<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event report): February 11, 1998
PINNACLE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Michigan 0-17937 38-2671129
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
830 Pleasant Street, St., Joseph, Michigan 49085
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 983-6311
Not Applicable
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS
Effective as of August 1, 1997, Indiana Federal Corporation, a Delaware
corporation ("IFC"), and CB Bancorp, Inc., a Delaware corporation ("CB"),
were merged with and into Pinnacle Financial Services, Inc., a Michigan
corporation ("Pinnacle"), with Pinnacle being the surviving corporation.
Coincident with those mergers, Indiana Federal Bank for Savings, a subsidiary
of IFC, and Community Bank, a Federal Savings Bank, a subsidiary of CB, were
merged with and into Pinnacle Bank, a subsidiary of Pinnacle, with Pinnacle
Bank being the surviving corporation. Attached to this Form 8-K as Exhibit
99.1 are certain restated audited consolidated financial statements of
Pinnacle, and the accompanying notes thereto, with each of said financial
statements giving retroactive effect to the foregoing mergers to the
beginning of the periods reported in said financial statements, respectively.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
Exhibit Reference
Number Exhibit Description
------------------ --------------------
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of Ernst & Young LLP*
23.3 Consent of Crowe, Chizek and Company LLP*
99.1 Restated Audited Consolidated Financial
Statements of Pinnacle Financial Services,
Inc. for the years ended December 31, 1996,
1995 and 1994*
__________________________________
*Filed herewith
<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 hereunto duly authorized.
PINNACLE FINANCIAL SERVICES, INC.
Date: February 11, 1998 By: /s/ David W. Kolhagen
-----------------------------------
David W. Kolhagen
Its: Senior Vice President
and Chief Financial Officer
<PAGE>
Exhibit 23.1
Consent of Independent Public Accountants
The Board of Directors
Pinnacle Financial Services, Inc.
We consent to the use of our reports included herein (or incorporated herein
by reference) in this Current Report on Form 8-K filed by Pinnacle Financial
Services, Inc.
KPMG Peat Marwick LLP
------------------------------
Chicago, Illinois
February 10, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 28, 1997, with respect to
the consolidated financial statements of Indiana Federal Corporation for the
year ended December 31, 1996 included in the Current Report on Form 8-K of
Pinnacle Financial Services, Inc.
/s/ Ernst & Young LLP
Chicago, Illinois
February 11, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in Form 8-K of Pinnacle Financial Services, Inc.,
of our report dated May 23, 1997 on the consolidated financial statements of
CB Bancorp, Inc. included in its Annual Report on Form 10-KSB for the year
ended March 31, 1997.
/s/ Crowe, Chizek and Company LLP
------------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
February 10, 1998
<PAGE>
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To Board of Directors
Pinnacle Financial Services, Inc.
We have audited the combination of Pinnacle Financial Services, Inc. and
subsidiaries (the Company) and Indiana Federal Corporation and subsidiaries
(IFC) and CB Bancorp, Inc. and subsidiaries (CB) as reflected in the
accompanying consolidated balance sheets of the Company as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the combination of the Company and IFC and CB as
reflected in these consolidated financial statements based on our audit
procedures.
We previously audited and reported on the consolidated balance sheets of the
Company as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the years in the three year period ended December 31, 1996, prior to their
restatement for the 1997 pooling of interests with IFC and CB (which
statements are not presented separately herein) and have issued our report
thereon dated March 3, 1997. Ernst & Young LLP previously audited and
reported on the consolidated balance sheets of IFC as of December 31, 1996
and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1996, prior to their restatement for the 1997
pooling of interests with the Company (which statements are not presented
separately herein) and have issued their report thereon dated February 28,
1997. Crowe, Chizek and Company LLP previously audited and reported on the
consolidated balance sheets of CB as of March 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three year period ended March 31,
1997, prior to their restatement for the 1997 pooling of interests with the
Company (which statements are not presented separately herein) and have
issued their report thereon dated May 23, 1997. The contribution of IFC to
combined restated assets as reflected in the consolidated financial
statements represented 39.3 percent as of December 31, 1996 and 1995; to
combined restated total income represented 28.7 percent, 45.0 percent, and
51.1 percent for the years ended December 31, 1996, 1995, and 1994,
respectively. The contribution of CB to combined restated assets as reflected
in the consolidated financial statements represented 10.6 percent and 11.2
percent as of March 31, 1997 and 1996, respectively; to combined restated
total income represented 14.4 percent, 15.2 percent, and 11.7 percent as of
March 31, 1997, 1996, and 1995, respectively.
The consolidated financial statements give retroactive effect to the merger
of the Company and IFC and CB on August 1, 1997, which has been accounted for
as a pooling of interests as described in Note 1 to the consolidated financial
statements. Generally accepted accounting principles prescribe giving effect
to a consummated business combination accounted for by the pooling of
interest method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation. However, they represent the historical consolidated financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the consolidated financial statements referred to above have
been combined on the basis described in Note 1 of the notes to the
consolidated financial statements.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
February 10, 1998
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Indiana Federal Corporation
We have audited the consolidated statements of condition of Indiana Federal
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996 (not
presented separately herein). These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Indiana Federal
Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 28, 1997
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
CB Bancorp, Inc. and Subsidiary
Michigan City, Indiana
We have audited the accompanying consolidated balance sheets of CB Bancorp,
Inc. and Subsidiary as of March 31, 1997 and 1996 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended March 31, 1997, 1996 and 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CB
Bancorp, Inc. and Subsidiary as of March 31, 1997 and 1996 and the results of
their operations and their cash flows for the years ended March 31, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES," as of April 1, 1994.
/s/ Crowe, Chizek and Company LLP
South Bend, Indiana
May 23, 1997
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------
Year Ended December 31 (in thousands, except share data) 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $60,957 $52,331
Federal funds sold 15,750 9,225
- -----------------------------------------------------------------------------------------------
Total cash and cash equivalents 76,707 61,556
Interest-bearing deposits with financial institutions 13,171 42,997
Securities available-for-sale:
Taxable 491,039 376,421
Tax-exempt 22,447 21,602
Securities held-to-maturity:
Taxable 14,299 15,867
Tax-exempt - -
Loans held for sale 11,485 26,740
Loans, net of unearned income 1,415,855 1,210,272
Less allowance for loan losses 14,909 13,853
- -----------------------------------------------------------------------------------------------
Net Loans 1,400,946 1,196,419
Premises and equipment, net 26,082 25,853
Interest receivable and other assets 79,034 73,896
- -----------------------------------------------------------------------------------------------
Total assets $2,135,210 $1,841,351
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Non-interest bearing demand $121,235 $97,926
Interest bearing demand 143,821 149,552
Savings 437,513 415,464
Time 776,142 710,365
- -----------------------------------------------------------------------------------------------
Total deposits 1,478,711 1,373,307
Federal Home Loan Bank advances 369,238 239,224
Securities sold under repurchase agreements, and other borrowings 102,206 47,160
Interest payable and other liabilities 14,796 17,202
- -----------------------------------------------------------------------------------------------
Total liabilities 1,964,951 1,676,893
STOCKHOLDERS' EQUITY:
Common stock; no par value; 15,000,000 shares authorized;
12,151,514 shares issued and outstanding at December 31, 1996;
and 12,031,463 shares issued and outstanding at December 31, 1995 19,110 19,110
Additional paid-in capital 78,192 77,486
Retained earnings 83,599 76,241
Treasury stock (10,304) (9,710)
Guaranteed ESOP obligation (379) (590)
Recognition and retention plan obligation (4) (21)
Net unrealized gain (loss) on securities available-for-sale 45 1,942
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 170,259 164,458
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,135,210 $1,841,351
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
See accompanying notes to supplemental consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------
Years ended December 31 (in thousands, except per share data) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $114,316 $90,234 $66,172
Tax-exempt 404 346 412
Interest and dividends on securities:
Available-for-sale
Taxable 29,424 12,867 9,845
Tax-exempt 1,140 159 178
Held-to-maturity
Taxable 1,227 2,500 3,111
Tax-exempt - 873 998
Interest on federal funds sold 410 257 140
Interest on interest-bearing deposits with financial institutions 982 680 1,211
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 147,903 107,916 82,067
INTEREST EXPENSE:
Interest on deposits 60,567 43,556 31,756
Interest on Federal Home Loan Bank advances 15,928 8,821 4,694
Interest on securities sold under repurchase agreements
and other borrowings 3,104 2,692 1,921
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 79,599 55,069 38,371
- -------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 68,304 52,847 43,696
Provision for loan losses 2,681 1,422 382
- -------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 65,623 51,425 43,314
Noninterest income:
Service charges on deposit accounts 4,341 3,653 2,999
Trust income 789 605 485
Securities gains and losses, net 708 790 134
Other income 7,015 4,761 5,453
- -------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 12,853 9,809 9,071
Noninterest expenses:
Salaries and benefits 21,690 17,599 14,803
Occupancy expense 4,123 3,076 2,707
Equipment expense 3,473 2,813 2,166
FDIC insurance premiums 7,858 1,965 2,064
Other expense 17,802 13,207 10,064
- -------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 54,946 38,660 31,804
- -------------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 23,530 22,574 20,581
FEDERAL INCOME TAX EXPENSE 7,443 6,353 6,369
- -------------------------------------------------------------------------------------------------------------
NET INCOME $16,087 $16,221 $14,212
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $1.32 $1.58 $1.39
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 12,196,963 10,298,390 10,226,756
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $0.82 $0.76 $0.62
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gains (Losses)
Additional Guaranteed on Securities
Common Paid-in Retained Treasury ESOP Available-for-
(Dollars in thousands) Stock Capital Earnings Stock Obligation RRP Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $19,110 $41,894 $58,893 $(7,217) $(895) $(90) $736 $112,431
Net income - - 14,212 - - - - 14,212
Common stock dividends declared:
Pinnacle Financial Services, Inc. $.62 per share - - (2,369) - - - - (2,369)
Pooled companies prior to merger - - (3,385) - - - - (3,385)
Common stock issuance upon exercise of options - 843 - - - - - 843
Purchase of treasury stock - - - (1,779) - - - (1,779)
Payments made on guaranteed ESOP obligation - - - - 180 - - 180
Amortization of RRP contribution - - - - - 42 - 42
Reissuance and retirement of treasury stock - (41) - 96 - - - 55
Cash paid in lieu of fractional shares - (6) - - - - - (6)
Change in unrealized gain(loss) for securities
available-for-sale net of tax effect of $ (2,677) - - - - - - (4,083) (4,083)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 19,110 42,690 67,351 (8,900) (715) (48) (3,347) 116,141
Net income - - 16,221 - - - - 16,221
Common stock dividends declared:
Pinnacle Financial Services, Inc. $.76 per share - - (3,295) - - - - (3,295)
Pooled companies prior to merger - - (4,036) - - - - (4,036)
Issuance of common stock for:
Employee incentive plan - 636 - - - - - 636
Stock offering, net of costs - 13,184 - - - - - 13,184
Acquisition of Maco Bancorp, Inc. - 20,985 - - - - - 20,985
Purchase of treasury stock - - - (957) - - - (957)
Payments made on guaranteed ESOP obligation - - - - 125 - - 125
Amortization of RRP contribution - - - - - 27 - 27
Reissuance and retirement of treasury stock - (79) - 147 - - - 68
Tax benefit related to stock option plans - 70 - - - - - 70
Change in unrealized gain(loss) for securities
available-for-sale net of tax effect of $3,468 - - - - - - 5,289 5,289
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 19,110 77,486 76,241 (9,710) (590) (21) 1,942 164,458
Net income - - 16,087 - - - - 16,087
Common stock dividends declared:
Pinnacle Financial Services, Inc. $.82 per share - - (4,838) - - - - (4,838)
Pooled companies prior to merger - - (3,891) - - - - (3,891)
Issuance of common stock for:
Employee incentive plan - 913 - - - - - 913
Additional costs related to prior year
stock offering - (259) - - - - - (259)
Purchase of treasury stock - - - (612) - - - (612)
Payments made on guaranteed ESOP obligation - - - - 211 - - 211
Amortization of RRP contribution - - - - - 17 - 17
Reissuance and retirement of treasury stock - (11) - 18 - - - 7
Tax benefit related to stock option plans - 63 - - - - - 63
Change in unrealized gain(loss) for securities
available-for-sale net of tax effect of $(1,244) - - - - - - (1,897) (1,897)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $19,110 $78,192 $83,599 $(10,304) $(379) $(4) $45 $170,259
======= ======= ======= ======== ===== ==== === ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
PINNACLE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, (in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $16,087 $16,221 $14,212
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization 4,999 3,756 2,734
Net amortization on loans and securities 636 1,088 1,450
Provision for loan losses 2,681 1,422 382
Deferred federal income taxes (1,206) (446) 349
Proceeds from sales of trading securities 10,154 1,975 13,610
Purchases of trading securities (10,171) (1,976) (13,553)
Mortgage loans purchased under agreements to resell (1,111,965) (795,862) (453,339)
Proceeds from sale of mortgage loans purchased
under agreements to resell 1,096,721 741,010 462,354
Mortgage loans originated for sale (175,118) (58,845) (24,808)
Proceeds from sales of loans 136,662 56,800 42,508
Gain on sale of securities (708) (790) (134)
Gain on sale of loans (1,019) (545) -
Decrease(increase) in interest receivable and other assets (2,697) (1,482) 603
Decrease in other liabilities (1,920) (2,899) (2,381)
- -------------------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (36,864) (40,573) 43,987
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans, excluding loan sales and purchases (67,920) (5,654) (93,155)
Purchases of loans (79,642) (17,723) (14,345)
Purchases of securities available-for-sale (320,047) (145,617) (168,015)
Purchases of securities held-to-maturity (4,237) (11,704) (13,396)
Proceeds from sales of securities available-for-sale 146,580 140,291 23,063
Proceeds from maturities and paydowns of securities
available-for-sale 65,200 22,555 114,964
Proceeds from maturities and paydowns of securities
held-to-maturity 5,803 31,036 111,799
Net (increase) decrease in interest-bearing deposits with
financial institutions 29,825 (24,583) (1,983)
Capital expenditures (3,086) (3,185) (2,443)
Purchase of Forrest Holdings Inc. preferred stock (2,500) - -
Acquisition of MACO Bancorp, Inc., net of cash acquired and
stock issued - (12,683) -
Purchase of NCB Corp., net of cash acquired - (6,841) -
Purchase of American Bancorp, Inc., net of cash acquired - - 5,170
- -------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (230,024) (34,108) (38,341)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 105,144 39,740 2,061
Net increase in securities sold under repurchase agreements
and other borrowings 185,207 53,789 6,378
Net change in obligation to limited partnership 18 - -
Common stock issued 654 13,752 557
Contribution to fund ESOP 211 125 180
Issuance of treasury stock 7 68 55
Purchase of treasury stock (612) (957) (1,779)
Dividends paid (8,590) (6,826) (5,684)
- -------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES 282,039 99,691 1,768
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,151 25,010 7,414
Cash and cash equivalents at beginning of year 61,556 36,546 29,132
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $76,707 $61,556 $36,546
======= ======= =======
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
- -------------------------------------------------------------------------------------------------------------
Interest paid $78,987 $54,079 $38,420
Federal income taxes paid $7,921 $7,518 $5,879
Loans transferred to other real estate owned $756 $738 $508
Transfers of securities held-to-maturity to available-for-sale $- $239,332 $-
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
December 31, 1996 and 1995
- -------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
The accounting and reporting policies of Pinnacle Financial Services, Inc.
and subsidiaries conform to generally accepted accounting principles and
prevailing practices within the banking industry. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make certain estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts, revenues and expenses during the reporting period.
Actual results could differ for those estimates.
The following are significant accounting and reporting policies of Pinnacle
Financial Services, Inc. and subsidiaries.
(a) Consolidation and restatement
The consolidated Pinnacle Financial Services, Inc. entity (the "Company")
was formed on August 1, 1997 through a merger transaction whereby Indiana
Federal Corporation and subsidiaries ("IFC") and CB Bancorp, Inc. and
subsidiaries ("CB") were merged with and into the then existing Pinnacle
Financial Services, Inc. and subsidiaries ("Pinnacle"). The merger
transaction was accounted for in accordance with the pooling-of-interests
method of accounting for a business combination. Accordingly, the
consolidated financial statements included herein reflect the combination
of the historical financial results of Pinnacle, IFC and CB and their
respective recorded assets and liabilities have been restated at their
historical cost as if the combining companies had been consolidated for
all periods presented.
As a result of the merger transaction, the consolidated financial
statements include the accounts of Pinnacle Financial Services, Inc. and
its wholly-owned subsidiaries, Pinnacle Bank (the "Bank"), IndFed Mortgage
Company, and Pinnacle Financial Consultants. Pinnacle Bank's two wholly-
owned subsidiaries are Starke's,Inc. and Brookview Real Estate, LTD.
Effective December 31, 1996, Pinnacle Bank-Indiana (formerly a wholly-
owned subsidiary of Pinnacle Financial Services, Inc.) was merged with and
into Pinnacle Bank-Michigan, now collectively known as Pinnacle Bank.
Significant intercompany balances and transactions have been eliminated in
consolidation.
Prior to the combination, CB's fiscal year ended March 31. In restating
the historical consolidated financial statements included herein, CB's
financial statements as of March 31, 1997 and 1996 and for each of the
years in the three year period ended March 31, 1997 were combined with
Pinnacle's and IFC's financial statements as of December 31, 1996 and 1995
and for each of the years in the three year period ended December 31,
1996.
(b) Securities
Securities which management believes could be sold prior to maturity in
order to manage interest rate risk, prepayment risk, liquidity risk, or
other corporate purposes are classified as available-for-sale and are
carried at fair value with unrealized gains and losses, net of applicable
income taxes, reported as a component of stockholders' equity.
Securities which management believes are held for resale in anticipation of
short-term market movements are classified as trading securities which
are stated at fair value with unrealized holding gains and losses
recognized in the income statement. Securities, other than the foregoing,
which management has the positive ability and intent to hold until
maturity are classified as securities held-to-maturity and are accounted
for using historical amortized cost.
9
<PAGE>
Premiums and discounts on securities are amortized and accreted over the
life of the related security as an adjustment to yield using the effective
interest method. Gain or loss on the sale of securities is determined
based on the adjusted cost of the specific security sold. A decline in
the market value of any available-for-sale or held-to-maturity security
below cost that is deemed other than temporary results in a charge to
earnings thereby establishing a new cost basis for the security.
(c) Loans Purchased Under Agreements to Resell
The Company purchases residential mortgage loans from various mortgage
companies prior to sale of these loans by the mortgage companies in the
secondary market. The Company held loans that were purchased under
agreements to resell from 66 of the 117 approved mortgage companies as of
December 31, 1996. The Company purchases such loans from mortgage
companies at par, net of certain fees, and later sells them back to the
mortgage companies at the same amount and without recourse provisions. As
a result, no gains and losses are recorded at the resale of loans. The
Company records interest income on the loans during the funding period and
the Company records fee income received from the mortgage company for each
loan when the loan is sold. The Company uses the stated interest rate in
the agreement with each mortgage company for interest income recognition,
and not the interest rates on individual loans. The Company does not
retain servicing of the loans when they are resold. Purchase money and
refinancing mortgage loans are generally held no more than 90 days by the
Company and typically are resold within 30 days. Construction loan
mortgages acquired are held for the duration of the construction loan
period, which is typically six months or longer.
(d) Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market
value. Net unrealized losses are recognized in a valuation allowance by
charges to income.
(e) Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to
operating expense, is decreased by charge offs, net of recoveries, and is
available for losses incurred on loans, including certain accrued interest
receivable.
The allowance for loan losses is based on management's periodic evaluation
of the loan portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions,
prior loan loss experience, the composition of the loan portfolio, and
management's evaluation of the collectibility of specific loans.
Management believes that the allowance for loan losses is adequate to
absorb potential losses in the portfolio, however, future additions to
the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies periodically review the provision
for loan losses. These agencies may require that additions be made to
allowance for loan losses based upon their judgment of information
available to them at the time of their examination.
A loan is considered impaired when it is probable that a creditor will be
unable to collect contractual principal and interest due according to the
contractual terms of the loan agreement. Impaired loans are generally
considered by the Company to be nonaccrual commercial and commercial real
estate loans, restructured loans and commercial and commercial real estate
loans for which principal and/or interest is at risk. Impairment is
measured by determining the fair value of the loans based on the present
value of expected cash flows, the market price of the loans, or the fair
value of the underlying collateral. If the fair value of the loan is less
than the recorded book value, a valuation allowance is established as a
component of the allowance for loan losses.
(f) Nonperforming Assets
10
<PAGE>
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, loans contractually past due 90 days or
more as to interest and/or principal and not included in nonaccrual loans,
and other real estate which has been acquired primarily through
foreclosure and is awaiting disposition. Loans are generally placed on a
nonaccrual basis when, in the opinion of management, collection of
principal or interest payments is unlikely. Income on such loans is then
recognized only to the extent that cash is received and where future
collection of principal is probable.
Other real estate is carried at the lower of cost or fair value, less
estimated costs to sell. When the property is acquired through
foreclosure, any excess of the related loan balance over estimated fair
value is charged to the allowance for loan losses. Subsequent write-
downs, losses upon sale, and expenses related to maintenance of properties
are charged to other expense.
(g) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation, computed on the straight-line and accelerated methods, is
charged to operations over the estimated useful lives of the properties.
(h) Long-lived Assets and Long-lived Assets to be Disposed of
On January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of", which requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicates that the
carrying amount may not be recoverable. The impairment is measured based
on the present value of expected future cash flows from the use of the
assets and its eventual disposition. If the expected cash flows are
less than the carrying amount of the asset, an impairment loss is
recognized based on current fair values. The adoption did not have a
material impact to the Company's consolidated financial statements.
(i) Goodwill and Other Intangibles
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis up to 15 years
with a remaining life of approximately 10 years at December 31, 1996.
At December 31, 1996 and 1995, goodwill of approximately $14,604,000 and
$16,618,000, respectively, is included in other assets in the accompanying
consolidated balance sheets.
Core deposit intangibles, representing the premium associated with the
acquisition of certain deposit liabilities, are being amortized to
operating expenses on a straight-line basis over the average lives of 7 to
10 years of such deposit liabilities, with a remaining life of
approximately 4 years. At December 31, 1996 and 1995, core deposit
intangibles of approximately $3,368,000 and $4,185,000, respectively, are
included in other assets in the accompanying consolidated balance sheets.
The Company assesses the recoverability of its goodwill and other
intangibles through review of various economic factors on a periodic
basis in determining whether impairment, if any, exists.
(j) Mortgage Servicing Rights
Effective January 1, 1995, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights". Statement 122 amended SFAS Statement 65,
"Accounting for Certain Mortgage Banking Activities", to require that a
mortgage banking enterprise recognize as separate assets the rights to
service mortgage loans for others, however those servicing rights are
acquired, eliminating differences
11
<PAGE>
between servicing rights acquired through purchase transactions and those
acquired through loan originator's. The Statement also requires the
assessment of capitalized mortgage servicing rights for impairment
based on the current fair value of those rights. Impairment is recognized
through a valuation allowance established through a charge to expense.
Mortgage servicing rights as of December 31, 1996 and 1995 totaled
approximately $477,000 and $79,000, respectively.
(k) Trust Assets
Assets held by the Company in fiduciary or agency capacity for customers
are not assets of the Company and as such are not included in the
consolidated financial statements. Fee income is recognized on an
accrual basis for financial reporting purposes.
(l) Retirement Plan
Costs for the Company's defined benefit plan, which covers substantially
all employees of the former Pinnacle and CB entities, are accounted for in
accordance with the requirements of Statement of Financial Accounting
Standards No. 87, "Employers; Accounting for Pensions". The projected
unit credit method is utilized for measuring net periodic
pension cost over the employees' service life. The Company's funding
policy is to contribute annually an amount calculated under the minimum
ERISA funding requirements.
(m) Postretirement Benefits Other Than Pensions
An accrual for postretirement benefits is charged to current earnings
based upon the expected cost of providing postretirement benefits to
employees during the years that the employees render services.
(n) Stock Option Plans
As of December 31, 1996, the Company adopted the disclosure requirements
of Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation". The Company applies APB Opinion 25,
"Accounting for Employee Benefit Plans" and related interpretations in
accounting for its stock option plans.
(o) Federal Income Taxes
Pinnacle, IFC and CB and their respective subsidiaries filed individual
consolidated U.S. income tax returns. The consolidated tax liability is
settled between companies generally as if each company had filed a
separate return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes", the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the
enactment date.
(p) Income Recognition
The Company uses the accrual basis of accounting for financial reporting
purposes. Loans are stated at the principal amount outstanding, net of
any unearned income. Loan origination fees and certain direct loan
origination costs are deferred and recognized over the lives of the
related loans as an adjustment of the yield.
(q) Statements of Cash Flows
12
<PAGE>
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold.
(r) Per Share Data
Earnings per share is calculated by dividing net income by the weighed
average number of shares of common stock and common stock equivalents
outstanding during each period and is retroactively adjusted for stock
splits and stock dividends. Common stock equivalents assume exercise of
stock options, and the calculation assumes purchase of treasury stock with
the proceeds at the average market price for the period (when dilutive).
Fully diluted earnings per share equal the primary amount for all
periods presented. Cash dividends per share are based upon the number
of shares outstanding at date of declaration, retroactively adjusted
for stock splits and stock dividends.
(s) Reclassifications
Certain prior year amounts were reclassified to conform to current year
presentation.
13
<PAGE>
- ------------------------------------------------------------------------------
NOTE 2 SUPERVISION AND REGULATION
- ------------------------------------------------------------------------------
The Company and its subsidiary bank are subject to supervision, regulation
and periodic examination by various federal and state banking regulatory
agencies including the Board of Governors of the Federal Reserve Board (the
"FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), and the
Michigan Financial Institutions Bureau (the "FIB"). Since the Company is a
bank holding company, the Company's activities are limited to the business of
banking and activities closely related to banking.
The following is a summary of certain statutes and regulations affecting the
Company. This summary is qualified in its entirety by such statutes and
regulations, which are subject to change based on pending and future
legislation and action by regulatory agencies.
BANK HOLDING COMPANIES. As a bank holding company, the Company is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the
"BHCA"), and by the FRB.
Banking laws and regulations restrict transactions by insured banks owned by
a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal stockholders, officers, directors and their affiliates,
and investments by the subsidiary banks in the shares or securities of the
parent holding company (or of any other non-bank or bank affiliates), and
acceptance of such shares or securities as collateral security for loans to
any borrower. The regulators also review other payments, such as management
fees, made by subsidiary banks or affiliated companies.
Under the BHCA, a bank holding company is prohibited, with certain limited
exceptions, from engaging in activities other than those of banking or of
managing or controlling banks and from acquiring or retaining direct or
indirect ownership or control of voting shares or assets of any company which
is not a bank or bank holding company, other than subsidiaries engaged in
activities which the Federal Reserve Board determines to be so closely
related to banking and managing or controlling banks as to be a proper
incident thereto.
BANKS. The Company's subsidiary bank is subject to regulation, supervision
and periodic examination by the Michigan FIB. Additionally, as an
institution whose deposits are insured by the Bank Insurance Fund (the "BIF")
and the Savings Association Insurance Fund (the "SAIF") of the FDIC, Pinnacle
Bank is also subject to supervision, regulation and periodic examination by
the FDIC.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary --- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
14
<PAGE>
As of December 31, 1996, the most recent notification from the primary
regulators of the former bank subsidiaries categorized the Bank as WELL
CAPITALIZED or adequately capitalized under the regulatory framework for
prompt corrective action. To be categorized as WELL CAPITALIZED the Bank
must maintain minimum total risk-based, Tier I risk-based, Tier I leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital
(to Risk Weighted Assets):
CONSOLIDATED $168,081 13.30% $100,870 8.00% $126,087 10.00%
Pinnacle Bank 145,522 11.61% 100,297 8.00% 125,372 10.00%
Tier 1 Capital
(to Risk Weighted Assets):
CONSOLIDATED $153,172 12.12% $50,435 4.00% $75,652 6.00%
Pinnacle Bank 130,613 10.42% 50,149 4.00% 75,223 6.00%
Tier 1 Capital
(to Average Assets):
CONSOLIDATED $153,172 7.41% $83,832 4.00% $104,790 5.00%
Pinnacle Bank 130,613 6.27% 83,367 4.00% 104,208 5.00%
</TABLE>
- ------------------------------------------------------------------------------
NOTE 3 MERGERS AND ACQUISITIONS
- ------------------------------------------------------------------------------
Effective 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):
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net interest income:
Pinnacle 34,276 19,344 17,106
IFC 25,674 26,141 21,466
CB 8,354 7,362 5,124
------ ------ ------
Consolidated 68,304 52,847 43,696
====== ====== ======
Net income:
Pinnacle 9,152 6,459 5,290
IFC 4,623 7,304 7,262
CB 2,312 2,458 1,660
------ ------ ------
Consolidated 16,087 16,221 14,212
====== ====== ======
</TABLE>
On October 1, 1996, the Company , through Pinnacle Bank, purchased Starke's,
Inc., a local insurance agency, through the issuance of 99,451 shares of
Pinnacle common stock. The assets acquired were $1,241,000 and the
transaction was accounted for using the pooling of interests method with no
restatement of prior periods as amounts involved were not material.
On December 1, 1995, the Company acquired all of the outstanding stock of
Maco Bancorp, Inc. ("Maco"), a Delaware corporation and registered savings
and loan holding company headquartered in Merrillville, Indiana, for a
purchase price of $41,944,000 (the "Purchase Price"). Approximately 50% of
the Purchase Price was paid in cash ($20,959,000) and the balance was paid in
Pinnacle common stock valued at $20,985,000. The acquisition of Maco was
accounted for as a purchase. All assets (approximately $412,800,000) and all
liabilities (approximately $384,200,000) of Maco and its subsidiaries (First
Federal Savings Bank of Indiana, Brookview Real Estate Ltd. and First
Insurance, Inc.) were adjusted to fair value as of the effective date
creating goodwill in the amount of $13,350,000 which is being amortized on a
straight line basis over 15 years. Premiums and discounts on the fair value
adjustments amounted to approximately $3,895,000 and $830,000, respectively.
The operating results of Maco have been included in the Company's financial
statements since the date of acquisition.
On January 31, 1995, the Company acquired, for $8.2 million, NCB Corporation
("NCB"), a bank holding company with total assets of approximately $45.0
16
<PAGE>
million with offices in Culver and Granger, Indiana. The operations of NCB
are included in the Company's financial statements since the date of
acquisition and reflect the application of the purchase method of accounting.
Under this method of accounting, the aggregate cost to the Company of the
acquisition was allocated to the assets acquired and liabilities assumed,
based on their estimated fair values as of January 31, 1995. On December 12,
1994, the Company acquired, for $7.1 million, American Bancorp, Inc. ("ABI"),
a bank holding company with total assets of approximately $65.0 million with
offices in North Judson, Knox, and San Pierre, Indiana. The operations of
ABI are included in the Company's financial statements from the acquisition
date and reflect the application of the purchase method of accounting. Under
this method of accounting, the aggregate cost to the Company of the
acquisition was allocated to the assets acquired and liabilities assumed,
based on their estimated fair values as of December 12, 1994.
- -----------------------------------------------------------------------------
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (Statement 107), requires that the Company
disclose estimated fair values for its financial instruments in its
consolidated financial statements. Fair value estimation methods and
assumptions are presented below for the Company's consolidated financial
statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
-------------------------------------------------------------------
CARRYING CARRYING
CARRYING VALUE VALUE FAIR VALUE VALUE FAIR VALUE
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $60,957 $60,957 $52,331 $52,331
Federal funds sold 15,750 15,750 9,225 9,225
Interest-bearing deposits with
financial institutions 13,171 13,171 42,997 42,997
Securities 527,785 527,834 413,890 413,949
Loans held for sale 11,485 11,491 26,740 27,015
Loans, net 1,400,946 1,405,485 1,196,419 1,206,755
Accrued interest recievable 15,778 15,778 11,799 11,799
-------------------------------------------------------------------
Total Financial Assets $2,045,872 $2,050,466 $1,753,401 $1,764,071
Financial Liabilities:
Noninterest-bearing deposits $121,235 $121,235 $97,926 $97,926
Interest-bearing deposits 1,357,476 1,361,453 1,275,381 1,278,722
Securities sold under repurchase
agreements, and other borrowings 471,445 474,356 286,384 286,664
Accrued interest payable 5,130 5,130 4,320 4,320
-------------------------------------------------------------------
Total Liabilities $1,955,286 $1,962,174 $1,664,011 $1,667,632
</TABLE>
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD: The carrying value of cash and
due from banks and federal funds sold approximates fair value due to the short
term maturity of those instruments.
INTEREST-BEARING DEPOSITS WITH FINANCIAL INSTITUTIONS AND SECURITIES: Fair
values of these instruments are based on quoted market prices, when available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable assets.
LOANS HELD FOR SALE: Fair value are estimated based on quoted market prices.
17
<PAGE>
LOANS, NET: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage, and consumer, including credit
card loans. Each loan category is further segmented into fixed and
adjustable rate interest terms.
The fair value of performing loans, except credit card loans, is calculated
by discounting scheduled cash flows through the estimated maturity using the
current rates at which similar loans would be made to borrowers with similar
credit ratings with the same remaining maturities. The estimate of the
maturity is based on industry forecast experience with repayments for each
loan classification. The fair value of variable rate loans repricing within
three months and credit card loans were assumed to be at carrying value.
Fair value for nonperforming loans is based on recent external appraisals.
If appraisals are not available, estimated cash flows are discounted using a
rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
The fair value estimate for credit card loans is based on the current
carrying value of existing loans at December 31, 1996 and 1995. This
estimate does not include the value that relates to estimated cash flows from
new loans generated from existing cardholders over the remaining life of the
portfolio.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE: The carrying value
of accrued interest receivable and accrued interest payable approximates fair
value due to the relatively short period of time to expected realization.
NONINTEREST-BEARING AND INTEREST-BEARING DEPOSITS: The fair value of
deposits with no stated maturity, such as demand deposits, savings, NOW
accounts and money market accounts, is equal to the amount payable on demand
as of December 31, 1996 and 1995. The fair value of time deposits is based
on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for similar remaining maturities.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER BORROWINGS: The
carrying amounts for securities sold under repurchase agreements and certain
other borrowings approximate fair value as they mature in 90 days or less.
The fair value of certain other borrowings with maturities greater than 90
days are based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for similar
remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT: The value of commitments
to extend credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties.
LIMITATIONS: Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
particular financial instruments. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
18
<PAGE>
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. For example, the Company has a substantial
trust department that contributes net fee income annually. The trust
department is not considered a financial instrument, and its value has not
been incorporated into the fair value estimates. Other significant assets
and liabilities that are not considered financial assets or liabilities
include the mortgage servicing operations, premises and equipment, and
intangible assets. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in the estimates.
- ------------------------------------------------------------------------------
NOTE 5 CASH AND DUE FROM BANKS
- ------------------------------------------------------------------------------
The Bank is required to maintain certain daily reserve balances on hand in
accordance with Federal Reserve Board requirements. The reserve balances
maintained in accordance with such requirements at December 31, 1996 and 1995,
were $10,603,000 and $10,015,000, respectively.
- ------------------------------------------------------------------------------
NOTE 6 SECURITIES
- ------------------------------------------------------------------------------
The following summarizes the amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for available-for-sale
securities at December 31, 1996.
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury and agency securities $ 205,608 $ 787 $(1,212) $205,183
Obligations of states and
political subdivisions 21,873 582 (8) 22,447
Corporate securities 12,350 4 (33) 12,321
Equity securities 23,653 101 (29) 23,725
Mortgage backed securities 249,950 1,327 (1,467) 249,810
---------------------------------------------------------------------------
Total securities $513,434 $2,801 $(2,749) $513,486
===========================================================================
</TABLE>
The following summarizes the amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for available-for-sale
securities at December 31, 1995.
19
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and agency securities $ 124,543 $ 1,455 $(130) $125,868
Obligations of states and political subdivisions 20,850 761 (9) 21,602
Corporate securities 22,734 21 (132) 22,623
Equity securities 17,366 44 (17) 17,393
Mortgage backed securities 209,474 1,576 (513) 210,537
---------- ------- ------ ---------
Total securities $394,967 $3,857 $(801) $398,023
========== ======= ====== =========
</TABLE>
The following summarizes the amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for securities held to maturity
at December 31, 1996.
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. Treasury and agency securities $3,000 $ - $ (48) $ 2,952
Obligations of states and political subdivisions - - - -
Corporate securities 2,789 6 (2) 2,793
Equity securities - - - -
Mortgage backed securities 8,510 102 (9) 8,603
------------------------------------------------------------------------------
Total securities $14,299 $108 $(59) $14,348
==============================================================================
</TABLE>
The following summarizes the amortized cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for securities held to maturity
at December 31, 1995.
20
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. Treasury and agency securities $ 3,000 $ - $ (30) $ 2,970
Obligations of states and political subdivisions - - - -
Corporate securities 2,675 5 (6) 2,674
Equity securities - - - -
Mortgage backed securities 10,192 143 (53) 10,282
------------------------------------------------------------------------------
Total securities $15,867 $148 $ (89) $ 15,926
==============================================================================
</TABLE>
Maturities of investment securities classified as available-for-sale at
December 31, 1996 by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
AMORTIZED
COST FAIR VALUE
---------------------------------------
(IN THOUSANDS)
<S> <C> <C>
No maturity $23,653 $23,725
Due in one year or less 12,635 12,715
Due after one year through five years 39,673 39,925
Due after five years through ten years 87,491 87,798
Due after ten years 138,480 137,657
Mortgage-backed securities 211,502 211,666
---------------------------------------
Total securities $513,434 $513,486
=======================================
</TABLE>
Maturities of investment securities classified as held-to-maturity at December
31, 1996 by contractual maturity, are shown below. Expected maturities will
differ from contracted maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
21
<PAGE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY
AMORTIZED
COST FAIR VALUE
-----------------------------
(in thousands)
<S> <C> <C>
No maturity $ - $ -
Due in one year or less 1,778 1,777
Due after one year through five years 4,011 3,968
Due after five years through ten years - -
Due after ten years - -
Mortgage-backed securities 8,510 8,603
-----------------------------
Total securities $14,299 $14,348
=============================
</TABLE>
Proceeds from sales of securities (excluding trading securities) during 1996,
1995 and 1994 were $146,580,000, $140,291,000, and $23,063,000, respectively.
Gross gains of $841,000, $1,599,000, and $110,000 and gross losses of
$150,000, $809,000, and $34,000 were realized on those sales for 1996, 1995,
and 1994, respectively. During 1996, 1995, and 1994 there were no sales of
securities classified as held-to-maturity.
On December 1, 1995, securities held-to-maturity were reclassified to
available-for-sale pursuant to the FASB issuance of "A Guide to
Implementation of Statement 115" that allowed entities to reassess the
appropriateness of the reclassification of all securities. At the date of
transfer, these securities held an amortized cost of $239,332,000 and a net
unrealized gain of $1,227,000.
Mortgage-backed securities include mortgage-backed securities and
collateralized mortgage obligations. The mortgage-backed securities
represent participating interest of pools of long-term first mortgage loans
originated and serviced by the issuers of the securities. Collateralized
mortgage obligations are debt securities that are secured by mortgage loans
or other mortgage-backed securities.
Securities with an amortized cost of $356,602,000 and $265,222,000 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits and securities sold under agreements to repurchase and for other
purposes as required by law or contract.
The Company did not have any investment securities of states (including their
political subdivisions) that individually exceeded 10% of stockholders'
equity at December 31, 1996 and 1995.
- ------------------------------------------------------------------------------
NOTE 7 LOANS
- ------------------------------------------------------------------------------
The following summarizes loans by classification at December 31 of each year.
22
<PAGE>
<TABLE>
<CAPTION>
1996 1995
--------------------------
(in thousands)
<S> <C> <C>
Real estate loans $ 650,624 $ 632,664
Commercial loans 421,948 314,562
Consumer loans 238,321 178,720
Tax exempt loans 9,686 4,295
Mortgage repurchase loans 95,276 80,031
--------------------------
Total loans $1,415,855 $1,210,272
==========================
</TABLE>
MORTGAGE REPURCHASE LOANS
The Company has entered into agreements with mortgage companies in which the
Company purchases, at its discretion, mortgage loans from the mortgage
companies at par, net of certain fees, and later sells them back to the
mortgage companies at the same amount and without recourse provisions. The
Company records interest income on the loans during the funding period and
the Company records fee income (recorded as noninterest income) received from
the mortgage company for each loan when resold. The interest income recorded
is based on a rate of interest tied to the prime rate (as established from
time to time by a major Chicago-based financial institution) during the
funding period, and not the rates on individual loans. Such loans are
reviewed, prior to purchase, for evidence that the loans are of secondary
market quality or meet the Company's internal underwriting guidelines. An
assignment of the mortgage to the Company is required. In addition, the
Company either takes possession of the original note and forwards such note
to the end investor or the Company receives a certified copy of the note and
subsequently receives acknowledgment from the end investor of receiving the
original note. A commitment to purchase from an end investor is required
prior to purchase by the Company. In the event that the end investor would
not honor this commitment and the mortgage companies would not be able to
honor their repurchase obligations, the Company would then need to sell these
loans in the secondary market at the fair value of these loans. Purchase
money and refinance loans are generally held no more than 90 days by the
Company and are typically resold within 30 days. The Company also purchases
interim construction loans under this program and holds these loans for the
duration of the construction loan period which is typically six months or
longer. With regard to the interim construction loans in the pipeline, the
Company recognizes that there may be additional credit risk due to possible
change in the borrower's financial condition during the interim construction
period. The Company had approximately $25,407,000 and $29,416,000 of interim
construction loans purchased under agreements to resell at December 31, 1996
and 1995.
The mortgage companies from which individual mortgage loans have been
purchased under agreements to resell and the related amounts of such loans
outstanding are as follows at December 31:
<TABLE>
<CAPTION>
Company 1996 1995
- ------- ------ ------
<S> <C> <C>
Company A $ 5,172,843 $12,792,251
Company B 8,611,206 8,614,313
Company C 13,677,480 6,791,723
Company D 8,336,445 5,023,314
Company E 5,646,301 -----
Company F 5,619,318 3,058,493
Companies with balances between $1,000,000 and $5,000,000
23
<PAGE>
(1996-16 companies; 1995-11 companies) 35,126,513 30,195,670
Other companies with balances less than $1,000,000 13,085,574 13,555,486
----------- -----------
$95,275,680 $80,031,250
=========== ===========
</TABLE>
The following summarizes nonaccrual loans and loans greater than 90 days
delinquent which are still accruing interest at December 31 of each year.
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------
Non- 90 Days Non- 90 Days
Accrual Past Due Accrual Past Due
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Real estate loans 1,742 3,459 5,268 2,078
Commercial loans 4,569 2,239 4,806 406
Consumer loans 118 503 395 71
Tax exempt loans - - - -
Mortgage repurchase loans 4,700 - - -
-----------------------------------------------
Total loans 11,129 6,201 10,469 2,555
===============================================
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, if nonaccrual loans had
been maintained current in accordance with their original terms, additional
interest income of $1,100,000, $449,000, and $207,000, respectively, would
have been realized.
In addition to the loans classified as nonaccrual and greater than 90 days
delinquent still accruing interest at December 31, 1996 and 1995, there were
other loans of approximately $11,118,000 in 1996 and $10,530,000 in 1995,
where management is closely following the borrowers' ability to continue to
comply with loan payment terms. Current conditions do not warrant
classification as nonperforming, nor is any principal loss on these loans
considered likely at this time. The Company is not dependent upon any
single industry or business for its banking opportunities.
The recorded investment in impaired loans at December 31, 1996 and 1995
totaled $13.3 million and $9.3 million, respectively, for which a specific
allowance for loan losses of $1.6 million and $893,000, respectively, was
required as of and for the years then ended. As of December 31, 1996 and
1995, the average recorded investment in impaired loans approximated $10.9
million and $6.1 million, respectively. For the years ended December 31,
1996 and 1995, interest income recorded on such loans totaled $688,000 and
$622,000, respectively, of which $475,000 and $517,000 respectively has been
recorded on a cash basis.
Certain officers, directors, and entities with which they are affiliated have
borrowed funds from the Company. These loans were made in the ordinary
course of business on substantially the same terms as loans to other persons
and, in the opinion of management, do not involve more than the normal risks
of collectibility or present other unfavorable features. Such loans at
December 31, 1996 and 1995 aggregated approximately $14,903,000 and
$13,337,000 respectively. The net decrease of $1,566,000 in such loans
resulted from new loans of $5,442,000 and collections on loans of $3,876,000.
The following summarizes the activity in the allowance for loan losses.
24
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $13,854 $11,787 $11,165
Provisions charged against income 2,681 1,422 382
Recoveries 734 335 363
Allowance of acquired financial institutions - 1,855 655
-----------------------------------------
17,269 15,399 12,565
Loans charged off (2,360) (1,546) (778)
-----------------------------------------
Balance, end of year $14,909 $13,853 $11,787
=========================================
</TABLE>
- ------------------------------------------------------------------------------
NOTE 8 PREMISES AND EQUIPMENT, NET
- ------------------------------------------------------------------------------
The following summarizes premises and equipment by classification at December
31.
<TABLE>
<CAPTION>
1996 1995
-------------------------------
(in thousands)
<S> <C> <C>
Land and land improvements $ 4,766 $ 4,727
Buildings 25,746 23,452
Furniture, fixtures and equipment 18,687 19,125
-------------------------------
Subtotal 49,199 47,304
Less accumulated depreciation 23,117 21,451
-------------------------------
Premises and equipment, net $26,082 $25,853
===============================
</TABLE>
Depreciation expense charged to operations was $2,856,000, $2,252,000, and
$1,876,000 in 1996, 1995, and 1994, respectively.
- ------------------------------------------------------------------------------
NOTE 9 TIME DEPOSITS
- ------------------------------------------------------------------------------
The following summarizes time deposits and their remaining maturities, included
in interest-bearing deposits at December 31.
<TABLE>
<CAPTION>
1996
--------------
(in thousands)
<S> <C>
Due within one year $615,893
From one to two years 93,363
From two to three years 25,071
From three to four years 17,815
From four to five years 20,341
Over five years 3,659
--------------
Total $776,142
==============
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------
NOTE 10 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS & OTHER BORROWINGS
- --------------------------------------------------------------------------
The following is a schedule of securities sold under repurchase agreements and
other borrowings at December 31 of each year.
<TABLE>
<CAPTION>
1996 1995
-----------------------
(IN THOUSANDS)
<S> <C> <C>
Securities sold under repurchase agreements $ 32,103 $ 21,810
Federal funds purchased 69,900 7,000
Federal Home Loan Bank advances 369,238 239,224
Other borrowings 203 18,350
-----------------------
Total $471,444 $286,384
=======================
</TABLE>
Securities sold under repurchase agreements represent an indebtedness of the
Company secured by certain securities. At December 31, 1996 and 1995, the
interest cost with regard to daily averages was 4.36% and 4.51%, respectively.
Securities with an amortized cost of $29.9 million and $23.3 million and an
estimated fair value of approximately $29.8 million and $23.7 million were
pledged as collateral for these agreements at December 31, 1996 and 1995,
respectively.
Federal funds purchased, which mature daily, had an interest cost with regard
to daily averages of 6.24%, and 5.63% at December 31, 1996, and 1995,
respectively.
Federal Home Loan Bank advances represent borrowings from Federal
Home Loan Bank. Advances of $728.9 million, and $2.1 billion, were drawn
upon during 1996, and 1995, respectively. At December 31, 1996, 1995, and
1994, respectively, the interest cost with regard to daily averages was
5.78%, 6.13%, and 5.65%, with maturities of one to ninety-four months. These
borrowings are secured by Federal Home Loan Bank stock (carried at $22.3
million), by all eligible first mortgage loans on one-to-four family
dwellings held by the Bank (approximately $743.0 million at December 31,
1996) and by specific securities with a carrying value of approximately $9.5
million.
Other borrowings consist of the guaranteed ESOP obligation and a secured
short-term, interest bearing promissory note. The ESOP entered into a loan
agreement to borrow up to $1.2 million with an unrelated financial
institution to purchase shares of common stock in the open market. The
balance outstanding as of December 31, 1996 and 1995 was $203,000 and
$350,000, respectively. The $18.0 million promissory note was a result of
the Company's December 1, 1995 acquisition of Maco Bancorp, Inc. as a part of
the purchase price and was paid in full in March 1996.
- --------------------------------------------------------------------------
NOTE 11 FEDERAL INCOME TAXES
- --------------------------------------------------------------------------
Federal income taxes (benefits) reported in the consolidated statements of
income for the years ended December 31, 1996, 1995, and 1994 include the
following components.
26
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Federal
Current $7,304 $5,811 $5,024
Deferred (1,267) (593) 349
State
Current 1,443 1,190 1,017
Deferred (37) (55) (21)
----------------------------------------
Total $7,443 $6,353 $6,369
========================================
</TABLE>
The following federal income tax expense differs from the amounts computed by
applying the federal income tax rate of 35% to pretax income at December 31 of
each year.
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed ""expected'' tax $8,199 $7,755 $7,099
Tax exempt interest, net (478) (430) (481)
Low income housing credit (1,299) (1,225) (826)
Amortization of goodwill 327 42 42
State income tax, net of federal benefit 860 768 741
Other, net (166) (557) (206)
----------------------------------------
Total $7,443 $6,353 $6,369
========================================
</TABLE>
The following presents the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and liabilities at
December 31 of each year.
27
<PAGE>
<TABLE>
<CAPTION>
1996 1995
-------------------------------
(Dollars in thousands)
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses (4,740) (3,375)
Deferred loan fees 182 606
Deferred directors fees 395 364
Deferred compensation - 80
Depreciation 228 220
Capital loss carryforward 887 501
Unrealized losses on securities available-for-sale 220 -
Alternative minimum tax credit carry forward - 563
Other 1,520 1,633
-------------------------------
Total gross deferred tax assets 8,172 7,342
Less valuation allowance (61) (61)
-------------------------------
Net deferred tax assets 8,111 7,281
===============================
Deferred Tax Liabilities:
Deposit base premium (1,007) (1,163)
Deferred loan fees (1,104) (1,161)
Depreciation (600) (564)
Pension (271) (270)
Purchase discount (1,369) (1,932)
Unrealized gains on securities available-for-sale (236) (1,097)
Other (1,273) (1,205)
-------------------------------
Total gross deferred tax liabilities (5,860) (7,392)
-------------------------------
Net deferred tax assets 2,251 (111)
===============================
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1996 and 1995
was $61,000. The valuation allowance is due to capital losses from prior years
which can only be utilized against subsequent capital gains.
- ------------------------------------------------------------------------------
NOTE 12 EMPLOYEE BENEFITS
- ------------------------------------------------------------------------------
The former Pinnacle, IFC and CB entities had various employee benefit programs
which have remained in place upon consummation of the merger transactions on
August 1, 1997. The details of each plan are described herein.
401(K) PLAN
The Company sponsors a defined contribution 401(k) plan for the benefit of
former Pinnacle employees. The Company matches employee contributions at
levels dependent upon current operating results. In 1996, 1995, and 1994, the
Company contributions amounted to $63,000, $121,000 and $56,000, respectively.
Employee contributions to the plan are based upon optional percentages (ranging
from 2% to 10%) of before tax compensation.
PENSION PLANS
The Company sponsors a defined benefit pension plan which provides benefits to
substantially all full time employees of the former Pinnacle entity. Benefits
under the plan are based on the employees' years of service and compensation
during the five highest paid plan years of the last ten years preceding
retirement. The following presents the components of net pension income at
December 31 of each year.
28
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 463 $ 333 $ 283
Interest cost on projected benefit obligation 401 268 217
Actual return on plan assets (923) (1,093) (6)
Net amortization and deferral 144 535 (551)
---------------------------------------------
Net pension expense (income) $ 85 $ 43 $ (57)
============================================
</TABLE>
The following presents the funded status of the former Pinnacle Bank's plan and
amounts recognized in the consolidated balance sheets at December 31 of each
year.
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Actuarial present value of projected
benefit obligation:
Accumulated benefit obligation:
Vested $(3,440) $(2,837) $(1,785)
Nonvested (118) (109) (68)
Provision for future salary increases (2,580) (1,969) (1,560)
-------------------------------------------
Projected benefit obligation (6,138) (4,915) (3,413)
Plan assets at fair value 8,048 7,253 4,811
-------------------------------------------
Excess of plan assets over projected
benefit obligation 1,910 2,338 1,398
Unrecognized net transition asset (731) (799) (867)
Unrecognized net (gain)loss 16 (259) 342
Unrecognized prior service cost (35) (36) (36)
-------------------------------------------
Prepaid pension cost,
included in other assets 1,160 1,244 837
===========================================
Major assumptions used:
Discount rate 7.50% 7.75% 7.25%
Rate of increase in compensation levels 5.50% 6.00% 6.00%
Expected long-term rate on plan assets 10.00% 10.00% 10.00%
</TABLE>
The plan assets are invested primarily in a collective investment trust at
December 31, 1996, 1995 and 1994.
The Company is also a part of a multi-employer defined benefit pension plan
covering substantially all former CB employees. The plan is administered by
the directors of the Financial Institutions Retirement Fund. There is no
separate actuarial valuation of plan benefits nor segregation of plan assets
specifically for the Company. As of June 30, 1996, the latest actuarial
valuation, the total plan assets exceeded the actuarially determined value of
total vested benefits. There was no pension plan expense or contribution for
the years ended December 31, 1996, 1995 and 1994. The administrative cost of
the plan is charged to expense and amounted to $1,052, $4,815 and $3,294 for
the years ended December 31, 1996, 1995 and 1994.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has a Retiree Medical Plan which provides a portion of retiree
medical care premiums for certain former Pinnacle employees. The Company's
level of contribution is based on age and service formula which provides
benefits to substantially all retired participants until December 31, 1997 and
will provide benefits to active participants in a 100% co-pay basis until age
65. The components of the 1996, 1995 and 1994 net periodic postretirement
benefit cost are shown below:
29
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service cost $ - $ - $ -
Interest cost 19 21 20
Net amortization and deferral 33 33 25
------------------------------------------
Net periodic postretirement benefit cost $ 52 $ 54 $ 45
==========================================
</TABLE>
The funded status of the plan and the amounts recognized in the consolidated
balance sheets are shown below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
(in thousands)
<S> <C> <C> <C>
Retired participants and beneficiaries $ (248) $ (281) $ (275)
Active participants - - -
------------------------------------------
Accumulated postretirement
benefit obligation (248) (281) (275)
Plan assets at fair value - - -
Excess of accumulated postirement
benefit obligation over plan assets (248) (281) (275)
Unrecognized transition obligation 193 226 260
Unrecognized loss(gain) (6) 2 (28)
------------------------------------------
Accrued postretirement benefit
obligation $(61) $(53) $(43)
==========================================
</TABLE>
For measurement purposes, a 9.00%, 10.00% and 12.00% annual rate of increase in
the per capita cost of covered benefits (health care cost trend rate) was
assumed for 1996, 1995, and 1994, respectively; the rate was further assumed to
decline to 4.00% after 8 years. The health care cost trend rate assumption has
an increasing effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation by $25,000 and
$53,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost by $2,000 for years ended December 31,
1996, 1995 and 1994, respectively. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 7.50% for
December 31, 1996 and 7.25% for December 31, 1995 and 1994.
SUPPLEMENTAL RETIREMENT PLANS
The Company maintains a supplemental retirement plan for executive officers of
the former CB entity for which the payment of benefits is accelerated upon
change of control of the Company. The Company has purchased insurance
contracts on the lives of the participants in the supplemental retirement plan
and has named the Company as beneficiary. While no direct contract exists
between the supplemental retirement plan and the life insurance contracts, it
is management's current intent that the proceeds from the insurance contracts
will be used as a funding source for the supplemental retirement plan. For the
years ended December 31, 1996 and 1995, the Company recorded a liability equal
to the projected present value of the payment due at retirement based on the
projected remaining years of service using the projected unit credit method.
During the year ending December 31, 1996, the Company funded the liability to a
secular trust. This trust is not under the Company's control. The cash
surrender value of the life insurance was approximately $995,000 and $938,000
at December 31, 1996 and 1995, and is included in other assets. The income
derived from the investment in life insurance included in other income was
approximately $57,000, $59,000 and $52,000 for the years ended December 31,
1996, 1995 and 1994. The cost of the plan charged to expense was approximately
$39,000, $44,000 and $40,000 for the years
30
<PAGE>
ended December 31, 1996 and 1995. The accrued liability to the Company was
approximately $0 and $203,000 at December 31, 1996 and 1995.
The Company also has a supplemental retirement plan for certain senior
executives of the former IFC entity. The plan provides for a retirement
benefit based on years of service and compensation levels. The Company has
purchased corporate-owned life insurance to partially fund its obligation
under this plan. The expense recognized in 1996 totaled $230,000 compared to
$25,000 in 1995 and $105,000 in 1994.
EMPLOYEE STOCK OWNERSHIP PLANS The Company has established a leveraged
Employee Stock Ownership Plan ("ESOP") in which all former IFC employees who
attain minimum age and service requirements are eligible to participate. The
Company is to make contributions on behalf of each participant at the rate of
1 percent of such participant's total compensation. The Board of Directors
may authorize additional contributions at its discretion. The Company
recorded expenses related to these plans of $278,000, $407,000, and $402,000
for the years ended December 31, 1996, 1995, and 1994, respectively. The
Company's 1996 contribution to the ESOP was $350,350 compared to $382,628 in
1995 and $362,093 in 1994. The ESOP entered into a loan agreement to borrow
up to $1,200,000 from an unrelated financial institution to purchase shares
of common stock in the open market. The loan is unconditionally guaranteed by
the Company and an equivalent amount, which is comparable to unearned
compensation, is shown as a deduction of shareholders' equity. Both the
liability and the amount of shareholders' equity will be reduced in equal
amounts as the ESOP repays the borrowing. The ESOP will repay the loan, plus
interest, over a ten-year period using company contributions.
At December 31, 1996 and 1995, the outstanding ESOP loan balance was $203,096
and $349,934, respectively. The interest incurred on the ESOP loan amounted
to $18,950 in 1996, $31,250 in 1995, and $29,848 in 1994. Dividends earned
on unallocated shares are used to purchase additional shares of stock for the
ESOP. Dividends paid on the unallocated ESOP shares totaled $45,519 in 1996,
$50,023 in 1995, and $53,780 in 1994. The table below summarizes shares of
Company Stock held by the ESOP.
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---------------------
<S> <C> <C>
Shares allocated to participants 185,171 168,396
----------------------
Unallocated shares:
Grandfathered under SOP 93-6 10,672 31,507
Unearned ESOP shares 29,706 24,004
----------------------
Total 225,549 223,907
----------------------
Fair value of unearned ESOP shares $664,671 $510,085
======================
</TABLE>
The Company also maintains an ESOP for eligible employees of the former CB
entity. Employees with 1,000 hours of employment with the Company and who
have attained age 21 are eligible to participate. The ESOP borrowed funds
from the Company to purchase 108,729 shares of common stock. Collateral for
the loan is the common stock purchased by the ESOP. The loan is being repaid
principally from the Company's discretionary contributions to the ESOP over a
seven-year period ending in 1999, at a variable interest rate. The current
interest rate for the loan is 9.00%. Shares purchased by the ESOP will be
held in a suspense account for allocation among participants as the loan is
repaid.
Contributions to the ESOP and shares released from the suspense account in an
amount proportional to the repayment of the ESOP loan are allocated among ESOP
participants on the basis of compensation in the year of
31
<PAGE>
allocation. Benefits generally become 100% vested after five years of
credited service. Prior to the completion of five years of credited service,
a participant who terminates employment for reasons other than death
retirement (or early retirement), or disability will not receive any benefit
under the ESOP. Forfeitures will be reallocated among remaining
participating employees, in the same proportion as contributions. Benefits
may be payable in the form of stock or cash upon termination of employment.
The Company's contributions to the ESOP are not fixed, so benefits payable
under the ESOP cannot be estimated.
The ESOP compensation expense was $64,211 for each of the years ended
December 31, 1996, 1995 and 1994. SOP 93-6 does not effect the Company's
recognition of compensation expense as all shares currently held were
purchased prior to December 31, 1992. The ESOP shares as of December 31,
were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Allocated shares 62,260 45,482
Shares released for allocation ---- 827
Unreleased shares 46,469 62,420
-------- --------
108,729 108,729
========= =========
</TABLE>
RECOGNITION AND RETENTION PLANS
The Company has established the Recognition and Retention Plans (RRP) as a
method of providing directors, officers and other key employees of the former
CB entity with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Company. The terms of each RRP
will be identical, only the participants and the number of shares awarded to
each participant vary. Eligible directors, officers and other key employees
of the Company will earn (i.e., become invested in) shares of common stock
covered by the award at a rate of 20% per year. The Company contributed
funds to the RRP to enable the Plans to acquire in the aggregate 46,600
shares of common stock. An expense of $16,475, $26,968 and $41,999 was
recorded for these Plans for the years-ended December 31, 1996, 1995, and
1994.
DIRECTORS COMPENSATION PLANS
The Company sponsors a stock-based deferred compensation plan for directors
of the former IFC entity, in which directors can defer fees and purchase
phantom units of the Company's common stock at $11.63. The amount charged to
expense related to this plan was $156,839, $162,199, and $54,198 in 1996,
1995, and 1994, respectively. At December 31, 1996, the directors had
purchased 31,894 phantom units of which 8,903 were purchased in 1996.
The Company also sponsors a deferred compensation plan for its Board of
Directors of the former CB entity. Under the terms of the plan, directors
may elect to defer a portion of their fees which would be retained by the
Company with interest being credited to the participant's deferred balance.
Upon retirement, the participant would be entitled to receive the accumulated
deferred balance, paid over a specified number of years. The Company has
purchased insurance contracts on the lives of the participants in the
deferred compensation plan and has named the Company as beneficiary. While
no direct contract exists between the deferred compensation plan and the life
insurance contracts, it is management's current intent that the proceeds from
the insurance contracts will be used as a funding source for the deferred
compensation plan. The cash surrender value of the life insurance was
approximately $1,474,000 and $1,426,000 at December 31, 1996 and 1995, and is
included in other assets. The income derived from the investment in life
insurance included in other income was approximately $48,000, $75,000 and
$68,000 for the years ended December 31, 1996, 1995 and 1994. At December
31, 1996 and 1995, the accrued liability for deferred fees was approximately
$241,000 and $152,000.
32
<PAGE>
The former CB Board of Directors adopted the Outside Directors' Consultation
and Retirement Plan (the "Directors' Consultation Plan"). The purpose of the
Directors' Consultation Plan is to provide possible retirement benefits to
directors who are not officers or employees of the former CB entity to ensure
that the Company will have their continued service and assistance, if
annually contracted for by the Board of Directors in the conduct of the
Company's business in the future. Effective April 1, 1996, the Board of
Directors of the Company approved the Outside Director's Emeritus Plan (the
"Directors' Emeritus Plan) to replace the Outside Directors' Consultation and
Retirement Plan. The purpose of the Directors' Emeritus Plan is to ensure
that the Company may, if the Board so desires, have the continued service and
assistance of directors who are not officers or employees of the Company in
the conduct of the Company's business in the future. The Directors' Emeritus
Plan provides that a participant will be eligible, upon termination due to
retirement, resignation, discharge, death, disability or otherwise, to
receive an amount equal to the most recently received monthly board fee paid
to the outside director prior to his termination for a period of 48 months.
Directors eligible to participate in the Directors' Emeritus Plan consist of
directors who are not active officers or employees of the Company, who have
served as a director for at least three consecutive years and have attained
the age of 55. However, an outside director with three years of continuous
service whose termination is due to retirement and is prior to his attaining
age 55 will become eligible to receive benefits under the Directors' Emeritus
Plan when he reaches age 55. In addition, if an outside director with three
years of continuous service becomes disabled or dies prior to reaching age 55
or prior to his electing director emeritus status, he or his beneficiary
shall receive benefits under the Directors' Emeritus Plan. The resulting
liability from the Directors' Emeritus Plan approximates the liability
accrued under the Directors' Consultation Plan. An expense of approximately
$33,000, $37,000 and $80,000 was recorded for these plans for the years ended
December 31, 1996, 1995 and 1994. The resulting liability to the Company was
approximately $244,000 and $211,000 at December 31, 1996 and 1995.
During the year ending December 31, 1996, the Company purchased insurance
contracts on the lives of the participants in the Directors' Emeritus Plan
and has named the Company as beneficiary. While no direct contract exists
between the Directors' Emeritus Plan and the life insurance contracts, it is
management's current intent that the proceeds from the insurance contracts
will be used as a funding source for the Directors' Emeritus Plan. The cash
surrender value of the life insurance was approximately $250,000 at December
31, 1996, and is included in other assets. There was no income derived from
the investment in life insurance for the year ending December 31, 1996.
- -----------------------------------------------------------------------------
NOTE 13 STOCK OPTION PLANS
- -----------------------------------------------------------------------------
At Pinnacle's 1993 Annual Stockholders Meeting, a non-qualified stock option
plan (the "Plan") was presented to and approved by the stockholders of the
Company. The Compensation Committee of the Board of Directors, none of whom is
eligible to participate in the Plan, awarded certain key employees options to
purchase shares of the Company's common stock at an exercise price which
approximates the fair market value at the date of grant. All stock options
have five year terms and vest and become fully exercisable after five years
from date of grant.The Board of Directors of the former CB entity has adopted
the CB Bancorp, Inc. 1992 Stock Option Plan for outside directors (the
"Directors' Plan") of the former CB entity. Options for the purchase of shares
of common stock are authorized under the Directors' Plan. The option exercise
price must be at least 100% of the fair market value of the common stock on the
date of the grant, and the option term cannot exceed 10 years. Eligible
directors may exercise 100% of the options awarded to them.
33
<PAGE>
The Company also awards incentive and non-qualified stock options to certain
former directors, officers and key employees. All options granted have 10 year
terms and vest and become fully exercisable over a 5 year period from the grant
date.
A summary of the Company's stock options activity and related information for
the year ended December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 499,921 11.80 491,327 12.79 506,076 6.83
Granted 121,750 20.90 153,750 16.85 103,848 16.88
Exercised 61,311 6.40 105,239 6.19 108,659 5.74
Forfeited or canceled 22,860 14.13 39,917 12.48 9,939 13.20
Outstanding - end of year 537,499 14.38 499,921 11.80 491,327 9.07
Exercisable - end of year 288,912 11.61 253,738 9.48 227,823 10.94
</TABLE>
At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $4.625 to $21.16 and
5.7 years, respectively.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $4.80 and $3.99, respectively, on the date of grant using
the Black Scholes option-pricing mode with the following weighted-average
assumptions: risk-free interest rate of 6.50%; a dividend yield of 3.75%;
volatily factors of the expected market price of the Company's common stock
of .216% and .341% for the former IFC and Pinnacle options, respectively, and
a weighted-average expected life of the option of 7 years and 3.5 years for
the former IFC and Pinnacle options, respectively. The weighted-average
assumptions for CB options are not included in the calculation as no former
CB options were granted after December 31, 1994.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's pro forma information follows (in thousands, except
for earnings per share information):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Pro forma net income 15,699 15,853
Pro forma earnings per share 1.29 1.54
</TABLE>
Pro forma net income and earnings per share reflect only options granted
since December 31, 1994. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in
pro forma net income and earnings per share presented above because
compensation cost is reflected over the options' vesting period of generally
five years and compensation cost for options granted prior to January 1, 1995
is not considered.
34
<PAGE>
- ------------------------------------------------------------------------------
NOTE 14 SUPPLEMENTARY INCOME STATEMENT INFORMATION
- ------------------------------------------------------------------------------
Other than the items listed below, other noninterest income and other
noninterest expenses did not include any accounts that exceeded 1% of total
revenue, which is the sum of total interest income and total noninterest
income.
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Other noninterest income:
Service charges on deposit accounts $4,341 $3,653 $2,999
Trust fees 789 605 485
Recoveries on distressed assets 250 296 262
Gain on sale of loans, net 1,019 545 -
Merchant & loan servicing fees 1,716 1,326 1,732
Fees related to loans purchased
under agreements to resell 689 369 164
Brokerage fees 1,982 1,263 963
Other noninterest expense:
Salaries and benefits 21,690 17,599 14,803
Occupancy 4,123 3,076 2,707
Equipment 3,473 2,813 2,166
Professional and legal fees 1,969 1,257 1,345
Amortization of intangibles 2,037 1,269 577
FDIC Insurance 7,858 1,965 2,064
Supplies 1,434 973 806
Postage 1,202 900 692
Marketing and promotion 2,244 1,469 1,064
Computer processing 1,972 1,702 1,029
</TABLE>
- ------------------------------------------------------------------------------
NOTE 15 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
- ------------------------------------------------------------------------------
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments are loan commitments to extend credit and letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the consolidated balance sheets.
The contract amount of these instruments reflects the extent of involvement the
Company has in these financial instruments.
The following presents financial instruments with off-balance sheet risk at
December 31 of each year.
<TABLE>
<CAPTION>
1996 1995
--------------------------
(in thousands)
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk
Commitments to extend credit $ 148,826 135,683
Letters of credit
5,660 4,151
Undisbursed construction loans
in repurchase program 12,419 12,412
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being
35
<PAGE>
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on management's
credit evaluation of the counter party. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Letters of credit written are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. All letters of
credit are short-term guarantees of one year or less. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Company has a secured interest
in various assets as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held on those
commitments at December 31, 1996 and 1995 is in excess of the committed
amount.
36
<PAGE>
- ------------------------------------------------------------------------------
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
CONDENSED PARENT COMPANY ONLY BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------
1996 1995
----------------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $8,197 $6,615
Interest-bearing deposits with
financial institutions - 18,100
Securities available for sale 217 165
Investment in subsidiaries 157,014 153,087
Note recievable 1,450 950
Other assets 5,433 5,454
----------------------
TOTAL ASSETS $172,311 $184,371
========================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES
Notes payable and other liabilities $ 2,052 $ 19,913
STOCKHOLDERS' EQUITY
Common stock 19,110 19,110
Additional paid-in capital 78,192 77,486
Retained earnings 83,599 76,241
Treasury stock at cost (10,304) (9,710)
Guaranteed ESOP obligation (379) (590)
Recognition and retention plan obligation (4) (21)
Net unrealized gain on securities
available-for-sale 45 1,942
-----------------------
Total stockholders' equity 170,259 164,458
-----------------------
Total liabilities and stockholders' equity $172,311 $184,371
=======================
</TABLE>
CONDENSED PARENT COMPANY ONLY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1996 1995 1994
----------------------------------
(in thousands)
<S> <C> <C> <C>
Income
Dividends from subsidiaries $14,445 $27,522 $14,904
Interest and other income 1,200 414 192
----------------------------------
Total income 15,645 27,936 15,096
----------------------------------
Expenses
Salaries and benefits 290 222 124
Other operating expenses 1,492 1,115 942
----------------------------------
TOTAL EXPENSES 1,782 1,337 1,066
----------------------------------
Income before income tax benefit and
undistributed earnings
of subsidiaries 13,863 26,599 14,030
Income tax benefit (210) (342) (293)
Equity in undistributed earnings of
subsidiaries 2,014 (10,720) (111)
----------------------------------
NET INCOME $16,087 $16,221 $14,212
----------------------------------
</TABLE>
37
<PAGE>
CONDENSED PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
December 31,1996
- ---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $16,087 $16,221 $14,212
Equity in undistributed earnings
of subsidiaries (2,014) 10,720 111
Other, net (1,188) (1,056) 555
------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 12,885 25,885 14,878
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-
bearing deposits with
financial institutions 18,108 (17,610) (391)
Purchase acquisition, net of cash - (28,219) (6,735)
Borrow funds to IndFed Mortgage Company - (950) -
Purchase preferred stock of Forrest Holdings, Inc. (2,500) - -
Purchase common stock of IFB Investment Services, Inc. (100) (100) -
Purchase common stock of IndFed Mortgage Company - (1,000) -
Purchase of available-for-sale securities (507) (35) (125)
Proceeds from paydowns of available-for-sale securities 27 27 59
------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 15,028 (47,887) (7,192)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 662 13,821 606
Purchase of treasury shares at cost (613) (957) (1,778)
Contribution to fund ESOP 211 125 180
(Repayments) Proceeds from short-term borrowings (18,000) 18,000 -
Dividends paid (8,590) (6,826) (5,678)
------------------------------------------
NET CASH USED (PROVIDED) BY FINANCING ACTIVITIES (26,330) 24,163 (6,670)
------------------------------------------
Net increase in cash and cash equivalents 1,583 2,161 1,016
Cash and cash equivalents at beginning of year 6,615 4,454 3,438
------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $8,198 $6,615 $4,454
==========================================
</TABLE>
- ------------------------------------------------------------------------------
NOTE 17 DIVIDENDS FROM HOLDING COMPANY
- ------------------------------------------------------------------------------
The Company is a legal entity separate and distinct from its subsidiaries.
Substantially all of the Company's revenues result from dividends paid to it
by its subsidiaries and from earnings on investments. There are statutory
and regulatory requirements applicable to the payment of dividends by
Pinnacle Bank as well as by the Company to its stockholders. Under the
foregoing dividend restrictions, Pinnacle Bank, without obtaining government
approvals, could declare aggregate dividends in 1996 of approximately $46.7
million.
On December 1, 1995 the Company, in conjunction with the acquisition of Maco
Bancorp, issued 862,500 shares in a public offering and issued 1,188,954
shares to the sole shareholder of Maco resulting in total shares outstanding
increasing from 9,980,009 to 12,031,463.
38
<PAGE>
Unless prior regulatory approval is obtained, banking regulations limit the
amount of dividends that Pinnacle Bank can declare during 1997, to the 1996
profits, as defined in the Federal Reserve Act, plus retained net profits for
1996 and 1995.
- ------------------------------------------------------------------------------
NOTE 18 COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------------------------------------
The Company has entered into indemnification agreements with the principal sole
stockholder of Maco, subject to certain conditions, to partially indemnify
Pinnacle from certain liabilities. Any claim on costs incurred by Pinnacle
related to such liabilities must be made by May 26, 1998. The indemnification
agreements relate to two transfer agreements and other various matters entered
into on May 4, 1995 between Maco and an affiliate of the principal sole
stockholder of Maco, that relate to litigation in effect prior to the
acquisition.
The first item relates to the 1988 acquisition of a distressed thrift by Maco
through an assistance agreement with the Federal Savings and Loan Insurance
Corporation ("FSLIC"). The Federal Deposit Insurance Corporation ("FDIC"),
successor-in-interest to FSLIC, has brought suite seeking payment of
$3,000,000 allegedly due it under such agreement. Management believes the
FDIC suit is without merit and the indemnification agreement and a related
escrow agreement reduces any risk of loss to the Company. The second item
relates to a counterclaim brought against Maco as a result of a claim made
against a third party by Maco. The Company intends to vigorously defend
these actions, even though it is covered by the indemnification agreements.
There are various other matters of litigation pending against the Company
that have arisen during the normal course of business. Based upon
discussions with legal counsel, management believes that the aggregate
liability, if any, issuing from these matters will not be material to the
financial results of the Company.
- ------------------------------------------------------------------------------
NOTE 19 SUBSEQUENT EVENT-ACQUISITION
- ------------------------------------------------------------------------------
As a result of the merger transactions of IFC and CB on August 1, 1997, the
Company recorded pre-tax restructuring charges approximating $11.5 million to
account for one-time expenses associated with the transactions. Additionally,
the company recorded a $10.0 million pre-tax increase in the provision for
loan losses as a result of conforming loan loss reserve methodologies of IFC
and CB to that of the Company.
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 ratio is 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
of accounting. The sale is subject to shareholder and regulatory approval and
is expected to close in the second quarter of 1998.
39
<PAGE>
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-----------------------------------------------------------------------
(in thousands, except stock prices)
<S> <C> <C> <C> <C>
1996
Interest income 34,646 35,649 37,452 40,156
Net interest income 16,118 16,651 17,383 18,152
Provision for loan losses 241 520 810 1,110
Income before income tax expense 6,925 6,329 2,637 7,639
Net income 4,788 4,208 2,057 5,034
Net income per share $ 0.39 $ 0.35 $ 0.17 $ 0.41
Stock price range 18.25-20.50 20.00-21.75 19.50-24.75 23.25-25.00
1995
Interest income 25,190 26,488 26,550 29,688
Net interest income 12,670 12,995 13,011 14,171
Provision for loan losses 299 141 171 811
Income before income tax expense 5,049 6,682 5,750 5,093
Net income 3,517 4,502 3,979 4,223
Net income per share $ 0.35 $ 0.44 $ 0.39 $ 0.39
Stock price range 15.00-17.50 15.75-17.75 15.50-17.50 16.50-18.50
</TABLE>
40
