COMMON STOCK
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 BENEFICIAL
NAME AND ADDRESS(1) NUMBER OF SHARES(2) OWNERSHIP(2)
- ----------------------------------- ------------------- ------------------------
<S> <C> <C>
Cyrus A. Ansary.................... 1,188,954 19.9%(3)
John P. Cunningham................. -0- *
Charles R. Edinger................. 34,072(4) *
John D. Fetters.................... 31,864 *
Terrence A. Friedman............... 35,288 *
David W. Kolhagen.................. 20,193(5)(6) *
LeAnn Krokker...................... 2,777(5)(7) *
John Newcomer...................... 2,836(5)(8) *
Donald E. Radde.................... 24,575(5)(9) *
Richard L. Schanze................. 281,504(3)(10) 4.7
Kay F. Varga....................... 8,471 *
Arnold L. Weaver................... 34,138(5)(11) *
Alton C. Wendzel................... 84,724(12) 1.4
All directors and executive
officers of Pinnacle as a group
(13 persons)..................... 560,342(13) 9.2
</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
December 13, 1996, 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) Upon consummation of the Merger, Mr. Ansary and Mr. Schanze will own
1,197,953 (or 11.2%), and 281,504 (or 2.6%), respectively, of the shares of
Pinnacle Common Stock then issued and outstanding. These numbers of shares
and percentages have been calculated in accordance with Rule 13d-3(d)(1)
under the Exchange Act and assuming (i) 5,977,548 shares of Pinnacle Common
Stock are issued and outstanding immediately prior to the Merger, (ii)
4,737,330 shares of IFC Common Stock are issued and outstanding immediately
prior to the Merger, (iii) 4,737,330 shares of Pinnacle Common Stock are
issued in the Merger, and (iv) 10,714,878 shares of Pinnacle Common Stock
are issued and outstanding following the Merger.
(4) Includes 25,432 shares held jointly with spouse, 4,320 held by Mr.
Edinger's spouse and 4,320 held by Mr. Edinger.
131
<PAGE>
(5) All shares are held jointly with spouse.
(6) Includes 17,500 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(7) Includes 2,226 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(8) Includes 1,688 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(9) Includes 19,400 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(10) Includes 39,200 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(11) Includes 27,700 shares of Pinnacle Common Stock issuabl eupon exercise of
options which are exercisable within 60 days.
(12) 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.
(13) Includes 105,488 shares of Pinnacle Common Stock issuable upon exercise of
options which are exercisable within 60 days.
LEGAL MATTERS
The legality of the Pinnacle Common Stock to be issued in connection with
the Merger, and certain other legal matters, will be passed upon by Miller,
Canfield, Paddock and Stone, P.L.C., 1400 North Woodward Avenue, Suite 100,
Bloomfield Hills, Michigan 48304. Certain legal matters will be passed upon for
IFC by Silver, Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., Suite 700,
Washington, D.C. 20005-3934.
EXPERTS
The consolidated financial statements of Pinnacle as of December 31, 1995
and 1994 and for each of the years in the three-year period ended December 31,
1995 have been included in this Joint Proxy Statement/Prospectus and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, which report appears elsewhere in this
Joint Proxy Statement/Prospectus, and upon the authority of that firm as experts
in accounting and auditing. See "PINNACLE CONSOLIDATED FINANCIAL STATEMENTS."
The consolidated financial statements of Maco as of September 30, 1995 and
1994 and for each of the years in the three-year period ended September 30, 1995
have been included herein in reliance upon the report of Crowe, Chizek and
Company LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in auditing and
accounting. See "MACO CONSOLIDATED FINANCIAL STATEMENTS."
The consolidated financial statements of IFC incorporated by reference in
IFC's Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated by reference in this Joint Proxy Statement, which is referred to
and made a part of this Prospectus and Registration Statement, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
incorporated by reference therein and incorporated by reference herein. Such
consolidated financial statements are incorporated by reference herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
132
<PAGE>
STOCKHOLDER PROPOSALS
Any Pinnacle stockholder who wishes to submit a proposal for presentation to
Pinnacle's 1997 Annual Meeting of Stockholders, and for inclusion, if
appropriate, in Pinnacle's proxy statement and the form of proxy relating to
such annual meeting, must comply with the rules and regulations of the
Commission then in effect and must transmit such proposal via registered or
certified mail to Donald E. Radde, Secretary, Pinnacle Financial Services, Inc.
830 Pleasant Street, St. Joseph, Michigan 49805. In the event that Pinnacle's
1997 Annual Meeting of Stockholders is held on or before May 30, 1997, any
stockholder proposal must have been received by Pinnacle not later than November
15, 1996. In the event that Pinnacle's 1997 Annual Meeting of Stockholders is
held after May 30, 1997, any stockholder proposal must be received by Pinnacle a
reasonable time before the solicitation of proxies for such annual meeting is
made. For purposes of the preceding sentence, Pinnacle will consider such a
proposal to have been received a reasonable time before such solicitation if
such proposal was received at least 60 days prior to the commencement of such
solicitation.
Any IFC stockholder who wishes to submit a proposal for presentation to
IFC's 1997 Annual Meeting of Stockholders, and for inclusion, if appropriate, in
IFC's proxy statement and the form of proxy relating to such annual meeting,
must comply with the rules and regulations of the Commission then in effect and
must submit such proposal to Brenda A. Sheetz, Secretary, Indiana Federal
Corporation, 56 Washington Street, Valparaiso, Indiana 46383. In the event that
IFC's 1997 Annual Meeting of Stockholders is held on or before May 24, 1997, any
stockholder proposal must have been received by IFC not later than November 29,
1996. In the event that IFC's 1997 Annual Meeting of Stockholders is held after
May 24, 1997, any stockholder proposal must be received by IFC a reasonable time
before the solicitation of proxies for such annual meeting is made. For purposes
of the preceding sentence, IFC will consider such a proposal to have been
received a reasonable time before such solicitation if such proposal was
received at least 60 days prior to the commencement of such solicitation.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Pinnacle Special Meeting and representatives of Ernst & Young LLP are expected
to be present at the IFC Special Meeting. These representatives will have an
opportunity to make statements if they so desire and will be available to
respond to appropriate questions.
133
<PAGE>
INDEX TO PINNACLE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Statements of Income
Three and Nine Months Ended September 30, 1996 and 1995 (unaudited)...................................... F-2
Consolidated Balance Sheets at September 30, 1996 and 1995
(unaudited) and December 31, 1995........................................................................ F-3
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1996 and 1995 (unaudited)................................................ F-4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 (unaudited)................................................ F-5
Independent Auditors' Report............................................................................... F-6
Consolidated Balance Sheets at December 31, 1995 and 1994.................................................. F-7
Consolidated Statements of Income
Years Ended December 31, 1995, 1994 and 1993............................................................. F-8
Consolidated Statements of Stockholders' Equity at
December 31, 1995, 1994 and 1993......................................................................... F-9
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1994 and 1993............................................................. F-10
Notes to Consolidated Financial Statements................................................................. F-11
</TABLE>
F-1
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans:
Taxable.............................................. $ 12,638 $ 7,160 $ 36,501 $ 20,865
Tax-exempt........................................... 50 49 136 168
Interest and dividends on securities:
Available-for-sale:
Taxable............................................ 5,631 998 15,771 3,026
Tax-exempt......................................... 261 -- 785 --
Held-to-maturity:
Taxable............................................ -- 307 -- 991
Tax-exempt......................................... -- 212 -- 667
Interest on federal funds sold....................... 45 120 150 182
Interest on interest-bearing deposits with financial
institutions....................................... 10 2 455 43
------------ ------------ ------------ ------------
Total interest income............................ 18,635 8,848 53,798 25,942
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits................................... 7,695 3,890 22,583 10,932
Federal Home Loan Bank advances........................ 1,835 166 4,932 581
Interest on securities sold under repurchase agreements
and other borrowings................................. 383 134 1,252 672
------------ ------------ ------------ ------------
Total interest expense............................. 9,913 4,190 28,767 12,185
------------ ------------ ------------ ------------
Net interest income................................ 8,722 4,658 25,031 13,757
Provision for loan losses.............................. 95 70 245 195
------------ ------------ ------------ ------------
Net interest income, after provision for loan
losses........................................... 8,627 4,588 24,786 13,562
------------ ------------ ------------ ------------
Non-interest income:
Service charges on deposit accounts.................... 538 381 1,474 1,116
Trust income........................................... 159 163 479 403
Securities gains, net.................................. 87 -- 357 181
Other income........................................... 1,232 538 3,286 1,523
------------ ------------ ------------ ------------
Total non-interest income........................ 2,016 1,082 5,596 3,223
Non-interest expenses:
Salaries and benefits.................................. 2,622 1,661 7,851 4,807
Occupancy expense...................................... 596 246 1,597 755
Equipment expense...................................... 391 219 1,147 632
FDIC insurance premiums................................ 2,600 20 3,046 420
Other expenses......................................... 2,526 1,239 6,997 3,527
------------ ------------ ------------ ------------
Total non-interest expenses...................... 8,735 3,385 20,638 10,141
------------ ------------ ------------ ------------
Income before federal income tax expense................. 1,908 2,285 9,744 6,644
Federal income tax expense............................... 647 717 3,459 2,069
------------ ------------ ------------ ------------
Net income............................................... $ 1,261 $ 1,568 $ 6,285 $ 4,575
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per common share.............................. $ 0.21 $ 0.41 $ 1.07 $ 1.20
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash dividends declared per common share................. $ 0.21 $ 0.19 $ 0.61 $ 0.57
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding...................... 5,873,745 3,821,904 5,873,541 3,821,904
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
9/30/96 9/30/95 12/31/95
------------ ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Assets:
Cash and due from banks.................................................. $ 27,796 $ 16,698 $ 24,681
Federal funds sold....................................................... 4,327 11,650 3,850
------------ ----------- ----------
Total cash and cash equivalents........................................ 32,123 28,348 28,531
Interest-bearing deposits with financial institutions.................... 364 130 41,511
Securities available-for-sale............................................ 360,076 61,679 287,532
Securities held-to-maturity.............................................. -- 35,282 --
Loans, net of unearned income:
Real estate............................................................ 277,394 104,263 268,911
Commercial............................................................. 201,054 133,385 154,044
Tax-exempt............................................................. 4,643 2,730 2,678
Consumer............................................................... 105,063 69,437 92,826
------------ ----------- ----------
Subtotal loans......................................................... 588,154 309,815 518,459
Less allowance for loan losses......................................... 5,676 4,865 5,852
------------ ----------- ----------
Net loans.............................................................. 582,478 304,950 512,607
Premises and equipment, net................................................ 12,744 7,517 12,546
Other assets............................................................... 30,655 10,600 28,719
------------ ----------- ----------
Total assets............................................................. $ 1,018,440 $ 448,506 $ 911,446
------------ ----------- ----------
------------ ----------- ----------
Liabilities:
Deposits:
Noninterest-bearing demand............................................. $ 65,153 $ 40,808 $ 50,400
Interest-bearing demand................................................ 74,824 51,499 80,066
Savings................................................................ 267,693 129,717 252,453
Time................................................................... 337,151 157,987 320,181
------------ ----------- ----------
Total deposits....................................................... 744,821 380,011 703,100
------------ ----------- ----------
Securities sold under repurchase agreements and other borrowings........... 193,315 25,610 127,154
Accrued interest payable and other liabilities............................. 6,823 3,839 6,296
------------ ----------- ----------
Total liabilities.................................................... 944,959 409,460 836,550
------------ ----------- ----------
Stockholders' equity:
Common Stock; no par value; 10,000,000 shares authorized; 5,875,121
shares issued and outstanding at 9/30/96, 5,873,358 shares issued and
outstanding at 12/31/95, and 3,821,904 shares issued and outstanding at
9/30/95................................................................ 19,110 19,110 19,110
Additional paid-in capital............................................... 43,946 10,005 44,174
Retained earnings........................................................ 13,177 9,708 10,475
Net unrealized gain (loss) on securities available-for-sale.............. (2,752) 223 1,137
------------ ----------- ----------
Total stockholders' equity........................................... 73,481 39,046 74,896
------------ ----------- ----------
Total liabilities and stockholders' equity......................... $ 1,018,440 $ 448,506 $ 911,446
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance, January 1.......................................................................... $ 74,896 $ 35,148
Net income................................................................................ 2,444 1,472
Stock offering costs...................................................................... (259) --
Dividends on Common Stock................................................................. (1,116) (726)
Net unrealized gains (losses) for securities available-for-sale........................... (2,467) 722
--------- ---------
Balance, March 31........................................................................... $ 73,498 $ 36,616
Net income................................................................................ 2,580 1,535
Dividends on Common Stock................................................................. (1,233) (726)
Net unrealized gains (losses) for securities available-for-sale........................... (2,951) 754
--------- ---------
Balance, September 30....................................................................... $ 71,894 $ 38,179
Net income................................................................................ 1,261 1,568
Dividends on Common Stock................................................................. (1,234) (726)
Net unrealized gains for securities available-for-sale.................................... 1,529 25
Common stock issuance (1,763 shares upon exercise of stock options)....................... 31 --
--------- ---------
Balance, September 30....................................................................... $ 73,481 $ 39,046
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 6,285 $ 4,575
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 1,948 876
Net amortization on loans and securities............................................ 1,096 946
Provision for loan losses........................................................... 245 195
Deferred federal income taxes....................................................... 35 (177)
Mortgage loans originated for sale.................................................. (88,167) (2,309)
Proceeds from sales of loans........................................................ 87,067 11,243
Gain on sale of securities, net..................................................... (357) (181)
Gain on sale of loans, net.......................................................... (944) (97)
Increase in interest receivable and other assets.................................... (938) (1,778)
Increase in other liabilities....................................................... 409 492
----------- ----------
Net cash provided by operating activities......................................... 6,679 13,785
----------- ----------
Cash flows from investing activities:
Net increase in loans, excluding loan sales, purchases and originated for sale...... (35,222) (19,428)
Purchase of loans................................................................... (33,612) (9,737)
Purchases of securities available-for-sale.......................................... (191,309) (55,833)
Proceeds from sales of securities available-for-sale................................ 83,036 37,502
Proceeds from maturities and paydowns of securities available-for-sale.............. 29,860 5,020
Purchases of securities held-to-maturity............................................ -- (1,120)
Proceeds from maturities and paydowns of securities held-to-maturity................ -- 11,013
Net increase in interest-bearing deposits with financial institutions............... 41,147 1,022
Capital expenditures................................................................ (1,176) (1,125)
----------- ----------
Net cash (used) provided by investing activities.................................. (107,276) (32,686)
----------- ----------
Cash flows from financing activities:
Changes in deposits................................................................. 41,721 28,835
Change in securities sold under repurchase agreements and other borrowings.......... 66,161 5,728
Common stock issued................................................................. (228) --
Dividends paid...................................................................... (3,465) (2,064)
----------- ----------
Net cash provided (used) by financing activities.................................. 104,189 32,499
----------- ----------
Net decrease in cash and cash equivalents............................................. 3,592 13,598
Cash and cash equivalents at beginning of year........................................ 28,531 14,750
----------- ----------
Cash and cash equivalents at end of year.............................................. $ 32,123 $ 28,348
----------- ----------
----------
Supplemental disclosures:
Interest paid....................................................................... $ 28,671 $ 11,829
Federal income taxes paid........................................................... $ 4,070 $ 2,492
Loans transferred to other real estate owned........................................ $ 216 $ 587
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
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 subsidiaries as of December 31, 1995 and 1994, 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, 1995.
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 subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
February 9, 1996
Chicago, Illinois
F-6
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Assets:
Cash and cash equivalents:
Cash and due from banks............................................................ $ 24,681 $ 14,750
Federal funds sold................................................................. 3,850 --
---------- ----------
Total cash and cash equivalents.................................................... 28,531 14,750
Interest-bearing deposits with financial institutions................................ 41,511 1,152
Securities available-for-sale........................................................ 287,532 48,094
Securities held-to-maturity (fair value of $42,402 for 1994)......................... -- 43,439
Loans, net of unearned income:
Real estate........................................................................ 268,911 103,016
Commercial......................................................................... 154,044 120,414
Tax-exempt......................................................................... 2,678 4,158
Consumer........................................................................... 92,826 62,742
---------- ----------
Subtotal loans................................................................... 518,459 290,330
Less allowance for loan losses..................................................... 5,852 5,014
---------- ----------
Net loans.......................................................................... 512,607 285,316
Premises and equipment, net.......................................................... 12,546 6,927
Interest receivable and other assets................................................. 28,719 9,760
---------- ----------
Total assets....................................................................... $ 911,446 $ 409,438
---------- ----------
---------- ----------
Liabilities:
Deposits:
Non-interest bearing demand........................................................ $ 50,400 $ 41,839
Interest bearing demand............................................................ 80,066 45,480
Savings............................................................................ 252,453 131,604
Time............................................................................... 320,181 133,114
---------- ----------
Total deposits................................................................... 703,100 352,037
Securities sold under repurchase agreements, and other borrowings.................... 127,154 19,882
Accrued interest payable and other liabilities....................................... 6,296 2,371
---------- ----------
Total liabilities.................................................................. 836,550 374,290
Stockholders' Equity:
Common stock; no par value; 10,000,000 shares authorized; 5,873,358 and 3,821,904
shares issued and outstanding at December 31, 1995 and 1994, respectively.......... 19,110 19,110
Additional paid-in capital........................................................... 44,174 10,005
Retained earnings.................................................................... 10,475 7,311
Unrealized gains (losses) on securities available-for-sale, net of tax............... 1,137 (1,278)
---------- ----------
Total stockholders' equity......................................................... 74,896 35,148
---------- ----------
Total liabilities and stockholders' equity......................................... $ 911,446 $ 409,438
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans:
Taxable................................................................ $ 29,542 $ 22,949 $ 22,879
Tax-exempt............................................................. 214 209 194
Interest and dividends on securities:
Available-for-sale
Taxable.............................................................. 5,074 2,712 --
Tax-exempt........................................................... 32 -- --
Held-to-maturity
Taxable.............................................................. 1,247 1,914 4,863
Tax-exempt........................................................... 873 998 978
Interest on federal funds sold........................................... 257 110 272
Interest on interest-bearing deposits with financial institutions........ 256 76 163
---------- ---------- ----------
Total interest income.............................................. 37,495 28,968 29,349
Interest expense:
Interest on deposits..................................................... 16,093 11,316 12,029
Interest on securities sold under repurchase agreements and other
borrowings............................................................. 2,058 546 391
---------- ---------- ----------
Total interest expense............................................. 18,151 11,862 12,420
---------- ---------- ----------
Net interest income................................................ 19,344 17,106 16,929
Provision for loan losses.................................................. 225 125 360
---------- ---------- ----------
Net interest income, after provision for loan losses............... 19,119 16,981 16,569
---------- ---------- ----------
Non-interest income:
Service charges on deposit accounts...................................... 1,530 1,479 1,470
Trust income............................................................. 533 485 352
Securities gains and losses, net......................................... 350 64 66
Other income............................................................. 2,173 1,728 2,286
---------- ---------- ----------
Total non-interest income.......................................... 4,586 3,756 4,174
Non-interest expenses:
Salaries and benefits.................................................... 7,100 6,073 6,071
Occupancy expense........................................................ 1,097 1,033 1,042
Equipment expense........................................................ 947 885 914
FDIC insurance premiums.................................................. 552 808 739
Other expense............................................................ 4,940 4,315 4,685
---------- ---------- ----------
Total non-interest expenses........................................ 14,636 13,114 13,451
---------- ---------- ----------
Income before federal income tax expense................................... 9,069 7,623 7,292
Federal income tax expense................................................. 2,610 2,333 2,255
---------- ---------- ----------
Net income................................................................. $ 6,459 $ 5,290 $ 5,037
---------- ---------- ----------
---------- ---------- ----------
Net income per common share................................................ $ 1.62 $ 1.38 $ 1.32
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding........................................ 3,996,137 3,821,904 3,821,904
---------- ---------- ----------
---------- ---------- ----------
Cash dividends declared per common share................................... $ 0.76 $ 0.62 $ 0.53
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON SECURITIES
COMMON PAID-IN RETAINED AVAILABLE-FOR
STOCK CAPITAL EARNINGS SALE TOTAL
--------- -------------- --------- -------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993......................... $ 19,110 $ 10,005 $ 1,379 $ -- $ 30,494
Net income....................................... -- -- 5,037 -- 5,037
Cash dividends declared, $.53 per share.......... -- -- (2,026) -- (2,026)
Implementation of change in accounting for for
marketable debt and equity securities, net of
tax effect of $192............................. -- -- -- 373 373
--------- ------- --------- ------- ---------
Balance, December 31, 1993....................... 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......................................... -- 20,985 -- -- 20,985
Cash dividends declared, $.76 per share.......... -- -- (3,295) -- (3,295)
Change in unrealized gains 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
--------- ------- --------- ------- ---------
--------- ------- --------- ------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 6,459 $ 5,290 $ 5,037
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 1,308 1,251 1,335
Net amortization on loans and securities.................................... 1,269 1,264 1,098
Provision for loan losses................................................... 225 125 360
Deferred federal income taxes............................................... (380) (340) 15
Mortgage loans originated for sale.......................................... (10,904) (581) --
Proceeds from sales of loans................................................ 24,318 12,386 23,499
Gain on sale of securities, net............................................. (350) (64) (66)
(Gain) Loss on sale of loans, net........................................... (182) 11 (352)
Decrease (increase) in interest receivable and other assets................. (2,793) 849 (745)
Increase (decrease) in other liabilities.................................... 436 69 (1,268)
---------- ---------- ----------
Net cash provided by operating activities............................... 19,406 20,260 28,913
---------- ---------- ----------
Cash flows from investing activities:
Net increase in loans, excluding loan sales................................. (18,497) (31,470) (16,764)
Purchases of loans.......................................................... (14,846) (7,192) (8,661)
Purchases of securities available-for-sale.................................. (116,722) (27,050) (30,030)
Purchases of securities held-to-maturity.................................... (1,600) (3,971) (34,685)
Proceeds from sales of securities available-for-sale........................ 69,007 14,149 5,147
Proceeds from maturities and paydowns of securities available-for-sale...... 14,231 25,667 16,966
Proceeds from maturities and paydowns of securities held-to-maturity........ 12,153 16,059 18,444
Net (increase) decrease in interest-bearing deposits with financial
institutions.............................................................. (24,362) (1,032) 9,006
Capital expenditures........................................................ (1,570) (720) (831)
Recoveries on distressed assets............................................. -- -- 28
Acquisition of financial institution, net of cash and stock issued.......... (12,683) -- --
---------- ---------- ----------
Net cash used by investing activities................................... (94,889) (15,560) (41,380)
---------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits......................................... 33,365 (10,977) 10,695
Net increase in securities sold under repurchase agreements................. 45,505 9,428 1,769
Common stock issued......................................................... 13,184 -- --
Dividends paid.............................................................. (2,790) (2,293) (1,968)
---------- ---------- ----------
Net cash provided (used) by financing activities........................ 89,264 (3,842) 10,496
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 13,781 858 (1,971)
Cash and cash equivalents at beginning of year................................ 14,750 13,892 15,863
---------- ---------- ----------
Cash and cash equivalents at end of year $ 28,531 $ 14,750 $ 13,892
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures:
Interest paid............................................................... $ 17,683 $ 11,752 $ 12,621
Federal income taxes paid................................................... 3,195 2,185 2,586
Loans transferred to other real estate owned................................ 738 508 1,841
Transfers of securities held-to-maturity to available-for-sale.............. 204,974 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Pinnacle Financial Services, Inc.
and subsidiaries 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 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 subsidiaries.
(a) CONSOLIDATION. The consolidated financial statements include the
accounts of Pinnacle Financial Services, Inc. and its wholly-owned subsidiaries,
The Peoples State Bank of St. Joseph, a Michigan state banking corporation now
known as "Pinnacle Bank" ("Peoples"), and First Federal Savings Bank of Indiana,
a federal savings bank that changed its name to as "Pinnacle Bank" in 1996
("First Federal") (collectively "Pinnacle" or the "Company"). 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, 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 to maturity are
classified as securities held-to-maturity and are accounted for using historical
amortized cost. The Company has no trading account securities.
Premium and discount 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 to 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.
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
F-11
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
using the loan s initial effective interest rate or 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. Prior to 1995, the allowance for loan losses related to these loans
was based on undiscounted cash flows or the fair value of the collateral for
collateral dependent loans. No additional provision to the allowance for loan
losses was required as a result of adopting these Statements.
(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 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.
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) RETIREMENT PLAN. Costs for the Company's defined benefit plans, which
cover substantially all employees, are accounted for in accordance with the
requirements of SFAS No. 87, "Employers' Accounting for Pensions" ("Statement
87"). The projected unit credit method is utilized 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.
(g) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. An accrual for
postretirement benefits is charged to current earnings based upon the expected
cost providing postretirement benefits to employees during the years that the
employees render services.
(h) 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.
(i) 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, 1995 and 1994, goodwill of
approximately $14,382,000 and $1,225,000 respectively, is included in other
assets in the accompanying consolidated balance sheets.
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 4 years. At
December 31, 1995 and 1994, core deposits intangibles of approximately
$1,265,000 and $1,581,000, 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.
F-12
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) MORTGAGE SERVICING RIGHTS. Effective January 1, 1995, the Company
adopted SFAS No. 122 "Accounting for Mortgage Servicing Rights" ("Statement
122"). 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 distinctions between servicing rights
acquired through purchase transactions and those acquired through loan
origination'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, 1995
totaled approximately $79,000.
(k) FEDERAL INCOME TAXES. The Company and its subsidiaries 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.
(l) 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 most 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.
(m) 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.
(n) PER SHARE DATA. Earnings per share is calculated by dividing net
income by the weighted 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.
(o) RECLASSIFICATIONS. Certain prior year figures have been reclassified
to conform to current year presentation.
(p) UNAUDITED FINANCIAL INFORMATION. The accompanying unaudited financial
information as of and for the periods ended September 30, 1996 and 1995 has been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information required to be included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. In the opinion of
management, all adjustments necessary for a fair presentation for the periods
presented have been reflected and are of a normal and recurring nature. Results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the year.
F-13
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITION
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 impact on net income before taxes on
such adjustments in 1995 amounted to $65,000.
The following presents unaudited proforma financial results for 1995 and
1994, as if Maco had been acquired on January 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Total revenue........................................................ $ 69,900 $ 57,500
Net income......................................................... $ 7,300 $ 6,996
Net income per share............................................... $ 1.24 $ 1.19
</TABLE>
This proforma information is not necessarily indicative of the actual
results of operations which would have occurred had the acquisition of Maco been
consummated on January 1, 1994, nor is it necessarily indicative of future
operating results.
NOTE 3--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
F-14
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
instruments in its consolidated financial statements. Fair value estimating
methods, and assumptions are presented below for the Company's consolidated
financial statements.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1995 1994
---------------------- ----------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks........................................ $ 24,681 $ 24,681 $ 14,750 $ 14,750
Federal funds sold............................................. 3,850 3,850 -- --
Interest-bearing deposits with financial institutions.......... 41,511 41,511 1,152 1,152
Securities available-for-sale.................................. 287,532 287,532 48,094 48,094
Securities held-to-maturity.................................... -- -- 43,439 42,402
Loans, net..................................................... 512,607 515,184 285,316 284,621
Accrued interest receivable.................................... 5,611 5,611 3,090 3,090
Financial Liabilities:
Noninterest-bearing deposits................................... $ 50,400 $ 50,400 $ 41,839 $ 41,839
Interest-bearing deposits...................................... 652,700 654,137 310,198 309,588
Securities sold under repurchase agreements, and other
borrowings................................................... 127,154 127,319 19,882 19,631
Accrued interest payable....................................... 1,337 1,337 647 647
</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.
F-15
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 instrument, possible
tax ramifications, or estimated transaction costs.
LOANS: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage, and consumer loans. Each loan
category is further segmented into fixed and adjustable rate interest terms.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using the current rates as 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 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 within 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.
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, 1995 and
1994. 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
than 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.
LIMITATIONS: Fair values 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.
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 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
F-16
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates.
NOTE 4--CASH AND DUE FROM BANKS
Peoples 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, 1995 and 1994,
were $4,908,000 and $3,603,000, respectively.
NOTE 5--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, 1995.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES 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>
F-17
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SECURITIES (CONTINUED)
The following summarizes the amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for available-for-sale and
held-to-maturity securities by major security type at December 31, 1994.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
----------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S.Treasury securities.......................................... $ 17,752 $ 2 $ (532) $ 17,222
Obligations of other U.S. government agencies and corporations... 7,258 -- (340) 6,918
Obligations of states and political subdivisions................. 55 -- -- 55
Equity securities................................................ 1,803 -- (32) 1,771
Mortgage backed securities....................................... 23,163 25 (1,060) 22,128
----------- ----- ----------- ---------
Total.......................................................... $ 50,031 $ 27 $ (1,964) $ 48,094
----------- ----- ----------- ---------
----------- ----- ----------- ---------
Held-to-maturity:
Obligations of states and political subdivisions................. 16,103 $ 265 $ (174) $ 16,194
Corporate securities............................................. 15,616 -- (439) 15,177
Mortgage backed securities....................................... 11,720 -- (689) 11,031
----------- ----- ----------- ---------
Total.......................................................... $ 43,439 $ 265 $ (1,302) $ 42,402
----------- ----- ----------- ---------
----------- ----- ----------- ---------
</TABLE>
Maturities of investment securities classified as available-for-sale at
December 31, 1995 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 FAIR
COST VALUE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................................... $ 33,775 $ 33,827
Due after one year through five years................................. 44,792 45,410
Due after five years through ten years................................ 47,030 47,595
Due after ten years................................................... 11,914 11,923
Mortgage-backed securities............................................ 148,298 148,777
---------- ----------
Total............................................................... $ 285,809 $ 287,532
---------- ----------
---------- ----------
</TABLE>
Proceeds from sales of securities during 1995, 1994, and 1993 were
$69,007,000, $14,149,000, and $5,147,000, respectively. Gross gains of $575,000,
$97,000, and $66,000 for 1995, 1994, and 1993, respectively, and gross losses of
$225,000, $33,000, were realized on those sales for 1995 and 1994, respectively.
During 1995, 1994, and 1993, there were no sales of securities classified as
held-to-maturity.
On December 1, 1995, securities held-to-maturity (includes those acquired
from First Federal) were reclassified to available-for-sale pursuant to the
FASB's issuance of "A Guide to Implementation of Statement 115" that allowed
entities to reassess the appropriateness of the reclassification of all
securities.
F-18
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SECURITIES (CONTINUED)
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.
Mortgage-backed securities include mortgage-backed securities and
collateralized mortgage obligations. The mortgage-backed securities represent
participating interests 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 $115,763,000 and $20,920,000 at
December 31, 1995 and 1994, 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 following presents the amortized cost and fair value of investment
securities of states (including all their political subdivisions) that
individually exceeded 10% of stockholders' equity at December 31 of each year.
<TABLE>
<CAPTION>
1995 1994
-------------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ----- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Illinois............................................. $ -- $ -- $ 3,706 $ 3,756
Michigan............................................. -- -- 4,315 4,338
--- --- ----------- ---------
Total.............................................. $ -- $ -- $ 8,021 $ 8,094
--- --- ----------- ---------
--- --- ----------- ---------
</TABLE>
NOTE 6--LOANS
The following summarizes loans by classification at December 31 of each
year.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate mortgages................................................. $ 268,911 $ 103,016
Commercial loans...................................................... 154,044 120,414
Consumer loans........................................................ 92,826 62,742
Economic development bonds and other tax exempt loans................. 2,678 4,158
---------- ----------
Total............................................................... $ 518,459 $ 290,330
---------- ----------
---------- ----------
</TABLE>
The Company's mortgage servicing portfolio for others totaled $67,462,000 at
December 31, 1995.
The recorded investment in loans determined to be impaired at December 31,
1995 totaled $838,000, of which the collateral values are equal to or greater
than the recorded investment. In addition, a specific loan loss reserve of
$197,000 has been assigned to all of these loans. As of December 31, 1995, the
average recorded investment in impaired loans approximated $590,000. For the
year, interest income recorded on such loans totaled $67,000, which has been
recorded on a cash basis.
F-19
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LOANS (CONTINUED)
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>
1995 1994
---------------------- ------------------------
NON- 90 DAYS NON- 90 DAYS
ACCRUAL PAST DUE ACCRUAL PAST DUE
--------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate Mortgages................................ $ 2,581 $ 556 $ 218 $ 295
Commercial Loans..................................... 577 52 497 64
Consumer Loans....................................... 163 67 34 131
--------- ----- ----- -----
Total.............................................. $ 3,321 $ 675 $ 749 $ 490
--------- ----- ----- -----
--------- ----- ----- -----
</TABLE>
At December 31, 1995, if nonaccrual loans had been maintained current in
accordance with their original terms, additional interest income of $81,000
would have been realized. For years ended December 31, 1994 and 1993, additional
interest income of $87,000 and $79,000 would have been realized.
In addition to the loans classified as nonaccrual or greater than 90 days
delinquent and still accruing interest at December 31, 1995 and 1994, there were
other loans of approximately $9,600,000 in 1995 and $7,000,000 in 1994, 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 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,
1995 and 1994 aggregated approximately $11,043,000 and $5,793,000 respectively.
The net increase of $5,250,000 in such loans resulted from new loans of
$6,353,000 and collections on loans of $1,103,000.
The following summarizes the activity in the allowance for loan losses.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.......................................................... $ 5,014 $ 5,215 $ 5,881
Provisions charged against income................................................... 225 125 360
Recoveries.......................................................................... 259 272 383
Allowance of acquired financial institution......................................... 1,098 -- --
--------- --------- ---------
Subtotal.......................................................................... 6,596 5,612 6,624
Loans charged off................................................................... (744) (598) (1,409)
--------- --------- ---------
Balance, end of year................................................................ $ 5,852 $ 5,014 $ 5,215
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PREMISES AND EQUIPMENT, NET
The following summarizes premises and equipment by classification at
December 31.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Land and land improvements....................................................... $ 2,124 $ 814
Buildings........................................................................ 10,069 7,231
Furniture, fixtures and equipment................................................ 7,056 4,842
--------- ---------
Subtotal....................................................................... 19,249 $ 12,887
Less accumulated depreciation.................................................... 6,703 5,960
--------- ---------
Premises and equipment, net.................................................... $ 12,546 $ 6,927
--------- ---------
--------- ---------
</TABLE>
Depreciation expense charged to operations was $789,000, $793,000, and
$873,000 in 1995, 1994, and 1993, respectively.
NOTE 8--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>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Three months or less............................................................. $ 17,424 $ 9,944
Three through six months......................................................... 8,858 2,051
Six through twelve months........................................................ 6,324 4,424
Over twelve months............................................................... 12,052 3,036
--------- ---------
Total........................................................................ $ 44,658 $ 19,455
--------- ---------
--------- ---------
</TABLE>
Interest expense related to time deposits of $100,000 or more approximated
$1,641,000, $638,000 and $755,000 for the years ended December 31, 1995, 1994,
and 1993, respectively.
NOTE 9--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>
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities sold under repurchase agreements..................................... $ 12,402 $ 9,982
Federal funds purchased......................................................... -- 1,400
Advances from the Federal Home Loan Bank........................................ 96,752 8,500
Other borrowings 18,000 --
---------- ----------
Total......................................................................... $ 127,154 $ 19,882
---------- ----------
---------- ----------
</TABLE>
Securities sold under repurchase agreements, which mature daily, represent
an indebtedness of the Company secured by certain securities. At December 31,
1995, 1994, and 1993, the interest cost with regard to daily averages was 3.41%,
2.95%, and 2.84%, respectively. Securities with an amortized cost of
F-21
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SECURITIES SOLD UNDER REPURCHASE AGREEMENTS & OTHER BORROWINGS
(CONTINUED)
$14,149,000 and $13,696,000, and an estimated fair value of approximately
$14,317,000 and $13,221,000, were pledged as collateral for these agreements at
December 31, 1995 and 1994, respectively.
Federal funds purchased, which mature daily, had an interest cost with
regard to daily averages of 4.64%, and 3.18% at December 31, 1994, and 1993,
respectively.
Advances from the Federal Home Loan Bank represent borrowings from Federal
Home Loan Banks. Advances of $32,500,000 and $5,000,000 were drawn upon during
1995 and 1994, respectively. In addition, the acquisition of Maco added
$61,500,000 in advances from the Federal Home Loan Banks and an additional
$20,000,000 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, 1995, 1994
and 1993, respectively, the interest cost with regard to daily averages was
6.22%, 5.73% and 6.16%, with maturities of three to sixty months. These
borrowings are secured by Federal Home Loan Bank Stock (carried at $6,078,000),
all eligible first mortgage loans on one-to-four family held by Peoples
(approximately $158,553,000 at December 31, 1995), and mortgage backed
securities held by First Federal (approximately $97,647,000 at December 31,
1995).
Other borrowings represent a short-term note payable issued to the principal
sole stockholder of Maco and due on March 15, 1996. The note was issued as part
of the cash portion of the acquisition price of Maco and is secured by a
corresponding certificate of deposit, with both carrying an interest rate of
5.6%
NOTE 10--FEDERAL INCOME TAXES
Federal income taxes (benefits) reported in the consolidated statements of
income for the years ended December 31, 1995, 1994, and 1993 include the
following components.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current.................................................................... $ 2,990 $ 2,673 $ 2,240
Deferred................................................................... (380) (340) 15
--------- --------- ---------
Federal income tax expense............................................... $ 2,610 $ 2,333 $ 2,255
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following federal income tax expense differs from the amounts computed
by applying the federal income tax rate of 34% to pretax for each year.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax.................................................... $ 3,083 $ 2,592 $ 2,479
Tax exempt interest, net................................................... (325) (367) (355)
Amortization of goodwill................................................... 42 42 42
Other, net................................................................. (190) 66 89
--------- --------- ---------
Federal income tax expense............................................... $ 2,610 $ 2,333 $ 2,255
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-22
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--FEDERAL INCOME TAXES (CONTINUED)
The following presents the tax effects of temporary differences that gave
rise to significant portions of the deferred tax assets and liabilities at
December 31 of each year.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Loan loss reserve................................................................ $ 833 $ 1,360
Deferred loan fees............................................................... 458 119
Deferred directors fees.......................................................... 364 293
Depreciation..................................................................... 179 281
Capital loss carryforward........................................................ 61 61
Unrealized losses on securities available-for-sale............................... -- 659
Alternative minimum tax credit carry forward..................................... 563 --
Other............................................................................ 361 121
--------- ---------
Total gross deferred tax assets................................................ 2,819 2,894
Less valuation allowance......................................................... (61) (61)
--------- ---------
Net deferred tax assets........................................................ $ 2,758 $ 2,833
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Deposit base premium................................................... $ (245) $ (392)
Pension................................................................ (270) (284)
Purchase accounting adjustments........................................ (1,932) (1,172)
Unrealized gains on securities available-for-sale...................... (586) --
Other.................................................................. (217) (6)
--------- ---------
Total gross deferred tax liabilities................................. (3,250) (1,854)
--------- ---------
Net deferred tax (liability)/asset..................................... $ (492) $ 979
--------- ---------
--------- ---------
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1995 and
1994 was $61,000, with no change during 1995. The valuation allowance is due to
capital losses from prior years which can only be utilized against subsequent
capital gains.
NOTE 11--RETIREMENT PLANS
Peoples (subsidiary of Pinnacle) 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
F-23
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--RETIREMENT PLANS (CONTINUED)
and compensation during the five highest paid plan years of the last ten years
preceding retirement. The following present the components of net pension
expense (income) at December 31 of each year.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the year............................... $ 326 $ 283 $ 268
Interest cost on projected benefit obligation............................... 262 217 190
Actual return on plan assets................................................ (1,085) (6) (554)
Net amortization and deferral............................................... 539 (551) 50
--------- --------- ---------
Net pension expense (income).............................................. $ 42 $ (57) $ (46)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following presents the funded status of Peoples' plan and amounts
recognized in the consolidated balance sheets at December 31 of each year.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of projected benefit obligation:
Accumulated benefit obligation:
Vested................................................................ $ (2,227) $ (1,785) $ (1,003)
Nonvested............................................................. (82) (68) (50)
Provision for future salary increases................................. (1,600) (1,560) (1,985)
--------- --------- ---------
Projected benefit obligation.......................................... (3,909) (3,413) (3,038)
Plan assets at fair value............................................. 5,802 4,811 4,928
--------- --------- ---------
Excess of plan assets over projected benefit obligation............... 1,893 1,398 1,890
Unrecognized net transition asset....................................... (799) (867) (934)
Unrecognized net (gain)/loss............................................ (264) 342 (353)
Unrecognized prior service cost......................................... (36) (36) 176
--------- --------- ---------
Prepaid pension cost, included in other assets........................ $ 794 $ 837 $ 779
--------- --------- ---------
--------- --------- ---------
Major assumptions used:
Discount rate......................................................... 7.75% 7.25% 7.25%
Rate of increase in compensation levels............................... 6.00% 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, 1995, 1994 and 1993.
Peoples 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 1995, 1994, and 1993, the Company
contributions amounted to $121,000, $56,000, and $95,000, respectively. Employee
contributions to the plan are based upon optional percentages (ranging from 2%
to 10%) of before tax compensation.
First Federal (subsidiary of Pinnacle) 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
F-24
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--RETIREMENT PLANS (CONTINUED)
service and compensation during the five highest paid plan years of the last ten
years preceding retirement. The following presents the components of net pension
income at December 31, 1995.
<TABLE>
<CAPTION>
1995
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Service cost--benefits earned during the year..................................... $ 7
Interest cost on projected benefit obligation..................................... 6
Actual return on plan assets...................................................... (8)
Net amortization and deferral..................................................... (4)
--
Net pension income.............................................................. $ 1
--
--
</TABLE>
The following presents the funded status of the First Federal's plan and
amounts recognized in the consolidated balance sheets at December 31, 1995.
<TABLE>
<CAPTION>
1995
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Actuarial present value of projected benefit obligation:
Accumulated benefit obligation:
Vested...................................................................... $ (610)
Nonvested................................................................... (27)
Provision for future salary increases......................................... (369)
-------
Projected benefit obligation.................................................. (1,006)
Plan assets at fair value......................................................... 1,451
-------
Excess of plan assets over projected benefit obligation........................... 445
Unrecognized net (gain)/loss...................................................... 5
-------
Prepaid pension cost, included in other assets.................................. $ 450
-------
-------
Major assumptions used:
Discount rate................................................................... 7.75%
Rate of increase in compensation levels......................................... 6.00%
Expected long-term rate on plan assets.......................................... 10.00%
</TABLE>
First Federal maintains a 401(k) plan covering substantially all employees.
Employees who are 21 years and older and who have completed twelve months of
service are eligible. Employees may elect to contribute to the plan from 1% to
15% of their salary subject to a statutory maximum amount. First Federal pays a
25% matching contribution at each biweekly pay period up to the maximum allowed
per employee, by the Internal Revenue Service. Employees become 100% vested in
First Federal's matching contribution after 5 years of service.
NOTE 12--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Peoples (subsidiary of Pinnacle) has a Retiree Medical Plan which provides a
portion of retiree medical care premiums. Pinnacle Bank'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
F-25
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
to active participants in a 100% co-pay until age 65. The components of the 1995
and 1994 and 1993 net periodic postretirement benefit cost are shown below:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................................................... $ -- $ -- $ 12
Interest cost................................................................... 21 20 32
Net amortization and deferral................................................... 33 25 34
--------- --------- ---
Net periodic postretirement benefit cost........................................ $ 54 $ 45 $ 78
--------- --------- ---
--------- --------- ---
</TABLE>
The funded status of the plan and amounts recognized in the consolidated
balance sheets are shown below:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retired participants and beneficiaries........................................ $ (281) $ (275) $ (353)
Active participants........................................................... -- -- (113)
--------- --------- ---------
Accumulated postretirement benefit obligation............................... (281) (275) (466)
Plan assets at fair value..................................................... -- -- --
--------- --------- ---------
Excess of accumulated postretirement benefit obligation over plan assets...... (281) (275) (466)
Unrecognized transition obligation............................................ 226 260 375
Unrecognized loss/(gain)...................................................... 2 (28) 36
--------- --------- ---------
Accrued postretirement benefit cost......................................... $ (53) $ (43) $ (55)
--------- --------- ---------
--------- --------- ---------
</TABLE>
For measurement purposes, a 9.50%, 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 1995, 1994 and 1993, respectively; the rate was further assumed to
decline to 4.00% after 10 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 $24,000, $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, 1995
and 1994 and $6,000 for the year ended December 31, 1993. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% at December 31, 1995, 1994 and 1993.
NOTE 13--NONQUALIFIED STOCK OPTION PLAN
At Pinnacle's 1993 Annual Stockholders Meeting, a nonqualified 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 as of the grant period. The total number of
shares available under the Plan is 150,000. (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.
F-26
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--NONQUALIFIED STOCK OPTION PLAN (CONTINUED)
The following is a summary of activity for 1995, 1994 and 1993.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF OPTION PRICE SHARES
SHARES PER SHARE EXERCISABLE
----------- --------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1993........................................... --
Granted................................................................ 23,350 $ 17.155
Exercised.............................................................. --
Cancelled.............................................................. --
----------- --------------- -----------
Outstanding at December 31, 1993......................................... 23,350 17.155 11,675
Granted................................................................ 27,600 17.95
Exercised.............................................................. --
Cancelled.............................................................. --
----------- --------------- -----------
Outstanding at December 31, 1994......................................... 50,950 17.155-17.95 18,475
Granted................................................................ 71,725 16.43-17.50
Exercised..............................................................
Cancelled.............................................................. (400) 17.95
Outstanding at December 31, 1995....................................... ' 122,275 $ 16.43-17.95 18,475
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
NOTE 14--SUPPLEMENTARY INCOME STATEMENT INFORMATION
Other than the items listed below, other non-interest income and other
non-interest expenses did not include any accounts that exceeded 1% of total
revenue, which is the sum of total interest income and total non-interest
income.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Other non-interest income:
Service charges on deposit accounts................................................ $ 1,530 $ 1,479 $ 1,470
Trust Fees......................................................................... 533 485 352
Recoveries on distressed assets.................................................... 296 262 596
Gain on sale of loans, net......................................................... 182 (11) 352
Merchant & loan servicing fees..................................................... 952 770 647
Other non-interest expenses:
Salaries and benefits.............................................................. 7,100 6,073 6,071
Occupancy.......................................................................... 1,097 1,033 1,042
Equipment.......................................................................... 947 885 914
Professional and legal fees........................................................ 314 417 663
Amortization of intangibles........................................................ 525 458 462
FDIC insurance premiums............................................................ 552 808 739
Supplies........................................................................... 455 418 366
Marketing & Promotion.............................................................. 695 298 367
</TABLE>
F-27
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--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 of the
Company has in these financial instruments.
The Company's exposure to credit loss in the event of the nonperformance by
the other party to the financial instruments for loan commitments to extend
credit and letters of credit is represented by the contractual amounts of these
instruments. The Company uses the same credit policies in making loan
commitments as it does for on-balance sheet loans.
The following presents financial instruments with off-balance sheet risk at
December 31 of each year.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit............................................................. $ 79,551 $ 42,554
Letters of credit........................................................................ 777 776
</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,
1995 and 1994, is in excess of the committed amount.
F-28
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--PARENT COMPANY FINANCIAL INFORMATION
CONDENSED PARENT COMPANY ONLY BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Assets
Cash and due from banks................................................................... $ 1,923 $ 1,099
Interest-bearing deposits with financial institutions..................................... 18,100 100
Investment in subsidiaries................................................................ 73,029 34,530
Other assets.............................................................................. 1,178 82
--------- ---------
Total assets............................................................................ $ 94,230 $ 35,811
--------- ---------
--------- ---------
Liabilities
Notes payable and other liabilities....................................................... $ 19,334 $ 663
--------- ---------
Stockholders' equity
Common stock.............................................................................. 19,110 19,110
Additional paid-in capital................................................................ 44,174 10,005
Retained earnings......................................................................... 10,475 7,311
Net unrealized gains/(losses) on securities available-for-sale............................ 1,137 (1,278)
--------- ---------
Total stockholders' equity................................................................ 74,896 35,148
--------- ---------
Total liabilities and stockholders' equity................................................ $ 94,230 $ 35,811
--------- ---------
--------- ---------
</TABLE>
CONDENSED PARENT COMPANY ONLY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income
Dividends from subsidiaries....................................................... $ 12,082 $ 2,376 $ 2,040
Interest and other income......................................................... 170 43 70
--------- --------- ---------
Total income.................................................................... 12,252 2,419 2,110
--------- --------- ---------
Expenses
Compensation and benefits......................................................... 192 96 76
Other operating expenses.......................................................... 368 239 280
--------- --------- ---------
Total expenses.................................................................. 560 335 356
--------- --------- ---------
Income before federal income tax expenses (benefit) and undistributed earnings of
subsidiaries....................................................................... 11,692 2,084 1,754
Federal income tax benefit.......................................................... (133) (97) (97)
Equity in undistributed net income of subsidiaries.................................. (5,366) 3,109 3,186
--------- --------- ---------
Net income...................................................................... $ 6,459 $ 5,290 $ 5,037
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-29
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED PARENT COMPANY ONLY STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 6,459 $ 5,290 $ 5,037
Equity in undistributed net income of subsidiaries............................. 5,366 (3,109) (3,186)
Other, net....................................................................... (956) 69 (50)
---------- --------- ---------
Net cash provided by operating activities.................................... 10,869 2,250 1,801
Cash flows from investing activities:
Net increase in interest-bearing deposits with financial institutions.......... (18,000) -- --
Purchase acquisition, net of cash.............................................. (20,466) -- --
Proceeds from paydowns of municipal bonds...................................... 27 59 17
---------- --------- ---------
Net cash (used) provided by investing activities............................. (38,439) 59 17
Cash flows from financing activities:
Proceeds from issuance of common stock......................................... 13,184 -- --
Proceeds from short-term borrowings............................................ 18,000 -- --
Dividends paid................................................................. (2,790) (2,293) (2,026)
---------- --------- ---------
Net cash provided (used) by financing activities............................. 28,374 (2,293) (2,026)
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. 824 16 (208)
Cash and cash equivalents at beginning of year................................... 1,099 1,083 1,291
---------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 1,923 $ 1,099 $ 1,083
---------- --------- ---------
---------- --------- ---------
</TABLE>
NOTE 17--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
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 1995 of approximately $17.2
million. First Federal was eligible to make capital distributions of
approximately $9.6 million at December 31, 1995.
Dividends paid in 1995 to Pinnacle by its subsidiary, Peoples amounted to
$12,082,000 of which approximately $8,500,000 was used for the cash portion of
the Maco Acquisition. In addition, First Federal, another subsidiary of
Pinnacle, paid dividends amounting to $4,000,000 used for debt reduction
obtained by way of Pinnacle's acquisition of Maco. Dividends paid to Pinnacle by
Peoples in 1994 and 1993 amounted to $2,376,000, and $2,040,000, respectively.
On December 1, 1995, Pinnacle, in conjunction with its acquisition of Maco
issued 862,500 shares of common stock in a public offering and issued 1,188,954
shares of common stock to the sole stockholder of Maco resulting in total shares
outstanding increasing from 3,821,904, to 5,873,358.
F-30
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--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 28, 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
which have arisen during the normal course of business. Based upon discussions
with legal counsel, management believes that the aggregate liability, if any,
resulting from these matters will not be material to the financial results of
the Company.
F-31
<PAGE>
NOTE 18--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
INDEX TO MACO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. G-2
Consolidated Statements of Financial Condition
September 30, 1995 and 1994.............................................................................. G-3
Consolidated Statements of Operations
Years ended September 30, 1995, 1994, and 1993........................................................... G-4
Consolidated Statements of Stockholder's Equity
Years ended September 30, 1995, 1994 and 1993............................................................ G-5
Consolidated Statements of Cash Flows
Years ended September 30, 1995, 1994 and 1993............................................................ G-6
Notes to Consolidated Financial Statements................................................................. G-7
</TABLE>
G-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Maco Bancorp, Inc.
Washington, D.C.
We have audited the accompanying consolidated statements of financial
condition of Maco Bancorp, Inc. and Subsidiary (the "Company") as of September
30, 1995 and 1994, and the related consolidated statements of operations,
stockholder's equity, and cash flows for each of the three years in the period
ended September 30, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of Maco Bancorp, Inc. and
Subsidiary as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for income taxes during the year ended
September 30, 1993 and its method of accounting for securities during the year
ended September 30, 1995.
Crowe, Chizek and Company
Oak Brook, Illinois
October 20, 1995
G-2
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash and due from banks................................................................... $ 6,206 $ 4,344
Interest-bearing deposits with financial institutions--short term......................... 14,958 1,930
---------- ----------
Cash and cash equivalents............................................................... 21,164 6,274
Interest-bearing deposits with financial institutions--longer term........................ -- 77
Securities held-to-maturity (fair value: 1995--$66,428) (Note 3).......................... 67,492 --
Mortgage-backed and related securities held-to-maturity
(fair value: 1995--$107,340) (Note 3)................................................... 107,978 --
Investment securities (fair value: 1994--$99,659) (Note 3)................................ -- 103,812
Mortgage-backed and related securities (fair value: 1994--$105,504) (Note 3).............. -- 114,472
Loans held for sale....................................................................... 4,742 4,497
Loans receivable, net (Note 4)............................................................ 199,285 160,029
Real estate held for sale (Note 5)........................................................ 362 362
Real estate owned and in judgment (Note 5)................................................ 1,217 561
Federal Home Loan Bank stock.............................................................. 4,525 2,675
Premises and equipment, net (Note 6)...................................................... 2,938 3,370
Accrued interest receivable............................................................... 2,334 2,772
Deferred income taxes (Note 11)........................................................... 1,357 1,711
Other assets.............................................................................. 631 934
---------- ----------
$ 414,025 $ 401,546
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Deposit accounts (Note 7)............................................................... $ 311,868 $ 310,152
Advance payments by borrowers for taxes and insurance................................... 2,689 1,967
Advances from the Federal Home Loan Bank of Indianapolis (Note 8)....................... 61,500 51,500
Notes payable (Note 9).................................................................. 5,790 6,973
Other liabilities (Note 15)............................................................. 3,898 4,740
---------- ----------
385,745 375,332
Commitments and contingencies (Note 15)
Stockholder's equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized;
no shares issued...................................................................... -- --
Common stock, $0.01 par value, 2,000,000 shares authorized;
1,012,300 shares issued............................................................... 10 10
Additional paid-in capital.............................................................. 5,119 5,119
Retained earnings....................................................................... 25,864 23,798
Treasury stock, 500,000 shares at cost (Note 10)........................................ (2,713) (2,713)
---------- ----------
28,280 26,214
---------- ----------
$ 414,025 $ 401,546
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
G-3
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
SEPTEMBER 30, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Interest income
Loans............................................................................... $ 16,749 $ 13,221 $ 18,101
Securities
Taxable........................................................................... 4,390 5,005 2,642
Tax exempt........................................................................ 172 163 --
Mortgage-backed and related securities.............................................. 7,519 5,598 4,933
Other............................................................................... 702 432 499
--------- --------- ---------
29,532 24,419 26,175
Interest expense
Deposit accounts (Note 7)........................................................... 13,086 11,849 13,340
Advances from Federal Home Loan Bank................................................ 4,721 664 32
Notes payable....................................................................... 618 509 696
--------- --------- ---------
18,425 13,022 14,068
--------- --------- ---------
NET INTEREST INCOME................................................................... 11,107 11,397 12,107
Provision for loan losses (Note 4).................................................... 120 180 --
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................................... 10,987 11,217 12,107
Non-interest income
Loss on sale of securities, net..................................................... (5) -- --
Gain (loss) on sale of loans originated for resale, net............................. 145 (138) 1,797
Gain on sales of participation loans................................................ -- -- 1,381
Gain (loss) on sales of real estate held for sale................................... -- (29) 399
Gain on sale of premises............................................................ 251 193 --
Amortization of assistance agreement liability (Note 15)............................ -- -- 1,000
Other income........................................................................ 829 769 958
--------- --------- ---------
1,220 795 5,535
Non-interest expense
Compensation and benefits........................................................... 3,461 3,030 2,984
Occupancy and equipment............................................................. 1,674 1,471 1,536
Federal deposit insurance premiums.................................................. 715 698 481
Advertising......................................................................... 365 444 489
Legal fees.......................................................................... 606 186 238
Loan expense........................................................................ 104 114 326
Gain on sales of real estate owned, net of loss provisions.......................... (24) (14) (20)
Other expense....................................................................... 2,045 1,517 1,628
--------- --------- ---------
8,946 7,446 7,662
--------- --------- ---------
Minority interest expense........................................................... -- 137 877
--------- --------- ---------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE........................... $ 3,261 $ 4,429 $ 9,103
Provision for income taxes (Note 11).................................................. 1,195 1,754 3,593
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE............................... 2,066 2,675 5,510
Extraordinary items
Loss on early extinguishment of debt................................................ -- -- (585)
Cumulative effect of a change in accounting for income taxes (Note 2)................. -- -- 5,544
--------- --------- ---------
NET INCOME............................................................................ $ 2,066 2,675 $ 10,469
--------- --------- ---------
--------- --------- ---------
Earnings per share
Before extraordinary item and cumulative effect of a change in accounting for income
taxes............................................................................. $ 4.03 $ 5.22 $ 10.76
Extraordinary item.................................................................. -- -- (1.14)
Cumulative effect of a change in accounting for income taxes........................ -- -- 10.82
--------- --------- ---------
Net income........................................................................ $ 4.03 $ 5.22 $ 20.44
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
G-4
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
SEPTEMBER 30, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED TREASURY
COMMON STOCK CAPITAL EARNINGS STOCK TOTAL
------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance,
October 1, 1992.......................................... $ 10 $ 5,119 $ 10,654 $ (2,713) $ 13,070
Net income, 1993.......................................... -- -- 10,469 -- 10,469
--- ----------- --------- --------- ---------
Balance,
September 30, 1993....................................... 10 5,119 21,123 (2,713) 23,539
Net income, 1994.......................................... -- -- 2,675 -- 2,675
--- ----------- --------- --------- ---------
Balance,
September 30, 1994....................................... 10 5,119 23,798 (2,713) 26,214
Net income, 1995.......................................... -- -- 2,066 -- 2,066
--- ----------- --------- --------- ---------
Balance,
September 30, 1995....................................... $ 10 $ 5,119 $ 25,864 $ (2,713) $ 28,280
--- ----------- --------- --------- ---------
--- ----------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
G-5
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 2,066 $ 2,675 $ 10,469
Adjustments to reconcile net income to net cash provided by operating activities
Extraordinary item.............................................................. -- -- 585
Cumulative effect of a charge in accounting for income taxes.................... -- -- (5,544)
Net (gain) loss on sale of securities........................................... 5 -- --
Loans originated for resale................................................... (145) 138 (1,797)
Participation loans........................................................... -- -- (1,381)
Real estate held for sale..................................................... -- 29 (399)
Real estate owned, net........................................................ (24) (14) (20)
Office premises and equipment................................................. (251) (193) --
Amortization of premiums, discounts and net deferred loan costs................. 208 475 (1,987)
Amortization of discounts on notes payable...................................... -- -- 54
Proceeds from the sale of first mortgage loans.................................. 52,534 149,396 209,374
Origination of loans held for sale.............................................. (52,634) (144,877) (205,318)
Provision for losses on loans................................................... 120 180 --
Depreciation and amortization................................................... 487 402 552
Assistance agreement amortization............................................... -- -- (1,000)
Minority interest expense....................................................... -- 137 877
Change in
Accrued interest receivable................................................... 438 (386) (329)
Deferred taxes................................................................ 354 1,407 2,766
Other assets.................................................................. 303 (11) 227
Other liabilities............................................................. (842) 677 (2,092)
--------- --------- ---------
Net cash provided by operating activities................................... 2,619 10,035 5,037
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable....................................... (40,790) (21,720) 51,182
Principal payments on mortgage-backed securities.................................. 6,541 44,499 17,035
Net decrease in interest- bearing deposits with financial institutions............ 77 -- --
Proceeds from sale and/or maturity of
Investment securities........................................................... 36,403 5,429 571
Participation loans............................................................. -- -- 26,486
Federal Home Loan Bank stock.................................................... -- -- 897
Real estate owned............................................................... 439 935 244
Real estate held for sale....................................................... -- 273 324
Office premises and equipment................................................... 475 286 --
Investment in
Mortgage-backed securities...................................................... -- (97,106) (13,853)
Investment securities........................................................... -- (31,417) (55,446)
Federal Home Loan Bank stock.................................................... (1,850) (1,034) --
Office premises and equipment................................................... (279) (222) (472)
--------- --------- ---------
Net cash provided by (used in) investing activities......................... 1,016 (100,077) 26,968
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances from Federal Home Loan Bank................................ $ 102,000 $ 72,500 $ 12,000
Repayment of advances from Federal Home Loan Bank................................. (92,000) (21,000) (12,000)
Net increase (decrease) in deposits............................................... 1,716 (2,086) (163)
Proceeds from notes payable....................................................... 147 999 4,202
Payments on notes payable......................................................... (1,330) (645) (4,267)
Repurchase of minority interest................................................... -- (1,886) --
Net increase (decrease) in advance payments by borrowers for taxes and
insurance....................................................................... 722 (274) (641)
--------- --------- ---------
Net cash provided by (used in) financing activities........................... 11,255 47,608 (869)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents................................ 14,890 (42,434) 31,136
Cash and cash equivalents at beginning of period.................................... 6,274 48,708 17,572
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 21,164 $ 6,274 $ 48,708
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest........................................................................ $ 18,846 $ 12,943 $ 14,006
Income taxes.................................................................... 655 665 1,795
Non-cash transactions
Transfers from loans to real estate acquired through foreclosure................ 1,071 50 682
Amounts due to broker for settlement of investment security purchases........... -- -- 11,010
Transfer of investment and mortgage-backed securities to securities
held-to-maturity............................................................... 218,284 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
G-6
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 1--ORGANIZATION
Maco Bancorp, Inc. (the "Company"), acquired First Federal Savings Bank of
Indiana (the "Bank"), effective September 30, 1988. In a simultaneous
transaction, the Bank underwent a supervisory conversion from a mutual savings
bank to a federal stock savings bank.
The acquisition was accounted for using the purchase method of accounting.
Adjustments were made on the books of the Bank to various assets and liabilities
acquired in order to reflect their market value on the date of acquisition.
These adjustments are being amortized over their respective estimated remaining
lives on a level-yield basis, except for adjustments to premises and equipment
which are being amortized on a straight-line basis.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Maco Bancorp, Inc., its wholly-owned subsidiary, First Federal
Savings Bank of Indiana, and First Federal's wholly-owned active subsidiaries
Brookview Real Estate, Ltd. and First Insurance, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
RECOGNITION OF LOAN INTEREST AND FEE INCOME: Interest on loans is accrued
over the term of the loans based upon the principal outstanding, except where
concerns regarding collectibility exist, in which case the accrual of interest
is discontinued.
Nonrefundable loan origination and commitment fees and direct costs of loan
origination are deferred and recognized as yield adjustments over the
contractual life of the loan using a method which approximates the level-yield
method.
LOAN SALES: The Company sells a portion of its fixed and variable rate
mortgage loan production in the secondary market. The Company obtains sales
commitments on these loans immediately prior to making the origination
commitment. Market value equals or exceeds cost on loans held for sale at
September 30, 1995 and 1994. The Company does not retain servicing on loans
sold.
ALLOWANCE FOR LOSSES ON LOANS: An allowance for loan losses is maintained
because some loans may not be repaid in full. The allowance for loan losses is
increased by charges to earnings and decreased by charge-offs, net of
recoveries. A loan is charged off as a loss by management when deemed
uncollectible, although collection efforts continue and future recoveries may
occur. Estimating the risk of loss is necessarily subjective. Accordingly,
management maintains the loss allowance at levels considered adequate to cover
possible losses based on past loan loss experience, general economic conditions,
information about specific borrower situations including financial position and
the estimated value of any underlying collateral, and other factors and
estimates that are subject to change over time. While management may
periodically allocate portions of the allowance to specific problem loan
situations, the entire allowance is available for any loan charge-offs that
occur.
SECURITIES: Effective October 1, 1994, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires corporations to classify debt securities as held-to-maturity, trading
or available-for-sale. Securities are classified as held-to-maturity when
management has the intent and the
G-7
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company has the ability to hold those securities to maturity. Premiums and
discounts are recognized in interest income using methods that approximate the
level-yield method.
Prior to the adoption of SFAS No. 115, investment and mortgage-backed
securities were carried at cost, adjusted for premiums and discounts, based on
management's intent and the Company's ability to hold such investments to
maturity.
REAL ESTATE: Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of foreclosure.
Costs relating to improving the property are capitalized, whereas costs relating
to holding the property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value, including estimated selling expenses.
Real estate properties held for investment are carried at the lower of cost,
including the cost of improvements incurred subsequent to acquisition, or net
realizable value. Costs relating to the holding of property are expensed.
PREMISES AND EQUIPMENT: Depreciation and amortization of premises and
equipment are computed using the straight-line method over the estimated useful
lives of the assets.
Leasehold improvements are amortized over the estimated useful life of the
asset or the term of the lease, whichever is shorter.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and liquid mutual
fund investments.
INCOME TAXES: In October 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes". The
adoption of FAS 109 changes the Company's method of accounting for income taxes
from a deferred method (APB 11) to an asset and liability approach. The asset
and liability approach requires the Company to record income tax expense based
on the amount of taxes due on its tax return plus deferred taxes computed on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates. The
effect of adopting FAS 109 is shown as a cumulative effect of a change in
accounting principle in the 1993 consolidated statement of operations with an
effect on prior years totaling $5,544,000. The effect on prior years includes
the impact of recognizing tax loss carryforwards, unclaimed bad debt deductions,
deferred gains on wash sales, loan loss allowances, and alternative minimum tax
credits.
OPERATIONS: The Company makes residential, commercial real estate and
consumer loans primarily in the northwestern Indiana and northeastern Illinois
area. Substantially all loans are secured by specific items of collateral,
including real estate, residences and consumer assets.
EARNINGS PER SHARE: Earnings per share have been computed on the basis of
the 512,300 shares of common stock outstanding at September 30, 1995, 1994 and
1993.
G-8
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS: Certain amounts appearing in the 1994 and 1993
consolidated financial statements and notes thereto have been reclassified to
conform to the current year's presentation.
NOTE 3--SECURITIES
The amortized cost and fair values of investments in debt securities are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
U.S. Treasury securities....................................... $ 999 $ -- $ (10) $ 989
Obligations of U.S. government corporations and agencies....... 62,031 33 (997) 61,067
Obligations of states and political subdivisions............... 4,462 -- (90) 4,372
---------- ----- ----------- ----------
$ 67,492 $ 33 $ (1,097) $ 66,428
---------- ----- ----------- ----------
---------- ----- ----------- ----------
MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY
GNMA certificates.............................................. $ 409 $ 14 $ -- $ 423
FNMA certificates.............................................. 242 1 -- 243
FHLMC certificates............................................. 543 -- (5) 538
Collateralized mortgage obligations............................ 106,784 785 (1,433) 106,136
---------- ----- ----------- ----------
$ 107,978 $ 800 $ (1,438) $ 107,340
---------- ----- ----------- ----------
---------- ----- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
U.S. Treasury securities....................................... $ 13,072 $ 6 $ (88) $ 12,990
Obligations of U.S. government corporations and agencies....... 86,272 9 (3,702) 82,579
Obligations of states and political subdivisions............... 4,468 -- (378) 4,090
---------- ----- ----------- ----------
$ 103,812 $ 15 $ (4,168) $ 99,659
---------- ----- ----------- ----------
---------- ----- ----------- ----------
</TABLE>
G-9
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 3--SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED AND RELATED SECURITIES
GNMA certificates.............................................. $ 459 $ -- $ (1) $ 458
FNMA certificates.............................................. 285 -- (4) 281
FHLMC certificates............................................. 628 -- (9) 619
Collateralized mortgage obligations............................ 113,100 15 (8,969) 104,146
---------- --- ----------- ----------
$ 114,472 $ 15 $ (8,983) $ 105,504
---------- --- ----------- ----------
---------- --- ----------- ----------
</TABLE>
The amortized cost and fair value of debt securities by contractual
maturity, are shown below. Expected maturities of debt securities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalty.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
----------------------
AMORTIZED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less................................................................... $ 24,023 $ 23,887
Due after one year through five years..................................................... 40,903 40,024
Due after five years through ten years.................................................... 2,566 2,517
---------- ----------
67,492 66,428
Mortgage-backed and related securities 107,978 107,340
---------- ----------
Total................................................................................... $ 175,470 $ 173,768
---------- ----------
---------- ----------
</TABLE>
The carrying value of mortgage-backed and related securities are net of
unamortized premiums of $50,000 and $147,000 and unearned discounts of
$1,504,000 and $2,005,000 at September 30, 1995 and 1994, respectively.
Proceeds from sales of the Company's securities held-to-maturity for the
year ended September 30, 1995 were $10,392,000. Gross losses of $5,029 were
realized on those sales. These sales were permissible under the provisions of
SFAS No. 115 since the securities were sold within 90 days of maturity or had
been paid down to less than 15% of the original par value. There were no sales
of investment and mortgage-backed securities in 1994 or 1993.
Investment and mortgage-backed securities with approximate amortized cost
and fair values of $105,355,000 and $104,041,000, respectively at September 30,
1995 and $93,745,000 and $89,559,000, respectively, at September 30, 1994 were
pledged to secure advances with the Federal Home Loan Bank of Indianapolis.
G-10
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 4--LOANS RECEIVABLE
Loans are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four-family residences.................................... $ 151,330 $ 119,667
Secured by other properties................................................. 16,898 17,930
Secured by land............................................................. 5,262 --
Construction loans.......................................................... 3,818 249
---------- ----------
177,308 137,846
Less
Undisbursed portion of construction loans................................... 2,029 49
Unearned discounts.......................................................... 640 18
Net deferred loan-origination costs......................................... (996) (741)
---------- ----------
Total first mortgage loans................................................ 175,635 138,520
Consumer and other loans
Principal balances
Home equity and second mortgage............................................. 18,423 16,043
Share....................................................................... 1,338 1,644
Commercial.................................................................. 1,064 874
Automobile.................................................................. 403 763
Other....................................................................... 3,507 3,219
---------- ----------
24,735 22,543
Unearned discounts............................................................ 6 11
---------- ----------
Total consumer and other loans............................................ 24,729 22,532
Less allowance for loan losses.................................................. 1,079 1,023
---------- ----------
$ 199,285 $ 160,029
---------- ----------
---------- ----------
</TABLE>
Nonaccrual and renegotiated loans for which interest has been reduced
totaled approximately $1,181,000 and $651,000 at September 30, 1995 and 1994,
respectively. Interest income that would have been recorded under the original
terms of such loans and the interest income actually recognized are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Interest income that would have been recorded...................................... $ 54 $ 67 $ 71
Interest income recognized......................................................... 9 14 13
--- --- ---
Interest income foregone........................................................... $ 45 $ 53 $ 58
--- --- ---
--- --- ---
</TABLE>
The Company is not committed to lend additional funds to debtors whose loans
have been modified.
G-11
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 4--LOANS RECEIVABLE (CONTINUED)
A summary of the activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period............................................. $ 1,023 $ 1,240 $ 1,105
Provision for losses on loans.............................................. 120 180 --
Charge-offs................................................................ (103) (504) (87)
Recoveries................................................................. 39 107 222
--------- --------- ---------
Balance at end of period................................................. $ 1,079 $ 1,023 $ 1,240
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 5--REAL ESTATE
Real estate held for investment, which consists of land in the Company's
local market area and which has been subdivided for commercial and residential
use, is reported on the Consolidated Statement of Financial Condition net of a
specific valuation allowance of $675,000 at September 30, 1995 and September 30,
1994.
Real estate owned and in judgment consists primarily of residential real
estate and is reported net of a specific loss allowance of $109,000 at September
30, 1995 and September 30, 1994.
Activity in the allowance for real estate owned losses is summarized as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period.................................................. $ 109 $ 148 $ 125
Provisions for losses........................................................... -- -- --
Charge-offs..................................................................... -- (39) (1)
Recoveries...................................................................... -- -- 24
--------- --------- ---------
Balance at end of period...................................................... $ 109 $ 109 $ 148
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 6--PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Land............................................................................... $ 1,236 $ 1,355
Office buildings................................................................... 2,076 2,183
Leasehold improvements............................................................. 445 441
Furniture and equipment............................................................ 2,206 1,974
--------- ---------
5,963 5,953
Less accumulated depreciation and amortization..................................... (3,025) (2,583)
--------- ---------
$ 2,938 $ 3,370
--------- ---------
--------- ---------
</TABLE>
G-12
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 7--DEPOSIT ACCOUNTS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 1994
1995 ----------------------- -----------------------
WEIGHTED AVERAGE PERCENT PERCENT
RATE AMOUNT TO TOTAL AMOUNT TO TOTAL
----------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts (including non-interest bearing
deposits of $4,979,000 and $3,332,000 at September
30, 1995 and 1994, respectively)..................... 2.42% $ 29,761 9.5% $ 33,081 10.7%
Money market........................................... 4.49 14,398 4.6 8,017 2.6
Passbook savings....................................... 3.19 106,440 34.1 135,103 43.5
---------- ----- ---------- -----
150,599 48.2 176,201 56.8
Certificates of deposit:
3.01% to 4.00%......................................... 6,074 1.9 35,437 11.4
4.01% to 5.00%......................................... 16,832 5.4 48,688 15.7
5.01% to 6.00%......................................... 77,185 24.8 24,224 7.8
6.01% to 7.00%......................................... 52,777 17.0 14,939 4.8
7.01% to 8.00%......................................... 6,924 2.2 4,954 1.6
8.01% to 9.00%......................................... 816 0.3 1,011 0.4
9.01% and higher....................................... 661 0.2 4,698 1.5
---------- ----- ---------- -----
5.73 161,269 51.8 133,951 43.2
---------- ----- ---------- -----
$ 311,868 100.0% $ 310,152 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
The aggregate amounts of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 were approximately $17,131,000 and $2,227,000
at September 30, 1995 and 1994, respectively.
At September 30, 1995, scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
--------------------------------
1996 1997 1998
---------- --------- ---------
<S> <C> <C> <C>
3.01% to 4.00%................................................................... $ 4,520 $ 1,236 $ 318
4.01% to 5.00%................................................................... 13,641 1,474 335
5.01% to 6.00%................................................................... 60,643 8,953 3,554
6.01% to 7.00%................................................................... 29,239 14,404 2,962
7.01% to 8.00%................................................................... 1,375 481 216
8.01% to 9.00%................................................................... 338 16 327
9.01% and higher................................................................. 568 87 --
---------- --------- ---------
$ 110,324 $ 26,651 $ 7,712
---------- --------- ---------
---------- --------- ---------
</TABLE>
G-13
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 7--DEPOSIT ACCOUNTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
---------------------------------------------
1999 2000 THEREAFTER TOTAL
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
3.01% to 4.00%........................................................ $ -- $ -- $ -- $ 6,074
4.01% to 5.00%........................................................ 1,299 73 10 16,832
5.01% to 6.00%........................................................ 3,445 428 162 77,185
6.01% to 7.00%........................................................ 1,158 2,430 2,584 52,777
7.01% to 8.00%........................................................ 260 4,489 103 6,924
8.01% to 9.00%........................................................ 134 1 -- 816
9.01% and higher...................................................... 6 -- -- 661
--------- --------- ----------- ----------
$ 6,302 $ 7,421 $ 2,859 $ 161,269
--------- --------- ----------- ----------
--------- --------- ----------- ----------
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Money market..................................................................... $ 408 $ 308 $ 358
Passbook savings................................................................. 3,819 4,536 4,744
NOW.............................................................................. 771 758 835
Certificates of deposit.......................................................... 8,088 6,247 7,403
--------- --------- ---------
$ 13,086 $ 11,849 $ 13,340
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 8--ADVANCES FROM THE FEDERAL HOME LOAN BANK OF INDIANAPOLIS
The Bank had the following advances from the Federal Home Loan Bank of
Indianapolis:
<TABLE>
<CAPTION>
FIXED OR
VARIABLE SEPTEMBER 30,
MATURITY INTEREST INTEREST --------------------
DATE RATE RATE 1995 1994
- ---------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C>
10-03-94 5.03% Variable $ -- $ 3,000
10-24-94 5.03 Variable -- 2,000
10-28-94 5.03 Variable -- 5,000
12-26-94 5.19 Variable -- 5,000
01-06-95 4.55 Variable -- 6,000
12-4-95 6.84 Fixed 6,000 --
1-29-96 5.96 Variable 25,000 --
8-12-96 6.49 Fixed 5,500 5,500
8-19-97 6.91 Fixed 5,000 5,000
9-1-97 6.79 Fixed 5,000 5,000
2-3-99 7.50 Variable* 10,000 10,000
4-28-99 7.50 Variable* 5,000 5,000
--------- ---------
$ 61,500 $ 51,500
--------- ---------
--------- ---------
</TABLE>
- ------------------------
* The maximum rate of these advances is 7.50%.
G-14
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 8--ADVANCES FROM THE FEDERAL HOME LOAN BANK OF INDIANAPOLIS (CONTINUED)
As of September 30, 1995 and September 30, 1994, the weighted average
interest rate of advances outstanding was 6.61% and 5.94%, respectively.
Investment and mortgage-backed securities with approximate amortized cost and
fair values of $105,355,000 and $104,041,000, respectively, at September 30,
1995 and $93,745,000 and $89,559,000, respectively, at September 30, 1994 were
pledged to secure these advances.
NOTE 9--NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Note payable to NationsBank, previously Maryland National Bank; interest rate of prime plus
0.5% payable quarterly; quarterly principal payments of $75,000 through June 30, 1995 and
$87,500 through June 30, 1996; balance due July 31, 1996; secured by 5 shares of First
Federal Savings Bank of Indiana.............................................................. $ 4,183 $ 4,495
Unsecured demand notes, payable to Maco stockholder; interest rate of 10%...................... 1,607 1,631
Other notes payable; dated March 30, 1992; interest rate of prime payable annually; principal
payable in four equal annual installments beginning March 30, 1993........................... -- 847
--------- ---------
$ 5,790 $ 6,973
--------- ---------
--------- ---------
</TABLE>
In connection with the issuance of the subordinated debentures by the
Company, its subsidiary, First Federal Savings Bank of Indiana, issued 82,000
stock purchase warrants, all of which have been exercised. During 1993, the
Company repaid the debentures.
At September 30, 1995, future payments on notes payable due during the year
ending September 30, 1996 total $5,790,000.
NOTE 10--PURCHASE OF TREASURY STOCK
On March 30, 1992, the Company entered into an agreement with one of its two
principal stockholders to acquire 500,000 shares of its common stock. The
acquired shares have been recorded as treasury stock. Also on March 30, 1992,
the Company entered into a non-compete agreement calling for payments totaling
$500,000 (plus interest at prime rate) over four years and a four-year $125,000
per year consulting agreement with the former stockholder. The Company completed
its payments under the non-compete agreement during the year ended September 30,
1995.
G-15
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 11--INCOME TAXES
The provision for income taxes consists of the following.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current.................................................................... $ 841 $ 347 $ 827
Deferred................................................................... 354 1,407 2,766
--------- --------- ---------
Net........................................................................ $ 1,195 $ 1,754 $ 3,593
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reasons for the difference between the effective tax rate and the
statutory corporate federal income tax rate are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF INCOME
BEFORE INCOME TAXES
-------------------------------------
YEAR ENDED
SEPTEMBER 30,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax rate.................................................... 34.0% 34.0% 34.0%
Nontaxable interest and market-value adjustment amortization............... (3.7) (2.4) (3.0)
State income taxes......................................................... 5.6 5.9 5.6
Other...................................................................... 0.7 2.1 3.6
--- --- ---
Effective income tax rate.................................................. 36.6% 39.6% 40.2%
--- --- ---
--- --- ---
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred loan fees................................................................... $ 181 $ 149
Deferred gain on security sales...................................................... 8 95
Loans, principally due to allowance for losses....................................... 465 532
Reserve for loss on real estate held for sale........................................ 267 267
Accrual for employee benefits........................................................ 35 57
Alternative minimum tax and other credit carryforwards............................... 563 872
Other................................................................................ 136 90
--------- ---------
Total deferred tax assets........................................................ 1,655 2,062
Deferred tax assets valuation allowance.............................................. -- --
Premises and equipment, principally due to differences in depreciation............... (298) (351)
--------- ---------
Total deferred tax liabilities................................................... (298) (351)
--------- ---------
Net deferred tax assets.......................................................... $ 1,357 $ 1,711
--------- ---------
--------- ---------
</TABLE>
Management has not recorded a valuation allowance against deferred tax
assets based on its estimate of future taxable income.
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income in the
G-16
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 11--INCOME TAXES (CONTINUED)
financial statements. Retained earnings at September 30, 1995, include
approximately $2,835,000 for which no deferred income tax liability has been
recorded. This amount represents an allocation of income to bad debt deductions
for tax purposes alone. Reduction of amounts so allocated for purposes other
than tax bad debt losses or adjustments from the carryback of net operating
losses would create income for tax purposes only, which would be subject to
current tax. The unrecorded deferred tax liability on the above amounts at
September 30, 1995, was approximately $964,000.
NOTE 12--CAPITAL REQUIREMENTS
Federal regulations require institutions to have minimum regulatory tangible
capital equal to 1.5% of total assets, a core capital ratio of 3% of adjusted
assets, and a risk-based capital ratio equal to 8.0% of risk-adjusted assets as
defined by regulation.
The following are reconciliations of the Bank's capital under generally
accepted accounting principles (GAAP) to regulatory capital at September 30,
1995:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
---------------------------------------------------------
% OF
% OF % OF RISK- RISK-
TANGIBLE ADJUSTED CORE ADJUSTED BASED BASED
CAPITAL ASSETS CAPITAL ASSETS CAPITAL ASSETS
-------- -------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital.......................................................... $ 31,275 7.6% $31,275 7.6% $31,275 18.6%
Investment in non-includable subsidiaries............................. (102) -- (102) -- (102) (0.1)
Regulatory general valuation allowances............................... -- -- -- -- 1,079 0.6
-- --
-------- ------- ------- ------
Regulatory capital--computed.......................................... 31,173 7.6 31,173 7.6 32,252 19.1
Minimum capital requirement........................................... 6,174 1.5 12,349 3.0 13,521 8.0
-- --
-------- ------- ------- ------
Excess regulatory capital over minimum................................ $ 24,999 6.1% $18,824 4.6% $18,731 11.1%
-- --
-- --
-------- ------- ------- ------
-------- ------- ------- ------
</TABLE>
Accordingly, management considers the capital requirements to have been met.
Federal regulations also include restrictions on loans to one borrower, certain
types of investments and loans, loans to officers, directors, and principal
stockholders, brokered deposits, and transactions with affiliates. Management
considers the Bank to be in compliance with these restrictions.
Federal regulations require the Bank to comply with a Qualified Thrift
Lender (QTL) test which requires that 65% of assets be maintained in
housing-related finance and other specified assets. If the QTL test is not met,
limits are placed on growth, branching, new investments, FHLB advances, and
dividends, or the institution must convert to a commercial bank charter.
Management considers the QTL test to have been met.
Regulations of the Office of Thrift Supervision limit the amount of
dividends and other capital distributions that may be paid by a savings
institution without prior approval of the Office of Thrift supervision. This
regulatory restriction is based on a three-tiered system with the greatest
flexibility being afforded to well-capitalized (Tier 1) institutions. The Bank
currently meets the requirements of a Tier 1 institution and has not been
informed by the OTS of the need for more than normal supervision. Accordingly,
the Bank can make, without prior regulatory approval, distributions during a
fiscal year up to the greater of (i) 100% of its net income to date during a
fiscal year plus an amount that would reduce by
G-17
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 12--CAPITAL REQUIREMENTS (CONTINUED)
one-half its "surplus capital ratio" (the excess over its Fully Phased-in
Capital Requirements) at the beginning of the last calendar year or (ii) 75% of
its net income over the most recent preceding four quarter period. At September
30, 1995, approximately $8,799,000 was available for payment of dividends by the
Bank to the Company.
NOTE 13--RETIREMENT PLANS
The Company maintains a defined benefit pension plan that covers
substantially all employees. Employees who have completed one year of service
and were initially hired prior to age 60 are eligible. The following table sets
forth the plan's funded status and amounts recognized in the Company's
Consolidated Statements of Financial Condition:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation,
including vested benefits of $831,000 and $837,000 at
September 30, 1995 and 1994...................................................... $ 866 $ 881
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date.......................... $ (1,356) $ (1,507)
Plan assets at fair value (primarily equity fund investments)...................... 1,422 1,351
--------- ---------
Excess (deficiency) of plan assets over projected benefit obligation............... 66 (156)
Unrecognized net loss due to experience different than assumed..................... 463 710
Unrecognized net asset as of October 1, 1989 recognized over approximately 15
years............................................................................ (441) (487)
--------- ---------
Prepaid pension cost included in other assets...................................... $ 88 $ 67
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net pension cost included the following components:
Service cost--benefits earned during the period................................ $ 73 $ 82 $ 93
Interest cost on projected benefit obligation.................................. 62 64 45
Return on plan assets.......................................................... (58) (118) (113)
Net amortization and deferral.................................................. (99) (47) (44)
--- --------- ---------
Net pension benefit............................................................ $ (22) $ (19) $ (19)
--- --------- ---------
--- --------- ---------
Assumptions used were as follows:
Discount rate.................................................................. 7.50% 7.50% 6.00%
Rate of increase in compensation levels of employees........................... 5.00 5.00 4.50
Expected long-term rate of return on plan assets............................... 8.00 8.00 8.00
</TABLE>
The Company made no contribution to the pension plan during the fiscal years
1995, 1994 and 1993.
The Company maintains a 401(k) plan covering substantially all employees.
Employees who are 21 years and older and who have completed twelve months of
service are eligible. Employees may elect to
G-18
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 13--RETIREMENT PLANS (CONTINUED)
contribute to the plan from 1% to 15% of their salary subject to a statutory
maximum amount. The Company pays a 25% matching contribution each December 31 up
to a maximum of $2,310 per employee. Employees become 100% vested in the
Company's matching contribution after 5 years of service.
NOTE 14--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 consist of commitments to make or purchase loans and
fund loans in process. The Company's exposure to credit loss in the event of
nonperformance by the party to these financial instruments is represented by the
contractual amount of these instruments. The Company follows the same credit
policy to make such commitments as is followed for those loans recorded on the
Consolidated Statement of Financial Condition.
These financial instruments are summarized as follows:
<TABLE>
<CAPTION>
APPROXIMATE CONTRACT
AMOUNT
--------------------
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to make loans....................................................... $ 10,261 $ 10,538
Commitments to buy loans........................................................ 2,114 4,494
Commitments to sell loans....................................................... 14,198 6,066
Unused commercial lines of credit............................................... 2,208 865
Unused consumer lines of credit................................................. 25,327 24,368
Outstanding letters of credit................................................... -- 56
</TABLE>
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 of up to 60 days. 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 creditworthiness on a case-by-case basis. Of
the amounts above at September 30, 1995, $7,110,000 of commitments to make loans
and $789,000 of commitments to buy loans have fixed interest rates. These rates
range from 6.25% to 9.00%.
The Company sells single family mortgage loans, servicing released, to
various mortgage companies and other purchasers. Some of these purchasers
require that the Company repurchase any loans that become 60 days or more
delinquent within 6 months of sale. Loans subject to these recourse agreements
totaled $30 million at September 30, 1995. Through September 30, 1995, the
Company had not repurchased any loans under these recourse arrangements.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued in favor of municipalities. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
G-19
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 14--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
The Company provides several types of loans to its customers including
residential, construction and installment loans. Lending activities are
conducted with individuals with a wide variety of credit requirements. The
Company does not have a concentration of loans with any specific customer.
Credit risk tends to be geographically concentrated in that the majority of the
Company's customer base lies primarily in northwestern Indiana and northeastern
Illinois.
NOTE 15--COMMITMENTS AND CONTINGENCIES
To facilitate the acquisition of the Bank by the Company, the Federal
Savings and Loan Insurance Corporation ("FSLIC") provided cash assistance and
various indemnifications as set forth in an Assistance Agreement (the
"Agreement"). The Agreement, dated October 3, 1988, provided for the Bank to be
indemnified against certain undisclosed liabilities, claims, and other legal
causes of action arising from transactions in periods prior to the acquisition.
Section 7 of the Agreement included an obligation for the Bank or the Company
either: (1) to acquire another failed thrift, or comparable asset, within five
years and to share with the FSLIC (or its successor) in the cash assistance
needed up to a maximum of $2,500,000; or (2) to deliver a $3,000,000 note to the
FSLIC after five years if no acquisition has been made. In recognition of this
obligation, $2,500,000 was allocated to this provision in recording the
acquisition of the Bank.
In a capital forbearance letter included by reference in the Agreement, the
FSLIC agreed to include $10,120,000 of the cash assistance provided to the
Company under the Agreement as part of the Bank's regulatory capital. The
Company negotiated this forbearance in part so that the Company would be capable
of fulfilling its obligation under the Agreement to acquire another failed
thrift or comparable asset. However, in August 1989, the Financial Institutions
Reform, Recovery and Enforcement Act ("FIRREA") was adopted, and in January
1990, the OTS issued Thrift Bulletin 38-2 ("TB 38-2"), which eliminated
regulatory capital forbearances. The Company did not thereafter acquire any
failed thrift or comparable asset. In September 1994, the Federal Deposit
Insurance Corporation ("FDIC"), as successor to the FSLIC, brought suit against
the Company seeking enforcement of the Company's $3,000,000 "liquidated damages"
payment under the Agreement. The Company is defending vigorously this lawsuit,
asserting, among other things, that the adoption of FIRREA and the OTS issuance
of TB 38-2 eliminated the consideration for which it had bargained in exchange
for undertaking the obligations under the Agreement. In addition, the Company
has counterclaimed against the FDIC and separately sued the United States of
America, asserting in each instance claims for damages arising from these
breaches of the Agreement. Several, but not all, of those court decisions thus
far issued with respect to these legal issues in other cases are consistent with
the Company's views. However, legal counsel has been unable to date to render a
formal opinion on this litigation.
Based on these above events, in order to reflect the reduced likelihood of
the enforcement of this provision of the Agreement, the Company began to
amortize into income the $2,500,000 liability initially recorded in a manner to
approximate the expense resulting from the amortization of corresponding
purchase accounting adjustments related to long-term and intangible assets,
leaving a liability balance of $570,000 at September 30, 1995. During the year
ended September 30, 1993, the Company accelerated the amortization of the
liability in response to developments concerning negotiations with the OTS.
However, in 1994, the Company discontinued the amortization of the liability to
reflect the remaining uncertainties
G-20
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
associated with the FDIC suit. Since the inception of the Agreement in 1988, the
Company has recognized $1,930,000 of amortization income related to the purchase
accounting liability and $2,009,000 in expense related to the amortization of
long-term and intangible assets recorded in the purchase. The Company has
continued to amortize the purchase accounting adjustments related to long-term
assets recorded in the purchase of the Bank.
Effective May 4, 1995, the Company and its sole stockholder entered into an
agreement (the "Transfer Agreement") under which the Company transferred to its
sole stockholder all of its claims against the FDIC and the United States
arising with respect to the Agreement, including rights to any settlement
proceeds and benefits of any kind in connection with these claims, in exchange
for the sole stockholder's assumption of all obligations arising from the
Agreement and the FDIC dispute, including a commitment to pay all costs of
litigation and to indemnify the Company against any liability thereunder, other
than any tax effects of any proceeds received by the Company or its successor as
a result of the litigation. As described in Note 19, the Company has entered
into a merger agreement with Pinnacle Financial Services, Inc. which requires
the continuation of the Transfer Agreement subsequent to completion of the
merger. At September 30, 1995, the balance of the liability related to the
Agreement was $570,000.
In September 1995, the Bank was named as defendant in a lawsuit brought by a
former officer of the Bank. The lawsuit alleges violations of the Age
Discrimination in Employment and Americans with Disabilities Acts and breach of
contract. The Bank intends to vigorously defend the action.
The Company and its subsidiary are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial position, results of operations, cash flows or capital
position of the Company and its subsidiary.
The Bank maintained reserves in accordance with Federal Reserve requirements
of approximately $618,000 at September 30, 1995.
The Company and its subsidiary occupy certain office and branch facilities
and rents certain computer equipment under operating lease arrangements. Rent
expense amounted to approximately $540,000, $454,000 and $465,000 for the years
ended September 30, 1995, 1994 and 1993, respectively. At September 30, 1995,
future minimum payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, AMOUNT
- --------------------------------------------------------------------------- ---------
<S> <C>
1996....................................................................... $ 655
1997....................................................................... 419
1998....................................................................... 335
1999....................................................................... 70
2000....................................................................... 50
Thereafter................................................................. 396
---------
$ 1,925
---------
---------
</TABLE>
There were no new leases entered into during the year ended September 30,
1995.
G-21
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 16--RELATED PARTY TRANSACTIONS
The Company has made loans to certain directors and executive officers.
Loans to these individuals totaled approximately $15,000 and $89,000 at
September 30, 1995 and 1994, respectively. These loans consist primarily of
residential mortgages, with a maximum balance of less than $51,000 per
individual. In addition, as described in Note 9, the Company has a note payable
to its sole stockholder.
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value and the related carrying
value of financial instruments:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------
1995 1994
------------------------ ------------------------
APPROXIMATE APPROXIMATE
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................................... $ 21,164 $ 21,164 $ 6,274 $ 6,274
Interest-bearing deposits with financial institutions--
longer term................................................ -- -- 77 77
Securities held-to-maturity.................................. 67,492 66,428 -- --
Mortgage-backed and related securities held-to-maturity...... 107,978 107,340 -- --
Investment securities........................................ -- -- 103,812 99,659
Mortgage-backed securities................................... -- -- 114,472 105,504
Loans held for sale.......................................... 4,742 4,742 4,497 4,497
Loans, receivable, net....................................... 199,285 198,940 160,029 161,558
Federal Home Loan Bank stock................................. 4,525 4,525 2,675 2,675
Accrued interest receivable.................................. 2,334 2,334 2,772 2,272
NOW, money market and passbook savings....................... 150,599 150,599 176,201 176,201
Certificates of deposit...................................... 161,269 161,848 133,951 134,063
Advance payments by borrowers for taxes and insurance........ 2,689 2,689 1,967 1,967
Advances from the Federal Home Loan Bank of Indianapolis..... 61,500 61,500 51,500 51,500
Notes payable................................................ 5,790 5,790 6,973 6,973
Accrued interest payable..................................... 228 228 208 208
</TABLE>
For purposes of the above, the following assumptions were used. The
estimated fair value for cash and cash equivalents, interest-bearing deposits
with financial institutions, Federal Home Loan Bank stock, accrued interest
receivable, NOW, money market and savings deposits, advance payments by
borrowers for taxes and insurance, notes payable, accrued interest payable, and
amounts due to broker are considered to approximate their carrying values. The
estimated fair value for investments and mortgage-backed and related securities
are based on quoted market values for the individual securities or for
equivalent securities. The estimated fair value of loans held for sale is based
on the contractual purchase prices from the buyers. The estimated fair value for
loans is based on estimates of the rate the Company would charge for similar
loans at September 30, 1995 and 1994, applied for the time period until
estimated payment. The
G-22
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 17--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
estimated fair value of certificates of deposit is based on estimates of the
rate the Company would pay on such deposits at September 30, 1995 and 1994,
applied for the time period until maturity. The estimated fair value of the
Federal Home Loan Bank advances is based on estimates of current advance rates
applied for the time period until maturity of the advances.
Loan commitments are not included in the table above, as their estimated
fair value is immaterial.
Other assets and liabilities of the Company that are not defined as
financial instruments, such as premises and equipment, are not included in the
above disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as loan servicing rights, customer
goodwill, and similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Company to have
disposed of these items on September 30, 1995 and 1994, the fair values would
have been achieved, because the market values may differ depending on the
circumstances. The estimated fair values at September 30, 1995 and 1994 should
not necessarily be considered to apply at subsequent dates.
G-23
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 18--PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets, condensed statements of
income and condensed statements of cash flows for Maco Bancorp, Inc.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash and cash equivalents $ 2,547 $ 807
Investment in First Federal Savings Bank of Indiana......................................... 31,275 32,003
Accrued interest, dividends receivable, deferred taxes and other assets..................... 866 1,309
--------- ---------
$ 34,688 $ 34,119
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable............................................................................... $ 5,790 $ 6,973
Other liabilities........................................................................... 618 932
--------- ---------
6,408 7,905
Common stock................................................................................ 10 10
Additional paid-in capital.................................................................. 5,119 5,119
Retained earnings........................................................................... 25,864 23,798
Treasury stock.............................................................................. (2,713) (2,713)
--------- ---------
28,280 26,214
--------- ---------
$ 34,688 $ 34,119
--------- ---------
--------- ---------
</TABLE>
G-24
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 18--PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Operating income
Dividends from subsidiary bank.................................................... $ 3,500 $ 476 $ --
Interest income................................................................... 102 15 35
Other income...................................................................... 188 76 --
--------- --------- ---------
3,790 567 35
Operating expense
Interest expense.................................................................. 618 509 697
Other expenses.................................................................... 1,194 680 1,418
--------- --------- ---------
1,812 1,189 2,115
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY............................................................ 1,978 (622) (2,080)
Income tax benefit.................................................................. 676 411 456
--------- --------- ---------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY..................................................................... 2,654 (211) (1,624)
Equity in undistributed earnings of subsidiary...................................... (588) 2,886 11,566
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING FOR INCOME TAXES........................................ 2,066 2,675 9,942
Extraordinary item--loss on early extinguishment of debt............................ -- -- (585)
Cumulative effect of change in accounting for income taxes.......................... -- -- 1,112
--------- --------- ---------
NET INCOME.......................................................................... $ 2,066 $ 2,675 $ 10,469
--------- --------- ---------
--------- --------- ---------
</TABLE>
G-25
<PAGE>
MACO BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1994, AND 1993
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
NOTE 18--PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income...................................................................... $ 2,066 $ 2,675 $ 10,469
Adjustments to reconcile net income to net cash provided by operating activities
Extraordinary item............................................................ -- 585
Cumulative effect of a change in accounting for income taxes.................. -- (1,112)
Equity in undistributed earnings of subsidiary................................ 588 (2,886) (11,566)
Depreciation and amortization................................................. (87) 31 207
Loss on sale of automobile.................................................... -- 1
Minority interest expense..................................................... -- 137 877
Change in
Deferred taxes.............................................................. 193 41 199
Other assets................................................................ 150 (39) (51)
Other liabilities........................................................... 13 (135) 17
--------- --------- ---------
Net cash provided by (used in) operations................................. 2,923 (175) (375)
Investing activities
Proceeds from sale of automobile................................................ -- 22 --
--------- --------- ---------
Net cash provided by investing activities..................................... -- 22 --
Financing activities
Proceeds from notes payable..................................................... 147 999 4,202
Payment on notes payable........................................................ (1,330) (645) (4,267)
Purchase of treasury stock...................................................... -- -- --
--------- --------- ---------
Net cash provided by (used in) financing activities........................... (1,183) 354 (65)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.................................. 1,740 201 (440)
Cash and cash equivalents at beginning of period.................................. 807 606 1,046
--------- --------- ---------
Cash and cash equivalents at end of period........................................ $ 2,547 $ 807 $ 606
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 19--SALE AGREEMENT
On June 29, 1995, the Company entered into a merger agreement with Pinnacle
Financial Services, Inc. ("Pinnacle") whereby the Company is to be purchased and
merged with Pinnacle. The transaction is subject to stockholder and regulatory
approval.
G-26
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 14, 1996, by and between
PINNACLE FINANCIAL SERVICES, INC., a Michigan corporation ("Pinnacle"), and
INDIANA FEDERAL CORPORATION, a Delaware corporation ("IFC").
WITNESSETH:
WHEREAS, the Boards of Directors of Pinnacle and IFC 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 IFC
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, it is the intent of the respective Boards of Directors of Pinnacle
and IFC that the Merger be structured as a "merger of equals" of Pinnacle and
IFC and that the Surviving Corporation be governed and operated on this basis;
and
WHEREAS, as a condition to, and immediately after the execution of, this
Agreement, Pinnacle and IFC are entering into a Pinnacle stock option agreement
(the "Pinnacle Option Agreement") attached hereto as Exhibit A; and
WHEREAS, as a condition to, and immediately after the execution of, this
Agreement, Pinnacle and IFC are entering into an IFC stock option agreement (the
"IFC Option Agreement"; and together with the Pinnacle Option Agreement, the
"Option Agreements") attached hereto as Exhibit B; 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"),
the Delaware General Corporation Law, as amended (the "DGCL"), at the Effective
Time (as defined in Section 1.2), IFC 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 IFC 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.
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 IFC 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, IFC or the holder of any of the following securities:
(a) Each share of the common stock, par value $0.01 per share, of IFC
(the "IFC Common Stock") issued and outstanding immediately prior to the
Effective Time (other than shares of IFC
<PAGE>
Common Stock held (x) in IFC's treasury or (y) directly or indirectly by IFC
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 IFC Disclosure
Schedule)), shall be converted into the right to receive one (1) share (the
"Exchange Ratio") of the common stock, without par value, of Pinnacle (the
"Pinnacle Common Stock").
(b) All of the shares of IFC Common Stock converted into Pinnacle Common
Stock 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 IFC Common Stock shall thereafter represent
the right to receive a certificate representing the number of whole shares
of Pinnacle Common Stock into which the shares of IFC 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 IFC Common Stock shall be exchanged for certificates representing
whole shares of Pinnacle Common Stock issued in consideration therefor 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 Pinnacle Common Stock or IFC 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 Ratio.
(c) At the Effective Time, all shares of IFC Common Stock that are owned
by IFC as treasury stock and all shares of IFC Common Stock that are owned,
directly or indirectly, by IFC or Pinnacle or any of their respective
wholly-owned Subsidiaries (other than shares of IFC 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 IFC or Pinnacle, as
the case may be, being referred to herein as "Trust Account Shares") and
other than any shares of IFC Common Stock held by IFC or Pinnacle or any of
their respective Subsidiaries in respect of a debt previously contracted
(any such shares of IFC Common Stock, and shares of Pinnacle Common Stock
which are similarly held, whether held directly or indirectly by IFC or
Pinnacle or any of their respective Subsidiaries, being referred to herein
as "DPC Shares") and as set forth in the IFC 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 IFC or any of its wholly-owned
Subsidiaries (other than Trust Account Shares and DPC Shares) shall become
treasury stock of Pinnacle.
1.6 OPTIONS.
(a) At the Effective Time, each option granted by IFC to purchase shares of
IFC Common Stock which is outstanding and unexercised immediately prior thereto
(excluding any and all IFC Rights (as hereinafter defined), all of which shall
have been redeemed, and thereby extinguished, terminated and cancelled without
any right of exercise, prior to the Effective Time) shall cease to represent a
right to acquire shares of IFC Common Stock and shall be converted automatically
into an option to purchase shares of Pinnacle Common Stock in an amount and at
an exercise price determined as provided below
2
<PAGE>
(and subject to the terms of the IFC benefit plans under which they were issued
(collectively, the "IFC Stock Plans") and the agreements evidencing grants
thereunder):
(i) The number of shares of Pinnacle Common Stock to be subject to the
new option shall be equal to the number of shares of IFC Common Stock
subject to the original option; and
(ii) The exercise price per share of Pinnacle Common Stock under the new
option shall be equal to the exercise price per share of IFC Common Stock
under the original option.
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code")) shall be and is intended to be effected in a manner
which is consistent with Section 424(a) of the Code. The duration and other
terms of the new option shall be the same as the original option except that all
references to IFC shall be deemed to be references to Pinnacle.
(b) At the Effective Time, each option granted by Pinnacle to purchase
shares of Pinnacle Common Stock which is outstanding and unexercised immediately
prior thereto shall continue to represent a right to acquire shares of Pinnacle
Common Stock and shall remain an issued and outstanding option to purchase from
the Surviving Corporation shares of Pinnacle Common Stock in the same amount and
at the same exercise price subject to the terms of the Pinnacle benefit plans
under which they were issued (collectively, the "Pinnacle Stock Plans") and the
agreements evidencing grants thereunder, and shall not be affected by the
Merger.
1.7 ARTICLES OF INCORPORATION. Subject to the terms and conditions of this
Agreement, at the Effective Time, the Articles 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 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, Mr. Richard L. Schanze shall be
the Chairman of the Board and the Chief Executive Officer of the Surviving
Corporation, and Mr. Donald A. Lesch shall be the Vice Chairman, President and
Chief Operating Officer of the Surviving Corporation.
1.11 BOARD OF DIRECTORS. At the Effective Time, the Board of Directors of
the Surviving Corporation shall consist of ten (10) persons, with Mr. Schanze,
as well as Mr. Arnold L. Weaver and three (3) other persons, to be named as
directors of the Surviving Corporation on behalf of the Board of Directors of
Pinnacle, and with Mr. Lesch, as well as Mr. Howard Silverman and three (3)
other persons, to be named as directors of the Surviving Corporation on behalf
of the Board of Directors of IFC. 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. 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 shall be increased in size to a total of twelve (12)
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 a twelfth person as a director
of the Surviving Corporation. Whenever the Board of Directors is comprised of
ten (10) or fewer persons, action
3
<PAGE>
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 the Surviving Corporation shall
be located in Valparaiso, Indiana.
1.13 BANK MERGER. At the Bank Merger Effective Time (as hereinafter
defined), Indiana Federal Bank for Savings, a federal savings bank ("IndFed
Bank"), the wholly-owned subsidiary of IFC, 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 C (the "Bank Merger
Agreement"). Upon consummation of the Bank Merger, the separate existence of
IndFed 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 IndFed Bank. The Bank Merger shall become effective at the time the Bank
Merger Agreement for such merger is 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 IndFed 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
IndFed 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 IndFed 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 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 the Board of Directors
of IndFed Bank; and 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.
ARTICLE II
EXCHANGE OF SHARES
2.1 PINNACLE TO MAKE SHARES AVAILABLE. At or 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 IFC (the "Exchange Agent"), for the benefit
of
4
<PAGE>
the holders of Common Certificates, for exchange in accordance with this Article
II, certificates representing the shares of Pinnacle Common Stock (such
certificates for shares of Pinnacle Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Section 1.4 and Section 2.2(a) in
exchange for outstanding shares of IFC 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 into which the shares of IFC 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 a
certificate representing that number of whole shares of Pinnacle Common Stock to
which such holder of IFC 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 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 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 IFC of shares of IFC 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 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.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of IFC for 12 months after the Effective Time shall be paid to
Pinnacle. Any stockholders of IFC who have not theretofore complied with this
Article II shall thereafter look only to Pinnacle for payment of the shares of
Pinnacle Common Stock and any unpaid dividends and distributions on the Pinnacle
Common Stock deliverable in respect of each share of IFC Common Stock such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. Notwithstanding the foregoing, none of IFC,
Pinnacle, the Exchange Agent or any other person shall be liable to any former
holder of shares of IFC
5
<PAGE>
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 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 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 IFC
concurrently herewith (the "Pinnacle Disclosure Schedule"), Pinnacle hereby
represents and warrants to IFC 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 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, the payment and/or incurrence of (i)
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
(ii) transactional expenses by IFC or Pinnacle in connection with the Merger, 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") and as a savings and loan holding company under the Home Owners' Loan
Act ("HOLA"). 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 IFC.
(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).
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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 November 11, 1996, 5,976,548
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 the
Pinnacle Option Agreement and the Pinnacle Stock Plans, 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 November 11, 1996, no shares of Pinnacle Common Stock were
reserved for issuance, except for (i) 496,261 shares reserved for issuance upon
the exercise of stock options pursuant to the Pinnacle Stock Plans. 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 the exercise of employee stock options
granted prior to such date. 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
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 IFC) 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
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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 IFC's stockholders to
be held in connection with this Agreement and the transactions contemplated
hereby (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,
(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
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 IFC, 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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3.9 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 or the Pinnacle 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 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.
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 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
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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.
(c) 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 Pinnacle
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 Pinnacle
Benefit Plan (as defined in Section 3.11(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).
(d) No disallowance of a deduction under Section 162(m) of the Code for
employee remuneration of any amount paid or payable by Pinnacle or any
Subsidiary of Pinnacle under any contract, plan, program, arrangement or
understanding would be reasonably likely to have a Material Adverse Effect on
Pinnacle.
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 IFC 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 Plan which is subject to
Title IV of ERISA, the present value of accrued benefits under such Plan, based
upon the actuarial assumptions used for funding purposes in the most recent
actuarial report prepared by such Plan's actuary with respect to such Plan, did
not, as of its latest valuation date, exceed the then current value of the
assets of such 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
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 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
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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 IFC 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 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
IFC, 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
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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 IFC 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.
(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) To Pinnacle's knowledge, 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); there is no investigation or inquiry by any
Governmental Entity pending, or to the knowledge of Pinnacle, threatened,
against or affecting 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
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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 June 30, 1996 Form 10-Q and for liabilities incurred in
the ordinary course of business consistent with past practice since June 30,
1996, 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 the Option Agreements 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
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applicable to Pinnacle will not apply to this Agreement or the Option Agreements
or any of the transactions contemplated hereby or thereby.
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 IFC
Except as disclosed in the IFC disclosure schedule delivered to Pinnacle
concurrently herewith (the "IFC Disclosure Schedule") IFC hereby represents and
warrants to Pinnacle as follows:
4.1 CORPORATE ORGANIZATION.
(a) IFC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. IFC 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 IFC.
IFC is duly registered as a savings and loan holding company under the HOLA.
True and complete copies of the Certificate of Incorporation and Bylaws of IFC,
as in effect as of the date of this Agreement, have previously been made
available by IFC to Pinnacle.
(b) Each IFC 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 IFC, 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 IFC 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 IFC).
4.2 CAPITALIZATION.
(a) The authorized capital stock of IFC consists of (i) 5,000,000 shares of
serial preferred stock, par value $0.01 per share, none of which as of November
11, 1996 were issued or outstanding; and (ii) 10,000,000 shares of IFC Common
Stock, of which as of November 11, 1996, 4,751,131 shares were issued and
outstanding and 1,110,000 shares were held in treasury. All of the issued and
outstanding shares of IFC 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 the IFC Option Agreement (as
hereinafter defined), the IFC Rights Agreement and the IFC Stock Plans, IFC 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 IFC Common Stock or any other equity securities of IFC
or any securities representing the right to purchase or otherwise receive any
shares of IFC Common Stock or any other equity securities of IFC. As of November
11, 1996, no shares of IFC Common Stock were reserved for issuance, except for
(i) 253,089 shares reserved for issuance upon the exercise of stock options
pursuant to the IFC Stock Plans, and (ii) shares reserved for issuance pursuant
to the IFC Rights Agreement. Since January 1, 1996, IFC has not issued any
shares of IFC Common Stock or other equity securities of IFC, or any securities
convertible into or exercisable for any shares of IFC Common Stock or other
equity securities of IFC, other than pursuant to the exercise of employee stock
options granted prior to such date.
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(b) As of November 11, 1996, there are issued and outstanding up to
4,751,131 rights in respect of shares of IFC Common Stock (the "IFC Rights"),
subject to terms and conditions of the Stockholder Protection Rights Agreement
dated as of February 26, 1992, as amended by the Amendment to Stockholder
Protection Rights Agreement dated as of November 14, 1996 (the "IFC Rights
Agreement"), between IFC and Harris Trust and Savings Bank, as Rights Agent. As
of the date of this Agreement, the Separation Time (as defined in the IFC Rights
Agreement) has not occurred, the Amendment to Stockholder Protection Rights
Agreement dated as of November 14, 1996, has been entered into and is effective
and in full force and effect, the entering into of this Agreement and/or the IFC
Stock Option Agreement and/or the consummation of the transactions contemplated
hereby and/or thereby have been exempted from the application of the IFC Rights
Agreement and do not and will not cause a Separation Time to occur, and all IFC
Rights are redeemable by IFC at a cost to IFC of not more than $0.01 per each of
the shares of IFC Common Stock issued and outstanding.
(c) IFC owns, directly or indirectly, all of the issued and outstanding
shares of capital stock of each of the IFC 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 IFC 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) IFC 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 IFC. The Board of Directors of IFC has directed that this Agreement
and the transactions contemplated hereby be submitted to IFC'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 IFC Common Stock, no other corporate proceedings on the
part of IFC are necessary to approve this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by IFC and (assuming due authorization, execution and
delivery by Pinnacle) constitutes a valid and binding obligation of IFC,
enforceable against IFC in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by IFC nor the
consummation by IFC of the transactions contemplated hereby, nor compliance by
IFC with any of the terms or provisions hereof, will (i) violate any provision
of the Certificate of Incorporation or Bylaws of IFC 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 IFC 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 IFC 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 IFC 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 IFC or the Surviving Corporation; provided, however, that
prior to the date hereof, IFC has secured a waiver of Harris Trust and Savings
Bank under the loan, security agreement and guaranty for the benefit of the IFC
Employee
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Stock Ownership Plan ("ESOP") so that this Agreement and the Merger shall not
cause any breach, default or acceleration under said IFC ESOP loan arrangement.
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 IFC, 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 IFC of this Agreement and
(B) the consummation by IFC of the Merger and the other transactions
contemplated hereby.
4.5 REPORTS. IFC 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 IFC. Except for normal examinations conducted
by a Regulatory Agency in the regular course of the business of IFC and its
Subsidiaries, no Regulatory Agency has initiated any proceeding or, to the best
knowledge of IFC, investigation into the business or operations of IFC 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 IFC. There is no unresolved violation, criticism, or
exception by any Regulatory Agency with respect to any report or statement
relating to any examinations of IFC or any of its Subsidiaries which, in the
reasonable judgment of IFC, is likely, either individually or in the aggregate,
to have a Material Adverse Effect on IFC.
4.6 FINANCIAL STATEMENTS. IFC has previously made available to Pinnacle
copies of (a) the consolidated balance sheets of IFC 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 IFC's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 filed with the SEC under
the Exchange Act, in each case accompanied by the audit report of Ernst & Young
LLP, independent public accountants with respect to IFC, and (b) the unaudited
consolidated balance sheet of IFC and its Subsidiaries as of June 30, 1996 and
the related unaudited consolidated statements of income and cash flows for the
six-month period then ended as reported in IFC's Quarterly Report on Form 10-Q
for the period ended June 30, 1996 filed with the SEC under the Exchange Act
(the "IFC June 30, 1996 Form 10-Q"). The December 31, 1995 consolidated balance
sheet of IFC (including the related notes, where applicable) fairly presents the
consolidated financial position of IFC and its Subsidiaries as of the date
thereof, and the other financial statements
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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 IFC 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 IFC
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 and reflect only actual transactions.
4.7 BROKER'S FEES. Neither IFC nor any IFC 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 or the
Option Agreements, other than Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") (a copy of which engagement agreement has been disclosed by IFC to
Pinnacle) whose fees, commissions and expenses shall be paid by IFC.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as publicly disclosed in IFC Reports (as defined in Section 4.12)
filed prior to the date hereof, since December 31, 1995, (i) IFC 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 IFC or
the Surviving Corporation.
(b) Except as publicly disclosed in IFC Reports filed prior to the date
hereof, since December 31, 1995, IFC 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 IFC 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 IFC'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 IFC, is likely, either
individually or in the aggregate, to have a Material Adverse Effect on IFC.
4.9 LEGAL PROCEEDINGS.
(a) Neither IFC nor any of its Subsidiaries is a party to any, and there are
no pending or, to the best of IFC's knowledge, threatened, material legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against IFC or any of its
Subsidiaries or challenging the validity or propriety of the transactions
contemplated by this Agreement or the IFC 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 IFC.
(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 IFC, any of its Subsidiaries or the assets of IFC or any of its
Subsidiaries which has had, or might reasonably be expected to have, a Material
Adverse Effect on IFC.
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4.10 TAXES AND TAX RETURNS.
(a) Each of IFC and its Subsidiaries has duly filed all federal, state,
county, foreign and, to the best of IFC'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 IFC, to have a Material Adverse Effect on IFC. The income
tax returns of IFC and its Subsidiaries have been examined by 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 IFC does not have adequate reserves or all such
deficiencies were satisfied. To the best of IFC's knowledge, there are no
material disputes pending, or claims asserted for, Taxes or assessments upon IFC
or any of its Subsidiaries for which IFC does not have adequate reserves, nor
has IFC 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 IFC 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 IFC, (B)
federal, state, county and local returns which are accurate and complete in all
material respects have been filed by IFC 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 IFC, (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 IFC in its consolidated financial
statements as of December 31, 1995, except where failure to do so would not have
a Material Adverse Effect on IFC and (D) there are no Tax liens upon any
property or assets of IFC or its Subsidiaries except liens for current taxes not
yet due or liens that would not have a Material Adverse Effect on IFC. Neither
IFC 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 IFC 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 IFC. Except as set forth in the financial statements described
in Section 4.6, neither IFC 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 IFC.
(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 IFC 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 IFC
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 IFC or any Subsidiary of
IFC under any contract, plan, program, arrangement or understanding would be
reasonably likely to have a Material Adverse Effect on IFC.
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4.11 EMPLOYEES.
(a) The IFC 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 "IFC Benefit Plans") by IFC or any of its
Subsidiaries or by any ERISA Affiliate, all of which together with IFC would be
deemed a "single employer" within the meaning of Section 4001 of ERISA.
(b) IFC has heretofore delivered to Pinnacle true and complete copies of
each of the IFC Benefit Plans and certain related documents, including, but not
limited to, (i) the actuarial report for such IFC 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 IFC 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 IFC Benefit Plans intended to
be "qualified" within the meaning of Section 401(a) of the Code is so qualified,
(iii) with respect to each Plan which is subject to Title IV of ERISA, the
present value of accrued benefits under such Plan, based upon the actuarial
assumptions used for funding purposes in the most recent actuarial report
prepared by such Plan's actuary with respect to such Plan, did not, as of its
latest valuation date, exceed the then current value of the assets of such Plan
allocable to such accrued benefits, (iv) no IFC Benefit Plan provides benefits,
including, without limitation, death or medical benefits (whether or not
insured), with respect to current or former employees of IFC, 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 IFC, 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 IFC, its Subsidiaries or any ERISA Affiliate that has not been
satisfied in full, and no condition exists that presents a material risk to IFC,
its Subsidiaries or any ERISA Affiliate of incurring a material liability
thereunder, (vi) no 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 IFC or its Subsidiaries as of the Effective Time with respect to each
IFC 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 IFC,
its Subsidiaries nor any ERISA Affiliate has engaged in a transaction in
connection with which IFC, 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 IFC there are no pending,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the IFC Benefit Plans or any trusts related thereto
which are, in the reasonable judgment of IFC, likely, either individually or in
the aggregate, to have a Material Adverse Effect on IFC.
(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 IFC or any of its affiliates from IFC or any of its affiliates under
any IFC Benefit Plan or otherwise, (ii) materially increase any benefits
otherwise payable under any IFC 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. IFC 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
IFC with the SEC pursuant to the Securities Act or the Exchange Act (the "IFC
Reports") and prior to the date hereof and (b) communication mailed by IFC 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
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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, IFC has timely filed all IFC
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 IFC Reports
complied in all material respects with the published rules and regulations of
the SEC with respect thereto.
4.13 COMPLIANCE WITH APPLICABLE LAW. IFC 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 IFC 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 IFC.
4.14 CERTAIN CONTRACTS.
(a) Neither IFC 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
IFC, 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 IFC Reports, (iv) which materially restricts
the conduct of any line of business by IFC, (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. IFC has previously made available to Pinnacle
true and correct copies of all employment and deferred compensation agreements
which are in writing and to which IFC 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 IFC Disclosure Schedule, is referred to herein
as an "IFC Contract", and neither IFC 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 IFC.
(b) (i) Each IFC Contract is valid and binding on IFC or any of its
Subsidiaries, as applicable, and in full force and effect, (ii) IFC and each of
its Subsidiaries has in all material respects performed all obligations required
to be performed by it to date under each IFC Contract, except where such
noncompliance, individually or in the aggregate, would not have a Material
Adverse Effect on IFC, 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 IFC or any of its Subsidiaries under any such IFC Contract,
except where such default, individually or in the aggregate, would not have a
Material Adverse Effect on IFC.
4.15 AGREEMENTS WITH REGULATORY AGENCIES. Neither IFC 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 IFC Disclosure Schedule, an "IFC Regulatory
Agreement"),
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nor has IFC 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 IFC AND ITS SUBSIDIARIES.
(a) Neither IFC 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 IFC
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) To IFC's knowledge, each IFC Subsidiary which is a federally insured
bank or savings institution (an "IFC Bank Subsidiary") currently performs all
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);
there is no investigation or inquiry by any Governmental Entity pending, or to
the knowledge of IFC, threatened, against or affecting IFC, or any Significant
Subsidiary thereof relating to the compliance by IFC 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 IFC, each
employee of a IFC 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 IFC Bank
Subsidiary; and each IFC 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.
4.17 INVESTMENT SECURITIES. Each of IFC 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 IFC or any of its Subsidiaries. Such securities are valued on the
books of IFC 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 IFC or for the account of
a customer of IFC or one of its Subsidiaries, were entered into in the ordinary
course of business and, to IFC'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 IFC 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. IFC 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
IFC'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 IFC included
in the IFC June 30, 1996 Form 10-Q and for liabilities incurred in the ordinary
course of business consistent with past practice since June 30, 1996, neither
IFC nor any of its Subsidiaries has incurred any liability of any nature
whatsoever (whether absolute, accrued,
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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 IFC.
4.20 ENVIRONMENTAL LIABILITY. Except as set forth in the IFC 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 IFC
or any of the IFC 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, CERCLA, pending or
threatened against IFC or any of the IFC Subsidiaries, which liability or
obligation could reasonably be expected to have a Material Adverse Effect on
IFC. To the knowledge of IFC, 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 IFC. Neither IFC nor any of the IFC 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 IFC.
4.21 STATE TAKEOVER LAWS; REDEMPTION OF IFC RIGHTS. The Board of Directors
of IFC has approved the transactions contemplated by this Agreement and the
Option Agreements and taken such action (i) such that the provisions of Section
9 of the Certificate of Incorporation of IFC pertaining to certain "Business
Combinations" shall not be applicable to the transactions contemplated by this
Agreement and the Option Agreements, and the provisions of Section 203 of the
DGCL and any other provision of any state or local "takeover" law applicable to
IFC will not apply to this Agreement or the Option Agreements or any of the
transactions contemplated hereby or thereby, and (ii) to redeem the IFC Rights
prior to the Effective Time at a cost to IFC of not more than $0.01 (the
"Redemption Price") per each of the shares of IFC Common Stock issued and
outstanding, such that all of said IFC Rights will have been extinguished,
terminated and cancelled prior to the Effective Time, without any right of
exercise, and shall only represent the right to receive the Redemption Price in
cash from IFC or the Surviving Corporation following the Merger.
4.22 POOLING OF INTERESTS. IFC 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 IFC Disclosure Schedule) or the Option Agreements, each of
Pinnacle and IFC shall, and shall cause each of their respective 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) take no action which would adversely affect or delay the ability of either
Pinnacle or IFC 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 or the Option
Agreements.
5.2 FORBEARANCES. During the period from the date of this Agreement to the
Effective Time, except as set forth in the Pinnacle Disclosure Schedule or the
IFC Disclosure Schedule, as the case may be, and, except as expressly
contemplated or permitted by this Agreement or the Option Agreements, neither
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Pinnacle nor IFC shall, and neither Pinnacle nor IFC shall permit any of their
respective Subsidiaries to, without the prior written consent of the other:
(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 Pinnacle or any of its Subsidiaries to Pinnacle or any of its
Subsidiaries, on the one hand, or of IFC or any of its Subsidiaries to IFC
or any of its Subsidiaries, on the other hand), 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);
(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 (except, (A) in the case of
Pinnacle, for regular quarterly cash dividends on Pinnacle Common Stock at a
rate not in excess of $0.25 per share of Pinnacle Common Stock, (B) in the
case of IFC, for regular quarterly cash dividends on IFC Common Stock at a
rate not in excess of $0.21 per share of IFC Common Stock, (C) for dividends
paid by any of the Subsidiaries of each of Pinnacle and IFC to Pinnacle or
IFC or any of their Subsidiaries, respectively, and (D) for dividends paid
in the ordinary course of business by any subsidiaries (whether or not
wholly owned) of each of Pinnacle and IFC), (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
Pinnacle Stock Plans or the IFC Stock Plans, except as otherwise agreed in
writing by Pinnacle and IFC) 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, (B) the Option Agreements, or (C) as
permitted unless clause (iii) above;
(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;
(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
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the acquisition of its voting securities, or the merger or business
combination of it or any of its Subsidiaries with any corporation or other
entity other than as provided by this Agreement (and each party shall
promptly notify the other 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
or IFC to exercise its rights under the Pinnacle Option Agreement or the IFC
Option Agreement, as the case may be;
(j) amend its Certificate of Incorporation or Articles of Incorporation,
as the case may be, or its Bylaws, except as contemplated by this Agreement;
(k) other than in prior consultation with the other party to this
Agreement, 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 5.2.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 REGULATORY MATTERS.
(a) Pinnacle and IFC 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 IFC 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 IFC 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 IFC
shall furnish all information concerning IFC and the holders of IFC 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 IFC 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 IFC, 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
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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 IFC 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, IFC 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 IFC 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 IFC 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 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 IFC 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 IFC, 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 IFC 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 IFC'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 IFC 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.
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6.3 STOCKHOLDERS' APPROVALS. Each of Pinnacle and IFC 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 IFC will, through their
respective Boards of Directors, subject to their respective 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 IFC 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
IFC 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 IFC 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 IFC to
approve this Agreement, a written agreement, in the form of Exhibit D hereto,
providing that such person will not sell, pledge, transfer or otherwise dispose
of any shares of Pinnacle Common Stock or IFC Common Stock held by such
"affiliate" and, in the case of the "affiliates" of IFC, 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 IFC 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 IFC.
(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 LISTING. Pinnacle shall cause the shares of Pinnacle Common
Stock to be issued in the Merger to be approved for trading and reporting on
NASDAQ, National Market System, 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 Pinnacle Benefit Plans and IFC Benefit Plans in effect as of the date of
this Agreement shall remain in effect with respect to employees of Pinnacle or
IFC (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
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 IFC Benefit Plans
(including, without limitation, non-qualified stock option agreements, incentive
stock option agreements, the IFC ESOP, deferred compensation plans and
agreements, supplemental retirement income agreements, severance agreements,
employment agreements and stock option and incentive plans benfitting current or
former directors, officers or employees of IFC or its Subsidiaries, or their
predecessors) which shall be cancelled, terminated or frozen
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to the extent permitted by applicable law (the "New Benefit Plans"). Prior to
the Closing Date, Pinnacle and IFC shall cooperate in reviewing, evaluating and
analyzing the Pinnacle Benefit Plans and IFC Benefit Plans with a view towards
developing 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 IFC Benefit Plans which shall be cancelled, terminated or frozen to the
extent permitted by applicable law. It is the intention of Pinnacle and IFC to
develop New Benefit Plans, effective as of the Effective Time, 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
IFC Benefit Plans, on the other, prior to the Effective Time, but (iii) with the
overall view that the IFC 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.
(b) The foregoing notwithstanding, the Surviving Corporation agrees to honor
in accordance with their terms all benefits vested as of the date hereof under
the Pinnacle Benefit Plans or the IFC Benefit Plans or under other contracts,
arrangements, commitments, or understandings described in the Pinnacle
Disclosure Schedule and the IFC Disclosure Schedule.
(c) Nothing in this Section 6.7 shall be interpreted as preventing the
Surviving Corporation from amending, modifying or terminating any Pinnacle
Benefit Plans, IFC Benefit Plans, or other 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 IFC or any of its Subsidiaries, including any entity specified in
the IFC 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 IFC, any of the IFC Subsidiaries or any entity specified in the IFC
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 IFC or any
of its Subsidiaries at such time, including the provisions of Section 11 of
IFC'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
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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 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 IFC, its Subsidiaries or any entity specified in the
IFC 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 IFC or any of the IFC 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 IFC or any of the IFC 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.
(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 IFC) 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 IFC 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.
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6.11 DIVIDENDS. After the date of this Agreement, each of Pinnacle and IFC
shall coordinate with the other the declaration of any dividends in respect of
Pinnacle Common Stock and IFC Common Stock and the record dates and payment
dates relating thereto, it being the intention of the parties hereto that
holders of Pinnacle Common Stock or IFC Common Stock shall not receive two
dividends, or fail to receive one dividend, for any quarter with respect to
their shares of Pinnacle Common Stock and/or IFC Common Stock and any shares of
Pinnacle Common Stock any such holder receives in exchange therefor in the
Merger.
6.12 NEGOTIATIONS WITH OTHER PARTIES. So long as this Agreement remains in
effect and no notice of termination has been given under this Agreement, neither
Pinnacle, on the one hand, nor IFC, on the other hand, shall 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 other than the other party to this Agreement or any
of its affiliates (a "Potential Acquiror") concerning any "Acquisition Proposal"
(as hereinafter defined) other than pursuant to this Agreement. The preceding
sentence shall not be construed to prohibit the Board of Directors of Pinnacle,
on the one hand, or IFC, on the other hand, 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
or IFC, would acquire or participate in a merger or other business combination
involving Pinnacle or any of the Pinnacle Bank Subsidiaries, on the one hand, or
IFC or any of the IFC Bank Subsidiaries, on the other hand, directly or
indirectly; (ii) proposal by which any corporation, partnership, person or other
entity or group, other than Pinnacle or IFC, would acquire the right to vote 10%
or more of the capital stock of Pinnacle or any of the Pinnacle Bank
Subsidiaries, on the one hand, or IFC or any of the IFC Bank Subsidiaries, on
the other hand, entitled to vote thereon for the election of directors; (iii)
acquisition of 10% or more of the assets of Pinnacle or any of the Pinnacle Bank
Subsidiaries, on the one hand, or IFC or any of the IFC Bank Subsidiaries, on
the other hand, other than in the ordinary course of business; or (iv)
acquisition in excess of 10% of the outstanding capital stock of Pinnacle or any
of the Pinnacle Bank Subsidiaries, on the one hand, or IFC or any of the IFC
Bank Subsidiaries, on the other hand, other than as contemplated by this
Agreement.
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 APPROVAL. 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 IFC
Common Stock entitled to vote thereon.
(b) NASDAQ LISTING. The shares of Pinnacle Common Stock which shall be
issued to the stockholders of IFC upon consummation of the Merger shall have
been authorized for trading and reporting on the NASDAQ, National Market
System, 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").
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(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 IFC each shall have received an
opinion of their respective tax counsel, addressed to Pinnacle or IFC, as
the case may be, in form and substance reasonably satisfactory to Pinnacle
and IFC, 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 IFC will each be a
party to the reorganization;
(ii) No gain or loss will be recognized by Pinnacle or IFC as a
result of the Merger;
(iii) No gain or loss will be recognized by the stockholders of IFC
who exchange their IFC 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 IFC Common Stock solely for
Pinnacle Common Stock in the Merger will be the same as the tax basis of
the IFC 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 IFC in the Merger will include the period during which
the shares of IFC Common Stock surrendered in exchange therefor were
held; provided, such IFC Common Stock was held as a capital asset by the
holder of such IFC Common Stock at the Effective Time. In rendering such
opinion, counsel may require and rely upon representations contained in
certificates of officers of Pinnacle, IFC and others.
(g) POOLING OF INTERESTS. Pinnacle and IFC shall each have received a
letter, effective as of the Effective Time, from their respective
independent accountants addressed to Pinnacle or IFC, 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 IFC 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 IFC Disclosure Schedule that are disclosed by IFC to Pinnacle
in the form of an updated IFC disclosure schedule delivered to Pinnacle as
of the Closing Date (the "Closing Date IFC 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 IFC by the Chief Executive
Officer and the Chief Financial Officer of IFC to the foregoing effect, and
to which any Closing Date IFC Disclosure Schedule shall be appended.
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(b) PERFORMANCE OF OBLIGATIONS OF IFC. IFC 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 behalf of IFC by the Chief Executive Officer and the
Chief Financial Officer of IFC to such effect.
(c) IFC RIGHTS REDEEMED. The IFC Rights shall have been redeemed at a
cost to IFC of not more than $0.01 (the "Redemption Price") per each of the
shares of the IFC Common Stock issued and outstanding, such that all of said
IFC Rights have been extinguished, terminated and cancelled, without any
right of exercise, and shall only represent the rights to receive the
Redemption Price in cash from IFC or the Surviving Corporation following the
Merger.
(d) COMFORT LETTERS. Pinnacle shall have received "comfort" letters
from Ernst & Young, 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 IFC's consolidated financial statements dated as of
December 31, 1995, June 30, 1996, each subsequent year-end and quarter-end
and the most recent interim month-end consolidated financial statements of
IFC 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, 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 IFC and the IFC
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 IFC 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 IFC, inquiries of officials of IFC
responsible for financial and accounting matters, and a reading of the
minutes of the Boards of Directors and stockholders of IFC and the IFC
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 IFC), nothing
came to their attention that caused them to believe that (A) the unaudited
consolidated financial statements of IFC 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 IFC, except
as a result of the exercise of employee stock options granted prior to June
30, 1996, or the IFC Subsidiaries or any increase in consolidated long-term
debt of IFC or the IFC 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 IFC's
accounts and records, which are described in such letter or are set forth in
the S-4 and the prospectus, or (B) since December 31, 1995 any dividends
were paid on the IFC 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.
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(e) LEGAL OPINION. IFC shall have delivered to Pinnacle an opinion,
dated the Closing Date, of counsel for IFC, satisfactory to Pinnacle and its
counsel, to the effect set forth on Exhibit E. Such opinion shall also cover
such other matters incident to the transactions herein contemplated as
Pinnacle and its counsel may reasonably request. In rendering their opinion,
counsel to IFC may rely on certificates of officers of IFC, 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 The Chicago Corporation in connection with the deliberations of
its Board of Directors approving this Agreement and the Option Agreements
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 which has, or is likely to have, a Materially Adverse Effect on IFC
or upon the right of IFC or any of the IFC Subsidiaries to conduct their
businesses as presently conducted.
7.3 CONDITIONS TO OBLIGATION OF IFC. The obligation of IFC to effect the
Merger is also subject to the satisfaction or waiver by IFC 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 IFC in the form of an updated Pinnacle disclosure schedule
delivered to IFC as of the Closing Date (the "Closing Date Pinnacle
Disclosure Schedule")) as of the Closing Date as though made on and as of
the Closing Date. IFC 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 IFC 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. IFC 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, June 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 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,
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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
(A) 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 June 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, or
(B) since December 31, 1995 any dividends were paid on the Pinnacle 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 IFC, as described in such letter.
(d) LEGAL OPINION. Pinnacle shall have delivered to IFC an opinion,
dated the Closing Date, of counsel for Pinnacle, satisfactory to IFC and its
counsel, to the effect set forth on Exhibit F. Such opinion shall also cover
such other matters incident to the transactions herein contemplated as IFC
and its counsel may reasonably request. 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. IFC shall have received the favorable opinion
from Sandler O'Neill in connection with the deliberations of its Board of
Directors approving this Agreement and the Option Agreements 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 IFC from a financial point of
view.
(f) NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred 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 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 IFC:
(a) by mutual consent of Pinnacle and IFC 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;
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(b) by either the Board of Directors of Pinnacle or the Board of
Directors of IFC 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 IFC 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 IFC (provided that the terminating party is 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 IFC if any approval of the stockholders of
Pinnacle or IFC 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 IFC if any of the conditions specified by
Article VII to the obligation of the terminating party have not been
satisfied on the Closing Date; or
(g) by Pinnacle if the Closing Date IFC Disclosure Schedule discloses
any change from the IFC Disclosure Schedule which has, or is likely to have,
a Material Adverse Effect on IFC or any of the IFC Subsidiaries; or by IFC
if the Closing Date Pinnacle Disclosure Schedule 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.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Pinnacle or IFC as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, and none of Pinnacle, IFC, 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 IFC 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 IFC; provided, however, that after any approval of the transactions
contemplated by this Agreement by the respective stockholders of Pinnacle or
IFC, 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 IFC 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
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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 IFC, 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 IFC 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 and the
Option Agreements, 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
Option Agreements, which shall terminate in accordance with their 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.
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 the costs and expenses of
printing and mailing the Joint Proxy Statement, and all filing and other fees
paid to the SEC in connection with the Merger, shall be borne equally by
Pinnacle and IFC.
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
36
<PAGE>
and
(b) if to IFC, to:
Indiana Federal Corporation
56 Washington Street
Valparaiso, Indiana 46383
Attention: Donald A. Lesch, Chairman and CEO
Fax: (219) 464-2041
with copies to:
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
Attention: James S. Fleischer Esq.
Fax: (202) 682-0354
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 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, IFC 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 other than the Option
Agreements and the Confidentiality Agreement.
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 IFC 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
37
<PAGE>
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.
IN WITNESS WHEREOF, Pinnacle and IFC 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
INDIANA FEDERAL CORPORATION
By:
-----------------------------------------
Donald A. Lesch
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
38
<PAGE>
SCHEDULE OF EXHIBITS
Exhibit A -- Pinnacle Option Agreement
Exhibit B -- IFC Option Agreement
Exhibit C -- Bank Merger Agreement
Exhibit D -- Affiliate Letter Agreement
Exhibit E -- Opinion of IFC Counsel
Exhibit F -- Opinion of Pinnacle Counsel
39
<PAGE>
ANNEX B
FORM OF OPINION OF ABN AMRO CHICAGO CORPORATION
ABN AMRO 208 South LaSalle Street
Chicago Corporation Chicago, Illinois 60604
(312) 855-7600
, 1997
Board of Directors
Pinnacle Financial Services, Inc.
830 Pleasant Street
St. Joseph, MI 49085-1265
Members of the Board:
Pinnacle Financial Services, Inc., a Michigan corporation ("Pinnacle"), and
Indiana Federal Corporation, a Delaware corporation ("IFC"), have entered into
an Agreement and Plan of Reorganization, dated as of November 14, 1996 (the
"Agreement"), pursuant to which IFC will be merged with and into Pinnacle, which
will be the surviving entity (the "Merger"). Pursuant to the Merger, as more
fully described in the Agreement, each share of common stock of IFC, $.01 par
value, issued and outstanding (the "IFC Common Stock") shall be converted into
the right to receive 1.0 share of common stock, no par value, of Pinnacle (the
"Pinnacle Common Stock").
You have requested our opinion as to the fairness of the consideration to be
paid (the "Merger Consideration"), from a financial point of view, to the
shareholders of Pinnacle, as of the date hereof.
During the course of our engagement, we have, among other things: (i)
reviewed the financial terms and conditions of the Agreement, the Joint Proxy
Statement/Prospectus and certain related documents; (ii) reviewed certain
publicly available financial and other data, including the audited and unaudited
recent financial statements of Pinnacle and IFC, as well as certain other
relevant internally-generated Pinnacle and IFC reports relating to
asset/liability management, asset quality and so forth, as made available to us;
(iii) reviewed and analyzed other material bearing upon the financial and
operating condition of Pinnacle and IFC and material prepared in connection with
the proposed transaction; (iv) reviewed the operating characteristics of certain
other financial institutions deemed relevant to the contemplated transaction;
(v) reviewed the nature and terms of recent sale and merger transactions
involving banks, thrifts, bank and thrift holding companies and other financial
institutions that we considered relevant; (vi) reviewed historical and current
market data for Pinnacle Common Stock and IFC Common Stock; (vii) conducted
meetings with members of the senior managements of Pinnacle and IFC for the
purpose of reviewing the future prospects of Pinnacle and IFC, the strategic
objectives of each, and the possible financial benefits which might be realized
following the Merger; (viii) reviewed certain information, including forecasts
pertaining to prospective cost savings and revenue enhancements relative to the
Merger; (ix) evaluated the pro forma ownership of Pinnacle Common Stock by IFC
shareholders, relative to the pro forma contribution of IFC's assets,
liabilities, equity and earnings to Pinnacle; and (x) performed such other
analyses and examinations as we deemed appropriate.
In rendering this opinion, we have relied upon, without independent
verification, the accuracy and completeness of the financial and other
information and representations provided to us by Pinnacle and IFC. We have
relied upon the managements of Pinnacle and IFC as to the reasonableness and
achievability of the financial forecasts and projections (and the assumptions
and bases therefore) provided to us, and have assumed that such forecasts and
projections are the best available estimates of management. We are not experts
in the evaluation of loan portfolios or the allowances for loan losses with
respect thereto and have assumed that such allowances by Pinnacle and IFC are in
the aggregate adequate to cover such losses. In addition, we have not reviewed
individual credit files nor have we made an independent appraisal of the assets
and liabilities of Pinnacle and IFC or any of their subsidiaries and we have not
been furnished with
<PAGE>
any such evaluation or appraisal. Finally, we have assumed, with your consent,
that the Merger will be recorded as a pooling of interests in accordance with
generally accepted accounting principles.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
ABN AMRO Chicago Corporation ("AACC"), as part of its investment banking
business, is continually engaged in the valuation of banks and bank holding
companies and thrifts and thrift holding companies in connection with mergers
and acquisitions as well as initial and secondary offerings of securities and
valuations for other purposes. AACC is a member of all principal U.S. securities
exchanges and may from time to time purchase securities from, and sell
securities to, Pinnacle or IFC and, either directly or through affiliates, buy
or sell the equity securities of Pinnacle or IFC as principal or for the
accounts of customers. Two affiliates of AACC manage limited partnerships which
invest in publicly-traded securities of financial institutions. Additionally,
AACC manages two group trusts which invest in publicly-traded securities of
financial institutions. Together, these investment pools, known as The Banc
Funds, have reported ownership of 41,100 shares of Pinnacle Common Stock and
37,515 shares of IFSL Common Stock.
The Board of Directors has requested that AACC issue this opinion and AACC
will receive a fee from Pinnacle for delivering this opinion to be used in
evaluating the proposed merger. A portion of such fee is contingent upon the
closing of the Merger.
This opinion is limited to the fairness, from a financial point of view, to
the holders of Pinnacle Common Stock, of the Merger Consideration. Moreover,
this letter, and the opinion expressed herein, is directed to the Board of
Directors of Pinnacle and does not constitute a recommendation to any
shareholder as to how such shareholder should vote on the Merger.
Based on the foregoing and our experience as investment bankers, we are of
the opinion that, as of the date hereof, the Merger Consideration to be paid to
the shareholders of IFC as described in the Agreement is fair from a financial
point of view to the shareholders of Pinnacle.
Sincerely,
ABN AMRO Chicago Corporation
<PAGE>
ANNEX C
FORM OF OPINION OF SANDLER O'NEILL & PARTNERS, L.P.
, 199
Board of Directors
Indiana Federal Corporation
56 Washington Street
Valparaiso, IN 46383
Ladies and Gentlemen:
Indiana Federal Corporation (the "Company") and Pinnacle Financial Services,
Inc. ("Pinnacle") have entered into an Agreement and Plan of Merger, dated as of
November 14, 1996 (the "Agreement"), pursuant to which the Company will be
merged with and into Pinnacle (the "Merger"). Under the terms of the Agreement,
upon consummation of the Merger, each outstanding share of the Company's common
stock, par value $.01 per share (the "Company Shares"), other than certain
shares specified in the Agreement, will be converted into the right to receive
1.0 share (the "Exchange Ratio") of the common stock, without par value, of
Pinnacle (the "Pinnacle Shares"), subject to possible adjustment as set forth in
the Agreement. The terms and conditions of the Merger are more fully set forth
in the Agreement. You have requested our opinion as to the fairness, from a
financial point of view, of the Exchange Ratio to the holders of the Company
Shares.
Sandler O'Neill & Partners, L.P., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions and other corporate
transactions.
In connection with this opinion, we have reviewed, among other things: (i) a
draft of the Agreement and exhibits thereto; (ii) the Stock Option Agreements,
dated as of November 14, 1996, by and between Pinnacle and the Company; (iii)
Pinnacle's audited consolidated financial statements and management's discussion
and analysis of the financial condition and results of operations contained in
its annual report to shareholders for the year ended December 31, 1995; (iv) the
Company's audited consolidated financial statements and management's discussion
and analysis of the financial condition and results of operations contained in
its annual reports to shareholders for the fiscal year ended December 31, 1995;
(v) Pinnacle's unaudited consolidated financial statements and management's
discussion and analysis of the financial condition and results of operations
contained in its Quarterly Reports on Form 10-Q for the quarters ended March 31,
June 30, and September 30, 1996, respectively; (vi) the Company's unaudited
consolidated financial statements and management's discussion and analysis of
the financial condition and results of operations contained in its Quarterly
Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30,
1996, respectively; (vii) certain financial analyses and forecasts of the
Company prepared by and reviewed with management of the Company and the views of
senior management of the Company regarding the Company's past and current
business operations, results thereof, financial condition and future prospects;
(viii) certain financial analyses and forecasts of Pinnacle prepared by and
reviewed with management of Pinnacle and the views of senior management of
Pinnacle regarding Pinnacle's past and current business operations, results
thereof, financial condition and future prospects; (ix) the pro forma impact of
the Merger on the combined companies; (x) the historical reported price and
trading activity for Pinnacle's and the Company's common stock, including a
comparison of certain financial and stock market information for Pinnacle and
the Company with similar information for certain other companies the securities
of which are publicly traded; (xi) the financial terms of recent business
combinations in the savings institution and banking industries; (xii) the
current market environment generally and the banking environment in particular;
and (xiii) such other information, financial studies, analyses and
investigations and financial, economic and market criteria as we considered
relevant. We were not asked to, and did not, solicit indications of interest in
a potential transaction from other third parties.
<PAGE>
In performing our review, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all the financial
information, analyses and other information reviewed by and discussed with us,
and we did not make an independent evaluation or appraisal of the specific
assets, the collateral securing assets or the liabilities of Pinnacle or the
Company or any other their subsidiaries, or the collectibility of any such
assets (relying, where relevant, on the analyses and estimates of Pinnacle and
the Company). With respect to the financial projections reviewed with
management, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of the respective future financial performances of
Pinnacle and the Company and that such performances will be achieved. We have
also assumed that there has been no material change in Pinnacle's or the
Company's assets, financial condition, results of operations, business or
prospects since September 30, 1996, the date of the last financial statements
noted above. We have assumed that the Merger will qualify for pooling of
interests accounting treatment and have further assumed that Pinnacle and the
Company will remain as a going concern for all periods relevant to our analyses
and that the conditions precedent in the Agreement are not waived.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We have not undertaken to reaffirm or revise
this opinion or otherwise comment upon events occurring after the date hereof.
We have acted as the Company's financial advisor in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon consummation of the Merger. We will also receive a fee for
rendering this opinion. We have also provided and continue to provide general
financial advisory services for the Company and have received and will continue
to receive fees for such services.
In the ordinary course of our business, we may actively trade the equity
securities of Pinnacle and the Company for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities.
Our opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote at any meeting of stockholders called to consider and
vote upon the Merger. Our opinion is not to be quoted or referred to, in whole
or in part, in a registration statement, prospectus, proxy statement or in any
other document, nor shall this opinion be used for any other purposes, without
Sandler O'Neill's prior written consent.
Based upon and subject to the foregoing, it is our opinion that the Exchange
Ratio is fair, from a financial point of view, to the holders of the Company
Shares.
Very truly yours,
<PAGE>
ANNEX D
PINNACLE FINANCIAL SERVICES, INC.
SUPPLEMENTARY FINANCIAL INFORMATION
The following table provides a summary of unaudited quarterly financial
information of Pinnacle for the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(dollars in thousands) March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
1996
Interest income $ 17,158 $ 18,005 $ 18,635 *
Net interest income 7,869 8,440 8,722 *
Provision for loan losses 80 70 95 *
Income before income tax
expense 3,622 4,214 1,908 *
Net income 2,444 2,580 1,261 *
Net income per share 0.42 0.44 0.21 *
Stock price range 18.25-20.50 20.00-21.75 19.50-24.75 $23.25-25.00
- --------------------------------------------------------------------------------
1995
Interest income $ 8,331 $ 8,763 $ 8,848 $ 11,553
Net interest income 4,552 4,547 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 15.00-17.50 15.75-17.75 15.50-17.50 16.50-18.50
- --------------------------------------------------------------------------------
1994
Interest income $ 6,735 $ 7,103 $ 7,379 $ 7,751
Net interest income 3,909 4,269 4,384 4,544
Provision for loan losses 35 30 -- 60
Income before federal
income tax expense 1,957 1,798 1,899 1,969
Net income 1,329 1,275 1,320 1,366
Net income per share 0.35 0.33 0.34 0.36
Stock price range 21-26 15.75-22.50 15.75-20 15-16
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Michigan Business Corporation Act, as amended ("MBCA"), provides that a
Michigan corporation, such as Pinnacle Financial Services, Inc. ("Pinnacle"),
may indemnify a director, officer, employee or agent of the corporation (an
"Indemnitee") against the Indemnitee's expenses and judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) involving the Indemnitee by reason
of the fact that the Indemnitee is or was a director, officer, employee or agent
of the corporation, if the Indemnitee acted in good faith and in a manner the
Indemnitee reasonably believed to be in or not opposed to the best interest of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The MBCA also
provides that in derivative actions, a corporation may indemnify a director,
officer, employee or agent of the corporation against expenses actually and
reasonably incurred by the Indemnitee to the extent that the Indemnitee is
successful on the merits or otherwise in any such action, suit or proceeding or
in the defense of any claim, issue or matter therein. Under the MBCA, no
indemnification shall be made with respect to any claim, issue or matter as to
which an Indemnitee shall have been adjudged to be liable to the corporation
unless and only to the extent that the court shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, the Indemnitee is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. The MBCA also
generally permits the advancement of reasonable expenses and empowers the
corporation to purchase and maintain directors' and officers' insurance.
Article VI of the By-laws of Pinnacle contains provisions authorizing
indemnification of directors, officers, employees and agents of Pinnacle that
are substantially similar to those set forth in the MBCA and authorizes Pinnacle
to purchase directors' and officers' insurance.
Section 209 of the MBCA provides that the articles of incorporation of a
corporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 551(1) (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock and
loans to director, officer, employee of subsidiary of the corporation) of the
MBCA, (iv) for any transaction from which the director derived an improper
personal benefit or (v) for an act or omission occurring prior to the date such
a provision becomes effective. At the 1989 Annual Meeting of Pinnacle's
stockholders, the stockholders approved an amendment to Pinnacle's Articles of
Incorporation to include such a provision. See Article VI of the Articles of
Incorporation of Pinnacle.
Pinnacle has entered into individual indemnity agreements with its officers
and directors whereby Pinnacle will indemnify each of its officers and directors
for any amount which they may be obligated to pay because of any claim made
against them because of any omission or neglect or breach of duty, including any
actual or alleged error or misstatements or misleading statement, committed or
suffered when acting in their capacities as officers, directors, employees and
agents of Pinnacle, its subsidiaries and certain other enterprises.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of Pinnacle pursuant to the provisions described in this Item 20 or
otherwise, Pinnacle has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by Pinnacle of expenses incurred or paid by a director, officer or
II-1
<PAGE>
controlling person of Pinnacle in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Pinnacle will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following exhibits are filed as part of the registration
statement on Form S-4:
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT
REFERENCE NUMBER EXHIBIT DESCRIPTION
- ---------------- ------------------------------------------------------------------------------------------
<C> <S>
(2)/(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).*
A conformed copy of the Agreement and Plan of Merger (without exhibits) also is included
as Annex A to the Joint Proxy Statement/Prospectus which is part of this Registration
Statement.
(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.*
(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)).
(5)(a) Opinion and consent of Miller, Canfield, Paddock and Stone, P.L.C.**
(8)(a) Opinion and consent of Miller, Canfield, Paddock and Stone, P.L.C.**
(8)(b) Opinion and consent of Silver, Freedman & Taff, L.L.P.**
(10)(b) Stock Option Agreement dated as of November 14, 1996 by and between Pinnacle Financial
Services, Inc. (as issuer) and Indiana Federal Corporation (as grantee).*
(10)(c) Stock Option Agreement dated as of November 14, 1996 by and between Pinnacle Financial
Services, Inc. (as grantee) and Indiana Federal Corporation (as issuer).*
(10)(d) 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.*
(10)(e) First Amendment to Pinnacle Financial Services, Inc. Executive Long-Term Incentive Plan.*
(10)(f) 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)(g) 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.*
</TABLE>
II-2
<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 Donald E. Radde.*
(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 David W. Kolhagen.*
(10)(j) 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)(k) 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)(l) 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)(m) 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)(n) 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)(o) 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)(p) 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)(q) 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).
(10)(r) 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)(s) 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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT
REFERENCE NUMBER EXHIBIT DESCRIPTION
- ---------------- ------------------------------------------------------------------------------------------
<C> <S>
(10)(t) 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)(u) Peoples State Bank of St. Joseph (now Pinnacle Bank) Deferred Compensation Plan for
Executive Officers.*
(11) Statement re Computation of Per Share Earnings.**
(21) List of subsidiaries of Pinnacle Financial Services, Inc.**
(23)(a) Consent of Miller, Canfield, Paddock and Stone, P.L.C. (to be included in Exhibit 5(a)).
(23)(b) Consent of Miller, Canfield, Paddock and Stone, P.L.C. (to be included in Exhibit 8(a)).
(23)(c) Consent of Silver, Freedman & Taff, L.L.P. (to be included in Exhibit 8(b)).
(23)(d) Consent of KPMG Peat Marwick LLP, independent certified public accountants.*
(23)(e) Consent of Ernst & Young LLP, independent certified public accountants.*
(23)(f) Consent of Crowe, Chizek and Company LLP, independent certified public accountants.*
(24) Powers of Attorney (contained in signature pages of this Registration Statement).
(99)(a) Form of opinion of ABN-AMRO Chicago Corporation, which is set forth in full as Annex B to
the Prospectus which is part of this Registration Statement.
(99)(b) Form of opinion of Sandler O'Neill & Partners L.P., which is set forth in full as Annex C
to the Prospectus which is part of this Registration Statement.
(99)(c) Consent of ABN-AMRO Chicago Corporation.*
(99)(d) Consent of Sandler O'Neill & Partners L.P.*
(99)(e) Form of Proxy for Pinnacle Financial Services, Inc.*
(99)(f) Form of Proxy for Indiana Federal Corporation.*
(99)(g) Form of Plan Participant Card for Indiana Federal Corporation.**
(99)(h) Consents of persons named as directors and executive officers.**
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules. Financial statement schedules have been
omitted because they are not required.
(c) Information Pursuant to Item 4(b). Not Applicable.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other
II-4
<PAGE>
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934, as amended), that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934, as amended; and, where interim financial information required to be
presented by Article 3 of Regulation S-X is not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933, as amended, and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions as described in
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of St. Joseph,
State of Michigan, on the 10th day of January, 1997.
PINNACLE FINANCIAL SERVICES, INC.,
By /s/ RICHARD L. SCHANZE
------------------------------------------
Name: Richard L. Schanze
Title: CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
By signing below, each of the undersigned does hereby severally constitute
and appoint Richard L. Schanze, Arnold L. Weaver, David W. Kolhagen and John A.
Newcomer, and each and every one of them, his true and lawful attorneys and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(both pre-effective amendments and post-effective amendments) to this
Registration Statement and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys and agents, and each and every one of
them, full power and authority to do and perform each and every act and things
requisite or necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys and agents, and each of them, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
Principal Executive Officer:
/s/ RICHARD L. SCHANZE
- ------------------------------ Chief Executive Officer January 10, 1997
Richard L. Schanze
Principal Financial Officer
and Principal Accounting
Officer:
/s/ DAVID W. KOLHAGEN
- ------------------------------ Treasurer and Chief January 10, 1997
David W. Kolhagen Financial Officer
II-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
By signing below, each of the undersigned does hereby severally constitute
and appoint Richard L. Schanze, Arnold L. Weaver, David W. Kolhagen, and John A.
Newcomer, and each and every one of them, his true and lawful attorneys and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(both pre-effective and post-effective amendments) to this Registration
Statement and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys and agents, and each and every one of them, full
power and authority to do and perform each and every act and things requisite or
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys and
agents, and each of them, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JOHN P. CUNNINGHAM
- ------------------------------ Director January 10, 1997
John P. Cunningham
/s/ CHARLES R. EDINGER
- ------------------------------ Director January 10, 1997
Charles R. Edinger
/s/ JOHN D. FETTERS
- ------------------------------ Director January 10, 1997
John D. Fetters
/s/ TERRENCE A. FRIEDMAN
- ------------------------------ Director January 10, 1997
Terrence A. Friedman
/s/ RICHARD L. SCHANZE
- ------------------------------ Director and Chief January 10, 1997
Richard L. Schanze Executive Officer
/s/ KAY F. VARGA
- ------------------------------ Director January 10, 1997
Kay F. Varga
/s/ ARNOLD L. WEAVER
- ------------------------------ Director and President January 10, 1997
Arnold L. Weaver
/s/ ALTON C. WENDZEL
- ------------------------------ Director January 10, 1997
Alton C. Wendzel
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT
REFERENCE NUMBER EXHIBIT DESCRIPTION PAGE
- ---------------- --------------------------------------------------------------------------------------- ---------
<C> <S> <C>
(2)/(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).*
A conformed copy of the Agreement and Plan of Merger (without exhibits) also is
included as Annex A to the Joint Proxy Statement/Prospectus which is part of this
Registration Statement.
(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.*
(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)).
(5)(a) Opinion and consent of Miller, Canfield, Paddock and Stone, P.L.C.**
(8)(a) Opinion and consent of Miller, Canfield, Paddock and Stone, P.L.C.**
(8)(b) Opinion and consent of Silver, Freedman & Taff, L.L.P.**
(10)(b) Stock Option Agreement dated as of November 14, 1996 by and between Pinnacle Financial
Services, Inc. (as issuer) and Indiana Federal Corporation (as grantee).*
(10)(c) Stock Option Agreement dated as of November 14, 1996 by and between Pinnacle Financial
Services, Inc. (as grantee) and Indiana Federal Corporation (as issuer).*
(10)(d) 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.*
(10)(e) First Amendment to Pinnacle Financial Services, Inc. Executive Long-Term Incentive
Plan.*
(10)(f) 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)(g) 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)(h) 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)(i) 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.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT
REFERENCE NUMBER EXHIBIT DESCRIPTION PAGE
- ---------------- --------------------------------------------------------------------------------------- ---------
<C> <S> <C>
(10)(j) 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)(k) 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)(l) 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)(m) 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)(n) 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)(o) 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)(p) 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)(q) 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).
(10)(r) 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)(s) 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)(t) 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)(u) Peoples State Bank of St. Joseph (now Pinnacle Bank) Deferred Compensation Plan for
Executive Officers.*
(11) Statement re Computation of Per Share Earnings.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT
REFERENCE NUMBER EXHIBIT DESCRIPTION PAGE
- ---------------- --------------------------------------------------------------------------------------- ---------
<C> <S> <C>
(21) List of subsidiaries of Pinnacle Financial Services, Inc.**
(23)(a) Consent of Miller, Canfield, Paddock and Stone, P.L.C. (to be included in Exhibit
5(a)).
(23)(b) Consent of Miller, Canfield, Paddock and Stone, P.L.C. (to be included in Exhibit
8(a)).
(23)(c) Consent of Silver, Freedman & Taff, L.L.P. (to be included in Exhibit 8(b)).
(23)(d) Consent of KPMG Peat Marwick LLP, independent certified public accountants.*
(23)(e) Consent of Ernst & Young LLP, independent certified public accountants.*
(23)(f) Consent of Crowe, Chizek and Company LLP, independent certified public accountants.*
(24) Powers of Attorney (contained in signature pages of this Registration Statement).
(99)(a) Form of opinion of ABN-AMRO Chicago Corporation, which is set forth in full as Annex B
to the Prospectus which is part of this Registration Statement.
(99)(b) Form of opinion of Sandler O'Neill & Partners L.P., which is set forth in full as Annex
C to the Prospectus which is part of this Registration Statement.
(99)(c) Consent of ABN-AMRO Chicago Corporation.*
(99)(d) Consent of Sandler O'Neill & Partners L.P.*
(99)(e) Form of Proxy for Pinnacle Financial Services, Inc.*
(99)(f) Form of Proxy for Indiana Federal Corporation.*
(99)(g) Form of Plan Participant Card for Indiana Federal Corporation.**
(99)(h) Consents of persons named as directors and executive officers.**
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
<PAGE>
EXHIBIT(2)/(10)(a)
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 14, 1996, by and between
PINNACLE FINANCIAL SERVICES, INC., a Michigan corporation ("Pinnacle"), and
INDIANA FEDERAL CORPORATION, a Delaware corporation ("IFC").
WITNESSETH:
WHEREAS, the Boards of Directors of Pinnacle and IFC 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 IFC
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, it is the intent of the respective Boards of Directors of Pinnacle
and IFC that the Merger be structured as a "merger of equals" of Pinnacle and
IFC and that the Surviving Corporation be governed and operated on this basis;
and
WHEREAS, as a condition to, and immediately after the execution of, this
Agreement, Pinnacle and IFC are entering into a Pinnacle stock option agreement
(the "Pinnacle Option Agreement") attached hereto as Exhibit A; and
WHEREAS, as a condition to, and immediately after the execution of, this
Agreement, Pinnacle and IFC are entering into an IFC stock option agreement (the
"IFC Option Agreement"; and together with the Pinnacle Option Agreement, the
"Option Agreements") attached hereto as Exhibit B; 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"),
the Delaware General Corporation Law, as amended (the "DGCL"), at the Effective
Time (as defined in Section 1.2), IFC 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 IFC 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.
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 IFC 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, IFC or the holder of any of the following securities:
(a) Each share of the common stock, par value $0.01 per share, of IFC
(the "IFC Common Stock") issued and outstanding immediately prior to the
Effective Time (other than shares of IFC
<PAGE>
Common Stock held (x) in IFC's treasury or (y) directly or indirectly by IFC
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 IFC Disclosure
Schedule)), shall be converted into the right to receive one (1) share (the
"Exchange Ratio") of the common stock, without par value, of Pinnacle (the
"Pinnacle Common Stock").
(b) All of the shares of IFC Common Stock converted into Pinnacle Common
Stock 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 IFC Common Stock shall thereafter represent
the right to receive a certificate representing the number of whole shares
of Pinnacle Common Stock into which the shares of IFC 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 IFC Common Stock shall be exchanged for certificates representing
whole shares of Pinnacle Common Stock issued in consideration therefor 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 Pinnacle Common Stock or IFC 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 Ratio.
(c) At the Effective Time, all shares of IFC Common Stock that are owned
by IFC as treasury stock and all shares of IFC Common Stock that are owned,
directly or indirectly, by IFC or Pinnacle or any of their respective
wholly-owned Subsidiaries (other than shares of IFC 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 IFC or Pinnacle, as
the case may be, being referred to herein as "Trust Account Shares") and
other than any shares of IFC Common Stock held by IFC or Pinnacle or any of
their respective Subsidiaries in respect of a debt previously contracted
(any such shares of IFC Common Stock, and shares of Pinnacle Common Stock
which are similarly held, whether held directly or indirectly by IFC or
Pinnacle or any of their respective Subsidiaries, being referred to herein
as "DPC Shares") and as set forth in the IFC 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 IFC or any of its wholly-owned
Subsidiaries (other than Trust Account Shares and DPC Shares) shall become
treasury stock of Pinnacle.
1.6 OPTIONS.
(a) At the Effective Time, each option granted by IFC to purchase shares of
IFC Common Stock which is outstanding and unexercised immediately prior thereto
(excluding any and all IFC Rights (as hereinafter defined), all of which shall
have been redeemed, and thereby extinguished, terminated and cancelled without
any right of exercise, prior to the Effective Time) shall cease to represent a
right to acquire shares of IFC Common Stock and shall be converted automatically
into an option to purchase shares of Pinnacle Common Stock in an amount and at
an exercise price determined as provided below
2
<PAGE>
(and subject to the terms of the IFC benefit plans under which they were issued
(collectively, the "IFC Stock Plans") and the agreements evidencing grants
thereunder):
(i) The number of shares of Pinnacle Common Stock to be subject to the
new option shall be equal to the number of shares of IFC Common Stock
subject to the original option; and
(ii) The exercise price per share of Pinnacle Common Stock under the new
option shall be equal to the exercise price per share of IFC Common Stock
under the original option.
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code")) shall be and is intended to be effected in a manner
which is consistent with Section 424(a) of the Code. The duration and other
terms of the new option shall be the same as the original option except that all
references to IFC shall be deemed to be references to Pinnacle.
(b) At the Effective Time, each option granted by Pinnacle to purchase
shares of Pinnacle Common Stock which is outstanding and unexercised immediately
prior thereto shall continue to represent a right to acquire shares of Pinnacle
Common Stock and shall remain an issued and outstanding option to purchase from
the Surviving Corporation shares of Pinnacle Common Stock in the same amount and
at the same exercise price subject to the terms of the Pinnacle benefit plans
under which they were issued (collectively, the "Pinnacle Stock Plans") and the
agreements evidencing grants thereunder, and shall not be affected by the
Merger.
1.7 ARTICLES OF INCORPORATION. Subject to the terms and conditions of this
Agreement, at the Effective Time, the Articles 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 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, Mr. Richard L. Schanze shall be
the Chairman of the Board and the Chief Executive Officer of the Surviving
Corporation, and Mr. Donald A. Lesch shall be the Vice Chairman, President and
Chief Operating Officer of the Surviving Corporation.
1.11 BOARD OF DIRECTORS. At the Effective Time, the Board of Directors of
the Surviving Corporation shall consist of ten (10) persons, with Mr. Schanze,
as well as Mr. Arnold L. Weaver and three (3) other persons, to be named as
directors of the Surviving Corporation on behalf of the Board of Directors of
Pinnacle, and with Mr. Lesch, as well as Mr. Howard Silverman and three (3)
other persons, to be named as directors of the Surviving Corporation on behalf
of the Board of Directors of IFC. 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. 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 shall be increased in size to a total of twelve (12)
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 a twelfth person as a director
of the Surviving Corporation. Whenever the Board of Directors is comprised of
ten (10) or fewer persons, action
3
<PAGE>
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 the Surviving Corporation shall
be located in Valparaiso, Indiana.
1.13 BANK MERGER. At the Bank Merger Effective Time (as hereinafter
defined), Indiana Federal Bank for Savings, a federal savings bank ("IndFed
Bank"), the wholly-owned subsidiary of IFC, 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 C (the "Bank Merger
Agreement"). Upon consummation of the Bank Merger, the separate existence of
IndFed 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 IndFed Bank. The Bank Merger shall become effective at the time the Bank
Merger Agreement for such merger is 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 IndFed 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
IndFed 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 IndFed 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 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 the Board of Directors
of IndFed Bank; and 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.
ARTICLE II
EXCHANGE OF SHARES
2.1 PINNACLE TO MAKE SHARES AVAILABLE. At or 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 IFC (the "Exchange Agent"), for the benefit
of
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the holders of Common Certificates, for exchange in accordance with this Article
II, certificates representing the shares of Pinnacle Common Stock (such
certificates for shares of Pinnacle Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Section 1.4 and Section 2.2(a) in
exchange for outstanding shares of IFC 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 into which the shares of IFC 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 a
certificate representing that number of whole shares of Pinnacle Common Stock to
which such holder of IFC 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 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 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 IFC of shares of IFC 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 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.
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of IFC for 12 months after the Effective Time shall be paid to
Pinnacle. Any stockholders of IFC who have not theretofore complied with this
Article II shall thereafter look only to Pinnacle for payment of the shares of
Pinnacle Common Stock and any unpaid dividends and distributions on the Pinnacle
Common Stock deliverable in respect of each share of IFC Common Stock such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. Notwithstanding the foregoing, none of IFC,
Pinnacle, the Exchange Agent or any other person shall be liable to any former
holder of shares of IFC
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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 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 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 IFC
concurrently herewith (the "Pinnacle Disclosure Schedule"), Pinnacle hereby
represents and warrants to IFC 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 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, the payment and/or incurrence of (i)
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
(ii) transactional expenses by IFC or Pinnacle in connection with the Merger, 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") and as a savings and loan holding company under the Home Owners' Loan
Act ("HOLA"). 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 IFC.
(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).
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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 November 11, 1996, 5,976,548
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 the
Pinnacle Option Agreement and the Pinnacle Stock Plans, 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 November 11, 1996, no shares of Pinnacle Common Stock were
reserved for issuance, except for (i) 496,261 shares reserved for issuance upon
the exercise of stock options pursuant to the Pinnacle Stock Plans. 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 the exercise of employee stock options
granted prior to such date. 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
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 IFC) 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
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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 IFC's stockholders to
be held in connection with this Agreement and the transactions contemplated
hereby (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,
(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
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 IFC, 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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3.9 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 or the Pinnacle 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 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.
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 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
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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.
(c) 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 Pinnacle
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 Pinnacle
Benefit Plan (as defined in Section 3.11(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).
(d) No disallowance of a deduction under Section 162(m) of the Code for
employee remuneration of any amount paid or payable by Pinnacle or any
Subsidiary of Pinnacle under any contract, plan, program, arrangement or
understanding would be reasonably likely to have a Material Adverse Effect on
Pinnacle.
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 IFC 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 Plan which is subject to
Title IV of ERISA, the present value of accrued benefits under such Plan, based
upon the actuarial assumptions used for funding purposes in the most recent
actuarial report prepared by such Plan's actuary with respect to such Plan, did
not, as of its latest valuation date, exceed the then current value of the
assets of such 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
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 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
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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 IFC 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 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
IFC, 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
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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 IFC 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.
(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) To Pinnacle's knowledge, 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); there is no investigation or inquiry by any
Governmental Entity pending, or to the knowledge of Pinnacle, threatened,
against or affecting 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
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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 June 30, 1996 Form 10-Q and for liabilities incurred in
the ordinary course of business consistent with past practice since June 30,
1996, 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 the Option Agreements 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
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applicable to Pinnacle will not apply to this Agreement or the Option Agreements
or any of the transactions contemplated hereby or thereby.
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 IFC
Except as disclosed in the IFC disclosure schedule delivered to Pinnacle
concurrently herewith (the "IFC Disclosure Schedule") IFC hereby represents and
warrants to Pinnacle as follows:
4.1 CORPORATE ORGANIZATION.
(a) IFC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. IFC 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 IFC.
IFC is duly registered as a savings and loan holding company under the HOLA.
True and complete copies of the Certificate of Incorporation and Bylaws of IFC,
as in effect as of the date of this Agreement, have previously been made
available by IFC to Pinnacle.
(b) Each IFC 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 IFC, 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 IFC 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 IFC).
4.2 CAPITALIZATION.
(a) The authorized capital stock of IFC consists of (i) 5,000,000 shares of
serial preferred stock, par value $0.01 per share, none of which as of November
11, 1996 were issued or outstanding; and (ii) 10,000,000 shares of IFC Common
Stock, of which as of November 11, 1996, 4,751,131 shares were issued and
outstanding and 1,110,000 shares were held in treasury. All of the issued and
outstanding shares of IFC 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 the IFC Option Agreement (as
hereinafter defined), the IFC Rights Agreement and the IFC Stock Plans, IFC 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 IFC Common Stock or any other equity securities of IFC
or any securities representing the right to purchase or otherwise receive any
shares of IFC Common Stock or any other equity securities of IFC. As of November
11, 1996, no shares of IFC Common Stock were reserved for issuance, except for
(i) 253,089 shares reserved for issuance upon the exercise of stock options
pursuant to the IFC Stock Plans, and (ii) shares reserved for issuance pursuant
to the IFC Rights Agreement. Since January 1, 1996, IFC has not issued any
shares of IFC Common Stock or other equity securities of IFC, or any securities
convertible into or exercisable for any shares of IFC Common Stock or other
equity securities of IFC, other than pursuant to the exercise of employee stock
options granted prior to such date.
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(b) As of November 11, 1996, there are issued and outstanding up to
4,751,131 rights in respect of shares of IFC Common Stock (the "IFC Rights"),
subject to terms and conditions of the Stockholder Protection Rights Agreement
dated as of February 26, 1992, as amended by the Amendment to Stockholder
Protection Rights Agreement dated as of November 14, 1996 (the "IFC Rights
Agreement"), between IFC and Harris Trust and Savings Bank, as Rights Agent. As
of the date of this Agreement, the Separation Time (as defined in the IFC Rights
Agreement) has not occurred, the Amendment to Stockholder Protection Rights
Agreement dated as of November 14, 1996, has been entered into and is effective
and in full force and effect, the entering into of this Agreement and/or the IFC
Stock Option Agreement and/or the consummation of the transactions contemplated
hereby and/or thereby have been exempted from the application of the IFC Rights
Agreement and do not and will not cause a Separation Time to occur, and all IFC
Rights are redeemable by IFC at a cost to IFC of not more than $0.01 per each of
the shares of IFC Common Stock issued and outstanding.
(c) IFC owns, directly or indirectly, all of the issued and outstanding
shares of capital stock of each of the IFC 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 IFC 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) IFC 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 IFC. The Board of Directors of IFC has directed that this Agreement
and the transactions contemplated hereby be submitted to IFC'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 IFC Common Stock, no other corporate proceedings on the
part of IFC are necessary to approve this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by IFC and (assuming due authorization, execution and
delivery by Pinnacle) constitutes a valid and binding obligation of IFC,
enforceable against IFC in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by IFC nor the
consummation by IFC of the transactions contemplated hereby, nor compliance by
IFC with any of the terms or provisions hereof, will (i) violate any provision
of the Certificate of Incorporation or Bylaws of IFC 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 IFC 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 IFC 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 IFC 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 IFC or the Surviving Corporation; provided, however, that
prior to the date hereof, IFC has secured a waiver of Harris Trust and Savings
Bank under the loan, security agreement and guaranty for the benefit of the IFC
Employee
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Stock Ownership Plan ("ESOP") so that this Agreement and the Merger shall not
cause any breach, default or acceleration under said IFC ESOP loan arrangement.
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 IFC, 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 IFC of this Agreement and
(B) the consummation by IFC of the Merger and the other transactions
contemplated hereby.
4.5 REPORTS. IFC 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 IFC. Except for normal examinations conducted
by a Regulatory Agency in the regular course of the business of IFC and its
Subsidiaries, no Regulatory Agency has initiated any proceeding or, to the best
knowledge of IFC, investigation into the business or operations of IFC 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 IFC. There is no unresolved violation, criticism, or
exception by any Regulatory Agency with respect to any report or statement
relating to any examinations of IFC or any of its Subsidiaries which, in the
reasonable judgment of IFC, is likely, either individually or in the aggregate,
to have a Material Adverse Effect on IFC.
4.6 FINANCIAL STATEMENTS. IFC has previously made available to Pinnacle
copies of (a) the consolidated balance sheets of IFC 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 IFC's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 filed with the SEC under
the Exchange Act, in each case accompanied by the audit report of Ernst & Young
LLP, independent public accountants with respect to IFC, and (b) the unaudited
consolidated balance sheet of IFC and its Subsidiaries as of June 30, 1996 and
the related unaudited consolidated statements of income and cash flows for the
six-month period then ended as reported in IFC's Quarterly Report on Form 10-Q
for the period ended June 30, 1996 filed with the SEC under the Exchange Act
(the "IFC June 30, 1996 Form 10-Q"). The December 31, 1995 consolidated balance
sheet of IFC (including the related notes, where applicable) fairly presents the
consolidated financial position of IFC and its Subsidiaries as of the date
thereof, and the other financial statements
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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 IFC 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 IFC
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 and reflect only actual transactions.
4.7 BROKER'S FEES. Neither IFC nor any IFC 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 or the
Option Agreements, other than Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") (a copy of which engagement agreement has been disclosed by IFC to
Pinnacle) whose fees, commissions and expenses shall be paid by IFC.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as publicly disclosed in IFC Reports (as defined in Section 4.12)
filed prior to the date hereof, since December 31, 1995, (i) IFC 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 IFC or
the Surviving Corporation.
(b) Except as publicly disclosed in IFC Reports filed prior to the date
hereof, since December 31, 1995, IFC 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 IFC 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 IFC'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 IFC, is likely, either
individually or in the aggregate, to have a Material Adverse Effect on IFC.
4.9 LEGAL PROCEEDINGS.
(a) Neither IFC nor any of its Subsidiaries is a party to any, and there are
no pending or, to the best of IFC's knowledge, threatened, material legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against IFC or any of its
Subsidiaries or challenging the validity or propriety of the transactions
contemplated by this Agreement or the IFC 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 IFC.
(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 IFC, any of its Subsidiaries or the assets of IFC or any of its
Subsidiaries which has had, or might reasonably be expected to have, a Material
Adverse Effect on IFC.
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4.10 TAXES AND TAX RETURNS.
(a) Each of IFC and its Subsidiaries has duly filed all federal, state,
county, foreign and, to the best of IFC'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 IFC, to have a Material Adverse Effect on IFC. The income
tax returns of IFC and its Subsidiaries have been examined by 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 IFC does not have adequate reserves or all such
deficiencies were satisfied. To the best of IFC's knowledge, there are no
material disputes pending, or claims asserted for, Taxes or assessments upon IFC
or any of its Subsidiaries for which IFC does not have adequate reserves, nor
has IFC 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 IFC 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 IFC, (B)
federal, state, county and local returns which are accurate and complete in all
material respects have been filed by IFC 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 IFC, (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 IFC in its consolidated financial
statements as of December 31, 1995, except where failure to do so would not have
a Material Adverse Effect on IFC and (D) there are no Tax liens upon any
property or assets of IFC or its Subsidiaries except liens for current taxes not
yet due or liens that would not have a Material Adverse Effect on IFC. Neither
IFC 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 IFC 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 IFC. Except as set forth in the financial statements described
in Section 4.6, neither IFC 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 IFC.
(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 IFC 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 IFC
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 IFC or any Subsidiary of
IFC under any contract, plan, program, arrangement or understanding would be
reasonably likely to have a Material Adverse Effect on IFC.
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4.11 EMPLOYEES.
(a) The IFC 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 "IFC Benefit Plans") by IFC or any of its
Subsidiaries or by any ERISA Affiliate, all of which together with IFC would be
deemed a "single employer" within the meaning of Section 4001 of ERISA.
(b) IFC has heretofore delivered to Pinnacle true and complete copies of
each of the IFC Benefit Plans and certain related documents, including, but not
limited to, (i) the actuarial report for such IFC 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 IFC 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 IFC Benefit Plans intended to
be "qualified" within the meaning of Section 401(a) of the Code is so qualified,
(iii) with respect to each Plan which is subject to Title IV of ERISA, the
present value of accrued benefits under such Plan, based upon the actuarial
assumptions used for funding purposes in the most recent actuarial report
prepared by such Plan's actuary with respect to such Plan, did not, as of its
latest valuation date, exceed the then current value of the assets of such Plan
allocable to such accrued benefits, (iv) no IFC Benefit Plan provides benefits,
including, without limitation, death or medical benefits (whether or not
insured), with respect to current or former employees of IFC, 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 IFC, 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 IFC, its Subsidiaries or any ERISA Affiliate that has not been
satisfied in full, and no condition exists that presents a material risk to IFC,
its Subsidiaries or any ERISA Affiliate of incurring a material liability
thereunder, (vi) no 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 IFC or its Subsidiaries as of the Effective Time with respect to each
IFC 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 IFC,
its Subsidiaries nor any ERISA Affiliate has engaged in a transaction in
connection with which IFC, 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 IFC there are no pending,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the IFC Benefit Plans or any trusts related thereto
which are, in the reasonable judgment of IFC, likely, either individually or in
the aggregate, to have a Material Adverse Effect on IFC.
(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 IFC or any of its affiliates from IFC or any of its affiliates under
any IFC Benefit Plan or otherwise, (ii) materially increase any benefits
otherwise payable under any IFC 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. IFC 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
IFC with the SEC pursuant to the Securities Act or the Exchange Act (the "IFC
Reports") and prior to the date hereof and (b) communication mailed by IFC 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
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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, IFC has timely filed all IFC
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 IFC Reports
complied in all material respects with the published rules and regulations of
the SEC with respect thereto.
4.13 COMPLIANCE WITH APPLICABLE LAW. IFC 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 IFC 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 IFC.
4.14 CERTAIN CONTRACTS.
(a) Neither IFC 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
IFC, 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 IFC Reports, (iv) which materially restricts
the conduct of any line of business by IFC, (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. IFC has previously made available to Pinnacle
true and correct copies of all employment and deferred compensation agreements
which are in writing and to which IFC 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 IFC Disclosure Schedule, is referred to herein
as an "IFC Contract", and neither IFC 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 IFC.
(b) (i) Each IFC Contract is valid and binding on IFC or any of its
Subsidiaries, as applicable, and in full force and effect, (ii) IFC and each of
its Subsidiaries has in all material respects performed all obligations required
to be performed by it to date under each IFC Contract, except where such
noncompliance, individually or in the aggregate, would not have a Material
Adverse Effect on IFC, 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 IFC or any of its Subsidiaries under any such IFC Contract,
except where such default, individually or in the aggregate, would not have a
Material Adverse Effect on IFC.
4.15 AGREEMENTS WITH REGULATORY AGENCIES. Neither IFC 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 IFC Disclosure Schedule, an "IFC Regulatory
Agreement"),
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nor has IFC 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 IFC AND ITS SUBSIDIARIES.
(a) Neither IFC 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 IFC
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) To IFC's knowledge, each IFC Subsidiary which is a federally insured
bank or savings institution (an "IFC Bank Subsidiary") currently performs all
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);
there is no investigation or inquiry by any Governmental Entity pending, or to
the knowledge of IFC, threatened, against or affecting IFC, or any Significant
Subsidiary thereof relating to the compliance by IFC 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 IFC, each
employee of a IFC 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 IFC Bank
Subsidiary; and each IFC 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.
4.17 INVESTMENT SECURITIES. Each of IFC 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 IFC or any of its Subsidiaries. Such securities are valued on the
books of IFC 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 IFC or for the account of
a customer of IFC or one of its Subsidiaries, were entered into in the ordinary
course of business and, to IFC'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 IFC 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. IFC 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
IFC'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 IFC included
in the IFC June 30, 1996 Form 10-Q and for liabilities incurred in the ordinary
course of business consistent with past practice since June 30, 1996, neither
IFC nor any of its Subsidiaries has incurred any liability of any nature
whatsoever (whether absolute, accrued,
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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 IFC.
4.20 ENVIRONMENTAL LIABILITY. Except as set forth in the IFC 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 IFC
or any of the IFC 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, CERCLA, pending or
threatened against IFC or any of the IFC Subsidiaries, which liability or
obligation could reasonably be expected to have a Material Adverse Effect on
IFC. To the knowledge of IFC, 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 IFC. Neither IFC nor any of the IFC 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 IFC.
4.21 STATE TAKEOVER LAWS; REDEMPTION OF IFC RIGHTS. The Board of Directors
of IFC has approved the transactions contemplated by this Agreement and the
Option Agreements and taken such action (i) such that the provisions of Section
9 of the Certificate of Incorporation of IFC pertaining to certain "Business
Combinations" shall not be applicable to the transactions contemplated by this
Agreement and the Option Agreements, and the provisions of Section 203 of the
DGCL and any other provision of any state or local "takeover" law applicable to
IFC will not apply to this Agreement or the Option Agreements or any of the
transactions contemplated hereby or thereby, and (ii) to redeem the IFC Rights
prior to the Effective Time at a cost to IFC of not more than $0.01 (the
"Redemption Price") per each of the shares of IFC Common Stock issued and
outstanding, such that all of said IFC Rights will have been extinguished,
terminated and cancelled prior to the Effective Time, without any right of
exercise, and shall only represent the right to receive the Redemption Price in
cash from IFC or the Surviving Corporation following the Merger.
4.22 POOLING OF INTERESTS. IFC 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 IFC Disclosure Schedule) or the Option Agreements, each of
Pinnacle and IFC shall, and shall cause each of their respective 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) take no action which would adversely affect or delay the ability of either
Pinnacle or IFC 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 or the Option
Agreements.
5.2 FORBEARANCES. During the period from the date of this Agreement to the
Effective Time, except as set forth in the Pinnacle Disclosure Schedule or the
IFC Disclosure Schedule, as the case may be, and, except as expressly
contemplated or permitted by this Agreement or the Option Agreements, neither
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Pinnacle nor IFC shall, and neither Pinnacle nor IFC shall permit any of their
respective Subsidiaries to, without the prior written consent of the other:
(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 Pinnacle or any of its Subsidiaries to Pinnacle or any of its
Subsidiaries, on the one hand, or of IFC or any of its Subsidiaries to IFC
or any of its Subsidiaries, on the other hand), 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);
(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 (except, (A) in the case of
Pinnacle, for regular quarterly cash dividends on Pinnacle Common Stock at a
rate not in excess of $0.25 per share of Pinnacle Common Stock, (B) in the
case of IFC, for regular quarterly cash dividends on IFC Common Stock at a
rate not in excess of $0.21 per share of IFC Common Stock, (C) for dividends
paid by any of the Subsidiaries of each of Pinnacle and IFC to Pinnacle or
IFC or any of their Subsidiaries, respectively, and (D) for dividends paid
in the ordinary course of business by any subsidiaries (whether or not
wholly owned) of each of Pinnacle and IFC), (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
Pinnacle Stock Plans or the IFC Stock Plans, except as otherwise agreed in
writing by Pinnacle and IFC) 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, (B) the Option Agreements, or (C) as
permitted unless clause (iii) above;
(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;
(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
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the acquisition of its voting securities, or the merger or business
combination of it or any of its Subsidiaries with any corporation or other
entity other than as provided by this Agreement (and each party shall
promptly notify the other 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
or IFC to exercise its rights under the Pinnacle Option Agreement or the IFC
Option Agreement, as the case may be;
(j) amend its Certificate of Incorporation or Articles of Incorporation,
as the case may be, or its Bylaws, except as contemplated by this Agreement;
(k) other than in prior consultation with the other party to this
Agreement, 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 5.2.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 REGULATORY MATTERS.
(a) Pinnacle and IFC 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 IFC 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 IFC 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 IFC
shall furnish all information concerning IFC and the holders of IFC 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 IFC 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 IFC, 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
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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 IFC 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, IFC 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 IFC 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 IFC 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 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 IFC 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 IFC, 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 IFC 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 IFC'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 IFC 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.
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6.3 STOCKHOLDERS' APPROVALS. Each of Pinnacle and IFC 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 IFC will, through their
respective Boards of Directors, subject to their respective 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 IFC 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
IFC 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 IFC 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 IFC to
approve this Agreement, a written agreement, in the form of Exhibit D hereto,
providing that such person will not sell, pledge, transfer or otherwise dispose
of any shares of Pinnacle Common Stock or IFC Common Stock held by such
"affiliate" and, in the case of the "affiliates" of IFC, 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 IFC 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 IFC.
(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 LISTING. Pinnacle shall cause the shares of Pinnacle Common
Stock to be issued in the Merger to be approved for trading and reporting on
NASDAQ, National Market System, 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 Pinnacle Benefit Plans and IFC Benefit Plans in effect as of the date of
this Agreement shall remain in effect with respect to employees of Pinnacle or
IFC (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
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 IFC Benefit Plans
(including, without limitation, non-qualified stock option agreements, incentive
stock option agreements, the IFC ESOP, deferred compensation plans and
agreements, supplemental retirement income agreements, severance agreements,
employment agreements and stock option and incentive plans benfitting current or
former directors, officers or employees of IFC or its Subsidiaries, or their
predecessors) which shall be cancelled, terminated or frozen
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to the extent permitted by applicable law (the "New Benefit Plans"). Prior to
the Closing Date, Pinnacle and IFC shall cooperate in reviewing, evaluating and
analyzing the Pinnacle Benefit Plans and IFC Benefit Plans with a view towards
developing 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 IFC Benefit Plans which shall be cancelled, terminated or frozen to the
extent permitted by applicable law. It is the intention of Pinnacle and IFC to
develop New Benefit Plans, effective as of the Effective Time, 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
IFC Benefit Plans, on the other, prior to the Effective Time, but (iii) with the
overall view that the IFC 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.
(b) The foregoing notwithstanding, the Surviving Corporation agrees to honor
in accordance with their terms all benefits vested as of the date hereof under
the Pinnacle Benefit Plans or the IFC Benefit Plans or under other contracts,
arrangements, commitments, or understandings described in the Pinnacle
Disclosure Schedule and the IFC Disclosure Schedule.
(c) Nothing in this Section 6.7 shall be interpreted as preventing the
Surviving Corporation from amending, modifying or terminating any Pinnacle
Benefit Plans, IFC Benefit Plans, or other 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 IFC or any of its Subsidiaries, including any entity specified in
the IFC 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 IFC, any of the IFC Subsidiaries or any entity specified in the IFC
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 IFC or any
of its Subsidiaries at such time, including the provisions of Section 11 of
IFC'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
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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 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 IFC, its Subsidiaries or any entity specified in the
IFC 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 IFC or any of the IFC 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 IFC or any of the IFC 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.
(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 IFC) 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 IFC 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.
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6.11 DIVIDENDS. After the date of this Agreement, each of Pinnacle and IFC
shall coordinate with the other the declaration of any dividends in respect of
Pinnacle Common Stock and IFC Common Stock and the record dates and payment
dates relating thereto, it being the intention of the parties hereto that
holders of Pinnacle Common Stock or IFC Common Stock shall not receive two
dividends, or fail to receive one dividend, for any quarter with respect to
their shares of Pinnacle Common Stock and/or IFC Common Stock and any shares of
Pinnacle Common Stock any such holder receives in exchange therefor in the
Merger.
6.12 NEGOTIATIONS WITH OTHER PARTIES. So long as this Agreement remains in
effect and no notice of termination has been given under this Agreement, neither
Pinnacle, on the one hand, nor IFC, on the other hand, shall 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 other than the other party to this Agreement or any
of its affiliates (a "Potential Acquiror") concerning any "Acquisition Proposal"
(as hereinafter defined) other than pursuant to this Agreement. The preceding
sentence shall not be construed to prohibit the Board of Directors of Pinnacle,
on the one hand, or IFC, on the other hand, 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
or IFC, would acquire or participate in a merger or other business combination
involving Pinnacle or any of the Pinnacle Bank Subsidiaries, on the one hand, or
IFC or any of the IFC Bank Subsidiaries, on the other hand, directly or
indirectly; (ii) proposal by which any corporation, partnership, person or other
entity or group, other than Pinnacle or IFC, would acquire the right to vote 10%
or more of the capital stock of Pinnacle or any of the Pinnacle Bank
Subsidiaries, on the one hand, or IFC or any of the IFC Bank Subsidiaries, on
the other hand, entitled to vote thereon for the election of directors; (iii)
acquisition of 10% or more of the assets of Pinnacle or any of the Pinnacle Bank
Subsidiaries, on the one hand, or IFC or any of the IFC Bank Subsidiaries, on
the other hand, other than in the ordinary course of business; or (iv)
acquisition in excess of 10% of the outstanding capital stock of Pinnacle or any
of the Pinnacle Bank Subsidiaries, on the one hand, or IFC or any of the IFC
Bank Subsidiaries, on the other hand, other than as contemplated by this
Agreement.
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 APPROVAL. 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 IFC
Common Stock entitled to vote thereon.
(b) NASDAQ LISTING. The shares of Pinnacle Common Stock which shall be
issued to the stockholders of IFC upon consummation of the Merger shall have
been authorized for trading and reporting on the NASDAQ, National Market
System, 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").
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(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 IFC each shall have received an
opinion of their respective tax counsel, addressed to Pinnacle or IFC, as
the case may be, in form and substance reasonably satisfactory to Pinnacle
and IFC, 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 IFC will each be a
party to the reorganization;
(ii) No gain or loss will be recognized by Pinnacle or IFC as a
result of the Merger;
(iii) No gain or loss will be recognized by the stockholders of IFC
who exchange their IFC 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 IFC Common Stock solely for
Pinnacle Common Stock in the Merger will be the same as the tax basis of
the IFC 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 IFC in the Merger will include the period during which
the shares of IFC Common Stock surrendered in exchange therefor were
held; provided, such IFC Common Stock was held as a capital asset by the
holder of such IFC Common Stock at the Effective Time. In rendering such
opinion, counsel may require and rely upon representations contained in
certificates of officers of Pinnacle, IFC and others.
(g) POOLING OF INTERESTS. Pinnacle and IFC shall each have received a
letter, effective as of the Effective Time, from their respective
independent accountants addressed to Pinnacle or IFC, 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 IFC 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 IFC Disclosure Schedule that are disclosed by IFC to Pinnacle
in the form of an updated IFC disclosure schedule delivered to Pinnacle as
of the Closing Date (the "Closing Date IFC 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 IFC by the Chief Executive
Officer and the Chief Financial Officer of IFC to the foregoing effect, and
to which any Closing Date IFC Disclosure Schedule shall be appended.
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(b) PERFORMANCE OF OBLIGATIONS OF IFC. IFC 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 behalf of IFC by the Chief Executive Officer and the
Chief Financial Officer of IFC to such effect.
(c) IFC RIGHTS REDEEMED. The IFC Rights shall have been redeemed at a
cost to IFC of not more than $0.01 (the "Redemption Price") per each of the
shares of the IFC Common Stock issued and outstanding, such that all of said
IFC Rights have been extinguished, terminated and cancelled, without any
right of exercise, and shall only represent the rights to receive the
Redemption Price in cash from IFC or the Surviving Corporation following the
Merger.
(d) COMFORT LETTERS. Pinnacle shall have received "comfort" letters
from Ernst & Young, 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 IFC's consolidated financial statements dated as of
December 31, 1995, June 30, 1996, each subsequent year-end and quarter-end
and the most recent interim month-end consolidated financial statements of
IFC 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, 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 IFC and the IFC
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 IFC 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 IFC, inquiries of officials of IFC
responsible for financial and accounting matters, and a reading of the
minutes of the Boards of Directors and stockholders of IFC and the IFC
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 IFC), nothing
came to their attention that caused them to believe that (A) the unaudited
consolidated financial statements of IFC 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 IFC, except
as a result of the exercise of employee stock options granted prior to June
30, 1996, or the IFC Subsidiaries or any increase in consolidated long-term
debt of IFC or the IFC 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 IFC's
accounts and records, which are described in such letter or are set forth in
the S-4 and the prospectus, or (B) since December 31, 1995 any dividends
were paid on the IFC 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.
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(e) LEGAL OPINION. IFC shall have delivered to Pinnacle an opinion,
dated the Closing Date, of counsel for IFC, satisfactory to Pinnacle and its
counsel, to the effect set forth on Exhibit E. Such opinion shall also cover
such other matters incident to the transactions herein contemplated as
Pinnacle and its counsel may reasonably request. In rendering their opinion,
counsel to IFC may rely on certificates of officers of IFC, 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 The Chicago Corporation in connection with the deliberations of
its Board of Directors approving this Agreement and the Option Agreements
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 which has, or is likely to have, a Materially Adverse Effect on IFC
or upon the right of IFC or any of the IFC Subsidiaries to conduct their
businesses as presently conducted.
7.3 CONDITIONS TO OBLIGATION OF IFC. The obligation of IFC to effect the
Merger is also subject to the satisfaction or waiver by IFC 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 IFC in the form of an updated Pinnacle disclosure schedule
delivered to IFC as of the Closing Date (the "Closing Date Pinnacle
Disclosure Schedule")) as of the Closing Date as though made on and as of
the Closing Date. IFC 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 IFC 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. IFC 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, June 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 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,
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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
(A) 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 June 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, or
(B) since December 31, 1995 any dividends were paid on the Pinnacle 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 IFC, as described in such letter.
(d) LEGAL OPINION. Pinnacle shall have delivered to IFC an opinion,
dated the Closing Date, of counsel for Pinnacle, satisfactory to IFC and its
counsel, to the effect set forth on Exhibit F. Such opinion shall also cover
such other matters incident to the transactions herein contemplated as IFC
and its counsel may reasonably request. 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. IFC shall have received the favorable opinion
from Sandler O'Neill in connection with the deliberations of its Board of
Directors approving this Agreement and the Option Agreements 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 IFC from a financial point of
view.
(f) NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred 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 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 IFC:
(a) by mutual consent of Pinnacle and IFC 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;
34
<PAGE>
(b) by either the Board of Directors of Pinnacle or the Board of
Directors of IFC 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 IFC 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 IFC (provided that the terminating party is 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 IFC if any approval of the stockholders of
Pinnacle or IFC 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 IFC if any of the conditions specified by
Article VII to the obligation of the terminating party have not been
satisfied on the Closing Date; or
(g) by Pinnacle if the Closing Date IFC Disclosure Schedule discloses
any change from the IFC Disclosure Schedule which has, or is likely to have,
a Material Adverse Effect on IFC or any of the IFC Subsidiaries; or by IFC
if the Closing Date Pinnacle Disclosure Schedule 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.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Pinnacle or IFC as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, and none of Pinnacle, IFC, 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 IFC 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 IFC; provided, however, that after any approval of the transactions
contemplated by this Agreement by the respective stockholders of Pinnacle or
IFC, 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 IFC 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
35
<PAGE>
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 IFC, 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 IFC 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 and the
Option Agreements, 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
Option Agreements, which shall terminate in accordance with their 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.
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 the costs and expenses of
printing and mailing the Joint Proxy Statement, and all filing and other fees
paid to the SEC in connection with the Merger, shall be borne equally by
Pinnacle and IFC.
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
36
<PAGE>
and
(b) if to IFC, to:
Indiana Federal Corporation
56 Washington Street
Valparaiso, Indiana 46383
Attention: Donald A. Lesch, Chairman and CEO
Fax: (219) 464-2041
with copies to:
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
Attention: James S. Fleischer Esq.
Fax: (202) 682-0354
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 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, IFC 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 other than the Option
Agreements and the Confidentiality Agreement.
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 IFC 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
37
<PAGE>
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.
IN WITNESS WHEREOF, Pinnacle and IFC 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
INDIANA FEDERAL CORPORATION
By:
-----------------------------------------
Donald A. Lesch
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
38
<PAGE>
SCHEDULE OF EXHIBITS
Exhibit A -- Pinnacle Option Agreement
Exhibit B -- IFC Option Agreement
Exhibit C -- Bank Merger Agreement
Exhibit D -- Affiliate Letter Agreement
Exhibit E -- Opinion of IFC Counsel
Exhibit F -- Opinion of Pinnacle Counsel
39
<PAGE>
EXHIBIT (4)(a)
RESTATED ARTICLES OF INCORPORATION
OF
PINNACLE FINANCIAL SERVICES, INC.
Pursuant to the provisions of Act 284, Public Acts of 1972, as amended, the
undersigned corporation executes the following Articles:
1. The present name of this Corporation is Pinnacle Financial Services,
Inc.
2. This Corporation's identification number (CID) assigned by the Bureau
is 325-614.
3. All former names of this Corporation are: N/A
4. The date of filing the original Articles of Incorporation of this
Corporation was March 7, 1986.
The following Restated Articles of Incorporation supersede the Articles of
Incorporation and shall be the Articles of Incorporation for this Corporation:
ARTICLE I
The name of the Corporation is: Pinnacle Financial Services, Inc.
ARTICLE II
The purpose or purposes for which the Corporation is organized is to engage
in any activity within the purposes for which corporations may be organized
under the Business Corporation Act of the State of Michigan.
ARTICLE III
The aggregate number of shares of all classes of capital stock which the
Corporation shall have authority to issue is 15,000,000 shares of Common Stock,
having no par value per share.
A statement of the designation of the powers and rights, and the
qualifications, limitations or restrictions of the above class of capital stock
shall be as follows:
The Corporation has only one class of capital stock, Common Stock, with no
par value per share, which has full voting rights and powers and all other
rights and powers and no qualifications, limitations or restrictions.
<PAGE>
ARTICLE IV
SECTION 1. The street address of the current registered office of the
Corporation is:
830 Pleasant Street
St. Joseph, Michigan 49085
SECTION 2. The mailing address of the current registered office of the
Corporation is:
P. O. Box 48
St. Joseph, Michigan 49085
SECTION 3. The name of the current resident agent of the Corporation at
the registered office is: John A. Newcomer
ARTICLE V
A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for a breach of fiduciary
duty as a director except for liability:
(1) For any breach of the director's duty of loyalty to the Corporation or
its shareholders;
(2) For acts or omissions not in good faith or that involve intentional
misconduct or knowing violation of law;
(3) For a violation of Section 551(1) of the Michigan Business Corporation
Act;
(4) For any transaction from which the director derived an improper
personal benefit;
(5) For any acts or omissions occurring before the date this Article is
filed by the Michigan Department of Commerce.
If, after the adoption of this Article by the shareholders of the
corporation, the Michigan Business Corporation Act is hereafter amended to
further eliminate or limit the liability of a director, then a director of the
corporation (in addition to the circumstances in which a director is not
personally liable as set forth in the preceding paragraph) shall not be liable
to the corporation or its shareholders to the fullest extent permitted by the
Michigan Business Corporation Act, as so amended.
Any repeal or modification of this Article by the shareholders of the
corporation shall not adversely affect any right or protection of a director of
the corporation existing at the time of such repeal or modification.
<PAGE>
5. These Restated Articles of Incorporation were duly adopted on the 16th
day of October, 1996, in accordance with the provisions of Section 642 of the
Act and were duly adopted by the Board of Directors without a vote of the
shareholders. These Restated Articles of Incorporation only restate and
integrate and do not further amend the provisions of the Articles of
Incorporation as heretofore amended and there is no material discrepancy between
those provisions and the provisions of these Restated Articles.
Signed this 3rd day of December, 1996
By /s/ Richard L. Schanze
-------------------------------------
Richard L. Schanze, Chairman
PREPARER'S NAME:
Mr. John A. Newcomer
Corporate Affairs Officer
Pinnacle Financial Services, Inc.
830 Pleasant Street
St. Joseph, Michigan 49085
<PAGE>
EXHIBIT 10(b)
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 November 14, 1996, between PINNACLE
FINANCIAL SERVICES, INC., a Michigan corporation ("Issuer"), and INDIANA FEDERAL
CORPORATION, a Delaware 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 591,678
fully paid and nonassessable shares of Issuer's Common Stock, no par value
("Common Stock"), at a price of $24.625 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
<PAGE>
Agreement shall be deemed to authorize Issuer or Grantee to breach any provision
of the Merger Agreement.
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 90 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
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<PAGE>
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 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 an overture 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
-3-
<PAGE>
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 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
-4-
<PAGE>
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 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
-5-
<PAGE>
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.
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. (S)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
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
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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 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
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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 six-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 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
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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 notice of repurchase by a fraction, the numerator of which is
the Option Repurchase Price less the portion thereof theretofore
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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
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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 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.
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(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 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
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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 (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
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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 System, 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.
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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.
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.
PINNACLE FINANCIAL SERVICES, INC.
By: ___________________________________________
Richard L. Schanze
Chairman and Chief Executive Officer
INDIANA FEDERAL CORPORATION
By: ___________________________________________
Donald A. Lesch
Chairman and Chief Executive Officer
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EXHIBIT 10(c)
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 November 14, 1996, between INDIANA
FEDERAL CORPORATION, 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 470,361
fully paid and nonassessable shares of Issuer's Common Stock, par value $ 0.01
per share ("Common Stock"), at a price of $19.875 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
<PAGE>
Agreement shall be deemed to authorize Issuer or Grantee to breach any provision
of the Merger Agreement.
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 90 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
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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 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 an overture 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
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<PAGE>
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 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
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<PAGE>
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 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. If at the time of
issuance of any shares of Common Stock pursuant to an exercise of all or part of
the Option hereunder, the Rights (as defined in the Stockholder Protection
Rights Agreement dated as of February 26, 1992, as amended by the Amendment to
Stockholder Protection Rights Agreement dated as of November 14, 1996 (the "IFC
Rights Agreement"), between Issuer and Harris Trust and Savings Bank, as Rights
Agent) issued pursuant to the IFC Rights Agreement remain outstanding, or Issuer
shall have issued any similar securities, then each share of Common Stock issued
pursuant to such Option exercise shall also represent Rights or such similar
securities with terms substantially the same as and at least as favorable to
Grantee as are provided under the IFC Rights Agreement or any similar agreement
then in effect.
(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
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<PAGE>
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.
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. (S)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
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<PAGE>
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
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
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<PAGE>
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 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
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<PAGE>
be paid by any third party pursuant to an agreement with Issuer, (iii) the
highest closing price for shares of Common Stock within the six-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 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
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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 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
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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.
(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
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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.
(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
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<PAGE>
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 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.
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<PAGE>
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 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
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<PAGE>
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.
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 System, 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
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<PAGE>
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.
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.
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.
INDIANA FEDERAL CORPORATION
By: ___________________________________________
Donald A. Lesch
Chairman and Chief Executive Officer
PINNACLE FINANCIAL SERVICES, INC.
By: ___________________________________________
Richard L. Schanze
Chairman and Chief Executive Officer
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<PAGE>
Exhibit 10(d)
AGREEMENT AND PLAN OF MERGER AND CONSOLIDATION
INDIANA FEDERAL BANK FOR SAVINGS 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 ________________, 199_, by and between the Board of Directors of
INDIANA FEDERAL BANK FOR SAVINGS, a federal savings bank ("IndFed Bank"), with
its principal office at 56 Washington Street, Valparaiso, Indiana 46383, 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, Indiana Federal Corporation, a Delaware corporation and the parent
corporation of IndFed 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 November 14, 1996 (the "Reorganization
Agreement"), providing for, among other things, the merger and consolidation of
IndFed Bank with and into, and under the charter of, Pinnacle Bank, with
Pinnacle Bank being the Surviving Bank; and
WHEREAS, Pinnacle Bank and IndFed Bank have determined that it is in their
mutual best interests to merge, with IndFed 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 IndFed Bank. Upon
the Bank Merger Effective Time (as hereinafter defined), IndFed 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
<PAGE>
date may be voted at any meeting of the shareholder of Pinnacle Bank at
which this Plan of Merger is submitted for approval.
B. The total authorized capital stock of IndFed Bank immediately
prior to the Bank Merger Effective Time shall be _____ shares of common
stock, par value $_____ per share (the "IndFed Bank Common Stock"), all of
which immediately prior to the Bank Merger Effective Time shall be issued
and outstanding. All of the shares of IndFed Bank Common Stock which are
issued and outstanding as of the effective record date may be voted at any
meeting of the shareholder of IndFed 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 IndFed 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
eighteen (18) persons: ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, ____________,
____________, ____________, ____________, ____________, and ____________.
4. The officers of the Surviving Bank shall be those persons
who are appointed by the Board of Directors of
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<PAGE>
the Surviving Bank promptly following the Bank Merger Effective Time.
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.
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<PAGE>
G. At the Bank Merger Effective Time, each share of IndFed 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 cancelled, and such cancelled
share of IndFed 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 IndFed 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
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<PAGE>
such action shall be taken by the Board of Directors of IndFed 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
IndFed Bank or the shareholder of Pinnacle Bank, as the case may be.
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 Indiana Federal Bank for Savings 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: INDIANA FEDERAL BANK FOR SAVINGS
By _________________________ By____________________________
Secretary President
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
____________________________ ________________________________
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<PAGE>
____________________________ ________________________________
____________________________ ________________________________
The signatories above being not less than a majority of all of the Directors of
Indiana Federal Bank for Savings.
[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]
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<PAGE>
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 Indiana Federal Bank for Savings, a federal
savings bank, 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, 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.
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<PAGE>
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 10(e)
FIRST AMENDMENT
TO THE
PINNACLE FINANCIAL SERVICES, INC.
1993 STOCK OPTION PLAN
----------------------------------
The Pinnacle Financial Services, Inc. 1993 Stock Option Plan, also known as
the "Pinnacle Executive Long-Term Incentive Plan" is amended, effective
March 24, 1996, as follows:
Article 2. Definitions.
Paragraph (1) of Article 2 is amended and restated in its entirety so as to
read and provide as follows:
"(1) 'Employee' means any full-time, non-union employee of the
Company or of any wholly owned Company subsidiary. Directors who are not
otherwise employed by the Company or any wholly owned Company subsidiary
shall not be considered Employees under this Plan."
Paragraph (v) of Article 2 is amended and restated in its entirety so as to
read and provide as follows:
"(v) 'Retirement' shall have the meaning ascribed to it in the
tax-qualified pension plan of the Company or the tax-qualified pension plan
of the Company subsidiary applicable to a respective Participant."
Article 4. Shares Subject to the Plan.
The first four lines of Section 4.1 of Article 4 are amended and restated
in their entirety so as to read and provide as follows:
"4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section
4.3 herein, the total number of shares available for grant under the Plan
may not exceed five hundred thousand shares (500,000)."
(Balance of Section 4.1 remains unchanged).
Article 5. Eligibility and Participation
Section 5.1 of Article 5 is amended and restated in its entirety so as to
read and provide as follows:
"5.1 ELIGIBILITY: Persons eligible to participate in this Plan
include all full-time, active Employees as determined by the Committee,
including Employees who are Directors, but excluding Directors who are not
Employees."
<PAGE>
Article 6. Stock Options
The last five lines of Section 6.6 of Article 6 are amended and restated in
their entirety so as to read and provide as follows:
"As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in
the Participant's name, Share certificates or evidence of book entry in an
appropriate amount based upon the number of Shares purchased under the
Option(s)."
(Balance of Section 6.6 remains unchanged).
<PAGE>
SCHANZE/EXHIBIT 10(f)
EMPLOYMENT SEVERANCE COMPENSATION AGREEMENT
I. INTRODUCTION
Both Pinnacle Financial Services, Inc. ("Pinnacle") and Pinnacle Bank, a
Michigan banking corporation, formerly The Peoples State Bank of St. Joseph
("the Bank") consider the maintenance of a vital management group to be
essential to protecting and enhancing the best interests of those Companies
and their shareholders. Pinnacle and the Bank recognize that, as is the case
with many publicly-held corporations, there is always the possibility of a
change in control, and further, that the uncertainty and questions which
arise as a result of that possibility may result in the departure of key
management personnel, to the detriment of the Companies and their
shareholders.
Accordingly, the Board of Directors for Pinnacle and the Bank have
determined that appropriate steps should be taken to protect its Chairman and
Chief Executive Officer, Mr. Richard L. Schanze ("Executive"), in the event
his employment is terminated due to a change in control of either Pinnacle or
the Bank.
Pinnacle, the Bank and Mr. Schanze previously entered into this
Employment Severance Compensation Agreement on October 16, 1992. The
Employment Severance Compensation Agreement is amended and restated by the
parties as hereafter provided.
II. OPERATION OF AGREEMENT
A. EFFECTIVE DATE. This Agreement will be effective and binding
immediately upon its execution by the parties hereto, but will operate
as an employment contract only during the "Term of Employment" as
described below.
B. TERM OF EMPLOYMENT. The "Term of Employment" is the period beginning
on the date of a "Change of Control" and ending on the earliest of:
1. Retirement at age 65, or any earlier age of retirement elected by
Executive under any of the Company's retirement plans.
2. Executive's death.
3. Executive's termination of employment as a result of disability as
defined in a disability plan or policy of disability insurance
maintained by the Company and under which Executive is eligible
for payments as a result of his disability.
4. The date on which all rights and obligations of the parties hereto
have been satisfied in accordance with the terms of this
Agreement.
5. Executive's termination of employment for cause, as defined in
paragraph C of Article V.
<PAGE>
The expiration of the Term of Employment will not relieve the
Company of the obligation to provide Executive, in accordance with the
terms hereof, the payments, benefits and coverage to which he has
become entitled under this Agreement.
C. COMPANY. "The Company" means both Pinnacle Financial Services,
Inc., and Pinnacle Bank, a Michigan banking corporation, formerly
named The Peoples State Bank of St. Joseph, collectively and
individually.
D. CHANGE OF CONTROL. "Change of Control" means any of the
following:
1. The Company sells substantially all of its assets to a
single purchaser or to a group of associated purchasers;
2. At least one-half of the outstanding corporate shares of the
Company are sold, exchanged, or otherwise disposed of, in
one transaction;
3. The Company elects to terminate its business or liquidate
its assets; or
4. There is a merger or consolidation of the Company in a
transaction in which the Company's shareholders receive less
than 50% of the outstanding voting shares of the new or
continuing corporation.
III. EMPLOYMENT
A. EMPLOYMENT OF EXECUTIVE. The Company agrees to employ Executive
throughout the Term of Employment as Chairman and Chief Executive
Officer of the Company without reducing Executive's authority or
status and without imposing on Executive travel requirements not
customary to the industry or other duties substantially more
onerous than those to which he was subject immediately prior to
the Change of Control. The Company agrees to provide Executive
with an office and executive secretarial support similar to those
provided immediately before the Change of Control and further
agrees that Executive's situs of employment will be in St.
Joseph, Michigan, or any other location mutually agreed upon by
Executive and the Company.
B. DUTIES. Executive agrees, subject to paragraph C of Article V
below, to remain in the Company's employ during the Term of
Employment, as described in paragraph A of this Article III.
Excluding periods of vacation and sick leave, Executive
agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company to the
extent necessary to discharge responsibilities assigned to
Executive hereunder and to use reasonable efforts to perform such
responsibilities faithfully and efficiently. No greater time,
attention or effort to discharge responsibilities shall be
required of Executive than is reasonable and customary to the
industry. Executive may:
1. Serve on corporate, civic and charitable boards or committees, and
<PAGE>
2. Deliver lectures, fulfill speaking engagements and teach at
educational institutions,
so long as such activities do not significantly interfere with
the performance of Executive's responsibilities. To the extent
that any such activities have been conducted by Executive prior
to the Change of Control, such prior conduct, and any subsequent
conduct similar in nature and scope, shall not be deemed to
interfere with the performance of Executive's responsibilities.
C. SUBSIDIARIES. For purposes of this Agreement, employment by a
subsidiary of the Company will be deemed to be employment by the
Company, and the Company may cause its obligations hereunder to
be discharged through such a subsidiary, provided that the
Company will remain liable for the discharge of all such
obligations and that the rights, benefits, authority and status
of the Executive are in no way diminished thereby. A subsidiary
is any corporation more than 50% of the voting stock of which is
owned by the Company or another subsidiary of the Company.
IV. COMPENSATION
A. EXECUTIVE'S COMPENSATION. The Company will pay as annual salary
to Executive for his services as an employee during the Term of
Employment a base annual salary at a rate equal to or greater
than the rate of base salary in effect for Executive immediately
prior to the Change of Control.
B. BENEFITS. In addition, for his service as an employee during the
Term of Employment, Executive will:
1. Participate fully in the Company's stock option plan (and/or
any successor plan);
2. Participate fully in all pension, profit sharing and similar
benefit plans of the Company;
3. Participate fully, together with his dependents and
beneficiaries, in all life insurance plans, accident and
health plans and other welfare plans, maintained or
sponsored by the Company immediately prior to the Change of
Control, or receive substantially equivalent coverage (or
the full value thereof in cash) from the Company; and
4. Participate fully in any additional benefit plans offered by
the Company to executives before or after the Change of
Control.
C. REASONABLE COMPENSATION. Amounts payable under this Article IV
for services rendered by Executive during his employment
constitute reasonable compensation for such services as provided
for under section 280G(b)(4) of the Code. This paragraph C of
Article IV does not apply to amounts payable under Article V.
3
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V. TERMINATION OF EMPLOYMENT
A. SEVERANCE COMPENSATION. In the event Executive's employment is
terminated by the Company during the Term of Employment for any
reason other than "Cause" (as defined in paragraph E below) the
Company will pay Executive:
1. An amount equal to two times the sum of his annual base
salary at the rate in effect at his date of termination,
plus an amount equal to two times the highest bonus paid to
him in any one year during the most recent five year period.
2. Maintain in full force and effect all life, health (medical
and dental), accidental death, and dismemberment and
disability insurance in effect on the date of termination,
for a period of two years after the date of termination or
until Executive receives equivalent benefits from any new
employer. In Executive's sole discretion, at the end of
that extended coverage period, the Company shall assign to
him any assignable insurance policy owned by the Company
which related to Executive, at no cost to him and with no
appointment of any prepaid premiums.
3. In the event Executive becomes self-employed after his
termination, the Company will pay his reasonable business
travel expenses incurred in that endeavor for a period of
two years after the date of termination, up to the amount
budgeted by the Company for his travel expenses in the year
in which the date of termination occurs.
4. Continue to provide Executive with the executive car
benefits available to him as of the date of termination, for
a period of two years after the date of termination.
5. Continue to provide Executive with benefits of any financial
counseling program available to him through the Company as
of the date of his termination, for a period of two years
after his date of termination.
6. Pay all the reasonable costs of any outplacement service
utilized by Executive until he becomes employed on a full-time
basis.
B. COMPANY BREACH.
1. Upon the occurrence of any breach by the Company of this
Agreement within the meaning of subparagraph 2, below,
Executive may give the Company written notice of his
intention to resign effective the 30th day following the
date of such notice. If the Company does not fully remedy
such breach within 15 days of the date of such notice,
Executive's resignation will become effective on such 30th
day. If the Executive resigns in accordance with this
paragraph during the Term of Employment, his employment will
be deemed to have been terminated by the Company for reasons
other than Cause (and he
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will be deemed to have offered to continue to provide
services to the Company), and he will be entitled to all the
payments and rights and benefits described in paragraph A of
this Article V; provided that such payments and rights and
benefits will in no event be less than they would have been
had such termination taken place on the date that the
Company first breached this Agreement.
2. The following events are breaches by the Company of this
Agreement within the meaning of this paragraph B of Article V:
(a) any reduction of, or failure to pay, Executive's
salary as described in paragraph A of Article IV;
(b) any failure to provide the benefits required by
paragraph B of Article IV or to make any payment
which might be due in accordance with paragraph C
of Article IV;
(c) assignment to Executive of any duties inconsistent
in any respect with his position (including
status, offices and titles), authority, duties or
responsibilities as contemplated by paragraph A of
Article III, and as is further inconsistent with
those customary to the industry, or any other
action by the Company which results in a
diminution of such position, authority, duties or
responsibilities as not customary in the industry;
(d) failure after a Change of Control to comply with
and satisfy Article IX;
(e) relocation of the Company's principal executive
offices, or any event that causes Executive to
have his principal place of work changed, to any
location outside the St. Joseph, Michigan area,
unless such relocation is mutually agreed upon by
Executive and the Company;
(f) any requirement by the Company that Executive
travel away from his office in the course of his
duties significantly more than what is customary
to the industry; and
(g) without limiting the generality or effect of the
foregoing, any other material breach of this
Agreement by the Company or any successor thereto
or transferee of substantially all the assets
thereof.
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C. CAUSE. If Executive is dismissed by the Company for Cause, he
will not be entitled to payments or benefits provided under
paragraph A of Article V above. "Cause" means only the willful
commission by Executive of theft, embezzlement or other serious
and substantial crimes against the Company. For purposes of this
definition, no act or omission shall be considered to have been
"willful" unless it was not in good faith and Executive had
knowledge at the time that the act or omission was not in the
best interest of the Company.
D. DISPUTE. If Executive's employment is alleged to be terminated
for Cause or if Executive's right to resign under paragraph B of
Article V is disputed, Executive may initiate binding arbitration
in St. Joseph, Michigan, before the American Arbitration
Association by serving a notice to arbitrate upon the Company or,
at Executive's election, institute judicial proceedings, in
either case within 90 days of the effective date of his
termination or, if later, his receipt of notice of termination,
or such longer period as may be reasonably necessary for
Executive to take such action if illness or incapacity should
impair his taking such action within the 90-day period. The
Company agrees to pay the costs and expenses (including fees of
counsel to Executive of any such arbitration and/or judicial
proceedings, including Executive's counsel fees).
E. DEATH OR DISABILITY. Termination of employment due to death or
disability of Executive will not be considered a termination for
purposes of this Article V.
F. BENEFICIARY. If Executive dies following a termination of
employment which entitled him to benefits under this Article V
but prior to receipt of all such benefits, his beneficiary (as
designated to the Company in writing) or, if none, his estate,
will be entitled to receive all unpaid amounts due hereunder.
VI. NO OBLIGATION TO MITIGATE
There shall be no requirement on the Executive's part to seek other
employment or otherwise mitigate in order to be entitled to the full
amount of any payments or benefits hereunder.
VII. LIMITATION ON SEVERANCE COMPENSATION
A. REDUCTION. Notwithstanding any other provision of this
Agreement, the payments or benefits to which Executive will be
entitled under Article V of this Agreement, plus any payments
payable to Executive outside this Agreement which are determined
to be in the nature of compensation for purposes of whether
payment of a "parachute payment" has occurred under Section
280G(b)(2) of the Code, or the applicable regulations will be
reduced to the extent necessary so that Executive will not be
liable for the federal excise tax levied on certain "excess
parachute payments" under section 4999 of the Code.
B. EXECUTIVE DETERMINATION. If a reduction is made pursuant to
paragraph A of this Article VII, Executive will have the right to
determine which payments and benefits will be reduced.
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<PAGE>
VIII. EXPENSES
It is the intent of the Company that the Executive not be required to
incur any expenses associated with the enforcement of his rights under
this Agreement by legal action or arbitration proceeding because the
cost and expenses thereof would substantially detract from the
benefits intended to be extended to the Executive hereunder.
Accordingly, if Executive determines in good faith that the Company
has failed to comply with any of its obligations under this Agreement,
or if the Company or any other person takes any action to declare this
Agreement void or unenforceable, or institutes any legal action or
arbitration proceedings designed to deny Executive, or to recover from
him, the benefits intended to be provided hereunder, or in the event
of action instituted as contemplated by paragraph D of Article V
above, the Company irrevocably authorizes Executive from time to time
to retain counsel of his choice, at the expense of the Company as
hereafter provided, to represent Executive in connection with any and
all actions and proceedings, whether by or against the Company, which
may adversely affect Executive's rights under this Agreement. In
addition, notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company
irrevocably consents to Executive's entering into an attorney-client
relationship with such counsel and agrees that a confidential
relationship shall exist between Executive and such counsel. Without
limiting the effect of paragraph D of Article V above or of the
foregoing provisions of this Article VIII, the Company shall pay or
cause to be paid and shall be solely responsible for any and all
attorneys' and related fees and expenses incurred by Executive as a
result of the Company failure to perform under this Agreement.
IX. MERGER OR ACQUISITION
A. ASSUMPTION. If the Company is at any time before or after a
Change of Control merged with or consolidated into or with any
other corporation or other entity (whether or not the Company is
the surviving entity), or if substantially all of the assets of
the Company are transferred to another corporation or other
entity, the corporation or other entity resulting from such
merger or consolidation, or the acquirer of such assets, shall
(by agreement in form and substance satisfactory to Executive)
expressly assume the obligations of the Company under this
Agreement. In any event, however, the provisions of this
Agreement shall be binding upon and inure to the benefit of the
corporation or other entity resulting from such merger or
consolidation or the acquirer of such assets, and this Article IX
will apply in the event of any subsequent merger or consolidation
or transfer of assets.
B. BENEFITS AFTER MERGER. In the event of any merger, consolidation
or sale of assets described above, nothing contained in this
Agreement will detract from or otherwise limit Executive's right
to or privilege of participation in any stock option or purchase
plan or any bonus, profit sharing, pension, group insurance,
hospitalization or other incentive or benefit plan or arrangement
which may be or become applicable to executives of the
corporation resulting from such merger or consolidation or the
corporation acquiring such assets of the Company.
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<PAGE>
C. SUCCESSOR ENTITY. In the event of any merger, consolidation or
sale of assets described above, references to the Company in this
Agreement shall unless the context suggest otherwise be deemed to
include the entity resulting from such merger or consolidation or
the acquirer of such assets of the Company.
X. WITHHOLDING
All payments required to be made by the Company hereunder to Executive
or his dependents, beneficiaries or estate will be subject to the
withholding of such amounts relating to tax and/or other payroll
deductions as may be required by law.
XI. AMENDMENT
A. No amendment, change or modification of this Agreement may be
made except in writing, signed by all parties.
XII. GENERAL
A. ENTIRE AGREEMENT. This Agreement supersedes all other agreements
previously made between the parties relating to its subject
matter. There are no other understandings or agreements.
B. NOTICE. Any notice to be delivered in the furtherance of this
Agreement shall be given in writing and delivered, personally or
by certified mail, postage prepaid, addressed to the Company or
to Executive at their last known address.
C. NON-WAIVER. No delay or failure by either party to exercise any
right under this Agreement, and no partial or single exercise of
that right, shall constitute a waiver of that or any other right.
D. HEADINGS. Headings in this Agreement are for convenience only,
and shall not be used to interpret or construe its provisions.
E. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the law of the State of Michigan. In the
event any of the provisions of this Agreement are determined by a
court of law to be void or unenforceable, then the remaining
provisions shall be interpreted to give the fullest effect
possible to the stated intentions of this Agreement.
F. MODIFICATION. This Agreement may be terminated or modified only
upon the written agreement of the Company and Executive.
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<PAGE>
XII. ACKNOWLEDGEMENTS
The parties to this Agreement acknowledge and certify that full and
fair consideration has been given for the promises made, that they
have had an opportunity to review this Agreement with the advisors of
their choice, and that, when signing on behalf of Pinnacle or the
Bank, they have full authority to enter into this Agreement and so
bind those organizations.
The effective date of this amended Agreement shall be April 30, 1996.
/s/ Richard L. Schanze
---------------------------------
Richard L. Schanze
PINNACLE FINANCIAL SERVICES, INC.
By: /s/ A. L. Weaver
------------------------------
A. L. Weaver
By: /s/ Terrence A. Friedman
------------------------------
Terrence A. Friedman
Its: President and Director, respectively
PINNACLE BANK, a Michigan Banking Corporation,
Formerly THE PEOPLES STATE BANK OF ST. JOSEPH
By: /s/ A. L. Weaver
------------------------------
A. L. Weaver
By: /s/ Terrence A. Friedman
------------------------------
Terrence A. Friedman
Its: President and Director, respectively
9
<PAGE>
WEAVER/EXHIBIT 10(g)
EMPLOYMENT SEVERANCE COMPENSATION AGREEMENT
I. INTRODUCTION
Both Pinnacle Financial Services, Inc. ("Pinnacle") and Pinnacle Bank, a
Michigan banking corporation, formerly The Peoples State Bank of St. Joseph
("the Bank") consider the maintenance of a vital management group to be
essential to protecting and enhancing the best interests of those Companies
and their shareholders. Pinnacle and the Bank recognize that, as is the case
with many publicly-held corporations, there is always the possibility of a
change in control, and further, that the uncertainty and questions which
arise as a result of that possibility may result in the departure of key
management personnel, to the detriment of the Companies and their
shareholders.
Accordingly, the Board of Directors for Pinnacle and the Bank have
determined that appropriate steps should be taken to protect its President
and Chief Operating Officer, Mr. Arnold L. Weaver ("Executive"), in the event
his employment is terminated due to a change in control of either Pinnacle or
the Bank.
Pinnacle, the Bank and Mr. Weaver previously entered into this Employment
Severance Compensation Agreement on October 16, 1992. The Employment
Severance Compensation Agreement is amended and restated by the parties as
hereafter provided.
II. OPERATION OF AGREEMENT
A. EFFECTIVE DATE. This Agreement will be effective and binding
immediately upon its execution by the parties hereto, but will
operate as an employment contract only during the "Term of
Employment" as described below.
B. TERM OF EMPLOYMENT. The "Term of Employment" is the period
beginning on the date of a "Change of Control" and ending on the
earliest of:
1. Retirement at age 65, or any earlier age of retirement
elected by Executive under any of the Company's retirement
plans.
2. Executive's death.
3. Executive's termination of employment as a result of
disability as defined in a disability plan or policy of
disability insurance maintained by the Company and under
which Executive is eligible for payments as a result of his
disability.
4. The date on which all rights and obligations of the parties
hereto have been satisfied in accordance with the terms of
this Agreement.
5. Executive's termination of employment for cause, as defined
in paragraph C of Article V.
<PAGE>
The expiration of the Term of Employment will not relieve the
Company of the obligation to provide Executive, in accordance with the
terms hereof, the payments, benefits and coverage to which he has
become entitled under this Agreement.
C. COMPANY. "The Company" means both Pinnacle Financial Services,
Inc., and Pinnacle Bank, a Michigan banking corporation, formerly
named The Peoples State Bank of St. Joseph, collectively and
individually.
D. CHANGE OF CONTROL. "Change of Control" means any of the
following:
1. The Company sells substantially all of its assets to a
single purchaser or to a group of associated purchasers;
2. At least one-half of the outstanding corporate shares of the
Company are sold, exchanged, or otherwise disposed of, in
one transaction;
3. The Company elects to terminate its business or liquidate
its assets; or
4. There is a merger or consolidation of the Company in a
transaction in which the Company's shareholders receive less
than 50% of the outstanding voting shares of the new or
continuing corporation.
III. EMPLOYMENT
A. EMPLOYMENT OF EXECUTIVE. The Company agrees to employ Executive
throughout the Term of Employment as President and Chief
Operating Officer of the Company without reducing Executive's
authority or status and without imposing on Executive travel
requirements not customary to the industry or other duties
substantially more onerous than those to which he was subject
immediately prior to the Change of Control. The Company agrees
to provide Executive with an office and executive secretarial
support similar to those provided immediately before the Change
of Control and further agrees that Executive's situs of
employment will be in St. Joseph, Michigan, or any other location
mutually agreed upon by Executive and the Company.
B. DUTIES. Executive agrees, subject to paragraph C of Article V
below, to remain in the Company's employ during the Term of
Employment, as described in paragraph A of this Article III.
Excluding periods of vacation and sick leave, Executive
agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company to the
extent necessary to discharge responsibilities assigned to
Executive hereunder and to use reasonable efforts to perform such
responsibilities faithfully and efficiently. No greater time,
attention or effort to discharge responsibilities shall be
required of Executive than is reasonable and customary to the
industry. Executive may:
1. Serve on corporate, civic and charitable boards or
committees, and
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2. Deliver lectures, fulfill speaking engagements and teach at
educational institutions,
so long as such activities do not significantly interfere with
the performance of Executive's responsibilities. To the extent
that any such activities have been conducted by Executive prior
to the Change of Control, such prior conduct, and any subsequent
conduct similar in nature and scope, shall not be deemed to
interfere with the performance of Executive's responsibilities.
C. SUBSIDIARIES. For purposes of this Agreement, employment by a
subsidiary of the Company will be deemed to be employment by the
Company, and the Company may cause its obligations hereunder to
be discharged through such a subsidiary, provided that the
Company will remain liable for the discharge of all such
obligations and that the rights, benefits, authority and status
of the Executive are in no way diminished thereby. A subsidiary
is any corporation more than 50% of the voting stock of which is
owned by the Company or another subsidiary of the Company.
IV. COMPENSATION
A. EXECUTIVE'S COMPENSATION. The Company will pay as annual salary
to Executive for his services as an employee during the Term of
Employment a base annual salary at a rate equal to or greater
than the rate of base salary in effect for Executive immediately
prior to the Change of Control.
B. BENEFITS. In addition, for his service as an employee during the
Term of Employment, Executive will:
1. Participate fully in the Company's stock option plan (and/or
any successor plan);
2. Participate fully in all pension, profit sharing and similar
benefit plans of the Company;
3. Participate fully, together with his dependents and
beneficiaries, in all life insurance plans, accident and
health plans and other welfare plans, maintained or
sponsored by the Company immediately prior to the Change of
Control, or receive substantially equivalent coverage (or
the full value thereof in cash) from the Company; and
4. Participate fully in any additional benefit plans offered by
the Company to executives before or after the Change of
Control.
C. REASONABLE COMPENSATION. Amounts payable under this Article IV
for services rendered by Executive during his employment
constitute reasonable compensation for such services as provided
for under section 280G(b)(4) of the Code. This paragraph C of
Article IV does not apply to amounts payable under Article V.
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V. TERMINATION OF EMPLOYMENT
A. SEVERANCE COMPENSATION. In the event Executive's employment is
terminated by the Company during the Term of Employment for any
reason other than "Cause" (as defined in paragraph E below) the
Company will pay Executive:
1. An amount equal to two times the sum of his annual base
salary at the rate in effect at his date of termination,
plus an amount equal to two times the highest bonus paid to
him in any one year during the most recent five year period.
2. Maintain in full force and effect all life, health (medical
and dental), accidental death, and dismemberment and
disability insurance in effect on the date of termination,
for a period of two years after the date of termination or
until Executive receives equivalent benefits from any new
employer. In Executive's sole discretion, at the end of
that extended coverage period, the Company shall assign to
him any assignable insurance policy owned by the Company
which related to Executive, at no cost to him and with no
appointment of any prepaid premiums.
3. In the event Executive becomes self-employed after his
termination, the Company will pay his reasonable business
travel expenses incurred in that endeavor for a period of
two years after the date of termination, up to the amount
budgeted by the Company for his travel expenses in the year
in which the date of termination occurs.
4. Continue to provide Executive with the executive car
benefits available to him as of the date of termination, for
a period of two years after the date of termination.
5. Continue to provide Executive with benefits of any financial
counseling program available to him through the Company as
of the date of his termination, for a period of two years
after his date of termination.
6. Pay all the reasonable costs of any outplacement service
utilized by Executive until he becomes employed on a full-time
basis.
B. COMPANY BREACH.
1. Upon the occurrence of any breach by the Company of this
Agreement within the meaning of subparagraph 2, below,
Executive may give the Company written notice of his
intention to resign effective the 30th day following the
date of such notice. If the Company does not fully remedy
such breach within 15 days of the date of such notice,
Executive's resignation will become effective on such 30th
day. If the Executive resigns in accordance with this
paragraph during the Term of Employment, his employment will
be deemed to have been terminated by the Company for reasons
other than Cause (and he will be deemed to have offered to
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continue to provide services to the Company), and he will be
entitled to all the payments and rights and benefits
described in paragraph A of this Article V; provided that
such payments and rights and benefits will in no event be
less than they would have been had such termination taken
place on the date that the Company first breached this
Agreement.
2. The following events are breaches by the Company of this
Agreement within the meaning of this paragraph B of Article
V:
(a) any reduction of, or failure to pay, Executive's
salary as described in paragraph A of Article IV;
(b) any failure to provide the benefits required by
paragraph B of Article IV or to make any payment
which might be due in accordance with paragraph C
of Article IV;
(c) assignment to Executive of any duties inconsistent
in any respect with his position (including
status, offices and titles), authority, duties or
responsibilities as contemplated by paragraph A of
Article III, and as is further inconsistent with
those customary to the industry, or any other
action by the Company which results in a
diminution of such position, authority, duties or
responsibilities as not customary in the industry;
(d) failure after a Change of Control to comply with
and satisfy Article IX;
(e) relocation of the Company's principal executive
offices, or any event that causes Executive to
have his principal place of work changed, to any
location outside the St. Joseph, Michigan area,
unless such relocation is mutually agreed upon by
Executive and the Company;
(f) any requirement by the Company that Executive
travel away from his office in the course of his
duties significantly more than what is customary
to the industry; and
(g) without limiting the generality or effect of the
foregoing, any other material breach of this
Agreement by the Company or any successor thereto
or transferee of substantially all the assets
thereof.
C. CAUSE. If Executive is dismissed by the Company for Cause, he
will not be entitled to payments or benefits provided under
paragraph A of Article V above. "Cause" means only the willful
commission by Executive of theft, embezzlement or other serious
and substantial crimes against the Company. For purposes of this
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definition, no act or omission shall be considered to have been
"willful" unless it was not in good faith and Executive had
knowledge at the time that the act or omission was not in the
best interest of the Company.
D. DISPUTE. If Executive's employment is alleged to be terminated
for Cause or if Executive's right to resign under paragraph B of
Article V is disputed, Executive may initiate binding arbitration
in St. Joseph, Michigan, before the American Arbitration
Association by serving a notice to arbitrate upon the Company or,
at Executive's election, institute judicial proceedings, in
either case within 90 days of the effective date of his
termination or, if later, his receipt of notice of termination,
or such longer period as may be reasonably necessary for
Executive to take such action if illness or incapacity should
impair his taking such action within the 90-day period. The
Company agrees to pay the costs and expenses (including fees of
counsel to Executive of any such arbitration and/or judicial
proceedings, including Executive's counsel fees).
E. DEATH OR DISABILITY. Termination of employment due to death or
disability of Executive will not be considered a termination for
purposes of this Article V.
F. BENEFICIARY. If Executive dies following a termination of
employment which entitled him to benefits under this Article V
but prior to receipt of all such benefits, his beneficiary (as
designated to the Company in writing) or, if none, his estate,
will be entitled to receive all unpaid amounts due hereunder.
VI. NO OBLIGATION TO MITIGATE
There shall be no requirement on the Executive's part to seek other
employment or otherwise mitigate in order to be entitled to the full
amount of any payments or benefits hereunder.
VII. LIMITATION ON SEVERANCE COMPENSATION
A. REDUCTION. Notwithstanding any other provision of this
Agreement, the payments or benefits to which Executive will be
entitled under Article V of this Agreement, plus any payments
payable to Executive outside this Agreement which are determined
to be in the nature of compensation for purposes of whether
payment of a "parachute payment" has occurred under Section
280G(b)(2) of the Code, or the applicable regulations will be
reduced to the extent necessary so that Executive will not be
liable for the federal excise tax levied on certain "excess
parachute payments" under section 4999 of the Code.
B. EXECUTIVE DETERMINATION. If a reduction is made pursuant to
paragraph A of this Article VII, Executive will have the right to
determine which payments and benefits will be reduced.
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<PAGE>
VIII. EXPENSES
It is the intent of the Company that the Executive not be required to
incur any expenses associated with the enforcement of his rights under
this Agreement by legal action or arbitration proceeding because the
cost and expenses thereof would substantially detract from the
benefits intended to be extended to the Executive hereunder.
Accordingly, if Executive determines in good faith that the Company
has failed to comply with any of its obligations under this Agreement,
or if the Company or any other person takes any action to declare this
Agreement void or unenforceable, or institutes any legal action or
arbitration proceedings designed to deny Executive, or to recover from
him, the benefits intended to be provided hereunder, or in the event
of action instituted as contemplated by paragraph D of Article V
above, the Company irrevocably authorizes Executive from time to time
to retain counsel of his choice, at the expense of the Company as
hereafter provided, to represent Executive in connection with any and
all actions and proceedings, whether by or against the Company which
may adversely affect Executive's rights under this Agreement. In
addition, notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company
irrevocably consents to Executive's entering into an attorney-client
relationship with such counsel and agrees that a confidential
relationship shall exist between Executive and such counsel. Without
limiting the effect of paragraph D of Article V above or of the
foregoing provisions of this Article VIII, the Company shall pay or
cause to be paid and shall be solely responsible for any and all
attorneys' and related fees and expenses incurred by Executive as a
result of the Company failure to perform under this Agreement.
IX. MERGER OR ACQUISITION
A. ASSUMPTION. If the Company is at any time before or after a
Change of Control merged with or consolidated into or with any
other corporation or other entity (whether or not the Company is
the surviving entity), or if substantially all of the assets of
the Company are transferred to another corporation or other
entity, the corporation or other entity resulting from such
merger or consolidation, or the acquirer of such assets, shall
(by agreement in form and substance satisfactory to Executive)
expressly assume the obligations of the Company under this
Agreement. In any event, however, the provisions of this
Agreement shall be binding upon and inure to the benefit of the
corporation or other entity resulting from such merger or
consolidation or the acquirer of such assets, and this Article IX
will apply in the event of any subsequent merger or consolidation
or transfer of assets.
B. BENEFITS AFTER MERGER. In the event of any merger, consolidation
or sale of assets described above, nothing contained in this
Agreement will detract from or otherwise limit Executive's right
to or privilege of participation in any stock option or purchase
plan or any bonus, profit sharing, pension, group insurance,
hospitalization or other incentive or benefit plan or arrangement
which may be or become applicable to executives of the
corporation resulting from such merger or consolidation or the
corporation acquiring such assets of the Company.
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C. SUCCESSOR ENTITY. In the event of any merger, consolidation or
sale of assets described above, references to the Company in this
Agreement shall unless the context suggest otherwise be deemed to
include the entity resulting from such merger or consolidation or
the acquirer of such assets of the Company.
X. WITHHOLDING
All payments required to be made by the Company hereunder to Executive
or his dependents, beneficiaries or estate will be subject to the
withholding of such amounts relating to tax and/or other payroll
deductions as may be required by law.
XI. AMENDMENT
A. No amendment, change or modification of this Agreement may be
made except in writing, signed by all parties.
XII. GENERAL
A. ENTIRE AGREEMENT. This Agreement supersedes all other agreements
previously made between the parties relating to its subject
matter. There are no other understandings or agreements.
B. NOTICE. Any notice to be delivered in the furtherance of this
Agreement shall be given in writing and delivered, personally or
by certified mail, postage prepaid, addressed to the Company or
to Executive at their last known address.
C. NON-WAIVER. No delay or failure by either party to exercise any
right under this Agreement, and no partial or single exercise of
that right, shall constitute a waiver of that or any other right.
D. HEADINGS. Headings in this Agreement are for convenience only,
and shall not be used to interpret or construe its provisions.
E. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the law of the State of Michigan. In the
event any of the provisions of this Agreement are determined by a
court of law to be void or unenforceable, then the remaining
provisions shall be interpreted to give the fullest effect
possible to the stated intentions of this Agreement.
F. MODIFICATION. This Agreement may be terminated or modified only
upon the written agreement of the Company and Executive.
XII. ACKNOWLEDGEMENTS
The parties to this Agreement acknowledge and certify that full and
fair consideration has been given for the promises made, that they
have had an opportunity to review this Agreement with the advisors of
their choice, and that, when signing on behalf of Pinnacle
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<PAGE>
or the Bank, they have full authority to enter into this Agreement and so
bind those organizations.
The effective date of this amended Agreement shall be April 30, 1996.
/s/ A. L. Weaver
--------------------------------------------------
A. L. Weaver
PINNACLE FINANCIAL SERVICES, INC.
By: /s/ Richard L. Schanze
-----------------------------------------------
Richard L. Schanze
By: /s/ Terrence A. Friedman
-----------------------------------------------
Terrence A. Friedman
Its: Chairman and Director, respectively
PINNACLE BANK, a Michigan Banking Corporation,
Formerly THE PEOPLES STATE BANK OF ST. JOSEPH
By: /s/ Richard L. Schanze
-----------------------------------------------
Richard L. Schanze
By: /s/ Terrence A. Friedman
-----------------------------------------------
Terrence A. Friedman
Its: Chairman and Director, respectively
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<PAGE>
RADDE/EXHIBIT 10(h)
EMPLOYMENT SEVERANCE COMPENSATION AGREEMENT
I. INTRODUCTION
Both Pinnacle Financial Services, Inc. ("Pinnacle") and Pinnacle Bank, a
Michigan banking corporation, formerly The Peoples State Bank of St. Joseph
("the Bank") consider the maintenance of a vital management group to be
essential to protecting and enhancing the best interests of those Companies and
their shareholders. Pinnacle and the Bank recognize that, as is the case with
many publicly-held corporations, there is always the possibility of a change in
control, and further, that the uncertainty and questions which arise as a result
of that possibility may result in the departure of key management personnel, to
the detriment of the Companies and their shareholders.
Accordingly, the Board of Directors for Pinnacle and the Bank have
determined that appropriate steps should be taken to protect its Executive Vice
President, Mr. Donald E. Radde ("Executive"), in the event his employment is
terminated due to a change in control of either Pinnacle or the Bank.
Pinnacle, the Bank and Mr. Radde previously entered into this Employment
Severance Compensation Agreement on April 18, 1995. The Employment Severance
Compensation Agreement is amended and restated by the parties as hereafter
provided.
II. OPERATION OF AGREEMENT
A. EFFECTIVE DATE. This Agreement will be effective and binding
immediately upon its execution by the parties hereto, but will
operate as an employment contract only during the "Term of
Employment" as described below.
B. TERM OF EMPLOYMENT. The "Term of Employment" is the period
beginning on the date of a "Change of Control" and ending on the
earliest of:
1. Retirement at age 65, or any earlier age of retirement
elected by Executive under any of the Company's retirement
plans.
2. Executive's death.
3. Executive's termination of employment as a result of
disability as defined in a disability plan or policy of
disability insurance maintained by the Company and under
which Executive is eligible for payments as a result of his
disability.
4. The date on which all rights and obligations of the parties
hereto have been satisfied in accordance with the terms of
this Agreement.
5. Executive's termination of employment for cause, as defined
in paragraph C of Article V.
The expiration of the Term of Employment will not relieve the
Company of the obligation to provide Executive, in accordance with the
terms hereof, the payments, benefits and coverage to which he has
become entitled under this Agreement.
<PAGE>
C. COMPANY. "The Company" means both Pinnacle Financial Services,
Inc., and Pinnacle Bank, a Michigan banking corporation, formerly
named The Peoples State Bank of St. Joseph, collectively and
individually.
D. CHANGE OF CONTROL. "Change of Control" means any of the
following:
1. The Company sells substantially all of its assets to a
single purchaser or to a group of associated purchasers;
2. At least one-half of the outstanding corporate shares of the
Company are sold, exchanged, or otherwise disposed of, in
one transaction;
3. The Company elects to terminate its business or liquidate
its assets; or
4. There is a merger or consolidation of the Company in a
transaction in which the Company's shareholders receive less
than 50% of the outstanding voting shares of the new or
continuing corporation.
III. EMPLOYMENT
A. EMPLOYMENT OF EXECUTIVE. The Company agrees to employ Executive
throughout the Term of Employment as Executive Vice President of
the Company without reducing Executive's authority or status and
without imposing on Executive travel requirements not customary
to the industry or other duties substantially more onerous than
those to which he was subject immediately prior to the Change of
Control. The Company agrees to provide Executive with an office
and executive secretarial support similar to those provided
immediately before the Change of Control and further agrees that
Executive's situs of employment will be in St. Joseph, Michigan,
or any other location mutually agreed upon by Executive and the
Company.
B. DUTIES. Executive agrees, subject to paragraph C of Article V
below, to remain in the Company's employ during the Term of
Employment, as described in paragraph A of this Article III.
Excluding periods of vacation and sick leave, Executive
agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company to the
extent necessary to discharge responsibilities assigned to
Executive hereunder and to use reasonable efforts to perform such
responsibilities faithfully and efficiently. No greater time,
attention or effort to discharge responsibilities shall be
required of Executive than is reasonable and customary to the
industry:
1. Serve on corporate, civic and charitable boards or
committees, and
2. Deliver lectures, fulfill speaking engagements and teach at
educational institutions,
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so long as such activities do not significantly interfere with
the performance of Executive's responsibilities. To the extent
that any such activities have been conducted by Executive prior
to the Change of Control, such prior conduct, and any subsequent
conduct similar in nature and scope, shall not be deemed to
interfere with the performance of Executive's responsibilities.
C. SUBSIDIARIES. For purposes of this Agreement, employment by a
subsidiary of the Company will be deemed to be employment by the
Company, and the Company may cause its obligations hereunder to
be discharged through such a subsidiary, provided that the
Company will remain liable for the discharge of all such
obligations and that the rights, benefits, authority and status
of the Executive are in no way diminished thereby. A subsidiary
is any corporation more than 50% of the voting stock of which is
owned by the Company or another subsidiary of the Company.
IV. COMPENSATION
A. EXECUTIVE'S COMPENSATION. The Company will pay as annual salary
to Executive for his services as an employee during the Term of
Employment a base annual salary at a rate equal to or greater
than the rate of base salary in effect for Executive immediately
prior to the Change of Control.
B. BENEFITS. In addition, for his service as an employee during the
Term of Employment, Executive will:
1. Participate fully in the Company's stock option plan (and/or
any successor plan);
2. Participate fully in all pension, profit sharing and similar
benefit plans of the Company;
3. Participate fully, together with his dependents and
beneficiaries, in all life insurance plans, accident and
health plans and other welfare plans, maintained or
sponsored by the Company immediately prior to the Change of
Control, or receive substantially equivalent coverage (or
the full value thereof in cash) from the Company; and
4. Participate fully in any additional benefit plans offered by
the Company to executives before or after the Change of
Control.
C. REASONABLE COMPENSATION. Amounts payable under this Article IV
for services rendered by Executive during his employment
constitute reasonable compensation for such services as provided
for under section 280G(b)(4) of the Code. This paragraph C of
Article IV does not apply to amounts payable under Article V.
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<PAGE>
V. TERMINATION OF EMPLOYMENT
A. SEVERANCE COMPENSATION. In the event Executive's employment is
terminated by the Company during the Term of Employment for any
reason other than "Cause" (as defined in paragraph E below) the
Company will pay Executive:
1. An amount equal to two times the sum of his annual base
salary at the rate in effect at his date of termination,
plus an amount equal to two times the highest bonus paid to
him in any one year during the most recent five year period.
2. Maintain in full force and effect all life, health (medical
and dental), accidental death, and dismemberment and
disability insurance in effect on the date of termination,
for a period of two years after the date of termination or
until Executive receives equivalent benefits from any new
employer. In Executive's sole discretion, at the end of
that extended coverage period, the Company shall assign to
him any assignable insurance policy owned by the Company
which related to Executive, at no cost to him and with no
appointment of any prepaid premiums.
3. In the event Executive becomes self-employed after his
termination, the Company will pay his reasonable business
travel expenses incurred in that endeavor for a period of
two years after the date of termination, up to the amount
budgeted by the Company for his travel expenses in the year
in which the date of termination occurs.
4. Continue to provide Executive with the executive car
benefits available to him as of the date of termination, for
a period of two years after the date of termination.
5. Continue to provide Executive with benefits of any financial
counseling program available to him through the Company as
of the date of his termination, for a period of two years
after his date of termination.
6. Pay all the reasonable costs of any outplacement service
utilized by Executive until he becomes employed on a full-time
basis.
B. COMPANY BREACH.
1. Upon the occurrence of any breach by the Company of this
Agreement within the meaning of subparagraph 2, below,
Executive may give the Company written notice of his
intention to resign effective the 30th day following the
date of such notice. If the Company does not fully remedy
such breach within 15 days of the date of such notice,
Executive's resignation will become effective on such 30th
day. If the Executive resigns in accordance with this
paragraph during the Term of Employment, his employment will
be deemed to have been terminated by the Company for reasons
other than Cause (and he will be deemed to have offered to
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<PAGE>
continue to provide services to the Company), and he will be
entitled to all the payments and rights and benefits
described in paragraph A of this Article V; provided that
such payments and rights and benefits will in no event be
less than they would have been had such termination taken
place on the date that the Company first breached this
Agreement.
2. The following events are breaches by the Company of this
Agreement within the meaning of this paragraph B of Article V:
(a) any reduction of, or failure to pay, Executive's
salary as described in paragraph A of Article IV;
(b) any failure to provide the benefits required by
paragraph B of Article IV or to make any payment
which might be due in accordance with paragraph C
of Article IV;
(c) assignment to Executive of any duties inconsistent
in any respect with his position (including
status, offices and titles), authority, duties or
responsibilities as contemplated by paragraph A of
Article III and as is further inconsistent with
those customary to the industry, or any other
action by the Company which results in a
diminution of such position, authority, duties or
responsibilities as not customary in the industry;
(d) failure after a Change of Control to comply with
and satisfy Article IX;
(e) relocation of the Company's principal executive
offices, or any event that causes Executive to
have his principal place of work changed, to any
location outside the St. Joseph, Michigan area,
unless such relocation is mutually agreed upon by
Executive and the Company;
(f) any requirement by the Company that Executive
travel away from his office in the course of his
duties significantly more than what is customary
to the industry; and
(g) without limiting the generality or effect of the
foregoing, any other material breach of this
Agreement by the Company or any successor thereto
or transferee of substantially all the assets
thereof.
C. CAUSE. If Executive is dismissed by the Company for Cause, he
will not be entitled to payments or benefits provided under
paragraph A of Article V above. "Cause" means only the willful
commission by Executive of theft, embezzlement or other serious
and substantial crimes against the Company. For purposes of this
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<PAGE>
definition, no act or omission shall be considered to have been
"willful" unless it was not in good faith and Executive had
knowledge at the time that the act or omission was not in the
best interest of the Company.
D. DISPUTE. If Executive's employment is alleged to be terminated
for Cause or if Executive's right to resign under paragraph B of
Article V is disputed, Executive may initiate binding arbitration
in St. Joseph, Michigan, before the American Arbitration
Association by serving a notice to arbitrate upon the Company or,
at Executive's election, institute judicial proceedings, in
either case within 90 days of the effective date of his
termination or, if later, his receipt of notice of termination,
or such longer period as may be reasonably necessary for
Executive to take such action if illness or incapacity should
impair his taking such action within the 90-day period. The
Company agrees to pay the costs and expenses (including fees of
counsel to Executive of any such arbitration and/or judicial
proceedings, including Executive's counsel fees).
E. DEATH OR DISABILITY. Termination of employment due to death or
disability of Executive will not be considered a termination for
purposes of this Article V.
F. BENEFICIARY. If Executive dies following a termination of
employment which entitled him to benefits under this Article V
but prior to receipt of all such benefits, his beneficiary (as
designated to the Company in writing) or, if none, his estate,
will be entitled to receive all unpaid amounts due hereunder.
VI. NO OBLIGATION TO MITIGATE
There shall be no requirement on the Executive's part to seek other
employment or otherwise mitigate in order to be entitled to the full
amount of any payments or benefits hereunder.
VII. LIMITATION ON SEVERANCE COMPENSATION
A. REDUCTION. Notwithstanding any other provision of this
Agreement, the payments or benefits to which Executive will be
entitled under Article V of this Agreement, plus any payments
payable to Executive outside this Agreement which are determined
to be in the nature of compensation for purposes of whether
payment of a "parachute payment" has occurred under Section
280G(b)(2) of the Code, or the applicable regulations will be
reduced to the extent necessary so that Executive will not be
liable for the federal excise tax levied on certain "excess
parachute payments" under section 4999 of the Code.
B. EXECUTIVE DETERMINATION. If a reduction is made pursuant to
paragraph A of this Article VII, Executive will have the right to
determine which payments and benefits will be reduced.
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<PAGE>
VIII. EXPENSES
It is the intent of the Company that the Executive not be required to
incur any expenses associated with the enforcement of his rights under
this Agreement by legal action or arbitration proceeding because the
cost and expenses thereof would substantially detract from the
benefits intended to be extended to the Executive hereunder.
Accordingly, if Executive determines in good faith that the Company
has failed to comply with any of its obligations under this Agreement,
or if the Company or any other person takes any action to declare this
Agreement void or unenforceable, or institutes any legal action or
arbitration proceedings designed to deny Executive, or to recover from
him, the benefits intended to be provided hereunder, or in the event
of action instituted as contemplated by paragraph D of Article V
above, the Company irrevocably authorizes Executive from time to time
to retain counsel of his choice, at the expense of the Company as
hereafter provided, to represent Executive in connection with any and
all actions and proceedings, whether by or against the Company which
may adversely affect Executive's rights under this Agreement. In
addition, notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company
irrevocably consents to Executive's entering into an attorney-client
relationship with such counsel and agrees that a confidential
relationship shall exist between Executive and such counsel. Without
limiting the effect of paragraph D of Article V above or of the
foregoing provisions of this Article VIII, the Company shall pay or
cause to be paid and shall be solely responsible for any and all
attorneys' and related fees and expenses incurred by Executive as a
result of the Company failure to perform under this Agreement.
IX. MERGER OR ACQUISITION
A. ASSUMPTION. If the Company is at any time before or after a
Change of Control merged with or consolidated into or with any
other corporation or other entity (whether or not the Company is
the surviving entity), or if substantially all of the assets of
the Company are transferred to another corporation or other
entity, the corporation or other entity resulting from such
merger or consolidation, or the acquirer of such assets, shall
(by agreement in form and substance satisfactory to Executive)
expressly assume the obligations of the Company under this
Agreement. In any event, however, the provisions of this
Agreement shall be binding upon and inure to the benefit of the
corporation or other entity resulting from such merger or
consolidation or the acquirer of such assets, and this Article IX
will apply in the event of any subsequent merger or consolidation
or transfer of assets.
B. BENEFITS AFTER MERGER. In the event of any merger, consolidation
or sale of assets described above, nothing contained in this
Agreement will detract from or otherwise limit Executive's right
to or privilege of participation in any stock option or purchase
plan or any bonus, profit sharing, pension, group insurance,
hospitalization or other incentive or benefit plan or arrangement
which may be or become applicable to executives of the
corporation resulting from such merger or consolidation or the
corporation acquiring such assets of the Company.
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<PAGE>
C. SUCCESSOR ENTITY. In the event of any merger, consolidation or
sale of assets described above, references to the Company in this
Agreement shall unless the context suggest otherwise be deemed to
include the entity resulting from such merger or consolidation or
the acquirer of such assets of the Company.
X. WITHHOLDING
All payments required to be made by the Company hereunder to Executive
or his dependents, beneficiaries or estate will be subject to the
withholding of such amounts relating to tax and/or other payroll
deductions as may be required by law.
XI. AMENDMENT
A. No amendment, change or modification of this Agreement may be
made except in writing, signed by all parties.
XII. GENERAL
A. ENTIRE AGREEMENT. This Agreement supersedes all other agreements
previously made between the parties relating to its subject
matter. There are no other understandings or agreements.
B. NOTICE. Any notice to be delivered in the furtherance of this
Agreement shall be given in writing and delivered, personally or
by certified mail, postage prepaid, addressed to the Company or
to Executive at their last known address.
C. NON-WAIVER. No delay or failure by either party to exercise any
right under this Agreement, and no partial or single exercise of
that right, shall constitute a waiver of that or any other right.
D. HEADINGS. Headings in this Agreement are for convenience only,
and shall not be used to interpret or construe its provisions.
E. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the law of the State of Michigan. In the
event any of the provisions of this Agreement are determined by a
court of law to be void or unenforceable, then the remaining
provisions shall be interpreted to give the fullest effect
possible to the stated intentions of this Agreement.
F. MODIFICATION. This Agreement may be terminated or modified only
upon the written agreement of the Company and Executive.
XII. ACKNOWLEDGEMENTS
The parties to this Agreement acknowledge and certify that full and
fair consideration has been given for the promises made, that they
have had an opportunity to review this Agreement with the advisors of
their choice, and that, when signing on behalf of Pinnacle
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<PAGE>
or the Bank, they have full authority to enter into this Agreement and so
bind those organizations.
The effective date of this amended Agreement shall be April 30, 1996.
/s/ Donald E. Radde
----------------------------------
Donald E. Radde
PINNACLE FINANCIAL SERVICES, INC.
By: /s/ Richard L. Schanze
----------------------------------
Richard L. Schanze
By: /s/ Terrence A. Friedman
----------------------------------
Terrence A. Friedman
Its: Chairman and Director, respectively
PINNACLE BANK, a Michigan Banking Corporation,
Formerly PEOPLES STATE BANK OF ST. JOSEPH
By: /s/ Richard L. Schanze
----------------------------------
Richard L. Schanze
By: /s/ Terrence A. Friedman
----------------------------------
Terrence A. Friedman
Its: Chairman and Director, respectively
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<PAGE>
KOLHAGEN/EXHIBIT 10(i)
EMPLOYMENT SEVERANCE COMPENSATION AGREEMENT
I. INTRODUCTION
Both Pinnacle Financial Services, Inc. ("Pinnacle") and Pinnacle Bank, a
Michigan banking corporation, formerly The Peoples State Bank of St. Joseph
("the Bank") consider the maintenance of a vital management group to be
essential to protecting and enhancing the best interests of those Companies and
their shareholders. Pinnacle and the Bank recognize that, as is the case with
many publicly-held corporations, there is always the possibility of a change in
control, and further, that the uncertainty and questions which arise as a result
of that possibility may result in the departure of key management personnel, to
the detriment of the Companies and their shareholders.
Accordingly, the Board of Directors for Pinnacle and the Bank have
determined that appropriate steps should be taken to protect its Vice President
and Treasurer, Mr. David W. Kolhagen ("Executive"), in the event his employment
is terminated due to a change in control of either Pinnacle or the Bank.
Pinnacle, the Bank and Mr. Kolhagen previously entered into this Employment
Severance Compensation Agreement on April 18, 1995. The Employment Severance
Compensation Agreement is amended and restated by the parties as hereafter
provided.
II. OPERATION OF AGREEMENT
A. EFFECTIVE DATE. This Agreement will be effective and binding
immediately upon its execution by the parties hereto, but will
operate as an employment contract only during the "Term of
Employment" as described below.
B. TERM OF EMPLOYMENT. The "Term of Employment" is the period
beginning on the date of a "Change of Control" and ending on the
earliest of:
1. Retirement at age 65, or any earlier age of retirement
elected by Executive under any of the Company's retirement
plans.
2. Executive's death.
3. Executive's termination of employment as a result of
disability as defined in a disability plan or policy of
disability insurance maintained by the Company and under
which Executive is eligible for payments as a result of his
disability.
4. The date on which all rights and obligations of the parties
hereto have been satisfied in accordance with the terms of
this Agreement.
5. Executive's termination of employment for cause, as defined
in paragraph C of Article V.
The expiration of the Term of Employment will not relieve the
Company of the obligation to provide Executive, in accordance with the
terms hereof, the payments, benefits and coverage to which he has
become entitled under this Agreement.
<PAGE>
C. COMPANY. "The Company" means both Pinnacle Financial Services,
Inc., and Pinnacle Bank, a Michigan banking corporation, formerly
named The Peoples State Bank of St. Joseph, collectively and
individually.
D. CHANGE OF CONTROL. "Change of Control" means any of the
following:
1. The Company sells substantially all of its assets to a
single purchaser or to a group of associated purchasers;
2. At least one-half of the outstanding corporate shares of the
Company are sold, exchanged, or otherwise disposed of, in
one transaction;
3. The Company elects to terminate its business or liquidate
its assets; or
4. There is a merger or consolidation of the Company in a
transaction in which the Company's shareholders receive less
than 50% of the outstanding voting shares of the new or
continuing corporation.
III. EMPLOYMENT
A. EMPLOYMENT OF EXECUTIVE. The Company agrees to employ Executive
throughout the Term of Employment as Vice President and Treasurer
of the Company without reducing Executive's authority or status
and without imposing on Executive travel requirements not
customary to the industry or other duties substantially more
onerous than those to which he was subject immediately prior to
the Change of Control. The Company agrees to provide Executive
with an office and executive secretarial support similar to those
provided immediately before the Change of Control and further
agrees that Executive's situs of employment will be in St.
Joseph, Michigan, or any other location mutually agreed upon by
Executive and the Company.
B. DUTIES. Executive agrees, subject to paragraph C of Article V
below, to remain in the Company's employ during the Term of
Employment, as described in paragraph A of this Article III.
Excluding periods of vacation and sick leave, Executive
agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company to the
extent necessary to discharge responsibilities assigned to
Executive hereunder and to use reasonable efforts to perform such
responsibilities faithfully and efficiently. No greater time,
attention or effort to discharge responsibilities shall be
required of Executive than is reasonable and customary to the
industry. Executive may:
1. Serve on corporate, civic and charitable boards or
committees, and
2. Deliver lectures, fulfill speaking engagements and teach at
educational institutions,
so long as such activities do not significantly interfere with
the performance of Executive's responsibilities. To the extent
that any such activities have been
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<PAGE>
conducted by Executive prior to the Change of Control, such prior
conduct, and any subsequent conduct similar in nature and scope,
shall not be deemed to interfere with the performance of
Executive's responsibilities.
C. SUBSIDIARIES. For purposes of this Agreement, employment by a
subsidiary of the Company will be deemed to be employment by the
Company, and the Company may cause its obligations hereunder to
be discharged through such a subsidiary, provided that the
Company will remain liable for the discharge of all such
obligations and that the rights, benefits, authority and status
of the Executive are in no way diminished thereby. A subsidiary
is any corporation more than 50% of the voting stock of which is
owned by the Company or another subsidiary of the Company.
IV. COMPENSATION
A. EXECUTIVE'S COMPENSATION. The Company will pay as annual salary
to Executive for his services as an employee during the Term of
Employment a base annual salary at a rate equal to or greater
than the rate of base salary in effect for Executive immediately
prior to the Change of Control.
B. BENEFITS. In addition, for his service as an employee during the
Term of Employment, Executive will:
1. Participate fully in the Company's stock option plan (and/or
any successor plan);
2. Participate fully in all pension, profit sharing and similar
benefit plans of the Company;
3. Participate fully, together with his dependents and
beneficiaries, in all life insurance plans, accident and
health plans and other welfare plans, maintained or
sponsored by the Company immediately prior to the Change of
Control, or receive substantially equivalent coverage (or
the full value thereof in cash) from the Company; and
4. Participate fully in any additional benefit plans offered by
the Company to executives before or after the Change of
Control.
C. REASONABLE COMPENSATION. Amounts payable under this Article IV
for services rendered by Executive during his employment
constitute reasonable compensation for such services as provided
for under section 280G(b)(4) of the Code. This paragraph C of
Article IV does not apply to amounts payable under Article V.
V. TERMINATION OF EMPLOYMENT
A. SEVERANCE COMPENSATION. In the event Executive's employment is
terminated by the Company during the Term of Employment for any
reason other than "Cause" (as defined in paragraph E below) the
Company will pay Executive:
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1. An amount equal to two times the sum of his annual base
salary at the rate in effect at his date of termination,
plus an amount equal to two times the highest bonus paid to
him in any one year during the most recent five year period.
2. Maintain in full force and effect all life, health (medical
and dental), accidental death, and dismemberment and
disability insurance in effect on the date of termination,
for a period of two years after the date of termination or
until Executive receives equivalent benefits from any new
employer. In Executive's sole discretion, at the end of
that extended coverage period, the Company shall assign to
him any assignable insurance policy owned by the Company
which related to Executive, at no cost to him and with no
appointment of any prepaid premiums.
3. In the event Executive becomes self-employed after his
termination, the Company will pay his reasonable business
travel expenses incurred in that endeavor for a period of
two years after the date of termination, up to the amount
budgeted by the Company for his travel expenses in the year
in which the date of termination occurs.
4. Continue to provide Executive with the executive car
benefits available to him as of the date of termination, for
a period of two years after the date of termination.
5. Continue to provide Executive with benefits of any financial
counseling program available to him through the Company as
of the date of his termination, for a period of two years
after his date of termination.
6. Pay all the reasonable costs of any outplacement service
utilized by Executive until he becomes employed on a full-time
basis.
B. COMPANY BREACH.
1. Upon the occurrence of any breach by the Company of this
Agreement within the meaning of subparagraph 2, below,
Executive may give the Company written notice of his
intention to resign effective the 30th day following the
date of such notice. If the Company does not fully remedy
such breach within 15 days of the date of such notice,
Executive's resignation will become effective on such 30th
day. If the Executive resigns in accordance with this
paragraph during the Term of Employment, his employment will
be deemed to have been terminated by the Company for reasons
other than Cause (and he will be deemed to have offered to
continue to provide services to the Company), and he will be
entitled to all the payments and rights and benefits
described in paragraph A of this Article V; provided that
such payments and rights and benefits will in no event be
less than they would have been had such termination taken
place on the date that the Company first breached this
Agreement.
-4-
<PAGE>
2. The following events are breaches by the Company of this
Agreement within the meaning of this paragraph B of Article
V:
(a) any reduction of, or failure to pay, Executive's
salary as described in paragraph A of Article IV;
(b) any failure to provide the benefits required by
paragraph B of Article IV or to make any payment
which might be due in accordance with paragraph C
of Article IV;
(c) assignment to Executive of any duties inconsistent
in any respect with his position (including
status, offices and titles), authority, duties or
responsibilities as contemplated by paragraph A of
Article III, and as is further inconsistent with
those customary to the industry, or any other
action by the Company which results in a
diminution of such position, authority, duties or
responsibilities as not customary to the industry;
(d) failure after a Change of Control to comply with
and satisfy Article IX;
(e) relocation of the Company's principal executive
offices, or any event that causes Executive to
have his principal place of work changed, to any
location outside the St. Joseph, Michigan area,
unless such relocation is mutually agreed upon by
Executive and the Company;
(f) any requirement by the Company that Executive
travel away from his office in the course of his
duties significantly more than what is customary
to the industry; and
(g) without limiting the generality or effect of the
foregoing, any other material breach of this
Agreement by the Company or any successor thereto
or transferee of substantially all the assets
thereof.
C. CAUSE. If Executive is dismissed by the Company for Cause, he
will not be entitled to payments or benefits provided under
paragraph A of Article V above. "Cause" means only the willful
commission by Executive of theft, embezzlement or other serious
and substantial crimes against the Company. For purposes of this
definition, no act or omission shall be considered to have been
"willful" unless it was not in good faith and Executive had
knowledge at the time that the act or omission was not in the
best interest of the Company.
D. DISPUTE. If Executive's employment is alleged to be terminated
for Cause or if Executive's right to resign under paragraph B of
Article V is disputed, Executive may initiate binding arbitration
in St. Joseph, Michigan, before the American
-5-
<PAGE>
Arbitration Association by serving a notice to arbitrate upon the
Company or, at Executive's election, institute judicial proceedings, in
either case within 90 days of the effective date of his termination or,
if later, his receipt of notice of termination, or such longer period
as may be reasonably necessary for Executive to take such action if
illness or incapacity should impair his taking such action within the
90-day period. The Company agrees to pay the costs and expenses
(including fees of counsel to Executive of any such arbitration and/or
judicial proceedings, including Executive's counsel fees).
E. DEATH OR DISABILITY. Termination of employment due to death or
disability of Executive will not be considered a termination for
purposes of this Article V.
F. BENEFICIARY. If Executive dies following a termination of
employment which entitled him to benefits under this Article V
but prior to receipt of all such benefits, his beneficiary (as
designated to the Company in writing) or, if none, his estate,
will be entitled to receive all unpaid amounts due hereunder.
VI. NO OBLIGATION TO MITIGATE
There shall be no requirement on the Executive's part to seek other
employment or otherwise mitigate in order to be entitled to the full
amount of any payments or benefits hereunder.
VII. LIMITATION ON SEVERANCE COMPENSATION
A. REDUCTION. Notwithstanding any other provision of this
Agreement, the payments or benefits to which Executive will be
entitled under Article V of this Agreement, plus any payments
payable to Executive outside this Agreement which are determined
to be in the nature of compensation for purposes of whether
payment of a "parachute payment" has occurred under Section
280G(b)(2) of the Code, or the applicable regulations will be
reduced to the extent necessary so that Executive will not be
liable for the federal excise tax levied on certain "excess
parachute payments" under section 4999 of the Code.
B. EXECUTIVE DETERMINATION. If a reduction is made pursuant to
paragraph A of this Article VII, Executive will have the right to
determine which payments and benefits will be reduced.
VIII. EXPENSES
It is the intent of the Company that the Executive not be required to
incur any expenses associated with the enforcement of his rights under
this Agreement by legal action or arbitration proceeding because the
cost and expenses thereof would substantially detract from the
benefits intended to be extended to the Executive hereunder.
Accordingly, if Executive determines in good faith that the Company
has failed to comply with any of its obligations under this Agreement,
or if the Company or any other person takes any action to declare this
Agreement void or unenforceable, or institutes any legal action or
arbitration proceedings designed to deny Executive, or to recover from
him, the benefits
-6-
<PAGE>
intended to be provided hereunder, or in the event of action instituted as
contemplated by paragraph D of Article V above, the Company irrevocably
authorizes Executive from time to time to retain counsel of his choice, at
the expense of the Company as hereafter provided, to represent Executive in
connection with any and all actions and proceedings, whether by or against
the Company which may adversely affect Executive's rights under this
Agreement. In addition, notwithstanding any existing or prior attorney-
client relationship between the Company and such counsel, the Company
irrevocably consents to Executive's entering into an attorney-client
relationship with such counsel and agrees that a confidential
relationship shall exist between Executive and such counsel. Without
limiting the effect of paragraph D of Article V above or of the
foregoing provisions of this Article VIII, the Company shall pay or
cause to be paid and shall be solely responsible for any and all
attorneys' and related fees and expenses incurred by Executive as a
result of the Company failure to perform under this Agreement.
IX. MERGER OR ACQUISITION
A. ASSUMPTION. If the Company is at any time before or after a
Change of Control merged with or consolidated into or with any
other corporation or other entity (whether or not the Company is
the surviving entity), or if substantially all of the assets of
the Company are transferred to another corporation or other
entity, the corporation or other entity resulting from such
merger or consolidation, or the acquirer of such assets, shall
(by agreement in form and substance satisfactory to Executive)
expressly assume the obligations of the Company under this
Agreement. In any event, however, the provisions of this
Agreement shall be binding upon and inure to the benefit of the
corporation or other entity resulting from such merger or
consolidation or the acquirer of such assets, and this Article IX
will apply in the event of any subsequent merger or consolidation
or transfer of assets.
B. BENEFITS AFTER MERGER. In the event of any merger, consolidation
or sale of assets described above, nothing contained in this
Agreement will detract from or otherwise limit Executive's right
to or privilege of participation in any stock option or purchase
plan or any bonus, profit sharing, pension, group insurance,
hospitalization or other incentive or benefit plan or arrangement
which may be or become applicable to executives of the
corporation resulting from such merger or consolidation or the
corporation acquiring such assets of the Company.
C. SUCCESSOR ENTITY. In the event of any merger, consolidation or
sale of assets described above, references to the Company in this
Agreement shall unless the context suggest otherwise be deemed to
include the entity resulting from such merger or consolidation or
the acquirer of such assets of the Company.
X. WITHHOLDING
All payments required to be made by the Company hereunder to Executive
or his dependents, beneficiaries or estate will be subject to the
withholding of such amounts relating to tax and/or other payroll
deductions as may be required by law.
-7-
<PAGE>
XI. AMENDMENT
A. No amendment, change or modification of this Agreement may be
made except in writing, signed by all parties.
XII. GENERAL
A. ENTIRE AGREEMENT. This Agreement supersedes all other agreements
previously made between the parties relating to its subject
matter. There are no other understandings or agreements.
B. NOTICE. Any notice to be delivered in the furtherance of this
Agreement shall be given in writing and delivered, personally or
by certified mail, postage prepaid, addressed to the Company or
to Executive at their last known address.
C. NON-WAIVER. No delay or failure by either party to exercise any
right under this Agreement, and no partial or single exercise of
that right, shall constitute a waiver of that or any other right.
D. HEADINGS. Headings in this Agreement are for convenience only,
and shall not be used to interpret or construe its provisions.
E. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the law of the State of Michigan. In the
event any of the provisions of this Agreement are determined by a
court of law to be void or unenforceable, then the remaining
provisions shall be interpreted to give the fullest effect
possible to the stated intentions of this Agreement.
F. MODIFICATION. This Agreement may be terminated or modified only
upon the written agreement of the Company and Executive.
XII. ACKNOWLEDGEMENTS
The parties to this Agreement acknowledge and certify that full and
fair consideration has been given for the promises made, that they
have had an opportunity to review this Agreement with the advisors of
their choice, and that, when signing on behalf of Pinnacle or the
Bank, they have full authority to enter into this Agreement and so
bind those organizations.
-8-
<PAGE>
The effective date of this amended Agreement shall be April 30, 1996.
/s/ David W. Kolhagen
---------------------------------------
David W. Kolhagen
PINNACLE FINANCIAL SERVICES, INC.
By: /s/ Richard L. Schanze
-------------------------------------
Richard L. Schanze
By: /s/ Terrence A. Friedman
------------------------------------
Terrence A. Friedman
Its: Chairman and Director, respectively
PINNACLE BANK, a Michigan Banking Corporation,
Formerly PEOPLES STATE BANK OF ST. JOSEPH
By: /s/ Richard L. Schanze
------------------------------------
Richard L. Schanze
By: /s/ Terrence A. Friedman
------------------------------------
Terrence A. Friedman
Its: Chairman and Director, respectively
-9-
<PAGE>
Exhibit 10(u)
THE PEOPLES STATE BANK OF ST. JOSEPH
DEFERRED COMPENSATION PLAN FOR EXECUTIVE OFFICERS
SECTION 1
The Compensation Committee of the Board of Directors of the Bank shall
determine, in its sole discretion, the select group of management or highly
compensated employees of the Bank or affiliates of the Bank who shall be
eligible to participate in the Plan. The Plan does not constitute a contract of
employment, and participation in the Plan will not give any participant the
right to continue in the employ of the Bank or an affiliate of the Bank or to
provide services thereto, nor shall the Plan interfere in any way with the right
of the Bank or an affiliate of the Bank to terminate the employment of any
participant, nor does the Plan give any right or claim to any benefit under the
terms of the Plan unless such right or claim is specifically vested under the
terms of the Plan.
SECTION 2
The Compensation Committee of the Board of Directors of the Bank shall
determine, in its sole discretion, on an annual basis, the recommended amount of
annual benefit to be credited to a memorandum account as provided in Section 3
for each participant of the Plan and such recommended amounts shall be subject
to final approval by the Board of Directors of the Bank.
SECTION 3
The Bank will maintain on its records a separate memorandum account for
each participant of the amounts determined pursuant to Section 2 and the
interest credited pursuant to Section 5 The Bank will have sole ownership of the
accounts and earnings on such accounts acquired pursuant to this Plan and no
participant will have any interest therein or the right to acquire the same. A
participant will, at all times, have nothing more than a mere unsecured promise
from the Bank to pay benefits in the future. The amounts in the memorandum
accounts will, at all times, be subject to the claims of the Bank's general
creditors.
SECTION 4
The amount of annual benefit determined pursuant to Section 2 shall be
allocated to a participants memorandum account as of December 31 of the year to
which it relates.
SECTION 5
The memorandum accounts shall earn interest from the date amounts are
allocated to a participant's memorandum account pursuant to Section 4 through
the date of distribution. Interest shall be credited to the participant's
memorandum account on the last day or each month at a rate equal to 110 percent
of that month's yield on actively traded U.S Treasury securities issues adjusted
to a constant maturity of 10-years as published in the Federal Reserve
statistical release (Treasury Constant Maturities).
SECTION 6
The Plan Administrator shall promptly notify each participant selected by
the Compensation Committee of the Board of Directors of the Bank pursuant to
Section 1. This notice shall include certification by the Plan Administrator to
the participant as to his eligibility to participate in the Plan. At the time
the participant is notified of his eligibility to participate in the Plan, the
Plan Administrator shall furnish the participant with a copy of the
<PAGE>
Plan. In addition, the Plan Administrator shall, annually, provide a written
accounting to each participant of all vested benefits of the participant in the
Plan.
SECTION 7
When a participant ceases to be an employee of the Bank, or an affiliate
of the Bank, his deferred compensation, together with accumulated interest
shall be distributed in annual installments over a 10-year period beginning
with the first day of the calendar year immediately following the year in
which the participant ceases to be an employee of the Bank or an affiliate of
the Bank. The Bank shall have the right to retain and withhold from the
payment of benefits, the amount of taxes required to be withheld or otherwise
be deducted and paid by the participant with respect to such payments.
Interest will continue to accrue as provided in Section 5 on the reducing
balance. The Board of Directors, in its sole discretion, may direct that a
participant upon retirement be paid immediately the entire balance of his
deferred compensation, including interest, in a lump sum.
SECTION 8
In the event a participant ceases to be an employee of the Bank and becomes
a proprietor, officer, partner, employee or otherwise becomes affiliated with
any business that is in competition with the Bank, the entire balance of his
deferred compensation, including interest, may, is directed by the Board of
Directors, in its sole discretion, be paid immediately to the participant in a
lump sum.
SECTION 9
Upon the death of a participant, prior to the expiration of the period
during which the deferred amounts are payable, the balance of his memorandum
account shall be payable to his designated beneficiary, if living, otherwise to
the participant's estate, in full within 90 days of his death. Each participant
from time to time, by signing a form furnished by the Plan Administrator, may
designate any person or persons (who may be designated concurrently,
contingently, or successively) to whom his benefits under the Plan are to be
paid if he dies before the participant receives all such benefits. A beneficiary
designation form will be effective only when the form is filed in writing with
the Plan Administrator while the participant is alive and will cancel all
beneficiary forms previously signed and filed by the participant.
SECTION 10
The Board of Directors of the Bank may, without the consent of the
participants or their beneficiaries, name or change the Plan Administrator or
amend the Plan at any time and from time to time, provided, however, that no
amendment shall divest any participant of rights to which he would have been
entitled if the Plan had been terminated on the effective date of such
amendment.
SECTION 11
No participant shall have the right to assign, pledge or otherwise dispose
of any undistributed balance in his account, nor shall the participant's
interest therein be subject to garnishment, attachment, transfer by operation of
law, or any legal process, nor shall any person entitled to receive cash or
remaining undistributed installments thereof, which become distributable after
the death of a participant in accordance with Section 9, have the right to
assign or pledge any undistributed balance in the account.
SECTION 12
The validity, construction, performance and effect of the Plan shall be
governed by Michigan law.
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this Plan to be executed in its
name and on its behalf effective as of July 19, l995.
THE PEOPLES STATE BANK OF ST. JOSEPH
By: ________________________________________
ARNOLD L. WEAVER, PRESIDENT
ATTEST:
____________________________________________
DONALD E. RADDE, EXECUTIVE VICE-PRESIDENT
<PAGE>
KPMG/Exhibit 23(d)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
The Board of Directors
Pinnacle Financial Services, Inc.:
We consent to the use of our reports included herein (or incorporated herein by
reference) and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 10, 1997
<PAGE>
E&Y/Exhibit 23(e)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Joint Proxy Statement of Pinnacle Financial Services, Inc. and Indiana
Federal Corporation, which is referred to and made a part of this Prospectus
and Registration Statement (Form S-4) of Pinnacle Financial Services, Inc.
for the registration of 5,004,220 shares of its common stock and to the
incorporation by reference of our report dated March 14, 1996, with respect
to the consolidated financial statements of Indiana Federal Corporation,
incorporated by reference in its Annual Report (Form 10-K) for the year ended
December 31, 1995, filed with the Securities and Exchange Commission.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-66618) pertaining to the 1986 Stock Option and
Incentive Plan of Indiana Federal Corporation of our report dated March 14,
1996, with respect to the consolidated financial statements of Indiana
Federal Corporation incorporated by reference in the Annual Report (Form
10-K) for the year ended December 31, 1995.
ERNST & YOUNG LLP
Chicago, Illinois
January 10, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement of Pinnacle Financial
Services, Inc. on Form S-4, of our report dated October 20, 1995 on the 1995
consolidated financial statements of Maco Bancorp, Inc. We also consent to the
reference to us under the heading "Experts" in the Prospectus which is part of
this Registration Statement.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 9, 1996
<PAGE>
Exhibit 99(c)
ABN AMRO
Chicago Corporation
CONSENT OF ABN AMRO CHICAGO CORPORATION
We hereby consent to the use of the form of our opinion letter to the Board
of Directors of Pinnacle Financial Services, Inc. included as Annex B to the
Joint Proxy Statement/Prospectus relating to the proposed merger of Pinnacle
Financial Services, Inc. and Indiana Federal Corporation and to the references
to our firm and such opinion in such Joint Proxy Statement/Prospectus. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we thereby admit that we are experts with respect to any part
of such Registration Statement within the meaning of the term "experts" as used
in the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
ABN AMRO Chicago Corporation
January 13, 1997
<PAGE>
Exhibit 99(d)
CONSENT OF SANDLER O'NEILL & PARTNERS, L.P.
We hereby consent to the use of our opinion letter to the Board of
Directors of Pinnacle Financial Services, Inc. included as Annex C to the Joint
Proxy Statement/Prospectus relating to the proposed merger of Pinnacle Financial
Services, Inc. and Indiana Federal Corporation and to the references to our firm
and such opinion in such Joint Proxy Statement/Prospectus. In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we thereby admit that we are experts with respect to any part
of such Registration Statement within the meaning of the term "experts" as used
in the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Sandler O'Neill & Partners, L.P.
January 13, 1997
<PAGE>
Exhibit 99(e)
[FRONT SIDE OF PROXY]
PROXY PINNACLE FINANCIAL SERVICES, INC. PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON ________, ________, 1997
The Stockholder executing this Proxy appoints Richard L. Schanze, Arnold L.
Weaver, David W. Kolhagen, and John A. Newcomer, or any of them, each with the
power to appoint his substitute, attorneys and proxies to represent the
Stockholder and to vote and act with respect to all shares of common stock, no
par value per share, of Pinnacle Financial Services, Inc. ("Pinnacle") that the
Stockholder would be entitled to vote on all matters which come before the
Special Meeting of Stockholders of Pinnacle referred to above (the "Special
Meeting") and at any adjournment(s) or postponement(s) of the Special Meeting.
PLEASE MARK, SIGN AND DATE THIS PROXY.
RETURN THIS PROXY PROMPTLY USING THE ENCLOSED POSTAGE PAID RETURN ENVELOPE
(Continued and to be signed on reverse side.)
<PAGE>
[BACK SIDE OF PROXY]
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL THAT
FOLLOWS:
Approval and adoption of (a) the Agreement and Plan of Merger dated as of
November 14, 1996 (the "Merger Agreement"), between Pinnacle Financial
Services, Inc. and Indiana Federal Corporation ("IFC"), and (b) all of the
transactions contemplated by the Merger Agreement (including, without
limitation, the merger of IFC with and into Pinnacle (the "Merger"), with
Pinnacle being the surviving corporation, and the issuance of shares of
common stock, no par value per share, of Pinnacle ("Pinnacle Common Stock")
to holders of common stock, $.01 par value per share, of IFC ("IFC Common
Stock"). Upon consummation of the Merger, each issued and outstanding
share of IFC Common Stock will be converted into one (1) share of Pinnacle
Common Stock.).
/ / FOR / / AGAINST / / ABSTAIN
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PINNACLE
FINANCIAL SERVICES, INC. IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES OF
PINNACLE COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF
NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE ABOVE PROPOSAL. THE
SHARES OF PINNACLE COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
DISCRETION OF THE PROXIES ON ANY OTHER MATTERS WHICH MAY COME BEFORE THE SPECIAL
MEETING.
The undersigned Stockholder hereby (i) revokes any and all proxies
previously executed with respect to the Special Meeting, and (ii) acknowledges
receipt of the notice and proxy statement for the Special Meeting.
Signature(s)
-----------------------------
-----------------------------
Please sign exactly as name appears
on this proxy. When shares are
held by joint tenants, both should
sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such. If a corporation, please
sign in full corporate name by an
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
Dated: , 1997
--------------------
<PAGE>
Exhibit 99(f)
[FRONT SIDE OF PROXY]
INDIANA FEDERAL CORPORATION
PROXY PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON _____, ________, 1997
The Stockholder executing this Proxy appoints __________, __________,
__________, and __________, or any of them, each with the power to appoint his
substitute, attorneys and proxies to represent the Stockholder and to vote and
act with respect to all shares of common stock, $.01 par value per share, of
Indiana Federal Corporation ("IFC") that the Stockholder would be entitled to
vote on all matters which come before the Special Meeting of Stockholders of IFC
referred to above (the "Special Meeting") and at any adjournment(s) or
postponement(s) of the Special Meeting.
PLEASE MARK, SIGN AND DATE THIS PROXY.
RETURN THIS PROXY PROMPTLY USING THE ENCLOSED POSTAGE PAID RETURN ENVELOPE
(Continued and to be signed on reverse side)
<PAGE>
[BACK SIDE OF PROXY]
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL THAT FOLLOWS:
Approval and adoption of (a) the Agreement and Plan of Merger dated as of
November 14, 1996 (the "Merger Agreement"), between Pinnacle Financial Services,
Inc. ("Pinnacle") and Indiana Federal Corporation, and (b) all of the
transactions contemplated by the Merger Agreement (including, without
limitation, the merger of IFC with and into Pinnacle (the "Merger"), with
Pinnacle being the surviving corporation, and the issuance of shares of common
stock, no par value per share, of Pinnacle ("Pinnacle Common Stock") to holders
of common stock, $.01 par value per share, of IFC ("IFC Common Stock"). Upon
consummation of the Merger, each issued and outstanding share of IFC Common
Stock will be converted into one (1) share of Pinnacle Common Stock.).
/ / FOR / / AGAINST / / ABSTAIN
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF INDIANA
FEDERAL CORPORATION. IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES OF IFC
COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE ABOVE PROPOSAL. THE
SHARES OF IFC COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
DISCRETION OF THE PROXIES ON ANY OTHER MATTERS WHICH MAY COME BEFORE THE SPECIAL
MEETING.
The undersigned Stockholder hereby (i) revokes any and all proxies
previously executed with respect to the Special Meeting, and (ii) acknowledges
receipt of the notice and proxy statement for the Special Meeting.
Signatures(s)
----------------------------------------
Please sign exactly as name appears on
this proxy. When shares are held by
joint tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by an authorized
officer. If a partnership, please sign
in partnership name by authorized
person.
Dated , 1997
-------------------------
