<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Amendment #2)
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
------------------ ------------------
Commission file number #0-17937
PINNACLE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2671129
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
830 PLEASANT STREET, ST. JOSEPH, MICHIGAN 49085
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 983-6311
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The number of shares of common stock, no par value per share, outstanding was
12,348,632 at November 13, 1997.
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
FORM 10-Q
September 30, 1997
TABLE OF CONTENTS PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1997; December 31, 1996 3
--
Consolidated Statements of Income
Nine Months and Quarter Ended September 30, 1997 and 1996 4
--
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 1997 and 1996 5
--
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
--
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 10
--
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 36
--
Item 6. Exhibits and Reports on Form 8-K 36
--
Signatures 37
--
2
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
(UNAUDITED) (UNAUDITED)
(Dollars in thousands, except per share data) 9/30/97 12/31/96
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 44,477 $ 60,957
Federal funds sold - 15,750
---------- ----------
Total cash and cash equivalents 44,477 76,707
Interest-bearing deposits with financial institutions 7,940 13,171
Securities available-for-sale:
Taxable 461,289 491,039
Tax-exempt 33,225 22,447
Securities held to maturity:
Taxable - 14,299
Tax-exempt - -
Loans, net of unearned income:
Real Estate 803,567 748,226
Commercial 473,829 430,242
Tax-exempt 10,298 9,686
Consumer 246,029 239,186
---------- ----------
Subtotal Loans 1,533,723 1,427,340
Less allowance for loan losses 24,414 14,909
---------- ----------
Net loans 1,509,309 1,412,431
Premises and equipments, net 28,152 26,082
Accrued interest receivable and other assets 95,939 79,034
---------- ----------
Total assets $2,180,331 $2,135,210
---------- ----------
Liabilities:
Deposits:
Noninterest bearing demand $ 113,513 $ 121,235
Interest-bearing demand 148,132 143,821
Savings 448,092 437,513
Time 762,219 776,142
---------- ----------
Total deposits 1,471,956 1,478,711
Federal Home Loan Bank advances 428,571 369,238
Securities sold under repurchase agreements and other borrowings 86,639 102,206
Accrued interest payable and other liabilities 23,418 14,796
---------- ----------
Total liabilities 2,010,584 1,964,951
Stockholders' Equity:
Common Stock; no par value; 15,000,000 shares authorized;
12,340,458 shares issued and outstanding at September 30, 1997;
12,151,514 shares issued and outstanding at December 31,1996. 19,110 19,110
Additional paid in capital 69,581 78,193
Treasury Stock - (10,304)
Guaranteed ESOP Obligation - (380)
R.R.P. - (4)
Retained earnings 79,381 83,599
Net unrealized gain (loss) on securities available-for-sale 1,675 45
---------- ----------
Total stockholders' equity 169,747 170,259
---------- ----------
Total liabilities and stockholders' equity $2,180,331 $2,135,210
---------- ----------
---------- ----------
</TABLE>
3
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands, except per share data) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 32,916 $ 28,886 $ 94,336 $ 83,947
Tax-exempt 144 99 449 256
Interest and dividends on securities:
Available-for-sale
Taxable 8,883 8,002 27,876 21,835
Tax-exempt 463 276 1,029 847
Interest on federal funds sold 67 46 129 150
Interest on interest-bearing deposits with
financial institutions 198 120 512 742
-------------------------------------------------------------
Total interest income 42,671 37,429 124,331 107,777
INTEREST EXPENSE:
Interest on deposits 15,989 15,362 47,154 44,805
Interest on Federal Home Loan Bank advances 6,623 4,031 18,136 10,734
Interest on securities sold under repurchase and
other borrowings 1,106 684 3,484 2,109
-------------------------------------------------------------
Total interest expense 23,718 20,077 68,774 57,648
-------------------------------------------------------------
Net interest income 18,953 17,352 55,557 50,129
Provision for loan losses 10,850 810 12,520 1,571
-------------------------------------------------------------
Net interest income, after provision for loan losses 8,103 16,542 43,037 48,558
-------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,508 1,011 4,167 3,059
Trust income 221 207 643 620
Securities gains and losses, net 277 139 515 409
Other income 3,409 1,926 8,474 5,110
-------------------------------------------------------------
Total noninterest income 5,415 3,283 13,799 9,198
NONINTEREST EXPENSES:
Salaries and benefits 5,570 5,016 17,636 15,830
Occupancy expense 1,121 1,072 3,360 3,112
Equipment expense 777 859 2,416 2,511
FDIC insurance premiums 170 5,660 502 7,494
Other expense 16,052 4,582 25,004 12,919
-------------------------------------------------------------
Total noninterest expense 23,690 17,189 48,918 41,866
-------------------------------------------------------------
Income before federal income tax (benefit) expense (10,172) 2,636 7,918 15,890
Income tax (benefit) expense (3,091) 579 3,049 4,838
-------------------------------------------------------------
Net (loss) income $ (7,081) $ 2,057 $ 4,869 $ 11,052
-------------------------------------------------------------
-------------------------------------------------------------
Net (loss) income per common share $ (0.58) $ 0.17 $ 0.40 $ 0.92
-------------------------------------------------------------
-------------------------------------------------------------
Weighted average shares outstanding 12,300,642 12,015,540 12,212,113 12,023,196
-------------------------------------------------------------
-------------------------------------------------------------
Cash dividends declared per common share $ 0.24 $ 0.21 $ 0.71 $ 0.61
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
4
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STOCKHOLDERS' EQUITY SCHEDULE
<TABLE>
<CAPTION>
ADDITIONAL GUARANTEED
COMMON PAID-IN RETAINED TREASURY ESOP
(Dollars in thousands) STOCK CAPITAL EARNINGS STOCK OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 19,110 77,486 76,242 (9,711) (591)
Net income - - 11,052 - -
Common stock issuance, net of stock, offering costs - (259) - - -
Cash dividends declared, $.61 per share - - (6,619) - -
Common stock issuance upon exercise of options - 171 - - -
Repurchase of common stock - - - (605) -
Payments made to guaranteed ESOP obligation - - - - 161
Amortization of RRP contribution - - - - -
Issuance of treasury stock - (10) - 19 -
Change in unrealized losses for securities
available-for-sale, net of tax effect of $410 - - - - -
---------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 19,110 77,388 80,675 (10,297) (430)
Net income - - 5,033 - -
Cash dividends declared, $.21 per share - - (2,110) - -
Common stock issuance upon exercise of options - 742 - - -
Repurchase of common stock - - - (7) -
Payments made to guaranteed ESOP obligation - - - - 50
Amortization of RRP contribution - - - - -
Tax benefit related to benefit plans - 63 - - -
Change in unrealized gains for securities
available-for-sale, net of tax effect of $466 - - - - -
---------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 19,110 78,193 83,598 (10,304) (380)
Net income - - 4,869 -
Common stock issuance upon exercise of options - 1,267 - -
Cash dividends declared, $.705 per share - (8,342) -
Payments made to guaranteed ESOP obligation - 380
Amortization of RRP contribution -
Issuance of treasury stock - (-1,125) 1,550
Retirement of treasury stock - (-8,754) 8,754
Adjustment for change in fiscal year (744)
Change in unrealized gains for securities
available-for-sale, net of tax effect of $(757) - -
---------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 19,110 69,581 79,381 - -
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
ON SECURITIES
AVAILABLE-FOR
(Dollars in thousands) RRP SALE TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 (21) 1,942 164,457
Net income - - 11,052
Common stock issuance, net of stock, offering costs - - (259)
Cash dividends declared, $.61 per share - - (6,619)
Common stock issuance upon exercise of options - - 171
Repurchase of common stock - - (605)
Payments made to guaranteed ESOP obligation - - 161
Amortization of RRP contribution (13) - 13
Issuance of treasury stock - - 9
Change in unrealized losses for securities
available-for-sale, net of tax effect of $410 - (4,937) (4,937)
------------------------------------------
BALANCE, SEPTEMBER 30, 1996 (8) (2,995) 163,443
Net income - - 5,034
Cash dividends declared, $.21 per share - - (2,110)
Common stock issuance upon exercise of options - - 742
Repurchase of common stock - - (7)
Payments made to guaranteed ESOP obligation - - 50
Amortization of RRP contribution (4) - 4
Tax benefit related to benefit plans - - 63
Change in unrealized gains for securities -
available-for-sale, net of tax effect of $466 - 3,040 3,040
------------------------------------------
BALANCE, DECEMBER 31, 1996 (4) 45 170,259
Net income - 4,869
Common stock issuance upon exercise of options - 1,266
Cash dividends declared, $.705 per share - (8,342)
Payments made to guaranteed ESOP obligation 380
Amortization of RRP contribution 4 4
Issuance of treasury stock 425
Retirement of treasury stock -
Adjustment for change in fiscal year (744)
Change in unrealized gains for securities
available-for-sale, net of tax effect of $(757) 1,630 1,630
------------------------------------------
BALANCE, SEPTEMBER 30, 1997 - 1,675 169,747
------------------------------------------
------------------------------------------
</TABLE>
5
<PAGE>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
----------------------
<S> <C> <C>
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,869 $ 11,052
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,559 3,705
Net amortization on loans and securities 516 1,208
Provision for loan losses 12,520 1,571
Deferred federal income taxes (910) (937)
Mortgage loans purchased under agreement to resell (936,133) (804,324)
Proceeds from sales of mortgage loans purchased under agreements to
resell 869,489 782,844
Mortgage loans originated for sale (34,954) (130,313)
Proceeds from sales of loans 91,683 132,706
Gain on sale of securities, net (515) (409)
Gain on sale of loans, net (1,375) (639)
Increase in interest receivable and other assets (15,872) (157)
Increase in interest payable and other liabilities 7,408 394
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 285 (3,299)
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans, excluding loan sales,
purchases, and originated for sale (59,106) (88,505)
Purchase of Forrest Holdings, Inc. preferred stock - (2,500)
Purchases of loans (38,014) (58,318)
Purchases of securities available-for-sale (156,054) (239,120)
Purchases of securities held-to-maturity - (3,719)
Proceeds from sales of securities available-for-sale 137,483 93,665
Proceeds from maturities and paydowns of securities
available-for-sale 51,590 49,918
Proceeds from maturities and paydowns of securities
held-to-maturity - 4,402
Net increase in interest-bearing deposits with financial institutions 4,967 40,341
Capital expenditures (4,124) (2,628)
----------------------
NET CASH USED BY INVESTING ACTIVITIES (63,258) (206,464)
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (6,755) 81,930
Net increase in securities sold under repurchase agreements
and other borrowings 43,766 133,194
Common stock issued 1,268 (88)
Dividends paid (8,342) (6,501)
Issuance of treasury stock 425 9
Purchase of treasury stock - (605)
Contributions to fund ESOP 380 48
----------------------
NET CASH USED BY FINANCING ACTIVITIES 30,742 207,987
----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (32,231) (1,776)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 76,707 61,556
----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,476 $ 59,780
----------------------
----------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 65,192 $ 57,270
Federal income taxes paid $ 6,910 $ 6,582
Loans transferred to other real estate owned $ 840 $ 550
</TABLE>
- --------------------------------------------------------------------------------
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 subsidiaries, the
"Company") have been prepared in conformity with generally accepted
accounting principles for interim financial information and with the
instruction for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all necessary adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. Certain amounts included in the prior period financial
statements have been reclassified to conform with the current financial
statement presentation. The operating results for the nine month period
ended September 30, 1997 are not necessarily indicative of the results to
be expected for the year ending December 31, 1997.
For further information, refer to the consolidated financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 as filed with the Securities
and Exchange Commission.
NOTE 2. MERGERS AND ACQUISITIONS
On August 1, 1997, the Company issued 4,790,736 and 1,553,144 shares
of its common stock in exchange for all outstanding common stock of Indiana
Federal Corporation ("IFC") and CB Bancorp, Inc. ("CB"), respectively, both
of which are thrift holding companies located in Valparaiso and Michigan
City, Indiana, respectively. The business combinations have been accounted
for as pooling-of-interests transactions, and accordingly, the consolidated
financial statements for periods prior to the combinations have been
restated to include the accounts and results of operations of IFC and CB.
The results of the operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying
consolidated financial statements are summarized below (in thousands):
Six months ended Year Ended
June 30, December 31,
1997 1996 1995
------ ------ ------
Net interest income:
Pinnacle 18,430 34,276 19,344
IFC 13,546 25,674 26,141
CB 4,628 8,354 7,362
------ ------ ------
Consolidated 36,604 68,304 52,847
------ ------ ------
------ ------ ------
Other noninterest income:
Pinnacle 4,338 7,308 4,586
IFC 3,076 3,870 4,109
CB 970 1,675 1,114
------ ------ ------
Consolidated 8,384 12,853 9,809
------ ------ ------
------ ------ ------
Net income:
Pinnacle 6,080 9,152 6,459
7
<PAGE>
IFC 4,251 4,623 7,304
CB 1,619 2,312 2,458
------ ------ ------
Consolidated 11,950 16,087 16,221
------ ------ ------
------ ------ ------
Prior to the combination, CB's fiscal year ended March 31. In
recording the pooling-of-interests combination, CB's financial statements
for the nine months ended September 30, 1997 were combined with the
Company's and IFC's financial statements for the same period. CB's
financial statements for the nine months ended December 31, 1996 were
combined with the Company's and IFC's financial statements for the nine
months ended September 30, 1996. An adjustment has been made to
stockholders' equity as of September 30, 1997, to eliminate the effect of
including CB's results of operations for the three months ended March 31,
1997 in both the year and nine months ended December 31, 1996 and September
30, 1997, respectively.
NOTE 3: 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 4: ACCOUNTING FOR TRANSFERS AND SERVICING FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES
The Financial Accounting Standards Board has issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" which is effective, in part, for
transactions occurring after December 31, 1996. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application
of a financial components approach that focuses on control. The Company
adopted this statement on January 1, 1997, and it did not have a material
effect on the Company's financial condition, results of operations, or
liquidity.
8
<PAGE>
NOTE 5: COMMITMENTS - PROPOSED TRANSACTION
On October 14, 1997 the Company entered into a definitive agreement to
sell the Company to CNB Bancshares,. Inc. ("CNB") of Evansville, Indiana
($4.4 billion in total assets). The fixed exchange rate was 1.0365 shares
of CNB Common Stock issued for each share issued and outstanding of
Pinnacle Common Stock, and it is anticipated to be accounted for using the
pooling-of-interests method. The sale is subject to shareholder and
regulatory approval and expected to close in the second quarter of 1998.
NOTE 6: PER COMMON SHARE DATA
Earnings per share are calculated by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Common stock equivalents are
calculated using the treasury stock method.
NOTE 7: RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION
The Company restated its previously reported third quarter 1997
results. The restatement increases the previously reported third quarter
loss of $1,131,000 (($.09) per share) to a loss of $7,081,000 (($.58) per
share). Additionally, earnings for the nine months ended September 30,
1997 have been restated reducing previously reported earnings of
$10,819,000 or $.89 per share to $4,869,000 or $.40 per share. The
restatement is primarily attributable to the conformity of loan loss
reserve methodologies as a result of the third quarter 1997 acquisitions
of IFC and CB to that of the Company. The restatement increases the
Company's allowance for loan losses $10,000,000 to $24,414,000. In
recently completing the Company's allowance for loan loss conformity
review of IFC and CB, the Company applied the general reserve assumptions
consistent with those utilized historically by the Company, while also
reflective of anticipated charge-off trends, particularly in the consumer
and credit card portfolios. Additionally, in fully implementing its
detailed individual loan grading methodology and conforming IFC and CB to
that methodology, the Company established additional general and specific
reserves in the combined commercial real estate portfolio.
9
<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 nine month period ended September 30,
1997 and are not necessarily indicative of results to be attained for any
other period. This discussion should be read in conjunction with the
consolidated financial statements, results of operations and related notes,
and 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 has 2 non-bank
subsidiaries, Pinnacle Financial Consultants, Inc., a fully disclosed
broker dealer and IndFed Mortgage Company. Pinnacle's principal executive
offices are located at 830 Pleasant Street, St. Joseph, Michigan 49085,
and its telephone number is (616) 983-6311.
At the close of business on August 1, 1997, Indiana Federal
Corporation ("IFC") and CB Bancorp, Inc. ("CB") were merged into Pinnacle,
creating a $2.2 billion bank holding company. Each of IFC's and CB's
principal operating subsidiaries, federally chartered savings institutions,
was merged into Pinnacle Bank in simultaneous transactions.
Through Pinnacle Bank, Pinnacle offers financial services products
which include domestic banking services such as consumer, commercial and
real estate loans, personal and business checking accounts, savings
accounts, time deposits, safe deposit services, cash management services,
and transmission of funds, as well as trust and other fiduciary services,
full-service brokerage services and insurance products. Commercial
customers include retailers, commercial developers, professionals, and
small manufacturers. Retail banking 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 47 branch offices located in a region extending
from southwestern Michigan to the Illinois state line, and through 4 loan
production offices located in Merrillville, Mishawaka, and Lafayette,
Indiana and St. Joseph, Michigan. Pinnacle Bank focuses on providing
personalized, high-quality and comprehensive service in order to develop
and maintain long-term, multiple account relationships with customers.
10
<PAGE>
Pinnacle's market, which is adjacent to metropolitan Chicago, Illinois
and is bisected by Interstate 94 (the primary highway between Chicago and
Detroit) currently consists of northern Indiana and southwestern Michigan.
The region's location has facilitated the development of a diverse economy
based primarily on manufacturing, service and agriculture. The region's
proximity to Chicago and the southeastern expansion of metropolitan Chicago
into Lake County, Indiana, have led to significant commercial and
residential development and a strong second-home housing market. The
region's popularity as a year-round recreational area also has led to a
tourism-driven economic growth.
Pinnacle has approximately $2.2 billion in total assets as of
September 30, 1997. Pinnacle returned (1.28%) on average assets for the
third quarter of 1997 as compared to .42% for the same period of 1996.
Pinnacle returned 0.30% on average assets for the nine months ended
September 30, 1997 as compared to .78% for the same period of 1996.
Pinnacle incurred $8.0 million in after tax restructuring charges in
connection with the acquisition of Indiana Federal Corporation and CB
Bancorp during the third quarter of 1997. Additionally, Pinnacle
recorded a $10.9 million provision for loan losses for the third quarter
of 1997 as compared to $810,000 for the same period in 1996, primarily as
a result of conforming loan loss reserve methodologies in connection
with the third quarter 1997 acquisitions of IFC and CB. Pinnacle incurred
$3.6 million after tax as a result of the one time SAIF charge recorded
during the third quarter of 1996. Return on assets without the
restructuring charges of $8.0 million after tax would have been .17% for
the third quarter of 1997 and .82% for the nine months ended September
30, 1997. Return on assets without the one time SAIF charge would have
been 1.16% for the third quarter of 1996 and 1.03% for the nine months
ended September 30, 1996.
For the third quarter of 1997, Pinnacle's return on average equity was
(15.90%) as compared to 5.05% for the same period of 1996. Pinnacle's
return on average equity was 3.78% for the nine months ended September 30,
1997 as compared to 9.03% for the same period of 1996. Without the
restructuring charges, return on average equity for the third quarter of
1997 would have been 2.06% and the nine months ended September 30, 1997
would have been 10.23%. Without the SAIF charge, return on average equity
for the third quarter of 1996 would have been 13.88% and the nine months
ended September 30, 1996 would have been 11.97%.
Pinnacle believes its success is in part attributable to a growth
strategy that has (i) increased assets to $2.2 billion as of September 30,
1997, and (ii) increased net loans to $1.5 billion as of September 30,
1997, primarily through three acquisitions in the Indiana market since
1995. On December 1, 1995, Pinnacle entered the Indiana market by way of
the acquisition of Maco Bancorp ($412.8 million in assets) and on August 1,
1997 added Indiana Federal Corporation ($837.0 million in assets) and CB
Bancorp ($290.0 million in assets). Pinnacle's loan to deposit ratio was
approximately 104.2% at September 30, 1997. Pinnacle's growth has been
generated internally through customer retention and cross-selling programs
and externally through acquisitions. Since 1988, Pinnacle has consummated
seven acquisitions, four of which involved thrifts.
Through its acquisition strategy, Pinnacle seeks to diversify and
expand both its market area and 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
11
<PAGE>
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.
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
obligated 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.
The Standstill Agreement provided that certain limitations imposed by
it on Mr. Ansary's beneficial ownership of Pinnacle Common Stock would
terminate if, among other things, the aggregate percentage of voting
securities of Pinnacle beneficially owned by the directors of Pinnacle as a
group declined by more than one-third from the aggregate percentage so held
as of the date of the Maco Acquisition. Consummation of the IFC and CB
Mergers caused such aggregate percentage to decline by more than one-third.
Accordingly, the foregoing limitations terminated upon consummation of the
Mergers.
As a result of the Maco Acquisition, Pinnacle acquired First
Insurance, Inc., an Indiana corporation engaged primarily in the sale of
multi-peril homeowners insurance to borrowers of Pinnacle Bank. On October
1, 1996, and in exchange for 99,451 shares of Pinnacle Common Stock then
valued at $2.1 million, Pinnacle Bank acquired Starke's, Inc., a Michigan
corporation and independent "full-line" insurance agency. On December 31,
1996, First Insurance, Inc. was merged with and into Starke's, Inc..
On August 1, 1997, the Company issued 4,790,736 and 1,553,144 shares
of its common stock in exchange for all outstanding common stock of Indiana
Federal Corporation ("IFC") and CB Bancorp ("CB"), respectively, both of
which are thrift holding companies located in Valparaiso and Michigan City,
Indiana, respectively. The business combinations have been accounted for
as pooling-of-interests transactions, and accordingly, the consolidated
financial statements for periods prior to the combinations have been
restated to include the accounts and results of operations of IFC and CB.
On October 14, 1997 the Company entered into a definitive agreement to
sell the Company to CNB Bancshares,. Inc. ("CNB") of Evansville, Indiana
($4.4 billion in total assets). The fixed exchange rate was 1.0365 shares
of CNB Common Stock issued for each share issued and outstanding of
Pinnacle Common Stock, and it is anticipated to be accounted for using the
pooling-of-interests method. The sale is subject to shareholder and
regulatory approval and is expected to close in the second quarter of 1998.
12
<PAGE>
OVERVIEW AND FINANCIAL CONDITION
NET INCOME
For the three months ended September 30, 1997, the Company reported
net loss of approximately $7.1 million or $(.58) per share, as compared to
net income of approximately $2.1 million, or $.17 per share for three
months ended September 30, 1996, a decrease in net income of 444.2% and
441.2% on a per share basis. For the nine months ended September 30, 1997,
the Company reported net income of approximately $4.9 million or $.40 per
share, as compared to net income of approximately $11.1 million or $.92 per
share for the same period in 1996. The decrease in net income was largely
the result of the restructuring charges of $8.0 million after tax and the
$10.0 million pre-tax increase in provision for loan losses in connection
with the acquisitions of IFC and CB in the third quarter of 1997, offset by
the one-time SAIF charge in the third quarter of 1996. Net income without
the restructuring charges of $8.0 million after tax would have been
$919 thousand or $.07 per share, as compared to $5.7 million or $.47 per
share for the three months ended September 30, 1997 and 1996, respectively,
a decrease of 83.6%.
BALANCE SHEET
Total assets at September 30, 1997 and at December 31, 1996 were
approximately $2.2 billion and $2.1 billion respectively. Average earning
assets equaled 94.2% of total average assets for the quarter ended
September 30, 1997 as compared to 93.4% of total average assets for the
quarter ended September 30, 1996. The following table summarizes the
components of Pinnacle's total assets, loans, net, total deposits and
stockholders' equity for the time periods indicated.
OVERVIEW AND FINANCIAL HIGHLIGHTS
At September 30, At December 31,
1997 1996
---- ----
(Dollars in Thousands)
Total assets $2,180,331 $2,135,210
Loans, net 1,509,309 1,412,431
Deposits 1,471,956 1,478,711
Stockholders' equity 169,747 170,259
Loans, net, at September 30, 1997 were approximately $1.5 billion,
which was $96.9 million greater than loans, net, at December 31, 1996 of
$1.4 billion. Commercial and tax exempt loans grew $44.2 million, or 10.0%
to $439.9 million at September 30, 1997 as compared to the December 31,
1996 total of $439.7 million. Consumer loans, consisting primarily of home
equity loans, were $246.0 million at September 30, 1997, an increase of
$6.8 million, or 2.9% , over the December 31, 1996 total of $239.2 million.
Real estate loans increased $55.3 million, or 7.4%, to $803.6 million at
September 30, 1997 from $748.2 million at December 31, 1996.
13
<PAGE>
The increase in commercial loans was primarily in the Indiana market
experiencing good economic growth. The growth in consumer loans was
controlled through the sale of home equity loans totaling approximately
$18 million in 1997. The increase in real estate loans was primarily
through the mortgage loan repurchase product obtained in the CB Bancorp
acquisition which increased from $95.2 million as of December 31, 1996 to
$163.7 million as of September 30, 1997.
The allowance for loan losses increased $9.5 million from $14.9
million at December 31, 1996 to $24.4 million at September 30, 1997. The
increase is primarily a result of conforming loan loss reserve
methodologies in connection with the third quarter 1997 acquisitions of
IFC and CB.
Total deposits at September 30, 1997 and December 31, 1996 were $1.5
billion. Savings deposits increased $11.6 million (to $448.1 million)
while time deposits decreased $13.9 million (to $762.2 million), and
noninterest bearing demand deposits decreased $10.3 million (to $113.5
million) mainly because of seasonal deposits at December 31, 1996 were
shifted to other interest bearing accounts.
Federal Home Loan Bank advances, securities sold under repurchase
agreements and other borrowings were approximately $515.2 million at
September 30, 1997, as compared to $471.4 million at December 31, 1996.
These increases reflect the use of these funding sources to match
specific investment securities purchases with the like maturities or
pricing terms and to fund strong loan growth during 1996 and 1997.
Stockholders' equity was approximately $169.7 million at September 30,
1997 as compared to $170.3 million at December 31, 1996. The decrease in
stockholders' equity since December 31, 1996 resulted from net income
earned for 1997 offset by changes in the market values of securities
available-for-sale and dividends paid.
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 (15.90%) for the third quarter of 1997 compared to 5.05% for the third
quarter of 1996. Pinnacle's return on average equity was 3.78% for the
nine months ended September 30, 1997 as compared to 9.03% for the same
period of 1996. Pinnacle incurred $8.0 million in net after tax
restructuring charges in connection with the acquisition of IFC and CB
during the third quarter of 1997. Pinnacle recorded a $10.9 million
provision for loan losses for the third quarter of 1997 compared to
$810,000 for the same period in 1996 as a result of primarily conforming
loan loss reserve methodologies in connection with the third quarter 1997
acquisitions of IFC and CB. Return on average equity without the
restructuring charge of $8.0 million after tax would have been 2.06% for
the third quarter of 1997 and 10.23% for the nine months ended September 30,
1997. Additionally, Pinnacle incurred $3.6 million in net after tax as a
result of the one-time SAIF charge during the third quarter of 1996.
Return on average equity without the one-time SAIF charge would have been
13.88% and 11.97% for the third quarter of 1996 and the nine months ended
September 30, 1996, respectively.
Return on average assets measures how profitably the total assets of
Pinnacle are invested. Return on average assets was (1.28%) for the
third quarter of 1997 compared to .42% for the third quarter of 1996.
Pinnacle returned .30% on average assets for the nine months ended
September 30, 1997 as compared to .78% for the same period of 1996.
Pinnacle incurred $8.0 million in net after tax restructuring charges and
a $10.0 million increase in provision for loan losses in connection with
the acquisition of IFC and CB during the third quarter of 1997. Return
on assets without the restructuring charge of $8.0 million after tax would
have been .17% for the third quarter of 1997 and .82% for the nine months
ended September 30, 1997. Additionally, Pinnacle incurred $3.6 million in
net after tax as a result of the one-time SAIF charge during the third
quarter of 1996. Return on average assets without the one-time SAIF charge
would have been 1.16% and 1.03% for the third quarter of 1996 and the nine
months ended September 30, 1996, respectively.
14
<PAGE>
The Company recognizes the importance of maximizing the use of
capital to provide improved returns to our stockholders. This has been
accomplished in the past by the way of growth through acquisition of
other financial institutions. While it is management's intention to seize
upon favorable opportunities which may arise with respect to community
banks or other financial institutions in the future, at the present time
there are no ongoing negotiations for any acquisitions, except as already
disclosed in the notes to the consolidated financial statements.
Pinnacle has acquired four companies since December 1995 which are
Maco Bancorp and its subsidiaries of First Federal Savings Bank of
Indiana, Brookview Real Estate, and First Insurance, Inc., headquartered
in Merrillville, Indiana on December 1, 1995, Starke's, Inc., a Michigan
corporation and an independent "full-line" insurance agency on October 1,
1996 and IFC and its subsidiaries Indiana Federal Bank for Savings,
IndFed Mortgage Company and IndFed Financial Services, Inc. and CB and
its subsidiary Community Bank, A Federal Savings Bank on August 1, 1997.
15
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
For the three months ended September 30, 1997, the Company reported
net loss of approximately $7.1 million or $(.58) per share, as compared
to net income of approximately $2.1 million, or $.17 per share for three
months ended September 30, 1996, a decrease in net income of 444.2% and
441.2% on a per share basis. For the nine months ended September 30,
1997, the Company reported net income of approximately $4.9 million or
$.40 per share, as compared to net income of approximately $11.1 million
or $.92 per share for the same period in 1996. The decrease in net
income was largely the result of the restructuring charges of $8.0
million after tax and a $10.0 million pre-tax increase to provision for loan
losses in connection with the acquisition of IFC and CB in the third
quarter of 1997, offset by the one-time SAIF charge in the third quarter
of 1996. Net income without the restructuring charges of $8.0 million
after tax would have been $919 thousand or $.07 per share, as compared to
$5.7 million or $.47 per share for the three months ended September 30,
1997 and 1996, respectively, a decrease of 84.2%.
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.
16
<PAGE>
The following table sets forth certain information with respect to Pinnacle's
consolidated net-interest income for the third quarter ended September 30, 1997
and 1996.
SUMMARY OF CONSOLIDATED NET INTEREST INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 4,863 $ 67 5.47% $ 3,666 $ 46 4.99%
Interest-bearing deposits
with financial institutions 7,920 198 9.92% 3,767 120 12.67%
U.S. Treasury and
government agencies 366,257 6,513 7.06% 304,939 5,418 7.07%
Other securities (2) 171,301 3,043 7.05% 177,805 2,987 6.68%
Loans (1) (2) 1,517,265 33,127 8.66% 1,325,666 29,032 8.71%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,067,606 42,948 8.24% 1,815,843 37,603 8.24%
- -----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 35,303 37,487
Premises and equipment, net 27,327 26,377
Allowance for loan losses (14,083) (14,101)
Other assets 79,907 78,462
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $2,196,060 $42,948 $1,944,068 $37,603
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing demand $ 143,756 $ 712 1.96% $ 143,590 $ 740 2.05%
Savings and money
market accounts 438,362 3,998 3.62% 430,826 3,809 3.52%
Time deposits of
$100,000 or more 789,175 11,279 5.67% 763,133 10,813 5.64%
Other time deposits
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,371,293 15,989 4.63% 1,337,549 15,362 4.57%
- -----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances 444,519 6,623 5.91% 281,159 4,031 5.70%
Federal funds purchased and
securities sold 84,043 1,106 5.22% 52,265 684 5.21%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,899,855 23,718 4.95% 1,670,973 20,077 4.78%
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 104,972 97,261
Other liabilities 14,601 13,728
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,019,428 1,781,962
Stockholders' equity 176,632 162,106
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,196,060 $1,944,068
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $19,230 $17,526
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Net interest rate margin (3) 3.69% 3.84%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</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.
17
<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
QUARTER ENDED SEPTEMBER 30, CHANGE IN INTEREST DUE TO:
- -------------------------------------------------------------------------------------------------------------------------------
RATE & NET
(Dollars in thousands) VOLUME RATE VOLUME CHANGE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 60 $ 18 $ (57) $ 21
Interest-bearing deposits with financial institutions 526 (104) (344) 78
U.S. Treasury and government agencies 4,335 (30) (3,210) 1,095
Other securities (1) (434) 658 168 56
Loans (1) 16,688 (663) (11,930) 4,095
---------------------------------------------------------
Total interest-earning assets $21,175 $ (121) $(15,709) $5,345
---------------------------------------------------------
---------------------------------------------------------
Liabilities
Interest-bearing demand $ 3 $ (129) $ 98 $ (28)
Savings and money market accounts 265 431 (507) 189
Time deposits 1,469 229 (1,232) 466
---------------------------------------------------------
Total interest-bearing deposits 1,737 531 (1,641) 627
---------------------------------------------------------
Federal Home Loan Bank advances 9,312 590 (7,310) 2,592
Federal funds purchased and securities sold 1,656 5 (1,239) 422
---------------------------------------------------------
Total interest-bearing liabilities $12,705 $ 1,126 $(10,190) $3,641
---------------------------------------------------------
Net interest income $ 8,470 $(1,247) $ (5,119) $1,704
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
(1) Income from state and political subdivisions securities and loans are
stated on a tax equivalent basis.
18
<PAGE>
The following table sets forth certain information with respect to Pinnacle's
consolidated net-interest income for the nine months ended September 30, 1997
and 1996.
SUMMARY OF CONSOLIDATED NET INTEREST INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 3,160 $ 128 5.42% $ 3,870 $ 150 5.18%
Interest-bearing deposits
with financial institutions 7,393 512 9.26% 14,869 742 6.67%
U.S. Treasury and
government agencies 370,844 20,115 7.25% 271,547 14,017 6.90%
Other securities (2) 178,429 9,254 6.93% 190,021 9,052 6.36%
Loans (1) (2) 1,465,014 94,997 8.67% 1,286,853 84,326 8.75%
------------------------------------------------------------------------
Total interest-earning assets $2,024,840 $125,006 8.25% 1,767,160 108,287 8.19%
------------------------------------------------------------------------
Cash and due from banks 34,589 34,372
Premises and equipment, net 26,613 26,057
Allowance for loan losses (14,596) (13,935)
Other assets 78,909 77,694
------------------------------------------------------------------------
Total assets $2,150,365 $125,006 $1,891,348 $108,287
------------------------------------------------------------------------
------------------------------------------------------------------------
Liabilities
Interest-bearing demand $ 142,341 $ 2,145 2.01% $ 141,757 $ 2,207 2.08%
Savings and money
market accounts 436,372 11,682 3.58% 427,578 11,053 3.45%
Time deposits 788,290 33,327 5.65% 746,162 31,545 5.65%
------------------------------------------------------------------------
Total interest-bearing deposits 1,367,003 47,154 4.61% 1,315,497 44,805 4.55%
------------------------------------------------------------------------
Federal Home Loan Bank advances 415,226 18,136 5.84% 251,420 10,734 5.70%
Federal funds purchased and
securities sold 84,599 3,484 5.51% 53,041 2,109 5.31%
------------------------------------------------------------------------
Total interest-bearing
liabilities 1,866,828 68,774 4.93% 1,619,958 57,648 4.75%
------------------------------------------------------------------------
Noninterest-bearing deposits 97,373 92,852
Other liabilities 13,978 15,095
------------------------------------------------------------------------
Total liabilities 1,978,179 1,727,905
Stockholders' equity 172,176 163,443
------------------------------------------------------------------------
Total liabilities and
stockholders' equity $2,150,355 $1,891,348
------------------------------------------------------------------------
------------------------------------------------------------------------
Net interest income $56,232 $50,639
------------------------------------------------------------------------
------------------------------------------------------------------------
Net interest rate margin (3) 3.71% 3.83%
------------------------------------------------------------------------
------------------------------------------------------------------------
</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.
19
<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
NINE MONTHS ENDED SEPTEMBER 30, CHANGE IN INTEREST DUE TO:
- -------------------------------------------------------------------------------------------------------------------------------
RATE & NET
(Dollars in thousands) VOLUME RATE VOLUME CHANGE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Federal funds sold $ (37) $ 9 $ 6 $ (22)
Interest-bearing deposits with financial institutions (499) 385 (116) (230)
U.S. Treasury and government agencies 6,851 950 (1,703) 6,098
Other securities (1) (737) 1,083 (144) 202
Loans (1) 15,589 (1,029) (3,889) 10,671
---------------------------------------------------------
Total interest-earning assets $ 21,167 $ 1,398 $(5,846) $16,719
---------------------------------------------------------
---------------------------------------------------------
Liabilities
Interest-bearing demand $ 12 $ (99) $ 25 $ (62)
Savings and money market accounts 303 556 (230) 629
Time deposits 2,380 -- (598) 1,782
---------------------------------------------------------
Total interest-bearing deposits 2,695 457 (803) 2,349
---------------------------------------------------------
Federal Home Loan Bank advances 9,337 352 (2,287) 7,402
Federal funds purchased and securities sold 1,676 106 (407) 1,375
---------------------------------------------------------
Total interest-bearing liabilities $ 13,708 $ 915 $(3,497) $11,126
---------------------------------------------------------
---------------------------------------------------------
Net interest income $ 7,459 $ 483 $(2,349) $ 5,593
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
(1) Income from state and political subdivisions securities and loans are
stated on a tax equivalent basis.
20
<PAGE>
Net interest income on a tax-equivalent basis was approximately $19.2
million for the third quarter of 1997 as compared to $17.5 million for
the third quarter of 1996. The increase of 9.7% was due primarily to
the increase in average earning assets which grew $252.0 million or 13.0%
for the quarter ended September 30, 1997 as compared to the same period
ended September 30, 1996. Net interest income was decreased by the lower
net interest margin of 3.69% for the three months ended September 30,
1997 as compared to 3.84% for the same period of 1996. The cost of funds
increased .17% to 4.95% in the third quarter of 1997 as compared to 4.78%
for the same period of 1996 as higher cost FHLB advances and other
borrowings were used to fund loan growth.
Net interest income on a tax-equivalent basis was approximately $56.2
million for the nine months ended September 30, 1997 as compared to $50.6
million for the nine months ended September 30, 1996. The increase of
11.0% was due primarily to the increase in average earning assets which
grew $259.0 million or 13.7% for the nine months ended September 30, 1997
as compared to the same period ended September 30, 1996. Net interest
income was decreased by the lower net interest margin of 3.71% for the
nine months ended September 30, 1997 as compared to 3.83% 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 .06% to 8.25% for the nine months ended September 30, 1997 as
compared to 8.19% for the nine months ended September 30, 1996 while the
cost of funds increased .18% to 4.93% in the third quarter of 1997 as
compared to 4.75% for the same period of 1996.
21
<PAGE>
NONINTEREST INCOME
The following table reflects various components of noninterest income
for each time period reported.
NONINTEREST INCOME
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,508 $ 1,011 $ 4,167 $3,059
Trust fees 221 207 643 620
Investment services fees 854 429 2,147 1,249
Merchant and loan service fees 645 440 1,557 1,291
Gain (loss) on sale of loans, net 605 459 1,375 639
Investment securities gains, net 277 139 515 409
Mortgage repurchase fees 297 178 719 485
Other income 1,008 420 2,676 1,446
-------- -------- -------- ------
Total noninterest income $ 5,415 $ 3,283 $ 13,799 $9,198
-------- -------- -------- ------
-------- -------- -------- ------
</TABLE>
Noninterest income for the three months ended September 30, 1997 was
approximately $5.4 million as compared to $3.3 million for the same period
in 1996. Service charges on deposit accounts increased $497 thousand or
49.2% as fee based deposit accounts continued to increase in the Company's
Indiana market from the new line of checking accounts. Gain on sale of
loans, net increased $146 thousand or 31.8% as the Company increased loan
sale activity in the third quarter. Investment service fees increased $425
thousand or 99.1%. Mortgage repurchase fees increased $119 thousand or
66.9% reflecting growth in this product line. Noninterest income for the
nine months ended September 30, 1997 was approximately $13.8 million as
compared to $9.2 million for the same period in 1996. Service charges on
deposit accounts provided most of the increase by growing to $4.2 million
as compared to $3.1 million for the nine month period ended September 30,
1996, an increase of 36.2%. Gain on sale of loans, net also increased $736
thousand or 115.2%. Investment service fees increase $898 thousand or
71.9%. Mortgage repurchase fees increased $234 thousand or 48.2% reflecting
growth in this product line.
22
<PAGE>
NONINTEREST EXPENSE
The following table presents the major components of noninterest
expense for each period reported.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Salaries $ 4,342 $ 3,961 $13,878 $12,587
Benefits 1,228 1,055 3,758 3,243
------- ------- ------- -------
Total salaries and benefits 5,570 5,016 17,636 15,830
Occupancy 1,121 1,072 3,360 3,112
Equipment 777 859 2,416 2,511
Postage and delivery 331 338 984 887
Supplies 370 400 992 1,130
Marketing and promotion 520 481 1,587 1,496
Professional services 977 532 1,959 1,335
FDIC insurance 170 5,660 502 7,494
Amortization of intangibles 483 507 1,449 1,503
Other expense 13,371 2,324 18,033 6,568
------- ------- ------- -------
Total noninterest expense $23,690 $17,189 $48,918 $41,866
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Noninterest expense for the three months ended September 30, 1997 was
$23.7 million as compared to $17.2 million for the same period in 1996.
Total salaries and benefits increased $554 thousand or 11.0% to $5.6
million for the three months ended September 30, 1997 as compared to the
same period for 1996. Marketing costs increased $39 thousand for the three
months ended September 30, 1997 or 8.1% primarily related to the
introduction of the new line of checking accounts in the Indiana market.
Professional services expenses increased $445 thousand in third quarter of
1997 or 83.6% 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 mergers as well as to
eliminate inefficient processes and procedures. FDIC insurance expense
decreased $5.5 million for the third quarter of 1997 as compared to the
same period in 1996 as 1996 incurred a one-time charge to recapitalize the
Savings Association Insurance Fund. Other expense increased $11.0 million
primarily from the $11.1 million in merger related restructuring charges.
The restructuring charges consisted of approximately $1.0 million for
legal, $300 thousand for accounting, $4.6 million for compensation and
employee contracts, $2.4 million for computer contracts written off, $2.4
million for advisors and $400 thousand for other charges.
Noninterest expense for the nine months ended September 30, 1997 was
$48.9 million as compared to $41.9 million for the same period in 1996.
Salaries and benefits
23
<PAGE>
increased $1.8 million or 11.4% to $15.8 million for the nine months ended
September 30, 1997 as compared to the same period in 1996. Occupancy
expense increased $248 thousand or 8.0% for the first nine months of 1997,
primarily related to new leased property. Postage expense increased $94
thousand or 10.9% because of additional mailings associated with the
checking account products in the Indiana market. Marketing expenses
increased $91 thousand or 6.1% also associated with marketing efforts for
the checking program in the Indiana market. Professional services expenses
increased $624 thousand or 46.7% in the first nine months of 1997 as a
consulting firm was hired in late 1996 to assist in the review of
organizational structure and processes and procedures efficiencies. FDIC
insurance expense decreased $6.9 million in the first nine months of 1997
as compared to the same period of 1996 as the Savings Association Insurance
Fund was re-capitalized with a special one-time charge in 1996. Other
expense increased $11.5 million primarily related to the restructuring
charge of $11.3 million associated with the IFC and CB mergers.
INCOME TAXES
The income tax benefit was approximately $3.1 million for the three
months ended September 30, 1997 and the income tax expense was approximately
$579 thousand for the same period in 1996. The income tax benefit for the
quarter was the result of the $10.0 million increase in provision for loan
losses primarily as a result of conforming loan loss methodologies in
connection with the third quarter 1997 acquisitions of IFC and CB, offset by
the non-deductibility of certain restructuring charges related to the
mergers. Income taxes were approximately $3.0 million for the nine
months ended September 30, 1997 and approximately $4.8 million for the
same period in 1996. The decrease was primarily attributable to the
higher level of provision for loan losses. The effective tax rate was
38.5% for the nine months ended September 30, 1997 as compared to 30.4%
for the same period in 1996.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Average earning assets equaled 94.2% of total average assets for the
third quarter ended September 30, 1997 as compared to 93.4% 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 third quarter of 1997 were $1.5
billion as compared to $1.3 billion for the same period in 1996, an
increase of $192 million or 14.5%. The growth was primarily in
commercial loans and consumer home equity loans as greater emphasis and
management was placed on this type of lending in the new Indiana market
entered in 1995. Average loans outstanding for the nine months ended
September 30, 1997 were $1.5 billion as compared to $1.3 billion for the
same period in 1996, an increase of $178 million or 13.8%. The growth
was also primarily in commercial loans and consumer home equity loans.
Average investment securities, interest-bearing deposits with
financial institutions and fed funds sold were $550 million for the third
quarter of 1997 as compared to $490 million for the same period in 1996,
an increase of $60 million or 12.3% as the Company increased the level of
adjustable rate securities that were matched with short-term FHLB
advances. Average investment securities, interest-bearing deposits with
financial institutions and fed funds sold were $560 million for the nine
months ended
24
<PAGE>
September 30, 1997 as compared to $480 million for the same period in
1996, an increase of $80 million or 16.6%.
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
September 30, 1997, cash and due from banks, federal funds sold, and money
market instruments equaled approximately $52.4 million. Additional
liquidity, is provided by the ability to borrow from the Federal Reserve
Bank and Federal Home Loan Bank of Indianapolis. As of September 30, 1997,
Pinnacle had borrowed $428.6 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
$494.5 million and $513.5 million, respectively, as being
available-for-sale at September 30, 1997 and December 31, 1996,
respectively, which consequently is available to meet liquidity needs of
Pinnacle.
Proceeds from the sale of securities available-for-sale amounted to
$137.5 million in the nine month period ended September 30, 1997 and
$93.7 million in the same period of 1996, with resulting net gains of
$515 thousand and $409 thousand, respectively. At September 30, 1997, net
unrealized gains in Pinnacle's total security portfolio amounted to $1.7
million and $45 thousand at September 30, 1996.
The focus of liquidity management at Pinnacle is to satisfy general
operating expenses, to service existing debt, and to take advantage of
investment opportunities which Pinnacle's management believes will result
in an improved return to stockholders. As Pinnacle is a legal entity
separate and distinct from its bank subsidiary, substantially all of
Pinnacle's revenue results from dividends paid to it by Pinnacle Bank and
from earnings on investments. Dividends paid to Pinnacle by Pinnacle Bank
amounted to $4.5 million for the third quarter of 1997 and $1.5 million for
the third quarter of 1996. Dividends paid to Pinnacle by Pinnacle Bank
amounted to $7.3 million for the nine month period ended September 30,
1997 and $6.9 million for the same period of 1996. Under current
regulations, the amount of dividends that Pinnacle Bank can declare in 1997
is limited to its 1997 net profits (as defined in the Federal Reserve Act)
plus retained profits for 1996 and 1995, unless regulatory approval is
obtained.
SHORT-TERM BORROWINGS
25
<PAGE>
Federal Home Loan Bank advances, securities sold under repurchase
agreements and other borrowings increased $43.8 million, or 9.3%, to
approximately $515.2 million at September 30, 1997. The increase was
primarily used to support growth in the mortgage repurchase loan
program.
ASSET QUALITY
ALLOWANCE FOR LOAN LOSSES
The following table summarizes the loan loss experience and provides a
breakdown of allowance for loan losses during the quarter and nine months
ended September 30, 1997 and 1996.
26
<PAGE>
LOAN LOSS ANALYSIS TABLE
<TABLE>
<CAPTION>
Quarter-to-date Year-to-date
September 30, September 30,
(Dollars in thousands) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans Outstanding at end of period,
net of unearned discount $ 1,533,745 $ 1,369,331
------------------------------------------------------------
------------------------------------------------------------
Average loans for the period $ 1,516,900 $ 1,322,797 $ 1,464,090 $ 1,283,162
------------------------------------------------------------
------------------------------------------------------------
Allowance for loans losses,
beginning of period $ 14,342 $ 14,560 $ 15,410 $ 14,016
------------------------------------------------------------
Charge-offs for period:
Commercial loans 331 366 2,153 472
Real Estate loans 393 -- 1,040 28
Home Equity loans -- -- 19 3
Consumer loans 189 267 714 749
------------------------------------------------------------
Total charge-offs 913 633 3,926 1,252
------------------------------------------------------------
Recoveries for period:
Commercial loans 7 52 8 220
Real Estate loans 85 9 280 141
Consumer loans 43 41 122 143
------------------------------------------------------------
Total recoveries 135 102 410 504
------------------------------------------------------------
Net charge-offs for the period 778 531 3,516 748
------------------------------------------------------------
Allowance recorded for
acquired loans -- -- -- --
Provision for loan losses 10,850 810 12,520 1,571
------------------------------------------------------------
Allowance for loan losses,
end of period $ 24,414 $ 14,839 $ 24,414 $ 14,839
------------------------------------------------------------
------------------------------------------------------------
Ratio of net charge-offs during the
period to average loans outstanding .05% .04% .24% .06%
------------------------------------------------------------
------------------------------------------------------------
Allocation of allowance for loan losses:
Commercial loans $ 12,738 $ 9,182
Real Estate loans 6,320 3,534
Home Equity loans 2,687 813
Consumer loans 2,669 1,310
------------------------------------------------------------
Total allowance for loan losses $ 24,414 $ 14,839
------------------------------------------------------------
------------------------------------------------------------
Percentage of loans to total gross loans:
Real Estate loans 52.4% 54.1%
Commercial loans 30.9% 29.1%
Home Equity loans 10.7% 9.0%
Consumer loans 5.3% 7.2%
Economic development bonds and
other tax exempt loans 0.7% 0.6%
------------------------------------------------------------
Total 100% 100%
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
27
<PAGE>
For the three months ended September 30, 1997, the provision for
loan losses totaled $10.9 million as compared to $810 thousand for the
same period in 1996. The increase was primarily attributable to the
conformity of loan loss reserve methodologies as a result of the third
quarter 1997 acquisition of IFC and CB to that of Pinnacle. In recently
completing Pinnacle's allowance for loan loss conformity review of IFC
and CB, Pinnacle applied the general reserve assumptions consistent with
those utilized historically by Pinnacle, while also reflective of
charge-off trends, particularly in the consumer and credit card
portfolios. Additionally, in fully implementing its detailed individual
loan grading methodology and conforming IFC and CB to that methodology,
Pinnacle established additional general and specific reserves in the
combined commercial real estate portfolio. For the nine months ended
September 30, 1997, the provision for loan losses totaled $12.5 million as
compared to $1.6 million for the same period in 1996. Net charge-offs for
the period ended September 30, 1997 was $3.5 million as compared to
$748 thousand for the same period in 1996.
The allowance for loan losses totaled approximately $24.4 million at
September 30, 1997 as compared to approximately $14.9 million at September
30, 1996 and the allowance as a percentage of total loans was 1.59% and
1.04% respectively, for such dates indicated. The allowance for loan
losses has been allocated according to the amount deemed to be reasonably
necessary to provide for the possibility of losses being incurred within
the above categories of loans at the dates indicated. The allowance is
based on management's periodic evaluation of the loan portfolio and
reflects an amount that, in management's opinion, is adequate to absorb
losses in the existing portfolio. In evaluating the portfolio, management
takes into consideration numerous factors, including current economic
conditions prior loss experience, the composition of loan portfolio, and
management's evaluation of the collectibility of specific loans.
NONPERFORMING ASSETS
Nonperforming assets include nonaccruing loans, restructured loans,
contractually past due 90 days or more but still accruing loans, and other
real estate owned. The following table presents detailed information
concerning nonperforming assets at September 30, 1997 and December 31,
1996.
28
<PAGE>
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
Nonperforming assets (a) :
Nonaccruing loans:
Real estate $ 5,479 $ 6,442
Commercial 5,339 4,569
Home equity 160 --
Other 67 118
- --------------------------------------------------------------------------------
Total nonaccruing loans 11,045 11,129
Contractually past due but still accruing
loans (a)
Real estate $ 5,216 $ 3,459
Commercial 2,665 2,239
Home equity 311 161
Other 543 342
- --------------------------------------------------------------------------------
Total contractually past due but still
accruing loans (a) 8,735 6,201
Restructured loans 476 684
- --------------------------------------------------------------------------------
Total nonperforming loans 20,256 18,014
Other real estate owned 2,633 5,152
- --------------------------------------------------------------------------------
Total nonperforming assets $ 22,889 $ 23,166
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nonperforming loans / loans 1.32% 1.26%
Nonperforming assets / loans and other
real estate owned 1.49% 1.62%
Reserve for possible loan
losses / nonperforming loans 120.53% 82.76%
Reserve for possible loan
losses / nonperforming assets 106.66% 64.36%
- --------------------------------------------------------------------------------
(a) Accruing loans past due 90 days or more.
The increase in total nonperforming loans from December 31, 1996 to
September 30, 1997 is primarily due to the increase in real estate loans past
due but still accruing of $1.8 million. Other real estate decreased $2.5
million.
Management's determination regarding the accrual of interest on loans that
were 90 days or more past due but still accruing is based on the availability
and sufficiency of collateral and the status of collection efforts. In the
present lending environment, certain of such loans could become nonperforming
assets and/or result in charge-offs in the future.
Management continues to focus on asset quality and its potential impact on
the provision and the reserve for possible loan losses. The Company believes
that it has responded appropriately to the current economic environment, and is
prepared to forego transactions which do not meet is quality standards.
29
<PAGE>
Effective January 1, 1995, the Company adopted the Financial
Accounting Standard Board's Statement of Financial Accounting Standards
("SFAS") 114, Accounting by Creditors for Impairment of a Loan and SFAS
118, "Accounting by Creditors for Impairment of a Loan Income Recognition
and Disclosures". A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due. Under SFAS 114 and SFAS 118, "impaired" loans
must be measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate, or, as a practical
expedient, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral-dependent. SFAS 114 and SFAS 118 do
not apply to certain groups of small-balance homogeneous loans that are
collectively evaluated for impairment, loans that are measured at fair
value or at the lower of cost or fair value, leases, or debt securities,
Prior to January 1, 1995, the Company's impaired loans were described as,
and included in, nonaccrual loans. The adoption of the Statements had no
effect on the Company's nonperforming assets or financial statements.
SFAS 114 and SFAS 118 also require additional disclosures. As a
result, the Company has expanded its accounting policy regarding the
recognition of interest income on loans to read as follows: "Interest
income is not accrued on loans where management has determined that the
borrowers may be unable to meet contractual principal and/or interest
obligations, or where interest or principal is 90 days or more past due,
unless the loans are adequately secured and in the process of collection.
When a loan is placed on nonaccrual status (which includes "impaired"
loans), interest accruals cease and uncollected accrued interest is
reversed and charged against current income. Nonaccrual loans are
generally not returned to accruing status until principal and interest
payments have been brought current and full collectibility is reasonably
assured. Cash receipts on nonaccrual loans are generally applied to the
principal balance until the remaining balance is considered fully
collectible, at which time interest income may be recognized according to
the revised terms."
As of September 30, 1997, under SFAS 114 and SFAS 118, the Company's
impaired loans totaled $3.5 million (of which $3.2 million were on a
nonaccrual basis). The related allowance for loan loss on these impaired
loans at September 30, 1997, was $2.3 million. The Company's impaired
loans averaged $4.0 million for the nine months ended September 30, 1997.
Interest income of approximately $137 thousand was recognized, of which
$113 thousand was on an accrual basis, on impaired loans for the nine
months ended September 30, 1997. Charge-offs of approximately $330
thousand were recognized on impaired loans during the nine months ended
September 30, 1997.
The levels of the provision and reserve for possible loan losses are
based on management's ongoing assessment of the Company's credit exposure
and consideration of a number of factors, including prevailing and
anticipated economic conditions, assigned risk ratings on credit exposures,
the diversification and size of the loan portfolio, the results of the most
recent regulatory examinations available to the Company, the current and
projected financial status and creditworthiness of borrowers, certain
off-balance sheet credit risks, the nature and level of nonperforming
assets and loans that have been identified as potential problems, the
adequacy of collateral, past and expected loss experience and other factors
deemed relevant by management. The Company's risk rating system and the
quarterly reporting process for problem and vulnerable credits are
utilized
30
<PAGE>
by management in determining the adequacy of the Company's reserve for
possible loan losses.
Net charge-offs were $778 thousand in the third quarter of 1997,
compared to $531 thousand in the third quarter of 1996. In the second
quarter of 1997 and 1996, respectively, net charge-offs included
$7 thousand and $52 thousand (recoveries) related to commercial borrowers,
$43 thousand and $41 thousand in consumer credits and $85 thousand and
-$9 thousand (recoveries) in real estate credits.
Net charge-offs were $3.5 million for the nine months ended
September 30, 1997, compared to $748 thousand for the same period of 1996.
For the nine month period ended September 30, 1997 and 1996, respectively,
net charge-offs included $8 thousand and -$172 thousand (recoveries)
related to commercial borrowers, $122 thousand and $141 thousand in
consumer credits and $280 thousand (recoveries) and $141 thousand
(recoveries) 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 $15.0 million and $14.0 million at September 30, 1997 and
December 31, 1996, respectively, where management is closely following the
borrower's ability to continue to comply with loan payment terms. Current
conditions do not warrant classification as nonperforming, nor is any
principal loss on these loans considered likely at this time.
FOREIGN LOANS
The Company's loans outstanding to borrowers in foreign countries as
of September 30, 1997 and 1996 did not exceed 1% of its total assets.
LOAN CONCENTRATIONS
As of September 30, 1997 and December 31, 1996, there were no
concentrations of loans to individual borrowers that exceed 10% of total
loans.
CAPITAL
CAPITAL COMPONENTS
The Federal Reserve Board measures capital adequacy for bank holding
companies on the basis of a risk-based capital framework and a leverage
ratio. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
established a capital-based supervisory system of prompt corrective action
for all depository institutions. The bank regulatory agencies implementing
rule under FDICIA defines "well-capitalized" institutions (the highest
possible rating) as those whose capital ratios equal or exceed all the
following: Tier I Risk-Based Ratio, 6.00%, Total Risk-Based Ratio, 10.00%,
and Tier I Leverage Ratio, 5.00%. At September 30, 1997 and December 31,
1996, the Company and its subsidiaries reported capital ratios in excess of
these well capitalized standards.
The Company's and the Bank's actual capital amounts and rations are also
presented in the table.
31
<PAGE>
<TABLE>
<CAPTION>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ------ ------- ----- ------ ------
AS OF SEPTEMBER 30, 1997
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $169,560 13.98% $97,007 8.00% $121,258 10.00%
Pinnacle Bank 148,314 12.41 95,606 8.00 119,507 10.00
TIER I CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated 154,288 12.72% 48,503 4.00% 72,755 6.00%
Pinnacle Bank 133,259 11.15 47,803 4.00 71,704 6.00
TIER I CAPITAL (TO AVERAGE ASSETS):
Consolidated 154,288 7.07% 87,294 4.00% 109,118 5.00%
Pinnacle Bank 133,259 6.13 86,952 4.00 108,690 5.00
</TABLE>
Pinnacle accounts for investment securities in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting of Certain Investments in Debt and Equity Securities. The
unrealized holding gains and losses, net of related tax effect, on
available-for-sale securities are reportable as a separate component of
stockholders equity until realized. However, for determining risk-based
capital ratios, only unrealized holding losses on equity securities are
considered as a component of qualifying capital.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is measured by analyzing the maturity and
timing of interest rate changes on assets and liabilities. The "gap" is
the amount by which interest-sensitive assets exceed interest-sensitive
liabilities for any given period. In periods of increasing interest rates,
a positive gap will generally result in increased net interest income;
conversely, a negative gap will result in decreased net interest income in
such periods. In periods of decreasing interest rates, a positive gap will
result in decreased net interest income, and a negative gap will result in
increased net interest income.
To manage Pinnacle's exposure to changes in interest rate, management
of Pinnacle closely monitors its interest rate risk. An asset/liability
committee consisting of senior officers meets regularly and reviews
Pinnacle's interest rate risk position and makes recommendation for
adjustments to the position. In addition, the Board of Directors of
Pinnacle periodically reviews Pinnacle's asset/liability position,
including simulations of the effect on Pinnacle's earnings and capital of
various interest rate scenarios.
In managing its asset/liability mix, and depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, Pinnacle may place somewhat greater emphasis on maximizing its
net interest margin than on matching the interest rate sensitivity of its
assets and liabilities in an effort to increase its net income. Management
believes that the increased net income results from a mismatch in the
maturity of its asset and liability portfolios can, during periods of
declining or stable interest rates, provide high enough returns to justify
the increase exposure to sudden and unexpected increases in interest rates
which can result from such mismatch. As a result, there may be relatively
more exposure to rapid increases in interest rates than some other
32
<PAGE>
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 and liabilities as of September 30, 1997. In
preparing the table, management of Pinnacle has assumed that loans prepay
to varying degrees based on type, maturity and rate. Certificates of
deposit have been entered into the analysis based on contractual maturity.
INTEREST RATE SENSITIVITY/GAP ANALYSIS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 INTEREST RATE SENSITIVITY PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
0 - 3 4 - 6 7 - 9 10 - 12 OVER 1
(Dollars in thousands) MONTHS MONTHS MONTHS MONTHS YEAR TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits
with financial institutions $ 7,269 $ - $ - $ - $ 672 $ 7,941
Securities available for sale 130,604 15,296 13,897 9,111 325,606 494,514
Loans 537,132 97,781 86,801 75,756 736,252 1,533,722
Nonearning assets - - - - - 150,131
----------------------------------------------------------------------------------------
Total Assets $ 675,005 $ 113,077 $ 100,698 $ 84,867 $ 1,062,530 $ 2,186,308
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
FUNDING SOURCES:
Interest-bearing demand $ 5,549 $ 68,825 $ 4,174 $ 4,174 $ 65,410 $ 148,132
Savings and time deposits 468,790 152,243 92,196 101,367 395,714 1,210,310
Federal Home Loan Bank
advances 205,000 33,900 38,600 15,200 135,871 428,571
Other borrowings 72,361 11,315 - - 2,963 86,639
Noninterest bearing demand - - - - - 113,514
Noninterest bearing source - - - - - 199,142
----------------------------------------------------------------------------------------
Total funding sources $ 751,700 $ 266,283 $ 134,970 $ 120,741 $ 599,958 $ 2,186,308
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
REPRICING/MATURITY GAP
Period $ (76,695) $ (153,206) $ (34,272) $ (35,874) $ 462,572
Cumulative $ (76,695) $ (229,901) $ (264,173) $ (300,047) $ 162,525
Cumulative rate sensitivity
assets/Cumulative rate
sensitivity funding sources 89.80% 77.42% 77.09% 76.44% 108.67%
----------------------------------------------------------------------------------------
</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
33
<PAGE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 12). SFAS No. 128 supersedes APB Opinion 15, "Earnings Per
Share", and specifies the computation, presentation and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. SFAS No. 128 was issued to
simplify the computations of EPS and to make the U.S. standard more
compatible with the EPS standards of the International Accounting Standards
Committee. It replaces the presentation of primary and fully-diluted EPS
with a presentation of basic and diluted EPS, respectively. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares of outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock, or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to fully-diluted
EPS under APB 15.
SFAS No. 128 is effective for financial statements for both interim
and annual periods ending 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.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130). Statement No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Statement No. 130 is effective for both interim and annual periods
beginning after December 15, 1997 and is not expected to have a material
impact on the Company.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131).
Statement No. 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. Statement No. 131 is effective for financial periods
beginning after December 15, 1997 and is not expected to have a material
impact on the Company.
34
<PAGE>
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. The Company is
currently evaluating the risks, solutions, and costs associated with Year
2000 issues. Most of the costs incurred in addressing the Year 2000
problem are expected to be expensed as incurred in compliance with
generally accepted accounting principles.
In October 1997, the Accounting Standards Executive Committee of the AICPA
voted to issue a final statement of Position (SOP), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use".
However, the issuance of this SOP is subject to approval by the Financial
Accounting Standards Board (FASB). The AICPA hopes to issue a final SOP in
the first quarter of 1998. The SOP would be effective for financial
statements for fiscal years beginning after December 15, 1998, with earlier
application encouraged.
In summary, the SOP states that the following costs incurred in developing
internal-use software should be capitalized: direct costs for materials
and services paid to external parties for developing or obtaining the
software; payroll and payroll-related costs for employers' time spent
directly on the project, and interest costs incurred in developing the
software.
Currently, banks must expense such costs. The impart of this SOP to the
Company's results is currently being evaluated.
Management's statements of expectations for certain financial results for
the future, as included in this report, are forward-looking statements.
The Company's actual performance and financial results may differ from
these projections as a result of a variety of factors, including but not
limited to changes in the economy, assumed rates of revenue growth, expense
reductions, competition and the implementation of internal business plans.
35
<PAGE>
PART II OTHER INFORMATION
Item 1. None
Item 2. None
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of the Security Holders of Pinnacle
Financial Services, Inc. common stock was held July 30,
1997.
c. At the meeting, security holders were asked to consider and
vote upon
1.) a proposal to approve and adopt (i) the Agreement and
Plan of Merger dated as of November 14, 1996, as amended
(the "IFC Merger Agreement"), by and between Pinnacle and
Indiana Federal Corporation ("IFC"), and (ii) all of the
transactions contemplated by the Merger Agreement, with
Pinnacle being the surviving corporation;
2.) a proposal to approve and adopt (i) the Agreement and
Plan of Merger dated as of March 1, 1997 (the "CB Merger
Agreement"), by and between Pinnacle and CB Bancorp, Inc.
("CB"), and (ii) all of the transactions contemplated by
the CB Merger Agreement, with Pinnacle being the surviving
corporation;
3.) nominees for the office of director.
Summary of Voting for Issues listed above:
<TABLE>
<CAPTION>
Non- Broker Non-
For Against Withheld votes Withheld votes
--- ------- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
1. IFC Merger 4,358,423 38,994 40,098 305,631 3,594 305,631
2. CB Merger 4,380,268 16,931 40,315 305,631 4,866 305,631
3. John P. Cunningham 4,721,082 0 22,064 0 6,029 0
Charles R. Edinger 4,727,871 0 15,276 0 4,129 0
John D. Fetters 4,727,871 0 15,276 0 4,129 0
Terrence A. Friedman 4,727,971 0 15,176 0 4,029 0
Richard L. Schanze 4,727,971 0 15,176 0 4,029 0
Kay F. Varga 4,642,727 0 100,420 0 39,931 0
Arnold L. Weaver 4,726,549 0 16,598 0 4,329 0
Alton C. Wendzel 4,727,871 0 15,276 0 4,129 0
</TABLE>
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(ii) ByLaws as amended and in effect as of July 30, 1997.
(27) Financial Data Schedule
(b) Reports on Form 8-K filed
1. Report filed August 4, 1997, reporting on acquisition
of assets in conjunction with mergers of Indiana Federal
Corporation ("IFC") and CB Bancorp, Inc. ("CB"),
effective August 1, 1997. (See Item 4 above)
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PINNACLE FINANCIAL SERVICES, INC.
DATE: January 7, 1998 By: /s/ David W. Kolhagen
------------------------------------------
David W. Kolhagen
Senior Vice President & Chief Financial Officer
By: /s/ John A. Newcomer
------------------------------------------
John A. Newcomer
Vice President & Corporate Affairs Officer
37
<PAGE>
BY-LAWS
OF
PINNACLE FINANCIAL SERVICES, INC.
(AS AMENDED JULY 30, 1997)
ARTICLE I. OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be in the
City of St. Joseph, County of Berrien, State of Michigan.
SECTION 2. OTHER OFFICES. The corporation may also have offices at
such other places both within and without the State of Michigan as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II. SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. All meetings of the shareholders of this
corporation shall be held at such time and place, either within or without the
State of Michigan, as may be determined from time to time by the board of
directors and stated in the notice of the meeting or in a duly executed waiver
of notice thereof.
SECTION 2. ANNUAL MEETING OF SHAREHOLDERS. The annual meeting of
shareholders for election of directors and for such other business as may
properly come before the meeting, commencing with the year 1996, shall be held
on the last Tuesday of April if not a legal holiday, and if a legal holiday,
then the next business day following, at 10:00 a.m., local time, or at such
other date and time as shall be determined from time to time by the Board of
Directors and stated in the notice of the meeting or in a duly executed waiver
of notice thereof.
SECTION 3. ORDER OF BUSINESS AT ANNUAL MEETING. The order of business
at the annual meeting of the shareholders shall be as follows:
(a) Reading of notice and proof of mailing,
(b) Reports of officers,
(c) Election of directors,
(d) Transaction of other business mentioned in the notice,
(e) Adjournment.
provided that, in the absence of any objection, the presiding officer may vary
the order of business at his discretion.
37
<PAGE>
SECTION 4. NOTICE OF MEETING OF SHAREHOLDERS. Except as otherwise
provided in the Michigan Business Corporation Act (herein called the "Act"),
or the articles of incorporation, written notice of the time, place and
purpose of a meeting of shareholders shall be given not less than ten nor
more than sixty days before the date of the meeting, either personally or by
mail, to each shareholder of record entitled to vote at the meeting. When a
meeting is adjourned to another time or place, it is not necessary to give
notice of the adjourned meeting if the time and place to which the meeting is
adjourned are announced at the meeting at which the adjournment is taken and
at the adjourned meeting only such business is transacted as might have been
transacted at the original meeting. However, if after the adjournment the
board of directors fixes a new record date for the adjourned meeting, a
notice of the adjourned meeting shall be given to each shareholder of record
on the new record date entitled to vote at the meeting.
SECTION 5. LIST OF SHAREHOLDERS ENTITLED TO VOTE. The officer or agent
having charge of the stock transfer books for shares of capital stock of the
corporation shall make and certify a complete list of the shareholders entitled
to vote at a shareholders' meeting or any adjournment thereof. The list shall:
(a) Be arranged alphabetically within each class and series of capital
stock, with the address of, and the number of shares held by, each
shareholder.
(b) Be produced at the time and place of the meeting.
(c) Be subject to inspection by any shareholder entitled to vote during
the whole time of the meeting.
(d) Be prima facie evidence as to who are the shareholders entitled to
examine the list or to vote at the meeting.
SECTION 6. SPECIAL MEETING OF SHAREHOLDERS. Except as otherwise
provided in the articles of incorporation, a special meeting of shareholders may
be called at any time by the chief executive officer of the corporation (See
Article V, Section 4) or by a majority of the members of the board of directors
then in office, or by shareholders owning, in the aggregate, not less than
twenty-five percent of all the shares of capital stock entitled to vote at such
special meeting. The method by which such meeting may be called is as follows:
Upon receipt of a specification in writing setting forth the date and objects of
such proposed special meeting, signed by the chief executive officer, or by a
majority of the members of the board of directors then in office, or by
shareholders as above provided, the secretary of this corporation shall prepare,
sign and mail the notices requisite to such meeting.
SECTION 7. QUORUM OF SHAREHOLDERS. Unless a greater or lesser quorum
is provided in the articles of incorporation, in a bylaw adopted by the
shareholders or in the Act, shares entitled to cast a majority of the votes at a
meeting constitute a quorum at the meeting. The shareholders present in person
or by proxy at such meeting may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. Whether or not a quorum is present, the meeting may be adjourned by a
vote of the shares present.
38
<PAGE>
SECTION 8. VOTE OF SHAREHOLDERS. Each outstanding share of capital
stock of the corporation shall be entitled to one vote on each matter submitted
to a vote, unless otherwise provided in the articles of incorporation. A vote
may be cast either orally or in writing. When an action, other than the
election of directors, is to be taken by vote of the shareholders, it shall be
authorized by a majority of the votes cast by the holders of shares entitled to
vote thereon, unless a greater plurality is required by the articles of
incorporation or the Act. Directors shall be elected by a plurality of the
votes cast at an election.
SECTION 9. RECORD DATE FOR DETERMINATION OF SHAREHOLDERS. For the
purpose of determining shareholders entitled to notice of and to vote at a
meeting of shareholders or an adjournment thereof, or to express consent or to
dissent from a proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of a dividend or allotment of a right,
or for the purpose of any other action, the board may fix, in advance, a date as
the record date for any such determination of shareholders. The date shall not
be more than sixty nor less than ten days before the date of the meeting, nor
more than sixty days before any other action. If a record date is not fixed (a)
the record date for determination of shareholders entitled to notice of or to
vote at a meeting of shareholders shall be the close of business on the day next
preceding the day on which notice is given, or, if no notice is given, the day
next preceding the day on which the meeting is held, and (b) the record date of
determining shareholders for any purpose other than that specified in
subdivision (a) shall be the close of business on the day on which the
resolution of the board relating thereto is adopted. When a determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders has been made as provided in this Section, the determination
applies to any adjournment of the meeting, unless the board fixes a new record
date under this Section for the adjourned meeting.
SECTION 10. PROXIES. A shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may authorize
one or more other persons to act for him by proxy. A proxy shall be signed by
the shareholder or his authorized agent or representative. A proxy shall not be
valid after the expiration of three years from its date unless otherwise
provided in the proxy.
SECTION 11. INSPECTORS OF ELECTION. The board of directors, in advance
of a shareholders' meeting, may appoint one or more inspectors of election to
act at the meeting or any adjournment thereof. If inspectors are not so
appointed, the person presiding at a shareholders' meeting may, and on request
of a shareholder entitled to vote thereat shall, appoint one or more inspectors.
In case a person appointed fails to appear or act, the vacancy may be filled by
appointment made by the board of directors in advance of the meeting or at the
meeting by the person presiding thereat. The inspectors shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine
challenges and questions arising in connection with the right to vote, count and
tabulate votes, ballots or consents, determine the result, and do such acts as
are proper to conduct the election or vote with fairness to all shareholders.
On request of the person presiding at the meeting or a shareholder entitled to
vote thereat, the inspectors shall make and execute a written report to the
person presiding at the meeting of any of the facts found by them and matters
determined by them. The report is prima facie evidence of the facts stated and
of the vote as certified by the inspectors.
39
<PAGE>
SECTION 12. CONSENT OF SHAREHOLDERS IN LIEU OF MEETING. Any action
required or permitted by the Act to be taken at an annual or special meeting of
shareholders may be taken without a meeting, without prior notice and without a
vote, if all the shareholders entitled to vote thereon consent thereto in
writing.
ARTICLE III. DIRECTORS
SECTION 1. NUMBER AND TERM OF DIRECTORS. The number of directors which
shall constitute the whole board shall be not less than five nor more than
twenty. The first board shall consist of eleven directors. Thereafter, the
number of directors which shall constitute the board of directors shall be
determined from time to time by resolution adopted by the affirmative vote of a
majority of the entire board of directors. A director shall hold office until
the next annual meeting of shareholders and thereafter until his successor shall
be elected and qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office. Directors need not be
shareholders.
SECTION 2. VACANCIES. A position occurring in the board of directors
resulting from a vacancy or an increase in the number of directors may be filled
by the affirmative vote of a majority of the remaining directors of the entire
board then in office, though less than a quorum of the board, for a term of
office until the next annual meeting of shareholders and thereafter until his
successor shall be elected and qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office.
SECTION 3. REMOVAL. Any director, or the entire board, may be removed
from office at any time, with or without cause, but only by the affirmative vote
of the holders of a majority of the outstanding shares of capital stock of the
corporation entitled to vote, voting together as a single class.
SECTION 4. RESIGNATION. A director may resign by written notice to the
corporation. The resignation is effective upon its receipt by the corporation
or a subsequent time as set forth in the notice of resignation.
SECTION 5. POWERS. The business and affairs of the corporation shall
be managed by its board of directors, except as otherwise provided in the Act or
in the articles of incorporation.
SECTION 6. LOCATION OF MEETINGS. Regular or special meetings of the
board of directors may be held either within or without the State of Michigan.
SECTION 7. ANNUAL ORGANIZATION MEETING OF BOARD. An annual
organization meeting of the board of directors shall be held at the place of
holding the annual meeting of shareholders, and immediately following the same,
for the purpose of electing officers and transacting any other business properly
brought before it, provided that the annual organization meeting in any year may
be held at a different time and place than that herein provided by a consent of
a majority of the board of directors. No notice of such meeting shall be
necessary to the directors in order legally to constitute the meeting, provided
a quorum shall be present, unless said meeting is not held at the place of
holding and immediately following the annual meeting of shareholders.
SECTION 8. REGULAR MEETING OF BOARD. Regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board.
40
<PAGE>
SECTION 9. SPECIAL MEETING OF BOARD. Special meetings of the board of
directors may be called by the chief executive officer, or by a majority of the
persons then comprising the board of directors, at any time by means of notice
of the time and place thereof to each director, given not less than twenty-four
hours before the time such special meeting is to be held.
SECTION 10. COMMITTEES OF DIRECTORS. The board of directors may
designate one or more committees, each committee to consist of one or more of
the directors of the corporation. The board may designate one or more directors
as alternate members of any committee, who may replace an absent or disqualified
member at a meeting of the committee. In the absence or disqualification of a
member of a committee, the members thereof present at a meeting and not
disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of directors
creating such committee, may exercise all the powers and authority of the board
of directors in the management of the business and affairs of the corporation.
However, such a committee shall not have the power or authority to amend the
articles of incorporation, adopt an agreement of merger or consolidation,
recommend to the shareholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommend to the
shareholders a dissolution of the corporation or a revocation of a dissolution,
amend the bylaws of the corporation, fill vacancies in the board of directors,
or fix compensation of the directors serving on the board or on a committee;
and, unless the resolution of the board of directors creating such committee or
the articles of incorporation expressly so provides, such a committee shall not
have the power or authority to declare a dividend or to authorize the issuance
of capital stock. Any such committee, and each member thereof, shall serve at
the pleasure of the board of directors.
SECTION 11. QUORUM AND REQUIRED VOTE OF BOARD AND COMMITTEES. At all
meetings of the board of directors, or of a committee thereof, a majority of the
members of the board then in office, or of the members of a committee thereof,
constitutes a quorum for transaction of business. The vote of the majority of
members present at a meeting at which a quorum is present constitutes the action
of the board or of the committee unless the vote of a larger number is required
by the Act, the articles of incorporation, or these Bylaws. If a quorum shall
not be present at any meeting of the board of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present. Notwithstanding
anything herein to the contrary, whenever the Board of Directors of the
corporation is comprised of ten (10) or fewer persons, action of the Board
within the meaning of Section 523 of the Act, and for all other purposes, shall
require the favorable vote of six (6) or more of the directors, and whenever the
Board of Directors of the corporation is comprised of eleven (11) or twelve (12)
persons, action of the Board within the meaning of Section 523 of the Act, and
for all other purposes, shall require the favorable vote of seven (7) or more of
the directors.
SECTION 12. ACTION BY WRITTEN CONSENT. Action required or permitted to
be taken pursuant to authorization voted at a meeting of the board of directors
or a committee thereof, may be taken without a meeting if, before or after the
action, all members of the board or of the committee consent thereto in writing.
The written consents shall be filed with the minutes of the proceedings of the
board or committee. The consent has the same effect as a vote of the board or
committee for all purposes.
SECTION 13. COMPENSATION OF DIRECTORS. The board of directors, by
affirmative vote of a majority of directors in office and irrespective of any
personal interest of any of them, may establish reasonable
41
<PAGE>
compensation of directors for services to the corporation as directors or
officers, but approval of the shareholders is required if the articles of
incorporation, these bylaws or any provisions of the Act so provide.
SECTION 14. PARTICIPATION IN MEETING BY TELEPHONE. By oral or written
permission of a majority of the board of directors, a member of the board of
directors or of a committee designated by the board may participate in a meeting
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section constitutes presence in
person at the meeting.
SECTION 15. NOMINATIONS OF DIRECTOR CANDIDATES.
(a) ELIGIBILITY TO MAKE NOMINATIONS. Nominations of candidates for
election as directors of the corporation at any meeting of shareholders called
for election of directors (an "Election Meeting") may be made by the board of
directors or by any shareholder entitled to vote at such Election Meeting.
42
<PAGE>
(b) PROCEDURE FOR NOMINATIONS BY THE BOARD OF DIRECTORS. Nominations
made by the board of directors shall be made at a meeting of the board of
directors, or by written consent of directors in lieu of a meeting, not less
than thirty days prior to the date of the Election Meeting, and such
nominations shall be reflected in the minute books of the corporation as of
the date made. At the request of the secretary of the corporation, each
proposed nominee shall provide the corporation with such information
concerning himself as is required, under the rules of the Securities and
Exchange Commission, to be included in the corporation's proxy statement
soliciting proxies for his election as a director.
(c) PROCEDURE FOR NOMINATIONS BY SHAREHOLDERS. No less than ninety days
prior to the date of the Election Meeting in the case of an annual meeting,
and not more than seven days following the date of notice of the meeting in
the case of a special meeting, any shareholder who intends to make a
nomination at the Election Meeting shall deliver a notice to the secretary of
the corporation setting forth (i) the name, age, business address and
residence of each nominee proposed in such notice, (ii) the principal
occupation or employment of each such nominee, (iii) the number of shares of
each class and series of capital stock of the corporation which are
beneficially owned by each such nominee and (iv) such other information
concerning each such nominee as would be required, under the rules of the
Securities and Exchange Commission, in a proxy statement soliciting proxies
for the election of such nominee.
(d) SUBSTITUTION OF NOMINEES. In the event that a person is validly
designated as a nominee in accordance with subsection (b) or (c) hereof and
shall thereafter become unable or unwilling to stand for election to the board
of directors, the board of directors or the shareholder who proposed such
nominee, as the case may be, may designate a substitute nominee.
(e) AGE QUALIFICATION. No person shall be nominated or elected as a
director of the corporation after having attained the age of seventy years;
provided, however, the foregoing (i) shall not be deemed to prevent a person
duly nominated and elected as a director of the corporation prior to attaining
the age of seventy years from continuing to hold office after attaining the age
of seventy years for the full term of office to which he was so elected, and
(ii) shall not be applicable with respect to a person who, on the date of filing
of the articles of incorporation of this corporation in the office of the
Corporation and Securities Bureau of the Michigan Department of Commerce, is
then serving, and has continuously since April 18, 1979, to said filing date
served, as a director of The Peoples State Bank of St. Joseph, Michigan.
(f) DETERMINATION OF COMPLIANCE WITH PROCEDURES. If the chairman of the
Election Meeting determines that a nomination was not in accordance with the
foregoing procedures, such nomination shall be void.
43
<PAGE>
ARTICLE IV. NOTICES
SECTION 1. NOTICE. Whenever any notice or communication is required to
be given by mail to any director or shareholder under any provision of the Act,
or of the articles of incorporation or of these bylaws, it shall be given in
writing, except as otherwise provided in the Act, to such director or
shareholder at the address designated by him for that purpose or, if none is
designated, at his last known address. The notice or communication is given
when deposited, with postage thereon prepaid, in a post office or official
depository under the exclusive care and custody of the United States postal
service. The mailing shall be registered, certified or other first class mail
except where otherwise provided in the Act. Written notice may also be given in
person or by telegram, telex, radiogram, cablegram, or mailgram, and such notice
shall be deemed to be given when the recipient receives the notice personally,
or when the notice, addressed as provided above, has been delivered to the
company, or to the equipment transmitting such notice. Neither the business to
be transacted at, nor the purpose of, a regular or special meeting of the board
of directors need be specified in the notice of the meeting.
SECTION 2. WAIVER OF NOTICE. When, under the Act or the articles of
incorporation or these bylaws, or by the terms of an agreement or instrument,
the corporation or the board or any committee thereof may take action after
notice to any person or after lapse of a prescribed period of time, the action
may be taken without notice and without lapse of the period of time, if at any
time before or after the action is completed the person entitled to notice or to
participate in the action to be taken or, in case of a shareholder, by his
attorney-in-fact, submits a signed waiver of such requirements. Neither the
business to be transacted at, nor the purpose of, a regular or special meeting
of the board of directors need be specified in the waiver of notice of the
meeting. Attendance of a person at a meeting of shareholders, in person or by
proxy, or of a director at a meeting constitutes a waiver of notice of such
meeting, except when the person or director attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
ARTICLE V. OFFICERS
SECTION 1. SELECTION. The board of directors, at its first meeting and
at each meeting following the annual meeting of shareholders, shall elect or
appoint a president, a secretary and a treasurer. The board of directors may
also elect or appoint a chairman of the board, one or more vice presidents and
such other officers, employees and agents as it shall deem necessary who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the board. Two or more
offices may be held by the same person but an officer shall not execute,
acknowledge or verify an instrument in more than one capacity.
SECTION 2. COMPENSATION. The salaries of all officers, employees and
agents of the corporation shall be fixed by the board of directors; provided,
however, that the board may delegate to the officers the fixing of compensation
of assistant officers, employees and agents.
44
<PAGE>
SECTION 3. TERM, REMOVAL AND VACANCIES. Each officer of the
corporation shall hold office for the term for which he is elected or appointed
and until his successor is elected or appointed and qualified, or until his
resignation or removal. An officer elected or appointed by the board of
directors may be removed by the board with or without cause at any time. An
officer may resign by written notice to the corporation. The resignation is
effective upon its receipt by the corporation or at a subsequent time specified
in the notice of resignation. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
SECTION 4. CHIEF EXECUTIVE OFFICER. At each annual organization
meeting of the board of directors, the board shall designate the chairman of
the board or president as the chief executive officer of the corporation;
provided, however, that if a motion is not made and carried to change the
designation, the designation shall be the same as the designation for the
preceding year; provided, further, that the designation of the chief
executive officer may be changed at any special meeting of the board of
directors. The president shall be the chief executive officer whenever the
office of chairman of the board is vacant. The chief executive officer shall
be responsible to the board of directors for the general supervision and
management of the business and affairs of the corporation and shall see that
all orders and resolutions of the board are carried into effect. The
chairman of the board or president who is not the chief executive officer
shall be subject to the authority of the chief executive officer, but shall
exercise all of the powers and discharge all of the duties of the chief
executive officer, during the absence or disability of the chief executive
officer.
SECTION 5. CHAIRMAN OF THE BOARD OF DIRECTORS. If the board of
directors elects or appoints a chairman of the board, he shall be elected or
appointed by, and from among, the membership of, the board of directors. He
shall preside at all meetings of the shareholders, of the board of directors and
of any executive committee. He shall perform such other duties and functions as
shall be assigned to him from time to time by the board of directors. He shall
be, ex officio, a member of all standing committees. Except where by law the
signature of the president of the corporation is required, the chairman of the
board of directors shall possess the same power and authority to sign all
certificates, contracts, instruments, papers and documents of every conceivable
kind and character whatsoever in the name of and on behalf of the corporation
which may be authorized by the board of directors. During the absence or
disability of the president, or while that office is vacant, the chairman of the
board of directors shall exercise all of the powers and discharge all of the
duties of the president.
45
<PAGE>
SECTION 6. PRESIDENT. The president shall be elected or appointed by,
and from among the membership of, the board of directors. During the absence or
disability of the chairman of the board, or while that office is vacant, the
president shall preside over all meetings of the board of directors, of the
shareholders and of any executive committee, and shall perform all of the duties
and functions, and when so acting shall have all powers and authority, of the
chairman of the board. He shall be, ex officio, a member of all standing
committees. The president shall, in general, perform all duties incident to the
office of president and such other duties as may be prescribed by the board of
directors.
SECTION 7. VICE PRESIDENTS. The board of directors may elect or
appoint one or more vice presidents. The board of directors may designate one
or more vice presidents as executive or senior vice presidents. Unless the
board of directors shall otherwise provide by resolution duly adopted by it,
such of the vice presidents as shall have been designated executive or senior
vice presidents and are members of the board of directors in the order specified
by the board of directors (or if no vice president who is a member of the board
of directors shall have been designated as executive or senior vice president,
then such vice presidents as are members of the board of directors in the order
specified by the board of directors) shall perform the duties and exercise the
powers of the president during the absence or disability of the president. The
vice presidents shall perform such other duties as may be delegated to them by
the board of directors, any executive committee, or the president.
SECTION 8. SECRETARY. The secretary or his designee shall attend all
meetings of the shareholders, and of the board of directors and of any
executive committee, and shall preserve in the books of the corporation true
minutes of the proceedings of all such meetings. He shall safely keep in his
custody the seal of the corporation and shall have authority to affix the
same to all instruments where its use is required or permitted. He shall
give all notice required by the Act, the articles of incorporation, these
bylaws or resolution. He shall perform such other duties as may be delegated
to him by the board of directors, any executive committee, or the president.
SECTION 9. TREASURER. The treasurer shall have custody of all
corporate funds and securities and shall keep in books belonging to the
corporation full and accurate accounts of all receipts and disbursements; he
shall deposit all moneys, securities and other valuable effects in the name of
the corporation in such depositories as may be designated for that purpose by
the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors
whenever requested an account of all his transactions as treasurer and of the
financial condition of the corporation. If required by the board of directors
he shall keep in force a bond in form, amount and with a surety or sureties
satisfactory to the board of directors, conditioned for faithful performance of
the duties of his office, and for restoration to the corporation in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and property of whatever kind in his possession or under his
control belonging to the corporation. He shall perform such other duties as may
be delegated to him by the board of directors, any executive committee, or the
president.
46
<PAGE>
SECTION 10. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretary or assistant secretaries, in the absence or disability of
the secretary, shall perform the duties and exercise the powers of the
secretary. The assistant treasurer or assistant treasurers, in the absence or
disability of the treasurer, shall perform the duties and exercise the powers of
the treasurer. Any assistant treasurer, if required by the board of directors,
shall keep in force a bond as provided in Section 9, Article V. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or by the treasurer, respectively, or
by the board of directors, any executive committee, or the president.
SECTION 11. DELEGATION OF AUTHORITY AND DUTIES BY BOARD OF DIRECTORS.
All officers, employees and agents shall, in addition to the authority
conferred, or duties imposed, on them by these bylaws, have such authority and
perform such duties in the management of the corporation as may be determined by
resolution of the board of directors not inconsistent with these bylaws.
ARTICLE VI. INDEMNIFICATION
SECTION 1. THIRD PARTY ACTIONS. The corporation shall indemnify a
person who was or is a party or is threatened to be made a party to a
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, against expenses (including attorneys' fees),
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with the action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation or its shareholders, and
with respect to a criminal action or proceeding, if such person had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation or its shareholders, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
SECTION 2. ACTIONS IN THE RIGHT OF THE CORPORATION. The corporation
shall indemnify a person who was or is a party to or is threatened to be made a
party to a threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, whether for profit or
not, against expenses (including actual and reasonable attorneys' fees) and
amounts paid in settlement incurred by him
47
<PAGE>
in connection with the action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders. However, indemnification shall not be made for
a claim, issue or matter as to which such person has been found liable to the
corporation unless and only to the extent that the court in which the action or
suit was brought has determined upon application that, despite the adjudication
of liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnification for the expenses which the court
considers proper.
SECTION 3. MANDATORY AND PERMISSIVE PAYMENTS.
(a) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 or 2 of this Article VI, or
in defense of any claim, issue or matter in the action, suit or proceeding, he
shall be indemnified against expenses (including actual and reasonable
attorneys' fees) incurred by him in connection with the action, suit or
proceeding and an action, suit, or proceeding brought to enforce the mandatory
indemnification provided hereby.
(b) Any indemnification under Sections 1 or 2 of this Article VI, unless
ordered by a court, shall be made by the corporation only as authorized in
the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in Sections 1 and 2 of this
Article VI. Such determination shall be made in any of the following ways:
(1) By a majority vote of a quorum of the board consisting of directors
who were not parties to the action, suit or proceeding.
(2) If such quorum is not obtainable, then by a majority vote of a
committee of directors who are not parties to the action, suit or
proceeding. The committee shall consist of not less than 2
disinterested directors.
(3) By independent legal counsel in a written opinion.
(4) By the shareholders.
(c) If a person is entitled to indemnification under Sections 1 or 2 of
this Article VI for a portion of expenses, including attorneys' fees, judgments,
penalties, fines, and amounts paid in settlement, but not for the total amount
thereof, the corporation may indemnify the person for the portion of the
expenses, judgments, penalties, fines, or amounts paid in settlement for which
the person is entitled to be indemnified.
SECTION 4. EXPENSE ADVANCES. Expenses incurred in defending a civil or
criminal action, suit or proceeding described in Sections 1 or 2 of this Article
VI may be paid by the corporation in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay the expenses if it is ultimately
determined that he is not entitled to be indemnified by the corporation. The
undertaking shall be by unlimited general obligation of the person on whose
behalf advances are made but need not be secured.
48
<PAGE>
SECTION 5. VALIDITY OF PROVISIONS. A provision made to indemnify
directors or officers of any action, suit or proceeding referred to in Sections
1 or 2 of this Article VI whether contained in the articles of incorporation,
these bylaws, a resolution of shareholders or directors, an agreement or
otherwise, shall be invalid only insofar as it is in conflict with Sections 1 to
5 of this Article VI. The indemnification provided in Sections 1 to 5 of this
Article VI continues as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
SECTION 6. INSURANCE. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the corporation would have power to indemnify him again
such liability under Sections 1 to 5 of this Article VI.
SECTION 7. DEFINITIONS. For the purposes of this Article VI:
References to the corporation includes all constituent corporations absorbed in
a consolidation or merger and the resulting or surviving corporation, so that a
person who is or was a director, officer, employee or agent of the constituent
corporation, or is or was serving at the request of the constituent corporation
as a director, officer, partner, trustee, employee or agent of another foreign
or domestic corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, shall stand in the same position under the provisions
of this Article VI with respect to the resulting or surviving corporation as he
would if he had served the resulting or surviving corporation in the same
capacity. References to "other enterprises" shall include employee benefit
plans; "fines" shall include any excise taxes assessed on a person with respect
to an employee benefit plan; and "serving at the request of the corporation"
shall include any service as a director, officer, employee, or agent of the
corporation which imposes duties on, or involves services by, the director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he or she reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be considered to have acted
in a manner "not opposed to the best interests of the corporation or its
shareholders" as referred to in Sections 1 and 2 of this Article VI.
SECTION 8. NONEXCLUSIVITY. The indemnification or advancement of
expenses provided under this Article VI is not exclusive of other rights to
which a person seeking indemnification or advancement of expenses may be
entitled under the corporation's articles of incorporation or a contractual
agreement. However, the total amount of expenses advanced or indemnified from
all sources combined shall not exceed the amount of actual expenses incurred by
the person seeking indemnification or advancement of expenses.
49
<PAGE>
ARTICLE VII. STOCK AND TRANSFERS
SECTION 1. SHARE CERTIFICATES: REQUIRED SIGNATURES. The shares of
capital stock of the corporation may be represented by certificates signed by
the chairman of the board of directors, vice chairman of the board of directors,
president or a vice president and by the treasurer, assistant treasurer,
secretary or assistant secretary of the corporation, and may be sealed with the
seal of the corporation or a facsimile thereof. The signatures of the officers
may be facsimiles if the certificate is countersigned by a transfer agent or
registered by a registrar other than the corporation itself or its employee. In
case an officer who has signed or whose facsimile signature has been placed upon
a certificate ceases to be such officer before the certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer at
the date of issue.
If the board authorizes the issuance of some or all of the shares without
certificates, the authorization will not affect shares already represented by
certificates. Within a reasonable time after the issuance or transfer of shares
without certificates, the corporation shall send the shareholder a written
statement of the information identical to that required on certificates by
section 332.
SECTION 2. SHARE CERTIFICATES: REQUIRED PROVISIONS. A certificate
representing shares of capital stock of the corporation shall state upon its
face:
(a) That the corporation is formed under the laws of this state.
(b) The name of the person to whom issued.
(c) The number and class of shares, and the designation of the series, if
any, which the certificate represents.
(d) The par value of each share represented by the certificate, or a
statement that the shares are without par value.
A certificate representing shares issued by a corporation which is authorized to
issue shares of more than one class shall set forth on its face or back or state
that the corporation will furnish to a shareholder upon request and without
charge a full statement of the designation, relative rights, preferences and
limitations of the shares of each class authorized to be issued, and if the
corporation is authorized to issue any class of shares in series, the
designation, relative rights, preferences and limitations of each series so far
as the same have been prescribed and the authority of the board to designate and
prescribe the relative rights, preferences and limitations of other series.
50
<PAGE>
SECTION 3. REPLACEMENT OF LOST OR DESTROYED SHARE CERTIFICATES. The
corporation may issue a new certificate for shares or fractional shares in place
of a certificate theretofore issued by it, alleged to have been lost or
destroyed, and the board of directors may require the owner of the lost or
destroyed certificate, or his legal representative, to give the corporation a
bond or other security sufficient to indemnify the corporation against any claim
that may be made against it on account of the alleged lost or destroyed
certificate or the issuance of such new certificate.
SECTION 4. REGISTERED SHAREHOLDERS. The corporation shall have the
right to treat the registered holder of any share of capital stock as the
absolute owner thereof, and shall not be bound to recognize any equitable or
other claim to, or interest in, such share of capital stock on the part of any
other person, whether or not the corporation shall have express or other notice
thereof, except as may be otherwise provided by applicable law.
SECTION 5. TRANSFER AGENT AND REGISTRAR. The board of directors may
appoint a transfer agent and a registrar for the registration of transfers of
its securities.
SECTION 6. REGULATIONS. The board of directors shall have power and
authority to make all such rules and regulations as the board shall deem
expedient regulating the issue, transfer and registration of certificates for
shares of capital stock of this corporation.
ARTICLE VIII. GENERAL PROVISIONS
SECTION 1. DIVIDENDS OR OTHER DISTRIBUTIONS IN CASH OR PROPERTY. By
action of the board of directors, the corporation may declare and pay dividends
or make other distributions in cash, bonds or property, including the shares or
bonds of other corporations, on its outstanding shares of capital stock, except
when currently the corporation is insolvent or would thereby be made insolvent,
or when the declaration, payment or distribution would be contrary to any
restriction contained in the articles of incorporation. Dividends may be
declared or paid and other distributions may be made out of surplus only. A
dividend paid or any other distribution made, in any part, from sources other
than earned surplus, shall be accompanied by a written notice (a) disclosing the
amounts by which the dividend or distribution affects stated capital, capital
surplus and earned surplus, or (b) if such amounts are not determinable at the
time of the notice, disclosing the approximate effect of the dividend or
distribution upon stated capital, capital surplus and earned surplus and stating
that the amounts are not yet determinable.
SECTION 2. RESERVES. The board of directors shall have power and
authority to set apart, out of any funds available for dividends, such reserve
or reserves, for any proper purpose, as the board in its discretion shall
approve, and the board shall have the power and authority to abolish any reserve
created by the board.
51
<PAGE>
SECTION 3. VOTING SECURITIES. Unless otherwise directed by the board,
the chairman of the board or president, or in the case of their absence or
inability to act, the vice presidents, in order of their seniority, shall have
full power and authority on behalf of the corporation to attend and to act and
to vote, or to execute in the name or on behalf of the corporation a consent in
writing in lieu of a meeting of shareholders or a proxy authorizing an agent or
attorney-in-fact for the corporation to attend and vote at any meetings of
security holders of corporations in which the corporation may hold securities,
and at such meetings he or his duly authorized agent or attorney-in-fact shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities and which, as the owner thereof, the corporation might have
possessed and exercised if present. The board by resolution from time to time
may confer like power upon any other person or persons.
SECTION 4. CHECKS. All checks, drafts and orders for the payment of
money shall be signed in the name of the corporation in such manner and by such
officer or officers or such other person or persons as the board of directors
shall from time to time designate for that purpose.
SECTION 5. CONTRACTS, CONVEYANCES, ETC. When the execution of any
contract, conveyance or other instrument has been authorized without
specification of the executing officers, the chairman of the board, president or
any vice president, and the secretary or assistant secretary, may execute the
same in the name and on behalf of this corporation and may affix the corporate
seal thereto. The board of directors shall have power to designate the officers
and agents who shall have authority to execute any instrument in behalf of this
corporation.
SECTION 6. CORPORATE BOOKS AND RECORDS. The corporation shall keep
books and records of account and minutes of the proceedings of its shareholders,
board of directors and executive committees, if any. The books, records and
minutes may be kept outside this state. The corporation shall keep at its
registered office, or at the office of its transfer agent within or without this
state, records containing the names and addresses of all shareholders, the
number, class and series of shares of capital stock held by each and the dates
when they respectively became holders of record thereof. Any of such books,
records or minutes may be in written form or in any other form capable of being
converted into written form within a reasonable time. The corporation shall
convert into written form without charge any such record not in such form, upon
written request of a person entitled to inspect them.
SECTION 7. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the board of directors.
SECTION 8. SEAL. If the corporation has a corporate seal, it shall
have inscribed thereon the name of the corporation and the words "Corporate
Seal" and "Michigan". The seal may be used by causing it or a facsimile to be
affixed, impressed or reproduced in any other manner.
52
<PAGE>
ARTICLE IX. AMENDMENTS
SECTION 1. The board of directors may amend or repeal the bylaws or
adopt new bylaws, except as otherwise provided in the articles of incorporation.
Such action may be taken by written consent or at any meeting of the board of
directors; provided that if notice of any such meeting is required by these
bylaws, the notice of the meeting shall contain notice of the proposed
amendment, repeal or new bylaw. Any bylaw hereafter made by the shareholders
shall not be altered or repealed by the board without the affirmative vote of
the holders of a majority of the outstanding shares of capital stock of the
corporation entitled to vote.
53
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