<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 130 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________________ to _________________
Commission file number #0-17937
PINNACLE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2671129
(State of Incorporation) (I.R.S. Employer Identification No.)
830 Pleasant Street, St. Joseph, Michigan 49085
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 983-6311
Indicate by check mark whether the registrant (1) has filed all reports
required to be by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of March 31, 1997 the number of shares of the registrant's common stock,
no par value per share, outstanding was 5,980,320.
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
FORM 10-Q
March 31, 1997
TABLE OF CONTENTS PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1997; March 31, 1996; December 31, 1996 3
Consolidated Statements of Income
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997, 1996, and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
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<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) 3/31/97 3/31/96 12/31/96
(UNAUDITED) (UNAUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 25,904 $ 23,229 $ 30,290
Federal funds sold - - 15,750
--------- --------- ---------
Total cash and cash equivalents 25,904 23,229 46,040
Interest-bearing deposits with financial institutions 2,016 423 3,223
Securities available-for-sale:
Taxable 392,775 313,174 350,685
Tax -exempt 20,150 19,652 21,472
Loans, net of unearned income:
Real estate 270,566 272,876 276,941
Commercial 216,275 171,820 210,315
Tax -exempt 8,121 2,774 8,196
Consumer 120,062 95,672 114,112
--------- --------- ----------
Subtotal Loans 615,024 543,142 609,564
Less allowance for loan losses 5,651 5,803 5,643
--------- --------- ----------
Net loans 609,373 537,339 603,921
Premises and equipment, net 12,923 12,449 12,686
Accrued interest receivable and other assets 34,650 29,205 31,094
----------- --------- -----------
Total assets $ 1,097,791 $ 935,471 $ 1,069,121
----------- --------- -----------
----------- --------- -----------
LIABILITIES:
Deposits:
Noninterest bearing demand $ 62,080 $ 50,152 $ 78,365
Interest-bearing demand 76,250 75,329 76,665
Savings 272,663 260,180 261,997
Time 346,929 330,998 344,242
----------- --------- -----------
Total deposits 757,922 716,659 761,269
Federal Home Loan Bank advances 180,455 104,108 159,489
Securities sold under repurchase agreements and
other borrowings 78,819 34,640 65,872
Accrued interest payable and other liabilities 5,305 6,566 4,442
----------- --------- -----------
Total liabilities 1,022,501 861,973 991,072
STOCKHOLDERS' EQUITY:
Common Stock; no par value; 15,000,000 shares
authorized; 5,980,320 shares issued and
outstanding at March 31, 1997; 5,977,548 shares
issued and outstanding at December 31, 1996; and
5,873,358 shares issued and outstanding at
March 31, 1996 19,110 19,110 19,110
Additional paid in capital 44,574 43,915 44,526
Retained earnings 16,354 11,803 14,789
Net unrealized (loss) on securities
available-for-sale (4,748) (1,330) (376)
----------- --------- -----------
Total stockholders' equity 75,290 73,498 78,049
----------- --------- -----------
Total liabilities and stockholders' equity $ 1,097,791 $ 935,471 $ 1,069,121
----------- --------- -----------
----------- --------- -----------
</TABLE>
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<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
(Dollars in thousands, except per share data) 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 13,025 $ 11,577
Tax-exempt 122 44
Interest and dividends on securities:
Available-for-sale
Taxable 6,571 4,767
Tax-exempt 273 264
Interest on federal funds sold 43 90
Interest on interest-bearing deposits with financial institutions 31 416
--------- ---------
Total interest income 20,065 17,158
INTEREST EXPENSE:
Interest on deposits 7,747 7,399
Interest on Federal Home Loan Bank advances 2,524 1,470
Interest on securities sold under repurchase and other borrowings 744 420
--------- ---------
Total interest expense 11,015 9,289
--------- ---------
Net interest income 9,050 7,869
Provision for loan losses 235 80
--------- ---------
Net interest income, after provision for loan losses 8,815 7,789
--------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 750 451
Trust income 165 144
Securities gains and losses, net 59 234
Other income 917 755
--------- ---------
Total noninterest income 1,891 1,584
NONINTEREST EXPENSES:
Salaries and benefits 2,765 2,522
Occupancy expense 611 522
Equipment expense 421 380
FDIC insurance premiums 96 219
Other expense 2,296 2,108
--------- ---------
Total noninterest expenses 6,189 5,751
--------- ---------
Income before federal income tax expense 4,517 3,622
Income tax expense 1,547 1,178
--------- ---------
Net income $ 2,970 $ 2,444
--------- ---------
--------- ---------
Net income per common share $ 0.50 $ 0.42
--------- ---------
--------- ---------
Weighted average shares outstanding 5,978,640 5,873,358
--------- ---------
--------- ---------
Cash dividends declared per common share $ 0.24 $ 0.19
--------- ---------
--------- ---------
</TABLE>
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<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON SECURITIES
COMMON PAID-IN RETAINED AVAILABLE-FOR
(Dollars in thousands) STOCK CAPITAL EARNINGS SALE TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 19,110 44,174 10,475 1,137 74,896
Net income - - 2,444 - 2,444
Common stock issuance, net of stock offering costs - (259) - - (259)
Cash dividends declared, $.19 per share - - (1,116) - (1,116)
Change in unrealized losses for securities
available-for-sale, net of tax effect of $(1,271) - - - (2,467) (2,467)
------ ------- ------- ------- --------
BALANCE, MARCH 31, 1996 19,110 43,915 11,803 (1,330) 73,498
Net income - 6,708 - 6,708
Common stock issuance - 611 - - 611
Cash dividends declared, $.63 per share - (3,722) - (3,722)
Change in unrealized gains for securities
available-for-sale, net of tax effect of $466 - - 954 954
------ ------- ------- ------- --------
BALANCE, DECEMBER 31, 1996 19,110 44,526 14,789 (376) 78,049
Net income - 2,970 - 2,970
Common stock issuance - 48 - - 48
Cash dividends declared, $.235 per share - (1,405) - (1,405)
Change in unrealized losses for securities
available-for-sale, net of tax effect of $(2,868) - - - (4,372) (4,372)
------ ------- ------- ------- --------
BALANCE, MARCH 31, 1997 19,110 44,574 16,354 (4,748) 75,290
------ ------- ------- ------- --------
------ ------- ------- ------- --------
</TABLE>
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<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,970 $ 2,444
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 646 467
Net amortization on loans and securities 231 440
Provision for loan losses 235 80
Deferred federal income taxes - 83
Mortgage loans originated for sale (22,566) (15,221)
Proceeds from sales of loans 15,172 24,798
Gain on sale of securities, net (59) (234)
Gain on sale of loans, net (177) (196)
Increase in interest receivable and other assets (1,027) 493
Increase in interest payable and other liabilities 863 270
-------- ------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (3,712) 13,424
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans, excluding loan sales,
purchases, and originated for sale 6,423 (28,738)
Purchases of loans (4,684) (5,834)
Purchases of securities available-for-sale (70,934) (81,750)
Proceeds from sales of securities available-for-sale 17,443 23,045
Proceeds from maturities and paydowns of securities
available-for-sale 5,478 9,846
Proceeds from maturities and paydowns of securities
held-to-maturity - -
Net increase in interest-bearing deposits with financial
institutions 1,207 41,088
Capital expenditures (566) (161)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (45,633) (42,504)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (3,347) 13,559
Net increase in securities sold under repurchase agreements
and other borrowings 33,913 11,594
Common stock issued 48 (259)
Dividends paid (1,405) (1,116)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,209 23,778
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (20,136) (5,302)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 46,040 28,531
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,904 $ 23,229
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 17,805 $ 9,231
Federal income taxes paid $ 100 $ 870
Loans transferred to other real estate owned $ 720 $ 75
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Pinnacle Financial Services, Inc. (together with its subsidiary, the
"Company") have been prepared in conformity with generally accepted
accounting principles for interim financial information and with the
instruction for Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all necessary adjustments (consisting of
normal recurring adjustments) considered necessary for a fair
presentation have been included. The operating results for the three
month period ended March 31, 1997 are not necessarily indicative of the
results to be expected for the year ending December 31, 1997.
For further information, refer to the consolidated financial statements
and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 as filed with the Securities
and Exchange Commission.
NOTE 2: ACCOUNTING FOR IMPAIRED LOANS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standard SFAS No. 114 (as amended by SFAS No. 118), "Accounting
by Creditors for Impairment of a Loan".
Impaired loans under SFAS 114 and SFAS 118 are nonaccrual loans and
restructured loans. All nonaccrual loans are considered as impaired
loans. Additionally, loans are considered impaired if principal and/or
interest is considered at risk, even if the loan is current with all
payments of principal and interest. Impaired loans follow the same
criteria as other loans with valuation reserves established at the
period deemed to be impaired.
Nonperforming loans are comprised of loans which the accrual of
interest has been discontinued, loans contractually past due 90 days or
more as the interest and/or principal and not included in nonaccrual
loans. Loans are generally placed on a nonaccrual basis when, in the
opinion of management, collection of principal or interest payments is
unlikely. Income on such loans is then recognized only to the extent
that cash is received and where future collection of principal is
probable.
NOTE 3: ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES
The Financial Accounting Standards Board has issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" which is effective, in part, for
transactions occurring after December 31, 1996. This statement provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial components approach that focuses on control.
The Company adopted this statement on January 1, 1997, and it did not have
a material effect on the Company's financial condition, results of
operations, or liquidity.
NOTE 4: COMMITMENTS - PROPOSED ACQUISITIONS
On November 14, 1996, the Company entered into a definitive agreement with
Indiana Federal Corporation ("IFC") which will add approximately $837
million in total assets. The transaction is contemplated as a merger
of equals through the issuance of one share of Pinnacle Common Stock
for each share of IFC Common Stock and it is anticipated to be
accounted for using the pooling of interests method. The acquisition,
subject to shareholder and regulatory approval is scheduled to close in
the third quarter of 1997.
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<PAGE>
On March 3, 1997, the Company announced the execution of a definitive
agreement to acquire CB Bancorp, Inc. ("CB") of Michigan City, Indiana,
which will add approximately $227 million in total assets. The fixed
purchase price is equal to $35.00 per CB share, payable in shares of
Pinnacle Common Stock. If the Company's average stock price exceeds
$29.00, CB shareholders will receive 1.2069 shares of Pinnacle Common
Stock for each share of CB Common Stock. If the Company's average stock
price is less than $23.00 per share, CB shareholders will receive 1.5217
shares of Pinnacle Common Stock for each share of CB Common Stock. The
acquisition, subject to shareholder and regulatory approval, is expected
to close in the third quarter of 1997 and is anticipated to be accounted
for using the pooling of interests method.
NOTE 5: PER COMMON SHARE DATA
Earnings per share are calculated by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents are calculated
using the treasury stock method.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides information regarding the financial
condition and results of operations of Pinnacle Financial Services, Inc. (the
"Company" or "Pinnacle") for the three month period ended March 31, 1997
and are not necessarily indicative of results to be attained for any other
period. This discussion should be read in conjunction with the consolidated
financial statements, results of operations and related notes and with the
statistical information and financial data appearing in this report as well
as the 1996 Annual Report on Form 10-K of Pinnacle Financial Services, Inc.
DESCRIPTION OF THE COMPANY
Pinnacle Financial Services, Inc. is a registered bank holding company that
was organized under the laws of the State of Michigan in 1986 in connection
with the June 30, 1986 reorganization of Pinnacle Bank, a Michigan state
banking corporation then known as "The Peoples State Bank of St. Joseph"
("Pinnacle Bank"), into a wholly-owned subsidiary of Pinnacle. Pinnacle is
one of the leading full-service community-banking institutions in
southwestern Michigan and northern Indiana. Pinnacle's principal executive
offices are located at 830 Pleasant Street, St. Joseph, Michigan 49085, and
its telephone number is (616) 983-6311.
Through Pinnacle Bank, Pinnacle offers financial service products which
include domestic banking services such as consumer, commercial and real
estate loans, personal and business checking accounts, savings accounts, time
deposits, safe deposit services, cash management services, and transmission
of funds, as well as trust and other fiduciary services, full-service
brokerage services and insurance products. Commercial customers include
retailers, commercial developers, professionals, and small manufacturers.
Retail banking and thrift customers cover a broad spectrum with focus on
providing personalized, high quality and comprehensive service in order to
develop and maintain long-term, multiple account relationships with customers.
Pinnacle Bank, which is headquartered in St. Joseph, Michigan, has two
non-bank subsidiaries: Starke's, Inc., an insurance agency, and Brookview
Real Estate, Ltd., a real estate development company. Pinnacle Bank
currently operates through 16 branch offices located throughout southwestern
Michigan, 14 branch offices located throughout northern Indiana, and two loan
production offices that are located in Merrillville and Indianapolis,
Indiana, respectively. Pinnacle Bank focuses on providing personalized, high
quality and comprehensive service in order to develop and maintain long-term,
multiple account relationships with customers.
Pinnacle's market, which is adjacent to metropolitan Chicago, Illinois and is
bisected by Interstate 94 (the primary highway between Chicago and Detroit),
currently consists of northern Indiana and southwestern Michigan, The region's
location has facilitated the development of a diverse economy based
primarily on manufacturing, service and agriculture. The region's proximity
to Chicago and the southeastern expansion of metropolitan Chicago into Lake
County, Indiana, have led to significant commercial and residential
development and a strong second-home housing market. The region's popularity
as a year-round recreational area also has led to tourism-driven economic
growth.
Pinnacle had $1.1 billion in total assets as of March 31, 1997. Pinnacle
returned 1.14% on average assets for the first quarter of 1997 as compared to
1.05% for the same period of 1996.
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<PAGE>
For the first quarter of 1997, Pinnacle's return on average equity was 15.62%
as compared to 13.03% for the same period of 1996.
Pinnacle believes its success is in part attributable to a growth strategy
that, since the beginning of 1995, has (i) increased assets by more than 168%
(with total assets growing to $1.1 billion by March 31, 1997), and
(ii) increased net loans by more than 109.9% (with total loans growing to
approximately $609.4 million at March 31, 1997). Pinnacle's loan to deposit
ratio was approximately 81.1% at March 31, 1997. 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.
Through its acquisition strategy, Pinnacle seeks to diversify and expand both
its market area and its asset base, and to increase its profitability.
On December 1, 1995, Pinnacle acquired all of the outstanding capital stock
of Maco Bancorp, Inc., a Delaware corporation and a registered savings and
loan holding company ("Maco"), for aggregate consideration of $41.9 million
(the "Purchase Price"), through the merger of Maco with and into Pinnacle
(the "Maco Acquisition"). The Purchase Price, which was paid to Mr. Cyrus
Ansary as the sole stockholder of Maco, consisted of cash, a secured,
short-term, interest bearing promissory note in the principal amount of $18.0
million (the "Acquisition Note"), and shares of Pinnacle Common Stock then
valued at approximately $21.0 million. As a result of the Maco Acquisition,
Pinnacle became the sole stockholder of First Federal Savings Bank of
Indiana, a federal savings bank that was renamed, "Pinnacle Bank" in 1996 and
was merged with and into Pinnacle Bank effective December 31, 1996, and Mr.
Ansary became the largest single Pinnacle stockholder. Mr. Ansary currently
holds approximately 20% of the shares of Pinnacle Common Stock outstanding.
(In connection with the Maco Acquisition, Mr. Ansary and Pinnacle entered
into certain agreements, including a Standstill Agreement dated as of
December 1, 1995 (the "Standstill Agreement"). The Standstill Agreement
obligates Mr. Ansary, through December 31, 1999 (unless it is sooner
terminated) to vote all Pinnacle voting securities of which he is the
beneficial owner in accordance with the written directions of Pinnacle's
management.)
As a result of 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
independent "full-line" insurance agency. On December 31, 1996, First
Insurance, Inc. was merged with and into Starke's, Inc.
On November 14, 1996, Pinnacle entered into an Agreement and Plan of Merger
with Indiana Federal Corporation, a Delaware corporation and a registered
savings and loan holding company ("IFC"). On March 1, 1997 Pinnacle
entered into an Agreement and plan of Merger with CB Bancorp, Inc., a
Delaware corporation and a registered savings and loan holding company
("CB"). The agreements contemplate the merger of each of IFC and CB with and
into Pinnacle, with Pinnacle being the surviving entity. These transactions
are expected to qualify as "pooling of interests" for accounting and
financial reporting purposes and to increase the total assets of Pinnacle by
more than $1.0 billion. Consummation of these transactions is subject to
shareholder and regulatory approval.
In addition to expansion through acquisitions, Pinnacle may consider
establishing branch facilities as a means of expanding its presence into new
market areas. Pinnacle may also consider expanding into businesses closely
related to its banking activities. Closely related businesses that Pinnacle
could acquire or organize include, among others, mortgage lending, mortgage
servicing, investment and financial advisory services, leasing, insurance,
data processing, management consulting to depository institutions, and
courier services.
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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 strategy to achieve growth will be successful.
OVERVIEW AND FINANCIAL CONDITION
NET INCOME. For the three months ended March 31, 1997, the Company reported
net income of approximately $3.0 million or $.50 per share, as compared to
net income of approximately $2.4 million, or $.42 per share for the three
months ended March 31, 1996, an increase in net income of 21.5% and 19.4% on
a per share basis. The increase in net income was largely the result of
higher levels of net interest income associated with higher levels of earning
assets, as average earning assets grew by $126.3 million or 14.4% in the
first quarter of 1997 as compared to the first quarter of 1996.
Presented below is an income statement analysis, expressed on a per-share
basis, comparing the quarter and three months ended March 31, 1997, to the
same period in 1996. A more detailed discussion and analysis of the major
factors outlined below is provided in following sections of this report.
QUARTER
-------
Net income per-share - Period ended March 31, 1996 $ .42
Pre-tax increase (decrease) in 1997, as compared to 1996
resulting from changes in:
Net interest income (taxable equivalent) .20
Provision for loan losses (.03)
Noninterest income .05
Noninterest expense (.08)
-----
Pre-tax increase .14
Income tax expense (.06)
----
Net income per share - Period ended March 31, 1997 $ .50
----
----
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<PAGE>
BALANCE SHEET. Total assets at March 31, 1997 and at December 31, 1996 were
approximately $1.1 billion. Total assets at March 31, 1996 were $935.5
million. Average earning assets equaled 94.3% of total average assets at
March 31, 1997 as compared to 94.1% of total average assets at December 31,
1996 and at March 31, 1996. The following table summarizes the components of
Pinnacle's total assets, loans, net, total deposits and stockholders' equity
for the time periods indicated.
OVERVIEW AND FINANCIAL HIGHLIGHTS
At March 31, At March 31, At December 31,
1997 1996 1996
------------ ------------ --------------
(dollars in thousands)
Total assets $1,097,791 $935,471 $1,069,121
Loans, net 609,373 537,339 603,921
Deposits 757,922 716,659 761,269
Stockholders' equity 75,290 73,498 78,049
Loans, net, at March 31, 1997 were approximately $609.4 million, which was
$5.5 million greater than loans, net, at December 31, 1996 of $603.9 million.
Commercial and tax exempt loans grew $5.9 million, or 2.7%, to $224.4 million
at March 31, 1997 as compared to the December 31, 1996 total of $218.5
million. Consumer loans, consisting primarily of home equity loans, were
$120.1 million at March 31, 1997, an increase of $6.0 million, or 5.3%, over
the December 31, 1996 total of $114.1 million. Real estate loans declined
$6.3 million, or 2.3%, to $270.6 million at March 31, 1997 from $276.9
million at December 31, 1996. The decline in real estate loans during the
first quarter of 1997 reflects management's decision to reduce Pinnacle's
level of real estate loans as a percentage of total loans outstanding. This
reduction was accomplished through the sale of originated loans in the
secondary market.
Loans, net, at March 31, 1997 were approximately $72.1 million greater than
loans, net, at March 31, 1996 of $537.4 million, reflecting Pinnacle's greater
emphasis on commercial and consumer lending in its Indiana markets following
its December 1995 acquisition of Maco Bancorp, Inc. Commercial and tax exempt
loans grew $49.8 million to $224.4 million at March 31, 1997 or 28.5% over
the March 31, 1996 total of $174.6 million. Consumer loans (which consisted
primarily of home equity loans) were $120.1 million at March 31, 1997, an
increase of $24.4 million and 25.6% over the March 31, 1996 total of
$95.7 million. Real estate loans at March 31, 1997 totaled $270.6 million as
compared to $272.9 million at March 31, 1996.
Total deposits at March 31, 1997 were $757.9 million as compared to $761.3
million at December 31, 1996 and $716.7 million at March 31, 1996. The
decrease in total deposits since December 31, 1996 reflects a seasonal change
in the composition of deposits as demand deposits shifted to other types of
deposits after year end 1996. This change in composition is reflected in a
$16.3 million decrease in noninterest bearing demand deposits (to $62.1
million), a $10.7 million increase in savings deposits (to $272.7 million)
and a $2.7 million increase in time deposits (to $346.9 million). The growth
in deposits since March 31, 1996 resulted from an $11.9 million increase in
noninterest bearing deposits, a $12.5 million increase in savings deposits
and a $15.9 million increase in time deposits.
Federal Home Loan Bank advances, securities sold under repurchase agreements
and other borrowings were approximately $259.3 million at March 31, 1997, as
compared to $225.4 million at December 31, 1996 and $138.7 million at March
31, 1996. These increases reflect the use of these funding sources to match
specific investment securities purchases with like maturities or pricing
terms and to fund strong loan growth during 1996.
Stockholders' equity was approximately $75.3 million at March 31, 1997, as
compared to $78.0 million at December 31, 1996 and $73.5 million at March 31,
1996. The decrease in stockholders' equity since December 31, 1996 resulted
from changes in the market values of securities available-for-sale. The
increase in stockholders' equity since March 31, 1996 reflects net income
earned since that date (offset by dividends paid and increased net unrealized
losses on securities available-for-sale). Such net unrealized losses
increased from an unrealized loss of $1.3 million at March 31, 1996 to an
unrealized loss of $4.7 million at March 31, 1997.
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<PAGE>
Pinnacle follows two key financial performance measures. Pinnacle's return
on average equity measures how profitably the stockholders invested capital
has been deployed. Pinnacle's return on average equity was 15.62% for the
first quarter of 1997 compared to 13.03% for the first quarter of 1996.
Return on average assets measures how profitably the total assets of Pinnacle
are invested. Return on average assets was 1.14% for the first quarter of
1997 compared to 1.05% for the first quarter of 1996.
The Company recognizes the importance of maximizing the use of capital to
provide improved returns to our stockholders. This has been accomplished in
the past by way of growth through acquisition of other financial
institutions. While it is management s intention to seize upon favorable
opportunities which may arise with respect to community banks or other
financial institutions in the future, at the present time there are no
ongoing negotiations for any acquisitions.
Pinnacle's most recent acquisitions occurred on December 1, 1995 when the
Company acquired Maco Bancorp and its subsidiaries of First Federal Savings
Bank of Indiana, Brookview Real Estate, and First Insurance, Inc.,
headquartered in Merrillville, Indiana and October 1, 1996 with the
acquisition of Starke's. Inc., a Michigan corporation and an independent
"full-line" insurance agency. In addition, two acquisitions are pending. On
November 14, 1996, Pinnacle entered into an Agreement and Plan of Merger
with Indiana Federal Corporation ("IFC"), a Delaware corporation and a
registered savings and loan holding company. On March 1, 1997, Pinnacle
entered into an Agreement and Plan of Merger with CB Bancorp, Inc., a
Delaware corporation and a registered savings and loan holding company
("CB"). The agreements contemplate the merger of each of IFC and CB with and
into Pinnacle with Pinnacle being the surviving entity and is expected to
close in the second quarter.
RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended March 31, 1997 was
approximately $3.0 million, a 21.5% increase as compared to net income of
$2.4 million for the same period in 1996. This increase was largely the
result of higher levels of net interest income associated with higher levels
of earning assets.
NET INTEREST INCOME. Net interest income is Pinnacle's primary source of
earnings and represents the excess of interest earned on earning assets over
interest expense associated with the deposits and other funding sources used
to finance those assets. Net interest income is influenced primarily by
changes in the volume and mix of earning assets and sources of funding and
market rates of interest. Other external factors, such as the strength of
credit demands by customers, liquidity and maturity preferences of deposit
customers, and governmental monetary policy, also can have a significant
impact on earnings.
-13-
<PAGE>
The following table sets forth certain information with respect to Pinnacle's
consolidated net interest income for the three months ended March 31, 1997,
1996 and 1995.
SUMMARY OF CONSOLIDATED NET INTEREST INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS -
Federal funds sold $ 3,244 $ 43 5.38% $ 6,858 $ 90 5.28% $ 1,169 $ 17 5.85%
Interest-bearing deposits
with financial institutions 3,198 31 3.93% 29,298 416 5.71% 1,144 15 5.27%
U.S. Treasury and
government agencies 272,916 4,988 7.41% 178,670 2,952 6.65% 56,450 920 6.55%
Other securities (2) 114,146 1,975 7.02% 136,157 2,194 6.48% 47,423 780 6.62%
Loans (1) (2) 608,045 13,201 8.80% 524,245 11,641 8.93% 295,910 6,731 9.15%
----------------------------------------------------------------------------------------
Total interest-earning assets 1,001,549 20,238 8.19% 875,228 17,293 7.95% 402,096 8,463 8.47%
----------------------------------------------------------------------------------------
Cash and due from banks 22,647 20,416 12,801
Premises and equipment, net 12,846 12,581 6,984
Allowance for loan losses (5,629) (5,849) (5,009)
Other assets 30,663 27,857 10,033
-------------------------------------------------------------------------------------------
Total assets $1,062,076 $20,238 $930,233 $17,293 $426,905 $8,463
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing demand $ 75,992 $ 363 1.94% $ 75,711 $ 397 2.11% $ 44,836 $ 212 1.90%
Savings and money
market accounts 269,610 2,511 3.78% 257,923 2,370 3.70% 134,132 1,355 4.06%
Time deposits of
$100,000 or more 66,198 918 5.62% 44,783 632 5.68% 21,778 299 5.52%
Other time deposits 285,288 3,955 5.62% 283,217 4,000 5.68% 115,646 1,448 5.04%
------------------------------------------------------------------------------------------
Total interest-bearing deposits 697,088 7,747 4.51% 661,634 7,399 4.50% 316,392 3,314 4.21%
------------------------------------------------------------------------------------------
Federal Home Loan Bank advances 173,404 2,524 5.90% 102,486 1,470 5.77% 16,000 214 5.38%
Federal funds purchased and
and securities sold 58,605 744 5.15% 36,748 420 4.60% 19,465 332 6.86%
Total interest-bearing
liabilities 929,097 11,015 4.81% 800,868 9,289 4.66% 351,857 3,860 4.41%
------------------------------------------------------------------------------------------
Noninterest-bearing deposits 51,245 47,842 36,770
Other liabilities 4,432 6,315 2,733
------------------------------------------------------------------------------------------
Total liabilities 984,774 855,025 391,360
Stockholders' equity 77,302 75,208 35,545
------------------------------------------------------------------------------------------
Total liabilities and $426,905
stockholders' equity $1,062,076 $ 930,233 $426,905
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Net interest income $ 9,223 $ 8,004 $4,603
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Net interest rate margin (3) 3.73% 3.68% 4.60%
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of these computations, nonaccrual loans and unearned income
are included in the daily average loan amounts outstanding.
(2) Income from state and political subdivisions securities and loans are
stated on a tax equivalent basis.
(3) Net interest rate margin is equal to total interest income less total
interest expense divided by total average earning assets.
-14-
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have
effected Pinnacle's interest income and expense during the periods indicated.
For each category of interest-earnings assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in volume (change in volume multiplied by prior year rate), (ii) changes in
rate (change in rate multiplied by prior year volume), (iii) changes in
volume and rate combined (change in rate multiplied by change in volume), and
(iv) total change in rate and volume.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
- ----------------------------------------------------------------------------------------------------------
1997/1996 1996/1995
Change in Interest Due to: Change in Interest Due to:
- ----------------------------------------------------------------------------------------------------------
Rate & Net Rate & Net
(Dollars in thousands) Volume Rate Volume Change Volume Rate Volume Change
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ (191) $ 7 $ 137 $ (47) $ 333 $ (7) $ (253) $ 73
Interest-bearing deposits
with financial institutions (1,491) (521) 1,627 (385) 1,485 5 (1,089) 401
U.S. Treasury and
government agencies 6,263 1,371 (5,598) 2,036 8,011 51 (6,030) 2,032
Other securities (1) (1,427) 730 478 (219) 5,870 (64) (4,392) 1,414
Loans (1) 7,484 (661) (5,263) 1,560 20,890 (644) (15,336) 4,910
-----------------------------------------------------------------------
Total interest-earning
assets $10,638 $ 926 $(8,619) $2,945 $36,589 $(659) $(27,100) $8,830
-----------------------------------------------------------------------
-----------------------------------------------------------------------
LIABILITIES
Interest-bearing demand $ 6 $ (130) $ 90 $ (34) $ 587 $ 93 $ (495) $ 185
Savings and money market
accounts 432 210 (501) 141 5,030 (493) (3,522) 1,015
Time deposits of $100,000
or more 1,216 (23) (907) 286 1,270 34 (971) 333
Other time deposits 118 (165) 2 (45) 8,439 745 (6,632) 2,552
-----------------------------------------------------------------------
Total interest-bearing
deposits 1,772 (108) (1,316) 348 15,326 379 (11,620) 4,085
-----------------------------------------------------------------------
Federal Home Loan Bank
advances 4,091 138 (3,175) 1,054 4,652 62 (3,458) 1,256
Federal funds purchased and 1,005 203 (884) 324 1,186 (441) (657) 88
securities sold 1,005 203 (884) 324 1,186 (441) (657) 88
-----------------------------------------------------------------------
Total interest-bearing
liabilities $6,868 $ 233 $ (5,375) $1,726 $21,164 $ - $(15,735) $5,429
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net interest income $3,770 $ 693 $(3,244) $1,219 $15,425 $ (659) $(11,365) $3,401
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(1) Income from state and political subdivisions securities and loans are stated on a tax equivalent basis.
</TABLE>
Net interest income on tax-equivalent basis was approximately $9.2 million
for the first quarter of 1997 as compared to $8.0 million for the first
quarter of 1996. The increase of 15% was due primarily to the increase in
average earning assets which grew $126.3 million or 14.4% at March 31, 1997
as compared to March 31, 1996. In addition, the net interest margin
increased slightly to 3.73% for the three months ended March 31, 1997 as
compared to 3.68% for the same period of 1996. Higher yields associated with
the increase in loans and higher yields on investments increased the yields
on interest earning assets by .24% to 8.19% for the first quarter of 1997 as
compared to 7.95% for the first quarter of 1996 while the cost of funds
increased only .15% to 4.81% in the first quarter of 1997 as compared to
4.66% in the first quarter of 1996.
-15-
<PAGE>
NONINTEREST INCOME. The following table reflects various components of
noninterest income for each time period reported.
NONINTEREST INCOME
Three Months Ended March 31,
1997 1996
----------- -----------
(Dollars in thousands)
Service charges on deposit accounts $ 750 $ 451
Trust fees 165 144
Investment services fees 52 60
Merchant and loan service fees 247 216
Recoveries on distressed assets 150 28
Gain (loss) on sale of loans, net 177 192
Investment securities gains, net 59 234
Other income 291 259
----------- -----------
Total noninterest income $ 1,891 $ 1,584
----------- -----------
----------- -----------
Noninterest income for the three months ended March 31, 1997 was
approximately $1.9 million as compared to $1.6 million for the same period in
1996. Service charges on deposit accounts increased $299,000 or 66.3% as fee
based deposit accounts were introduced in the Company's Indiana market
including a new line of checking accounts. Recoveries on distressed assets
increased from $28,000 for the first quarter ended March 31,1996 to $150,000
for the same period in 1997 while investment securities gains, net, decreased
from $234,000 in 1996 to $59,000 for the first quarter of 1997, a decrease of
$175,000.
NONINTEREST EXPENSE. The following table presents the major components of
noninterest expense for each period reported.
NONINTEREST EXPENSE
Three Months Ended March 31,
1997 1996
----------- -----------
(Dollars in thousands)
Salaries $ 2,177 $ 1,980
Benefits 588 542
----------- -----------
Total salaries and benefits 2,765 2,522
Occupancy expense 611 522
Equipment expense 421 380
Postage and delivery 179 157
Supplies 260 193
Marketing and promotion 292 224
Professional services 273 113
FDIC insurance 96 219
Amortization of intangibles 317 340
Other expense 975 1,081
----------- -----------
Total noninterest expense $ 6,189 $ 5,751
----------- -----------
Noninterest expense for the three months ended March 31, 1997 was $6.2
million as compared to $5.8 million for the same period in 1996. Total
salaries and benefits increased $243,000 or 9.6 %
-16-
<PAGE>
to $2.8 million for the three months ended March 31, 1997 as compared to the
same period for 1996. Occupancy expense increased $89,000 for the first
quarter of 1997 or 17.0% as a new short term lease was written in Indiana at
a higher cost and additional space was leased in the Michigan corporate
offices. Marketing costs also increased $68,000 for the three months ended
March 31, 1997 or 30.4% primarily related to the introduction of the new line
of checking accounts in the Indiana market. Professional services expenses
increased $160,000 in first quarter of 1997 or 141.6% as the company incurred
costs associated with a consulting firm to assist in the implementation of an
organizational structure to meet the demands of a larger institution after
the two pending mergers as well as to eliminate inefficient processes and
procedures. FDIC insurance expense decreased $123,000 for the first quarter
of 1997 or 56.2% as compared to the same period in 1996 as the improvement in
the fund balances in the Savings Association Insurance Fund was fully
capitalized in 1996 which allowed it to reduce assessments.
INCOME TAXES. Income taxes were approximately $1.5 million for the three
months ended March 31, 1997 and approximately $1.2 million for the same
period in 1996. The increase was the result of higher levels of earnings.
The effective tax rate was 34.2% for the first quarter of 1997 as compared to
32.5% for the same period in 1997 as the higher level of earnings increased
the marginal tax rate from 34% to 35% for 1997.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS. Average earning assets equaled 94.3% of total average assets
for the first quarter ended March 31, 1997 as compared to 94.1% of total
average assets during the same period in 1996. Generally, the higher earning
assets are to total assets, the greater the contribution of Pinnacle's net
interest margin to profitability.
Average loans outstanding for the first quarter of 1997 were $608.0 million
as compared to $524.2 million for the same period in 1996, an increase of
$83.8 million or 16.0%. The growth was primarily in commercial loans and
consumer home equity loans as greater emphasis and management was placed on
this type of lending in the new Indiana market entered in 1995.
Average investment securities, interest-bearing deposits with financial
institutions and fed funds sold were $393.5 million for the first quarter of
1997 as compared to $351.0 million for the same period in 1996, an
increase of $42.5 million or 12.1% as the company increased the level of
adjustable rate securities that were matched with short-term FHLB advances.
LIQUIDITY AND FUNDING. Liquidity is the ability to satisfy demands for
extensions of credit, deposit withdrawals, and other customer and operational
needs. Traditional sources of liquidity include asset maturities and core
deposit growth. Pinnacle maintains a portion of its assets in liquid form to
meet anticipated withdrawal requirements and loan demand from customers. At
March 31, 1997, cash and due from banks, federal funds sold, and money
market instruments equaled approximately $27.9 million. Additional
liquidity, is provided by the ability to borrow from the Federal Reserve Bank
and Federal Home Loan Bank of Indianapolis. As of March 31, 1997, Pinnacle
had borrowed $180.5 million from the Federal Home Loan Bank of Indianapolis
to match longer term loans and specific securities with matching maturities
and repricing features.
Pinnacle identified investment securities totaling approximately $412.9
million and $372.2 million, respectively, as being available-for-sale at
March 31, 1997 and December 31, 1996, respectively, which consequently is
available to meet liquidity needs of Pinnacle.
-17-
<PAGE>
Proceeds from the sales of securities available-for-sale amounted to $17.4
million in the first quarter of 1997 and $ 23.0 million in the same period of
1996, with resulting net gains of $59,000 and $234,000, respectively. At
March 31, 1997, net unrealized losses in Pinnacle's total security portfolio
amounted to $4.7 million and $1.3 million at March 31, 1996.
The focus of liquidity management at Pinnacle is to satisfy general operating
expenses, to service existing debt, and to take advantage of investment
opportunities which Pinnacle's management believes will result in an improved
return to stockholders. As Pinnacle is a legal entity separate and distinct
from its bank subsidiary, substantially all of Pinnacle's revenue results
from dividends paid to it by Pinnacle Bank and from earnings on investments.
Dividends paid to Pinnacle by Pinnacle Bank amounted to $1.4 million for the
first quarter of 1997 and $1.2 million for the first quarter of 1996. Under
current regulations, the amount of dividends that Pinnacle Bank can declare
in 1997 is limited to its 1997 net profits (as defined in the Federal Reserve
Act) plus retained profits for 1996 and 1995, unless regulatory approval is
obtained.
SHORT-TERM BORROWINGS. The following table shows short-term borrowings and
average interest rates for each time period reported.
SHORT-TERM BORROWINGS
For the Three Months Ended March 31,
1997 1996 1995
------------------------------------
(Dollars in thousands)
FEDERAL FUNDS PURCHASED:
Balance at end of period $ 8,000 $ 8,450 $ 9,500
Weighted average interest rate at
end of quarter 7.22% 5.97% 6.84%
Maximum amount outstanding (1) $ 18,575 $ 8,450 $ 10,400
Average amount outstanding $ 12,786 $ 2,413 $ 3,924
Weighted average interest rate
during quarter 5.85% 5.67% 6.19%
SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS:
Balance at end of period $ 70,819 $ 24,286 $ 20,791
Weighted average interest rate at
end of quarter 5.27% 3.89% 4.78%
Maximum amount outstanding (1) $ 81,581 $ 25,092 $ 24,209
Average amount outstanding $ 45,819 $ 19,698 $ 19,641
Weighted average interest rate
during quarter 4.95% 3.64% 4.87%
- ------------------
(1) Based on amount outstanding at month end during quarter
Federal Home Loan Bank advances, securities sold under repurchase agreements
and other borrowings increased $120.6 million, or 87.0%, to approximately
$259.3 million at March 31, 1997. The increase was primarily used to match
specific adjustable rate security purchases of approximately $40 million and
to match fund approximately $30 million in longer term 15 year home equity
loans.
ASSET QUALITY
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the loan loss
experience and provides a breakdown of the allowance for loan losses during
the quarters ended March 31, 1997 and 1996.
-18-
<PAGE>
LOAN LOSS ANALYSIS TABLE
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------
Loans Outstanding at end of period,
net of unearned discount $ 615,024 $ 543,142
-----------------------------
-----------------------------
Average loans for the period $ 608,045 $ 524,245
-----------------------------
-----------------------------
Allowance for loans losses,
beginning of period $ 5,643 $ 5,852
-----------------------------
Charge-offs for period:
Commercial loans 40 40
Real Estate loans - 23
Consumer loans 234 158
-----------------------------
Total charge-offs 274 221
-----------------------------
Recoveries for period:
Commercial loans - 52
Real Estate loans 8 4
Consumer loans 39 36
-----------------------------
Total recoveries 47 92
-----------------------------
Net charge-offs for the period 227 129
-----------------------------
Allowance recorded for
acquired loans - -
Provision for loan losses 235 80
-----------------------------
Allowance for loan losses,
end of period $ 5,651 $ 5,803
-----------------------------
-----------------------------
Ratio of net charge-offs during the
period to average loans
outstanding 0.04% 0.02%
-----------------------------
-----------------------------
Allocation of allowance for
loan losses:
Commercial loans $ 3,050 $ 3,181
Real Estate loans 1,354 1,456
Consumer loans 1,247 1,166
-----------------------------
Total allowance for
loan losses $ 5,651 $ 5,803
-----------------------------
-----------------------------
Percentage of loans to total
gross loans:
Commercial loans 35% 32%
Real Estate loans 44 50
Consumer loans 20 18
Economic development bonds and
other tax exempt loans 1 1
-----------------------------
Total 100% 100%
-----------------------------
-----------------------------
-19-
<PAGE>
For the three months ended March 31, 1997, the provision for loan losses
totaled $235,000 as compared to $80,000 for the same period in 1996. The
increase was attributable mainly to loan growth and an increase in net
charge-offs primarily in consumer loans and lower levels of recoveries in
real estate loans of $98,000 in the first quarter as compared to the first
quarter of 1996. Pinnacle management believes the increase in provision for
loan losses is primarily from the lending emphasis changing to commercial and
home equity lending which generally carry higher reserve provisions and not
to any general decline in credit quality.
The allowance for loan losses totaled approximately $5.7 million at March 31,
1997 as compared to approximately $ 5.8 million at March 31, 1996 and the
allowance as a percentage of total loans was .92% and 1.07% respectively, for
such dates indicated. The allowance for loan losses has been allocated
according to the amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the above categories of loans at
the dates indicated. The allowance is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in management's
opinion, is adequate to absorb losses in the existing portfolio. In
evaluating the portfolio, management takes into consideration numerous
factors, including current economic conditions, prior loss experience, the
composition of the loan portfolio, and management's evaluation of the
collectability of specific loans.
-20-
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets include nonaccruing loans, restructured loans,
contractually past due 90 days or more but still accruing loans, and other
real estate owned. The following table presents detailed information
concerning nonperforming assets at March 31, 1997, and December 31, 1996.
March 31, December 31,
Dollars in thousands 1997 1996
- --------------------------------------------------------------------
Nonperforming assets (a):
Nonaccruing loans:
Real Estate $ 338 $ 293
Commercial 1,506 388
Other 93 80
- --------------------------------------------------------------------
Total nonaccruing loans 1,937 761
Contractually past due but still
accruing loans (a)
Real Estate 1,709 1,849
Commercial 1,731 1,773
Other 404 294
- --------------------------------------------------------------------
Total contractually past due but
still accruing loans (a) 3,844 3,916
Restructured loans 182 227
- --------------------------------------------------------------------
Total nonperforming loans 5,963 4,904
Other real estate owned 1,676 1,698
- --------------------------------------------------------------------
Total nonperforming assets 7,639 6,602
- --------------------------------------------------------------------
Nonperforming loans/loans 0.97% 0.80%
Nonperforming assets/loans and
other real estate owned 1.24% 1.08%
Reserve for possible loan
losses/nonperforming loans 94.77% 115.07%
Reserve for possible loan
losses/nonperforming assets 73.98% 85.47%
- --------------------------------------------------------------------
(a) Accruing loans past due 90 days or more.
The increase in total nonperforming loans from December 31, 1996 to March 31,
1997 is primarily due to an increase in commercial nonaccruing loans of $1.1
million.
Management's determination regarding the accrual of interest on loans that
were 90 days or more past due but still accruing is based on the availability
and sufficiency of collateral and the status of collection efforts. In the
present lending environment, certain of such loans could become nonperforming
assets and/or result in charge-offs in the future.
Management continues to focus on asset quality and its potential impact on
the provision and the reserve for possible loan losses. The Company believes
that it has responded appropriately to the current economic environment, and
is prepared to forego transactions which do not meet it quality standards.
-21-
<PAGE>
Effective January 1, 1995, the Company adopted the Financial Accounting
Standard Board's Statement of Financial Accounting Standards ("SFAS") 114,
Accounting by Creditors for Impairment of a Loan and SFAS 118, "Accounting
by Creditors for Impairment of a Loan Income Recognition and Disclosures". A
loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due. Under
SFAS 114 and SFAS 118, "impaired" loans must be measured based on the present
value of expected future cash flows, discounted at the loan's effective
interest rate, or, as a practical expedient, at the loan's observable market
price, or the fair value of the collateral if the loan is
collateral-dependent. SFAS 114 and SFAS 118 do not apply to certain groups
of small-balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of cost or
fair value, leases, or debt securities. Prior to January 1, 1995, the
Company's impaired loans were described as, and included in, nonaccrual
loans. The adoption of the Statements had no effect on the Company's
nonperforming assets or financial statements.
SFAS 114 and SFAS 118 also require additional disclosures. As a result, the
Company has expanded its accounting policy regarding the recognition of
interest income on loans to read as follows: "Interest income is not accrued
on loans where management has determined that the borrowers may be unable to
meet contractual principal and/or interest obligations, or where interest or
principal is 90 days or more past due, unless the loans are adequately
secured and in the process of collection. When a loan is placed on
nonaccrual status (which includes "impaired" loans), interest accruals cease
and uncollected accrued interest is reversed and charged against current
income. Nonaccrual loans are generally not returned to accruing status until
principal and interest payments have been brought current and full
collectibility is reasonably assured. Cash receipts on nonaccrual loans are
generally applied to the principal balance until the remaining balance is
considered fully collectible, at which time interest income may be recognized
when received. Interest on loans that have been restructured is recognized
according to the revised terms."
As of March 31, 1997, under SFAS 114 and SFAS 118, the Company's impaired
loans totaled $861,000 (of which $346,000 were on a nonaccrual basis). The
related allowance for loan loss on these impaired loans at March 31, 1997,
was $387,000. The Company's impaired loans averaged $828,000 for the three
months ended March 31, 1997. Interest income of approximately $13,000 was
recognized, all of which was on a cash basis, on impaired loans for the three
months ended March 31, 1997. Charge-offs of approximately $26,000 were
recognized on impaired loans during the three months ended March 31, 1997.
The levels of the provision and reserve for possible loan losses are based on
management's ongoing assessment of the Company's credit exposure and
consideration of a number of factors, including prevailing and anticipated
economic conditions, assigned risk ratings on credit exposures, the
diversification and size of the loan portfolio, the results of the most
recent regulatory examinations available to the Company, the current and
projected financial status and creditworthiness of borrowers, certain
off-balance sheet credit risks, the nature and level of nonperforming assets
and loans that have been identified as potential problems, the adequacy of
collateral, past and expected loss experience and other factors deemed
relevant by management. The Company's risk rating system and the quarterly
reporting process for problem and vulnerable credits are utilized by
management in determining the adequacy of the Company's reserve for possible
loan losses.
-22-
<PAGE>
Net charge-offs were $227,000 in the first quarter of 1997, compared to
$129,000 in the first quarter of 1996. In the first quarter of 1997 and
1996, respectively, net charge-offs included $40,000 and -$12,000
(recoveries) related to commercial borrowers, $195,000 and $122,000 in
consumer credits and -$8,000 (recoveries) and $19,000 in real estate credits.
POTENTIAL PROBLEM LOANS. In addition to the loans classified as nonaccrual
or greater than 90 days delinquent and still accruing interest, there were
other loans of approximately $11.2 million and $8.3 million at March 31, 1997
and December 31, 1996, respectively, where management is closely following the
borrower's ability to continue to comply with loan payment terms. Current
conditions do not warrant classification as nonperforming, nor is any principal
loss on these loans considered likely at this time.
FOREIGN LOANS. The Company's loans outstanding to borrowers in foreign
countries as of March 31, 1997 and 1996 did not exceed 1% of its total assets.
LOAN CONCENTRATIONS. As of March 31, 1997 and December 31, 1996, there were
no concentrations of loans to individual borrowers that exceed 10% of total
loans.
-23-
<PAGE>
CAPITAL
CAPITAL COMPONENTS. The Federal Reserve Board measures capital adequacy for
bank holding companies on the basis of a risk-based capital framework and a
leverage ratio. The Federal Deposit Insurance Corporation Improvement Act
("FDICIA") established a capital-based supervisory system of prompt
corrective action for all depository institutions. The bank regulatory
agencies implementing rule under FDICIA defines "well-capitalized"
institutions (the highest possible rating) as those whose capital ratios
equal or exceed all the following: Tier I Risk-Based Ratio, 6.00%, Total
Risk-Based Ratio, 10.00% and Tier I leverage Ratio, 5.00%. At March 31, 1997
and December 31, 1996, the Company and its subsidiary reported capital ratios
in excess of these well capitalized standards.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------- ------- -------- ------- ------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 1997
Total Capital (to Risk
Weighted Assets):
Consolidated $ 73,399 13.49% $ 43,543 8.00% $54,429 10.00%
Pinnacle Bank 70,329 12.68 44,370 8.00 55,463 10.00
TIER I CAPITAL (TO RISK
WEIGHTED ASSETS):
Consolidated $ 67,748 12.45% $ 21,772 4.00% $32,658 6.00%
Pinnacle Bank 64,678 11.66 22,185 4.00 33,278 6.00
TIER I CAPITAL (TO AVERAGE ASSETS):
Consolidated $ 67,748 6.44% $ 42,095 4.00% $52,619 5.00%
Pinnacle Bank 64,678 6.29 41,114 4.00 51,393 5.00
</TABLE>
Pinnacle accounts for investment securities in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
of Certain Investments in Debt and Equity Securities. The unrealized
holding gains and losses, net of related tax effect, on available-for-sale
securities are reportable as a separate component of stockholders equity
until realized. However, for determining risk-based capital ratios, only
unrealized holding losses on equity securities are considered as a component
of qualifying capital.
-24-
<PAGE>
INTEREST RATE SENSITIVITY. Interest rate sensitivity is measured by
analyzing the maturity and timing of interest rate changes on assets and
liabilities. the "gap" is the amount by which interest-sensitive assets
exceed interest-sensitive liabilities for any given period. In periods of
increasing interest rates, a positive gap will generally result in increased
net interest income; conversely, a negative gap will result in decreased net
interest income in such periods. In periods of decreasing interest rates, a
positive gap will result in decreased net interest income, and a negative gap
will result in increased net interest income.
To manage Pinnacle's exposure to changes in interest rates, management of
Pinnacle closely monitors its interest rate risk. An asset/liability
committee consisting of senior officers meets regularly and reviews
Pinnacle's interest rate risk position and makes recommendation for
adjustments to the position. In addition, the Board of Directors of Pinnacle
periodically reviews Pinnacle's asset/liability position, including
simulations of the effect on Pinnacle's earnings and capital of various
interest rate scenarios.
In managing its asset/liability mix, and depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, Pinnacle may place somewhat greater emphasis on maximizing its
net interest margin than on matching the interest rate sensitivity of its
assets and liabilities in an effort to increase its net income. Management
believes that the increased net income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of
declining or stable interest rates, provide high enough returns to justify
the increased exposure to sudden and unexpected increases in interest rates
which can result from such mismatch. As a result, there may be relatively
more exposure to rapid increases in interest rates than some other
institutions which concentrate principally on matching the duration of their
assets and liabilities.
Pinnacle is managing its current negative gap position by emphasizing
variable rate loans, investing in short-term securities, and encouraging
longer term deposit products through pricing strategies. The following table
sets forth management's estimate of the projected maturities and/or repricing
of Pinnacle's assets an liabilities as of March 31, 1997. In preparing the
table, management of Pinnacle has assumed that loans prepay to varying
degrees based on type, maturity and rate. Certificates of deposit have been
entered into the analysis based on contractual maturity.
-25-
<PAGE>
INTEREST RATE SENSITIVITY/GAP ANALYSIS
<TABLE>
<CAPTION>
MARCH 31, 1997 INTEREST RATE SENSITIVITY PERIOD
- ------------------------------------------------------------------------------------------------------
0 - 3 4 - 6 7 - 9 10 - 12 Over 1
(Dollars in thousands) MONTHS MONTHS MONTHS MONTHS YEAR TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits
with financial institutions $ 2,016 $ - $ - $ - $ - $ 2,016
Securities available for sale 173,827 6,692 10,066 10,928 211,412 412,925
Loans 175,185 41,369 32,147 29,762 336,561 615,024
Nonearning assets - - - - - 67,826
----------------------------------------------------------------------
Total Assets $351,028 $ 48,061 $ 42,213 $ 40,690 $547,973 $1,097,791
----------------------------------------------------------------------
----------------------------------------------------------------------
FUNDING SOURCES:
Interest-bearing demand $ 66,442 $ - $ - $ - $ 9,808 $ 76,250
Savings and time deposits 283,585 76,082 38,518 20,957 200,450 619,592
Federal Home Loan Bank
advances 32,500 40,500 - 33,900 73,555 180,455
Other borrowings 48,408 19,095 - 11,316 - 78,819
Noninterest bearing sources - - - - - 142,675
----------------------------------------------------------------------
Total funding sources $ 430,935 $ 135,677 $ 38,518 $ 66,173 $283,813 $1,097,791
----------------------------------------------------------------------
----------------------------------------------------------------------
REPRICING/MATURITY GAP
Period $ (79,907) $ (87,616) $ 3,695 $ (25,483) $264,160
Cumulative $ (79,907) $(167,523) $ (163,828) $(189,311) $ 74,849
Cumulative rate sensitivity
assets/Cumulative rate
sensitivity funding sources 81.46% 70.43% 72.93% 71.80% 107.84%
----------------------------------------------------------------------
</TABLE>
Certain shortcomings are inherent in the above analysis. For example,
although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in
market interest rates. Also, interest rates on certain types of assets and
liabilities may fluctuate in advance of, or lag behind, changes in market
rates. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels could deviate significantly from those assumed in
calculating the analysis. Finally, in the event of rising interest rates,
management may choose to increase the rates paid on deposit accounts in order
to retain those accounts.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.
128). SFAS No. 128 supersedes APB Opinion 15, "Earnings Per Share," and
specifies the computation, presentation and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock. SFAS No. 128 was issued to simplify the computations
of EPS and to make the U.S. standard more compatible with the EPS standards
of the International Accounting Standards Committee. It replaces the
presentation of primary and fully-diluted EPS with a presentation of basic
and diluted EPS, respectively. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the
-26-
<PAGE>
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock, or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly
to fully-diluted EPS under APB 15.
SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997 and is not expected to have a
material impact on the Company.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" (SFAS No. 129). SFAS No. 129 provides required
disclosures for the capital structure of both public and nonpublic companies
and is effective for financial statements for periods ending after December
15, 1997. The required disclosures had been included in a number of separate
statements and opinions. As such, the issuance of SFAS No. 129 is not
expected to require significant revision of prior disclosures.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
The Company filed one Current Report on Form 8-K during the
quarterly period ended March 31, 1997. The report, which was
dated March 3, 1997, disclosed under Item 5 the Company's
proposed merger with CB Bancorp, Inc.
-27-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Pinnacle Financial Services, Inc.
/s/ David W. Kolhagen
Date May 27, 1997 ---------------------------------------
Name: David W. Kolhagen
Its: Treasurer and Chief
Financial Officer
(Chief Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 25,904
<INT-BEARING-DEPOSITS> 2,016
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 412,925
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 615,024
<ALLOWANCE> 5,651
<TOTAL-ASSETS> 609,373
<DEPOSITS> 757,922
<SHORT-TERM> 259,224
<LIABILITIES-OTHER> 5,305
<LONG-TERM> 0
0
0
<COMMON> 19,110
<OTHER-SE> 56,180
<TOTAL-LIABILITIES-AND-EQUITY> 1,097,791
<INTEREST-LOAN> 13,147
<INTEREST-INVEST> 16,844
<INTEREST-OTHER> 74
<INTEREST-TOTAL> 20,065
<INTEREST-DEPOSIT> 7,747
<INTEREST-EXPENSE> 11,015
<INTEREST-INCOME-NET> 9,050
<LOAN-LOSSES> 235
<SECURITIES-GAINS> 59
<EXPENSE-OTHER> 6,189
<INCOME-PRETAX> 4,517
<INCOME-PRE-EXTRAORDINARY> 4,517
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,970
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 8.19
<LOANS-NON> 1,937
<LOANS-PAST> 3,844
<LOANS-TROUBLED> 182
<LOANS-PROBLEM> 11,200
<ALLOWANCE-OPEN> 5,643
<CHARGE-OFFS> 274
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 5,651
<ALLOWANCE-DOMESTIC> 5,651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
